Filthy Lucre

Economics for People Who Hate Capitalism

by Joseph Heath

[Texts]

Good exposition of useful frames. Albeit mildly simplistic at times.

Libertarians and Social Darwinists

His defense of libertarianism the ideology is useful and draws on the prevailing intuitions that Darwinianism created, namely that order emerges from chaos and that there are self-organizing principles in simply-ordered systems. See:

In order to see the attractions of libertarianism, it is important to consider two very powerful images that emerged from the nineteenth century. The first regards nature as an optimizing system, with Darwinian natural selection ruthlessly weeding out the sick and unfit. The second regards capitalism as an optimizing system, with the discipline of the market driving out the lazy, irresponsible, and inefficient. The confluence of these two ideas is summed up perfectly in Herbert Spencer’s expression “survival of the fittest,” initially used to describe social relations in the market economy but subsequently extended to describe evolutionary dynamics in the natural world.6

Indeed, Spencer was not the only one to be struck by the similarities between Adam Smith’s “invisible hand” and Charles Darwin’s mechanism of natural selection. Both represented systems of “spontaneous order”—situations in which an outcome that looked like the product of meticulous planning and design turned out in fact to be the result of a “blind” mechanism. If one looks at bird beaks among different species, for instance, it seems that each was designed for a particular task: cracking seeds, catching fish, tearing meat, and so on. Darwin was the first to propose a mechanism that could achieve this result without positing any sort of conscious design.

The market exhibits a very similar structure. When left to its own devices, the movement of prices ensures that labor and resources migrate to their best employment. If there is a shortage of coal, tin, wheat, or whatever, prices will be bid up until only people who are able to make best use of these inputs are able to afford them. An alien observing from on high might think that some conscious intellect was rationing these goods, but in fact the outcome is nothing more than a consequence of each individual’s pursuing his or her own interest under the appropriate circumstances. Tin cans are no longer made out of tin, and nickels are no longer made out of nickel, not because anyone sat down and decided that these metals would be of greater use in other applications, but simply because the price of these metals was bid up to the point where it became economical to change the way tin cans and nickels were made.

The medieval Christian worldview assumed that all the order in the universe was a product of some underlying divine purpose. Everything from rocks, plants, and animals to humans needed to be understood in terms of the good that was sought, since this good represented the place of each of these creatures in the providential order. Striving for the good was seen to be the “final cause” of all natural and vital motion. In the case of humans, this good was sought self-consciously, taking the form of “natural law.” The highest manifestation of this pursuit of the good was the state, which was taken to be the agency through which humans sought to give concrete expression to the dictates of this natural law.

The central success of the Scientific Revolution was its demonstration of how “orderliness” could be explained without divine intention. Newtonian mechanics allowed one to show how heavenly order (the regularity of planetary orbits, their alignment in a single plane) could be explained without God. In the case of living things, Darwin showed how a perfectly “blind” mechanism, such as natural selection, could achieve adaptation and “design.” There was no need to assume that living creatures sought some good or pursued some higher divine purpose; a narrow drive for self-preservation was all that was required for natural selection to occur.

In the case of society, Adam Smith showed that a perfectly “blind” mechanism was able to achieve order. There was no need for conscious guidance by the state, since the market mechanism was able to produce optimal allocations on its own. Furthermore, there was no need to assume any pursuit of the good, or any higher divine purpose, on the part of individuals. When seen in this light, “natural law” becomes irrelevant; the narrow pursuit of self-interest is all that is required to achieve what Spencer described as “a constant progress toward a higher degree of skill, intelligence, and self-regulation—a better co-ordination of actions—a more complete life.”

Thus twentieth-century libertarianism developed, essentially as an application to society of the principles of the Darwinian revolution. Aristotle thought that “the good” was required in order to have order in either nature or society; as it turned out, it wasn’t required for either. What libertarians posited, in the place of the state and of natural law, was simply a system of natural rights, most famously the rights to life, liberty, and property.

From this basic point of departure, two flavors of libertarianism developed. The first claims that self-interest alone is enough to motivate individuals not only to assert their own rights, but to respect the rights of others.8 No government whatsoever is required; a market economy is perfectly capable of arising in the so-called state of nature. The second claims that a state is required in order to prevent individuals from interfering with one another’s rights but that this constitutes the only legitimate role for government. Libertarians of this tendency endorse a minimal, or what Robert Nozick called a “nightwatchman,” state—one that has no mandate to take any positive action: it is merely there to ensure that the rights of individuals are respected.

