Coordination Games Are Not (Merely) Maximization Problems: Welfare Economics Reconsidered

Leeson (2019) compellingly demonstrates that the logic of maximization entails that every institution is efficient, where efficiency consists of a stable equilibrium in which gains from trade are exhausted. What he wants us to take away from this is not that we live in the best of all possible worlds (that may or may not be true) but rather to think, “So much the worse for efficiency.” Efficiency is not an operational concept in economics. I aim to rectify this problem.

The problem with efficiency is that an invocation of the idea with respect to institutions seems to commit the Nirvana fallacy (Demsetz 1981), which is another way of stating Leeson’s point. “Monopolistic markets are inefficient” — compared to what benchmark of efficiency? Perhaps a government could break-up the monopoly for a cost less than the deadweight loss of the monopoly’s existence, for a net efficiency gain. Then again, perhaps the government’s activity would be more costly. This is Demsetz’s (1964) point. Complicating the situation further, perhaps the dissolution of a monopoly does at present yield a net efficiency gain, but also precludes a future market shift that would have eliminated the monopoly at less cost, which means that, all things considered, antitrust action (or the repeal of rent-creating legislation) may generate a net efficiency loss. The same pattern of reasoning applies to all instances of market failure and of government failure: It is impossible to compare the relative costs and benefits of alternative institutional arrangements.

The problem can be made more precise. Allen (1991) gives us a working definition of transaction costs: the costs of defining and enforcing property rights. Perhaps we can attach a dollar value to the costs of enforcement — intuitively, the defensive output of locks on houses, police forces, and the like can be measured with some level of precision, as can the labor and capital costs required for their production. But what can possibly be meant by the costs of defining? What is the cost of defining a rule?

Let’s suppose this: the opportunity cost of defining a rule in one way is the value of defining the rule in the second-best way. Thus, the cost of defining a rule includes both alternative ways of defining the same rule and defining different rules entirely (sidestepping the ship-of-Theseus question, “Is it still the same rule?”). It is tempting to look at the costs of definition as an empirical question. This optimism is naive at best. We can’t identify the cost of a particular institutional arrangement because we can’t  know the set of possible outcomes that the institutional arrangement will generate, and we can’t know the set of possible outcomes for every alternative institutional arrangement. As Hayek points out, the value of liberty consists in the fact that liberty will generate outcomes that the designer of the system could not foresee (1960, 1991). It is a “fatal conceit” to imagine that we can envision every possible response to a given set of rules.

Thus the true opportunity cost of alternative rulesets must of necessity be indeterminate, where true cost is the one that rule-followers and rule-creators actually bear. The cost of definition is neither a theoretical nor an empirical question; it is an unanswerable one. But we might say instead that choosers face a given probability distribution of costs, or distribution of distributions, or that at the very least they have some conjecture or intuition (that need not match reality in the slightest) of the relative strengths and weaknesses of different rules. Economists like Leeson are inclined then to say that every institution is efficient. Given the logic of maximization, it follows that every institution is efficient: people maximize with respect to their information about benefits and costs of different institutions.

What I want to suggest is that there are cases of decision-making which cannot be properly described as maximizing. Sometimes people have no prior beliefs about the benefits and costs of an action, and yet, by the nature of the decision they confront, must act. It is in fact the action which creates conditions for belief, or perhaps taking action just is the formation of belief, but the action is not determined by some prior set of beliefs, information, or the like.

Consider the case of an aboriginal island nation, some sixty miles west of a mainland of which the islanders are ignorant. The indigenous peoples have an extremely low standard of living relative to the mainlanders. Both could benefit from exchange. Thus, in this status quo, there remain unexploited gains from trade. So it is tempting to call the situation inefficient. On the island, however, they do not have the technology to sail to the mainland; indeed, they may not know that the mainland exists. So, given that the islanders are doing the best they can with what they have, the situation is efficient. The ignorance of the mainland is just another component of the islanders’ budget constraint.

But a thoughtful islander will recognize that he does not, properly speaking, know whether there is a mainland or not. He might surmise that there is the possibility of sailing to another place and finding another people with whom he can exchange, but the islander knows neither the costs of sailing nor the benefits. He may sail east and find the mainland, or he may sail west into oblivion. The costs of each journey are radically different and his decision must be arbitrary with respect to maximization. The same can be said for the costs of making a journey at all. The same can be said of the decision to invest in the production of seagoing watercraft in the first place. The same can be said of the decision to think about investing in the production of seagoing watercraft. The uncertainty with which the islander must operate precludes him from assessing opportunity cost. The benefits that the islander might receive from sailing are wholly unknowable prior to attempting a journey.

Whatever the islander decides to do, his decision is not maximizing. He is not optimizing a consumption bundle under constraints. He is not maximizing a risky consumption bundle with known probabilities of consumption under a risky constraint with known probabilities of various costs. Whether he chooses to sail or not, he is choosing to pursue an unknown consumption bundle with an unknown probability of acquisition against an unknown set of costs with unknown probabilities of bearing those costs (Knight 1921). 

