Economics in Two Lessons

More seriously, I think there’s a wider area which is not covered even by your impatience with the constraint of talking about ‘market failure’. The quality of social capital is clearly of great importance in economic outcomes. As Adam Smith suggested in the Theory of Moral Sentiments. If you’re trying to tackle poverty that’s a pretty major issue – and also something that’s unfortunately glossed over when you say “the best way to fight poverty is to give money to poor people”. Which people? As individuals or a community? Micro-lending and the Australian Centre for Social Innovation’s experience in building Family by Family suggests at least groups of people.

Hazlitt was also hostile toward “growthmanship,” which he lumped together indiscriminately with Keynes’s analysis. His position throws light on aspects of contemporary austerity policy that are frequently overlooked. In the 1950s, several of Hazlitt’s Newsweek columns criticized the “fetish” of economic growth. The following is a good example:

Rates of Growth

August 25, 1958

Is it true, as we are now so frequently told, that Communist Russia’s economic “rate of growth” is faster than ours, or that we cannot survive unless we increase our own “rate of growth”? There are at least five main reasons why rate-of-growth comparisons are untrustworthy.

1—In the midst of daily glib comparisons of national income and particularly “gross national product,” or GNP, it may come as a shock to many to learn that these figures are in large part arbitrary. It is impossible to compare the national income of Russia with that of the U.S. We do not know whether the Communists are telling the truth about specific output figures. Even if they were, their figures would have little comparative meaning. They have no true market prices, but only arbitrary government prices and wages. The production of specific goods is not determined by consumer demand. The comparative purchasing power of the inconvertible paper ruble and the U.S. dollar can only be guessed at.

2—It would take a book to describe all the arbitrary judgments and guesses that enter into even our own national income figures. They measure only the values that pass through the market. When a man marries his cook, for example, the money value of her services disappears from the national-income accounts. Inflation constantly changes the value of the dollar in terms of which everything else is measured.

The President’s last annual Economic Report boasted in its opening paragraph that the nation’s output of goods and services in 1957 totaled $434 billion, “5 percent larger than in the preceding year.” Only later in the report were we explicitly told that “four-fifths of this increase was accounted for by rising prices,” and that therefore “in physical terms, the increase was only about 1 percent.” This July, however, all nationalincome estimates were revised again. It seems the government statisticians now think our GNP in 1957 was not $434 billion but $440 billion and that our 1956 GNP was not $415 billion but $419 billion. Yet in “1957 prices” our 1956 GNP was $435 billion.

3—It may be thought that we can make meaningful comparisons between the Russian economy and our such as pure metals in ingot form, this may be possible. But in most things there are enormous qualitative differences that never get into quantitative statistics. Not how much clothing but what kind of clothing; not how many square feet of housing but what kind of housing; not how much food in bulk but in nutrition, variety, flavor, and quality is what counts for economic welfare. Even in military weapons, quality may be the decisive factor.

4—Prof. G. Warren Nutter has pointed out that there is “a long-run tendency . . . for the industrial growth rates to slow down, or retard, as the level of production gets higher.” There are several basic explanations of this. One has to do with a trick of percentage figures. Another has to do with a physical satiety point in human needs. If only one family in a country has a bathtub, and the next year 50 families get one, the rate of growth is 5,000 percent. But when everybody has a bathtub net growth stops. This principle applies to houses, automobiles, radios, television sets, and so on.

5—Here we come to a more subtle point. Larger crops often have a smaller total dollar value than smaller crops. (Hence crop-restriction schemes.) But this merely illustrates a wider principle. Economists have pointed out since the time of Adam Smith that it is not “value-in-use,” but scarcity, that determines “value-in-exchange,” or money price. Water is an indispensable commodity that ordinarily commands no price at all. If more and more things became plentiful (except dollars), the national income, as measured in dollars, might begin to fall. If we could imagine a situation in which everything we could wish for was in as adequate supply as air and water, we might have no (monetary) national income at all!

Let’s stop making a fetish of national income statistics and percentage rates of growth.

david,

Adam Smith made similar points in the eighteenth century. It’s a mainstream story, even if each generation underestimates the extent to which what is now seen as a luxury will be seen as a necessity or, failing that, highly desirable. Like a washing machine.

