Archive for the ‘Political Economy’ Category

Adam Smith’s ‘invisible hand’

Saturday, January 24th, 2015

What, exactly, is the “invisible hand”, a phrase attributed to Adam Smith? Is it a sound economic principle or a myth propagated by the misreading of Smith? All this continues to attract controversy. If you are interested, I recommend a lucid, 12-minute podcast on the topic. You can access it without charge, courtesy of  The Guardian newspaper, at the link below.

When we asked you to nominate some intellectual cliches for this series earlier this year, Adam Smith’s “invisible hand” cropped up repeatedly ….

In the third episode of The Big Ideas, Benjamen Walker discusses the meaning and uses of Smith’s concept with philosopher John Gray, academic Marianne Johnson, economist Eamonn Butler and Guardian columnist Polly Toynbee. ….

As we mention in the podcast, Smith himself only used the phrase “invisible hand” sparingly. ….

Benjamin Walker, “The Big Ideas podcast: Adam Smith’s ‘invisible hand’“, The Guardian Comment is Free podcast, 6 October 2011.

Smith did use the term ‘invisible hand’ quite sparingly. It appears only once in each of three published works, for a grand total of three times.

In The History of Astronomy (written before 1758, but published in 1811), Smith writes that there is no need to resort to the supernatural, to “the invisible hand of Jupiter”, to explain natural phenomena:

Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters. [Emphasis added.]

The phrase appears a second time in The Theory of Moral Sentiments (1759), in paragraph 10 of the first and only chapter of part IV:

The rich … consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. [Emphasis added.]

His third and last use of the phrase is in book IV, chapter 2, paragraph 9 of The Wealth of Nations (1776):

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. [Emphasis added.]

softening the war on drugs

Saturday, January 24th, 2015

FT columnist John Paul Rathbone favours legalization of cannabis (marijuana), but recognizes that this brings costs as well as benefits.

The biggest cost will mostly be carried by those who might lose control of their drug use. This is unavoidable, even if the general increase is modest (as in Portugal). Still, while a cannabis habit may be far less destructive than alcohol — which accounts for more problems than all illegal drugs combined — it is still plenty bad if it happens to you, or someone in your family.

The benefits, however, include raising state revenues from taxing a global business estimated to be worth more than $380bn a year; freeing up police time to investigate other crimes; reducing (even if not eliminating) revenues to criminal gangs and terrorist groups; bringing on to the right side of the law the 80 per cent of consumers whose drug use is occasional and mostly harmless; and making huge savings on what is now spent arresting and imprisoning drug users and sellers. The US spends over $40bn a year on this alone, making drug prohibition a surprising example of a big government programme. Here it is worth remembering that Milton Friedman, the Nobel-prize winning economist who grew up during Prohibition and concluded that it caused more problems than alcohol itself, saw the war on drugs as a criminal waste of money.

John Paul Rathbone, “The never-ending war on drugs“, Financial Times, 24 January 2015.

Alcohol and tobacco are legal in most countries. Why not cannabis?

Stiglitz on organizations and economics

Friday, January 23rd, 2015

Somewhat surprisingly, most economists have traditionally relegated the study of organizations to business schools, or worse still, to sociologists. …. Many economists argued that there was no need to look carefully into the black box called the firm: firms maximized profits (stock market value); if managers didn’t, they would be replaced; and firms that didn’t maximize value wouldn’t survive.

Joseph E. Stiglitz, “Symposium on Organizations and Economics“, Journal of Economic Perspectives, Spring 1991.

This view is still common, but less now than when Stiglitz wrote this. All issues of the Journal of Economic Perspectives are accessible online at no charge, compliments of the American Economic Association.

State of the Union

Thursday, January 22nd, 2015

Few newspaper editorials are worth reading. Editorials of the Financial Times, in my opinion, are an exception to this rule. Today’s editorial on President Obama’s State of the Union address is an example of what newspaper editorials should be: clear, informative, concise and opinionated.

Much of what Mr Obama put forward on Tuesday night should be passed on its own merits. The US federal minimum wage is low by historic standards. Community college remains too expensive for many low-income Americans. Seven days of annual paid sick leave is not too much to ask. Marginal taxes on the middle class remain too steep. Yet in failing to acknowledge the scale of his party’s heavy defeat in last November’s midterms, Mr Obama set the wrong tone for a productive Congress. Whatever the merit of its substance — and there was much — it was an ungracious speech.

That said, it was also a coherent one. Mr Obama’s tax proposals make sense on their own terms. Under his plan, he would raise $320bn in the next decade by raising the capital gains tax on high-income earners to 28 per cent — the same level as under Ronald Reagan. He would also close a big loophole that enables many wealthy estates to avoid paying inheritance taxes altogether.

