Friday, January 31, 2014

Economic Motivation (1)

A basic principle of modern economics is that all economic behaviour is motivated by self-interest. Self-interest is a powerful motivator of economic activity, but it seems to be contrary to Christian morality. Capitalism has lifted economic well-being in an amazing way, but capitalistic economic theory seems to require people to pursue their self-interest exclusively. The pursuit of self-interest supports economic growth, but it does not fit well with Christian morality. This is a conundrum that needs a solution.

Some economists advocate dropping traditional morality and encouraging people to think only of themselves (see Capitalism without Guilt). Christians cannot accept this option, so we need a better option. We need a theory of economic behaviour that does not contradict Christian morality. The solution is not to drop Christian morality, but to understand that modern economic theory is incorrect in assuming that all economic behaviour is motivated by self-interest. This assumption only explains some economic behaviour. For example, most people care for their families. Many people show amazing generosity to people in need. Sometimes it is self-serving, but often it is not. Economic thinking has to go beyond self-interest to explain altruistic behaviour.

The insight I gained from scholastic economics is that everything we do is for a person. Things are means to achieve ends, which are persons. The big question is which person.

The New Testament specifies five categories of person our actions can serve.

1. God
God is so amazing that everyone on earth should love him.

Love the Lord your God with all your heart and with all your soul and with all your strength and with all your mind (Luke 10:27).
Jesus said we are to love God with all we are. God must come first in everything. We must love him, because he is worthy. Love of God should drive all our actions and behaviour. Love of God takes priority over love of self and love of neighbours, but it does not contradict them, because he has not commanded us no to love ourselves.

2. Self
Loving yourself is normal. Most people to do it naturally.
Love your neighbour as yourself (Luke 10:27).
When Jesus said we should love our neighbour as our self, he recognised that it is natural for humans to pursue their self-interest, ie to love oneself. There is nothing wrong with that. We are expected to nurture our bodies (Eph 5:29). We are to seek God’s blessing (Luke 6:21). We love ourselves naturally, because that is the way that God has created us.

3. Family
Husbands and wives are required to love each other and to love their children.
Husbands ought to love their wives as their own bodies (Eph 5:28).
We must love our family and have a responsibility to provide for them and care for them.

4. Neighbour
Jesus commanded us to love our neighbour.
Love your neighbour as yourself (Luke 10:27).
This command extends beyond our immediate family to those who live close to or work with us. Jesus radicalised this command by extending the boundary of who is our neighbour to include all the people we encounter during everyday life. His definition includes people from different ethnic and social groups that we meet up with in various ways.

5. Others
The “Others” groups includes all the other people in the world, beyond our neighbours. Jesus said,
Do to others as you would have them do to you (Luke 6:31).
The thieves working on the road from Jerusalem to Jericho were others, not neighbours of the Good Samaritan. People living in other countries are others in this context. We should treat others as we would like to be treated.

We are not required to love others as ourselves, or as our neighbour, as that would be impossible. Rather we are required to do to others what we would have them do to us. We do not expect others to love us, because they do not know us. However, we would like them not to harm us. We would like them to exchange their surplus production with us. We would like them to sell their expertise, if we have need of it. We do not expect them to provide stuff to us for free, because they do not know us. If we have skills that would benefit them, we would like supply them to us in return for an appropriate payment.

Monday, January 27, 2014

Redeeming Economics (13) Two Problems

The book Redeeming Economics by John D Mueller has a couple of serious weaknesses. First, he advocates natural law. Natural laws are those that can be derived by human reason, rather than by revelation. The problem with natural law is that almost anything can be derived by human reason, depending on the starting assumptions. If the natural law theologian begins with Christian assumptions, they do not want to far from the truth. When secular assumptions are applied, natural law can go anywhere.

The other problem with the book is that Mueller adopts Aristotle’s theory of distributive justice. Aristotle was an advocate of political power, so he believed that every government must have a principle for distributing goods among its citizens.

The scholastic “economists” favored both voluntary and socially organized redistribution of wealth to favor the less fortunate. But they also recognized that the capacity for such giving is always limited by the fact of scarcity. Absolute equality of wealth or income is neither practically possible nor useful to society, since it would require abolishing private property with its triple advantages of productivity, order and social peace. Policymakers’ direct control does not extend beyond what the government can tax, subsidize or regulate.
This approach to distributive justice has been used to support the redistributionist policies of modern governments. This is a dangerous trend, because compulsory redistribution by taxation is not supported by the scriptures.

Saturday, January 25, 2014

Redeeming Economics (12) Interest

In his book Redeeming Economics, John D Mueller has some interesting insights on the issue of interest. The scholastic economists were opposed to interest. Mueller explains the reason. They had adopted an assumption from Aristotle that economic growth does not take place. Based on their experience, this assumption seemed quite reasonable.

They adopted Aristotle’s assumptions that the population and its average standard of living does not increase—because mankind in general had never experienced a substantial and sustained increase of either. One reason they had not increased was that the average length of a human life had not increased… Average life expectancy in England in the fourteenth and early fifteenth centuries—twenty-four years—was about the same as it had been in the Roman Egypt…. Twenty-four years is too short for the average person to acquire much human or nonhuman wealth, so per capita real income was close to the subsistence level, and average annual real economic grow during the whole period was approximately zero (p.34).
This assumption was a weakness in their economic theory. When the standard of living began to grow during the mid-sixteenth century, they could not explain it. It also affected their understanding of interest.
The scholastic assumption that economies did not grow was directly relevant to the controversy about interest and usury… The scholastics carefully analyzed the components of interest and resolved them into three: the risk of loss (damnum emergens) when the borrower defaults or repays the loan in depreciated money; the opportunity cost of forgoing income from alternative investments (lucrum cessans); and the pure interest (interesse) excluding these factors. A consensus allowed for the charging of interest to compensate for risk of loss, but it did not allow charging pure interest, while there was disagreement about whether it was right to expect compensation for opportunity cost.

A stagnant economy, the kind the early Scholastics routinely assumed, rarely produces aggregate business profits, because new production at best replaces goods consume directly and the human and nonhuman capital used up in the process (p.35).
Mueller suggests that the reason the Scholastics objected to pure interest was empirical rather than moral. They believed it was impossible to get a return on an investment, so pure interest could not exist. If someone was able to get a return, it was because they were exploiting other people.

Friday, January 24, 2014

Redeeming Economics (11) Smiths Folly

In his book called Redeeming Economics, John D Mueller is strongly critical of Adam Smith. He explains the sources of his confusion.

There are three keys to understanding Smith, both as a philosopher and as an economist: his moral Newtonianism, his philosophical Stoicism, and his Sophistical view of rhetoric.

First, Smith was in friendly competition with his older friend David Hume to do for moral philosophy what he believed Isaac Newton had done for natural science: to reduce all its phenomena to a single familiar principle, like gravity. He was always aiming, as he put it in an unpublished manuscript, “to see the phenomena which we reckoned the most unaccountable all deduced from some principle (commonly a well-known) and all united in one chain.” He wanted an economic system with one basic element, not four.
Second, having rejected his Christian baptism well before writing the Wealth of Nations, Smith was a wholehearted convert to the ancient Stoic philosophy–and Stoics are pantheists.

There are two ways in which the providence of Stoic pantheism differs from the biblically orthodox version of Augustine and Aquinas. First, the Stoic god is not a creator, but the world-soul of an eternal and uncreated universe that goes through endless identical cycles of expansion and contraction. Second, it necessarily follows that humans are not creatures endowed with free will, but rather appendages of God fated to do everything they do, good or bad. According to Augustine’s more logically consistent theory of providence, the order in markets and society comes entirely from the virtue (itself a kind of order) that remains even in bad people as long as they exist.

Finally, Smith was much more proficient (and interested) in rhetoric than in logical, systematic analysis. When first hired by the University of Glasgow as Professor of Logic (he later became Professor of Moral Philosophy), he immediately changed the course to teach rhetoric instead of the prescribed logic and metaphysics. Moreover, as his lectures and unpublished papers make clear, Smith disagreed fundamentally with Aristotle about the nature of rhetoric.

According to Aristotle, the purpose of rhetoric “is not to persuade, but to discover the available means of persuasion in a given case.” Why? “In Rhetoric, as in Dialectic, we should be able to argue on either side of a question; not with a view to putting both sides into practice–we must not advocate evil–but in order that no aspect of the case may escape us, and that if our opponents make unfair use of the arguments, we may be able to refute them.”