No – Hazlitt was writing in an era where the mainstream was Keynesian and his specific attacks (e.g., on the use of physical output measures, by which he is referring to the steel production of which the USSR was so proud) must be understood in that frame. His railing against national accounting arose in a context where the USSR seemed to be doing very well indeed – if not better than the rich US, then certainly well enough to be alluring for key Cold War allies, and Hazlitt very much believed that social democracy was a mere halfway house to Soviet communism.

I’d add a third: willingness to pay – dependent on ability to pay -, and therefore price, is not a good measure of utility. If I can afford to pay more for my third meal than a penny-less man is able to give for his first, I will get fat and he will go hungry.

As Robespierre points out, this is a bit besides the point. The critical point is opportunity cost for WHOM?

That should have been “would be,” not “wouldn’t be a more potent critique.” My proof reading skill are radically diminished by a box around the text.

John’s zombie book did a lot of good, and I’m looking forward to his two lessons, although I’m afraid the second lesson is going to proliferate into many parts and subparts. It’s hard to be concise and punchy if you want to take a more realistic view of things.

To make matters worse, I think he is leaving out important parts of the critique of free market fundamentalism. I’ve argued for a long time that the original sin of the market fetish is the assumption that there is no interaction, cultural, technological, ecological or of any other sort, outside the marketplace. Assuming a world in which the whole is never more (or less) than the sum of its parts underlies the assumption of a single equilibrium in every market and in the system as a whole. You would need this, for instance, to attach any normative significance to the opportunity cost implications of market prices. Of course, the assumption is rarely made explicitly, and most people, including economics textbook authors, who promote the utilitarian case for free markets are unaware that such an assumption is required. This argument is logically prior to all the others about market failure: market failures are neither necessary nor sufficient for the interaction effects that give rise to multiple equilibria.

I’ve thought that this point deserves a whole book in itself, and if I ever get the time for it, it’s on my to do list. But I’d be very happy if JQ wrote it instead. Someone should do it.

As for the book that JQ actually wants to write, I’m happy to hear that he will point out that the allocation of rights—property rights, social insurance rights, institutional rights (e.g. whether or not a society has employment at will)—are also prior to market outcomes. This is one reason, even before we get empirical, for rejecting the argument that equity and “efficiency” are always at loggerheads.

(Note that doing away with the price mechanism is a very much more radical step than just having a centrally planned economy. It would mean radically reducing the amount of feedback to the planners from the consumers at the end of the chain.)

We could stop lying about how we use the price mechanism. We could stop lying about having a “market economy” and about supposedly not-having a command-and-control economy. We could stop lying about whether markets, actual and metaphorical, are “self-regulating”.

The thing about “opportunity cost”, which other commenters have already pointed out, is that it only makes sense when we know enough. Mostly, we do not know enough, and our future or alternative choices are lost in a fog of uncertainty. Hazlitt, to state the obvious, was not an economist, but a hack journalist, whose mission in life was feeding complacency to reactionaries. “Market economy” is Cold War propaganda, not science.

We can imagine a pure market economy, but to make that exercise work out in logical, deductive reasoning, we have to resolve away uncertainty, and the resulting palace of the mind is deeply unrealistic, presenting sharp and remarkable contrasts to the actual features of the institutional economy. That contrast could be a rich source of information and knowledge, if economists would take their heads out of their derrieres long enough to look at the actual economy. If the first lesson is to think logically about consequences within a presumed system, my second lesson would be to acknowledge the role of uncertainty, and to look and to see.

There’s an elaborate argument about how we need prices to reveal preferences, and it is not entirely wrong, but the deeper need is to de-couple the system. All the computers in Google’s fantastic network are not enough to resolve the answer to every detailed question to a point. We simply do not know a great deal more than we do know. And, consequently, we need the system to be loosely coupled. Prices and money let us do that in a way that, nevertheless, allows people to strive (and we do need striving).