There was also a small surcharge on the liabilities of “too big to fail” banks. The proceeds would be spent on rewards to work, including tripling the child credit to $3,000 a year and raising the benefits to two-earner households. In addition, Mr Obama would step up much needed spending on US infrastructure, which would also boost the middle-income labour market.

Barack Obama sets out case for middle-class economics“, Financial Times editorial, 22 January 2015.

The editorialist mixes praise with criticism of Obama, concluding with these two sentences: “Once again, Mr Obama has shown what a good campaigner he is. The doubts concern his aptitude for governing.”

Registered non-subscribers: Accessing this editorial counts as one of your ten free downloads for the month. (It really is much longer that the paragraphs I copied and pasted above.)

universal basic income

Thursday, November 13th, 2014

Timothy Taylor, in his regular column in  the current issue of Journal of Economic Perspectives (Fall 2014 , pp. 227-234) points us to an article that extols the virtues of a policy that promises to end poverty immediately, with administrative efficiency and maintenance of incentives to get up and go to work each morning. The author is Edwin G. Dolan (born 1943), an American economist with an impressive cv.

Are you frustrated by the interminable quest to end poverty in the face of ideological division and widespread cynicism? Why not just cut to the chase, sending everybody in the country a monthly check that covers the rudimentary needs of even the poorest among us? ….

The concept goes by many names: unconditional basic income, basic income guarantee, demo-grant. I prefer “universal basic income,” or UBI for short. Whatever you call it, though, the feature that distinguishes a UBI from other sorts of social safety nets is its universality. Unlike other income-support programs, it is not means-tested. Instead, a UBI would provide subsistence-level grants to everyone, regardless of need, earned income, age or job status. …

Hardly anyone sees a UBI as a perfect safety net. It offends conservatives by offering something for nothing. And it raises serious questions for progressives who worry there is more to poverty than a lack of income—that a UBI would not do enough to transform the culture of poverty that weighs down the underclass. But it has pragmatic advocates (including me) who believe that a UBI offers a better compromise than do other income-support programs among the mutually incompatible criteria of effectiveness in reducing poverty, maintenance of work incentives, administrative efficiency and accurate targeting.

A big worry, of course, is that a UBI would end up as budget-buster or require a raid on private wealth to finance it. However, as shown, it need be nothing of the sort—provided it were part of a bargain in which other antipoverty efforts (save medical care) were abandoned, and middle-income earners traded in a hodgepodge of tax breaks for the universal basic income grant.

The most encouraging sign is that the liveliest debates over a UBI today are taking place within, rather than between, the main ideological camps. At a time when macroeconomic forces and the politics of big money are leading to ever- greater inequality, perhaps America is still capable of finding common ground for a pragmatic antipoverty effort.

Ed Dolan, “The Pragmatic Case for a Universal Basic Income”, Milken Institute Review, Third Quarter 2014, pp. 14-23.

This is a universal age pension, with a qualifying age of 18 or even zero rather than 65 or 70. None of the links above are gated. Enjoy!

return of the neocons

Wednesday, November 12th, 2014

This is scary. American writer Jacob Heilbrunn (born around 1965) explains.

[T]he Republican party is resurrecting the unilateral foreign policy doctrines that first took hold under President George W Bush and his vice-president Dick Cheney.

Unlike the Democrats of the Kennedy and Johnson administrations, who later came to express regret over their role in the Vietnam war, leading Republican figures such as Mr Cheney and former deputy secretary of defence Paul Wolfowitz have never admitted to making missteps in Iraq or Afghanistan. On the contrary, they have argued that it is President Barack Obama who has erred by failing to prosecute combat in Iraq and Afghanistan vigorously enough.

Until recently they did not get much of a hearing. But recent events have blown fresh wind into the sails of the neocons. ….

Perhaps no one has been more impassioned in their support of the foreign policy of George W Bush than Tom Cotton, a 37-year-old Iraq war veteran who has won election as senator in Arkansas. Mr Cotton has called the Iraq war a “just and noble” cause and said that victory in Afghanistan is simply a matter of finding enough willpower. In Iowa incoming Republican senator Joni Ernst, another Iraq veteran, also lauded the war. Based on her service in Iraq, she said: “I do have reason to believe there were weapons of mass destruction in Iraq.”  [Emphasis added.] ….