Smith’s view of rhetoric, in contrast, resembled that of the Sophists who opposed Plato and Aristotle, by placing a higher value on whether a statement is useful to the speaker than whether it is an accurate description of reality. Smith taught his students, “The Rhetoricall [discourse] again endeavours by all means to persuade us; and for this purpose magnifies all the arguments on one side and diminishes or conceals those that might be brought on the side contrary to that which it is designed that we should favour.” And this, as we will see, is exactly how Smith presents his economic theory.

Smith’s moral Newtonianism induced him to oversimplify the economic theory he had inherited. In his earlier Theory of Moral Sentiments, he tried to reduce all moral philosophy to the single sentiment of sympathy; Smith attempted in the Wealth of Nations to explain all economic behavior by the single principle of labor–but he never achieved a theory that could reconcile these two.
Smith’s philosophical Stoicism accounts for his rejection of some elements of the scholastic outline and retention of others. In the Theory of Moral Sentiments, Smith rejected the scholastic theories of final distribution and utility on the grounds that they presume rational, purposive behavior.

In Smith’s view–and here the pantheism becomes apparent–decisions about ends and means, rather than being decided by human beings, are ultimately dictated to them by an inscrutable Stoic version of providence, which engages the vast majority of humankind in a “deception” about the “real satisfaction” afforded by economic goods. By systematically manipulating human emotion, the Stoic Author of Nature supposedly “rouses and keeps in continual motion the industry of mankind,” luring most people (except the Stoic sage) into vice. The rich are seduced by greed into “selfishness and rapacity,” while the “mob of mankind” is corrupted by envy of the rich. Yet all is for the best. To satisfy their “vain and insatiable desires,” the rich few must employ the envious mob, and so “they are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among its inhabitants.”

Smith’s famous “invisible hand,” therefore, is not a summary of his economic analysis; it is a rhetorical plug that he substitutes where the two elements of economic analysis that he eliminated are required: the scholastic theories of final distribution and utility. Moreover, “invisible hand” is a thoroughly apt metaphor: his philosophy reduces humans to puppets compelled to act by hidden manipulation.

Since Smith treats final distribution and utility by omission rather than revision, it is easy to overlook their significance when we come upon the passages in the Wealth of Nations in which their omission is signaled.

Smith’s elimination of Augustine’s theory of personal distribution from the outline of economic theory is signaled in the passage that includes his famous declaration: “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. We address ourselves not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.”

In Augustine’s theory, the main reason the brewer or baker doesn’t serve his customers from beneficence is not exclusive self-love, but rather the fact of scarcity: if the baker shared his bread equally with every customer instead of charging for it, he would leave himself and his family too little to live on. Augustine’s theory also explains why the brewer or baker shares with his family or friends but not with his business customers: he loves his customers only with benevolence (wishing good to them) with both benevolence and beneficence (doing good to them). He sells his product to customers to earn the means to provide for himself and the rest of his family.

Augustine’s theory of personal distribution explains the essential difference between a gift and an exchange, and provides a measure of how far each of us actually is motivated by self-love and how much by love of neighbor. By treating self-love as the only motive of economic behavior, Smith replaced Augustine’s empirically verifiable theory of personal distribution with an arbitrary and often false assumption: that no one ever shares his wealth with anyone else. Both classical and neoclassical economics implicitly assume that we’ve always already made our choice of persons–and have always chosen “number one”: ourselves.
Smith fails to grapple with the fact that charitable behavior simply does not fit into a theory that reduces all human transactions to exchange and self-love. He never explains why customers never expect their dinner from the butcher’s beneficence, yet his friends occasionally and his children always expect it.

Shortly after dismissing the scholastic theory of final distribution with this assertion about universal self-love, Smith dismisses the scholastic theory of utility by posing what is sometimes called the “paradox of value.” Without offering a solution to this apparent paradox, Smith rhetorically throws up his hands and abandons discussion of value in use, as if the concept were absurd.
This is a case in which Smith “endeavours by all means to persuade us; and for this purpose magnifies all the arguments on one side and diminishes or conceals those that might be brought on the side contrary to that which it is designed that we should favour.” Though Smith twitted Hume in the Theory of Moral Sentiments for retaining Augustine’s theory of utility, students’ lecture notes show that Smith continued teaching it for several years in his own university lectures, posing the same paradox involving diamonds and water he later raised in Wealth of Nations, and easily resolved it along scholastic lines, explaining the difference in value by the combination of utility and scarcity.

Thursday, January 23, 2014

Redeeming Economics (10) Personalism

In his book called Redeeming Economics, John D Mueller explains the difference between individualism and personalism.

The scholastics (and “neoscholastics” like Wicksteed) adopted Augustine’s method of personalism, which recognizes the moral freedom and responsibility of each person to make free choices about both the ends and means of economic activity. The fact of personal interdependence is expressed above all by the fact that every person, like every community, has a distribution function. Utilitarian philosophy adopts a method of individualism, largely ignoring the fact of relationships among different persons and assuming that everyone has the peculiar kind of distribution function in which all goods are distributed to the self. For the same reason, Utilitarianism can treat a household or larger community only as if it were a single organism— not a “unity of order” arising from, and explainable by, the choices freely made by persons who recognize and act upon their interdependence. The modern Utilitarians have therefore missed—as Philip Wicksteed did not—the most important lesson that the mother has to teach: All human action, including economic activity, is done by persons and for persons. Human economic activity is not ultimately done by “individuals” for “utility.”

Let’s pause and summarize what we learned from observing the mother. The first thing to observe is that we are not dealing with an individual, but with a person—that is, (whatever else this term might mean) someone with a number of relationships to others. She is somebody’s wife (offstage at the moment), the mother of at least three other somebodies, and the mistress of a cat. She is someone’s daughter, someone else’s granddaughter (perhaps deceased but not forgotten), and possibly also someone’s sister, aunt, cousin, or niece. She is someone’s friend, and someone’s neighbor. Part of the time, she is also someone’s employee or manager or co-worker. She may be a room mother at her child’s school, or manager of her child’s soccer team. She is the customer of many businesses. Since she considers volunteer work, she may have some role in another community organization. Since she belongs to a church or other religious community, she presumably considers herself a daughter of God, but also may find herself on the education committee. The list, though perhaps exhausting, is far from exhaustive. Considering one woman, therefore, has uncovered a complex web of personal, social, and cultural relationships. And these in turn revealed a definite organization of the society in which she lives: a neighborhood of similar households, voluntary organizations and religious institutions, public or private schools, and presumably one or more levels of government, though we have not glimpsed them directly.

The chief fact of economic organization is that the woman lives with her husband and their children in a household. We note that the ownership of resources is mostly private: the mother and father presumably legally own all the property of the household, as well as their own human resources. But this ownership involves two distinct aspects: its disposition and its use. The parents own and dispose of all the property, but they themselves do not use all the property. Beyond their own use, they allocate a large part of the household’s resources for the use of their children, each of whom has his or her own scale of preferences for goods, but does not yet contribute (much) to acquiring them.

In addition, we saw that the couple chooses to contribute some part of their resources to persons or organizations outside the household. And we assume that they are required to pay taxes, which will be used either to purchase some public goods or transferred to members of some other household. Her husband brings home a money income, probably by working for a business firm (though possibly for a non-profit organization or government), and she also spends some time in the labor market, though usually not as much as her husband. Mostly with the proceeds from such employment (along with any property income or gifts received), they purchase things that have been produced and distributed by such business firms. She and her husband then combine these purchases with their own services for ultimate distribution and use by the various members of the family. And this final use, so far as we can tell by observation, is the ultimate purpose of their economic activity: it is last in the sequence of time, but first in the sense that everything has been planned and executed with this goal in mind. We have thus reached the “end of economics.”

Wednesday, January 22, 2014

Redeeming Economics (9) Scarcity

In his book called Redeeming Economics, John D Mueller discusses Augustine's thinking about scarcity.

We noted that St. Augustine’s insight is crucial in understanding the implications of scarcity for moral choice. What does it mean, he asks, to “love your neighbor as yourself”? Loving someone means willing that person some good. What this involves depends crucially on whether the good involved is “diminished by being shared with others”—that is, scarce.

