On the Wealth of Nations
76What's This?
This hub will be somewhat different from most hubs I write. Instead of proceeding logically to prove a narrow, incontestable point, I would like to write in a stream-of-consciousness way, providing some pointers to parts of the conventional wisdom that pervades the way we look at reality. I am sure I will live to regret doing this.
The hub is provoked by a hub of Aya's to which I will link, whose main point seems to be that in a totally free economy, growth is unlikely to occur. This thesis, of course, is almost certainly false. However, that is not my point. My point is that most people don't react to it coherently enough to reach that conclusion. The thesis seems especially designed to seem to them totally nonsensical.
Most people don't really think economic growth, per se, is bad, so it is difficult for them to parse the statement that they should support free economies because they limit growth severely. Once any reader gets past that, it is very difficult for the reader to believe that Aya is actually saying that free markets are bad for growth because we all know they're good for growth, even if we happen to be communists and oppose them for other reasons.
Rather than arguing about whether it's true or not, I just want to give some explanations about how it is that we all seem to know it.
Aya's Hub
- The Connection between Economy and Ecology
Many people believe that government bailouts of ailing businesses are necessary, because these businesses employ most people, and without the bailouts all would be jobless, homeless and might even go hungry....
Adam Smith
Classical Economics
Free markets have been considered to be consistent with economic growth since at least 1776. The event of that year to which I'm referring is not the signing of the American Declaration of Independence but the publication of the Scottish economist Adam Smith's treatise "An inquiry into the Nature and Causes of the Wealth of Nations." The copyright on this treatise has expired and it is available freely, in the original English.
The book was groundbreaking in that it was concerned with macroeconomics. The book was not about the rights of individual but the wealth of nations. Nevertheless, it claimed that nations became wealthy not by stimulating wealth but rather by allowing each individual to pursue his own self interest. The modern translation of this is that Adam Smith claimed that a free market economy maximizes economic growth.
Of course, economics was a much younger subject when Smith wrote. So his terminology was a little different.He never mentioned free markets but rather "systems of perfect liberty." He never mentioned economic growth (there was not yet a quantitative notion of gross domestic product) but only the "Progress of Opulence" !!!
For the ecologists in the audience: he has very nice chapters on how the growth of commerce in towns leads to increased utilization of the countryside and what are the benefits to both in these exchanges. I will provide a link to the full text for any masochists that actually want to read the junk.
Adam Smith's book laid the foundation for what is now called "Classical Economics".
Table of contents for Wealth of Nations
growth, math, and other kinds of economics
This capsule will be an extremely shallow and incomplete discussion about things which deserve their own detailed hubs but those hubs are not worth writing, because no one will be able to read those hubs for content but only to try to extract slogans.
In order to talk about growth, there has to be some quantity which is growing. Usually in economics we think of the output of the economy. Various econometricians come up with statistics to measure this output and most of them are quite imperfect descriptions of what we really think of as output. If I were to discuss this in great detail, you would all get really bored.
Now lets say there is such a thing as the total opulence (or output) of the society O and that at the initial time the total opulence is O0. Let's say everything works the way Adam Smith says it does and we've divided up time so that the opulence doubles in every unit of time. Then as a function of time, we will have that opulence is given by
O(t)=O02t
Now suppose instead 1% of the population are total nutcases. They use the fact that they function in a free economy to stick their fingers in their ears and sing out "La La La La La La La ..." and refuse to grow economically. Then we might have instead
O(t)=.01 O0 + .99 O0 2t
Notice that this is still exponential growth in the limit. Moreover the people who grow their economic output will dominate those who do not, at least in terms of economic output. They are free to act this way and to keep their resources and their land, but in the long run most won't because it isn't natural. It violates the laws of sociology. It's like trying to make engineers live indefinitely in an agricultural compound.
If you like, what I wrote above was a very simplified, very silly mathematical model for the way economic growth works. (As a mathematical model,you should take seriously not the text interpretation but only the formulae in bold. If I get comments about the text interpretation, I'm likely to ignore them!)
There are different kinds of economists, classical economist, Keynesian economists, Austrian economists and much is said in other places in hubpages about the distinctions among them. At some point, economists realized their subject is a quantitative one, so that math plays some role. Then they started making simplified mathematical models to try to figure out what would happen by rigorous mathematical means instead of just seeing which kind of economist can yell the loudest. Big names in this include Von Neumann, Morgenstern, Nash, Arrow, and Debreu. Eventually some of the classical economists and Keynesian economists tried to justify their claims this way. They became Neo-Classical and Neo-Keynesian economists and there is some common ground between them because they can at least discuss the merits of their models.
