Friday, October 31, 2014

ADAM SMITH AS A SELF-HELP GURU?

Gary Belsky posts on TIME (Money Magazine) HERE
"The Father of Economics Was Also the World’s First Self-Help Guru — And Can Improve Your Life!"
"Adam Smith, the 18th century Scotsman best known for writing The Wealth of Nations, is widely misunderstood. His insights into technology, ambition, and friendship that are as relevant today as they were in 1759.
In his new book, How Adam Smith Can Change Your Life, economics popularizer Russell Roberts explores what may be the world’s first self-help book, which is all the more remarkable for its author: Adam Smith, a.k.a., the18th century Scotsman known as the father of economics. But Roberts—host of the popular podcast EconTalk—focuses on Smith’s mostly forgotten book The Theory of Moral Sentiments, illuminating Smith’s insights into technology, ambition and friendship that are as relevant today as they were in 1759." 
Here are five surprising takeaways by Gary Belsky from his research.
1. Adam Smith is widely misunderstood.
2. Adam Smith was a Buddhist in the making.
3. Adam Smith understood consumers—in the   21st century.
4. Adam Smith was the first behavioral economist.
5. Adam Smith just wanted you to be happy.
Comment
Come on. Take a few minutes to follow the link and read how Gary Belsky summarises, briefly, what Russell Roberts makes of Adam Smith’s Moral Philosophy. It is in fact recognisably Adam Smith’s moral philosopy in modern American English.  It might prompt you to read Smith 1759 book on ‘Moral Sentiments if you have not done so yet.
After all Russell Roberts admitted elsehwere that he had bought a copy of Smith’s “Theory of Moral Sentiments” (Liberty Press) and left it on his book shelf unread for 30 years!  
Now that Russell has finally read it, he makes his interpretations of Adam’s work admirably relevant to all readers, many of whom have also not yet read Smith’ s neglected earlier other work.

I could also add that many modern economists have not read Smith’s Wealth Of Nations (1776) either.  That’s why there are more myths about Adam Smith’s political economy than is sensible or safe to leave them influencing policies today.

HALLOWEEN FUN IS OK!

Paul B. Farrell posts (31 October) on Market Watch HERE 
Halloween’s midterm-election monsters are killing capitalism”
Yes, bad news, lots. And the future gets worst: Affordable health-care repeal? GOP Senate? Weak recovery? Dream Act? Ebola? ISIS? Bush III? Fear oozes from media. Nasty news. Creepy cable.
In desperate times like these, truth is rare: Nobel economist Joseph Stiglitz sees a scary Frankenstein capitalism ideology in “Freefall: America, Free Markets, and the Sinking of the World Economy” ... Thomas Piketty’s “Capital in the 21st Century” is a mausoleum of misleading data ... a relentless unstoppable negative trend is undermining global capitalism ... the inequality gap is widening ... democracy is on life support ... 67 billionaires already own half of the world’s assets ... by 2100, with 11 trillionaires at the top, capitalism will rule the global economy, 10 billion souls ... until a revolution burns in our spirit. …
… Why the relentless Halloween horror story, every year, why the midterm madness? Because Ayn Rand’s “mutant capitalism” (as Jack Bogle calls her narcissistic godless atheism) destroyed the moral foundations of Adam Smith’s Invisible Hand economics that made America great the first two centuries after 1776. And because Ayn Rands’s mutant capitalist economics is vacuous, empty, hollow without Adam Smith’s “Moral Sentiments.”
And soon Ayn Rand’s mutant capitalism will self-destruct, taking with it the Big Oil energy industry and the GOP.
Paradoxically, this Halloween chaos also opens the way for a paradigm shift ... to economic enlightenment in a post-capitalist world that reinstates morality, the Greater Good and the Invisible Hand back into our politics, our economics, our culture.
Comment
Ayn Rand’s role in economic thought is grossly exaggerated. She made a living from being a controversial and a Hollywood script writer and novellist. She preached ‘selfishness’ as a moral choice upon which she erected her pro-capitalism and feminist stances (both admirable objectives in themselves) but misled her passionate (in all senses of the word) supporters.  Up close and personal she does not appear, at least to me, to have many redeeming features. Her influence on market philosophy was less than benign. 
Of Paul B. Farrell I know nothing and I am not sure what exactly his article in Market Watch (of which I also know nothing) is about. 
Our grandchildren are out and about tonight, as was and is traditional in Scotland (long before it re-appeared across in the colonies), and as I was at their age too.  A bit of fun, lightly pretend scary, to which our wilder shores of religious zealotry used to denounce as ‘devil worship’ that fortunately no longer attracts draconian punishments.

Donate your pennies/cents, sweets and such like generously.  It’s part of children growing up and it also promotes adult employment and 'capitalism'. 
'Killing capitalism'?   Lighten up Paul! 

IT'S IN THE DRAFTING NOT IN WHAT IT MEANS

Christine Lagarde, Managing Director, International Monetary Fund, in her Acceptance Speech for Foreign Policy Diplomat of the Year Award, 29 October, Washington, D.C.
“Africa: Economic Diplomacy and the Need for a New Multilateralism”
… “Future Challenges and the New Multilateralism
… “One thing is certain: 21st Century challenges demand global solutions.
…. “The model of Adam Smith's "invisible hand"--where pursuing one's own self-interest would also serve the collective interest--requires solid institutional underpinnings, such as the rule of law, a currency, a competition watchdog, to name a few.
On the international scene, these underpinnings are more tentative. Multilateral institutions such as the UN and the IMF have provided a global framework for the cooperation of sovereign states, and they have served their purpose well.
Yet, to me it looks more and more as if Adam Smith's model is being turned upside down.
What do I mean?
Given the high degree of interconnectedness in the modern global economy, many of the challenges we face represent a collective threat, and call for a collective response. Rather than collective good arising out of self-interested action, it is only by acting collectively that an individual country's self-interest can be achieved.
Comment
Christine Lagarde, once hailed as the great hope of the IMF on her appointment, clearly brought with her a lot of ideological baggage drawn from the deep pool of modern IMF economist-believers in the almighty “invisible hand”, falsely attributed to Adam Smith, as the opiate of most economic policy wonks. The other lot among the leftist, big government proselitizers(?), denounce the IH believers with the same fervour that their high-priests denounce markets and capitalism. Lagarde obviously has mastered her brief to avoid provoking controversy.
Lagarde suggests bridging the gap between the stand-offs common in economic discourse today - ‘markets not governments’ versus ‘governments not markets’ - with nods to both theologies, while legitimising the “model of Adam Smith's ‘invisible hand’ with the “solid institutional underpinnings” by “acting collectively” so “that an individual country's self-interest can be achieved”. 
This is a master example of drafting just enough anodyne wording to baffle readers with empty waffle that means next to nothing. I once served as a member, later chairman, of the UK’s Standing Committe for Social Science in UNESCO, and witnessed many examples of such skilled drafting by civil servants, written to avoid antagonising friends and allies of the UK in the United Nations in the depths of the Cold War.

