Thursday, January 31, 2013

Reasoning Preferred to Rational Theorising

Mikko I Arevuo posts "Ayn Rand and the Free Market Revolution" on the Adam Smith Institute Blog
HERE and reports on Dr Yaron Brook, president of Ayn Rand Institute, the advocate for Objectivist philosophy, about his new book co-authored with Don WatkinsFree Market Revolution: how Ayn Rand’s ideas can end big government.” However, Mikko I Arevuo, who advocates of free markets and small government parts company with the Ayn Rand Institute because it is atheistic, but what he agrees with is more sympathetic to its objectivist philosophy and provides a one paragraph explanation of it outlined by  Dr Edward Younkins:
“Hierarchically, philosophy, including its metaphysical, epistemological, and ethical dimensions, precedes and determines politics which, in turn, precedes and determines economics. Rand bases her metaphysics on the idea that reality is objective and absolute. Epistemologically, the Randian view is that man’s mind is competent to achieve objectively valid knowledge of that which exists. Rand’s moral theory of self-interest is derived from man’ s nature as a rational being and end in himself, recognizes man’s right to think and act according to his freely-chosen principles, and reflects a man’s potential to be the best person he can be in the context of his existing circumstances. This leads to the notion of the complete separation of political power and economic power – that proper government should have no economic favours to convey. The role of the government is, thus, to protect man’s natural rights through the use of force, but only in retaliation and only against those who initiate the use of force. Capitalism, the resulting economic system, is based on the recognition of individual rights, including property rights, in which all property is privately owned.  For Rand, capitalism, the system of laissez-faire, is the only moral system.
I read most of Ayn Rand’s paper-back philosophy books and novels in the 50s-60s.  I was struck then by her fatal weakness: to “save the world” she requires the world to adopt her objectivist philosophy, or at least behave as if they did, a most unlikely outcome.  Therefore, it ain’t likely to happen.
For Rand, capitalism, the system of laissez-faire, is the only moral system.  That may well be logical, given her philosophy (ignoring for the meanwhile that ‘laissez-faire’ is a dubious fork of morality). Laissez-faire’s leading advocates in the 19th and 20th centuries were mostly spokesmen for capitalist owners who considered laissez-faire only to mean freedom for them to oppose legislation (such as the Factory Acts) seeking to protect employees from their employers’ low wages, unsafe working practices, and the use of child labour.  Smith in WN noted how merchants secretly combined to resist employee wage demands while opposing the rights of employees to combine to pursue their collective interests.

Adam Smith’s advocacy of the philosophy of Natural Liberty was quite different from laissez-faire (words he never mentioned). Natural Liberty, as expressed by Smith, equalised the rights of all participants in commercial society, employers, labourers and consumers.  This does not prevent modern economists from associating laissez-faire with Adam Smith’s name, a habit that goes right back to the early 19th century and continues into the 21st. Many, I find, conflate laissez-faire to mean both freedom for employers and governments.  The lobbying of government is big business and by big business in many countries

Rand’s assertion that her “moral theory of self-interest is derived from man’ s nature as a rational being and end in himself” sits comfortably with neo-classical theories of ‘rational’ beings (who ‘Max U’ in everything).  That belief in rational Homo economicus is unfounded.   Humans are capable of reasoning (not the same as having a common rational faculty) because their individual ability to reason is not the same as all of us arriving at the same answers or choices. Jails are full of the victims of their own ‘rational’ choices given their desperate or opportunistic circumstances and many more prisons would be required if judicial processes were applied for the rational choices of those in government who intentionally or unintentionally inflict misery on their innocent victims. Our behaviour in different circumstances may be considered individually to be reasoned, given our individual perceptions of specific situations, but there is no reason to believe our individual actions from our perceptions of the circumstances are subject to a universal rationality.  Humans in human societies are not like that.  We do not all rationally act in accordance with some theory of rational choice.

It is in this area that I parted company with Ludwig von Mises in his 1966  “Human Action: a treatise on economics” – a very large tome I read some years back – in which he derives everything that follows in his book from a rigorous logic of the consequences of proposition. 

I prefer Smith’s approach of studying what happened since some humans left the forest and then as a minority, at first, moved to shepherding and farming.  Another minority  (“at last”) moved from country life to live in towns, inevitably and indubitably, creating (“at last”) commercial society that first processed food and raw materials from the country in traded exchange for processed food and later in exchange for manufactured goods. It was that historical development of traded exchange that laid the basis for the creation of capital that led to commercial development.  Those that remained in the forest, or in shepherding or farming, mostly remained there for millennia.  There is nothing ordained about what humans do, nor is there a particular direction by which they pass their lifetimes, as their archaeological remains testify.