The thing is that the de-coupled system is not a “market system” seeking equilibrium, and cannot be. In our actual economy, in our conditions of limited knowledge, we make sunk-cost investments and commitments routinely and all of our deals and exchanges are contingent. The result is that there are few actual markets in our market economy, and most of our administered and metaphoric markets do not clear in price. That’s just an observable fact. If you wilfully fail to observe it, and fail to draw appropriate implications, you are probably an economist.

Have heard of it, but tbh, have always instinctively shied away from it because lots of parecon people on mailing lists I was on in the 00s were not the best advertisement. I didn’t think it involved getting rid of price mechanisms though?

William Timberman@15, Daniel@17,18: Solutions in special cases are possible, though clearly not in the general case. In problems of comparable computational difficulty, special case solutions are often of value. So the answer might be sometimes, in some cases.

The biggest problem with interpreting and applying surveillance data to the task that I can see is that surveillance data is often erroneous; we often don’t know what people will decide until they do decide, and there is a huge amount of blither posted online.

Daniel @22: Yes, leftists aren’t always the best advertisements for left-wing ideas.

As I remember, A&H proposed using twenty-first century information technology (unspecified, but not science-fiction-sounding — Albert was something of a computer geek) to compile a rough inventory of resources and thus of a range of possible outputs, and then to ask consumers, in a series of around seven iterations, each of which incorporated the results of the previous ones, to choose a personal/household consumption schedule. They estimated the whole process would take around as much time as filling out the average person’s income tax.

I’m going to regret this, but…

15, 21, 26: In a word, no. In more words, this and this. On “parecon” specifically, I refer you to David Schweickart.

(This is not to dispute the importance of what Bruce Wilder says in 20.)

I do realize that my comment @ 15 would have been more suitable for one of the Ken MacLeod threads, perhaps Cosma Shalizi’s ruminations about possible, actual historical antecedents of the True Knowledge, rather than here, where real economists are discussing actual, honest-to-God economics. The truth is, I couldn’t resist the irony. If, after all the money thrown down various ratholes by the control freaks at Google FaceBook and Amazon and the NSA, we still can’t figure out how much toothpaste to produce, how in hell can we (they) assume that it’s even remotely possible to manage the whole of human society. (Once more unto the breach, dear friends — a few more data farms here and there, Moore’s law kept going for just a few more years, etc., etc. — surveillance drones, water cannons, and SWAT teams if things other than prices get sticky….)

As an intrepid defender of die Gedanken sind frei, I’m inclined to assert that it doesn’t matter if you know my income down to the penny, have a record of everything I buy, where I am every minute of the day, what books I read, and every word I tweet to my friends, you still don’t know me. In fact, you still don’t know enough about me to be certain that you’re safe from eruptions from below.

Or, as Bruce Wilder puts it:

We can imagine a pure market economy, but to make that exercise work out in logical, deductive reasoning, we have to resolve away uncertainty, and the resulting palace of the mind is deeply unrealistic, presenting sharp and remarkable contrasts to the actual features of the institutional economy.

An furthermore, as he says here and elsewhere, market-clearing prices are something of a myth. Producers and marketers are always reduced to casting their bread upon the waters. Are their results really better for knowing a lot more now then they used to before computers and big data? Recent history suggests not, although it doesn’t seem likely that faulty price signaling should be blamed for the mess we’ve been in since 2008.

Fun! Here is a price theory for you

I will take Wilder a step further with two quotes from Frederick Lordon, radical Spinozist (with a soupcon of Bourdieu):

“Spinoza is very insistent on this point. Value and meaning do not reside in things but are produced by the desiring forces that seize them: ‘We neither strive, nor will, neither want, nor desire anything because we judge it to be good; on the contrary, we judge something to be good because we strive for it, will it, want it, and desire it.’”

and:

“It is precisely the deployment of this variety that life under the master-desire precludes, as the condition of the dominated produces the contraction of the domain of desire and its opportunities for joy. The distinctive feature of domination is thus to rivet the dominated to minor objects of desire, in any case those deemed so by the dominators, who keep the other objects for themselves. With joy rather than fear – this is no doubt how the dominators govern most effectively; but they delimit the joys strictly, rigorously selecting the objects of desire that will be offered. Determining the distribution of the desirable is therefore perhaps domination’s most characteristic effect, and also the most general

Symbolic violence consists then properly speaking in the production of a double imaginary, the imaginary of fulfilment, which makes the humble joys to which the dominated are assigned appear sufficient, and the imaginary of powerlessness, which convinces them to renounce any greater ones to which they might aspire. ‘For whatever man imagines he cannot do, he necessarily imagines; and he is so disposed by this imagination that he really cannot do what he imagines he cannot do.’

