Saturday, March 29, 2014
Philipp Gassner writes (29 Mar 2014 ) in Business Mirror (Philippines) HERE “Nature’s invisible hand: Simply complex”
“Marveling the resourcefulness of nature’s incredibly ludicrous and squandering inventions, one cannot help but wonder: what’s the point and how is this even possible? By sheer chance? Surely not.
Scottish economist and moral philosopher Adam Smith offers an answer. Exactly 238 years ago, on March 9, 1776, he published The Wealth of Nations.
In this fundamental work in classical economics, he illuminates how our incredibly complex, inventive and powerful economy works and developed—a similarly puzzling mystery to nature’s rich biological diversity.
In a nutshell: each enterprise is doing its best to prosper, yet without the “benefit” of a centralized planner. Something very simple—individual competition—results invisibly to our eye in something very complex—an efficient economy.
But how can Smith’s famous metaphor of the invisible hand of the self-regulating market explain our rich natural biodiversity? English naturalist Charles Darwin wondered too, and coined the term “Economy of Nature,” according to which life on Earth evolves without the guidance of a designer. Instead, in his book Origin of Species he explains the “invisible hand” of nature, better known as evolution.”
ADAM SMITH AND CHARLES DARWIN’S ideas from different perspectives have much in common. We know Darwin read “Wealth Of Nations” (he refers to it and it was taught at Edinburgh while Darwin was a student there). Smith did not develop a theory of how commercial entities were guide by an IH, nor did he develop a theory using the metaphor of an “invisible hand” that performed a co-ordinating role, including a ‘designer’, in a parallel fashion to “evolution”. Back projecting such ideas to Smith are anachronistic wishful thinking.
The IH metaphor referred to something else entirely and that such an idea is used today as an analogy for Darwinian evolution is, well, sad. In fact the entire economics discipline suffers from a category 1 error in regard to the IH metaphor.
Briefly, Smith taught Rhetoric as well as Moral Sentiments at Glasgow University. He defined metaphors as describing their “object” in a “more striking and interesting manner”, giving examples to his listeners (see Adam Smith’s “Lectures on Rhetoric and Belles Lettres”, 1762-3). The “object” is what is described by the metaphor.
Smith only used the IH metaphor 3 times throughout his entire published works, and his definition is confirmed still today in the Oxford English Dictionary, as well as most other English language dictionaries, not often read by economists.
In no case did he use the IH metaphor in reference to “competition”, individual or combined, or as a “co-ordinating role” or in a “complex economy”.
His first reference in his History of Astronomy (posthumous 1793 - written 1744-58) was to the belief of credulous Pagan Romans that their invisible God, Jupiter, fired thunderbolts at non-believers and enemies of Rome in, ironically, very visible and noisy, thunderstorms.
His second reference in Theory of Moral Sentiments (1759) was to “proud and unfeeling landlords” who fed their serfs, slaves and peasantry, with food from their landlords’ fields. With no other source of food, the serfs would soon expire from starvation and excessive labour; moreover, the landlord’s source of greatness would disappear without labourers. This exchange of food for work to produce more food arrangement enabled the landlords’ economy to function, on which their rule depended.
His third reference 0n Wealth Of Nations, (1776), was to those merchants who avoided trading abroad for fear of losing their capital to unscrupulous foreign traders and therefore they preferred to invest it locally in their “domestic industry” and thereby added to domestic output. Their “insecurity” helped to grow the economy.
The philosophical point Smith was making had to do with what agents (those who acted) were “led” to do. by their motives. He started with the plausible but invisible motives of the actors - we cannot see into the minds of other people. In these 3 cases the ‘credulous’ Romans, the ‘unfeeling’ landlords and the ‘insecure’ merchants. He then identified the (plausible) visible actions that followed: the ‘credulous’ cowered in fear during thunderstorms and remained at home; the ‘unfeeling’ landlords shared some portion of ‘their’ crops with their fieldworkers, and the ‘insecure’ merchants, invested their capital which necessarily added to the capital available to the domestic economy.
The actors’ motives “led” them to their chosen actions and were intended to produce their intended consequences - loyalty to Rome, sufficiently-fed labourers to undertake heavy field work, and to secure the profitable use of the merchants’ capital.
However, Smith added another set of consequences from the actions, which is important enough to be remarked upon by Smith, because this time the intended consequences of their initial actions also had “unintended consequences” from the agents’ motivated initial actions.