Though all goods with a material dimension are finite, some are normally so abundant (for example, fresh air at the earth’s surface) that we loosely speak of them as “free.” But we realize that this is not literally the case, when we consider exactly what is involved in providing sufficient air to astronauts in outer space, to divers or submariners under the sea, or to miners far below the earth’s surface. Even at the earth’s surface, fresh air can be diminished by pollution. To be literally free, a good would have to be infinite.

As a Christian, Augustine could conceive of infinite goods such as the love of God or eternal happiness. And he argued that all men can and should love each other equally in wishing other persons such goods. But Augustine also pointed out that we cannot actually give others such a good, only wish it for them. Moral philosophers have traditionally called this kind of love benevolence, or “goodwill.” If love is taken to mean actually sharing one’s scarce goods (which include one’s time and affections) to that person, Augustine says that it is flatly impossible to love every other human equally. Moral philosophers have traditionally called this kind of love beneficence, or “doing good.”

Augustine’s sensible position is that no one is morally obliged to do what is impossible. Therefore, loving your neighbor as yourself cannot mean doing good equally to everyone. “Since you cannot do good to all, you are to pay special regard to those who, by the accidents of time, or place, or circumstance, are brought into closer connection with you.” Differential calculus would not be invented for some 1200 years, but Augustine expresses the idea of “declining marginal significance” by posing the problem of an indivisible good: “Suppose you had a great deal of some commodity, and felt bound to give it away to somebody who had none, and that it could not be given to more than one person; if two persons presented themselves, neither of whom had either from need or relationship a greater claim on you than the other, you could do nothing fairer than choose by lot to which you would give what could not be given to both. Just so among men: since you cannot consult for the good of them all, you must take the matter as decided for you by a sort of lot, according as each man happens for the time being to be more closely connected with you.” Thus Augustine puts the fact of scarcity squarely at the center of moral decision-making.

And all the scholastic “economists” followed him. For example, Thomas Aquinas, after noting that the word "neighbor" denotes the reason for loving—“because they are nigh to us, both as to the natural image of God, and as to the capacity for glory"—concludes, "The mode of love is indicated in the words as thyself. This does not mean that a man must love his neighbor equally as himself, but in like manner as himself."

By way of illustration, consider the famous story of the Good Samaritan, the classic case of “loving one’s neighbor as oneself.” On the road from Jerusalem to Jericho, a Samaritan came upon a Jew beaten by robbers and left for dead. A priest and a Levite—that is, two religious officials of the same faith and nationality as the beaten man—had already seen the man and passed him by. A Samaritan in the 1st Century A.D. had roughly the same relation to a Jew as a Palestinian Arab does to a modern Israeli, or a member of Afghanistan’s Taliban to a modern American. Yet the Samaritan stopped, treated the man’s wounds as best he could, and transported him to an inn.

We are told that the Samaritan paid about two days’ wages in cash to the innkeeper to look after the victim, and promised to pay any further costs on his return. He must have lost at least another half-day’s wages stopping to help. The decision cost him at least half a week’s wages, or 1 percent of his annual income, on the spot. For someone earning $50,000 a year, that would be equivalent to handing out at least $500 in cash for a stranger. The Good Samaritan loved his neighbor “as himself” in the sense that, unlike those who passed by, he treated him as a person like himself. But the gift represented half his income for a week, not for a year or for the rest of his life. He loved his neighbor as himself, but not equally with himself. (I imagine the Good Samaritan’s wife, when he returned home, saying: “You gave what!? To whom?!”).

Common sense and simple arithmetic tell us that St. Augustine was right: the number of human beings with whom it is possible to share one’s scarce goods equally is limited to the fingers of two hands (or even one hand). For most people, substantially equal sharing is limited to their immediate relatives. But it need not be so. It would be entirely feasible for an otherwise unattached person with an average income to share it equally with five close friends, or with five strangers, rather than with five family members. People do it all the time: for example, when joining a religious community. Moreover, most of us can and do voluntarily contribute something to help those in need to whom we are not related. Christians are told that that their lives will be judged on this. “If you do good only to those who do good to you, what virtue is there in that? Even sinners do the same.”

Tuesday, January 21, 2014

Redeeming Economics (8) Crime

In his book called Redeeming Economics, John D Mueller discusses crime and hate.

Just as modern economists have tended to explain love in terms of utility, many have tried to explain crime and other antisocial behavior in terms of utility. Gary Becker was also the leader in expounding this theory...

Like love, crime is not explainable solely in terms of utility. Most people do not commit crimes, even though doing so would increase their wealth (after allowing for the probability of punishment), thus raising the expected total utility of their wealth. To argue that most people must receive utility from not committing crimes reduces the theory to a tautology; it is unscientific, because it renders the theory unfalsifiable.

Crime, or any other kind of subjugation, is the reverse of love. Rather than a gift or voluntary transfer payment given, it is an involuntary transfer payment exacted. In both cases, the motivation of the transfer depends essentially on a weighing of persons, not a weighing of utilities. In gifts (voluntary transfers), the significance of the other person is either positive (for someone who receives a gift) or zero (for someone who doesn’t). In the case of a crime, the criminal gives himself a positive and the victim a negative significance. If I take what belongs to you against your will, I am giving myself a positive significance in a distribution that exceeds 100% of my own resources, and giving you a negative significance in the “distribution.” I may take something from you, or I may destroy something belonging to you. Just as loving one other person half as much as oneself is mathematically equivalent to loving one-and-a-half persons equally, increasing one’s wealth by half through stealing from another persons is mathematically equivalent to loving “two-thirds of a person” equally with oneself. But the number of persons loved equally is always greater than zero, because one always loves oneself.
Here is Mueller's summary.
Crime, like love is essentially not a weighting of utilities, but a weighting of persons. Thus it is always a moral decision. A crime consists in depriving a person of something that belongs to him, giving that person a negative significance in the distribution of goods (pp.109-110).

Monday, January 20, 2014

Redeeming Economics (7) Altruism

In his book called Redeeming Economics, John D Mueller discusses the nature of altruism.

Modern economists are schooled to explain everything in terms of utility, including human love and hate. For example, when Kenneth Arrow considered the nature of “altruism,” he posed three interpretations, all based on utility... The only difference among these three explanations is what kind of utility is supposed to explain altruism—the satisfaction at perceiving others’ satisfaction, the satisfaction at contributing to others’ satisfaction, or the satisfaction of feeling more secure in one’s own possessions as the result of pursuing “enlightened self-interest.” Arrow added, “This classification is not exhaustive, or even exclusive”; but he did not suggest that there is an explanation based on any principle other than utility.

As we have seen, the notion that calculations of utility explain all human action is also at the heart of Becker’s “economic approach to human behavior.” By reducing all human behavior to utility, Becker ‘s approach requires that each person treat other persons for economic purposes only as objects, much the way the mother regards the milk. He argues that people get married or have children “because they expect to increase their utility.” He says that “if more is voluntarily spent on one child than on another, it is because the parents obtain additional utility from the additional expenditure. . .”

In contrast to Becker’s “economic approach to human behaviour,” the main tradition of economic theory has always been based on Augustine’s “human approach to economic behavior.” The logic of economic theory is quite clear that love cannot be based on utility, for the simple reason that utility is derived from love. To love a person for his or her own sake is precisely to treat him or her as an end; and it is only because there is such an end that the means selected to serve that end (like milk or college tuition) have any value. To say that love is based on utility is therefore incurably circular.

In economic theory, human love is essentially neither an emotion nor a weighing of utilities (though these may also be present) but a weighing of persons. If I weigh another person as equal to myself, and the needs and preferences of that person are similar to mine, then I give him or her the use of half of what I have: it’s that simple. If I weigh several people as equal to myself, I divide my property or income equally among all such persons including myself. (If the needs or preferences of the persons differ from mine, I weight—that is, multiply—the marginal significance of the goods by the relative significance of the person.) In other words, loving someone does not increase one’s utility. Rather, our estimate of other persons’ importance, relative to our own, determines how much we are willing to lower our own utility to love them. The relative weight of the self versus other persons is described in each person’s “distribution function.”

Rather than an exchange, love is best described in economic theory as a gift, or voluntary “transfer payment”—that is, a distribution out of one’s resources not made in compensation for useful services rendered. The size of the transfer payment is determined by the resources of the distributor and the relative importance of the recipient in the eyes of the distributor.