A thoughtful reflector on a given rule may recognize that he does not know whether the rule is best, and yet, he still must choose to uphold or follow the rule, or change it or disregard it. His behavior is shaped by a choice he must make about the rule. A sufficiently self-conscious chooser must make this choice, in circumstances of great uncertainty, without respect to beliefs he has about the rule: he does not have enough belief to generate a decision. Nonetheless, the logic of the situation requires that a decision be made. A decision is made that is not entirely maximizing; maximization does not summarize the entirety of the decision making process.

To sum up so far, the logic of maximization commits us to seeing all institutions as efficient. However, because it is impossible to appreciate the opportunity cost of defining alternative rules, it is better to say that all institutions are of indeterminate efficiency. In other words, people are not (always) maximizers. We should still accept Leeson’s principal conclusion: Welfare economics is unscientific. This is not because all rules are the best we could have, nor merely because we cannot know, in principle, if given rules are the best we could have, but because this fact causes some people to confront a forced decision where they must make a genuine choice about what to believe.

Two questions naturally arise from the foregoing discussion. (1) If people are not always maximizers, how do they make decisions when not maximizing? And (2) obviously, we know some rules are better than others, e.g., socialism precludes the possibility of economic calculation (Mises 1920; Hayek 1936, 1945; Lavoie 1985a, 1985b) and so people under socialist regimes will be poorer than those under capitalist regimes, ceteris paribus. How do we capture this knowledge if not through the apparatus of efficiency?

The second is less existential and thus easier to answer. Leeson himself points the way. We need to cease speaking of relative efficiencies and substitute discussion of relative wealth. People living under socialism are poorer than those who are not. It may be too costly to remove those constraints, and thus, it may be the case that, were the costs of socialism and the costs of privatizing fully known, socialism is occasionally an efficient system. We can always say that, since the relative costs of socialism and of replacing socialism are never fully known, it is impossible to say whether socialism is efficient. However, we can know that people under socialism will be poorer than they would be in a broadly capitalist society if switching away from socialism were costless. Our desire to reform socialist countries is thus, in a sense, an informed act of faith – the economic analysis of socialism groundlessly assumes costless transition.

The assumption of costless transition is baked into every level of economic analysis. Consider minimum wages. Econ 101 graphs show us that a binding price floor generates a surplus, with a measurable triangle of deadweight loss. We are tempted to describe the situation as inefficient because we think we can see a clear relevant alternative: the equilibrium without minimum wage. But Leeson, Demsetz, Barzel, Stigler, Coase, and that whole gang of thoughtful critics of the Pigouvian tradition remind us that it is not by any means costless to repeal the minimum wage. Thus, we cannot say the institution is inefficient. But what we can say is that, if it were costless to repeal, repealing it would make people less poor.

Clearly something is right about the 101 presentation, even if it lacks nuance. What I want to suggest is that it is legitimate, on occasion, to falsely assume costlessness of transition. Economists can be guided by their moral judgments: We know it is not costless to repeal a minimum wage, but we know that if Congress just knew a little more economics and was composed of marginally less immoral people, they would repeal the price control (assuming the 101 depiction accurately captures reality). We assume costlessness for the purpose of demonstrating that, if we did not confront the costs of evil and ignorant people making our rules, we would be less poor. And we also slip in a bit of moral judgment in our estimation of greater poverty being, ceteris paribus, bad, and less good. The reason we use the supply and demand analysis is to persuade: to show others why it is that the world we live in is not as good as it could be. And it is that act of persuasion that can on occasion improve the world (or at least, increase our wealth).

It is not inefficiency that justifies intervention or its absence, but our moral judgment about why putative inefficiency is perceived. It may be the case that the putative inefficiency is not at all inefficient, when positive transaction costs are accounted for, like the mall parking lot in Demsetz (1964) or the pre-fur-trade Montagne lands in Demsetz (1967); it may be the case that the only reason transaction costs are positive is on account of the wickedness or ignorance of some people. Welfare economics must, as Coase (1960) explained, resolve into ethics and aesthetics.

This fact is not a demerit. In fact, it sheds light on the first question: If people are not maximizers, then what are they doing when they make decisions? They are, I suspect, relying on ethical and aesthetic criteria which guide their beliefs. And to the extent that they are relying on such criteria, they are not maximizing. The islander must make a decision whether to sail or not to sail. His decision is arbitrary with respect to his beliefs. But suppose he can choose to believe something. I am describing something rather like what William James lays out in The Will to Believe. The conventional economic analysis goes something like: beliefs/information inform decisions. What I have shown is that there are, plausibly, decisions that have to be made without the advantage of prior beliefs/information. I want to now suggest that the way James articulates the capacity for choice among beliefs is relevant to economic analysis.

James makes his argument about religion. Belief in God, so says James, is forced (for on his account there is no middle ground, no suspension of judgment, only belief and disbelief), live for some (meaning that there are some people who, for whatever reason, consider Deity to be a plausible metaphysic), and momentous (the decision carries a great deal of weight). Since evidence is incapable of demonstrating either the nature or (non)existence of God, yet people must still either believe or disbelieve in God, then they must make a choice – a choice about what to believe. It is not at all clear what governs this choice, but James suggests it is a person’s “passional nature”. In other words, people choose to believe in God because they want to live in a reality governed by God (where James gets controversial and interesting is in his view that this choice is utterly legitimate).

Feel free to set aside the philosophy of religion, but keep the Jamesian framework. The islander confronts a forced, live, momentous decision, for which evidence is incapable of discrimination. What governs his choice? Perhaps it is some kind of ethical or aesthetic judgment about what kind of world would be a good one to live in.

