Monday, April 27, 2015
Harold Sare in Stillwater News Press posts (26 April) HERE
“Inequality: The politics of economics”
Economic inequality, or better stated as economic income disparity, is a very complicated set of issues and has a long history over the past centuries. Early history reflects various societies’ acceptance of it, which gave it legitimacy. In today’s world of constitutional democracies, politics has kept it alive and well, but really does not give it complete legitimacy.
Adam Smith wrote about the “invisible hand” governing the private enterprise system, but those who quote Smith do not take into account that he also said, “People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” (The Wealth of Nations, Collier, 1902, p. 207) This of course runs counter to the idea of the “invisible hand.”
Harold Sare has got hold of a half-understood idea and runs with it to critique aspects of contemporary society. He presents a contempary notion of what Smith meant in reference to an ‘invisible hand’ “governing the private enterprise system”. Smith referred to the ‘invisible-hand’ three times only and on two of those three occasions it had nothing to do with “governing the private enterprise system”.
His first passing reference was to ancient Rome in his “History of Astronomy”, written by him between 1744-58, and referred to the “invisible-hand” of the Roman God, Jupiter. This was a long time before “the private enterprise system, apart from refererring to pagan religious beliefs, and certainly not about the “private enterprise system”.
The second time was in reference to a “proud and unfeeling landlord” in agricultural societies “since providence divided the land” (i.e. a very long time before the “private enterprise system”) (see Smith ”The Theory of Moral Sentiments”, 1759).
The third - and last time - in Wealth Of Nations, 1776, referred to a risk averse merchant manufacturer avoiding send his capital abroad and investing it domestically instead, to avoid his perceived risks of letting it out of his sight. Again this was not about the “private enterpruse system” as a whole. Many other merchants and manufacturers invested both domestically and abroad and made profits from doing so. Moreover the foreign-trade averse manufacturers added their capital to “domestic revenue and employment”, which Smith regarded as a “public benefit”. Again, the “invisible-hand” that led the risk averse merchant to act in this manner was a specific and not a general case “governing the private enterprise system”. This latter was a myth largely spread by Chicago scholars and such as Paul Samuelson from 1948.
With these facts it is an error to attribute to Smith ideas he never articulated.
I agree with Harold Sare that “those who quote Smith do not take into account” what Smith actually said. Nor do they know what he he meant when referring to “an invisible hand”.
Both the extreme free-markets advocates and the statist advocates of extensive regulation by political disctats falsely quote Adam Smith in pursuit of their utopias.
Adam Smith broadly favoured markets where possible, the state where necessary, to which I would add on pragmatic grounds that poverty is a more serious (even more pressing) problem than inequality. Abolishing Poverty is a more fixable problem and within our reach, rather than the far longer-term problems of abolishing inequality and coping with its unintentional consequences.
Sunday, April 26, 2015
A BUSINESS ADVISOR ON 'MORAL SENTIMENTS'
Robert Litan, a nonresident senior fellow at the Brookings Institution, and chief economic adviser to Patent Properties Inc., and the author of “Trillion Dollar Economists, posts (25 April) HERE
"Adam Smith Preached Self-Interest–and Self-Help, Too."
“Behave as if an impartial spectator is watching you. Use the idea of an impartial spectator to step outside yourself and see yourself as others see you. Use that vision to know yourself. Avoid the seductions of money and fame, for they will never satisfy.”
It sounds like something from a theologian or self-help guru. But those words were penned by Adam Smith, author of “The Wealth of Nations,” the late-18th-century work considered the first real book on economics.
The quotation is from “The Theory of Moral Sentiments,” a less well-known book that Smith wrote earlier in his career but that is, arguably, equally important.
The insights in “Moral Sentiments” have been revived in a remarkable book published late last year, “How Adam Smith Can Change Your Life,” by economist Russ Roberts. Like many people, I thought Smith was the original champion of why acting in one’s self-interest was good for society–ostensibly because it allowed each person or firm to specialize in what he or it did best and then trade for whatever else was required. But the self-interest that Smith made famous can be a powerful force for good in one’s personal life.
According to Smith, many of us do good things because we want others to approve and admire us. Mr. Roberts explores implications of this and other Smith insights.
Mr. Roberts’s witty, candid take on Smith is filled with his own wisdom. Gurus, theologians and economists alike might learn a thing or two from him and the first modern economist.”
I certainly concur that Russ Riberts is a” witty” and “candid” writer and knows more than most about Adam Smith, but I am not so sure that Litan is correct on his “take” on Adam Smith is the last word. What he credits as a quotation from Smith is not a quote at all. Smith was more nuanced on self-interest, as usually expressed by economists, including those few who have read his “Theory of Moral Sentiments” (1759).