Likewise, mutual love (as it is ideally in marriage) is not essentially an exchange of utilities, though of course a mixture of gift and exchange is possible. Mutual love is best viewed as a simultaneous pair of gifts or voluntary transfer payments, of which there is no reason to believe that any equality in gifts should apply—except in the special case in which the resources of each person and their respective estimates of the importance of the other person happen to be exactly identical. But even in this case, the utility of the two gifts for their recipients cannot be assumed to be equal.

Objectively speaking, love always involves sacrifice, regardless of how the person loving feels about it: she may be happy or sad, willing or resentful, or all of these alternatively. The love is expressed by what she does, not what she feels. And it is probably more often the case than not, that the feelings follow the doing, not vice versa.
Mueller applies this to the Mother's Task.
Rather than increasing her utility, here love determines how much value or utility she is willing to sacrifice. Her ability to sacrifice is inherently limited, since the more she distributes to others, the scarcer and the more valuable each remaining unit becomes to herself. Love always involves sacrifice.

Redeeming Economics (6) Augustine's Solution

In his book called Redeeming Economics, John D Mueller explains how Augustine resolved the mother's problem.

If we consider her more closely, we realize that the mother is always doing two things at the same time, not one: she is simultaneously ranking persons as ends, and she is ranking things as means. To understand how she does this, we need to turn to St. Augustine, who might with justice be called the co-founder of economics (along with Aristotle). For it was St. Augustine, as a matter of historical fact, who first described how every human person uses two decision-making tools to integrate his or her economic decisions about scarce means with moral decisions about their ends or ultimate goals. Augustine’s explanation of economic value begins with the broader question of “goods” and “values” in general. So it is of interest not only to the economist or historian of economics, but also to anyone trying to understand the role that economic choice does or should play in his or her own life. Augustine begins by taking a sort of inventory of everything that can be known, and which therefore can be a possible object of value. Everything is obviously a thing, “for what is not a thing is nothing at all.”

We humans are ourselves among those things. Our intellect is what enables us to know what a thing is. And considering things in themselves, we recognize a kind of “scale of being,” ascending from inanimate objects to plants to animals to humans to God. Everything’s intrinsic value is simply its degree of being. Whatever exists, insofar as it exists, is good, in exactly that degree. But if we consider a thing in relation to ourselves, we consider it potentially as something to attain (or avoid): as an object of the will. In this light, a thing is viewed either as an end or a means to an end. An end is said to be “enjoyed,” and a means is said to be “used.” But which things are ends and which are means? What should we enjoy and what should we use? This requires us to rank things, not according to their intrinsic value, but their value to us. Yet we are not forced to choose one thing over another, even if we recognize that either its intrinsic or its moral value is higher. We can choose rightly or wrongly, whether measured by others or by our own understanding. That’s what we mean by “free will.”

By mentioning intellect and free will, we express an important factual distinction among things. Some things are endowed with intellect and free will—these we call “persons”—and some are not. All humans are persons, since humans are “rational animals,” as Aristotle put it, and “made in the image and likeness of God,” as the Bible puts it. Humans are, as far as we know, the only animals that are persons. Other animals are like us in having sense, imagination, memory, affections, desires and aversions, and the ability to calculate means—but not in possessing intellect. Animals therefore also have choice, but not free choice: they can choose their means, but not their ends; because the ends are already determined by natural inclination. Only persons can choose their ends as well as their means. But if all humans are persons, not all persons are human: notably God, whose existence we know both by reason reflecting on experience and by divine revelation.

All this indicates that in human action, says Augustine, persons ought to be considered as ends, and other things as means. This is true, both as a description of, and a prescription for, human action. The Two Great Commandments—“You shall love God with all your heart, soul and mind,” and “You shall love your neighbor as yourself”—agree with the “scale of being” that we find in reality. They are therefore in accord with reason. No commandment, “You shall love yourself,” is necessary, says Augustine, because this is taken for granted: everyone loves himself by nature. The whole problem is to love ourselves “ordinately,” that is, while observing the proper ranking of ultimate moral goods.

But what sets Augustine apart as the co-founder of economics is not his prescription, but his description. Others had said—and would, like Emmanuel Kant, say after him—that persons ought to be treated as ends and not merely as means. Not only Jewish prophets and Christian Apostles, but also Confucian sages and Greek and Roman philosophers, had argued before Augustine, and would argue long after him, about what humans ought to hold as their summum bonum, or highest good. What sets Augustine apart as an analyst is his observation that every human does, in fact, always act with some person as the ultimate end, even if that person is only him- or herself. A miser is said to love money as his highest good, notes Augustine—yet he still parts with it to buy bread to continue living. Augustine does not, however, jump to the empirically false conclusion that every human acts solely for him- or herself. That is precisely what each person is free to decide.

After making this point, Augustine immediately goes on to make another important observation: our ranking of both ends and means is necessarily affected by the fact of scarcity. What does it mean, he asks, to say that “you shall love your neighbor as yourself”? Since loving a person means willing him some good, the kind of love is conditioned by the person loved and the kind of good we will to him. Plato and Aristotle had distinguished between goods of the soul (such as knowledge of truth, or moral virtue), goods of the body (such as health, beauty or physical excellence), and external goods (such as wealth). They noted that external goods should be subordinated to goods of the body, and goods of the body and external goods to goods of the soul. We should therefore want all, but especially the higher, goods, both for ourselves and for those persons we love. But Augustine adds that what “loving others equally” means depends on whether or not the good which we will to them is “diminished by being shared with others.”11 If the good is not scarce, then no problem arises. But when it comes to distributing our scarce goods, it is impossible to share equally with everyone, and therefore in practice we cannot rank all persons equally with ourselves...

However, Augustine goes farther, by observing that every person, by virtue of being a person and therefore having interdependent relations with others, also has a “distribution function,” which determines how the person allocates his scarce goods between himself and others. The principle of distributive justice in any community is independent of the transactions between individual members. But in the case of a person, the principle of distributive justice is identical with the person’s ranking of other persons relative to him- or herself: that is, his love of the other person. We might call this the “Good Samaritan principle,” because it operates whether or not the person expects to receive any current or future benefit from the persons to whom he allocates the use of his goods.13 We’ll consider later on what this means in practice. Augustine had worked all this out and written it around 396 A.D., shortly after becoming bishop of Hippo. But in writing City of God, a sort of history of the human race, which he began in 410, Augustine had to develop a further analytical refinement, which economists now call the “utility function.” Talking about ends and means, “enjoyment” and “use,” becomes difficult when we are trying to describe the actions of men who obey the moral laws as well as of those who don’t. What the good man seeks as his end to “enjoy”, the bad man “uses” as his means.

Moreover, the terminology becomes confusing whenever an act involves a good which is an end under one aspect and a means under another. For example, one’s body and mental skills are an integral part of his person, and yet for analytical purposes the person must be said to “use” this “human capital,” for example, to earn wages to pay for other goods, such as food, which are necessary to sustain the person—whether himself or someone else—who is the end he is said to “enjoy.” And this person who is the purpose of one action may love other persons or intend as his highest end the enjoyment of God, still another person (or, in the Christian understanding, persons). A more general terminology was therefore necessary, and such a terminology is exactly what one needs to relate the personal scales of preference to market prices.14 Utility, explained Augustine, is simply the value of something, not in itself, but viewed as a means to some other end intended by the evaluating person. For example, Augustine noted, the intrinsic value of a live mouse—a sentient being—is obviously higher than that of a plant; yet most of us prefer to have loaves of bread (made from dead plants) rather than live mice in the house.

What Augustine has done, then, is to scale or rank everything in the universe in three ways. The first is the “scale of being,” which includes everything, ranked by its degree of being or intrinsic value. The second is the ultimate moral scale, on which each person selects and ranks the ultimate ends or purposes of action; and these ends consist entirely of persons (always including, but not limited to, the person doing the ranking). The third is the scale of utility, by which each person chooses and ranks the means to attain the ends chosen in his ultimate moral scale. And Augustine has explained that the rankings of both ends and means will be affected by the fact of scarcity. Let’s apply Augustine’s insight to explain what the mother is doing in distributing goods like milk to her family. We’ll break the explanation into two parts, starting with her ranking of means, like milk, before considering her ranking of persons as ends. For the first part, we can draw on Wicksteed’s lucid discussion.