My own pragmatic preference is for “markets where possible, the state where necessary”, a stance that would have been acceptable to Adam Smith, judging by his Moral Sentiments and Wealth Of Nations..

BEWARE THE MISUSE OF METAPHORS

Marc Horn posts on Market Oracle (Financial Maekwts Analysis and Forecasting) HERE 
“Stock Market S&P Index MAP Wave Analysis Forecast”
“I have been looking for this for a while:
‘Over lunch at the Bank of England, Keynes tells Henry Clay of his hopes that Adam Smith’s ‘invisible hand’ can help Britain out of the economic hole it is in: “I find myself more and more relying for a solution of our problems on the invisible hand which I tried to eject from economic thinking twenty years ago’ (11 April 1946).
Still today we follow Keynesian economics where he himself shortly before his death felt that his theories were not the solution to our economic woes, but Adam Smiths invisible hand from the 1700’s was more reliable! Yet we persist to follow his economic theories despite his warning as our primary model almost globally!
But then again it suits those in power in our corrupt political systems – keep the people stupid and they are easier to control (rape and pillage would be a better description!) but the end game is always the same – revolution where the elite just change from one group to another… [by] doing everything possible to kill the dollar as the global reserve currency with its attitude of totally ignoring international law and applying the shear fact that you use US dollars for a transaction that they have jurisdiction and they will prosecute you if they feel they want to. … The only way people can overcome this is by using anything but the dollar! This in turn is imploding the global economy as Americans find it extremely difficult to open bank accounts outside of the US as they clearly are “tax avoiders” which is killing investment precisely when it is needed!

This is an example of Adam Smith’s invisible hand at work. …It is time to dramatically change the political system before it is too late! … We have failed lawyers running our countries with zero economic experience, supported by economic academics who also would not make it in the real world and also have zero experience! This is like going to a paediatrician if you want brain surgery.

The Euro will collapse because there was not a European debt as the US$ has. … This is another example of Adam Smith’s invisible hand at work. Politicians cannot overcome their self interest and acknowledge there are fundamental structural flaws in the Euro and will sooner lead to another war in Europe before admitting they are wrong because then their incomes and pensions will be at risk, but in their eyes that will be someone else’s mess to sort out once they leave office!”
Comment
Well what can we say? Marc Hom certainly writes with confidence.  Of his financial advice I have nothing to say, or his apparent suspicions of politicians, of whom I have no idea to who he refers.
However, of his assertions about Adam Smith’s supposed “invisible hand”, I can confirm Marc is wildly inaccurate about when the IH Metaphor is supposed to be “at work”.  Metaphors are never ‘at work’ because they are figures of speech that, in Smith’s case, in his three uses of the metaphor, he describes how motivated humans choose intentionally to act in pursuit of what they regard as their self-interests. Their actions have intended outcomes.  They also may have unintended outcomes. But the unintended outcomes are the result of the actions that led them to their initial actions.
That unintended outcomes can arise for good or ill are irrelevant to the original motives of the intended actions. This distinction is of paramount importance because 20th-century economists, contemplating Adam Smith’s use of the ‘invisible hand’ metaphor, leapt over the limited description of  the object of the metaphor, and extended it to unintended consequence of the subsequent events. In doing so they gave the “invisible hand” a mystical, even miraculous role as leading people to the unintded consequences of their initially limited intended consequence.  
In fact, this error brought a wholly theological element to the ordinary behaviour of human beings. Some entity - God say - was micro-managing the economy!  Hence, Marc comments three times with what he claims are “examples of Adam Smith’s invisible hand at work”. Not at all. They are three unexplained examples of the modern myth of the “invisible hand” asserted by Marc allied to a contentious semi-theoretical assertion about some vast malign conspiracy by ruling elites in modern states.
But just in case anybody follwing his analysis and associated advice he imposes the following legal cover against law suits for their losses:
“By using this MAP Wave Analysis (MWA)  you confirm that you are personally responsible for any and every decision you make based on any content found on this site.
You confirm that you have read and agree to abide by the Copyright and Intellectual Property Rights as stated .
You confirm that you have read and agree to follow Your Duty of Care as stated
You confirm that you have read and agree to and take full personal responsibility for your decisions as stated in the Disclaimer.
You confirm that you have read and agree to and will abide by principles of my Terms of  Service as stated.
© 2014 Copyright Marc Horn- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.”

I say no more.
[NB. Nothing written in my comments cast any aspersions of any kind on the good and honest character of Marc Horn or the high quality of his financial advice based on the information available to him and the disclaimers he requires from users of his services.]