It follows that most of the opportunities for social joy are differential – to possess what others will not have – and the actions of reserving (to oneself, or to one’s ‘class’) and keeping away (the others) are social domination’s most characteristic gestures. But in order to be fully successful, the distributive operation of domination must meet an additional requirement; it must reserve certain objects of desire to the dominators, and make the dominated recognise them as desirable, but with a decisive provision: desirable in general, but not for them.

Left to diffuse and impersonal mechanisms, the social division of desire, working through the mechanism set forth in Ethics, III, 49, makes individuals experience the arbitrariness of their assignations as necessity, as a fatum without a god, which therefore deserves love, or at least less hatred than if one imagined it the result of a free cause. The great movement of imaginary social production assumes the task of providing justifications for the arbitrary made necessary. And from the time of the Greeks, these justifications have always fallen conspicuously inside the triangle of birth, wealth, and competence. ” End quotes

In a hierarchical capitalist society, prices (and all values) in no way reveal preferences; prices are the social constructivist means to create, maintain, and demonstrate differentials of status, power, and freedom.

Cosma @28 : Schweickart’s critique of Parecon is plausible and forceful. I’m not ready yet to sign up for a “balanced job complex” or to fill out my five or seven itemized consumption requests. But I think Schweickart does overlook the opportunity costs (handy term, that) of price regulation through markets, even regulated ones. In his footnote 13, for example, he explains that in the real world

Farmers overplant. Supply exceeds demand. Grain prices fall. Farmers cut back production. Demand exceeds supply. Prices soar. Farmers overplant, etc. Markets are useful, not because they bring supply and demand into alignment over time, but because provide useful information to producers as to the direction of the imbalance and effective motivation to producers to act on this information.

Albert might reply that the magnitude of suffering entailed by the sequence described in the first half of this paragraph is so colossal that it justifies a really great amount of inconvenience to avoid it, as his scheme supposedly does. Or that a society that can dispense with most of the insurance, advertising, security, high-end luxury, and other useless but profitable industries would save enough resources to make skimping on one’s consumption request unnecessary.

Also, Schweickart’s footnote 17 ascribes an “obsessive egalitarianism” to Parecon. Again, not entirely off the mark, but A&H certainly make allowances (whether adequately or not) for different needs, talents, and inclinations.

So re LTV, diamonds are more expensive than water because they “contain” the metric fuckton of labor DeBoers put into creating social desire.

Prices are the language of social domination.

Just to show I’m aware…

Silly Bob, what about cobalt? How we gonna know how much cobalt to mine and distribute next month without price signals?

Well shit, guess we’re stuck now and forever. Heck of a mess we’ve created.

@32

Lordon: “But in order to be fully successful, the distributive operation of domination must meet an additional requirement; it must reserve certain objects of desire to the dominators, and make the dominated recognise them as desirable, but with a decisive provision: desirable in general, but not for them.”

mcmanus: “In a hierarchical capitalist society, prices (and all values) in no way reveal preferences; prices are the social constructivist means to create, maintain, and demonstrate differentials of status, power, and freedom.”

Fun, indeed!

” ‘we live in a society, not an economy’ ” oops strike that, should be:

We live in an ecology, of which society and economy are only part. Hard to get your head around this thinking like a planet stuff.

John Quiggin,

“The allocation of property rights, broadly defined to include rights to pensions and social security, obligations to pay tax and so on, and the opportunity costs associated with alternative allocations”

I disagree with this broad definition of property rights. I think it is better codified as a “mutual obligation” like the Howard government phrased it here in Australia.