The mother’s choice of means. The mother is forced to choose among different goods because of their scarcity: each good has a cost, and her budget of money, time and other resources is limited. But this raises a fundamental question: how can she value various objects that are so intrinsically different? She has a problem of comparing apples and oranges, so to speak, on a massive scale. How can the mother decide how much of the family’s resources to allocate toward food, a piano, the children’s French lessons or Indian famine relief? She does this, not by focusing on the qualities in which the various goods and services differ, but on the quantitative respect in which they are similar: namely, their ability to satisfy human needs or wants. This is what we always have to do when we choose between one scarce good and another.

A large part of what the mother is doing, then, is comparing the “differential significances” or “marginal utilities” of goods: whether of the same good in different uses, or of different goods in the same use, or of different goods in different uses. “We may conceive of a general ‘scale of preferences’ or ‘relative scale of estimates’ on which all objects of desire or pursuit (positive or negative) find their place, and which registers the terms on which they would be accepted as equivalents or preferred one to the other.”16 Such comparisons are necessary whenever we choose among limited alternatives, whether or not exchange is involved.

In all her economic decisions about scarce means, the mother is constantly applying two fundamental principles. The first is what Wicksteed calls the “declining marginal significance” of scarce goods. We said that the significance of any given amount of a good depends on how much of the good we already possess, and that in valuing goods we are always considering the difference made by one unit added to or subtracted from what we own. Declining marginal significance means that each additional unit adds to one’s well-being, but not by as much as the previous unit. The value of a glassful of milk depends not only on whether you like milk, but also on how long it’s been since you last drank any. If you’ve just had two glasses, the value of a third glass will be lower than if you haven’t had any since yesterday. This is why a baby, when she is hungry, drinks the first half of the bottle of milk more eagerly than the second half, until at some point she is full. If she drinks too much she may wish she had had less. Too much of a “good” can turn into a “bad.” In that case, the total significance does not merely rise at a slower rate, but actually falls. But when the baby feels better and gets hungry again, the milk turns back into a “good.” I said that as the quantity of a scarce good increases, its marginal significance declines “after a certain point.” Before that point, it’s quite possible for the marginal significance of a good to increase with its quantity.

When considering a single good in different uses, like milk, the mother applies the rule of declining marginal significances by satisfying the most urgent need first. Let’s return to the simple example with which we started. We recall that the baby gets to drink until she is full, before any milk goes to the older children. The older children’s cups in turn ordinarily take precedence over milk for the adults’ tea or coffee; and milk for the adults’ daily coffee or tea normally takes precedence over an occasional pudding or a saucerful as a treat for the family cat. The baby receives her milk before the older children because her need is judged more urgent, which means that more milk is necessary to reduce its marginal significance to any given level. The older children’s need for milk comes next in significance, which means that it takes less milk to reduce its urgency to the same level, as judged by the mother, as the baby’s after drinking the larger amount. And so on, down to the cat. That these priorities are not absolute becomes clear if the quantity available for all uses should change—say, because half the milk spoils, or if an unexpected use should arise. If the baby can drink other liquids like juice, or if water can be mixed with baby formula, there is the possibility of using a little less milk for the baby, and so leaving at least some for the older children. Or if there is no spoilage but the mother’s friend should unexpectedly drop by for tea or coffee, or wish to borrow a cup for a recipe, there is no great harm in giving the older children cups of milk that are slightly less full that day and serving them more of other food or liquids. The cat may receive extra dry food and affection, but no milk. Or even the milk for mixing in the adults’ beverages may give way if, say, the cat suddenly turns up after a week’s absence.

But here we must recall our earlier discussion. The mother is always doing two things, not one thing: she is weighing persons as ends and things as means. She is not merely considering the marginal significance of milk: she is effectively multiplying the marginal significance of milk times what might be called the “marginal significance of the person.”
Mueller sums up Augustines solution to the Mother's problem this way. Neoclassical economics cannot explain this.
Instead of always doing one thing—maximising the utility to herself of various things—the mother is always doing two things: weighing the importance of persons as ends, and the utility of things to serve those persons.

Sunday, January 19, 2014

Redeeming Economics (5) Mother's Task

In his book called Redeeming Economics, John D Mueller discusses the Mother's Task. He shows that economic theory cannot explain what mothers do.

The best way to learn economics, thought Philip Wicksteed, is to consider the daily activities of a typical mother. We’ve already seen that the word “economics” means “household management.” And who better understands how to manage a household than a mother? It wouldn’t do to begin with a typical father, because most of a father’s daily activity is at once too specialized and too far removed from its ultimate purpose to be understood easily. Even in households not run by a mother, household affairs are something that “every member of every family is more or less keenly interested in,” so it furnishes us with a “common ground, the exploration of which demands no special or technical information.”

This is why Wicksteed’s Common Sense of Political Economy, though now all but forgotten by economists, remains the best introduction to the meaning of modern economics by any of the economists who played a central role in forming it. Most economists, and perhaps most mothers, are under the impression that mothers need to learn from economists, not vice versa. This mistake underlies half of all serious errors in economic theory. (The rest are due to the ignorance of most economists about the 2,100-year history of their discipline before Adam Smith.) The job of the economist is not to tell the mother what to do, but to understand what she is doing. And the only way to learn this is to sit at her feet and watch.

Wicksteed’s Common Sense therefore begins with examples from the life of a typical English mother, circa 1910. We find her first shopping: weighing the advantages of new potatoes against old potatoes, the purchase of a piano against a bicycle (which will take her to piano recitals, among many other uses), whether to serve cod or chicken to her guests (in light of the couple’s social standing, the fact that all the women guests know the prices of cod and chicken, and their aspirations that the children will learn to speak French), and all of these against an urgent appeal to alleviate a famine in India. Then we observe her at home as she combines her market purchases with her own most important resources—her time and attention—in the combinations which will be most valuable to her family. Finally, we watch her distribute the household’s goods to the users she had in mind from the beginning: whether serving the milk and potatoes to family or guests, or distributing her time and attention among family members, an outside job, unpaid volunteer service, reading great literature or worship.

Today’s American mother spends much less time preparing food, more time in the labor market, and more time transporting family members from place to place in the family “wagon” than her British or American counterpart of a century earlier. Her family’s budget can purchase a much larger quantity, a higher quality, and a much larger variety, of goods and services. The particular objects of choice are therefore somewhat different: she and her husband would be considering the purchase of a minivan in the same light the couple of a century earlier viewed a bicycle, for example. And much of the food is at least partially prepared, to save on the mother’s time: the 24 hours in a day are one thing that has not increased, though the mother and other members of her family can expect to live 20 or 25 years longer. But even before allowing for these changes in income, “household technology,” and longevity, Wicksteed’s examples from the early 20th century remain perfectly intelligible to an American mother of the early 21st century. And they illustrate exactly the same lessons about life and economics.

“Her doings in the market-place and her doings at home are … parts of one continuous process of administration of resources, guided by the same fundamental principle; and it is the home problem that dominates the market problem and gives it its ultimate meaning,” says Wicksteed. The fundamental principle is that in all cases, “She is trying to make everything go as far as it will, or, in other words, serve the most important purpose that it can. She will consider that she has been successful if, in the end, no want which she has left unsatisfied appears, in her deliberate judgment, to have really been more important than some other want to which she attended in place of it. Otherwise there has been waste somewhere, for money, milk, potatoes, or attention has been applied to one purpose when they might better have been applied to another.”

Yet, when we turn to even the simplest of her daily tasks, we discover that the modern economist cannot fully explain what the mother is doing. Consider this example offered by Wicksteed: how the mother distributes the use of a single good, milk, which has alternate uses. “In the usual routine, milk may be wanted for the baby, for the other children, for a pudding, for tea or coffee, and for the cat,” notes Wicksteed. The quantity of milk on hand begins with the amount she purchased in the supermarket (or in Wicksteed’s day, from the daily delivery wagon), which was based on her expectation of its various uses and the price she found in the market. Normally, the baby gets to drink until she is full, before any milk goes to the older children. The older children’s cups in turn ordinarily take precedence over milk for the adults’ daily tea or coffee; and milk for the adults’ coffee or tea normally takes precedence over an occasional pudding or a saucerful as a treat for the family cat.