Economists have a model that captures and explains some kinds of non-maximizing behavior: the coordination game. In the coordination game, there are obvious mistakes to be avoided (left-right and vice versa) but there are two equilibria where the payoff is equal, and thus between which the players should be perfectly indifferent. Is the player’s decision thus completely arbitrary? Perhaps in the pure case, but certainly not in most identifiable real-world cases of coordination games.

Focal points (Schelling 1960) often arise as a result of the use of ethical and aesthetic heuristics. Focal points guide players to an equilibrium neither deterministically nor randomly. They are not deterministic since they arise on account of mutual expectations, and expectations about another’s expectations about one’s own expectations about another’s expectations about one’s own expectations (etc.) cannot, ultimately, be determined by decision-theory. That is, the set of mutual expectations that generates a Schelling point is not a linearly defined relationship of cause and effect, but is instead a spiral process without clear beginning. It is of course possible that people hold expectations deterministically on account of some physico-chemical or divine subordination of their psyche, but that possibility is irrelevant. The important fact is that an individual’s expectations about expectations about expectations (ad infinitum) is not determined by a strictly rational decision-making process.

And yet focal points are clearly non-arbitrary, and people can and do coordinate around them. They are not arbitrary for two reasons. First, they are apparently constrained by the possibility of discoordination: Left-Right and vice versa cannot be focal points. Another way of putting the idea is that not every point can be focal. From the outset, the hard constraint on focal points is that they only occur at equilibria. Second, they are constrained by ethical and aesthetic judgments. The clock at Grand Central Terminal at 12 noon is not the meeting place because it satisfies our preferences uniquely (other places and times satisfy our preferences equally well) nor because it is the place of highest probability of meeting (it is meaningless to speak of probabilities, since expectations of others’ behavior cannot have a probability attached to them on account of their circularity), but because the clock at Grand Central at noon has a kind of aesthetic significance that lends itself to coordination. Maybe that significance can be explained — but not in terms of maximization.

In other words, coordination games are not maximization problems. And yet, coordination games can be solved for Nash equilibria, in the real world, in such a way that behavior is not arbitrary. In general, I think institutions are (often, or at least sometimes) solutions to coordination games, and not the product of maximization. This means that institutions are of indeterminate efficiency: They are better than disequilibrium, but there might be an alternative point around which we could coordinate which would be just as good, or even better (Assurance), or better for some but worse for others (Battle of the Sexes).

The foregoing discussion does not and should not be taken to imply that I believe maximization is a useless apparatus. On the contrary, much behavior does seem to be maximizing. Even the creation of some institutions, like property rights in the Demsetz story, seem to be the result of maximizing behavior. However, not all behavior is maximizing, and those institutions which are the product of coordination games and not of maximization cannot be said to be efficient. Maximization implies efficiency; some behavior is maximizing; some institutions are thus efficient. However, some behavior is not maximizing but coordinating; some institutions are thus of indeterminate efficiency.

Recall the above discussion of minimum wage laws. Are they efficient? Suppose that American society has coordinated around minimum wages being a good solution to poverty — everyone expects everyone to be better off with a higher minimum wage. The efficiency of the law, strictly speaking, is indeterminate, since no one here is maximizing (there might be an equally appealing putative solution to poverty that is, for whatever reason, not focal). Efficiency analysis is nonetheless useful in illuminating our moral commitments and the moral state of the world. We may show by means of an efficiency analysis that, relative to other states of the world where people are less ignorant and politicians are less motivated to distribute rents, the minimum wage makes workers poorer. The key feature of this analysis that makes it acceptable is the fact that the appeal to efficiency does not assume costlessness of transition, but rather illustrates that the transition would be good to make if it were costless. In doing so, it highlights what the costs of transition are: the ignorance and immorality of the people who are coordinating. Thus, aesthetic and moral judgments are essential for guiding all non-maximizing behavior — including that of the welfare economist.

Three Things I Learned in the First Year of an Economics PhD

1. Mathematics is a language.

Because of the circles I’ve grown up in, I’ve developed a violent kneejerk reaction against mathematical models. I am cautiously becoming more comfortable with math-y models, the more I study both economics and mathematics. Though it’s true that mathematical models can obfuscate the phenomenology of “choice”, when you understand the meaning of the models, the translations are much simpler. When you understand how to speak in mathematics, it’s much easier to read these models. A mathematical model is not the source of our insights, but they can be a useful way to communicate our insights. Mathematics should be judged the same way that we judge an AI translation program. If I can translate a sentence from English to Greek and back to English without loss of meaning, then I am satisfied with the accuracy of the program. Still, don’t let mathematical models scare you into believing them by their elegance, but to judge them you need to speak the language. You wouldn’t want someone critiquing your verbal model if they didn’t speak English, would you?

2. Questions can be more powerful than answers.

Once you give yourself a set of axioms, it’s not too difficult to find the fullness of their implications. Given a philosophical revolution, give or take a few centuries before that paradigm is dead, no matter how much “progress” it lead to. Once you find yourself in one of these paradigms it takes a special kind of attention, to find the foundations and subvert them. The set of axioms or assumptions that you choose is an art, and for those who want a “final, objective, authoritative” science, that’s hard to admit. If you can ask a meaningful and interesting question within an existing scientific framework, you can keep the wisdom of older thinkers while opening up a new frontier for discovery. In an academic career (especially early on), such questions should be your quarry.