Superstitious Romans remained loyal to Rome, therefore this added to intended political stability from fears of lightening strikes (and also fewer Romans died from lightening strikes by their staying in doors than those careless enough to venture outside); field labourers laboured more effectively with regular food, which had ‘unintended consequences’ over the long run from continuous procreation of the species, and GDP was maintained at a higher level, long term.
Of course, unintended consequences were not always positive. If conspirators moved freely in defiance of the credulous beliefs about lightening strikes being other than random, they could, perhaps catch a garrison by surprise and seize power in a rebellion as happened in far away parts of the Empire (also see Shakespeare’s “Julius Ceasar’); if “unfeeling landlords” disregarded the quality of the serfs’ food or its amount, then health losses could cause labour shortages and a relative decline for an individual landlords’ “greatness”; and if domestic-focussed merchants also prevented any imports with lobbying for tariffs, they could slow GDP growth and weaken the economy, not strengthen it.
Now you do not get such analysis from modern economists who have invented wholly spurious interpretations on Adam Smith’s use of the “invisible hand” metaphor, worse they have invented a mythical entity that does not exist to be at work in an economy.
Visible prices play the co-ordinating role in economies. No economy can work without visible prices. Simple, eh?
THE ANSWER IS IN THE SOIL
Following comments by Michael Webster ( along standing regular reader of Lost Legacy, I want to explore the consequences for early and proto-humans in the long, so-called ‘pre-history’ of our species. We have a ‘marker’ species against which we can ‘measure’ human’ performance – the chimpanzees that stayed still in mid-Africa.
Archeology also provides our ‘history’ well beyond the written record that currently provides our very short literate ‘History’ (a few Millennia). I adopt a perspective of history that includes all of the detailed archeological record from the stone-age (the data is quite deep from the Lower Pleistocene (1 million BP) and nearly prolific from 500,000 BP, and then very prolific from 100,000 BP.
To the cases: humans slowly spread across Africa, and apparently so did pre-humans before them. Following water-courses (Nile), humans then crossed into Europe and eventually along the North Mediterranean coast and East. Daily movement in search of food was imperative with various strategies – locust style, casual mobile harvesting, small species hunting, seasonal visits, new food sources, group adult hunting, herd following, limited shepherding, limited plant gathering, seasonal settlements, sporadic farming, sporadic contact with other groups, including, eg. Neanderthals.
My brief point is that these traces required daily decisions for groups (family, extended families, larger groups) with thin margins for errors and violent disputes, especially amidst regular environmental and climate changes, which over millennia were ‘frequent’.
We cannot know for certain how decisions were reached; we can see in the records often buried in the ground, in caves, and in ‘middens’, how groups performed and details of their diets. Hence, on a results basis –brutal, no doubt – those that lasted for centuries or millennia, viably ‘solved’ the decision problem, others disappeared within the short-lifetimes of those who got it wrong. Moreover, those that got it right more often than wrong, left their record for us to ‘read’ in slowly changing organised encampments, even primitive structures and domestic living spaces, plus their ‘tools’.
One large study I found is Cyprian Broodbank’s “The Making of he Middle Sea: a history of he Mediterranean from the Beginning to the Emergence of the Classical World”, Thames and Hudson (via Amazon).
It is a conscious changing experience about Human deep history, grounded in science. It certainly put the modern debate – by implication – over the market versus state stalemate into perspective, at least for me.
Friday, March 28, 2014
RICARDO HAUSMANN ON STATES AND MARKETS
“The disappearance of Malaysia Airlines Flight 370 shows how wrong Smith was, for it highlights the intricate interaction between modern production and the state. To make air travel feasible and safe, states ensure that pilots know how to fly and that aircraft pass stringent tests. They build airports and provide radar and satellites that can track planes, air traffic controllers to keep them apart, and security services to keep terrorists on the ground. And, when something goes wrong, it is not peace, easy taxes, and justice that are called in to assist; it is professional, well-resourced government agencies.
All advanced economies today seem to need much more than the young Smith assumed. And their governments are not only large and complex, encompassing thousands of agencies that administer millions of pages of rules and regulations; they are also democratic — and not just because they hold elections every so often. Why?
By the time he published The Wealth of Nations, at the age of 43, Smith had become the first complexity scientist. He understood that the economy was a complex system that needed to co-ordinate the work of thousands of people just to make things as simple as a meal or a suit.