Thursday, October 30, 2014

MARKETS: WHERE IGNORANT ARMIES CLASH BY NIGHT

Chris Thurman (30 October) posts on Business Day live (South Africa) HERE

“All that shimmers does not turn into gold”
“Markets are whimsical and moody. What this really means is that the traders who decide what happens to markets are whimsical and moody. They are certainly not sentimental. The activity on the JSE [Johanesburgh Stick Exchange] had nothing to do with the death of Senzo Meyiwa.
It was based on educated guesswork about external factors such as the US Federal Reserve’s possible revision of interest rates, and on responses to updates by SA’s big corporations.
Nonetheless, we cling to the idea that markets somehow reflect national or global sentiments (as opposed to creating or precipitating them). Indeed, through a strange process of personification we conceive of a single entity called The Market, which has the capacity to experience emotion.
It is something of a contradiction to proceed — on a misapplication of Adam Smith’s notion of the "invisible hand" — as though The Market is essentially a rational creature, acting in its own best interest, which is to turn individual selfishness to universal benefit. Market self-regulation actually comes at appreciable human cost. The Market survives cycles of boom and bust, but only because taxpayers, mortgage owners, pensioners and unwitting investors take the hit.”
Comment
Interesting observations by Chris Thurman.  He is right about it being a “misapplication Adam Smith’s notion of the invisible hand” and and the nonsense of the “market” that “has the capacity to experience emotion”. 
People who act in market relationships experience emotions, individually and collectively, and that is a big difference between people acting in market relationships and carbon and other atoms, which do not have or feel emotions. Atoms do not have intended consequences and neither do they cause unintentional consequences. There is nothing intentional in natural science.
Second Comment
I liked this paragraph too:
“…Still, despite the crystalline and epiphanic quality of many of the images, viewing the ocean in terms of The Market (or vice versa) also brings to mind Matthew Arnold’s poem Dover Beach, which describes the "tremulous cadence" of the waves as a reminder of "the turbid ebb and flow / Of human misery”.
As an undergraduate (1965-9) I was struck by Arnold’s 'Dover Beach' poem and it introduced me to the role of figures of speech and metaphors, which sparked my interest years later in 2003-5 when I contemplated the enigma of Adam Smith’s use and meaning of the “invisible hand” metaphor and its economics.
Its last three lines stuck in my mind throughout those intervening years and ever since:
“And we are here as on a darkling plain
Swept with confused alarms of struggle and flight,

Where ignorant armies clash by night” (Mathew Arnold (Dover Beach).

ANOTHER SLAP DOWN OF "INVISIBLE-HAND' THEORIES

Kevin G. Hall, McClatchy Washington Bureau (October 29), reviews a new book on economics that is causig a stir HERE 

“New book slams economists, their theories and their forecasts” 
Jeff Madrick has a bone to pick with the economics profession, and that’s putting it nicely. Consider the title of his new book: “Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World.”
The book amounts to a broadside on modern economics and recently was critiqued by 2008 Nobel Prize-winning economist Paul Krugman, whose review appeared in The New York Times.
“Hardly any economists predicted the 2008 crisis – and the handful who did tended to be people who also predicted crises that didn’t happen,” Krugman noted, underscoring a central theme of the book – that the profession has a poor forecasting track record. “More significant, many and arguably most economists were claiming right up to the moment of collapse that nothing like this could even happen.”
Madrick is a longtime writer on economic matters for Harper’s magazine and a former New York Times columnist. He dropped by McClatchy’s Washington Bureau recently to discuss his book. Here are some of his thoughts, edited into a question and answer format.
Q: You question economists’ devotion to the famous “invisible hand,” the notion that in a free market absent of government intervention buyers and sellers find an agreeable price and self-regulate the economy. Why?
A: This book is about how economics has been oversimplified and increasingly they take good ideas, the invisible hand, and oversimplify them, and make them rules of thumb.
Q: You cite raising the minimum wage as an example of that. Economists doggedly insist that because of the invisible hand, raising wages will reduce the demand for workers. Research raises doubts on this. What’s your view?
A: That’s an example of the abuse of a good idea turned into a rule of thumb. My argument is that since the 1970s and certainly since the 1980s, economists have increasingly moved in this direction of making many good ideas and some not-good ideas into rules of thumb as a shortcut for thinking.
Q: You disagree with those who say the invisible hand got the U.S. economy back on track after the financial crisis. You think the stimulus program, while too small, helped reverse the steep economic decline of late 2008 and 2009. Why?
A: (The idea that) economies adjust with no help from the government, that wages, prices go down and people invest, that’s what drove economic thinking in the Great Depression – it’s just not true. The economy does not adjust itself. The economy is not one big invisible hand.”
Comment
So far so good. Nothing like evidential criticism to expose the emptyness of the prevailing concensus on the so-called invisible-hand (though Krugman is quite defensive - he still believes in the myth of the “invsisible hand” being more than a metaphor for something other than what he thinks it is for.
Forecasting the future is hubris. Economists have enough problems with understanding the past; economics is not like physics which can predict the next lunar eclipse with impressive accuracy and the eclipses that will occur in the next hundred years or more.  What they can’t do is predict what will happen to you next Friday; they can predict, with wide margins of error, what might happen to you. Human behaviour is full of surprises; the predictable laws of physics are dull in comparison.  Yet some economists think human behaviour is predictable and have theories of human behaviour that assume humans behave like the physics of atoms.
So hats off to Jeff Madrick! He’s not fooled by the Emperor’s new clothes cheer-leaders that dominate economics and award each other Nobel Prizes and hang on to the myths of the “invisible hand” that they falsely arttribute to Adam Smith.

Moreover this is the second incident of better sense this week undermining the prevailing ‘certainties’ of “an invisible-hand” ‘miraculously’ and ‘beningly’ running the economy.
I have no comments on the rest of Madrick's ideas.

Wednesday, October 29, 2014

PUBLIC LECTURE AT LSE: LOST LEGACY IS NOT ALONE!