3. Game theory has near limitless potential, especially for new institutional economics.

Before you comment, remember this is after my *first* year, not my second year. I will have a different, more humble opinion by then. I have become totally smitten with the style of institutional analysis that Greif promotes in his 2005 book, and in a number of his papers. From my brief skimming, he characterizes all institutions as a confluence of elements that people recognize and remember. Historically, this has been called a “spirit of the age” or zeitgeist. The narrowest that Greif defines institutions is as a regularity of behavior that everyone recognizes, and sees as external to them. The institution is an irreducible pattern that’s actualized by many different rituals of recognition and remembrance. Which is basically what a spirit is. There are multiple Nash equilibria that can be actualized, it’s not deterministic which ones are present. Economics is a set of tools for testing “plot holes” in the real world. Every story that you can tell about the world has to “make sense” in economic terms. But the “economic variables” constraints etc don’t dictate which story takes place. Many models include expectations, beliefs, interpretive frames without a good investigation of those terms and with a casual inclusion of their relevance. I want to get into that. It sounds fascinating.

How Elastic are Churches to a Pandemic?

There are two main ways that churches can adapt to Covid-19 regulations: changes in service structure and change in service times. Change in service structure can take many forms: Doing church online, having church outside, or having church with people in their cars. Churches alter service times by limiting the number of attendees who can come to a service and encouraging people to attend less popular services.

Churches can generally be divided into two categories: liturgical and non-liturgical. Major liturgical churches include Orthodox, Catholic, High Church Anglican, and some Lutheran denominations. They are characterized by structured services, rituals, and pre-written prayers and creeds. They also typically have an episcopal polity ( not to be confused with the American Epicopal church), which consists of bishops, priests, and deacons. Liturgical churches usually play traditional music. It is common for liturgical churches to have a variety of services throughout the week; some are full services like Divine Liturgies or Masses, and others are shorter vespers (evening prayer) or matins (morning prayer) services. On the other hand, non-liturgical churches will typically have less structured services, spontaneous prayer, and a variety of church governance systems. It is common for non-liturgical churches to only meet on Sunday mornings, although some will also have Sunday night and/or Wednesday night services. Their music is more likely to be contemporary.

Let’s walk through how churches in my life have responded to Covid-19 regulations. The Orthodox church that I attend has done very little to change how the service is conducted, and have mostly adapted by using an online registration system to limit services to 50% capacity and encouraging attendees to go to less popular service times. Attendees who are excluded by capacity limits for Sunday services use other non-Sunday services as substitutes, so demand increases for non-Sunday services. Some alterations to how the services are conducted have been made: icons and the priest’s robe cannot be kissed, people must maintain social distance (4 cubits) while in the church, and people have to bring a health form with them. I learned from talking with friends that local Lutheran and Catholic churches are also doing in person services regulated by online sign-ups. Larger churches like St. Nicholas Orthodox1 in DC and St. Leo the Great Catholic Church2 in Fairfax are also maintaining indoor service and reducing capacity, so it appears that this method of regulatory compliance is quite common and regardless of size, although some churches, like St. Leo the Great Catholic Church2, are not using an online registration system and simply exclude attendees once capacity has been reached.

As for non-liturgical churches, a Southern Baptist church I occasionally visit has moved their service outside in order to comply with Covid-19 regulations without requiring sign-ups or adding services. A non-denominational church in my area has had drive in services. I have also seen some of my non-denominational friends on Facebook posted about taking communion at home. 

The differences in the responses between liturgical and non-liturgical churches should be expected given the differences between their values. Liturgical churches’ more structured services and the spiritual value they assign to the structure makes their service structure inelastic to relative to costs incurred by exogenous shocks like Covid-19. On the other hand, since non-liturgical churches generally do not have a rigid style of service and assign relatively lower spiritual significance to their style of service, they should be elastic to changes in service style. 

Moreover, because liturgical churches have more than just Sunday morning services, demand for Sunday morning services is relatively elastic given the easy availability of substitutes, where the substitutes for Sunday services are the already existing non-Sunday services. Furthermore, since attendees of liturgical churches are used to attending non-Sunday services, they see new non-Sunday services as less costly. However, given that non-liturgical churches often do not have any other services other than their Sunday morning service, the cost of adding new service times will be high and demand will be inelastic. 

The cost of adding new service times will likely be higher for non-liturgical churches because their services typically have higher fixed costs associated with them. The contemporary music commonly played at non-liturgical churches usually requires a multi-person worship team, and A/V team to set up and run sound and powerpoints for the worship and sermon. I believe this is true by and large, but I am unsure of the magnitude of its effect on church leaders.

Non-liturgical attendants are likely to have a more inelastic demand for non-Sunday services. Non-liturgical church attendees very rarely have non-Sunday services, so there is likely a culture that has developed to be resistant to going to church on days other than Sunday. Going to non-Sunday services will feel more foriegn to non-liturgical church attendees; furthermore, they will probably have schedules that do not include free time for church services for days other than Sunday.