But Smith also understood that while the economy was too intricate to be organised by anybody, it had the capacity to self-organise. It possesses an "invisible hand", which operates through market prices to provide an information system that can be used to calculate whether using resources for a given purpose is worthwhile — that is, profitable.
Profit is an incentive system that leads firms and individuals to respond to the information provided by prices. And capital markets are a resource-mobilisation system that provides money to those companies and projects that are expected to be profitable — that is, the ones that respond adequately to market prices.
But modern production requires many inputs that markets do not provide. And, as in the case of airlines, these inputs — rules, standards, certifications, infrastructure, schools and training centres, scientific labs, security services — are deeply complementary to the ones that can be procured in markets. They interact in the most intricate ways with the activities that markets organise.
I do not intend to conduct a line-by-line polemic against Professor Hausmann’s rich tableaux of ideas, mainly because I agree with many of them. I prefer instead to place his ideas in context where I agree with him and why, simultaneously, I differ on aspects of his thinking, not least where I believe he misses important aspects of Adam Smith’s thinking, given the information he had in the 18th century that can be reframed today to bridge the initial gulf between Hausmann and me to a clearer understanding.
First, let us agree that all human societies have had some instrument in their arrangements that performed roles to which we attribute in the modern world to states.
In the simplest human groups, bands, tribes and such like, modern words like ‘government’, or ‘state’ can be misleading and missed when the governing ‘agency’ is not as visible as it is today. In short ‘states’ have always existed vested in a single individual or family or group of elders. Somehow, the group of hunters or gatherers each morning have to decide in which direction to go to hunt or gather their food. Anarchy has never been a viable survival strategy, though no doubt tried from time and circumstance.
Leaping forward, with population and economies emerging, the idea that markets can be perfectly free is illusionary, and therefore political, as is the opposite ideology that states can exist and grow without any vestige of markets. (Plundering neighbours is not a viable strategy). The empirical evidence is all around in performance (stagnant GDP/per head and in the ruins of past civilisations ran by oligarchies).
Only commercial markets have enabled civilisations to perform for a while, sometimes millennia long, and modern tourists can visit them as spectators and wonder at their stone detritus spread around the ancient world. But only democratic states with commercial sectors can subsist and grow in GDP/capita at the historically high levels experienced under what is called ‘capitalism' with entrepreneurial innovations, albeit in ‘managed markets’ when the ‘statists’ (social-democrats) turn to government and ‘freer’ markets when its the ‘(soft) Libertarians’ turn in government.
Stable democratic governments under the rule of law and justice (Smith’s initial thinking) work. The rest don’t.
So much I agree with Ricardo Hausmann. It would help if he would read Adam Smith and not be influenced too much by modern epigones as represented in the sentence of complex economies possessing “an invisible hand", which operates in markets. Bluntly there is no “invisible hand” as understood today. It does not exist and a moment’s reflection (OK, perhaps several moments) would show this.
Market prices … provide an information system that can be used to calculate whether using resources for a given purpose is worthwhile — that is, profitable.” But that has nothing to do with Smith’s “invisible hand” (see Lost Legacy passim). True markets operate by “prices” as Smith showed. What does an “invisible hand” metaphor add to this truth? And Smith never said it did.
By “invisible hand” Smith referred to the hidden and disparate motives of agents who act in accordance with their motives which “leads” them to act, nothing more! (The story of why modern economists came to believe in the myth of the IH see Gavin Kennedy, (2010): ‘Paul Samuelson and the Invention of the Modern Economics of the Invisible Hand’, History of Economic Ideas. XVIII (3) 105-19.)
Smith added that their motivated actions had both “intended consequences" and “untended consequences”, which seems to have confused some modern economists into believing this was the “invisible hand”.
Hausmann is absolutely right: “Profit is an incentive system that leads firms and individuals to respond to the information provided by prices. And capital markets are a resource-mobilisation system that provides money to those companies and projects that are expected to be profitable — that is, the ones that respond adequately to market prices.”
Again with VISIBLE prices there is absolutely no need for the metaphor of “an invisible hand” for markets and economies to work. But we need States to exist for markets to operate - liberty and justice and, where necessary, “regulations” for them to work safely and honestly.
That is why I present the necessary dual role of markets and government as: “markets where possible, state where necessary”.