Self-interest has been transmuted into a sub-genre of competitive behaviour, especially when it is used to refer to how individuals should treat each other. We are not in competition with those with whom we wish to co-operate to manage exchange transactions and relationships, as anybody who has thought about or attempted to conduct a bargained transaction or persuade anybody would know.
Two self-interested egoists would have great difficulty in agreeing or concluding a bargain when each sees their preferred exchange as the other party being forced to “give in”. Exchange doesn’t work that way. Nor is it required that each person ‘gives in” equally (whatever that is supposed to mean). I find anthropologists seem to express this view from a misguided belief that both parties should ‘gain’ the same in some sense, otherwise they assume that one bargainer would ‘lose’ more than the other. That so-called "loss" is an absurdity not an observation.
Smith made it clear in Wealth of Nations that we each “stand at all times in need of the co-operation and assistance of great multitudes” and we achieve that co-operation when we bargain by proposing “Give me that which I want and you shall have this which you want”. Our subjective assessments of our mutual gains or losses cannot be measured in practice. Even in the maths of "utility" theory a measurement the outcome of the bargain is the not the arithmetic sum of the 'gains' but the maximisation of their product.
We are most likely to prevail by interesting their “self-love” in our favour “from their regard for “their own interest”, by talking about their “advantages” from the proposed transaction and NOT of our “necessities”.
This is a very early expression by Smith of the “Conditional Proposition” which is the key to making bargains. It says nothing about who gains or loses most, as such estimates are wholly subjective and immeasureable. Self-interested bargainers use “persuasion” and “conversation” as discussed by Smith in “Moral Sentiments” on how we conduct relationships in society.
The way Litan presents Smith on the impartial spectator is fantasy. I am sure that Russ Roberts knows more than is presented by Litan about Smith's "Moral Sentiments".
Thursday, April 23, 2015
LOONY TUNES NO.115
“Many times, the “invisible hand” can use a “guiding wand.”
Alan Eggleston posts on Screen Fad (8 April) HERE
“The hacker is some kind of “invisible hand trying to strangle me,” says Khan, “I know it’s an artificial intelligence trying to kill me, I just don’t know why.” (From Film: “Person of Interest Recap: The Trouble with Khan”).
Jenna Iacuri posts (23 April) on Nature World News HERE
"Within less than a minute, the majority of the participants started to transfer the sensation of touch to the portion of empty space where they saw the paintbrush move and experienced an invisible body in that position," lead author Arvid Guterstam explained in a statement. "We showed in a previous study that the same illusion can be created for a single hand. The present study demonstrates that the 'invisible hand illusion' can, surprisingly, be extended to an entire invisible body."
MARKETING MUDDLE NO SUBSTITUTE FOR ELEMENTARY ECONOMICS
VW Staff post on Value Walk HERE
“Velocity Of Money: Demand In The Current Moment by Miller Howard Investments”
“WE ALL LEARN, IN ECON 101, that the prices of goods and services are set in the marketplace by the “invisible hand” within whose palm sits Supply and Demand, two figures always battling for supremacy in the never-ending dialectic through which prices are determined. Conservatives embrace the interaction of supply and demand with an almost religious fervor, asserting that the “hand” always produces optimum results that will balance resources and social needs, while progressives see the hand as a tool enabling the greediest to abscond with resources and the fruits of society’s labor. We’re not here to decide which position is ultimately correct, but we do know that within the remarkable landscape visible today, supply and demand aren’t always functioning as they used to, or as some might say, as they should.”
What a muddle! First, everything is “set” by something called an “invisible hand” which apparently has "within" its “palm” Supply and Demand. How do “VW staff” know this if they cannot see the “hand” or its “palm”?
Then there is a “battle” between said “supply an demand”, which determines “prices”, despite all prices, everywhere, being visible because no market can work without visible prices!
Moreover “Conservatives” believe this fairy story with “religious fervour” which “produces “optimum results” and “progressives” [Note: not capitalised!] “see the hand as a tool enabling the greediest to abscond with resources and the fruits of society’s labor.” How can ‘progressives’ “see” an “invisible hand” or it "absconding"?
No wonder the VW staffers cannot “decide which position is ultimately correct”!
Tip: Would be investors should steer clear of advice from such muddled people, even if they passed Econ 101.
Tuesday, April 21, 2015
INTERESTING THEME FROM "DOWN-UNDER AND THEN SOME"
Press Relase for Bill McArthur in Scoop - independent news HERE
Dr Bill McArthur - “Understanding Adam Smith: how the invisible hand beats the smart trick to create the common good”
Tuesday, 21 April 2015, 9:32 am Press Release: New Zealand Fabian Society
Dr Bill McArthur - “Understanding Adam Smith: Self interest in Smith’s argument is not simply confined to profit seeking individuals, but in the context of business practice, people are led by an invisible hand to promote an end that was no part of their intention. That end was the common good.”