The Real Story Behind the Invisible Hand
LSE public lecture  Date: Thursday 30 October 2014
Time: 6.30-8pm
Venue: Old Theatre, Old Building
Speaker: Russell Roberts
Chair: Tim Frost
“Adam Smith gave the world the metaphor of the invisible hand, the most famous metaphor of economics. But he only used the phrase three times in his writings. And none of the uses reflect what the phrase has come to mean today--a justification of laissez-faire capitalism. Yet Smith is indeed a key figure in the idea of emergent order--order that is the result of human action but not human design. Ironically, his richest explanation of that concept may be found in his little-known masterpiece, The Theory of Moral Sentiments. His application there is not to our economic system, but to the very idea of civilization and culture. This talk explores Smith's concept of emergent order and its relevance for our conduct today and its potential to let all of us help to make the world a better place.”
Russell Roberts (@EconTalker), author of How Adam Smith Can Change Your Life, is a research fellow at Stanford University's Hoover Institution and the host of EconTalk, a weekly hour-long award-winning podcast. Previously, he was a professor of economics at George Mason University and founding director of the Center for Experiential Learning at the John M. Olin School of Business at Washington University.
This event is free and open to all with no ticket or pre-registration required. Entry is on a first come, first served basis. For any queries see LSE Events FAQ or contact us at events@lse.ac.uk 0207 955 6043. 
Comment
The above news, to put it mildly, is welcome news to Lost Legacy. Russel is a prominent public economist in the USA and speaks to a wide audience.
If I could travel I would attend.  If you can go please attend and send your post to Lost Legacy. 

Lost Legacy is no longer a lone voice.

MEDIATING THE SELF-INTERESTS OF PEOPLE THROUGH BARGAINED EXCHANGES CAN RAISE MUTUAL WELFARE

Attorney Jonathan Emord, author of "The Rise of Tyranny" and
"Global Censorship of Health Information" and "Restore The Republic” posts (6 October) on NewsWithViews.com (“Where reality shatters illusion”
HERE http://www.newswithviews.com/Emord/jonathan363.htm
“THE ECONOMY'S TRUE CONDITION”
This historic death spiral for an over taxed and over regulated economy can be reversed before a collapse but it requires courageous leadership. At root, it requires an appreciation for Adam Smith’s moral and economic philosophy. “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner,” wrote Smith, “but from their regard to their own interest.
In short, economic welfare cannot be achieved through planned economies, whether under the mercantilist system that Adam Smith rejected in the 18th century or under the morass of regulations that erect politically preferred prior restraints under the administrative state of the 21st century. Smith’s “invisible hand” of the market offers the only solution that respects individual liberty and freedom of choice, recognizing that one’s pursuit of self interest in the market leads inevitably to the satisfaction of others’ needs and wants, enabling the economy overall to rise.
Comment
Yes, but Adam Smith on self-interest can only work as he shows, but it has since been forgotten (as shown in the above shortened quotation), by the mutual mediation of individual self-interests by persuasion and bargaining and “addressing the self-love of others”, and specifically in Smith's "butcher, brewer, baker" example (see WN, Book 1, chapter 2, paragraph 2) and also in TMS on ‘persuasion’, “good offices”,  and “exchange”.

It is by pursuing the self-interests of others in markets (NOT solely our own self interests!) that makes markets work. Markets work through VISIBLE prices to meet the “satisfaction of others’ needs" while in pursuit of our own.  Whether the  “economy overall” rises can only be judged on a case-by-case basis. Satisfying our own needs only could undermine basic freedoms and the welfare of others (pollution, trade tariffs and prohibitions, environmental destruction, and wars).

Tuesday, October 28, 2014

ABSOLUTE POVERTY IS MORE IMPORTANT THAN INEQUALITY


This post was initially made in 2007 on Lost Legacy and i reproduce it today as my contribution to a discussion on Poverty and Inequality.
This theme has been pursued on Lost Legacy since I began posting in 2005 and it is still - perhaps more so -relevant to public discussions of modern controversies (see the reception of some economists to Piketty's Capital).

LOST LEGACY: JANUARY 27, 2007
Absolute Poverty is the Priority, Not Relative Opulence”

Eduardo Penalver, writing in Dot Commonweal, a Blog by the magazine’s editors and contributors (Commonweal: a review of religion, politics and culture), takes a pop at Tyler Cowen, for his column in the New York Times on ‘Inequality’.

Eduardo Penalver quotes from Tyler Cowen’s column:

The broader philosophical question is why we should worry about inequality — of any kind — much at all. Life is not a race against fellow human beings, and we should discourage people from treating it as such. Many of the rich have made the mistake of viewing their lives as a game of relative status. So why should economists promote this same zero-sum worldview? Yes, there are corporate scandals, but it remains the case that most American wealth today is produced rather than taken from other people.

What matters most is how well people are doing in absolute terms. We should continue to improve opportunities for lower-income people, but inequality as a major and chronic American problem has been overstated.”

Penalver comments:

The notion that we should only care about "how well people are doing in absolute terms" appears to be completely untethered from any plausible conception of human flourishing and its relationship to distributive justice. One reason that Catholic teachings on economic justice are so powerfully persuasive is that they are rooted in a realistic conception of human nature that rejects the unstated individualistic premises about human nature underlying Cowen's op-ed.

Cowen is surely correct that "life is not a race against fellow human beings." But neither is it the case that individual lives are hermetically sealed pursuits in which our absolute well being can even be measured in isolation from what happens to others. For starters, as Cornell economist Robert Frank has argued, most people actually care about their relative position in society -- so making someone at the top even better off than they already are by itself makes other people less well off in a real and measurable sense. 

The connection between our own well being and the well being of others does not depend just on the fact that we might be envious of the wealthy, but also on the fact that conventions of social participation are sensitive to the well being of others. Adam Smith understood, for example, that what we legitimately consider to be a necessity will depend upon our particular cultural and social context. Drawing on Smith's insight, Amartya Sen has argued that -- even for someone who accepts an objective and universal account of human flourishing -- the resources human beings need to flourish will vary from culture to culture and, within the same culture, from era to era. As societies become wealthier, what each individual needs in order to meaningfully participate in that society will also become more elaborate and expensive.”

Comment
Tyler Cowen’s point seems perfectly sensible to me. It is not, of course, the end of the matter, or the last word, but it encompasses the basic lesson of history that the creation of wealth (the annual flow of ‘necessaries, conveniences, and amusements of life’) takes priority over its distribution.