On that basis, I can agree with Ricardo Hausmann as a SMITHIAN libertarian social democrat and I can recommend readers to read his blog post” RICARDO HAUSMANN, 28 MARCH, on Business Day Live HERE
From My NoteBook no. 24
"WHEN Adam Smith was 22, he famously proclaimed that, "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.”
Ricardo Hausmann in "States need an invisible hand to fix their flaws” (26 March).
Dugald Stewart, AS Eulogy, read to RSE Jan-March 1793.
Smith born 1723; therefore aged 22 = 1745.
To show: 1755 paper written when Smith was 26 NOT 22.
Glasgow student = 1737-40 = aged = 14 - 17.
Oxford student = 1740-1746 = aged 17 - 23.
Edinburgh lectures = 1748 - 1751 = age 25-28.
Glasgow lectures = 1752 - 64 = age 28-40.
'Easy taxes' paper, ‘1755' - 6 years = 1749 = age 26.
- The ‘1755’ quotation from paper written by his ’scribe’ from Smith’s dictation for Edinburgh lectures in 1749. Smith was aged 26, repeated in Glasgow lectures 1752 - ?
- Smith was 22 in (1723 + 22) = 1745 and he was still at Oxford.
- Hence, Smith wrote ‘easy taxes’ paper at age = 26 = 1749, not 22.
As a new feature of Lost Legacy I shall post more 'From my Note Book' series of occasional jottings. These may interest scholars and promote critical comments and observations.
They are not intended to be critical or to have polemical content.
They are notes I make on a regular basis which do not appear on Lost Legacy but may promote readers to see what they can find on the issues and subjects.
For instance, I have just read Ricardo Hausmann on "States need an invisible hand to fix their flaws” (26 March) which has promoted some very useful thinking about current policy issues of which I intend to Blog about.
YOU CAN'T HAVE ONE WITHOUT THE OTHER
Anon on ‘Deft News’ (Linking News That Matters (26 March)
“The Invisible Hand of the Market vs. the Dead Hand of Politically-Motivated Regulation”
“What the invisible hand of free-market innovation giveth, the dead hand of politically motivated regulation tryeth desperately to take away.That’s the only way to describe what’s happening to three wildly innovative and popular products: the award-winning electric car Tesla, taxi-replacement service Uber and hotel alternative Airbnb. These companies are not only revolutionizing their industries via cutting-edge technology and customer-empowering distribution, they’re also running afoul of interest groups that are quick to use political muscle to maintain market share and the status quo. The invisible hand of free markets shouldn’t have to spend so much of its time slapping away the dead hand of political entrepreneurship.”
The “invisible hand” is given three roles: “free-market innovation”; “invisible hand of free markets”; and, of course, its role as used by Adam Smith, specifically the “invisible hand” of the agent’s motivations for the actions they take that have both intended consequences and, added Smith, the “unintended consequences” that this actions may cause. Nothing is mentioned about “innovation” nor “free markets”, or for that matter, “the Dead Hand of Politically-Motivated Regulation”.
I could generalise and assert that all human societies since the invention of farming and the following of deer, sheep, and other animals have been accompanied by some forms of ‘government’, whether tribal, individual, or, later, full blown states that set the boundaries of acceptable behaviour, a.k.a. laws and justice, including their instruments of power.
Remove all ‘regulations’ and they will inevitably return in some form or other.
Thursday, March 27, 2014
I AM HAVING TROUBLE WITH SPAMMERS WHO HIJACKED LOST LEGACY.
NORMAL SERVICE SHALL RESUME AT FIRST OPPORTUNITY.
PLEASE BE PATIENT.
Tuesday, March 25, 2014
APOLOGIES ALL ROUND
I had a relapse and have been in hospital again for two days. I'm now back out, this time I hope for a lot longer...
Done a lot thinking and read a couple of interesting books, of which more later this week.
That's all folks, as they used to say.
Done a lot thinking and read a couple of interesting books, of which more later this week.
That's all folks, as they used to say.
Saturday, March 22, 2014
HISTORY BOOK THAT SHOWS WE'VE BEEN THROUGH THIS BEFORE IN 1720
'The Great Mirror of Folly: Finance, Culture and the Crash of 1720' by William N. Goetzmann, Catherine Labio, K. Geert Rouwenhorst and Timothy G. Young, editors, . New Haven: Yale University Press, 2013. xiv + 346 pp. $75 (hardcover), ISBN: 978-0-300-16246-2.