Smith did not require the conversion of everybody to new morality or to a universal conformity to logic.  In fact he wrote of humans as they were.  He made no predictions about the future  (except about the future of the former British colonies in North America becoming the wealthiest economy in the world by around 1875).  Instead he studied the past to understand within the limitations of knowledge the present; we might be better doing the same.  

Wednesday, January 30, 2013

Pragmatism is Better than Ideology

Adam Kotsko posts on An und für sich HERE
The reverse invisible hand”
“As we all know, capitalist accumulation is guided by the “invisible hand,” which ensures that the selfish and short-sighted choices of individual capitalists fit together into a beneficial whole that promotes long-term wealth-creation for all. What’s less well known is that for workers, the situation is reversed: their self-interested decisions add up to create a situation that is more and more disadvantageous for workers as a whole. Examples abound. On the individual level, taking an unpaid internship can give one a leg up on the competition — on the whole, it creates a situation where more and more work is being done on an unpaid basis, so that there are fewer slots available for paid workers.”
I shall ignore on this occasion any comments on Adam Kotso’s repetition of the usual nonsense from modern economics about the “invisible hand”.  Instead, I shall comment on the assertions he makes about “unpaid internships” being part of his assessment of capitalist exploitation.
I see unpaid internships and paid 'modern' apprenticships as an extended job interview and better than making a decision on the basis of one or two interviews, which usually are not informed by evidence of a candidate’s range of suitability.  This can lead to early terminations for disciplinary breaches (not turning up for work regularly), or not showing those little positive attitudinal benefits on a daily basis (getting on with colleagues and customers), the absence of which make their employment stressful all round. 
It’s not all one way by any means.  A few weeks work in a work role can also enlighten the unpaid employee.  They may too discover they are not suited or do not wish to be suited for that type of work.  They end up with some experience too which in itself is of benefit to other employers, both private capitalists, public, NGOs and private individuals.
Ignoring the consequences of politically motivated interventions is typical of (albeit well meaning) stances.   In France the restrictive labour laws in the cases of young people and adults too was to raise the costs of employing the unemployed because of the difficulty of correcting mistakes in recruitment of what turns out to be unsuitable candidates.  Hence, youth unemployment is higher that it needs to be even in the current recession.
Pragmatism rather than ideology is relevant when discussing practical problems and selecting and testing potential solutions to them.

Respect the Integrity of History - Don't Rewrite it

Daniel Kuehn in “Facts and Other Stubborn ThingsHERE 
"...the notion that a social system moved by independent actions in pursuit of different values is consistent with a final coherent state of balance, and one in which the outcomes may be quite different from those intended by the agents, is surely the most important intellectual contribution that economic thought has made to the general understanding of social processes. [Adam] Smith also perceived the most important implication of general equilibrium theory, the ability of a competitive system to achieve an allocation of resources that is efficient in some sense. Nothing resembling a rigorous argument for, or even a careful statement of the efficiency propositions can be found in Smith, however"  Arrow and Hahn, 1971.
Arrow of course proceeds to provide some efficiency propositions that most economists would find relevant to think about, and he rigorously demonstrates the point that individuals pursuing their own interests can generate beneficial results for society in a system of market exchange. Adam Smith took an enormous step forward and provided arguments that had been fairly convincing. Walras, Arrow, Hahn, Debreu, etc. picked up where Smith left off. I'm sure they found Smith's arguments plenty convincing, but they were nevertheless able to provide new arguments - and they did.
Is Arrow's efficiency criteria Smith's? No, of course not. They didn't even talk about "efficiency criteria" back then and Pareto hadn't even been born yet (much less Kaldor or Hicks). To point out that this is not precisely how Adam Smith addressed the question misses the point. We don't want to keep providing the same answer, we want to make this Smithian channel of thought deeper, broader, and stronger.
Are the parameters of Arrow's inquiry exactly the same as Smith's? No, of course not. The analytical toolbox gave primacy to some assumptions and made others less relevant. In the end Arrow did not speak to all that Smith spoke to, and vice versa. But again, we don't want to keep providing the same answer in science. We want to take a good answer and make it deeper, broader, and stronger. And that's what Arrow did.
Mark Blaug has called this a "travesty", but Mark Blaug seems to think Arrow's citation of Smith indicates that Arrow thought he was reproducing Smith's argument as opposed to doing constructive work in the same channel of thought. Mark Blaug is a historian of thought, but in calling Arrow's citation of Smith a "travesty" he demonstrates that tendency that we all succumb to sometimes when we hold a hammer: the tendency to see nails everywhere.
… The suggestion that he is not moving forward Smithian economics because his framing of the issue is not identical to Smith's seems to miss the whole point of "moving forward Smithian economics" to me. The most important element here is that private choices in market exchange are socially beneficial. Arrow has that. The idea that he brings in certain efficiency criteria and assumptions to talk rigorously about this phenomenon doesn't change the fact that he's doing Smithian economics. Smithian economics is about the heart of the theory, not the minutiae of approaching the question that change over time. On the flip side, the idea that Arrow is not moving forward Smithian economics because he only provided his answer to a relatively restricted case is laughable. You try to do better if you are tempted to throw this at him. I know I can't!
Daniel Kuehn’s presentation of the issues raised by Arrow and Hahn’s contributions to General Equilibrium theory for Adam Smith’s contribution is misleading.
 To point out that this is not precisely how Adam Smith addressed the question misses the point. We don't want to keep providing the same answer, we want to make this Smithian channel of thought deeper, broader, and stronger” Adding: Arrow and Hahn “picked up where Smith left off” and repeats the mantra about making Smith “deeper, broader, and stronger”. 
 In general I have no problem with 20th/21st century economists advancing analytical science, for which they deservedly receive the accolades of Nobel Prizes.
  My objection is when they link their work in general equilibrium and Pareto’s Welfare theorem directly to Adam Smith’s use of the metaphor of  “an invisible hand”. This leads to misleading associations of Adam Smith authority with modern views of how economic processes work.
 On the association of the invisible hand, see Arrow (1987): “The profoundest observation of Smith”; Arrow and Hahn (1971): “surely the most important contribution of economic thought”; Tobin, (1992): “one of the great ideas of history and one of the most influential”, and Samuelson (1976): who introduced his readers (and their tutors) to the notion that general equilibrium redefined the “the humble Invisible Hand doctrine”. 
These attributions to Smith on the back of modern work are misleading. They are now endemic in public commentary by economists. They make a “doctrine” out of a grammatical metaphor, giving its metaphoric role a completely doctrinal role well beyond its role in Smith’s work. For Smith it was a metaphor, not a doctrine. Mark Blaug was right to describe it as a "travesty".
That “private choices in market exchange” can be “socially beneficial” is true.  Smith said as much.  He also noted in Wealth Of Nations over 70 instances (not including the withering critiques contained in Book IV of WN) in which “private choices” specifically not beneficial to the “public good” (such as monopolies, mercantile policies, tariffs and such like).  Nobody wants answers to remain the same in science, but in respect of Smith’s work in the 18th century, his answers for him stubbornly remain the same.  Modern authors should respect the historical integrity of Smith’s work.

