Monday, September 24, 2012

Surely Some Confusion?

"The Invisible Hand Still Exists "Economics Beyond the Textbook"
J. J. Jasper ( who describes himself as “a college student studying finance and economics, with aspirations of making a beneficial difference in the world by being a part of the large, and often times evil financial, sector.” Jasper posts HERE a piece on US military spending, purporting to show that “we aren’t even spending 1% of what we were spending at the end of WWII” when the US fought major wars against the Japanese (involving multiple “D-Day” scale landings in the Pacific) and a major war in Europe and North Africa against the Nazi Germany and Fascist Italy)  by shifting the measure from US (inflated) dollars to units of “gold-value”.
Despite my former specialism in defence economics (example: Duckworth, 1975) I shall not bother to contest this “evidence”.  His piece makes no reference to the existence of otherwise of the “invisible hand” and is therefore in that respect a ‘wild Goose chase’.
In an earlier post HERE  , “What is a Business? The Invisible Hand and the Dismal Science at a Personal Level, Jasper reports:
“It makes more sense to think of myself as guided by an Invisible Hand to make decisions. To me, such a hand is not the equivalent of greed, but an equivalent to wanting what’s best for everyone.
While taking a microeconomics class in the past year, my professor played a game with us: we’d have one partner who would decide how much of ten bonus points he’d like to share with us. If we thought the offer wasn’t good enough, we would deny the offer. In such a case, no one in the group would receive any bonus points.
When it was my turn, my partner offered me zero. When asked whether or not I’d accept the offer, it dawned on me: the only reason why my partner would make such an offer is because he had so much need for the bonus points. He was guided by the Invisible Hand to ask me if he could have all of the bonus points. He wasn’t being greedy, he was trying to make the grade.
So, I let him have the points. That’s what seemed logical and efficient. I had an A in the class, I didn’t need the help as much. In a weird way, the invisible hand had guided us both to make appropriate decisions, and we met at an equilibrium. Our equilibrium included no bonus for me- no surplus- but a full surplus for my partner.”
This is a well-known game in elementary behaviourial  economics, known as the “ultimatum game”.   It is claimed to show how people react negatively to what they consider “unfair” demands, by declining the first one-way offer, even at the cost of getting nothing, and declining offers judged to be unfair (99% for me, 1% for you), but settlements can take place when counter-offers approach 30% towards 50% for me, the rest for you.   Supposedly, this shows there is a sense of “fairness” in the outlook of most people, and that overly “greedy” offers or counter-offers tend to be declined.
Jasper’s response was to accept the other player’s offer of ‘nothing for Jasper but everything for me’.   What he learned from this game I am not sure, but it certainly wasn’t worth an “A” in behavioural economics, though perhaps it may be worth an 'A' in Christian theology in a seminary for apprentice Saints.  Though be clear, I am not commenting philosophically here, only in the role of my former required teaching of neo-classical economic theory – basically that from the rational postulate of neo-classical economic theory, people ‘rationally’ would accept even an unfair share-out because ‘rationally’ something is better than nothing.
Jasper seems to operate to the extreme rational postulate of nothing but maximum spiritual satisfaction for me if the other party gets everything – compare with the parable of the “labourer is worthy of his hire”, taken to the extreme – the employer is worthy of everything and the labourers should be grateful even if they get nothing more if the men hired halfway through the working day get a full day's wages …


Blogger neroden@gmail said...

It sounds like Jasper is not a normal human being.

Well, there's a statistical distribution of responses in the ultimatum game. Most people have some self-preservational desire to at least do tit-for-tat. Some people are greedheads and some people will let anyone walk all over them.

12:02 p.m.  
Blogger Gavin Kennedy said...

The next question is whether people in such games can learn to co-operate through bargaining. My work over many years with the 'red-blue' game showed that they can (See Kennedy, G. The New Negotiating Edge, 1998 - still in print). See also Adam Smith, Wealth Of Nations, Book 1, chapter 2, on bargaining.

2:10 p.m.  

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