[Reviewed for EH. NET: (Societies for History of Economics) by Antoin E. Murphy, Department of Economics, Trinity College Dublin. (Antoin E. Murphy is the author of numerous books and articles, including John Law: Economic Theorist and Policymaker (Oxford University Press, 1997).
“This is a wonderful book about an extraordinary work, Het Groote Tafereel der Dwaasheid (The Great Mirror of Folly), which though a bibliographic nightmare, provides a fascinating set of engravings and texts about the world’s first stock market booms and collapses in Paris, London and Amsterdam during the frenzied financial year of 1720. Yale University is to be congratulated not only for publishing such a book through Yale University Press, but, also because two of its libraries, the Beinecke Rare Book and Manuscripts Library and the Lewis Walpole Library, have against the current, been presciently building up a financial history collection that provides many of the antiquarian treasures that are presented in this volume.
When the financial crisis broke in 2007 and 2008 many economists who had forgotten about history, naively believing that the Great Moderation had been reached, found themselves on intellectual quicksand. Despite all their apparently sophisticated theorizing they were unable, excepting for a small number of economists including the foreword writer of this book, Nobel laureate Robert J. Schiller, to cast very much light on the unfolding events which destroyed a great part of the financial fabric of the United States and, via contagion effects, nearly brought down the global economy. History had been replaced by mathematical modelling; antiquarian books had been discarded and libraries holding them downgraded; the past was seen as no predictor of the future. But of course history does have a tendency to repeat itself. Remove the wigs from the eighteenth century bankers, financiers and traders and replace them with mobile phones and one finds essentially the same type of agents with all their excessive hype that characterized recent financial markets not just in New York but across the globe. The Great Mirror of Folly of the eighteenth century has most certainly been mirrored in the follies at the start of the twenty-first century. If one accepts this view then there are still important roles for antiquarian books, specialist libraries, economic historians and historians of economic thought to highlight how apparently rational people become irrational, inhabiting asset market bubbles that have huge economic and social costs when they burst. So take a bow Yale along with the editorial team that published this book.”
I concur with Antoin E. Murphy’s judgement. I am pleased to see his review as another recent judgement of recent on the dire state of current economics as exposed by the recent shock to policy (fiscal and monetary), with no consensus as to what caused it over 2008-14 or what to do about it: so-called: “austerity” or “borrow” our way out of it.
Antoin Murphy’s is a positive comment on part of a problem that has bothered me for years, since I retired and had time to look around what has happened to all the certainties of economics that once constituted that “glad, confident mornings” (now no more) of my chosen academic discipline of economics in the 1960s.
In retrospect, perhaps I should have spent more critical attention to what I was learning. I should have emphasised more often to my own students that the best candidate for the patron ‘saint’ of students was exemplified by “Doubting” Thomas.
Friday, March 21, 2014
THE EMPERORS ARE NAKED
From the quite brilliant Don Boudreaux (20 March) in Cafe Hayek HERE
“Then a Miracle Occurs”
“The miracle assumed by the unscientific ‘scientific’ modern economist is that government will act (1) apolitically, (2) without any of the human imperfections, myopia, and psychological quirks that (are assumed to) give rise to the market imperfections that allegedly justify government intervention, and (3) with more information and wisdom than is discovered and used in markets. …
… But it is simply, deeply, and inexcusably unscientific for economists (or any one, for that matter) to simply assume that government will perform as the social-engineering theory requires it to perform. Put differently, despite more than a half-century of scholarship in public-choice economics, too many economists mysteriously regard warnings about government failing to act ‘perfectly’ as being unworthy or, at least, only of secondary or tertiary significance. It’s unscientific – deeply so.”
I agree completely with Boudreaux’s assessment of statists on the wonders of governments as against the fallacies of what they expect from the deliberations of politicians and administrators of state machinery. His strictures against statist fallacies are well-targeted and amusingly credible.
However, I am left speculating about the expectations of those of us who favour markets with similar fervour to those opposed to markets in favour of statist governments. I suggest that “too many economists mysteriously regard warnings about [markets] failing to act ‘perfectly’ as being unworthy or, at least, only of secondary or tertiary significance. It’s unscientific – deeply so.”
‘Pot’ and ‘Kettle’ analogies spring to mind.