The adult people are citizens of Australia since they can vote and they are also subjects of the crown which is responsible for the laws with help of the parliament etc. All the money and land and so on are vested ultimately in the crown hence the crown on the back of the money – but the crown has obligations to the subjects – sometimes these are in conflict or the crown is beholden to parliament and does not meets its obligations eg. Property ownership and the acts of enclosures hurting the common people when they were not citizens and had no parliamentary representation due to being unenfranchised; or climate change now.

In something I was reading on public trust law the epigraphs were chosen to show tension in the legal system’s approach to water rights which are on the one hand held as commons and also vested in the crown or bought by farmers

“As long ago as the Institute of Justinian, running waters, like the air and the sea, were res communes – things common to all and property of none” United States v Gerlach Live Stock Co. 1950

“The real title, of course, must be vested in some person” Smith v Andrews 1891

So there is some conflict (opportunity costs? I find Hazlitt’s phrasing easier to read) and as I already mentioned there is also native title etc in colonised countries that adds another element – costs of destroying culture is also not reflected in market prices

http://youtu.be/vgfQAZaqKsY

john c. halasz @ 43

Sunk cost investment that changes opportunity cost (and if it didn’t, why would anyone do it?) is where economics drives off into the existential void.

bob mcmanus,

“So re LTV, diamonds are more expensive than water because they “contain” the metric fuckton of labor DeBoers put into creating social desire.
Prices are the language of social domination.”

A geologist friend explained to me that in terms of their atomic make up diamonds are actually unusual and thus precious because the atoms are fused together which is very uncommon.

John Quiggin,

If your book is going to deal with law as well as theory, another thing you might want to include if you have not already is Roman jurisprudence differentiating ownership from possession – so with the Uncle Tom’s Cabin example Uncle Tom would possess the house but not own it. Apparently most European legal systems derive from Roman jurisprudence (which is still taught to law students) but with language/cultural adaptations since the decline of the Roman Empire. Apologies if someone already mentioned this.

I’m afraid I’m still pretty sure that the Hazlitts and those who admire them will persist in using opportunity costs in the same fashion. The notion of opportunity cost seems to be fairly tractable in theory if it is reduced to profits foregone by capitalists. That is the concern after all.

As for the wise words of Bruce Wilder and Cosma Shalizi about the impossibility of a valid economic epistemology (to date at least,) I’m not quite sure I understand. Is the business cycle an illusion? Or is it the result of noneconomic factors, like ideology?

Thought occasioned by the comments of Bruce Wilder and john c. halasz (needless to say, any perversities of interpretation are entirely my own):

If a commercial or governmental enterprise has the necessary resources, or can attain them, it’s simply less stressful for those in the driver’s seat to manage demand than to identify it, and, by ignoring externalities, to reduce the complexity of their decision-making processes. This requires an asymmetry of information — the less those outside the planning process know about the plan, the simpler it is to implement. Hence what seem on the surface to be oversized investments in advertising, propaganda, and media consolidation become the norm. And — pace bob mcmanus — this needn’t imply any ideological agenda other than the survival of the enterprise itself, although if there is one, so much the worse for civilians.

The amount of systemic inertia built up as our management schools come to teach these principles as a matter of efficiency, or competitiveness, or whatever, is considerable, and sunk costs can only increase that inertia — the pain threshold for writing off what already exists, and for the time being seems to be ticking along more or less nicely, almost guarantees it. (British Petroleum, anyone? The F-35? The Euro?)

At this point, it seems appropriate to bring the so-called democratic deficit into the discussion. The people, the civilians, as I call them — those who aren’t managers, at any rate — experience first-hand the caprices of the institutions which claim to be running things, and the consequences, and since the invention of television, they’ve also endured decades of what amounts to intellectual and political suffocation in the name of the status quo. It should therefore come as no surprise that rejection of the status quo as often as not manifests itself in uprisings like Golden Dawn in Greece, UKIP in the UK or the Tea Party in the U.S. What Brad DeLong has identified for us as the left neo-liberals are appalled, and they should be, as forestalling exactly this sort of disruption was, in a sense, the founding principle of neo-liberalism. I don’t suppose they envisioned their mission as a defense of the indefensible, but that seems to be what it’s become.