Sunday, January 27, 2013

Adam Smith Institute Ranked

“Adam Smith Institute ranked among top 10 economic think tanks in the world”
“Today, the University of Pennsylvania has released its authoritative Global Go To Think Tanks Report’s rankings of over 6,500 think tanks. The Adam Smith Institute is delighted to be placed 7th in the world for domestic economic policy and 10th for international economic policy.
These rankings place us in the same league as think tanks with budgets a hundred times bigger than ours. They confirm that we make a big difference, are highly cost-effective, and have earned the respect of our peers around the world. We were also named as the think tank with the 18th most significant impact on public policy in the world.
These rankings for 2012 confirm the Adam Smith Institute as one of the world’s leading policy think tanks, effectively fighting for free markets and a free society. 2012 has been an exceptional year and the impact of our work is reflected in our excellent position in the global rankings.
"This is a marvellous endorsement of our young, focused, energetic team, who have outperformed much larger institutions in terms of impact and cost-effectiveness", said Adam Smith Institute Director Dr Eamonn Butler. "I am proud to work alongside them in one of the world's leading policy think tanks."
This press release from the Adam Smith Institute is a significant report of an assessment by a serious academic institution, the University of Pennsylvania.
The placing of ASI as 7th for domestic (UK) economic policy and 10th for international economic policy out of 6,500 think tanks in the world is well deserved. 
Contrary to some views I hear from time to time, ASI is not a nest of warped reactionary ideologues with far out politics.  Anybody reading the ASI ‘Pin Factory Blog’ HERE  for a couple of weeks will find a mixed range of centre-right views of topical interest and short pieces on current economic policies. 
Tim Worstall’s economic contributions are trenchant, clearly written, always punchy, and a delight to read. Sam Bowman (editor) is also on target on political issues of the day.
Eamonn Butler, ASI Director, is an exponent of the rare art of writing informed short pieces on weighty issues and theory, as well as educative short booklets on major figures such as Hayek, and, of course, Adam Smith.  His 84-page “The Condensed Wealth Of Nations and The Incredibly Condensed Theory of Moral Sentiments” (2011) is a masterly piece of intellectual precision and is informative too for “old hands” and those new to Adam Smith.
Of course, I have my occasional criticism of some of the views expressed by ASI writers (most of whom are several decades younger than me) and I do not always agree with all the policies advocated from time to time. 
ASI as a think tank encourages people to think, not to conform.  It is not ideological – disclosure: I am an ASI Fellow – and nobody expects me to conform to a fixed party line because ASI does not have one.
Lost Legacy readers can judge for themselves by reading the “Pin Factory Blog” for a few weeks and by scrolling through previous posts.   The Blog attracts lively readers comments each day. 