The higher fixed costs of non-liturgical church services and the more inelastic demand for non-Sunday services does not mean that it unthinkable for non-liturgical churches to add services to adapt to Covid-19 regulation. This point will become more important as we head into winter. The costs of doing services outdoors will increase as the temperature drops, so if regulations do not change, then some non-liturgical churches who have been conducting outdoor services may transition to conducting services indoors and increase the number of services they offer.  

Given that liturgical churches are inelastic to changes in service structure and elastic to expansions in services, we should expect to see liturgical churches conducting their services in a manner similar to how they were running them before the Covid-19 outbreak, and that they will be complying with new government regulation by limiting the number of attendees to maintain social distancing and encouraging people to attend services that are less popular. In the same way, non-liturgical churches are expected to alter their service structure as their primary means of complying with Covid-19 regulation since they are elastic to service structure change and inelastic to modifying or expanding their service time. 

Liturgical churches’ values have made them reluctant to alter how their services are conducted, so they typically comply with Covid-19 regulations by limiting service capacity and encouraging attendees to go to less popular services. On the other hand, many non-liturgical churches have not had to limit capacity for their services because their values allow them to innovate with their service structure. Innovation and flexibility are generally seen as positive traits in the commercial world, but that is not necessarily the case for the religious world. Churches claim to profess an ancient faith, so making changes to what churches believe or how they worship should be viewed with suspicion. As we have seen, different values and beliefs held by various churches lead to significant differences to how they respond to changes to the environment they exist in.

Recording

Many of you may know that since approximately September 2019, I’ve been recording conversations with people.

I’ve got a couple basic policies to ensure security.

  1. I don’t share the audio with anyone who wasn’t there. 
    1. Even in that case they don’t get the file, they’re just allowed to listen with me.
  2. I will shut it off if it’s absolutely necessary or if someone really doesn’t trust me.
    1. Legality and necessity are not the same thing.
  3. The only other person that I’ll ever share with is my wife.
    1. Girls should consider this before marrying someone other than me, unless they are also marrying their husband for access to his conversation recordings.

So more importantly, why do I do this?

For as long as I can remember, I’ve liked remembering things. Good things, bad things whatever. But my memory often fails me, or things get lost in the gaps. Most people use pictures to store memories, but pictures usually creep me out. Why are recordings the answer?

  1. Pictures are fine, but they are easy to lie in. Most people, even if they’re having an awful time, can smile for five seconds. It’s hard to lie about having a good time over 6 hours of conversation.
  2. We’ve all heard the expression “Would you like to be seen with so and so.” This could have a positive or negative connotation. You don’t want to be seen with an undesirable, and you do want to be seen with a desirable. But again, like with pictures, being seen together is easy to lie with. Rather, we should be asking ourselves, “Would you like to be heard with so and so?” Ask yourself whether your interaction with this other person reflects well on your character, this is true for desirables and undesirables.
  3. When listening to yourself in a recording you gain two things:
    1. A good way of catching ideas that you had in a moment that you lost soon after, that you perhaps said but didn’t have the time to write down.
    2. A moderately impartial perspective on yourself. You may actually be able to see and judge yourself as another person. The interests and passions you feel at the time are not clouding your judgement. Also, the fact that you are listening to a conversation without the impetus to speak gives your mind more free space to actually listen. Hopefully, this habit can be carried over to actual conversation.

Try it. Record a conversation, and listen back to it later. It’s very fun. Trust me.

Toward a Practical Justice Part 2: Adam Smith’s Moral and Economic Psychology

Image result for adam smith rules

Since Hayek’s concept of justice is insufficient, we have to turn no farther than the grandfather of modern economics for a richer understanding of justice and morality that I believe does stand the pragmatic test. In Adam Smith’s first book, The Theory of Moral Sentiments (TMS), he uses the word justice with multiple interconnected meanings.

When brought together these create a moral guide that fulfills both the demand that justice be a practical guide to individual conduct and the higher senses of justice that “social justice” usually tries to satisfy. To talk about justice in Smith, we need first to understand his moral psychology.

To Smith, human life is made up of sentiments towards various people, actions, and objects. These sentiments are developed through experience. We are born with the natural instinct to care for our own pleasure and pain. Through life, we develop a concern for the well-being of those around us such as our family and neighbors, and further we may develop a love for mankind as a whole. Since these outward developments occur so regularly, Smith feels no hesitation to also call them natural sentiments. Our sentiments develop with someone more intimately the closer they are.  There is a “sympathetic gradient” that develops with ourselves at the center and our attachments growing colder as the distance between us and another increases. Sentiments can be built for concrete objects and people or abstract patterns. Sentiments about human conduct we call moral sentiments.

But sentiments in the moment can deceive. Imagine someone sitting in front of you, perhaps a friend that you habitually end up in debates with. In the heat of the moment, when something that they say brings you past the boiling point, is it not natural to want to call them the first nasty name you can think of? Afterwards, remorse usually sets in, and any cool-headed bystander would disapprove of such behavior, no matter how reprehensible the opinion of the victim. Smith says, “This self-deceit, this fatal weakness of mankind, is the source of half the disorders of human life” (TMS 158). Our moral faculties have not left us unarmed against this weakness. “Our continual observations upon the conduct of others, insensibly leads us to form ourselves certain general rules concerning what is fit and proper either to be done or to be avoided” (TMS 159). To make sure our sentiments don’t lead us to disastrous decisions in the heat of the moment, we develop sentiments for general rules of conduct. These general rules help moderate our behavior and temper our partiality.