What, exactly, is the mother doing here? Not for some 70 pages after presenting and discussing this interesting problem does Wicksteed reveal that, in his opinion, the problem crosses the line of what he considers Pure Economics: “The widest definition of the scope of Economics would confine their scope to things that can be regarded as in some sense exchangeable, and capable of being transferred according to order and agreement. No one would regard the principles upon which I balance the claims of devotion [to God] against those of friendship, or of either against the indulgence of my aesthetic appetites, as within the range of economic science.”

And the mother’s activity is clearly a combination of the two: “For instance, the housewife’s administration of her stores amongst different claimants at home is not a series of acts of exchange, but is a series of acts relating to exchangeable things.” This leads to an enlightening discussion of what Wicksteed calls an “economic relation” (to which we will return after trying to figure out what the mother is doing)—but not a complete explanation of the mother’s actions. The important point is that Wicksteed has flagged to our attention that the mother, by dealing simultaneously with exchangeable things and with persons she loves, is doing something which cannot be reduced to a series of exchanges.

Paul Samuelson, considering a similar problem half a century later, shrinks from giving an explanation of what the mother is doing. The only theory he offers concerns what “must be a family of adults, or at least of very unusual children.” Even in that case, Samuelson says, there can be no straightforward explanation of what the mother is doing. He contents himself with trying to prove that the family can be treated as if it were a single consuming unit.

In the past few decades, economist Gary Becker claims to have explained what the mother is doing. Becker says she is always doing basically one thing: maximizing the “utility” to herself of various “commodities,” among which she includes her children. Becker’s explanation amounts to saying that everyone (even an “altruist”) treats other persons as things providing him- or herself with “utility.” But he never really explains what “utility” is, and as we will see, Becker cannot fully explain exactly how the mother administers the milk.
Mueller summarises the problem this way.
The mother's problem is simply to determine the amount of milk to allocate to each one. If all the alternatives were personal use, neoclassical economic theory could provide the solution. But the mother's problem is quite different and and answerable by neoclassical economic, since she is not only dealing with her own preferences, but also the preferences of several other users of the milk. Her problem is twofold: not only to estimate the preference of each use, but also to decide how much weight to give to those preferences (pp.87,88).

Saturday, January 18, 2014

Redeeming Economics (4) Augustine

In his book called Redeeming Economics, John D Mueller discusses Augustine's contribution to Economics.

A. Positive scholastic theory. To explain the Two Great Commandments, Augustine had started from Aristotle’s insight that “every agent acts for an end” and his definition of love — willing some good to some person. But Augustine drew an implication that Aristotle had not: every person always acts for the sake of some person(s). For example, when I say, “I love vanilla ice cream,” I really mean that I love myself and use (consume) vanilla ice cream to express that love (in preference, say, to strawberry ice cream or Brussels sprouts, which reflects my separate scale of utility). Augustine also introduced the important distinction between “private” goods like bread, which inherently only one person at a time can consume, and “public” goods (like a theater performance, national defense, or enforcement of justice) which, at least within certain limits, many people can simultaneously enjoy, because they are not “diminished by being shared.”
In other words, Augustine’s crucial insight is that we humans always act on two scales of preference — one for persons as ends and the other for other things as means: personal love and utility, respectively. Moreover, we express our preferences for persons with two kinds of external acts. Since man is a social creature, Augustine noted, “human society is knit together by transactions of giving and receiving.” But these outwardly similar transactions may be of two essentially different kinds, he added: “sale or gift.” Generally speaking, we give our wealth without compensation to people we particularly love, and sell it to people we don’t, in order to provide for those we do love. Since it’s always possible to avoid depriving others of their own goods, this is the bare minimum of love expressed as benevolence or goodwill and the measure of what Aristotle called justice in exchange. But our positive self-love is expressed by the utility of the goods we provide ourselves, and our positive love of others with beneficence: gifts. Hate or malevolence is expressed by the opposite of a gift: maleficence or crime.

That’s “positive” scholastic economics in a nutshell: describing what is, not necessarily what ought to be.

B. Normative” scholastic theory. We naturally love ourselves, Augustine pointed out. All other moral rules are derived from the Two Great Commandments because these measure the degree to which our love is “ordinate”: rightly ordered. If a good were sufficiently abundant we could and should share it equally with everyone else. But with such goods as time and money, which are “diminished by being shared” (i.e., scarce), this is impossible. Therefore “loving your neighbor as yourself” can’t always mean equally with yourself: “All men are to be loved equally. But since you cannot do good to all,” Augustine concluded, “you are to pay special regard to those who, by the accidents of time, place, or circumstances, are brought into closer connection with you.”

Friday, January 17, 2014

Redeeming Economics (3)

In his book called Redeeming Economics, John D Mueller outlines the big developments in the history of economics.

Scholastic economics (c.1250-1776) began when Aquinas first integrated these four elements (production, exchange, distribution, and consumption) into an outline of personal, domestic, and political economy, both positive and normative, organizing Aristotle’s contributions according to Augustine’s framework.

The scholastic outline was taught at the highest university level for more than five centuries by Catholics and (after the Reformation) Protestants alike. Adam Smith himself was taught from Lutheran Samuel Pufendorf’s compendium On the Duty of Man and Citizen According to Natural Law, which as with Aquinas and the earlier scholastics, contains all four basic elements of economic theory, organized according to personal, domestic and political economy, and integrating normative with descriptive theory by the Two Great Commandments.

The fact that Pufendorf was a Lutheran who wrote a critical history of the Catholic Church and that his theories were taught at the generally Calvinist University of Glasgow, demonstrates that the scholastic outline of economic theory was broadly known and accepted by both Catholics and Protestants. Pufendorf was widely read in the American colonies and recommended for example by Alexander Hamilton, who had penned two-thirds of the Federalist papers and as first Treasury Secretary would reject Smith’s specific economic advice in the Wealth of Nations to the United States.

Classical economics (1776-1871) began when Adam Smith cut these four elements to two, trying to explain what he called “division of labor” (specialized production) by production and exchange alone. Smith was addressing the main drawback of scholastic economics, which lay not in the theory itself, but the routine assumption that the economy did not grow in the long run — which had been true on average for about two millennia. To explain growth, Smith and classical followers like David Ricardo undoubtedly advanced the two elements Smith retained. But it was on oversimplification.

Smith also dropped Augustine’s theory of utility (which is necessary to describe consumption) and replaced Augustine’s theory of personal distribution (gifts and their opposite, crimes) as well as Aristotle’s theory of domestic and political distributive justice with the mere (often false) assumption that “every individual…intends only his own gain,” as Smith put it in his famous “invisible hand” passage in the Wealth of Nations.

Neoclassical economics (1871-c.2000) began when three economists dissatisfied with the practical failure of Smith’s classical outline (William Stanley Jevons 1871 in England, Carl Menger 1871 in Austria, and Leon Walras 1874 in Switzerland) independently but almost simultaneously reinvented Augustine’s theory of utility, starting its reintegration with the theories of production and exchange. They abandoned Smith’s revised outline mostly for three related reasons: without the theory of utility classical economists were unable to answer some important questions (for example, why goods that can’t be reproduced with labor have value); made predictions about others that turned out to be spectacularly wrong (notably the “iron law of wages,” which predicted that rising population would prevent rising living standards); and directly fostered Karl Marx’s disastrously erroneous economic analysis. Though schools of neoclassical economics have since multiplied, all are derived from these three.

Thus Adam Smith’s chief significance is not what he added to, but rather subtracted from economics. As Joseph Schumpeter noted in his History of Economic Analysis, “The fact is that the Wealth of Nations does not contain a single analytic idea, principle or method that was entirely new in 1776.”

Neoscholastic economics (c.2000-). I argue that Neoscholastic economics is already and will continue to revolutionize economics in coming decades, by replacing its lost cornerstone, the theory of distribution.

Thursday, January 16, 2014

Redeeming Economics (2)

In his book called Redeeming Economics, John D Mueller discusses What is economics about?

Jesus once noted — I interpret this as an astute empirical observation, not divine revelation — since the days of Noah and Lot, people have been doing, and until the end of the world presumably will be doing, four kinds of things. He gave these examples: “planting and building,” “buying and selling,” ‘marrying and being given in marriage,” and “eating and drinking” (Luke 18:27-28). In other words, we produce, exchange, give, and use (or consume) our human and nonhuman goods.

That’s the usual order in our action. But as St. Augustine first explained, the order is different in our planning. First we choose For Whom we intend to provide; next What to provide as means for those persons. Finally, Thomas Aquinas latter added, we choose How to provide the chosen means, through production (always) and exchange (almost always), both of which Aristotle had described.