Wednesday, January 23, 2013

On The Precision of Words By Philosophers

“Adam Smith in The Birth of Biopolitics, reconsidered”.
In a guest-post on Eric Schleisser’s Blog (HERE by Barry Stocker HERE; the paragraph below is included:
Smith begins by arguing that ‘domestick industry’ benefits from the ‘invisible hand’, so that the individual with capital directs it to the use of domestic industry rather than foreign industry, for reasons of self interest rather than public good. It is only that this individual does not only think of the ‘revenue of society’, not that he is completely unaware of it.”

Philosophers normally are precise in their use of language. The above suggests laxity not precision.
Smith’s construction of his argument was that concern for the security of his capital in foreign trade or carriage led the merchant to invest domestically, where there were still risks, but lesser risks than when his capital was out of his sight in the hands of other people of whom he knew less well than domestic merchants (WN IV.II.paras 1- 8: pages 452-455). The merchant’s insecurity is invisible; it is in his mind while making his decision, hence the appropriateness of Smith’s use of the IH metaphor. The domestic industry does not benefit from a mystical or otherwise “an invisible hand”; it benefits from actions arising from the “insecurity” of the merchant.
Smith then used the metaphor of “an invisible hand” that metaphorically led the merchant to invest locally. The IH metaphor refers to its grammatical object, the merchant’s insecurity; it does not exist as a "magical" or otherwise mysterious  entity of some kind in this case, or in any other case of proper metaphoric use, independently of the object that it “describes in a more striking and interesting manner” (Smith, 1763: “Lectures On Rhetoric and Belles Lettres”, p age 29).
The consequence of some merchants (but clearly not all domestic merchants because some other merchants exported and imported goods to and from non-domestic partners) investing locally instead of abroad was that domestic “revenues and employment” were arithmetically higher than they would otherwise be if fewer merchants invested “domestically” – arithmetically, the whole is the sum of its parts.
Smith does not suggest that such insecure merchants are thinking, or need to think, about the “public good”; they think only of the security of their capital (mentioned six times, twice in paragraph 9, the IH paragraph).
That so many economists and philosophers fail to see this connection is to my mind astonishing.

Review of an "Agreeable Connexion"

