A Gaia Economist Slips into Error

Molly Scott Cato writes (28 May) on ‘Gaian Economics’ HERE

‘All other green campaigns become futile without tackling the economic system and its ideological defenders. Economics is only dismal because there are not enough of us making it our own. Read on and become empowered!’

‘Less Osborne More Hobsbawm’

Advocates of a market view of the economy and proponents of further and faster globalisation both tend to seek inspiration from the work of Adam Smith, who is taken to be the founding father of market economics. Smith's work The Wealth of Nations, was published in 1776, only on the cusp of the industrial revolution and before its technological advance had had the chance to impact widely on social and economic structures.

The economist who better represents the theory that has come to dominate our modern world is rather David Ricardo, whose most famous work Principles of Political Economy and Taxation was published in 1817, some 40 years after that of Smith, and whose work set the parameters for the world of laissez-faire capitalism and export-led growth that we inhabit today. Ricardo was attempting to theorise the economic reality of a world where labour and land were made subject to market forces, as they had been to only a limited extent in Smith's day.

In an excellent article in the New Statesman back in March, Robert Skidelsky made clear George Osborne's debt to Ricardo, whose economic theories he rather brutally summarised in the following phrase: 'It goes like this: the private sector creates wealth and the government squanders it. The smaller the government – the less it taxes and spends – the more the economy will thrive.' Moreover to a Ricardian there is no fundamental distinction between taxation and government borrowing: borrowing is merely deferred taxation.

This is an article of faith, unsupported by empirical evidence. …

… Economics is a complex system, where numerous variables interact in ways that can never be predictable. This is why jokes about one-armed economists are just foolish: there will always be a multitude of answers to every question and predicting the future is a mug's game. Hence the wise economist leaves his options open, and makes sure that the politicians he is advising do the same.’

Comment
A preliminary observation: Molly (the name by which she writes, so I am not being patronising) adopts the label of economics as the ‘dismal science, and “everyone knows that economics is the dismal science [and] almost everyone knows that it was given this description by Thomas Carlyle, who was inspired to coin the phrase by T. R. Malthus's gloomy prediction that population would always grow faster than food, dooming mankind to unending poverty and hardship.”

However, the facts are different and Molly ought to know the truth about the use of ‘the dismal science’ label, and I assume she does not know, otherwise if she did know she would be ashamed:

“Carlyle's target was not Malthus, but economists such as John Stuart Mill, who argued that it was institutions, not race, that explained why some nations were rich and others poor. Carlyle attacked Mill, not for supporting Malthus's predictions about the dire consequences of population growth, but for supporting the emancipation of slaves. It was this fact—that economics assumed that people were basically all the same, and thus all entitled to liberty—that led Carlyle to label economics "the dismal science."

“Carlyle's target was not Malthus, but economists such as John Stuart Mill, who argued that it was institutions, not race, that explained why some nations were rich and others poor. Carlyle attacked Mill, not for supporting Malthus's predictions about the dire consequences of population growth, but for supporting the emancipation of slaves. It was this fact—that economics assumed that people were basically all the same, and thus all entitled to liberty—that led Carlyle to label economics "the dismal science." Quoted from: David M. Levy and Sandra J. Peart , 22 JANUARY 2001: “The Secret History of the Dismal Science. Part I. Economics, Religion and Race in the 19th Century” HERE:

Carlyle’s bitter attack on Mill came from disgraceful and scurrilous pamphlet entitled: "An Occasional discourse on the Negro Question" 1849 (which is the polite version – it was originally called ‘on the N----- Question’), and was written by the 'great' Thomas Carlyle.

This episode shows that liberal-minded people do not have a monopoly of the social virtues, which is also clear from today’s representatives, such as Molly, or, indeed, the distinguished historian, Professor Eric Hobsbawm in her title.

On the substance of Molly’s article, I am not in total support of her side-blast at David Ricardo, or more pointedly, I have more fundamental disagreements over Ricardo’s influence on economics than an alleged error of George Osborne, the British Chancellor.

Smith’s criticized the consequences of the discovery by government that it could add to its capacity for extracting revenue from taxation from some of its citizens (always unpopular) by borrowing, which was less painful politically, governments soon realized. In fact, because they often needed to borrow to fund their dynastic wars, governments displaced loan repayments and their interest costs to the future, which caused yet more borrowing and interest burdens to future taxpayers.