“Smith advocated that the role of government be more than mere policing. He considered that the government had a responsibility to ensure that the nation was well provided with ‘the necessaries and conveniences of life’. People must be reasonably sure that he or she will benefit from their labours.
This state of affairs can be achieved by haggling and bargaining in the market place. Not only does this facilitate a free flow of information, but ensures that people in small to medium sized enterprise are morally accountable to any disciplinary measures in which customer contact is inherent. As Smith puts it, ‘When people seldom deal with one another, we find that they are somewhat disposed to cheat, because they can gain more by a smart trick than they lose by the injury which it does to their character’.
Born in Scotland raised in the Waikato, Bill is passionate about social issues, ethical standards and accountability, and a ‘fair deal for all’.
Bill is a rare combination of industrialist & academic and has a PhD from the University of Waikato, and a background in high quality electrical precision and in the management of Arts notably with Theatre of the Impossible Charitable Trust.”
Sounds interesting and raises questions I would have asked if I had been at the seminar. I note that Bill McArthur was born in Scotland and, presumably educated in Waikato, New Zealand, to which indepenent country generations of Scots emigrated from the 1800s up to today. Bill’s passion for “social interests” is a common social interest of many Scots.
I would appreciate knowing the source for his attributed view to Smith that: “When people seldom deal with one another, we find that they are somewhat disposed to cheat, because they can gain more by a smart trick than they lose by the injury which it does to their character”.
Sunday, April 19, 2015
ECONOMIC BEHAVIOUR IS NOT A MATHEMATICAL SCIENCE
Edward Chancellor posts (17 April) in Breaking News HERE
“Back in the 18th century Adam Smith established economics, according to Desai, as a combination of philosophy, history, economic theory and some practical policy advice yet modern economists, while adept at mathematics, lack Smith’s intellectual breadth. In particular, they are largely ignorant about economic history and know even less about the intellectual development of their own discipline.
As a result they fail to learn the lessons of history. …
Desai suggests that many of the flaws of economics derive from the attempt to turn the subject into a science; a development he traces back to the father of economics, David Ricardo, who theorised that the economy tends naturally towards equlibrium. Such a balanced state can be modelled mathematically with ease, allowing economists to satisfy their “physics envy”. As Desai points out modern economists are wedded to mathematical models, despite the models’ reliance on highly unrealistic assuptions about the real world.”
I came acros this piece while browsing through the web this morning - taking a short break from preparing my new paper: “Adam Smith on “Self Betterment, Self-Interest, the Invisible-Hand metaphor and Intended and Unintended Consequences” - and thought it would interest readers.
In the mid-1970s, I attended several seminars at LSE (I was lecturing at Brunel University and National Defence College at the time) where, on occasion, I heard Professor Meghnad Desai of LSE (now retired) enthusiastically contributing to the various seminar topics. He struck me as an academic with his feet on the ground. I certainly agree with his quoted views above.
Working on my new paper, I cannot help but agree with Deasai’s general criticism of modern economists for their near total neglect of history and their almost total reverence for mathematical models with little connected relevance to the real world now or thoughout the history of the human species. Smith’s historical approach was richer in relevance and enabled him to write authoritatively about real people’s behaviours influenced and affected by their interactions with other real people, as the real people of history demonstrated. Be clear too, that Desai was far from being innumerate and could ‘mix-it’ with his mathematically-minded collegues, of which LSE at the time abounded. (I published three text-books based on my lectures to undergraduates: 'Mathematics for Innumerate Economists' (1982); 'Invitation to Statistics, 1983, and "Defense Economics", 1983).
I have spent four days re-reading Wealth Of Nations - with side-forays into his “Lectures on Jurisprudence” and “Moral Sentiments” - while I went over my previous red-dotted paragraphs in his texts where Smith referred to the behaviours of a cast of self-interested players and how they behaved under such stimuli, when confronted by choices of economic and political importance to themselves (it is not a pretty sight).
The general impression over the centuries that Smith covers is not attractive to those who believe, despite the evidence of millennia, never mind today, that people are and have been imbued with a matchless sense of humanity, qualifying their descendents, especially in modern economies, to behave in the manner assumed by abstract mathematical models. You can measure and appreciate the regular and predictable behaviours of atoms, but, alas, not people.
I shall also take this opportunity to explain my few posts recently, despite a queue of possible posts I have lined up for Lost Legacy. My paper is taking all my attention at present and may do so for a few weeks more. It is progressing well and I am happy with its general approach. It requires knitting together without adding too much new material.