We once ‘enjoyed’ the equality of absolute and relative poverty for all, but at a very low standard of living, which included short life-pans during the 190,000 years of Homo sapiens before the agricultural revolution, 8-10,000 years ago. It is unlikely that people in that condition were reconciled to their egalitarian poverty and that none of them wished to ‘better himself’ (a powerful human motive said Smith, and with us 'from the cradle to the grave’).

Yes, I know that even living standards dropped too over this period from 10,000 years ago at first, to which population pressures on the hunting mode of production contributed, the struggle to recover from the most recent ice age, and also that much of the agricultural systems in the near East, India, China and, eventually, South America a millennium or so ago, were characterized by ‘tyrannies’ of frightful dimensions.

It was only after what Adam Smith called the fourth age of man, the age of commerce appeared, that the march from subsistence agriculture to the opulence of manufacturing markets was initiated about 2-3 millennia ago, but this was interrupted catastrophically from the fall of Rome (5th century) until its very slow and gradual revival in Western Europe (14th century). Interestingly, China, on the verge of the first breakthrough to modernity in the 14th century fumbled the pass by self-inflicted nutty policies of withdrawing from international contact with ‘barbarians’, about the time that Western sea power was reaching towards the Americas. 

China did not get ‘moving’ again until in the 20th century. Even then it took another ‘nutty’’ detour, until it began dismantling its state-run communist economy, to ‘open up’ to the world, which its leaders six centuries earlier had closed at precisely the time when China and its technology might have been the leading industrialized nation in the world for several centuries.

Countries can set the world back for centuries by false policies; a threat that is of concern in the current alliance of anti-globalists and the nuttier waves of the climate change catastrophists (many of whom don’t like capitalism or markets, either).

In this context, Tyler Cowen’s points are reasonable. Not for Eduardo Penalver. He writes:

For starters, as Cornell economist Robert Frank has argued, most people actually care about their relative position in society -- so making someone at the top even better off than they already are by itself makes other people less well off in a real and measurable sense.”

The fact is that ‘most people’ see their relative position as more significant than their absolute position (the zero sum view – what the rich gain; the poor lose, a wholly rhetorical device based on envy – not one of the Catholic virtues, nor Adam Smith’s) and this is not an argument that strikes Cowen’s statement at all. Tyler is talking about priorities; inequality is a price of market driven development, against which attempts at inducing equality by restricting markets have been shown to reduce wealth for all; it does not just redistribute it from rich to poor. Wealth is a flow, not a stock; slow down the flow and you eventually rundown the stock, of which archeology presents many examples. 

Smith wrote extensively in Moral Sentiments about envy and the adoration of the ‘rich’ (known as ‘celebrity’ obsession today). Most people do not sit pining for the lives of the rich, but they do care deeply about being relatively poor compared to their peers and this operates within the meanest ghetto and the plushest suburbs. It is already at work among kids in the smallest school playground ‘gang’ too; in any car park; in any club; in any student common room - anywhere in fact where people mix, work or socialize, including within the family (especially when older siblings look at what their parent’s rising incomes mean for the life-styles of young siblings compared to what they experienced a few years earlier at the same age. Inequality across class divides is nowhere as painful as inequality with one’s peers. 

It is estimated that Mao’s redistribution horrors killed 30 million peasants families from starvation, and it happened without a free press and media to report the facts on the country’s tv screens. A calamity on a tiny fraction of that scale would have been shown widely each night and it would have rocked the government if anything similar had happened in the US or Europe (the Chinese people didn’t have many tvs anyway). Compare how a few deaths on a bad day in Iraq damage the President’s standing in US polls with the adulation for mass murder by Mao in China not so long ago.

Amartya Sen also points out in ‘Freedom as Development’(Oxford UP) that some minority sections of the poor in the US have shorter life spans than people in Kerala, India; a sobering point worthy of notice by those who are extreme in their complacent acceptance of satisfaction with US progress. But this problem is more likely to be solved by US wealth than it is by impoverishing the ultra rich. You don’t raise anybody’s life spans by reducing everybody else’s; and, anyway, the deprived ghetto youth cares most about the shoes or the swagger of next door’s resident than about the glitter of Holywood ‘stars’.

Development can take centuries, whatever the emotional pain of ‘make poverty history’ campaigners whose target is measured in weeks or months. Poverty, above all others, is the most common experience of the history of the human species. Wealth is relatively recent history – a mere two centuries out of the two thousand centuries or so that we have been around since our predecessor’s speciation from the Hominids – poverty [has been] the norm is the iron rule of human society, but we are now on the verge of general opulence. 

We would be advised to deal with relatively minor poverty and longevity problems in the US with great care and circumspection, so that there is sufficient momentum for economic growth around the world to raise the overwhelming, and, dare I say, absolute majority of the 6 billion people on the planet from abject, crippling, destructive and appalling poverty that is their lot, as it was the lot for all our predecessors long before the priests, rabbis, sun gods and assorted mystics pontificated about ‘falls’ from mythical Eden gardens of the past, and ‘certain hopes’ of mythical heavens after death. Abolishing absolute poverty for the up to four or five billion outside the USA, Europe, parts of Asia, etc., takes precedence over the relatively minor incidences of it in the (skewed) 'rich' economies.

Humanity’s salvation from absolute poverty is now happening here for approaching a billion out of six billion; that’s several billion to go and counting. That is the absolute, most important target first. Relative opulence is the spur to eliminating absolute poverty. 

[Read the article by Eduardo Pemalver at:
http://www.commonwealmagazine.org/blog/post/index/727/Tyler-Cowen-on-Inequality]

Comment (27 October 2014)

Contributions are invited from readers on the above thesis.  I shall make space for those that are without abuse and vitriol.

