Pursuit of Truthiness

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Archive for June 2011

Remembering Adam Smith Efficiently

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Adam Smith is usually remembered as the father of economics and laissez-faire, for the metaphor of the invisible hand, and for its meaning that people acting in their self-interest promote the public good.  A vocal minority likes to point out that Adam Smith was much more complex than this, and in particular that his thoughts on businessmen and the role of government are very different from those of many people who claim to love Smith.  However, I believe that the naive picture of Smith that most people have is in fact efficient, in the same way that peoples’ ignorance of politics is efficient.

Smith was in fact quite complex.  He is thought of as a champion of capitalists and businessmen, but he said they are “an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it” and that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

He is thought to have said that people are only motivated by rational self-interest, but he was no Gary Becker.  He recognized that people want to do good, saying: “We are pleased, not only with praise, but with having done what is praise-worthy” and ” To prevent, therefore, this paltry misfortune to himself, would a man of humanity be willing to sacrifice the lives of a hundred millions of his brethren, provided he had never seen them? Human nature startles with horror at the thought, and the world, in its greatest depravity and corruption, never produced such a villain as could be capable of entertaining it”.  He also recognized that people are far from rational, saying “self-deceit, this fatal weakness of mankind, is the source of half the disorders of human life” and “The chance of gain is by every man more or less over-valued”.

Smith is thought to have called for laissez-faire small government, but in fact he suggested several large roles for government, such as putting a ceiling on interest rates to curtail risky investments, progressive taxation, and public education to counter the bad effect of the division of labor: “He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become…. in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.”

For a supposed apologist for propertied classes, he sometimes sounds a lot like an anarcho-communist, saying: “As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed” (of course, all the classical economists hated landlords, even if they loved capitalists), and “The affluence of the rich excites the indignation of the poor, who are often both driven by want, and prompted by envy, to invade his possessions. It is only under the shelter of the civil magistrate that the owner of that valuable property, which is acquired by the labour of many years, or perhaps of many successive generations, can sleep a single night in security.”

Smith takes his message to the streets

Given all this, how can I say that Smith is remembered efficiently as promoting self-interest, capitalism, and small government?  There are two main reasons.  One is simply that Smith said a lot of things, and it is easy to distort his main message with selective quotes.  As Jacob Viner said, “Traces of every conceivable sort of doctrine are to be found in that most catholic book, and an economist must have peculiar theories indeed who cannot quote from the Wealth of Nations to support his special purposes”.    Smith made no strong effort at self-consistency; again as Viner said, “The one personal characteristic which all of his biographers agree in attributing to him is absent-mindedness, and his general principle of natural liberty seems to have been one of the things he was most absent-minded about.”

In the main, Adam Smith’s message was that markets worked well and that mercantilist calls for government to restrict trade should be opposed.  The usual quotes used to show Smith’s support of self-interest and laissez-faire are in fact more representative of his work as a whole than the quotes I used above to show his nuance.  The most popular such quotes are probably: “it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest” and “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…. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”  He can’t have believed much in the power of altruism as he said “The late resolution of the Quakers in Pennsylvania to set at liberty all their negro slaves,  may satisfy us that their number cannot be very great. Had they made any considerable part of their property, such a resolution could never have been agreed to.”  The list of government policies supported by Smith is very small compared to what modern governments do, though it would not make all libertarians happy.

The main reason I say Adam Smith has been remembered efficiently is that his ideas about self-interest and the invisible hand were what set him apart at the time and what inspired later economists.  People like me who are interested in history and Adam Smith for their own sake should know about the complexities.  But many people before Smith had criticized the conspiracies of business, advocated for government regulations, and recognized that people have many motivations.  What made Smith different, and what later economists built on, was his focus on self-interest and how to maximize happiness.  Adam Smith was not Gary Becker, but his works had the seeds of modern economics in a way that previous thinkers did not, and it makes sense to focus on the parts of his work that would later bear so much fruit.

Written by James Bailey

June 15, 2011 at 6:07 pm

J.S. Mill (1848) on the Financial Crisis of 2007-8

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In his 1848 Principles of Political Economy, John Stuart Mill gives what sounds to me like a description of the “global savings glut” and subsequent financial crisis of the 2000’s:

By the time a few years have passed over without a crisis, so much additional capital has been accumulated, that it is no longer possible to invest it at the accustomed profit: all public securities rise to a high price, the rate of interest on the best mercantile security falls very low, and the complaint is general among persons in business that no money is to be made…. the diminished scale of all safe gains inclines persons to give a ready ear to any projects which hold out, though at the risk of loss, the hope of a higher rate of profit; and speculations ensue, which, with the subsequent revulsions, destroy, or transfer to foreigners, a considerable amount of capital, produce a temporary rise of interest and profit, make room for fresh accumulations, and the same round is recommenced.