It is not clear to me the significance of Professor Skidelski’s or Rucardo’s point about Taxation and Borrowing. I do know that the habit of medieval Kings who simply expropriated their lenders when it was expedient to do so is not available to modern governments under the rule of law and that defaulting on debts likewise has downsides, including morally too.

However, Ricardo’s main malign error concerned his analytical devices, which when taken up by the neo-classical economists from the 1870s, especially the mathematically obsessed, has been quite damaging. In order to get determinate ‘solutions’ the assumption of decreasing returns from agricultural examples lead to uni-dimensional economics, which produced fine equations, wonderful graphs, and, eventually, an absence of people from economics, perhaps the most significant loss to unreality, yet attempted by its practitioners. In the extreme, the triumph of ‘general equilibrium’, seen as the pinnacle of economics as a science, is actually a minor triumph of analysis that does not conform (i.e., explain) social reality.

Disequilibrium rules. Equilibrium is at best partial – never general as the persistence of temporary relapses into recessions and depressions, followed by temporary booms, shows. Whether this is ‘good’ or ‘bad’ thing is less important than the recognition that it happens. The question is whether societies can live with these events, with the subsequent question of whether- and more particularly ‘which’ - political interventions to ‘correct’ these events makes things ‘better’ or ‘worse’.

Adam Smith made (very) few predictions. His almost entire approach was historical – how did we get to where we are – and not predictive. If anything he remained sceptical of predictions and of the likelihood that political elites would choose the appropriate policies to remove existing anomalies –they were, more often, the cause, not the cure, of errors in economic management (mercantile political economy). I confess, not to having much faith in ‘gaia economics’, or other would be salvation (New Economics Foundation, etc.,).

But I mean no malice. I will read what Molly writes, and wait and see.

The Hesitant Hand by Steve Medema, Part 3: Chapter 2:

[Posting is a trifle slow this week due to matters related to our sudden return from France]

This is where Steve’s book begins to look new (to me) and very interesting. He is beginning to enter into his theme (‘Taming Self-Interest in History of Economic Ideas’).

Steve writes a brisk but purposeful account of the evolution of political economy towards economics in the 19th century. Apart from the residual dominance of Adam Smith, present but not necessarily in charge, there is that enigma called Jeremy Bentham, of whom, I for one have never been comfortable around people with their feet firmly planted in the clouds.

Bentham's utilitarian approach was itself utopian in its pewrspective of how people behave (a way too improbable a calculus for the bulk of people to abide by) and the institutional arrangements of his proposed schemes in society were just as utopian. Nowhere is just about as close as you can get to finding a society that would incorporate his imaginative ideas.

The 19th-century enduring illusion of laissez-faire, wrongly attributed (still!) to Adam Smith, pervades popular discourse throughout but most serious economists controlled themselves, so to speak, in their appreciation of its unrealistic applicability. Market competition, yes, but blind faith in laissez-faire, no. It was more of a phrase embedded in political agitation and journalism (The Economist) than other than a limited panacea among serious economists.

Steve quotes J. E. Cairns asserting that ‘the maxim laissez-faire … has no scientific basis whatever’ (31), which seems appropriate for a phrase first uttered in 1680 by a ‘plain spoken’ merchant, M. le Gendre, when asked by the French Finance Minister, Colbert, what he wanted from the government (‘leave us alone!’). A thin reed, surely, on which to analyse society and later promote it to a principle of economic policy, echoed on the streets of France by the French political agitator, Pierre Poujade in the 1950s.

Steve gently guides readers from the streets to the constructive perspectives of how to draw the mercantile state from policies favouring special interest groups towards those that would benefit the general population. This meant becoming realistic about government activity – necessary not overly interventionist in creating monopolies

Primarily, he is concerned with the ideas of John Stuart Mill and Henry Sidgwick on self-interest in the context of growing realisation of the possibilities of local market failure, a relatively new idea among 19th-century economists. The commercial society of which Adam Smith wrote had changed, and would continue to change, throughout the 19th century, and with the changes came changing concerns of what was agenda for economics.

Steve wanders slightly into a Venn diagram in an attempt to illustrate Mill’s view of overlapping interests where self-interest is superseded by morality, and the slide to welfare economics begins in pursuit of the legitimate functions of government, particularly that of law making, where the appropriate solution to certain conflicts of interest is not obvious. There is no easy rule that resolves all conflicts where there are clear beneficiaries and clear losers. Mill, typically, seeks a ‘solution’ in ‘expediency’, which boils down to the arrangement that can be imposed (or left alone) causing the least disturbance.