Alexander Broadie. 2012. “Agreeable Connexions: Scottish Enlightenment links with France”. Edinburgh: John Donald, Birlinn Ltd. ISBN 978 1 906566 51 7. £25.
This is a most agreeable book for scholars and those interested in the Scottish Enlightenment from which so much of the modern world evolved.   The revolution in philosophical thinking about human society indirectly influenced, and was every bit as important, for the re-emergence of the market economies in the evolution of the modern world.   Both changes in philosophy and economics also changed everything else, not by any means perfectly. Lingering remnants of the old world in philosophy and in economics continued alongside the new.  What Smith called “pusillanimous superstition” continues among some philosophers (and physicists) as did the economics and magnitude of the state’s role.
Alexander Broadie is a most agreeable author, far more so than many academic philosophers and economists writing in related fields.  I found his “Agreeable Connexions” most enjoyable and informative.  But then I was expecting nothing less, having conversed with him on several occasions. He once ensured the wrapt attention of a discriminating David Hume Institute meeting by opening his remarks with a simple statement that he held Adam Smith’s former (1751) Chair of Logic at Glasgow University. Since then, we have conversed at meetings of the Scottish Philosophy Forum (organised by St. Andrews University). I found him a most amiable, informative, and most unpretentious authority, without a whiff of the competitive academic arrogance sometimes displayed by academics.  Hence, I looked forward to reading his new book.  I was not disappointed.  Reading histories of philosophy, like much of the history and practice of modern economics, can sometimes weary the most diligent of informed readers.
Broadie’s thesis is that what became known as the Scottish Enlightenment has its roots in a long history of connections between Scottish intellectuals from the medieval period onwards, primarily with their French opposite numbers, despite their different theological traditions, particularly after the Reformation (largely inspired from Luther’s Germany).  Enlightened thinkers thought for themselves; unenlightened thinkers were tied to the unchanging thoughts of past, mainly theological, authorities. Where there is argument and debate without political repression, or at least passivity, Enlightenment may follow.  Broadie’s account of this background is enlightening itself.  He points to the judicial execution of a theology student, Thomas Aikenhead, on dubious charges of blasphemy in 1697, as a tipping point in Scotland.  The moral authority of Protestant Church power slowly ebbed away thereafter.
France, in direct contrast to Scotland, took its own, quite different, course to the spread of Enlightenment thinking.  The Catholic Church’s monolithic grip of the French universities remained secure, ensuring that well-educated French exponents of Enlightenment remained outside them.  Remarkably however, Scottish intellectuals played an active role in French universities from the 14th century (17 Scots were rectors of the University of Paris by 1600). Their intellectual work was theological, aided by their fluency in Latin and French. Their presence among the French academic elite over the centuries continued through to connections between Scots and French enlightened thinkers. The Reformation did not break the academic links between Scotland and France, despite the non-catholic affiliations of 16th-18th century Scots and the rigid Catholicism of the French universities. There was also a flurry of independent Protestant institutions, ‘universities’ in all but name.  Both Protestant Scottish students and Professors mixed with French, including Catholic and Protestant, students and academics as they continued to move between the two countries.
Fusion and infusion of radical ideas set the scene throughout the 16th and 17th centuries for the 18th century Enlightenment.  Broadie traces these complex developments with commendable clarity.  The role of David Hume in visits France in his 20s and of French influence on David Hume is revealing.  Hume went to France to continue his studies in the libraries of resident Scottish contacts and to study the ideas of French sceptics to whom he was introduced.  He made a second visit to France, staying in retreat in the Jesuit convent at La Fleche, where he completed his Treatise, of which he was to famously and sadly remark that it “fell still-born from the press’. However, it has never been out of print since.  It is standard reading with his other major works today.
Students of philosophy will appreciate Broadie’s masterly account of Hume’s Philosophy and his scepticism, as they will his discussions of the Scottish counter-response of Thomas Reid and the Scottish “common sense” philosophy school that momentarily pushed Hume (and Adam Smith’s ‘Moral Sentiments’) aside.  But a philosophy anchored in theological certainties only temporarily stemmed the sceptical tide. For Hume the real world exists in the form of “impressions of it” as ideas of it in a “sustained act of imagination”.  The “common sense” school rejected Hume’s projection of his theory of the mind, largely I would suggest because the so-called “common sense” stance emanated from those bound to theological precepts that made room for the existence of the “soul” on which their philosophy and their religion were anchored.
Broadie’s presentation of “morality and sentiment” encompasses the contributions of Adam Smith’s ‘Theory of Moral Sentiments’ (1759).  He discusses Smith’s contributions in the context of their reception by French activists, especially Sophie de Grouchy, Marquise de Condorcet, who wrote as the French Enlightenment came to the whimper and end in “horrendously tumultuous times, of Revolution and Terror, of cabals and conspiracies, secret denunciations and summary executions”. She became prominent after Smith had died in 1790.
Broadie’s account of Smith and his contributions as background to those of the French philosophers is masterly. Students and teachers would gain from reading Broadie on Smith’s moral philosophy and the links he highlights in Smith’s ideas in relation to Hume’s.   His account (pp. 134-40) of how Smith’s “sympathy” has an important relevance for “conflict resolution” is among the very best I have seen from a philosopher. I am an economist not a philosopher, so I was happy to read that Broadie’s account confirms my very rudimentary applications of the “harmonising influences” of Smith’s moral sentiments in Smithian “exchange” (bargaining) transactions (Kennedy, 2010 Adam Smith: a moral philosopher and his political economy, pp 30-34. Palgrave-Macmillan).  
However, also as an economist I have a small quibble with Broadie on page 137, where he mentions Smith’s reference to “truck, barter and exchange”.  “Truck” had nothing to do with modern “trucking” or “taking goods to market”; it refers to the 18th-century practice of employers’ paying wages in kind not money, a procedure much abused by employers (company stores, etc.,) [1] and made illegal in 1831, while barter, despite popular usage, was a negotiation to exchange goods for goods.
Broadie’s coverage of Adam Ferguson shows the Scottish Enlightenment was not a one-way traffic from Scotland to France.  Montesquieu in ‘Spirit of the Laws’ (1748) influenced the Stadial theories of Adam Smith, and Montesquieu was also admired by David Hume and many others.  Ferguson’s “Essay on the History of Civil Society” (1767) shows Montesquieu’s influence throughout.  Broadie develops the themes of republican virtue, the meaning of liberty (doing what the law permits, but not otherwise) and the separation of powers in the legislature, the executive, and the judiciary.  This covers much of what Adam Smith outlined in his “Lectures On Jurisprudence” (1763) and “Wealth Of Nations” (1776).  It also explains the understated role of Adam Ferguson in Scottish Enlightenment thinking.
Broadie’s concluding chapter reveals the author’s theme of what “Agreeable Connexion” is about (always an author’s privilege).  I would recommend readers to read these last 5 pages first.  They are helpful as anchor points to Broadie’s argument. 
In summary, I consider Alexander Broadie has established his thesis that the centuries long links between France and Scotland were foundational in what became the Scottish Enlightenment in the unpromising circumstances of each country, one dominated by an all embracing rigid Calvinism and the other by a monolithic Catholic Church, yet feeding each other intellectually in the prelude of the transformation of one world to another.  The broad consequence was an historical, unintentional, unplanned transformation of average incomes from under $1 to over $100 a day in less than 3 centuries.   For those hundreds of millions living through that transformation, very few will have heard of many of the Enlightenment thinkers mentioned in “Agreeable Connexions”.  I hope thousands read Broadie’s book and appreciate what Enlightenment thinking achieved in the longer run.