So, economics is essentially a theory of providence: it describes how we provide for ourselves and the other persons we love, using scarce means that have alternate uses. Human providence is a synonym for the cardinal virtue of prudence. Aristotle had divided moral philosophy into ethics and politics. But he also aptly described humans as “rational,” “matrimonial,” and “political animals.” So Aquinas redivided moral philosophy into three, distinguishing personal, domestic, and political prudence — or equivalently, “economy” — according to the social unit described.

Wednesday, January 15, 2014

Redeeming Economics (1)

I have just finished reading a book called Redeeming Economics (Rediscovering the Missing Element) by John D Mueller.

I found it very thought provoking. He claims that Adam Smith made some serious mistakes in his Economics, which set back the development of the discipline. I have always understood this. Smith pushed the labour theory of value, which is flawed. This theory sent economics down many false trails.

Modern universities teach that economics began with Adam Smith. I have always known this is wrong. In his two-volume History of Economic Thought, Murray Rothbard shows that there was nothing new in Adam Smith’s economic thought. Rothbard describes the development of economic thought by scholastic theologians and He claims that Smith was a plagiarist who stole ideas from other economists without acknowledging them.

Mueller goes further in his criticism. He claims,

The first revolution in economics had occurred five centuries before Smith, when Thomas Aquinas (1225-74) set forth the basic elements of economic theory. Synthesizing the work of Aristotle (384-322 BC) and Augustine of Hippos (AD 354-430), Aquinas offered a comprehensive view of human economic actions. All such actions fall into four categories: humans produce, exchange, distribute, and consume goods (human and nonhuman). Thus the theory Aquinas outlined―known as “Scholastic Economics” economics―had four key elements: the theory of production, which explains which goods (and how many of them) we produce; the theory of justice in exchange, which accounts for how we are compensated through the sale of goods for our contributing to their production; the theory of final distribution, which determines who will consume our goods; and final, the theory of consumption (or utility), which explains which goods people prefer to consume (p.1).
I knew from reading Rothbard that the scholastic theologians had developed a most of the components of economics. However, I was not aware of the achievements of Aquinas. Rothbard is negative towards him because of his treatment of interest. I knew that Augustine wrote on politics, but I did not realise that he had made such important contributions to economics.

Mueller explains,
Adam Smith sparked the second economic revolution when he drastic simplified the Scholastic economics he had been taught. He dropped not one, but two elements of the four that Aquinas had outlined. He eliminated the Scholastic theories of consumption and final distribution, launching “classical economics with production and exchange alone. At the same time, he claimed that Aristotle’s theory of production could be pared to a single factor: labour. Most complications in comics result from the fact that Smith's revision was an oversimplification (p.2).
A century later, the neoclassical economists, recognised one of the shortcomings of Smiths approach. They restored one of the elements that he had dropped: Augustine’ theory of utility, which describes consumption. But they did not restore the other.

Tuesday, January 14, 2014

Capitalism without Guilt

I recently listened to a podcast of a talk called Capitalism without Guilt given by Yaron Brook at the London School of Economics. I was interested, because I did not expect the Director of the Ayn Rand Institute to be speaking at the LSE. He said that the fundamental objection to capitalism is not economic, but moral.

People operate in the market to make money. Some will have a passion for what they do, but their basic drive is to make their own life better. The businessperson’s motivation is not the “common good” or “social utility”, but to make their lives better. The market is a place where people meet to fulfil their self-interest. Buyers and sellers both want to make their lives better.

We are taught that to be good or virtuous is to be selfless and to sacrifice to others. We were taught to think of others first and yourself last. According to philosophers, morality is about being selfless and caring for others. The more you sacrifice, the more noble you are. The more you give the better you are. According to most moral teaching self-interest is wrong. People honour philanthropy and community service, but denigrate business, profit seeking and entrepreneurship.

We tend to assume that all businessmen are evil. We feel safe because an elevator has been checked by a bureaucrat. We sleep at night because Ben Bernanke is in charge of a monetary system.

We have a morality that is inconsistent with capitalism. Very few people live a selfless life. They pursue self-interest. When you live one life, but believe you should be living another, you get guilt. Guilt is a powerful emotion. It is an amazing mechanism for controlling people. It is why rich people cote for increases in taxes. They need to redress their guilt, because they have this unrealistic morality.

We will continue to move away from capitalism, as long as our current morality is maintained. Brook does not agree with it. We need a new morality with the objective of making a human life as good as possible. Goodness lies in the pursuing self-interest. Ayn Rand said that the number one value is self-interest.

Capitalism is a moral system, because it allows each one of us to pursue our self-interest. This is good. Brook says that we need to reject to morality of living for others, and live instead for our own flourishing. I disagree, but his talk got me thinking. Capitalism has lifted economic well being in an amazing way, but capitalistic economic theory requires people to pursue their self-interest. Yet this does not fit well with Christian morality.

This is a conundrum that has puzzled me for a while. I found the answer in another book that I am reading. I will post on it in the next few days.

Monday, January 13, 2014

Employment Contracts

All exchanges in a free market are legitimate, provided:

  • there is not deception;
  • the seller owns the thing be sold:
  • there is not coercion;
and the buyer and seller freely agree on the price.

Labour market transactions are different. Once a person becomes an employer of labour, they take on additional responsibilities. They are not free to pay what the market will bear. They cannot just pay the lowest wage rate that they can get away with. Employment contracts are different from other market transactions.

God’s Instructions for Economic Life set some boundaries on employment contracts. Employees are neighbours, and should be treated as such. A critical part of being a good neighbour is to pay generous wages. God's people should not be satisfied with paying the minimum wage. God expects more than that. They should pay the person enough for them to live on.

The employer should not just think about their convenience. They must do what is best for the employee. If the person were really poor, they would not be able to wait until the end of the week for their money, because they would be without food. Even though it is inconvenient for the employer, the poor person should be paid each day. They have done the work, so they are entitled to the pay. In the modern world, weekly or fortnightly pay has become the standard, but that makes life really hard for some people.
Do not defraud or rob your neighbour. Do not hold back the wages of a hired worker overnight (Lev 19:13).
God's guidance for economic life says that holding back the wages of a hired worker overnight is the same as defrauding them. Employees are not disconnected people. They are neighbours that employers must love and care for.

Jesus told employers that they should be considerate in the parable of the workers in the vineyard (Matt 20:1-16). The employer promised to pay the employees who only worked for part of a day "what is right"(v 4,7). The Greek word is dikaion, which means righteous. This employer wanted to do the right thing. For Jesus listeners, what is right would be what is specified by the law. The workers who were employed for the whole day were offered a denarius. That was the standard pay for a day's work at that time.

The employer paid every worker a denarius, even though some had only worked for a few hours, while others had worked for a whole day. The reason was that a person needed a denarius to buy a day's rations. These people were on the poverty line, living from one day to the next. The employer was considerate. He decided to pay each person enough to buy food for the day. This was a generous application of the command to pay employs each evening (Deut 24:15). An employer has an obligation to give his neighbour enough food that he will be strong enough to work the next day.
Don't I have the right to do what I want with my own money? Or are you envious because I am generous (Matt 20:15).
Being considerate and providing for a neighbour is more important than being fair.

Saturday, January 11, 2014

Legal Minimum Wage

According to the economic theory, an increase in the minimum wage increases unemployment, because employers stop employing people whose productive capacity is less worth than the increased legal minimum. This is only true, if employers actually know exactly how much a potential employee is worth to their business. This is almost never the case. If a business has several employees and uses capital equipment, it is almost impossible to determine accurately how much an individual employee contributes to the income of the business. Accounting tools for determining this do not exist.

The result is that most employers do not know what a potential employees is worth to the business. Therefore, they do not know if they are worth more or less than the legal minimum. (The television program Under Cover Boss shows that most bosses do not have a clue about what their employees are worth).

Most employers of unskilled staff just take the easy way out. They do not bother trying to work out how much a potential staff member is worth, they just pay them the minimum wage instead. Some will pay a few dollars above the minimum wage, so that they feel better. The minimum wages does not just affect the poor, it has also corrupted employers, causing them to stop thinking about what their employees are worth. They just take the easy way out and pay what the state dictates.