Mill’s views of government – its ‘natural tendency towards collective mediocrity’ (41) – did not lead to ‘government by the brightest’ because if too many ‘bright people’ leave non-government, the quality of an outside check on the errors of government would be weakened. Even then, ‘government by the brightest’ would not be better than ‘government by the mediocre’.

Mill returned to the mystique of ‘laissez-faire’ (with its unsubstantiated superiority to other arrangements) and warned against departing from it (42). I always think that while we know what M. le Gendre wanted from M. Colbert, we don’t know what M. le Gendre’s customers wanted – as usual the consumers’ interests are trumped by the producer’s, and probably worsened by the government’s. Laissez-faire is the cry of producers; Adam Smith spoke up for consumers. Advocates of laissez-faire (which did not include Smith, but did include Mill) should avoid confusing laissez-faire with liberty for all.

Steve moves on to Henry Sidgwick, Mill’s contemporary, and author of Methods of Ethics (1874) and Principles of Political Economy (1901), thus spanning Marginalist and Marshallian thinking.

For Sidgwick, self-interest was the central assumption upon which ethics and economics could be founded, but Natural Liberty could be ‘dismantled’. He considered that ‘extreme laissez-faire’ and the assumption that self-interest is ‘universally beneficent’ and ‘harmonious’, ‘should be banished to the remotest available planet’ (43), which message could be validly expressed today in some circles given the widespread misunderstanding of those who wildly misquote (indeed, often make up) Adam Smith’s views on these subjects.

I found this section of the chapter most valuable, not being familiar with Sidgwick’s thinking. He spotted errors in laissez-faire, particularly its non-conformity with actual practice. It had negative spillover effects in one party’s ‘use’ of a finite resource, in certain contracts that harmed a third party, and, of course, where monopolies were present(44).

With government, too far then the scale of interventions, narrowed the sphere appropriate for private enterprise; too little government exposed the community to higher risks of disagreeable outcomes. The ‘Goldilocks’ solution is self-evident, but realising it not, nor easy.

This seems typical of Sidgwick from what Steve says about him, and probably in the category of ‘motherhood and apple-pie’ - he may be too intellectual to be practical. Perhaps he recognised this by asserting that ‘in human affairs we have often only a choice of evils’. (45)

[Part 4 is on ‘Marginalizing the Market’]

Extraordinay Outburst Against Adam Smith

In British intellectual history, the name of John Ruskin for some reason stands out. The ‘soft’ left seem to adore him as do many modern environmentalists (often the very same people).

I am reading ‘Wealth and Life: essays on the Intellectual History of Political Economy in Britain, 1848-1914’, by Donald Winch (Cambridge University Press, 2009), loaned to me by a colleague for my summer, off-piste, reading.

And a good read it is turning out to be, perhaps because I have a loose acquaintance with the work of its subject personalities, in the chapter I am reading (4 to be explicit, which covers ‘Ruskin’s aversion to Mill’ - that is John Stuart Mill)and Harriet Taylor, his wife). I admit ‘loose’ probably is too strong a word for my actual familiarity, such as a skimmed reading of Mill’s Principles of Economics (1848), the most read
19th century economics textbook at university - until replaced by Alfred Marshall’s Principles (1890-1924).

Donald Winch, to be sure, is the doyen of historians of economics, highly regarded for good reason by his peers and those aspiring to become so. I read his shorter book, Adam Smith’s Politics (1967), a few years ago and it is in my library (I bought a second-hand copy for a few pounds and have consulted it several time since).

I was reading Wealth and Life this morning on my way home on a bus from a morning coffee with my retired geologist friend (parking is impossible in the centre of Edinburgh with the construction of a new tram way) and I found this astonishing attack (page 91) on Adam Smith by Ruskin:

“Adam Smith was ‘that half-bred and half-witted Scotchman’ who had taught the ‘deliberate blasphemy’ that ‘thou shalt hate the Lord thy God, damn his laws, and covet thy neighbour’s goods”. (The Complete Works of John Ruskin, 1903-1912. vol. XXVII; 764, and XXIX: 134; 212; 282; London: George Allen & Unwin).

Ruskin didn’t think much better of Mill and said so in print. Extraordinary behaviour for a self-proclaimed Christian (?) gentleman. Ruskin took ad hominem debate to a whole new (low) level.

Yet he is still lauded for his artistic sensibilities by many people today!

As they say in parts of England: ‘there’s nowt so queer as fowk’ (Google it for a translation).

In the meantime, buy a copy of Wealth and Life by Donald Winch.