[1] Think of the 1950s US pop song: “16 tons”: “St. Peter don’t you call me/ for I can’t go/ I owe my soul to the company store”.

Saturday, January 19, 2013

Training In Smith's Theory of Bargaining

Michael Webster asks:
“Gavin, did you ever post your note about Smith's conditional bargain? on Adam Smith on Bargaining and My Experience Applying His Theory.  Post yesterday as a comment on my post about Adam Smith’s on Bargaining exchanges, 9 August 2011.
I shall answer it here because readers may not read a comment listed in 2011.

GK: A simple game I included in my negotiation workshops from 1972 to 2005, was the ‘red-blue’ (Prisoner’s Dilemma) game, which opened the Negotiate workshop (see ‘Kennedy on Negotiation’, Gower, 1997 or Kennedy, ‘The New Negotiating Edge’, Nicholas Brierely, 1998).  Red-Blue introduced beginners (and 'old hands') to the consequences of the common behaviour of pure self-interested bargaining by allowing participants to show themselves the folly of their only considering one’s own selfish and short-sighted interests when trying to transact with others. Thousands of plays of Red-Blue over 40 years revealed interesting data about those consequences.
The game is played in pairs, randomly chosen. Each player is given two coloured plastic disks, one red and one blue, or asked to mark two small squares of paper labelled “R” or “B”. They are told the rules (especially about no talking with partners, except when allowed under the rules), and they are given absolutely no advice on how to play or what they will learn, or even the point of the exercise.
The scores for each round were shown on flip charts for the four possible outcomes of each round of play: If both play ‘Blue-Blue’ = +4 points each; both play ‘Red-Red’ = -4 points each; one plays ‘Red’ and the other plays ‘Blue’, then the Red player = +8 points and Blue player = -8 points.  They divide into their pairs and commence playing anywhere in the room, standing or sitting.  The noise level rises during the games.
Each player chooses the colour they intend to play, first held out of sight behind their backs for each round and each then revels their plays simultaneously on a common signal between them. They note their scores for each round on printed score sheets according to what they played. They then play the next round again without talking. After the first four rounds they pause for a 5-minute conversation, perhaps recriminating on the other’s plays or defending their own, and perhaps agreeing on how to play the next four rounds, under the same rules and scores. Again, after round 8, they stop for a 5-minute conversation perhaps again recriminating if one or both defected on their agreement from the previous 5-minute break. The last two rounds (9 and 10) are played with all scores doubling. Paired-blue play = +16 points each; paired red play = -16 each; one plays blue and one plays red = +16 points to the red player = -16 points to the blue player.
They then discussed with tutor the resulting total scores over the 10 rounds from each pair. Over the years the pattern of plays across all levels of management, experience, countries of origin and current domicile, moral (religious) labels, ages (from youngest school children to retired adults), education levels, private and public sector employees, caring professions, hard-nosed financial traders, all nationalities, mixed groups, both sexes, politicians, health staff (from porters to surgeons), and beginners or experienced sales and buying staffs.  The results showed relative stability.
Now the maximum score from total cooperation (no defections) was +48 points each. I found that over the years this score was achieved by only about 8 per cent of the players. Negotiate tutors gave absolutely no pre-game briefing suggestions or hints, other that describing the scoring system. Despite almost always being asked to identify the objects of the exercise, we said nothing other than ‘maximise your individual scores’. Of course, the only way to achieve this was by discovering the blue-blue play, the jointly co-operative strategy, because Red play tended to be punished in retaliation.   Attempts to gain by defecting to other strategies were mostly unsuccessful because defection provoked the other player’s defection in subsequent rounds.
Players could suffer from the other’s early red play and subsequent defections, other than the almost predictable retaliatory Red play defections by former Blue players in some fairly drastic red play from Round 5 onwards to round 10 (and almost certainly from round 9). Counter-defectors from broken promises by red players could reduce the early defector’s scores, even though both also ended with a high minus score. No red player with early counter defections reached +48 (the Blue-Blue score) or better. On two occasions only in 33 years did a Red player reach +96 - because the other player played Blue every round irrespective of the red player’s play every round.  The two  blue players appeared unconcerned at their constant losses of -96.
In a large minority (sometimes a majority) of plays of the game, early defection was followed by unbroken promises to play blue in every round, which though the total positive score was less than +48 (perfect, no-defections), it was at least +32 each and sometimes better.
In brief, players could learn that playing a co-operative blue each round after early defections could result in a better score than defecting to gain at their partner’s expense. Those who defected would often simply provoke retaliation in subsequent rounds. It was not a perfect exchange, but zero-sum bargaining never was better than non-zero bargaining as identified by Smith on bargaining:
Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of” (WN I.ii: 25).
The rest of the Negotiate Workshop’ Agenda showed how to achieve non-zero sum bargaining in the real world.
Red-Blue is about the learning process that occurs in the real world and was summed by Adam Smith as “the great school of self-command” where individuals learn in society’s “mirror” as they leave the exclusive boundaries of the family and mix with other children and adults who may not have the same protective emotional relationships as in the smaller world of their family.   Others do not indulge them and they have to learn to cope with and adjust to that new circumstance.  Smith, from his sickly constitution, went to school later than others in Kirkcaldy but he still made some close friends who remained his life-long close companions. 
In short, he graduated from the “great school of self-command along with graduating from the scholarly school intellectually.
Those who attended Negotiate Workshops showed how prevalent is the process through which learn to persuade and develop co-operation so necessary for successful negotiation. Those who learn that bargaining, for instance, is about mediating their self-interest with the self-interests of others to achieve some degree of their own self-interests.
In practise, as the Red-Blue game illustrates, the “propensity to exchange” identified by Smith in Wealth Of Nations is not a well understood process across the population, which Smith clearly identified as the ‘If-Then’ conditional proposition (WN I.ii: 25-6). By recognising Smith’s ‘If-Then’ proposition it is easily understood and practised in the real world.
Once again, neoclassical Max U economics approaches bargaining by wrongly formulating it as confrontational problem (see modern economics on bargaining since the 1930s around themes like Zeuthen’s ‘economic warfare’, Hicks on ‘strikes’, Cross and others on ‘conflict’, even actual warfare, through to the 1980s.
Yet Adam Smith set it out in both Moral Sentiments and Wealth Of Nations in the 18th century in his two great, but mostly unread, books.  Hence, my particular sadness, at people libelling Smith with a self-interest theory that he never held.