Smith’s famous example of the Chinese earthquake explains best (TMS 136-37). If a man in Europe is informed of an earthquake that swallows up all of China he may express sympathy, but ultimately it will not affect his sleep that night. If he is informed that the next day he will lose his pinky, that night will be one of the longest of his life. The example demonstrates clearly the sympathetic gradient. China is much farther from me than the two fingers I have resting on “A” and “;” as I type this sentence. Even though that may be the case, if anyone was given the choice between keeping their pinky and saving one billion people, most would make the sacrifice. How can this be the case if they have already confessed a greater attachment to their finger? There is a third inner force at work. Their devotion to the general rule that they must sacrifice what is only a “paltry misfortune” to themselves for the good of an “immense multitude” makes the choice an easy one. The rule saved this poor soul from the blindness of his own partiality.

Another similar tale that Smith tells is of the policy maker. Economic policy is laid out for the well-being of the people, but the policy maker rarely has an intimate relationship with each member of the population their policy will affect, both in terms of personal affection and situational knowledge. “…if you would implant public virtue in the breast of him who seems heedless of the interest of his country, it will be to no purpose to tell him, what superior advantages the subjects of a well-governed state enjoy…You will be more likely to persuade, if you describe the great system of public police [policy] which procures these advantages,” (TMS 186) Smith is appealing to economists. The love of political and economic systems can prompt even the most cold-hearted to work towards the betterment of others.

It is still important to remember that Smith believed that these rules and systems were “ultimately founded upon experience of what, in particular circumstances, our moral faculties…approve or disapprove of” (TMS 159). The general rules grow out of a deeper soil of natural sentiment. They can change over time as experiences accumulate and traditions evolve. They are still respected as rules in themselves, but their purpose remains to adjust people to pursue higher goals and protect them from self-deceit.

If the respect for rules or love of systems gets in the way of those higher goals, we run into the infamous man of system. The man of system may admit partiality in others, but out of “his own conceit” believes the system he has fallen in love with, or the rules that he has developed, trump all others.

“He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the pieces upon a chessboard. He does not consider that the pieces upon the chessboard have no other principle of motion besides that which the hand impresses on them”

Theory of Moral Sentiments pg. 234

We have a level of intimacy with chess pieces that we do not have with the members of a great society. Systems that ignore other forces will lead to disorder. The intimacy that the man of system fails to have is not always one of affection, but also that of situational knowledge. No single system can contain all the “particulars of time and place” that Hayek speaks of in “The Use of Knowledge in Society”.

Next week I’ll show how Adam Smith’s moral psychology reflects upon his broader and more encompassing sense of justice.

Bibliography:

  • Hayek, Friedrich. (1945) “The use of knowledge in society.” The American economic review 35, no. 4: 519-530.
  • Smith, Adam (1759) The Theory of Moral Sentiments. Liberty Fund.

The Projections of Classical Political Economy & Marx’ Solution in Alienation

This is an essay I wrote for my Karl Marx class this semester.  Expect more along these lines.

Image result for adam smith vs. karl marxMarcus Shera

PHIL 325

Kurt Brandhorst

10/4/17

 

 

The Projections of Classical Political Economy & Marx’ Solution in Alienation

 

  • Introduction

 

The Karl Marx that inhabits the mind of many today is a gung-ho advocate for the working class, revolution, and a communist paradise.  What else would one assume of the man who wrote a book called “THE COMMUNIST MANIFESTO”?  While this image is not wholly wrong it confuses what made Marx unique among the socialists of his day.  Marx had a disdain for those whom he called the “utopian socialists”; those who were enamoured by the paradise that communism, socialism, and other utopian ideals theoretically promised them.  Marx’ project was of a very different flavor.  He was not concerned with the reorganization of capitalist society to fit the needs of the less fortunate, a plan that could have aligned with the utopian dreams, but to overhaul the system completely and show its inherent flaws.  

His focus was on showing the instabilities in the current system, and doing very little to speculate about what was to come in the future.  His obvious adversaries would be the figureheads of economic analysis in favor of the current system at the time, those who we today call the classical economists.  Their economic thought was built on certain categories, ideas, and presuppositions that were sourced from their individual assumptions about the world around them.  These assumptions included the necessity of private property, the separation of the categories land, labor, and capital, and subsequently wages, profit, and ground rent.  Marx’ critique was to show that these relationships which they held to be self-evident were in fact quite weak, and were an attempt to justify the economic chaos of capitalism.  What Marx did was reanalyze the same world from a different, more real starting point, the relationship of the human to his world; in economic terms, the laborer to his product.  Marx resulting analysis of capitalism from this perspective is what becomes the theory of alienation.

In this paper, I will describe how Marx analyzed these particular ideas in the Economic and Philosophic Manuscripts of 1844, and how he re-grounded his economic analysis of capitalism on the  relationships between labor and objects that result in alienation.  I will conclude with some criticisms and alternative approaches from other economists contemporary to and after Marx.