Sunday, October 26, 2014

SHAVING BRUSHES 101

LeisureGuy, 25 October posts on shaving brushes  HERE 
“When the Invisible Hand of the Market picks up a shaving brush…
…When I saw today how very much better the silvertip badger brush worked than the boar brush on the same soap, I had my “duh” moment. Silvertip badger brushes are much more expensive than boar brushes. That means that the invisible hand of the market is willing to pay (substantially) more for silvertip badger. The invisible hand of the market is considered by some to be pretty much an infallible guide: if prices that are artificially high (i.e., in excess of the benefits gained), then those prices must fall as “the market” turns to lower-priced alternatives to keep the cost/benefit ratio acceptable. So of course silvertip badger would perform better than boar—otherwise, everyone would buy boar, since the higher cost of silvertip would produce no benefit.
I personally am not that enamored of “the invisible hand of the free market,” particularly when Libertarians present it as a universal panacea. We see manifold failures of the free market: environmental degradation, refusal to develop medicines for which the market is small or poor (I’m looking at you, ebola vaccine, but many other examples exist), and in general all the government services undertaken for the general welfare that the invisible hand will either not address or screws up abominably (e.g., for-profit hospitals, for-profit schools, for-profit military units like Blackwater).
Still, given the undeniable major difference in lather quality from the silvertip badger brush and the Omega boar, one can certainly see how the invisible hand will pay more for silvertip badger than for boar. I do understand that boar is more readily available (more supply) and thus less costly to obtain, but the fact that the market is willing to value silvertip badger so much more highly means that (overall) the market recognizes the superiority of the brush in terms of its function: making lather.
Comment
This is a classic example of muddled thinking. No, I am not going to launch into my regular theme of banging on about the myth of the “invisible hand”.
I want to highlight the error so basic that it borders on sheer nonsense.  The post itself is probably of interest to those looking for a case study for a tutorial class in marketing (follow the link above) or a case for students of “duh” moments, or even students of product differentiation in Marketing 101.
In terms of the economics of markets it completely misses the most common, fundamental and absolutely essential characteristic of all markets - no exceptions.  I refer to the VISIBILITY of prices. Without prices - however expressed - markets cannot function.
Smith expressed this as a function of ‘Truck’ (offering on thing or service for another (example: labour for things - think of the folk song ’16 tons and what d’ya get? Another day older and deeper in debt’); ‘Barter’ (offfering one thing for another - ‘my fishing rod and tackle for your stamp album’) and ‘Exchange’ (anything for anything). Money of course simplifies the claculations of the worth of what’s offered for what is sought.
Modern markets work in commonly understood VISIBLE prices; all exchanges throughout history (and pre-history too) have been facilitated by each party knowing what they give for what they get, whether its ‘things’, ‘obigations’ or cash money. Without VISIBLE prices modern markets would not work, which is why markets took so long to evolve and today are bounded by rules, backed by laws.

It has nothing to do with an “invisible hand” that is “willing to pay more for silvertip badger than for boar” because it is down to a real, living customer who is “willing to pay more for silvertip badger than for boar”, once the customer can see the difference in the VISIBLE price and can relate that to what money she has available, should she be in the market seeking a shaving brush, or whatever. 

Wednesday, October 22, 2014

PRAGMATISM BEATS IDEOLOGY

Scott Porch posts on the Daily Beast HERE  an article “How LBJ and Reagan Wrecked Our Faith in Government”, much of it quoting Jonathan Darman, 33 year old’s, former reporter for Newsweek:Landslide: LBJ and Ronald Reagan at the Dawn of a New America”, a new history of the seismic leftward and then rightward shift in national politics during the three years after the Kennedy assassination, is a dual narrative of Johnson and Reagan during those years.
“Darman argues that Johnson and Reagan preached competing visions of a utopian America—for Johnson a government-led social reformation, for Reagan an idyllic society guided by the invisible hand of free enterprise—and neither delivered, fostering a cynical view of the United States government that persists 50 years later.
“Each of the myths discredited government,” Darman writes. “Reagan’s did it overtly, maintaining that government was the source of America’s problems. Johnson’s did it by example, making promises for government that it could not possibly fulfill. As a result, a generation of Americans has come of age with little faith in government’s ability to do much of anything.”
Comment
Leftists believe that the State is a solution to a country’s economic problems. Rightists believe the State is the problem, and a free-enterprise capitalism would solve the State’s problems.  Both are wrong in important parts of their analyses and their remedies for the other’s failures.
There are no easy remedies and no neat solutions to these problems.  
Adam Smith was pragmatic; he was interested in what worked and recognised that both State and Markets had roles to play.  Political economy is about melding the positive contributions of both States and Markets, not choosing one to the exclusion of the other.
He showed in Wealth Of Nations that where markets (and the people in them) fail to function according to well-defined criteria, intervention by the State according to broadly acceptable standards of justice could be recommended, deliberated over and, perhaps, adopted. 
Similarly, where the State fails to function according to well-defined criteria, alternative provision by markets could be acceptable and recommended, deliberated over and, perhaps, adopted (Or both run to demonstrate the most efficacious choice). Both forms of provision would require monitoring for quality of provision.

This could be sumarised as: markets where possible, the State where necessary. 

Tuesday, October 21, 2014

LITTLE PONY AND TEACHING ECONOMICS?

