Tuesday, May 15, 2012

Yeasty Psychopaths in the Economic Boule

There has been a lively discussion among my email interlocutorship, prankishly initiated by my brother in law Craig, about this May 12th column in the New York Times.   I have many conflicting reactions to this piece, but before I get to them I want to reprint (with permission) the response via email from Craig's son and my nephew Dan.  Here it is, in full, a kind of guest blog here:


"I stopped reading about here:  'and capitalism is predicated on bad behavior.'... I then begrudgingly kept reading but found the rest of the article just as ludicrous.  The market system is not predicated on 'bad' behavior any more than a knife is predicated on stabbing someone, or our social system is predicated on 'winning' the friendship game. Capitalism is a tool, and an extremely effective one at that. In fact, capitalism has been largely successful in providing social mobility and wealth to a massive audience. Unrivaled success in those terms, really.

Real, genuine value, mountains of it, have come out of capitalism. Profit is usually found at the intersection of human desire and possibility. Capitalism has expedited scientific discovery and the battle against poverty. Yes folks, this capitalism includes entrepreneurs and businessmen, so learn to love them. 

I read recently that the role of a manager is to make his employees more productive. If a manager is making 10 people 20% more efficient, then even though he is 'just a manager' (as opposed to those hard working workers who provide the REAL value), he is doing a good thing for everyone. Lots more people can get cheaper goods and more services. More people have jobs. The employees that are now more productive might even get paid more. Capitalism is a beautiful thing.
The stock market and other investment vehicles are there so that investment can flow to good ideas. Good hospitals, that might not have had the capital to expand on their own, can open new offices and take care of more little babies. 

Every system will be exploitable. Let us not hate on knives, or those who use knives, because of the murderers. Let us say that children cannot use knives, nor can murderers, and let us all decide on these rules together. Which is the real problem after all. Our current lack of voice in the rules being set.

In other words, at the risk of sounding like Gordon Gecko, the profit motive is good. It genuinely does and empirically has create/d opportunity, wealth, value, and lots of other pretty things. It is our decision on how to bridle that motive when it becomes destructive. Yes, we need to fix the political and cultural systems that overlay capitalism. But we sound ridiculous when we try to get rid of murderers by saying we should outlaw knives."


Yes...with some reservations.   My response in the email chain was not nearly that eloquent.  I said this:

"Capitalism is not predicated on any particular kind of behavior, it's just a way of organizing productive activity based on private ownership and control of the physical inputs and outputs of the production process.  I have used the analogy of fire, which is not predicated on burning down people's houses.  It can be either good or bad depending on how it is used and how it is controlled.  And of course there's a long chain of theory and evidence that capitalism's distributed decision process (as opposed to centralized decisions on economic matters) is pretty danged efficient at allocating resources pretty danged well for most kinds of products.  Socialists might not agree with that last sentence, but in the United States both Democrats and Republicans do.   (The interpretation of the phrases 'most kinds of products' and 'how it is controlled' creates all kinds of conflict between our major parties...and these days, at least, there seems to be a complete disconnect between them on whether the resulting income distribution is 'fair')."

and then later:

"And I find myself savoring the flavor of the last quote from Mandeville about how capitalism works: 'Vice is beneficial found, / When it’s by Justice lopt, and bound.'

In other words, capitalism works exceptionally well, and to the general benefit---as long as its harsher tendencies are constrained by law and regulation, and its occasional areas of blindness (such as environmental damage) are corrected by public action."

I have many small agreements and disagreements with both the column and Dan's response to it---for example,  his fable of the manager who makes each of his employees more productive is a great ideal, but we have all known kiss-up, kick-down managers who did just the opposite and yet still managed to rise to great success in the vast bureaucratic heirarchy.  But on the whole he states the defense of capitalism as a system fairly well: it is a mechanism for using widely dispersed individual knowledge and skill to organize economic activity in a way that no central planner can possibly match.

Since we're expressing praise for private enterprise, we should quote one of the masters of this genre.  Here's what Hayek said in a paper in the American Economic Review in 1945:

"The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. 


Fundamentally, in a system where the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people .... It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say tin, has arisen, or that one of the sources of supply of tin has been eliminated.
All that the users of tin need to know is that some of the tin they use to consume is now more profitably employed elsewhere, and that in consequence they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin , and their substitutes, and so on; and all this without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes... The mere fact that there is one price for any commodity...brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.
The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; i.e., they move in the right direction.
The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action."

Yes.  And on the whole, this whole image of a perfectly operating price mechanism finding its perfect level, like water in a vast hydraulic system, works---decently, on the whole.  It works not too badly.  Not so badly that we can just arbitrarily throw it out.  Because there is truly no good substitute: Hayek's first sentence says it.  The knowledge required to make all the optimal individual decisions can never be gathered together in a single centralized place.  It's simply too disparate, too tangled, too inaccessibly buried in the hearts and visions of billions of average people, billions of organizations, large and small.  It is countless insights from countless personal (and local) observations.  It is not even all really knowledge: much of it is personal taste or desire.  So we have no good alternative to letting each person and each organization make local choices within some guiding bounds of custom and law.

But that doesn't mean it all works perfectly, or that there are no externalities (such as environmental damage or workplace risk) that we can mitigate with public actions.  It doesn't mean that there are no natural disasters, or that there is no poverty or sickness, that public action can help resolve, and it certainly does not mean that the fairness of the income distribution is a natural outcome of the capitalist process.  But all of those are topics for other blog entries.  For now, the lesson here is that there are functions that private enterprise performs better than any known alternative system.

An additional interesting historical fact: Mandeville published the Fable of the Bees in 1705, which was 71 years before Adam Smith published the Wealth of Nations.  This conversation has been going on for quite a long time.

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