So much mumbo jumbo about universal ‘perfect rationality’ from single-track maximisation of utilities, backed by mathematical ‘proofs’ wrapped in claims for scientific status for its practitioners are deeply unconvincing to me nowadays. Samuelson tried to square the circle with his (1948) comments of the ‘selfish’ invisible hand that ensured that out of the mix would miraculously spring the ‘public good’, eventually. He clearly did not consult Adam Smith very closely.
Given the paucity of evidence supporting their assertions - and much of it showing that experience was quite different, I wonder if proponents of each single-sided different solution (State v Market) realise just how pathetic they really look to each other, and to more neutral observers of their naked Emperors as they pass by as partisan admirers of their own side’s naked emperor, dimly oblivious to the naked-state of their own champion, as they join the chorus about the wonders of their Emperors and his ‘wonderful’ clothes, with contempt for their rival’s nakedness?
That is why I agree with Adam Smith’s pragmatism: markets where possible, government where necessary.
Thursday, March 20, 2014
GREAT QUOTES SERIES, No 1:
Antoin E. Murphy, Department of Economics, Trinity College Dublin is the author of numerous books and articles, including John Law: Economic Theorist and Policymaker (Oxford University Press, 1997). He reviews William N. Goetzmann, Catherine Labio, K. Geert Rouwenhorst and Timothy G. Young, editors: “The Great Mirror of Folly: Finance, Culture and the Crash of 1720” (New Haven: Yale University Press), 2013. xiv + 346 pp. (ISBN: 978-0-300-16246-2) for the Society Of Economics Societies (SHOE) @EH NET.
“History had been replaced by mathematical modelling; antiquarian books had been discarded and libraries holding them downgraded; the past was seen as no predictor of the future. But of course history does have a tendency to repeat itself. Remove the wigs from the eighteenth century bankers, financiers and traders and replace them with mobile phones and one finds essentially the same type of agents with all their excessive hype that characterized recent financial markets not just in New York but across the globe. The Great Mirror of Folly of the eighteenth century has most certainly been mirrored in the follies at the start of the twenty-first century. If one accepts this view then there are still important roles for antiquarian books, specialist libraries, economic historians and historians of economic thought to highlight how apparently rational people become irrational, inhabiting asset market bubbles that have huge economic and social costs when they burst. So take a bow Yale along with the editorial team that published this book.”
This is a positive comment on part of a problem that has bothered me for years, since I retired and had time to look around what has happened to all the certainties of economics that once constituted that “glad, confident mornings” (now no more) of my chosen academic discipline in the 1960s.
Its been a busy retirement lately, This afternoon (Scottish time) I completed a final ms of a new chapter for a new book for A Palgrave Collection (hence a shortage of posts these last two weeks). There’s now more in the pipeline. Promise!
Friday, March 14, 2014
Selfishness Throughout Deep History
David Livingstone on 15 Feb -posts on The Boundary Sentinel HERE
“However, like the idea of charity itself, greed and its excuses are also as old as humanity. Over recent centuries, there has been an attempt to gain popular support for such a perverted view of reality. In the eighteenth century, Adam Smith, reverently hailed as the “father of economics,” put forward the mythology that the selfish pursuit of wealth creates prosperity for all.”
This is of course a mistaken view of Adam Smith promoted by ‘conservatives’ in North America. Smith held no such views, though some English (not Scottish!) academics in the late 19th-century taught the 'selfish' theme. The ‘selfish’ interpretation was boosted by a young US middle-of-the-road and talented economist, Paul Samuelson. From his justified prestige in developing mathematically-based economics his elementary textbook, Samuelson's ‘Economics; an analytical introduction’ (1948), McGraw-Hill, that achieved sales of about 5 million to 2010.This meant his ‘selfish’ version of ‘self-interest, became embedded in popular consciousness and among teachers and tutors, and the general public.
However, the ‘selfish’ interpretation bears no resemblance to Smith’s teaching on ‘self-interest’.
Smith argued that mankind depended on the mutual co-operation of thousands (now billions) of others for their daily sustenance and long-term survival. This is driven by their (and our) ‘self-interest’ and expresses itself through the mediation of each person’s self-interest through ‘persuasion’, ‘conversation’, and the 'mutual exchange’ of ‘good offices’ (bargaining).