Management and democracy may not necessarily be antithetical, but that appears to be the trend. If so, it seems pretty clear that we’ve badly misunderstood the political part of political economy, and that the defense of the status quo has become untenable. What we do instead is confusing a lot of people — Brad DeLong, despite his credentials, and his smarts, will just have to get in line with the rest of us.

Nameschecked, let me see let me see, finished the Lordon moved on to Franco Moretti reading Crusoe, Conrad and the library, and feeling slightly sympatico for the nonce with the Sandwichman…but I’ll just paraphrase. Opportunity costs? Sunk costs?

The three top values of the bourgeoisie are:

a) industry: the work ethic, habitual hard work, steady, calm, repeated, less energy but for longer, work, utility

b) comfort: freedom from want and renunciation of luxury, excess, waste

c) efficiency: thrift, waste not want not, maximizing the use of tools (we are tools of minimax productivity? are we?) and resources without unused capacity, externalities unaddressed, sunkcosts unredeemed, opportunities overlooked.

These are the hidden values of liberal capitalism and its bourgeois economists that must be extracted from the cold equations, revealed, mocked, and overthrown in order to achieve a free and equal society of slackers, wastrels, and dillettantes. We need more William Blake, Nietzsche, and Oscar Wilde in our economic discourse.

Peter Dorman @ 16: I’m happy to hear that he will point out that the allocation of rights—property rights, social insurance rights, institutional rights (e.g. whether or not a society has employment at will)—are also prior to market outcomes. This is one reason, even before we get empirical, for rejecting the argument that equity and “efficiency” are always at loggerheads.

Why “prior”? (Well, also, why “market”? but I’ll let that go.)

But, really, isn’t “prior” both logically and sequentially wrong?

“property rights, social insurance rights, institutional rights” — in actual practice, we invoke all of these in an important, functional sense after market outcomes. The political and legal disputes and tussles form ex post governance. We decide after, whether the the bankster stole the money or earned it, whether the public school teachers get their pensions, whether Detroit’s bondholders or art museum get the paintings, who if anyone has to clean up the polluted river. That is the point of institutions like bankruptcy and litigation in contract disputes. After.

“market prices reflect opportunity cost”. I have trouble understanding what this means. Has anyone empirically examined prices to see if they do “reflect opportunity costs”? For example, by looking at the prices of, say, cinema tickets in urban centres as opposed to country towns (where the alternative forms of entertainment are obviously much less)? Or is it a statement about some ideal type?

What’s a “price” here anyway? The price of the same jar of peanut butter will differ from one supermarket chain to another, even within the same shopping centre. Do the opportunity costs differ? Or, more plausibly, are the supermarkets pricing slightly differing baskets of goods (one groups the peanut butter with the spreads, the other with the crackers). In which case the “price” is of the basket, not the jar. What’s the unit here?

When I worked on illicit drug policy I looked at the prices of heroin and ecstasy, in what are often supposed to be markets untainted by regulation. I found that dealers and buyers strongly preferred to hold money prices steady (a deal of heroin in western Sydney was a constant $50, or $80 in the red light district, for years at a time). They varied access to credit, freebies, demand for cash rather than goods, or supply to fringe customers, not the cash price. All recognisable as ordinary actions of ordinary people in a social network. How many pure prices are there in the world? How important are they?

“IOW are the narrowly economic constructions of human agents and agencies remotely plausible in anthropological terms?”

I am just writing an assignment where this came up. I will just quote:

“In her ‘Epistemology for the next revolution’ (2011) Linda Martín Alcoff refers approvingly to Bruno Latour’s (2004) plea for a realism that does not demand of real things a spurious independence—the supposed independence of what he calls ‘matters of fact’ or ‘objects’. She shares his disavowal both of the positivism that would make such a demand and of postmodern stances that, finding it unmet, would reject the possibility of making and sustaining claims about a real world. As Latour laments: ‘no matter what we do, when we try to reconnect scientific objects with their aura, their crown, their web of associations, when we accompany them back to their gathering, we always appear to weaken them, not to strengthen their claim to reality . . . . Why can we never discover the same stubbornness, the same solid realism by bringing out the obviously webby, “thingy” qualities of matters of concern? Why can’t we ever counteract the claim of realists that only a fare of matters of fact can satisfy their appetite . . . ?’ (Latour 2004, p. 237, emphasis in the original)

….