“Adam McKay, "Anchorman" director and Funny or Die co-founded posts on METRO HERE 
Teaching economics via 'My Little Pony' parodies"
“Everyone quotes that "invisible hand of the free market" bit from Adam Smith, but what no one talks about is there's 50 pages before it where he's talking about how that free market has to be heavily regulated in order for the invisible hand to operate. Somewhere along the line that got lost. The best comparison I've heard is if you have an NFL football game, you don't just get rid of all the rules and say, "Well, it's a free game" and have guys attacking each other in the parking lot and throwing rocks at each other. You have to have rules in order for the economy to operate.”
Comment
Follow the link to approach Adam McKay’s slant linking ‘little Pony’s” to Adam Smith - an allusion lost on me - and a typically confused notion of what Adam Smith was using the invisible-hand metaphor for. That’s not Adam McKay’s fault at all - the tainted honour for that confusion goes back to Paul Samuelson in 1948 and his all-time, best-selling “Economics: an analytical introduction” (c.5 million plus used sales markets and scores authors of imitation texts).Its now an endemic ideological myth that dominates most modern economics teaching. 
I have discussed this myth many times on Lost Leagcy - scroll down my blog posts to read why.
Smith never said there was a "invisible hand of the free market”.  In fact on the three-only ocasions in which he used the IH metaphor he referred first to the pagan superstitions of classical Rome, second to the ‘proud and unfeeling” landlords in pre- and post feudal Europe, and third, and lastly, to merchants in Europe who happened to be, what we would call, risk-averse to sending their capital abroad and thereby chose instead to invest it locally, which they regarded as safer. 
In short, the “free market” was not an issue, and anyway did not exist in any of the three contexts to which he referred. Indeed, in mercantile Europe, including Britain and Ireland, there was no question of there being ‘free-markets”, which was precisely why he wrote his Wealth of Nations!
He also used the “invisible hand” as a metaphor, not as a description of reality. He referred to the subjective motives for agents that caused them to take certain actions: in Rome it was in fear of being struck by “Jupiter’s lightning bolts” that kept pagan believers indoors during thunder storms; in slave-farming and serfdom societies it impelled landlords to feed their inferiors who worked his fields because with their forced labour and regular food they could not labour and the landlord’s ‘greatness’ would crumble. Without the slaves/serfs being fed, they could not labour; and in mercantile Europe, supplying the local economy preferentially,added to “domestic investment and employment”.  
The metaphor of the “invisible hand” describes the hiddden motivations, that caused them to take actions, which had their intended consequences: fears of lightning kept potential conspirators indoors and not out and about in pursuit of mischief against Rome; feeding the labourers kept the farming systems in motion, and insecurity felt by merchants added to domestic prosperity.  
However, motivated actions besides their intended consequences could also have unintended consequences (stability in Rome, propagation of the human species in the long run, and higher domestic output and employment.
This analysis also fits Adam Smith’s teaching on the role of metaphors: “to describe in a more striking and interesting manner” their “objects”, which objects in these three cases are identified in my (and Smith’s) explantions above.

Adam McKay is a world away from Adam Smith’s use of the “invisible hand” metaphor. The long-chain of post-Samuelson modern economists have misread Adam Smith  I don’t think the ‘Little Pony’s can help his readers on this occasion.

Saturday, October 18, 2014

LOONY TUNES No. 103

1
Llewellyn King (lking@kingpublishing.com) is executive producer and host of “White House Chronicle” on PBS posts: HERE Adam Smith’s “invisible hand,” describing the efficient operation of markets, has morphed into a something else: an invisible hand in my pocket and yours.
2
Charles Gaba posts (24 Sept) on ACASign ups.net
HERE 
"Obamacare = Socialism!" Claims Given the Finger by Invisible Hand of the Free Market, Part 11Source: Forbes, 09/23/14: State Farm, Blue Cross Partner To Sell Obamacare Policies:  Mark N.
This one comes to us from that bastion of Socialist-Communist-Pinko thinking known as…Forbes.com:"
3
Reihan Salam (18 October)  (From SLATE) HERE 
Comment: Amazon is what the American economy needs”
We've all heard of Adam Smith's "invisible hand" that guides the free market. The invisible foot is the invisible hand's brutish older brother. It is the force that sees to it that capital gets reallocated from firms that aren't doing their jobs to firms that are by putting the former out of business.”
4
Bryant McGill, best-selling author, speaker and activist in the fields of self-development, personal freedom and human rights, posts HERE 

“There is an invisible hand at work in the making of beautiful lives.”
5
Ann M Florini, Carnegie Endowment for International Peace, Paper prepared for the Annual World Bank Conference on Development Economics, Washington, D.C., April 28-30, 1999. HERE 

“Does the Invisible Hand Need a Transparent Glove? The Politics of Transparency.”
6
Shellie Karabel, who “has spent more than four decades as an international broadcast journalist covering most major international new events since 1980 throughout Western and Eastern Europe and the Middle East for outlets such as ABC News, PBS, AP Broadcast, and CNBC", posts the following absolutely untrue statement about Adam Smith on Forbes HERE 
Adam Smith spoke of the “miracle of the ‘invisible hand’,” – a metaphor for “hidden market dynamics that bring about a socially optimal outcome when self-interested agents (“businessmen”) in a market try to maximize their personal benefits.” 
Comment
May I suggest that Shellie read Adam Smith first before asertively passing on made-up nonsense about what Smith said when he used the metaphor of “an invisible hand?  

His actual words bear no resemblance to what she alleges.





Monday, October 13, 2014

DAVID HENDERSON ON PIKETTY: POVERTY MORE IMPORTANT THAN INEQUALITY

David Henderson on Piketty
David Henderson is posting extracts from his review of Thomas Pikcetty’s block buster book: “Captial in the 21st century”, Bellknap, Harvard.
1: “My long review of Thomas Piketty's Capital in Twenty-First Century is finally out. It is titled "An Unintended Case for More Capitalism." Unlike many free-market critics of Piketty's book, I find his big-picture statistical analysis somewhat compelling, although like the other critics I see some serious problems with it. But even if his analysis is correct, I still find it much less important than he does, and I find his policy proposals appalling. Beyond his big-picture analysis and policy proposals, he discusses many issues: Social Security, the history of tax policy in the United States and France, global warming policy, immigration, and many others. On some of these, his analysis is good. On others, it is weak or outright wrong. Sometimes he gets his history wrong, and in important ways. Finally, he has a bad habit of questioning the motives of those with whom he disagrees.
Start with the big picture. "It is long past the time," he writes in the Introduction, "when we should have put the question of inequality back at the center of economic analysis and begun asking questions first raised in the nineteenth century." The center? Really? But if we put inequality at the center, we can easily miss the tremendous growth in well-being for a huge percentage of people in the world and for almost everyone in the United States and Western Europe. Much later in the book, Piketty shows that he is aware of those improved conditions, writing:
Nevertheless, according to official indices, the average per capita purchasing power in Britain and France in 1800 was about one-tenth what it was in 2010. In other words, with 20 to 30 times the average income in 1800, a person would probably have lived no better than with 2 or 3 times the average income today. With 5-10 times the average income in 1800, one would have been in a situation somewhere between the minimum and average wage today.
In his own way, he is pointing out, albeit less dramatically, what University of California, Berkeley economist Brad DeLong noted in a study aptly titled "Cornucopia." In that well-argued and documented paper, DeLong examines the 20th century and shows that the price of almost every item we buy--if stated in hours of labor required to earn enough to pay for it--has fallen to a fraction of its cost in 1900. Moreover, that reduction in cost understates the improvement in well-being because many crucial items that we buy today did not exist in 1900. Antibiotics, for example, are a 20th century invention. Their price in 1900 was effectively infinite.