Saturday, April 11, 2015
I FIRST GRADUATED FROM THE UNIVERSITY OF LIFE
Don Boudreau in his regular Blog (9 April) HERE raises an important fact from economic history, which is correct in what it criticises. You should follow the link for the economics of Don’s valid criticism:
“Crazy yet Immortal Economic Myths: Example no. 1”
“To justify raising the minimum wage, Gary Jimenez alludes to the tale that in 1914 Henry Ford raised his workers’ pay to $5 per day so that he would earn more profits by dint of his workers spending their higher incomes on new Ford cars (Letters, April 9). This tale is a myth. Were Mr. Jimenez a better student of history he would know that Ford raised his workers’ pay in order to reduce worker turnover in his factories.”
Don provides the appropriate link to Tim Worstall’s post HERE I hope readers follow the link to the academic rebuttal of Garry Jimenez’s fallacy, as picked up by Don.
My first job in Australia was at a car-manufacturer’s brand-new plant, then under construction and nearing production. I was assigned to the stores issuing tools and machine parts, tools, and accessories to the mechanics in exchange for authorisation chits signed by their foremen, and was also generally engaged in ”run about” message-taking across the production and administrative buildings.
I also looked round the manufacturing plant’s vast production lines, then partly busy with mechanics readying them for car production, between trips from the stores to deliver urgent items to the teams of mechanics, en route passing by notices banning photographs and showing my pass at ‘No Entry’ signs etc., and also dodging vigilant and surly security men. My interest was from pure curiousity and wonder and my sometimes unauthorised visits to departments which were in aid of my rushing delivery of urgent parts to 'friends' of stores.
Over time I got to know many people and chatted about the wonders of modern car manufacture. One thing was made very clear to me that when the plant started producing cars it was to be a two-shift, non-stop operation geared to the demand for domestically produced cars (desgned and as operated in the UK - always referred to as ‘England’, never ‘Britain’).
Recruitment of the line-workers and supervision were underway and training teams were everywhere. Many ‘Poms”- Australian slang for ‘English’-born migrants - had come over to Sydney on two-year contracts and were fairly open to loose conversation. I listened to the experienced migrant car workers and their accounts of what car manufacturing was like to work for in the UK. They all said that the pay was good but the work relentless. Whatever else happened the ‘line’ had to be kept moving. Stopping the ‘line’ was too serious to contemplate and they would recount stories of someone dying of a heart attack who was moved to the side while his place was taken by a ‘charge hand’ (lowest grade of supervision) and medics removed his body. Now this was my early experience of workers’- banter, partly made-up and grossly exaggerated to impress the innoncent (I was just 15).
But the image stuck with me, until years later, as a ‘mature’ student at University in Scotland, I came across the story of Henry Ford’s raising of car-producers’ wages well above prevalent average workers’ pay rates, as if it was unexplainable. It did not strike me as odd or worthy of too much scepticism. I simply thought of those new Australian car production lines, plus all of their feeder lines of parts, large and small, simple and complex, all critical to produce a finished unit of output.
The daily unit-output of completed cars was a critical indicator of performance. Anything that interrupted the flow of car bodies along those lines was a serious deficiency of hourly/daily output. The backlog of the flow of parts into and out of the stores was a visible rising cost of production for every minute of any idle time during working shifts, raising the unit costs of unfinished cars and causing the idle non-productivity of line labour, which struck at the profitability of the car-plant.
Paying labour on stopped production lines because of the regular non-availability of labour from irregular absences was more expensive than paying higher wages, well-above the national norm to ensure, or at least mitigate, a much smaller scale of absences (closer to zero), so it made sense to set and keep the hourly rate high enough to ensure regular attendance. This all seemed logical to me aged 15 in a new Australian carplant, long, long before I went to university to study economics, aged 25.
Gary Jimenez did not really need to “be a better student of history” to know better. He needs to observe human psychology. What he needed to do is work in a car plant and see its organisation and observe its vulnerabilities without knowing anything much about “history”, or much else, for that matter, except perhaps something about the human psychology of real, ordinary people, who are much smarter than they are often credited.
[For years later, I often replied, when asked by colleagues, even interview panels (for which I was told by a senior profesor that I “lived dangerously”), which univeristies I had attended, that I first graduated from the ‘University of Life’, and, then I went on to graduate from three Universities of ‘Academe’.]
Tuesday, April 07, 2015
PROOF OF THE PUDDING?
Jundalisay (see Lost Legacy, Saturday 4 April) posts on Socioeconomic science HERE
“Socioeconomics Vs Economics Supply and Demand Exercise on Logic.” (jundalisay April 7, 2015) http://wp.me/p4LhJ1-K7)
Here is an interesting Q & A exercise contrasting Socioeconomics answers to a supply and demand question and answer from Mankiw’s big selling textbook, “Principles of Economics”.
Mainstream micro-economics teachers may like to comment.