 

  • The Foundations of Classical Political Economy

 

Often considered the godfather of modern economic thought, Adam Smith theorized in An Inquiry into the Nature and Causes of the Wealth of Nations (1776) what it was that made some nations wealthier than others.  He offers a number of explanations, most notably that men are more productive when they divide their labor among one another.  From him developed theories of other influential economists like David Ricardo, Frederic Bastiat, and John Stuart Mill.   

In the Economic and Philosophical Manuscripts of 1844, Marx outlines certain presuppositions that these thinkers took for granted and attempts to explain their existence while simultaneously destroying their necessity.  Taking from the tradition of the Young Hegelians and Ludwig Feuerbach, Marx believed that man projected his ideas onto the world and did not indifferently receive the “truth” through senses or rationality.  Feuerbach analyzed how man projected religious ideas onto the heavens, while Marx analyzed how the economists projected private property and other economic categories onto the world around them.  “Let us not be like the political economist who, when he wishes to explain something, puts himself in an imaginary original state of affairs. … Similarly, the theologian explains the origin of evil through the fall, i.e. he presupposes as an historical fact what he should be explaining.” (McLellan 86)  Political economists would assume a state of nature that presupposed those categories that their theories were built upon, the individual, his rights, and thus his property.  

The position that Marx notes the classic economists start from is private property.  The relationship of owner to owned is primary.  It is from this relationship that they derive the concepts of the different economic goods to be owned.  The major categories of economic goods were Labor, Capital, and Land, however Marx notes that there is absolutely no reason to separate these categories.  The economists only feel the need to separate these as they have accepted these categories from their experience in their specific economy.  “Political Economy starts with the fact of private property, it does not explain it to us….  Political Economy does not afford us any explanation of the reason for the separation of labor, and capital, capital and land.” (McLellan 85)  From private property, the only force that drives the economic agent in capitalism is greed and the competition that results from said greed.

Marx lists a number of things that the economist haven’t been able to explain as of yet with their theories as they are based on private property.  “…new contradictions have arisen it its doctrines, of example, between that of monopoly and that of competition, freedom of craft and corporations, division of landed property and large estates.  For competition, free trade, and the division of landed property were only seen as fortuitous circumstance created by will and force, not developed and comprehended as necessary, inevitable, and natural results of monopoly, corporations, and landed property.” (McLellan 86)  How can monopoly exist in a world grounded on competition?  How can there be free trade when corporations exist?  Is the feudal system really overturned when capitalist estates are just as large?  Marx attempts to solve these problems by basing economic analysis not on the relationship of owner and property, but on the relationship between human and product.  This is a relationship that is in fact necessary to every human society, unlike the arbitrary projections that the political economists made onto the world.

 

  • Marx’ Answer in Alienation

 

Marx begins his regrounding in the Economic and Philosophical Manuscripts of 1844 with the statement, “We start with a contemporary fact of political economy: The worker becomes poorer the richer is his production, the more it increases in power and scope.  The worker becomes a commodity that is all the cheaper the more commodities he creates.  The depreciation of the human world progresses in direct proportion to the increase in value of the world of things.  Labor does not only produce commodities; it produces itself and the laborer as a commodity  and that to the the extent to which it produces commodities in general.” (McLellan 86)  This is the beginning of the concept of alienation, and it is from this necessary relationship that Marx analyzes capitalism.  

He elaborates on four aspects of alienation:

  1. The laborer in the capitalist mode of production, alienates his product from himself when they are owned now by the capitalist through the imagined system of private property.  This creates a world of things and traded commodities opposed to the human world.  Just like in religion a creation of man is subsuming the products of man.  “It is just the same in religion, The more man puts into God, the less he retains in himself.” (McLellan 87)
  2. The laborer must make the labor itself a commodity and he now stands opposed to himself.  Labor is forced upon him, and it is no longer his home.  He is slave to the whims of his economic conditions.  His only solace is “leisure time”, that time that he is not producing any good.  He consoles himself with his animal functions; eating, drinking, procreating etc.
  3. The third aspect is derived from the other two.  Man is now alienated from his species-being.  When nature is alienated from man, and then man alienated from himself, labor is now only a tool to serve his individual interests.  The only reason for life and labor is to further extend one’s own life.  Labor extends life, but it does not produce authentic human life.  Human labor no longer retains the purpose of living in the species, but in putting the individual interests ahead of species interests, denying an important part of the human essence.
  4. As man is alienated from his species, he is now also alienated from other men.  Man relates not to other real members of his species, but to them as other commodities vying for a position in the labor market.  “…the relationship of man to himself first becomes objective and real to him through his relationship to other men.  So if he relates to the product of his labour, his objectified labour, as to an object that is alien, hostile, powerful, and independent of him, this relationship implies that another man is the alien, hostile, powerful, and independent master of this object.”  (McLellan 92)

The relationship between worker and product can explain the apparent contradictions in political economy by collapsing the categories into a single necessary one, the human category.  Private property can now explain itself.  What private property in fact is, is the consequence of the now created world of things.  It is man’s attempt to explain and justify his own alienation.  “But it is evident from the analysis of this concept that, although private property appears to be the ground and reason for externalized labour, it is rather a consequence of it , just as the gods are originally, not the cause but the effect of the aberration of the human mind…” (McLellan 93).  The theoretical positions of private property and labor are now flipped.  