Selfishly demanding that someone gets what they want without exchanging with others for some of what they want too, would lead to failures to transact and exchange, and possibly to violence and theft, and ultimately to the breakdown of society - a not unknown consequence throughout our deep history, as the archaeological record shows way back beyond written history and still, regrettably, occurs today in isolated cases.
Monday, March 10, 2014
MARKETS WHERE POSSIBLE, STATES WHERE NECESSARY
Don Boudreaux posts on Café Hayek Blog (7 March) HERE a thoughtful quote and commentary, typical of his literate, hard Libertarian thinking, titled “Witch Doctory”, from pages16-17 of the 3rd edition of Paul Krugman’s and Robin Wells’s Economics (2013): “When markets don’t achieve efficiency, government intervention can improve society’s welfare. That is, when markets go wrong, an appropriately designed government policy can sometimes move society closer to an efficient outcome by changing how society’s resources are used… An important part of your education in economics is learning to identify not just when markets work but also when they don’t work, and to judge what government policies are appropriate in each situation.”
Don reports this passage from Jim Gwartney’s talk at the 2014 meeting of the Public Choice Society (in Charleston, SC – one of Don’s “favorite towns on the planet”). Jim Gwartney notes that “too many econ textbooks are ignorant of public choice” and the Krugman-Wells text “apparently has zero mention of public choice or of government failure (despite that book’s many mentions of market failure).”
The theme of Jim’s talk “was that it is not only intellectually sloppy or lazy but, in fact, deeply unscholarly and unscientific for economists today to ignore public-choice analyses of political decision-making. The quotation from Krugman’s and Wells’s book “is just one example – of the still-widespread failure of economists to take public choice seriously… and an embarrassingly large number of such texts – many written by the world’s most acclaimed economists, such as Paul Krugman – are surprisingly naive and unscientific. The authors of these texts pretend to write about reality, but they instead write about a fantasy world and “Far too many economists, such as Krugman – because they either ignore or are ignorant of public choice – simply assume that government somehow is not affected by the many imperfections that these economists readily find in markets”
Don Boudreaux suggests that Krugman and Wells should have ended with a different concluding paragraph that he kindly writes for them:
“An important part of your education in economics is learning to identify not just when governments work but also when they don’t work, and to judge what market policies are appropriate in each situation.” That is, “if someone suggested that you assume that markets always work perfectly (or always work better than government), what sort of scientific credibility would you accord to that person? I hope none. It’s profoundly misguided simply to assume that, if government fails to achieve some attainable and desirable outcome, that outcome can be achieved instead by markets that are assumed to operate perfectly. Such an assumption about market perfection (or superiority) would be unscientific. But such an assumption – as is made by too many economists today – about government perfection is equally unscientific.”
Jim Gwartney rightly laments that far too many economists today simply assume that the witch doctor – the state – has both the miraculous powers and the benevolent interest necessary to cure all social ailments, or at least to deal with these ailments better than can admittedly ‘imperfect’ markets.”
These are typical debating styles in ‘close-quarter’ contests between adherents of polar opposite ideas, common in economics, and rampant in politics, such as in ‘Markets versus ‘States’ debates.
However, I suggest, the habit is universal on all sides of these irresolvable arguments.
Many people are deeply antagonistic to Markets, even considering them immoral and unnatural. Others are equally antagonistic to States, considering them captive to special, corrupting interest groups or dictators and fantasists.
I prefer to be guided by the philosophy closer to the pragmatics of Adam Smith: Markets where Possible, State where Necessary”.