This behaviour makes the minimum wages the benchmark for many low paid people, not just those who are at the minimum. It means that the minimum wage will have to be increased from time to time, because that is the only way that wage rates benchmarked to it will change. Employees cannot rely on employers to work out what they are worth and pay them more when they deserve it, so they need an adjustment in the minimum wage rate to give them any increases that they may deserve.

While we have a minimum wage and high level of inequality, regular increases in the legal minimum will be needed. Arguing that the minimum wage increases unemployment is irrelevant, because though in theory it should, in practice it does not. This has been confirmed by statistical studies.

The only argument against the minimum wage is that is immoral. The government should not be intervening in wage contracts. That will only be realistic, if employers get much better at working out what their employees word, and pay those at the bottom a margin to allow for the potential errors in their assessment.

Friday, January 10, 2014

Five Stages of Collapse (6)

In his book called The Five Stages of Collapse, Dimitry Orlov suggests that lack of personal virtual could be disastrous during a time of social collapse.

Personal virtues are all but destroyed in Western society, but for the time being their absence is being masked by the impersonal institutions of finance, commerce and government. In the wake of financial, commercial, political and social collapse will we become ruthless and vicious?

The civilized world is a cold world. Its citizens are theoretically expected to fend for themselves, but in reality, they can only survive thanks to the impersonal services of finance, commerce and government. What will happen to us once these impersonalised services are longer available? Will we have our humanity to fall back on, or will we go the way of ruthlessness and viciousness (229).
Good question.

Thursday, January 09, 2014

Five Stages of Collapse (5)

In his bookcalled The Five Stages ofCollapse, Dimitry Orlov suggests that the western world is not ready for social collapse.

To my mind, social collapse is not a political or economic or technological problem for the elites to solve, but a cultural one (196)

All of the coping mechanisms that exist to deal with societal are designed to treat it as the exception rather than the norm; there is no safety net designed to catch entire societies as they fall. International aid, charity, disaster management, peacekeeping efforts and military interventions are designed to handle singular, localized limited crises and cannot be expected to be useful within an international landscape of constant and accelerating collapse. Few places are likely to remain sufficiently insular to escape the onslaught of internationally displaced groups driven from their land by a variety of forces from political unrest to economic dislocation caused by globalization to habitation destruction created by rapid climate change.

Some who see the inevitability of this onslaught react by attempting to isolate themselves by building a well-stocked “doomstead” in a remote area. This may work for a few people; for the rest, it might be better to abandon the idea of finding a safe place to be, and to concentrate instead on discovering a safe way to be-in company with others. (197)
I describe a safe way for Christians to be in the company of others in Being Church Where We Live.

Wednesday, January 08, 2014

Monarch Emerging

Thirty minutes later.

Five Stages of Collapse (4)

In his book called The Five Stages of Collapse, Dimitry Orlov suggests that we should not be afraid of anarchy.

In the face of political collapse it is quite reasonable to expect that the good people of almost any nation will cower in their homes and, al themselves to be herded like domesticated animals, because their worst fear is not despotism-it is anarchy. Anarchy! Are you afraid, of anarchy? Or are you more afraid of hierarchy? Colour me strange, but I am much more afraid of being subjected to a chain of command, than of anarchy (which is a lack of hierarchy).

A bit of hierarchy may be temporarily justified while facing down a specific, temporary threat or while an ambitious task that requires a big, coordinated team effort. But once that is over, it's back to anarchy. Few of us enjoy taking orders from the sorts of characters who enjoy ordering people, be they numbnuts who rose through the ranks, or pampered children of privilege, but to realise that there is an alternative we need to overcome our fear of anarchy (125)

Tuesday, January 07, 2014

Five Stages of Collapse (3)

In a book called The Five Stages of Collapse, Dimitry Orlov explains that political collapse is more dangerous than financial collapse.

Commercial and commercial collapse are already potential lethal. People lose their bearing and their sense of purpose, or decide to take advantage of those in distress, or fail simply through and inability to adapt to radically altered circumstances, and when that happens people get hurt. Financial and commercial collapses tend to be hard on those who failed to prepare by putting aside objects that hold their value when the national currency hyperinflates and banks close and by stockpiling the necessary supplies to tide them over during the uncertain transition period, when the old ways of doing things no longer work but the new ones have not yet evolved. Both of these causes of potentially lethal circumstances can be avoided first, by choosing the right kind of community second, by laying in supplies or securing independent access to food, water and energy and third, by generally finding a way to bide your time and ignore the world at large until times get barter.

Political collapse is a different animal altogether, because it makes the world at large difficult to ignore. The potential for chaos is still there, but so is the potential for organized action of a very damaging sort, because the ruling class and the classes that serve them (the police, the military, the bureaucrats) generally refuse to go softly into the night and allow the people to self-organize, experiment and come together as autonomous new groups adapted to the new environment in the composition and patterns of self-governance. Instead, they are like to spontaneously hatch a hare-brained new plan and initiative to restore national unity, in the sense of restoring the status quo ante, at least in regard to preserving their own power and privilege, at others expense. In a situation where every person and every neighbourhood should be experimenting on their own to find out what works and what does not, the politicians and the officials are apt to introduce new draconian crime fighting measures, curfews and detentions, allowing only certain activities-ones that benefit them-while mercilessly putting down any sign of insubordination.

To deflect the blame for their failure, the ruling elite usually also does its best to find an internal or external enemy. Those who are the weakest and the least politically connected- the poor, the minorities and the immigrants are accused of dragging everyone down and singled out for the harshest treatment. This is conducive to creating a climate of fear and suppressing free speech. But nothing causes people to band together like an external threat, and, for the sake of preserving national unity, a failing nation state often looks for an external enemy to attack, preferably a weak, defenceless one, so that it poses no risk of reprisal. Putting the nation on a war footing, makes it possible for the government to commandeer resources, reallocate them to the benefit of the ruling class, further restrict movements and activities, round up troublesome youths and ship them off to battle and lock up undesirables.

Financial and commercial collapse creates an opening for those inclined toward the most miserable despotism. Once a despotic regime is established, the weak, demoralized, disoriented population almost inevitably finds itself incapable of rising in opposition to it, and the new despotism may become entrenched and quite durable, lasting for an extended period of time during which the country is hollowed out and traumatized before collapsing through internecine strife or a battle of succession, or through increasing weakness that causes it to succumb to foreign occupation. The spectrum of possible responses to financial and commercial collapse stretches from despotism to chaos. There is sweet spot of autonomous, anarchic social cooperation, with many small skirmishes and standoffs, but well short of armed conflict (124)
My book called Times and Seasons explains how political collapse could become an issue in our time and how Christians will find their way through the chaos.

Monday, January 06, 2014


Five Stages of Collapse (2)

In a book called The Five Stages of Collapse, Dimitry Orlov suggests that communities and extended families will important during seasons of financial collapse.

What I am laying out here may be starting to sound hopelessly idealistic. After all, strong extended families that pool all their resources and are presided over by elders, of the sort could band together form a community and achieve self-governance via a council of elders, may seem like something from a century long gone. But they aren't there are plenty of communities of this sort still to be found around the world. They just happen to be those families and communities that have not become addicted to economic growth, either because of their conservatism or their adverse circumstances, or both. They will be around following the collapse. But families and communities of this sort may be rather difficult to reconstitute within a western European or a North American context of atomic families, parents who can hardly wait until their children grow up and “become independent”, alienated children who yearn to grow up and abandon their parents, elders not worthy of the name, who only care about preserving their independence, for which they have neither savings, nor the mental fortitude-an anonymous crowd of pseudo-rugged individualists abjectly dependent on the consumer economy and government services for survival. This gaping chasm between what should exist and what does exist is going to be very difficult to bridge (41).

Far from sketching out some sort of financial utopia, I am describing a successful human cultural universal: a family is three generations at a minimum, living together, pooling resources and allocating them in the best interests of the whole. A community is a band of such families capable of self-governance. The traditional form of self-governance, for the reasons outlined above, is a council of elders (42)
Orlov doubts that people of the West are capable of forming communities that could survive and grow during troubled times. In my book Being Church Where We Live, I explain how Christians can achieve this goal. This model of church is recession and persecution proof.

I am amazed at the number of pastors who are warning their people of troubled times ahead, but are doing nothing to reorganize their church to be ready. They seem to think they will be able to carry on a model of church that is designed for prosperous times, without any consequences. This seems unwise.