Whether a Republican president would result in wholesale reversion to Bush-era policies is an open question. But the fact that the neocons are driving the debate in the Republican party and putting Mr Obama on the defensive is itself a remarkable tribute to their resilience. Indeed, to say that they are back may be something of a mistake. They never went away in the first place. The difference is that the Republican party is listening to them once again.

Jacob Heilbrunn, “Unvanquished Republican neocons surge back“, Financial Times, 12 November 2014.

Mr Heilbrunn is author of  They Knew They Were Right: The Rise of the Neocons (Doubleday, 2008) and editor of The National Interest (TNI), an American international affairs magazine. TNI was founded in 1985 by Irving Kristol.  Henry Kissinger is the magazine’s honorary chairman.

Candidate Joni Ernst (born 1970) was endorsed by the Tea Party.  According to Wikipedia, she opposes cap and trade, a federal minimum wage, and same-sex marriage while supporting gun rights and partial privatization of Social Security old-age pension accounts. She won the 2014 race for the US Senate 52.2% to 43.7%. Senator-elect Tom Cotton was also supported by the Tea Party movement.

global warming and US politics

Tuesday, November 11th, 2014

Martin Wolf looks at the implications for climate change of the Republican victory in recent midterm elections.

The most important consequence of this election may therefore be to bury what little hope remained of getting to grips with the risk of dangerous climate change. Countries cannot keep bits of the atmosphere to themselves. Moving off the world’s current trajectory is a collective task. Without US will and technological resources, the needed shift will not happen. Other countries will not – indeed cannot – compensate.

Many Republicans seem to have concluded man-made climate change is a hoax. If so, this is quite a hoax. Just read the synthesis report of the Intergovernmental Panel on Climate Change. One is asked to imagine that thousands of scientists have put together a complex fabrication in order to promote their not particularly remunerative careers, in the near certainty they will be found out. This hypothesis makes no sense.

Martin Wolf, “Republican midterm victory bodes ill for warming planet“, Financial Times, 12 November 2014.

Martin reminds us that the US is not only “the world’s largest and most technologically advanced economy, guarantor of the open world economy and greatest military power”. It “is also the world’s second-largest emitter of greenhouse gases and among the highest emitters per head”.

government spending and taxation in the UK

Sunday, November 2nd, 2014

The always sensible Martin Wolf, on the (im)morality of UK fiscal policy.

By choosing overall balance as its objective, rather than a balance on the budget for current spending, the Conservative party has chosen a demanding objective. This makes it all the more extraordinary that they propose to cut taxes, too. In the current parliament, all the fiscal consolidation has been due to such cuts. The same would happen again in the next parliament under the Conservatives – and then the government would cut spending some more.

The Conservative leadership says such an adjustment is the moral choice. Some do indeed argue that the moral choice is to leave money with the people who earn it. But that would also leave them without a state. In practice, then, morality necessitates a balance between meeting legitimate demands upon the state, on one hand, and the costs of taxation, on the other. This choice is at the very heart of democratic politics. [Emphasis added.]

Martin Wolf, “Improving public finances is both a moral and technical challenge“, Financial Times, 31 October 2014.

Overall balance takes into account expenditure on both capital and current accounts.

the pain in Spain continues

Thursday, October 30th, 2014

The Spanish economy is growing, and the recession is over, but living standards for many continue to fall.

[D]onations [to food banks] have risen sharply since the start of the Spanish crisis, but that demand has grown faster still. Over the past five years, the number of Spaniards who rely on the country’s 55 food banks has soared from 780,000 to 1.5m, and – despite growing signs of economic recovery – their numbers continue to rise.

“On the macroeconomic level you see that things are going better. But our people see no change,” says Nicolás Palacios, the president of Spain’s food bank federation. “There are more and more people whose unemployment benefits have run out, and who have used up all their financial reserves. And even if they have some income, a few hundred euros are just not enough to feed a family.” ….

The number of people receiving emergency aid from Caritas [the charity branch of the Roman Catholic Church] has leapt from 350,000 in 2007 to 1m today. Even one year after the end of the recession, the organisation says it sees no sign that the recovery is reaching the most vulnerable sectors of Spanish society: “We hear that economic growth is back, we hear that the banks are doing well. But people are desperate,” says Sebastián Mora, the secretary-general of Caritas España.

Tobias Buck, “Spanish recovery lays bare a social crisis“, Financial Times, 30 October 2014.

Hunger in Spain (people receiving food hand-outs)

Spanish unemployment rate (per cent)

material comfort and happiness

Sunday, October 26th, 2014

Three FT columnists – Undercover Economist Tim Harford, psychotherapist Antonia Macaro, and  philosopher Julian Baggini – discuss possible links between happiness and the consumption of material goods. (more…)