Monday, March 03, 2014
Competition and Cooperation
Mark Wadsworth, Young Peoples Party posts (15 February) HERE
“The Invisible Hand is the expression used, among other things, to describe the phenomenon that even though the private economy is split up into lots of smaller organisations, some co-operating and some competing, when you look at it as a whole, it looks as if it had been deliberately organised that way to achieve a reasonably near-optimum level of output, employment, profits etc. (in the absence of state intervention and natural or government-granted monopolies and so on). So the Honda car you bought from the Honda showroom was not really built and sold to you by one huge organisation called "Honda". There is an endless chain of sub-contractors, suppliers, franchisees and so on. For some reason, things tend to work slightly better this way, if there are lots of smaller enterprises, each focussed on doing one or two things really well. Now if the entire Somerset Levels were owned by a single landowner, it seems likely that he would have looked after his own interests by dredging rivers, digging more channels, keeping certain areas forested, leaving marshy bits at the edge of rivers, building his buildings on stilts or on higher ground (or whatever it is that he would do) and so on. But the Levels are owned by 1,000 farmers with an average of 170 acres each (source). Each of them is trying to get as much out of his little bit as possible, so the farmers on higher ground chop down their trees; the ones near the river want to use all the land rather than leave it fallow; if your farm is on low lying ground, that's where you'll build your buildings; I'm not aware that they all chip in to a common fund to dredge rivers. UPDATE: they do have Drainage Rates actually, see comments. And so things go wrong, and when things go wrong, they all start whining that it is the government's responsibility. I suppose it is true that the government absolved them of this responsibility and then messed up, but all the same, it illustrates the general observation that once it comes to land ownership, The Invisible Hand simply does not function (which in turn suggests that land ownership is the result of state intervention or a monopoly situation). See the related topic of retail mix control. A large part of the reason for the demise of "The Traditional High Street" is precisely because they are divided up into tiny units, each owned by a different people, and there is no incentive to co-ordinate and co-operate to get the best overall use.”
Mark is a little economical with Adam Smith’s actual thinking. I suggest respectively that he poses co-ordination efficiency as a contest of states versus markets, when in fact history shows they were complementary and ever present. This complementary process was a staggered emergence from post-hunter-gatherer societies and the evolution of the division of labour and property, in which collective band and tribal cultures, including local languages, emerged over many tens of millennia. This evolutionary process was not universally in step and is still continuing, as anthropology science shows.
Adam Smith surmised that the very long process of human societal evolution roughly conformed to a four-stadia over-lapping sequence of hunter-gathering, shepherding, farming, and, “at last”, commerce. (Smith “LJ”, 1762-3). He also noted that the entire social sequence was dominated by the universal importance of human “exchange”, that is “The necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.
Whether this propensity be one of those original principles in human nature, of which no further account can be given; or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to enquire. It is common to all men” (Smith “WN”, 1776.)
This is paragraph is of considerable significance to the “cooperating-competing” axis raised by Mark Wadsworth that “when you look at it as a whole, it looks as if it had been deliberately organised that way to achieve a reasonably near-optimum level of output, employment, profits etc. (in the absence of state intervention and natural or government-granted monopolies and so on).” The phrase “deliberately arranged” is worrying because it applies some extra-human entity deliberately intervening in human social evolution.
Experiences such as in Honda operation’s are not uncommon and have not been non-existence throughout history. It is typical of the evolution of exchange almost from deep history. Smith gave an example in the manufacture of the common labourers’ woolen coat in WN. The supply chain extended beyond immediate neighbourhoods internationally abroad. Much of this activity was evolutionary and unintentional, even accidental. There is no semblance of anything like “deliberate” intention and certainly nothing worthy of the simile metaphor of “as if” it is deliberately arranged”.
Mark slips up on facts but thankfully owns up that “they do have Drainage Rates” but he reveals his attachment if in the negative to the modern myth of an “Invisible Hand” this that “in this case [it] simply does not function”.
Lastly, Mark makes an extraordinary claim that if “High Street businesses are “Divided up into tiny units, each owned by a different people, and there is no incentive to co-ordinate and co-operate to get the best overall use.”
Leaving aside my usual comments on the “invisible hand” (scroll down earlier posts” for details), Mark is up against experience of how competitive major and minor firms “co-ordinate and co-operate” on a permanent and continuing basis on matters of their shared common interests, such as common services they pay for and receive from landlords, local and national governments and which they are obliged to pay for or implement. I have consulted professionally for both sides of such transactions (not at the same time!).I also recommend Mark reads Daniel B. Klein’s “Knowledge and Coordination” Cambridge University, 2013, for an appreciation of just how significant coordination is for dynamically competitive market economics. Without combined competition and coordination markets work less dynamically and, in the extreme, severely stagnate
MANY THANKS FOR THE MESSAGES SENT DURING MY RECENT STAY IN HOSPITAL. I AM STILL BEING TREATED FOR FATIGUE AND A LAPSE IN MY RECOVERY FROM STROKE.
I SHALL CUT BACK ON ACADEMIC WORK. ONLY THIS WEEK I TOOK DELIVERY OF A NEW APPLE MAC, BUT HAVE BEEN UNABLE TO USE IT YET! FORTUNATELY, MY OLD MACBOOK PRO IS STILL SERVICEABLE.