One thing we (ought to) learn is that ontological independence is neither what makes the world real nor what makes it objectively knowable. This is something that Nancy Tuana has known and written about for a long time, but that was brought strikingly home to her as she reflected on Katrina and the city of New Orleans. After, as she says, two decades of advocating an ‘interactionist ontology’, she was struck by how ‘the events unfolding in the wake of Katrina provided a trenchant illustration of the importance of embracing such an ontology and its concomitant epistemology. For in witnessing Katrina, the urgency of embracing an ontology that rematerializes the social and takes seriously the agency of the natural is rendered apparent.’ (Tuana 2008, p. 188, emphasis in the original)

…

The interactionist ontology that Tuana articulates applies to all of us, to the entire human and other-than-human world: it is part of what is needed for a thorough-goingly realist account of the world; but it becomes evident from the perspectives of those whose entanglements expose distinctive vulnerabilities.”

From: Scheman, Naomi. “Toward a sustainable epistemology.” Social Epistemology 26.3-4 (2012): 471-489.

Nobody (not even Sandwichman which surprises me) seems to have picked up the point about opportunity cost for WHOM. I wonder why not. It would seem to be a critical question, one man’s golf course, is another man’s wheat field, is potentially a future man’s desert. So any single evaluation of opportunity cost implies choosing a particular point of view that has not got any universal relevance. The problem here lies in the word COST. Not only in interpersonal comparison of utility impossible, interpersonal comparison of cost is also not possible. There is no universal unit of measurement to use.

WT @ 54: we’ve badly misunderstood the political part of political economy, and that the defense of the status quo has become untenable. What we do instead is confusing a lot of people

I think it is actually the economics that we get wrong, and it sinks our politics.

Hazlitt begins his One Lesson with a plain acknowledgment of the political problem of economics in a democracy:

Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics, or medicine—the special pleading of selfish interests. While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

Not so bad an account, I think, of the politics.

It’s Hazlitt’s economics — which appears to me to be Mises’ economics covered with Hazlitt’s rhetorical charm — that is so wrong. Hazlitt’s doctrine is the market economy:

. . . in an economy in equilibrium, a given industry can expand only at the expense of other industries. For at any moment the factors of production are limited. One industry can be expanded only by diverting to it labor, land, and capital that would otherwise be employed in other industries. . . .

Everything, in short, is produced at the expense of forgoing something else. Costs of production themselves, in fact, might be defined as the things that are given up (the leisure and pleasures, the raw materials with alternative potential uses) in order to create the thing that is made.

[Opportunity cost! – bw]

. . . . It is only the much vilified price system that solves the enormously complicated problem of deciding precisely how much of tens of thousands of different commodities and services should be produced in relation to each other. These otherwise bewildering equations are solved quasi-automatically by the system of prices, profits, and costs. They are solved by this system incomparably better than any group of bureaucrats could solve them. For they are solved by a system under which each consumer makes his own demand and casts a fresh vote, or a dozen fresh votes, every day; whereas bureaucrats would try to solve it by having made for the consumers, not what the consumers themselves wanted, but what the bureaucrats decided was good for them.

So, there you have it: Hayek’s market prices beating calculating bureaucrats and Friedman’s consumer sovereignty. If you squint, you can see Brad DeLong’s neoliberalism: “. . . market mechanisms–properly-regulated market mechanisms–are more likely than not a better road to social democratic ends than command-and-control mechanisms.” (Typical of DeLong, weak tea with two lumps of sugar, but still recognizable, and it is that nodding agreement with the likes of Friedman that makes him a foolish aka left neoliberal. Back before neo, a liberal would have just called Friedman a liar or a charlatan and let it go at that.)