There are no Neo-Austrian economists and that's too bad. Austrian economists have some very good ideas but theyare anti-math and that's not great for them. It's certainly that not all mathematical models really encompass or approximate all of reality and there's room to argue about the details. However to claim that there are universal facts about reality which are easily stated and proved and which do not encode naturally in some mathematical model, one would have to be either phenomenally stupid or phenomenally dishonest, or some combination. It's magical thinking.
The blog of a very nice neo-Keynesian economist
Government by consent of the governed
Often discussions of these matters touch on what system of government one should have. I have very little that I wan't to say about this right now beyond the banal observation that government is by consent of the governed. I close, in order to give food for further thought by linking to two videos which make important points about government by consent of the governed.
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FL, your couplets are always welcome here!
I don't dispute the existence of trees, even fast growing ones. Perhaps the best way to deplete carbon from the atmosphere would be to stop recycling paper and instead deposit it safely in landfills.
Nets, there are societies that have a free economy and do not grow.
Chimpanzee society is an example. The society of the San people is also an example. Without government intervention and without external marauders, their societies maintained a natural equilibrium. How do you explain that?
I think perhaps their economy is not so free.
Suppose I were a member of a wild chimpanzee tribe. And suppose that I decided I would like to build a rocket ship factory. I think I would have to contend with members of the chimpanzee government breaking into my factory and taking it apart down to the last screw. It's the violence inherent in the system.
But you retort, "Oh no member of a chimpanzee society ever wants to build a rocket ship factory."
It is very reminiscent of arguments that you have with the likes of Paraglider and Sufidreamer. They say, that living in Europe, they feel they are living in a free society. They are not prevented from doing anything they want to do.
You retort that they are prevented from doing lots of things
that they don't want to do.
What's good for the goose is good for the gander.
Nets, read my most recent hub on Lelouch of the Rebellion. In it I explain that growth economies need Lebensraum and they go about acquiring it by less than democratic means. They most certainly don't acquire it by bidding for it on the free market.
Maybe chimps are violent. Are they more violent than people with technology? Have you ever seen a great nation that got there without grabbing the natural resources needed for continued growth?
Aya,
You should be ashamed of yourself. You're the person who claims that no conclusion can be reached about the way a free economy functions, from, for instance, America in the early 1900's, because of certain unfree aspects of economy. [I disagree, not because there weren't unfree aspects of the economy, but because I think there are more subtle ways of reaching conclusions.] But I should take chimpanzees as the very model of a free society?
If I were to join a chimpanzee society, I would have to fear on a day to day basis that my property rights would not be respected. Does this automatically make them more free than nations that were established by force in the past.
I know of no nation that was established by force. But I know of plenty that experienced economic growth by exploiting those resources long after they were grabbed. And I know of a few, who not having sufficient resources, grew their economies by trading other things for the natural resources held by others.
Nets, I'm sure you left out a negation there. You write: "I know of no nation that was established by force." Perhaps you meant: "I know of no nation that was NOT established by force." That, at least, would make sense.
You have a way of reducing everything ad absurdum. Do you think the San people prevent other members of their group from developing new technology? I have no reason to believe that. But I don't claim I know everything about them.
I am looking for a way to establish a fair system that will not thrive on instability and growth that requires unlimited natural resources. There do seem to be some historical examples of peoples who did this since before recorded history began. However, every time they encountered a technologically superior group, with a growth economy based on exponential population growth, they have been defeated, and in most cases, absorbed into the winning group.
If you are looking for a solution, as I am, then you must realize that it's not good enough to simply demolish an opponent's argument. You need to offer a counter-solution.
Guys, are you siblings by chance? :)
Misha, how'd you guess?
Aya,
You're right about my missing negation.
I don't know anything about the San people. You admit to not knowing very much either. Therefore I'm not going to let you intimidate me just by mentioning them. I seriously doubt they have a free economy.
I am not looking for a "solution". I only seek the truth.
But I doubt you will find any solutions by denying the truth. Trying to prove false claims does not give you
a special mantle of virtue.
If you are looking for a "solution", for an economy that
does not thrive on instability and growth, then a totally free economy is not for you. Perhaps you should consider the
interventions of the chimpanzees, the interventions of the
San, or the interventions of the Obamunists or the convivialists.
I was thinking of writing a hub page about cap and trade. Is it worth the effort?
Nets, I don't know. What is "cap and trade"?
I'd be interested in your opinion on population growth or decline in the US and its effect on the economy. Also, the effect of congestion on wealth.
For instance, James Watkins believes we've lost out on all these citizens who were never conceived by reason of the pill, and that the economy and our productivity (in the US) are suffering as a result.
Ledefensetech, on the other hand, assures me that we will not run out of resources, among other things, because of the decline in the birth rate due to high technology.