Over the years, libertarians tried various strategies to show that all this could be accomplished entirely through decentralized, self-interested action. Unfortunately, they never quite succeeded in doing so.

The libertarians failed, Heath argues, because of a few reasons (the Law of the Second Best features quite prominently), but mainly that “competition is nonproductive from the standpoint of [the general population]” in a Darwinian sense. Natural selection can’t be optimizing, because otherwise the Earth would be covered in a smooth, uniform layer of bacteria! Members of the same species end up competing against each other for resources, and as a result the pressure for better ‘fitness’ on the individual level doesn’t correspond to better ‘fitness’ on the population or the species level!

For the purposes of his argument, that pure libertarianism is doomed because an authority is needed to enforce Hume’s three “fundamental laws” (private property, voluntary exchange, contract enforcement), it works. But the general argument that ‘evolution doesn’t optimize’ or that ‘optimization occurs on the organismal level not the species level’ is clearly flawed, because it occurs on the genomic level. Trait prevalence waxing and waning in a population is the measure of the fitness, not the survival of an individual species (genes are initialized and fixed at birth).

If I understand correctly, this is why it makes sense to consider ‘memetic evolution’ or the ‘marketplace of ideas’ as analogous to traditional evolution, as the ideas themselves act on carriers and get transmitted via similar means as DNA. But considering competition in and of itself as the driver of fitness and then deciding that it doesn’t make ‘organisms’ or ‘species’ more fit is begging the question? These systems exist and are replicators of themselves, and in fact the thing getting replicated is the source code, and if it does not benefit the source code then it likely won’t be replicated.

This is why “reproductive success of the individual” is a slightly incorrect metric to consider. Yes, natural selection may not be optimizing directly for the “reproductive success of the individual”. But if the individual is reproductively successful this is evidence that its genome was good, and its genes get propagated slightly more in the population. And this is slightly different than optimizing for individual welfare, slightly different than optimizing for societal welfare, but can still be described by an optimization process nonetheless.

Here is where the analogy to the market starts to break down. Qualitatively, genes don’t have agency, while humans do. Humans have their own preferences and desires (dare I say ‘utility functions’), and behave in some correspondence with those (insert discussions on human rationality here). Markets mediate interactions between humans, and as such we get such phenomena as ‘free rider problems’ and ‘prisoner’s dilemmas’ when self-interest clashes with societal interest. Of course drawing from Darwinian logic won’t help us much here. But there are other studies of incentive & mechanism design, human psychology, and game theory that can maybe help us get a handle on which sorts of societal structures can be designed to have naturally occurring good outcomes from self-organization.

Yes, these fields are flawed. It’s just illustrative. I may consider it a fool’s errand to try and make these on the nationwide level at the moment, but superrationality-esque things do exist and it is not the death-knell to the pure libertarian hope of a purely self-organizing society that we do not behave according to the dictates of evolution. Maybe we just have to be smarter. But Heath’s practical point, that pure libertarianism as envisioned now would fail now, is broadly correct.

International Competition Doesn’t Exist??

We do not compete with China, India, or Mexico when we trade with them, nor do we compete with firms in those countries.

This is a weird definition of competition.

There are consumers in the world. These consumers have the ability to buy from American producers, Chinese producers, European producers, and Indian producers. These consumers will likely attempt to minimize costs, and via the virtues of modern currency exchange will be able to buy secondhand Lego sets on Alibaba rather than Amazon. As a result, the secondhand Lego set sellers on Amazon have less revenue, and perhaps no longer can maintain a sustainable profit margin.

Wait! But the foreign currency transaction hides something!

Currency is thus an incredibly important mechanism when it comes to regulating international trade. Yet all of these complexities should not be allowed to obscure the fundamental fact that in international trade, all imports are ultimately paid for with exports. This is an immediate consequence of the fact that trade is a system of exchange. China doesn’t just give us stuff; they also expect something in return. Of course, they may not demand repayment immediately (and by “repayment,” I mean payment in real goods, not paper money). They may choose to park their money in the country for a while, by buying government bonds or some other form of investment. This is what makes it possible for a country to show a trade deficit. When imports exceed exports, it means only that this year imports exceeded exports, because foreigners are now holding more of our currency (or debts denominated in our currency) than they were in the past. Eventually, by hook or by crook, they will have to be repaid with exports. After all, they’re not stupid. They don’t want our money: They want our goods.

Money is just a voucher, you see. It’s redeemable for a specific nation’s goods and services. Ultimately, domestic production will have to respond to trade deficits because otherwise how would we pay other countries??