'Anonymous' is Wrong; Try Again?

The ‘Invisible Hand’ is an economic concept developed by economist Adam Smith to explain the natural regulation of a free market that comes about when individuals are left to pursue their own self-interests."
Posted by ‘anonymous’ on “Raising the Invisible HandHERE
It was not a “concept” developed by Adam Smith (nor was he an “economist”); it did not explain the “natural regulation of a free-market”, and nor was it “about when individuals are left to pursue their own self-interests”.
It was a metaphor, popular in the 17th-18th centuries, used twice only by Adam Smith, and applied in the first case in Moral Sentiments to “a proud and unfeeling landlord”, not likely to be found in a ‘free market”, and in the second case in Wealth of Nations it applied to some, but not all, merchants in the highly regulated UK mercantile economy discussed by Adam Smith for being specifically dominated by legislation ensuring far from “free market” conditions.
So where does “anonymous” get these wrong-headed ideas from?
Smith’s writing on self-interest does not conform to the Maximum Utility models of neoclassical economics.  Smith notes scores of cases where individuals pursuing their self-interests undermine the self-interests of others. In fact, Smith’s ideas on the “pursuit” of self-interests are quite the opposite of the views asserted in “Raising the Invisible Hand” at the head of the above statement. 
[I have no views on the politics expressed by "anonymous", as I only comment on political views expressed in the country or about the country where I vote, i.e., Scotland.]

Thursday, January 17, 2013

Two Examples of the Appropriate Use of the IH metaphor

CCTV NewsVideo: Editor:James  on a “Bite of Chin” 
“UDF accuses invisible hand for party constant trouble”
The United Democratic Front (UDF) on Tuesday has accused some hands outside the party for the for the constant disagreements among the members.
I have noted several recent uses of the Invisible Hand Metaphor that are grammatically correct though I do not necessarily concur with their sentiments.
Internal organizational disputes are prone to allegations and counter-allegations of conspiracies and the IH metaphor is a powerful, because sinister, figure of speech used to denigrate or to damage unspecified other people, who may have quite legitimate grievances and aspirations. 
Attack their alleged or implied secret and invisible identities as an "invisible Hand", which if believed by the intended audience, undermines the substance of their possibly legitimate aspirations for a change of policies or personnel.
I have formed the impression, though so far I have not collected data, that the use of the IH metaphor (inspired by its over-use by modern economists and media publicists) in these political roles is resorted to mainly by dictatorial rulers in countries forming the usual suspects and dominant party leaders facing challenges to their authority and the usual privileges of mismanaging large budgets.  
I have also noted an occasional opposition using the IH metaphor against claims that the people in power are wielding secret campaigns against them, or vice versa.
Those convinced that there is an actual (‘miraculous’) IH working in the economy may wish to reflect on this trend internationally, both to consider how metaphors are used in English and how their own mis-use in economics has drifted away from Adam Smith’s metaphoric use in 1759 and 1776.
PS: I should add that neither use of the "invisible hand" in the above examples has anything to do with Adam Smith's quite different use of the IH metaphor in his works.