The concept of wages and prices are now subsumed as well.  They become one with the mechanism of private property, they are a system used to explain and justify the exchange and patterns of the world of things; the world of commodities that are created by alienation.  “..wages and private property are identical: for wages, in which the product, the object of the labour, remunerates the labour itself, are just a necessary consequence of the alienation of labor.” (McLellan 93)  It is also worth noting that this is why Marx refused the idea that raising wages or redistributing products would solve the issues of capitalism.  The problem was that the world of things was siphoning life out of the human world through the processes of alienation.  Any reorganization of that world would do no good to close the gap.  This is what he often saw in other socialists such as Proudhon.

The only solution to alienation was then to destroy the concepts that kept it alive.  The abolition of private property was the only means of truly liberating the workers and thus humanity.  Marx’ had offered a bedrock for analysis of capitalist economy that made no unnecessary assumptions in the style of the political economists.  Marx had no need to explain how socialism would work.  All that he needed to show was that capitalism inherently contained a flaw that alienated humans from their products, themselves, their species, and each other.  What happened after class consciousness was obtained and private property was abolished was not an issue to him yet.

 

  • Alternate Criticisms

 

Marxian critique itself is hotly debated, but what is rarely brought into question is the necessity to critique those presuppositions the classical economists held that seem so arbitrary in hindsight.  The following are other approaches that critique both the classical economists and Marx’ fashion of critique itself.

 

  • Carl Menger and Subjective Valuation.

 

Marx was certainly not the only one to realize that classical political economy had presupposed its categories.  Carl Menger, an Austrian economist, similarly noticed that the economic categories which the classicals had devised were wholly arbitrary.  He was also concerned that they could not explain the effect that the buyers in a market had on the price and organization of production.  Their theory of price determination rested on the costs of production to the seller, and the theory that the value of a good derived from the labor time necessary to produce it.  This theory of value was also taken up by Marx. Price determination was calculated by analyzing the nature of the production costs of goods in broad categories which they had arbitrarily designed.  The nature of the goods was what determined the actions of the economic actors.  In Marx’ terms, the human world was a slave to the world of things.   

Carl Menger made a similar move to Marx when he re grounded economics on the human, but instead of the relationship between laborer and product he grounded it  on human action.  “Man is himself the beginning and the end of every economy.” (Salerno)  He developed a perspective later known as subjective valuation, in which each action by humans was a result of one attempting to satisfy their own perceived need.  The economic categories that the classics needed to explain their theories were no longer necessary. Private Property, wages, and prices are not explained by the nature of economic goods in the world of things, but on the terms of each individual’s subjective valuation.  Marx would respond to Menger by revealing that his system never in fact overcame the process of alienation.  Marx believes that alienation is inherent to the capitalist mode of production.  When Menger says that humans act to satisfy their subjective needs and wants he shows precisely what Marx meant by alienation from species-being.

 

  • Ludwig von Mises and the Socialist Calculation Debate

 

Ludwig von Mises was a student of Carl Menger and participated in a series of debates with socialists now known as the socialist calculation debate.  Mises conceded the Marxian idea that if private property were abolished, humans would be able to put species or collective interests in front of individual interests.  Marxism, by being primarily a critique of capitalism, avoided criticism of any specific form of socialism as it made no central claims as to what a post-private property world would look like.  Mises thinks this an unsafe outlook to base a social movement on.  “There is a danger, however, in examining socialism only indirectly through a study of capitalism: Potential problems of socialist organization are apt to be ignored.”  (Lavoie 29)

Mises problem with Marxism is in the role that he saw property rights and prices played in the economy.  They functioned in Menger and Mises’ systems as guides that told economic actors more about the economic conditions that were outside the bounds of their knowledge.  No one economic actor could contain the total economic knowledge needed to make decisions, and prices through private property and exchange reflected this knowledge to them indirectly.  If man is to live as a species-being it necessitates the organization of a central plan and a realized economic order without prices or private property.  Therefore, Marxian socialism would need to overcome Mises’ knowledge problem.  “…if, as Mises calculation argument contends, there is a fundamental flaw in Marx’s socialism, this error must also be reflected somewhere in the Marxian analysis of capitalism.” (Lavoie 30)

 

  • Conclusion

 

Marx realized that the classical economists were projecting their own explanations and justifications for the society that they lived onto the world around them.  He was able to explain their reasons for creating these ideals through the theory of alienation.  Private property, wages, and commodities can all be understood as a coping mechanism with the process of alienation.  Private property alienates the laborer from his product, and then out of necessity private property is designed to make this relationship appear necessary.  Marx was not the only one who argued against the classical economists shortcomings, but his particular theory was one of the first and most systematic attempts to rigorously critique classical political economy in order to overcome it.

 

  • Works Cited

 

  1. Marx, Karl, Selected Writings, 2nd edition, D. McLellan (ed), Oxford University Press, 2000
  2. Salerno, Joseph T. Biography of Carl Menger: The Founder of the Austrian School (1840-1921). Mises Institute, 18 Aug. 2014, mises.org/library/biography-carl-menger-founder-austrian-school-1840-1921.
  3. Lavoie, Don. “Chapter 2: Marx’s Socialism.” Rivalry and Central Planning: the Socialist Calculation Debate Reconsidered, Mercatus Center, 2015, pp. 28–48.