A global savings glut lead to low yields on safe investments like US Treasuries.  Investors chasing high yields turned to riskier investments, especially those which could be packaged as safe- like securitized subprime mortgages.  When the risks were realized, the crisis occurred.  Score one for Mill.

Written by James Bailey

June 15, 2011 at 3:12 pm

A Paradox of Sustainability

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When discussing Malthus, I said that we don’t need to worry about “overpopulation”, because there are no global food shortages in the foreseeable future.  A natural response to this is that we may be able to feed more people, but they would consume other resources and pollute in an unsustainable fashion.  I have previously expressed several reservations about the idea of sustainability, and I stand by those.  Most environmental problems are not necessary results of overpopulation or a high discount rate that undervalues future generations.  I cannot think of an environmental problem that is not caused by externalities or a lack of property rights, and thus could not be solved by the proper application of Pigouvian taxes or property rights.  Many of these solutions would work fast enough to be worth it to current people at current discount rates; we should have higher gas taxes and property rights in fish regardless of “sustainability”.

Of course, even with these fixes, there will still be increasing amounts of some pollution.  Part of this is due to discounting  the future, which could be reduced in an non-distortionary way by lowering taxes on saving and investment.  Even at a zero discount rate, though, we may still leave the world more polluted than we found it, for instance with more carbon dioxide.  Would this be “unsustainable”?

One definition of sustainability is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.  In economics terms, this means we should have no time rate of preference (we should care about the future as much as the present); in Rawlsian terms, we should arrange society as we would if we didn’t know which generation we would be born in.  I have previously argued that high pollution and consumption can be sustainable because future generations will probably be richer and we aren’t sure how much they will value our actions.  In finance terms, this is like taking out loans instead of saving because you think your income will be higher in the future and because investments are risky.   Such an individual would take out loans even if they value their present and future selves equally.

All of these criticisms simply reduce the scope of sustainability; but it is still reasonable to reduce some pollution and consumption if you think future generations will be poorer than us and you have a good idea of what they will value (though I think they will be much richer than us).  The actual contradiction comes when we consider “overpopulation”.  It is often said that people today should have fewer kids because a higher population is not “sustainable”.  If we have fewer kids, there will be more resources per person; each person in the future will be able to pollute and consume more.  How is this a problem?

Robert Solow pointed out one contradiction of sustainability (though he was kind enough to call it a “paradox”) when he said (page 7, it is worth reading all 9):

“I want to mention what strikes me as a sort of paradox- as a difficulty with a concept of sustainability.  I said, I kind of insisted, that you should think about it as a matter of equity…. how productive capacity should be shared between us and them, them being the future.  Once you think about it that way you are almost forced logically to think about not between periods of time but equity right now…. the paradox arises because if you are concerned about people who are currently poor, it will turn out that your concern for them will translate to an increase in [current] consumption”

This is one contradiction, that we want equity across generations, and we achieve it by worsening current inequality.  We tell poor Brazilians not to clear land for their farms, poor Chinese not to burn coal to light their homes, poor Africans not to use DDT to protect their health; all so people in the future can enjoy more species and a stable climate.  This seems to be a transfer from poor to rich in the name of equity.  But Solow, right after pointing out one contradiction, stumbles into another, saying “control of population growth would probably be the best available policy on behalf of sustainability”.

This creates another kind of inequality.  Say a future generation can safely consume and pollute 10 units, spreading this over 10 people, so each person gets one unit of “exhaustible GDP”.  Are we being equitable if instead we control population so that there are only 5 people and they can each have 2 units of goods?  No, we are making the rich (who get to experience life) richer with an extra good per person, while the 5 “poor” don’t get to exist at all or consume anything.

Further, the only ways to explain away the problem are blocked by the logic of sustainability itself.  One could say that the people who don’t exist shouldn’t be counted; but the whole point of sustainability is to speak up for future generations who don’t yet exist and so can’t speak for themselves.  One could say that a life that is allowed little pollution or consumption of exhaustible resources is not worth living; but the whole strategy of sustainability is to tell people that life is still good when you pollute little, consume little, and draw enjoyment from things besides consumerism and materialism.

So an argument that we should have fewer kids to be sustainable and equitable is really an argument for increasing inequality in the future.  It does not make sense on equity grounds; sustainability needs to drop the idea of population control to be logically consistent (except insofar as it does prevent famine and musicals).  The new growth theory and a host of empirical work have also established that it doesn’t make sense on efficiency grounds, since the externality of a marginal child is positive.

There are lots of good reasons not to have kids, but a worry about sustainability is not one of them.

Written by James Bailey

June 3, 2011 at 8:42 pm

Malthus was right, but he would want you to have kids

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Mr. Malthus- central Propositions correct, indeed obviously so- Misinterpretations by modern critics and supporters- The importance of certain technological developments

Thomas Malthus is famous for his 1798 Essay on the Principle of Population, which argued that population will always quickly rise to the limit that the food supply allows, meaning many people will always live in poverty and near-starvation.  Ever since its publication, people of all kinds have been eager to attack the ideas and their author.  I have to admit I always found it hard to take Malthus seriously- mostly because the last 200 years of increasing population without world famine seem to prove him wrong; also because of the silliness of the “arithmetic vs. geometric growth” thing.  However, when you look closely at what Malthus said, he was mostly correct, and when wrong it was not for the reasons most people came up with.