Ralph Deeds thinks we would be more prosperous if we had never experienced any set-backs in the 1930s in terms of productivity! But might we have become poorer, actually, as a result of such productivity, because there would be fewer undeveloped natural resources per capita? Isn't that how real wealth ought to be measured? Our potential ability to waste as much as we like? People who have to sort things to be recycled seem poorer than those who can just throw things away. Recycling is labor intensive.
Both Watkins and Ledefensetech favor a "free economy" although Watkins does not favor reproductive choice. Is James Watkins right that productivity is limited by birthrate? Is Ledefensetech mistaken that the economy can continue to grow without an exponentially growing population? Is Ralph Deed right that harvested raw materials are always better than those left in the ground?
Aya,
Uncontrolled population growth is clearly a sufficient condition for an economy to reach its logistic limit, that is for the growth to stop because of limited resources, which you rightly view as an ecological disaster.
However, it is not a necessary condition. You could have
a stable population with economic growth, wherein the average member of the population over time consumes more and more resources and reach the logistic limit that way.
There is some truth in the statement that increases in standard of living can reduce the rate of growth of populations. Most developed countries, the U.S. included,
are only growing their population through immigration. Some countries in Europe with stricter immigration laws than in the U.S. are experiencing population decline.
Once you suggested a method of controlling population by distributing tradable birth vouchers. This system was supposed to keep under control (cap) the number of births but leave determination of the specific births to the market (trade). This kind of system is called Cap and Trade (for births).
Now, if we believe the goal is not to reach the logistic limit, then it is not enough to limit births. We have to limit economic activity. Now economic activity is notoriously difficult to measure. But recently, the environmental movement has suggested an interesting proxy for it - emission of carbon dioxide.
I concede that emission of carbon dioxide is not a perfect measure of economic activity. Production of solar power counts as zero economic activity, as, essentially, does writing novels, except for certain peripheral costs like breathing. If you plant fast growing trees, chop them down, bury them in the ground and start over, that is negative economic activity. But at least for certain periods of the industrial age, emission of carbon dioxide has been a pretty good measure of economic activity and it has grown considerably.
There is a bill before Congress that would institute Cap and Trade for carbon emissions. My understanding is that under this bill, by 2050, carbon emissions in the U.S. would be lower than they were at the end of World War II.
This bill, in the carbon sense, specifically mandates economic decline. It has the support of President Obama. It has narrowly passed the House of Representatives. It will have some difficulties in the Senate but it certainly has many supporters there.
What do you think about this?
Nets, I'll have to think on it and get back to you. Sword is coming home and I want to hear all about Obama's exciting speech!
Nets, it's not so much that Austrian economists are anti-math, it's that their definition of what economics is, differs from most. Ludwig von Mises considered economics a subset of what he called praxeology or the study of human action. Mathematics has little to say about the interactions between people and the decisions they make. That's not to say that mathematics has nothing to do with economics, but it has less to do with economics than say a Keynesian would have us believe.
Ledefensetech,
I respectfully disagree. Mathematics has a lot to say about the interactions between people and the decisions they make. This is because people are generally rational.
Nets, okay. I'm back. Apparently, there was no speech.
I gave up on the birth vouchers because I thought it would be hard to enforce. I think that tradeable emissions vouchers might not work for technical rather than theoretical reasons. Who would enforce the rules? How would we avoid corruption in the system?
It's so great to live out in the country and not have to sort through our garbage and not have to pick up after our dogs every time they defecate. I think that's worth something. I think this is true luxury, and somehow models of wealth that don't talk about how great it is not to have paperwork for emissions vouchers and income tax miss something really important!
Nets, not all people are rational, and even those who are do not always understand the math that would explain to them what the most "rational" take on a situation would be. Is there some field of mathematics that deals with decisions people make when they can't do the math?
Nets, my only concern with using mathematics is the assumptions you have to make in creating mathematical models. Look at all of those Wall Street whiz kids who created their models over the last couple of decades whose assumptions have doomed their models in this sort of an economy. Like I said, mathematics can tell us something about how people interact, but over-reliance on mathematics is sometimes just a way to go wrong with confidence.
Ledefensetech: I agree. Mathematics is not a way of avoiding understanding things. In order to do mathematics correctly, one has to understand things very precisely. I think it is the wish to avoid this which generally motivates people who wish not to use mathematics.
Aya: I think people are much less stupid than you assume them to be. But certainly one can and does deal mathematically with the problem of what happens when they make errors.
Aya,
I certainly agree that there are both corruption and technical problems with Cap and Trade. (And this may help sink it in the senate.)
But I find it an interesting example of a proposed intervention that takes on economic growth directly and explicitly.