2 In Piketty's view, if someone's share of wealth stays constant, he cannot be better off, even if wealth has increased.

Yesterday I highlighted the opening of my lengthy published review of Thomas Piketty's Capital in the Twenty-First Century. Here's the next episode.
In my view, a steady increase in well-being for the vast majority of the world's inhabitants, as well as the policies necessary to achieve that, are what should be central to economic analysis. But Piketty chooses to put inequality front and center, and so be it. He states his conclusion up front:

When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income.
The reasoning is fairly straightforward: Assume that someone who owns capital earns an average annual real return of 5 percent and that the rate of growth of the economy is 3 percent. If the owner of capital can live on 1 percentage point of the annual return, his wealth will grow at 4 percent per year, which is higher than the economy's growth rate. We need only one more assumption: that the capital owner has only one son or daughter who, in turn, will live on that 1 percentage point per year. QED
.
In short, Piketty's conclusion follows logically, but only if we include assumptions about the number of heirs and their spending discipline. But if, for example, each wealthy person has three heirs who dissipate the wealth, those heirs will leave little to their heirs. So, based on just Piketty's skimpy assumptions, his claim does not follow logically. He, unfortunately, starts out by overstating his case. He could be right empirically, though, and he presents evidence for the growing share of income earned by owners of capital, much of which they inherited.
We are still left with the question: "So what?" Imagine--as Piketty has convinced me seems at least plausible--that the share of income going to owners of capital could rise over time, which means that the share of income going to labor would fall. Would that mean that laborers are worse off? Not at all. In fact, they are likely to be better off. Unfortunately, many people who read the book, especially those who are not economists, could easily miss this point for two reasons: (1) Piketty's emphasis on income shares rather than on real income; and (2) his misleading language. We would expect an emphasis on shares rather than real income from someone who believes that inequality of wealth and income, rather than improvements in standards of living, is "at the center of economic analysis."
What compounds the misleading impression is Piketty's misleading language. For example, in discussing his country, France, he writes, "Probate records also enable us to observe that the decrease in the upper decile's share of national wealth in the twentieth century benefited the middle 40 percent of the population exclusively." But as he well knows, French wealth per capita grew enormously in the 20th century, and so the decline in share of the wealthiest does not imply an absolute decline in wealth. Moreover, even if the wealthiest French people had lost wealth in absolute terms, the higher share of the people below them is not sufficient evidence that the wealthiest group's decline benefited the middle 40 percent. The middle 40 percent could have done better simply because of their own savings and investments.
Piketty's misleading explanation of the French case above is not an isolated weakness. Throughout the book, he writes as if he thinks that wealth is zero-sum and, thus, that increases in various groups' wealth must come at the expense of others. Writing about early 19th-century France, for example, he refers to a "transfer of 10 percent of national income to capital." But a look at his Figure 6.1, on which he bases this claim, shows no such transfer. All it shows is that the share of income going to capital rose. Similarly, in discussing the United States in the late 20th century, he calls an increase in the income share of the top 10 percent an "internal transfer between social groups." Never mind that on the very same page, he admits that income for the bottom 90 percent slowly grew over that same period.
Or consider Piketty's statement about the United States and France: "And the poorer half of the population are as poor today as they were in the past, with barely 5 percent of total wealth, just as in 1910." That is nonsense. If the poor have the same percentage of wealth as they had in 1910, they are much richer because wealth is much greater, as Piketty well knows. Here, he has gone beyond misleading language into actual error.”

Comment
I have my copy of Piketty’s book om my desk but I have not finished it yet.

However, from the start it clashes with my own considered views, summed in my insistence that poverty is a more important problem than inequality, as I have expressed several times on Lost Legacy. 
I have debated with David Henderson on Lost Legacy on the “invisible hand” metaphor, HERE  (29 November, 2005) so we do not see eye-to-eye on that subject at least, and perhaps others, but his review of Pikett’s book is spot on.
Inequality cennot be “solved” by a magic bullet, acts of government, political wishful thinking, “occupations”, or revolutions of any kind. It is an historical feature of all human societies since our much fewer ancestors left the forest and taht life will return in short-order if the good intentions of good people become twisted by those who have always emerged after whatever economic processes are destroyed.
Nowhere in all of human history have societies, prior to the 18th century in North Western Europe and prior to what emerged in North America in the 19th century, and continues today in the 20th and 21st centuries has inequality been abolished by design (Marx’s solution). 
The real undesigned transformation are now spreading across large population swathes in the fomerly “undeveloped” rest of the world, and we can seen rising per capita incomes up and down the income scales. 
There is a long ways to go, yet. And the desperately poor of the world know it. That’s why some of the desperately poor make hazardous and risky journeys in attempts to get into the ranks of the poor in what they regard as the rich countries. 
It is ironic that poor people in the poorest part of the world regard the poverty of the rich countries as infinitely better than their own poverty, even though the rise in per capita incomes and access to technologies, in recent and continuing decades, where they live or came from, are rising for the first time since humanity spontaneously started on that road less that 500 years ago - and with long ways to go yet.
Of course, for the humanitarian concerned people in the world, the pace of change is too slow. They want action to hurry-it up. A worthy goal, indeed. I share their aspirations and admire their self-sacrificing enthusiasm but I only worry that in trying to get what they wish for, they don’t bring the whole house down with them.