Wednesday, May 17, 2006

A Wee Parable for Today's Easy Solutions

“Aren’t economists in a rut? We need a more credible human model than what economic theory has been able to provide.” By Arun Mairi

While some people were delighted with this apparent change of heart amongst profit-obsessed businessmen, others, like The Economist, were aghast. In an issue focussing on corporate social responsibility, the journal argued that good economics (citing Adam Smith for this, as it often does) requires corporate leaders’ social responsibility be limited to the pursuit of profits for shareholders and nothing else.”


Economists tend to over-simplify their assumptions to enable mathematical modelling. For example, The Economist says, “Measuring profits is fairly straightforward; measuring environmental protection and social justice is not. The difficulty is partly that there is no single yardstick...How is any given success for environmental action to be weighed against any given advance in social justice, or, against any given change in profits? Measuring profits—the good old single bottom line—offers a pretty clear test of business success.”
This is sheer intellectual laziness. If Newton had decided to ignore the concept of gravity merely because he did not have the means to measure it, physics could not have developed its power to change man’s world
.”

Published in Financial Express, Mumbai, India today.

Comment
Makes it sound easy, doesn’t it? Modern economics has gone down a blind alley into abstract mathematics, turning it back on political economy as envisaged by Adam Smith, yet it often justifies this direction by references to Adam Smith and isolated quotations from ‘Wealth of Nations’, shorn of their context.

‘Trading for the public good?’ Waste of time. If the government directed them to do so with a view to growing the domestic economy and not dissipating its energies in distant investments, it would probably fail. Hence, don’t bother. Leave ‘em alone and they’ll bring the bacon home.

Why? Well most of them don’t like to invest their scarce capital stock where they cannot watch over it. It’s called risk and in the early primitive stage of capital accumulation the risks are greatest, the consequences dire if it goes wrong – absolute poverty for those involved. Hence, they are more likely to take smaller risks with their capital-stock where they can watch over it. This itself concentrates capital accumulation, job creation and profit earning locally.

Makes sense doesn’t it? What? Is it different today since Smith wrote the above ideas in 1776? Well of course it is. Small tradesmen and artisans with £5 or £100 of capital have been replaced with multi-million, even multi-billion pound corporations, the rule of law and contracts is so widespread and sophisticated that whole firms of lawyers, accountants, financial and technology specialists abound.

Yes, we need new approaches and I have only mentioned Adam Smith’s ideas on this particular issue because the Economist did so. Whether the Economist’s use of the ideas of Smith suitable for the 18th century are valid in the 21st, that’s another question. But whatever you do, don’t ask a mathematician – they know little about people and less about how real economies work.

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