“in an economy in equilibrium” is the key phrase, the logical premise from which all else derives. It’s not a bad account of a market equilibrium, though it may seem tightly wound. An economy in equilibrium is on a knife’s edge, in a sense. No firm wants to produce even one more unit at current prices, and someone would have to yield something up to change that rigid stance one iota. It’s that knife’s edge that defines “opportunity cost” in a semi-sensible fashion.

Market equilibrium is just not something we’re familiar with, because it does not describe the economy we experience.

A competitive market equilibrium implies that firms offer product — produce and sell units right up to the point where marginal revenue equals marginal cost, and then want to stop. Marginal revenue is falling and marginal cost is rising, and they don’t want to sell another unit at any price the market will bear. That’s the knife’s edge. And: Marginal cost is rising. That’s a key condition for a market to clear. And, that is a very unusual cost structure in the real world.

In the real world, for most firms most of the time, marginal cost is considerably less than marginal revenue and for many firms, marginal cost is falling over the relevant range of output — at least long-run* marginal cost is falling. If marginal cost is falling, there’s no market equilibrium in price possible.

Falling marginal cost is typical of a cost structure of increasing returns, and that’s the world we live in. Although he didn’t recognize it, it is the world Adam Smith was describing when he told the tale of the pin factory, and explained that specialization reduced costs and was limited only by the extent of the market.

In the real world, firms specialize (for a lack of better term) and make dedicated, sunk-cost investments that increase their total factor productivity, lowering their cost. The baker can make his next loaf of bread more easily and cheaply than the last, and more cheaply by far than any non-baker, because he is in possession of the outcome of sunk-cost investments in skills, experience, reputation, specialized tools and equipment, a shop and location, and so on. If he could, he’d like a better oven, more skill as a baker, a bigger shop in a better location, more customers at the location he has. He’s not going to lower his price if he doesn’t have to, but if he could sell more at that price, he would do so, and if he had to, he’d sell more at a lower price, too. That describes a disequilibrium situation.

There’s a couple of things we should note about this economy in disequilibrium. One is that prices have to be administered. The price of iPhones. The price of McDonald’s hamburgers. The price of heroin, apparently. Prices are not the product of magical tatonnement by the market god operating “quasi-automatically” because in conditions of disequilibrium and non-clearing markets he could never arrive at a stable solution; the prices we observe are creatures of command-and-control. (Good thing Brad has tenure, because he’s an idiot.)

The other thing is: all business is risky business. As WT put it poetically, business must cast its bread upon the waters. The technologically efficient methods require prior sunk-cost, irrecoverable commitments. And, then management of sunk-cost investments has to try, against all reason, to recover a return on that investment. Those returns on sunk-costs are, for the wonks, some kind of economic rent. A quasi-rent in some cases — this is no place for typology. The point is that businesses need to secure a political power to earn an economic rent, to recover a return on a sunk-cost investment. That’s where the “allocation of property rights” comes in.

This economy in disequilibrium is not on a knife edge exactly — none of the lines are that sharply drawn. This is an economy with a lot of unknowns, that runs on fictions and could use, and misuse, a lot of insurance. This is an economy where “opportunity cost” is more than a bit fuzzy. If I am a newstand vendor, what’s the opportunity cost of a newspaper that goes unsold? I don’t want to miss a sale because I’ve run out, so practically everyday I throw away unsold, unread papers. Also, because property rights in economic rents are so critical to the ability to earn a return and finance an investment, as another comment pointed out, opportunities are likely to be the property of someone in particular.

Sorry for the economics lecture. I tried to keep it relatively short. It seemed to me that comments were getting mystical and could use some of this, for balance.

*I don’t want to get into the whole long-run, short-run distinction. In increasing returns situations, the long-run beckons like a siren, demanding new sunk-cost investment that will return the firm to disequilibrium, even if it manages to a place where a short-run equilibrium is possible. My favorite example is an airline: For any given passenger load, a bigger plane with some empty seats is always a cheaper way to move that given number of people than a smaller plane with just that number of seats. So, the airline is led to alternately try to fill the empty seats or to get a bigger plane, which will, again have empty seats.

DeBeers with a little monopolistic courtesy from General Electric.

http://marginalrevolution.com/marginalrevolution/2015/05/the-differential-marginal-utility-of-money.html