Personally speaking, I'm glad you're the math whiz around here. I know just enough to get myself into trouble. I do, however, pride myself on knowing history and how the interaction of people, events and places have shaped the world we find ourselves in today. So personally, I'm a bit biased towards the Austrian school, although I rely on others to explain such things mathematically.
LOL Aya, your last names are obviously the same, and while this family name is as common among Ashkenazi as Smith among English, you guys seem to speak like people who know each other quite well. :)
Nets, you wrote: "people are generally rational." I would disagree. :) I think people are completely irrational, with rare exceptions which do not make any difference on average. People tend to act on perceptions, that are mostly emotional. Yet their behavior is quantifiable, cause they tend to act in patterns. Like boom-bust, etc. Here is where maths comes into play. :)
Misha:
Boom/Bust behavior has rational motivations.
It is not irrational to use perceptions and emotions. Indeed
it would be irrational not to.
I have to agree Misha, people generally act in what they think is their own self-interest, but since sometimes people don't have all the facts, they jump to what in hindsight looks like irrational decisions. If you can figure out the assumptions a person has made, you can pretty much tell what their decision on a particular topic is going to be.
In fact usually it is already late to act when all the needed facts are known :)
Those perceptions and such is the thing I did not finish thinking through yet, so I am not going to religiously defend it, but the bottom line as I see it currently is pretty much what LDT said. People act on perceived best interest, which rarely coincides with their real best interest. :)
Some people do learn, Misha, as for the others....well they're pretty much hopeless, I think.
Nets, I don't think that placing caps on emissions is a direct limitation on productivity. I don't think it's even intended that way. It's probably intended to allow productivity to continue using less wasteful methods -- in other words, to ratchet up efficiency in the process of turning natural resources into end products for people to use.
People who are concerned about global warming may be concerned about emissions, but those of us who want to keep the ratio of people to things down are not that impressed by emissions caps. We want to keep things cheap because they are plenty, and we perceive that we become poorer when things are more expensive, because natural resources have been harvested. We like to wear fur coats, for instance, and therefore we want an environment where silver foxes are plentiful, and anyone can get one if he just owns a rifle.
If you don't mind, I'd like to explore the argument with Ralph Deeds on the issue of "lost productivity from the thirties" a little more.
Say somebody's great grandfather had a large estate of thousands of acres. There was timber, there was coal, there was even oil beneath the ground. Maybe gold, too. Because the great grandfather's business did poorly due to the depression, he never got a chance to harvest all those resources.
Is the great grandson (who inherits the land) poorer or richer for his grandfather's lack of productivity?
It depends on the grandson's utility function.
I think you are incorrect about the motivations of those who would cap emissions.
If you read carefully your own description of how you want things to be, you will see immediately why it is not stable. (Or maybe you won't.)
Nets, maybe some of those who want to cap emissions just want to make things difficult. The "liberal" tendency is to make the average person poorer by tying him up in red tape. But people who champion increased productivity make the average person poorer by making it harder and harder to have direct access to natural resources. The more of them are harvested, the harder it becomes to harvest the next layer, until the technology required becomes something that a single human being or even a small group cannot own or control. This requires collective ownership of resources, and whether the owner is a corporation or a government makes very little difference to the average person, because his influence is diluted.
Aya,
If the resources are easy to harvest, they will be harvested.
About emissions reduction, you'll like this:
http://www.telegraph.co.uk/earth/environment/clima
On growth: I've been teaching Calculus 1 to a class of about 60 students. One of their homework questions asked
somewhat imprecisely: "is your height as a function of time
one-to-one." Half my students think they will continue growing indefinitely.
Nets, do they think they will continue growing indefinitely or did they misunderstand the question and the terminology in which it was couched?
Yes, I do like the title of the article you linked: "'Contraception cheapest way to combat climate change'"
At least some of them justified their answer by telling me something like "we're always growing."
Wow! The mind boggles.
Did you tell them growing out doesn't count?
Interesting debate. Thank you nhkatz for Adam Smith's book. I have saved it.
RK Sangha on HubPages
![Alan Greenspan- Was He Blind or Stubborn: 200 Years of a Failed Economic Philosophy and the Great Recession of 2008 [96]](http://s4.hubimg.com/u/5107931_50.jpg "Alan Greenspan- Was He Blind or Stubborn: 200 Years of a Failed Economic Philosophy and the Great Recession of 2008 [96]")
Ef El Light 2 years ago
Bodies of lucre bear salubrious growth,
Of bigger metamorphoses not loath.
I should mention there are more trees in the US now than 50 years ago, since the harvesters of wood replant with fast growing trees. Do a search on "fast-growing trees." There are probably more salmon grown in farms now than could be caught naturally 50 years ago.
Greedy cooperation should engross
The world in profit, as all men hate loss.