Malthus’ main ideas can be summarized: 1) people need food to live  2) there is only so much land to grow food on 3) Given that the “passion between the sexes” is a part of human nature, people just keep having kids 4) given 1-3, population will increase until it hits the food-limit imposed by nature and is kept in check by starvation

He notes that when people encounter “new” land, as in America, their population will double as quickly as every 25 years and quickly fill it up; people everywhere would like to have enough kids that population increases in this way.  It is hard to imagine agricultural productivity doubling every 25 years to enable the same population growth on a set amount of land.  Certainly adding more workers to a given farm quickly hits diminishing returns.  Further, it is hard to imagine even now- and must have been very hard in 1798- to imagine that new techniques, crops and machines could double output every 25 years.

Malthus describes many ways in which population is kept in check short of famine.  There are other ways the death rate is increased- war, disease, infanticide- and he argues these become more common when food is short.  There are ways the birth rate is decreased- abstinence and late marriage.  His economic analysis is excellent for its time.  He describes how price signals enable individuals to make decisions that avoid famine.  As population gets close to the food limit, food prices increase, so kids become more expensive to feed, and people try to have fewer of them.  When many people are nearing the subsistence level, the price of labor will be low.  When labor is cheap and food expensive, farmers will have a bigger incentive to produce more food.  Prices enable population to fluctuate less violently around the equilibrium level.

Malthus’ main descriptive proposition, that population will quickly catch up to any increase in potential food production, was true for essentially all human history until about 1880, when the demographic transition began in earnest and children per woman began its long decline while agricultural productivity expanded rapidly.  But what policy conclusions did Malthus draw from his idea?  This is where things get weird.

Malthus’ idea has been adopted by leftist environmentalists to argue that people in general should have fewer kids.  This is probably why I thought Malthus must be wrong when I heard about him as a college freshman.  But Malthus himself didn’t argue this at all.  In fact, Malthus thinks that having kids is great as long as you can afford to feed them with your own money.  He likes kids; he doesn’t like it when they starve; he doesn’t like it when people have to turn to welfare or adoption to get their kids fed.  He really didn’t like welfare:

“The poor-laws of England tend to depress the general condition of the poor…. increase the population without increasing the food for its support…. create the poor which they maintain…. diminishes the shares that would otherwise belong to more industrious and worthy members… dependent poverty ought to be held disgraceful.” p 38-9 Norton 2nd ed

Malthus’ main policy conclusion is that the poor laws (the welfare of his day) should be abolished.  His secondary conclusion is to support agricultural productivity, by encouraging “tillage above grazing” (thus producing more calories per acre), opening new farmland, and encouraging agriculture above manufacturing and cities.  This will increase the number of people the land of England can support.

His main advice to individuals is not to have kids if they are likely to starve or have to go on the public dole.  If welfare is abolished as he would like, this is simplified to: don’t have kids if they are likely to starve.  This is why I feel confident that Malthus wouldn’t mind if you (I assume those likely to read this could afford to feed kids) have kids.

So what did Malthus get wrong?  He didn’t foresee effective birth control or the explosive, endogenous growth of agricultural technology.  He assumed that having fewer kids would always mean misery (abstinence) or vice (infanticide), both of which are hard to do.  If he had known about condoms or the pill, he may have called them “vice”, but he would recognize them to be easier than abstinence and more moral than infanticide.  Birth control, when people are rich and educated enough to use it, is itself enough to evade the Malthusian trap, as below-replacement birthrates in many countries now attest.  Malthus saw technology as something that developed slowly and randomly, so he didn’t consider that it could avoid the trap, and didn’t include research as a way to encourage agriculture.  In fact, agricultural technology has grown “geometrically” (exponentially).  It has not done so randomly, but instead is largely due to factors Malthus ignored- like government-sponsored research- or spurned as pulling workers away from agriculture, such as cities (where most inventions and discoveries take place, even in agriculture) and manufacturing (which makes tractors, et c).

On the whole, though, I was surprised by how rational Malthus’ writing is and how much modern economics he knew in 1798.  His work has not been rendered completely irrelevant by technology and birth control; much of the world does still live on or near the Malthusian frontier.  It is unclear to me whether it is helpful to give food aid to such regions, either through private charity or government food subsidies as with Indian rice.  Personally I think giving to education in poor countries is a better bet, and the fact that it does not aggravate a potential Malthusian trap is one reason why.

To get back to kids though, there are lots of good reasons you may not want them, but one reason you shouldn’t have is that “the world is overpopulated and Thomas Malthus would be sad”.

Written by James Bailey

June 2, 2011 at 5:23 pm