There’s a hidden assumption here that the buck eventually stops. I think this is a pretty heavy assumption to make, and that perhaps maybe society has converged on the US dollar as a coordination mechanism more than anything else. Also crypto. And bitcoin.

Prices

Aristotle argued that a “just price” should be determined by equalizing the benefit going to either party to the exchange. Augustine thought that the desire “to buy cheap and sell dear” was a vice, and that the price should be determined by the intrinsic value of the object. John Duns Scotus argued that prices should be determined on a “cost plus” basis (and thus that supply-side considerations should predominate). The Renaissance “Salamanca School,” on the other hand, focused more on the demand side, arguing that goods should be priced in accordance with the extent to which they are “esteemed”.

The view that came to predominate, however, is that prices should be determined by the relative scarcity of the goods. (The scarcity in question is relative because the adequacy of any given quantity of good is a function of how much people want it: Scarcity is determined by the relation between supply and demand.) It is this concept of scarcity pricing that Layton was tacitly rejecting, by demanding that gas prices remain low during a time of shortage. Now it happens to be a feature of the market economy that competition generates scarcity pricing. However, the appeal of the basic principle extends far beyond whatever affection one may have for the market. One of the great insights of the “socialist calculation” debate of the early twentieth century was the realization that any economic system, capitalist or socialist, would want to use scarcity pricing if it hoped to avoid wasting vast quantities of resources and labor.

It would be great if the world worked in a manner such that everyone could “pay-as-they-want” for goods, in a way that maximized consumer surplus. Sadly, we have not yet figured out a way to allocate goods and services with this method in a way that is actually in accordance with how much individuals value given items. Relative scarcity pricing is the best we’ve got—but with the slight pitfall that individuals have massively different levels of financial resources, and as a result the same price for two separate individuals means two completely separate valuations of the same product.

One way to try to fix this is with price controls. This is quite a bad solution, as you’re eliminating a really good source of information (the untethered prices) as well as benefiting the rich differentially more than the poor, because the rich can still buy more than the poor. Perhaps you’d try to fix this with quotas, but even then, you’re benefiting the rich at least as much as the poor.

Another way to try to fix this is with income interventions. Make the poor richer, and hopefully the gap between rich and poor narrows. This is good! Some thought must be placed into the specifics (cash transfers, food vouchers, tax breaks), but this doesn’t eliminate the only known efficient mechanism for allocating goods under scarcity.

A surprisingly-not-apocryphal example can be found in the case of Oxfam’s attempt to alleviate the coffee fair trade problem at the beginning of the century.

…Oxfam calculated that in 2001 the total world supply of coffee was 115 million (132-pound) bags per year, whereas total demand was in the neighborhood of 105 million bags. The glut was caused not only by an increase in production, but also by a precipitous decline in coffee consumption in the developed world. [annual coffee consumption in America declined from 36 gal/person in 1970 to 17 gal/person in 2000] …The low price of coffee was thus caused not by market failure, but by the scarcity pricing mechanism functioning exactly as it was supposed to.
…
In a classic case of treating the symptoms rather than the disease, Oxfam and other fair trade enthusiasts suggested that Western consumers should respond to the glut by paying producers higher prices for their coffee. Not only is it the wrong thing to do (in the sense that it won’t solve the problem), but it’s the opposite of the right thing to do (in the sense that it will exacerbate exactly the problem that it is intendend to resolve).
…
It is to Oxfam’s credit, however, that it was forthright in acknowledging the consequences of the policies it was recommending (unlike many purveyors of fair trade coffee beans). Oxfam recognized that fair trade pricing would do nothign to address the underlying problem, which was the excess supply of coffee. And so the flip side of Oxfam’s eleemosynary pricing policy was a committment to destroying existing stocks of coffee beans. They recommended that “governments and companies” purchase about 5 million bags of coffee (at an estimated cost of $100 million) and destroy them.

Ah yes, we will buy hundreds of millions of dollars worth of a good that no one needs and then destroy it because this is somehow better than those same producers correcting earlier to produce different things given that the paying-for-beans-to-be-destroyed policy cannot be sustainable. Wonderful.

Interesting point about rich countries: we don’t have as much domestic labor here vs. in developing countries because services get more valuable as a country gets richer, so a person’s time becomes more valuable, and therefore paying them to do menial tasks for you in America is much more expensive than in India. Whereas in India, their counterfactual is much less valuable than the American counterfactual, so domestic labor is cheap.