Wednesday, January 16, 2013

Eric Schliesser Introduces Foucault

Eric Schliesser follows last week’s ‘Philo of Economics’ with this week’s on “Foucault and the Invisible Hand”.
Eric refers to Michel Foucault's treatment of Smith in “The Birth of Biopolitics”. While commenting on Smith's use of "invisible hand" in the Wealth of Nations (hereafter WN), Foucault insists that Smith is committed to the claim that:
Everyone must be uncertain with regard to the collective outcome if this positive collective outcome is really to be expected. Being in the dark and the blindness of all the economic agents are absolutely necessary. The collective good must not be an objective... Invisibility is not just a fact arising from the imperfect nature of human intelligence which prevents people from realizing that there is a hand behind them which arranges or connects everything that each individual does on their own account. Invisibility is absolutely indispensable. It is an invisibility which means that no economic agent should or can pursue the collective good” (Foucault 2008: 279-80).
I am not going to comment on Foucault’s general reasoning on Adam Smith’s use of the IH metaphor in this post.  His reasoning tends to be obscure.
To argue that “human intelligence prevents people from realizing that there is a hand behind them which arranges or connects everything that each individual does on their own account” is a strange way of putting it. The “hand behind them which arranges or connects everything that each individual does on their own account” is either saying that “human intelligence” stops them fantasising about an IH that actually exists or prevents them fantasising about one that does not exist.  That is what makes philosophy such a tormented subject; it’s never really clear as to what they mean except by engaging in constant “deep thinking”.  Those excellent teacher’s of philosophy (such as Eric Schliesser) are unfazed by textual ambiguity and are among the brightest and best of social scientists.  They are always stimulating when listened to in conversation or in seminars and stretch their student’s critical faculties. 
The “hand behind them which arranges or connects everything that each individual does on their own account” has to be a fantasy, suggesting that the (invisible?) “hand behind them” and therefore behind every one of the billions of others on the planet is super intelligent – even well beyond mere god-like superstitious superiority – who/which ‘controls’ everything down to the smallest detail. 
I suggest Hayek’s defiant conjecture (Fatal Conceit) that knowing every action of 7 billion of people about matching possible choices among billions of products and services (36 billion choices in New York alone each minute of the day – only a few dozen choices for gatherer-hunter upper Amazonian tribes) is well beyond human comprehension or understanding, let alone practical even in a Providential fantasy of the imagination. Surely it is an extreme theological idea, even as a figure of speech.
Smith’s IH passage in TMS contrasts with the brutal realism of Cantillon’s 1755 passage dismissing providential explanations for land division.   Even Smith’s more brutal, non-providential, passages in his accounts of the evolution of land divisions in his Lectures on Jurisprudence undermine the seriousness of his surel unserious literary account in Moral Sentiments, which in my view should not be taken too seriously.
In TMS (1759) Smith goes on from the IH passage to discuss the “patriot” whose “love of system”, “the same regard to beauty of order, of art and contrivance, frequently serves to recommend those institutions which tend to promote the public service.  When a patriot exerts himself for the improvement of any part of the public police, his conduct does not always arise from pure sympathy with the happiness of those who are to reap the benefit of it” (TMS IV.1.11: 185).
Smith gives examples and summarises of what he means:
It is not commonly from a fellow–feeling with carriers and waggoners that a public–spirited man encourages the mending of high roads. When the legislature establishes premiums and other encouragements to advance the linen or woollen manufactures, its conduct seldom proceeds from pure sympathy with the wearer of cheap or fine cloth, and much less from that with the manufacturer or merchant. The perfection of police, the extension of trade and manufactures, are noble and magnificent objects. The contemplation of them pleases us, and we are interested in whatever can tend to advance them. They make part of the great system of government, and the wheels of the political machine seem to move with more harmony and ease by means of them. We take pleasure in beholding the perfection of so beautiful and grand a system, and we are uneasy till we remove any obstruction that can in the least disturb or encumber the regularity of its motions. All constitutions of government, however, are valued only in proportion as they tend to promote the happiness of those who live under them. This is their sole use and end. From a certain spirit of system, however, from a certain love of art and contrivance, we sometimes seem to value the means more than the end, and to be eager to promote the happiness of our fellow–creatures, rather from a view to perfect and improve a certain beautiful and orderly system, than from any immediate sense or feeling of what they either suffer or enjoy (MS IV.1.11: 185).
I am not minded to take Foucault's (2008) distraction as a serious commentary on Smith.  I do not know where Eric is taking this argument and await his further explanation with interest.