Tuesday, 7 April 2015

From the comments: A strange view of economics

Jd Dalisay kindly left the following comment on my posting on A strange view of economics which raised some questions about the ideas underlying Dalisay's blog Socioeconomic Science:
Here are the answers to most of your questions:

what are we make of the work of people like Amartya Sen or Tony Atkinson.. and subjects like welfare economics?

I'm unfamiliar with those. Though I know a little of Sen in that he said that famines are caused by lack of freedom or 'failure of exchange entitlements', which was already explained by Smith earlier: "A famine only arose from the government’s violence in attempting to remedy a dearth by improper means."

How does behavioural economics fit into jundalisay's framework?

Behavioural economics has its roots in psychology which sees the mind as an entity subordinate to the brain. Smith's and Hume's political economy is based on metaphysics which sees the mind as an entity which can exist without the brain, as a soul. This is taboo now because metaphysics is regarded as pseudoscience. In Smith's time it made 1/3 of the sciences: Natural Philosophy, Metaphysics, and Logic: “This general division seems perfectly agreeable to the nature of things" (5.1.151)

Much of post-19th century economics is to do with proper government policies and regulation.. So how does standard economics and 'Political Economy version 2.0' differ in this regard?

Economics needs many regulations because its underlying philosophy is utility or personal desire, begun by Say and Mill. Because personal desires vary per person, it creates many complexities which likewise need complex regulations. Metaphysicians such as Smith, Hume, Buddha and Laotzu never advocated utlity because it leads to selfishness and destruction: "Power and riches are enormous and operose machines ready at any moment to crush their unfortunate possessor." (TMS Part 4). Socio-economics replaces utility with 'natural self-interest in the context of one's society'. To avoid ambiguity, I equated this term to svadharma, which roughly translates in English as own dharma, own path, in existence. A baker bakes because he naturally loves baking (cause), not because it will bring him cash (effect), otherwise he would've been banker.

Who in post-19th century economics is it that championed the cause of businesses?

Says Law. It says "Supply creates its own demand". Smith pointed out that this 'Production Motive' is a mercantilist sophistry. In reality, the wealth of a society is in the purchasing power of its people: "The net revenue is their stock which they can..spend on their subsistence, conveniencies, and amusements.." In Smith's system, the wealth of countries will be measured in Purchasing Power, or in how much each citizen can buy, not on Gross Domestic Product or how much its businesses can sell. Thus GDP is the first proof of the business-cause.

It's irrelevant whether a business is called a firm, corporation, or company. The main guide is if it earns by profits. The dominance of profit maximization is another proof of the business-cause. In Smith's system, ordinary profits is the target and is defined as the minimum profit needed by the owner/s to continue their business. This minimum profit translates to maximum benefit to all members: "The increased competition would reduce the profits of the masters and the wages of the workmen. The trades, the crafts, the mysteries, would all be losers. But the public would be a gainer because the work of all artificers would become cheaper this way. All corporations and most of corporation laws have been established to prevent this reduction of price by restraining that free competition which would most certainly occasion it."
Let me just a a quick comment on the last point. Gross domestic product can be determined in three ways all of which give the same result. They are the production (or output or value added) approach, the income approach, or the expenditure approach.

The production approach sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors ("producers," colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes.

So by the expenditure approach GDP is basically what people spend on their "subsistence, conveniencies, and amusements".

I take Say's Law to be a point about macroeconomics, not micro. As Mark Blaug has said:
The assertion that 'products are paid for by products' [the gist of Say's Law] is by no means trivial. In one sense it is the beginning of sound thinking in macroeconomics.
The important point is that I don't see it as having anything to do with firms, that is, with what institutional arrangement is used to produce goods and services. Say's Law doesn't depend on firms being private for-profit organisations. Output could be produced by not-for-profit firms, worker cooperatives, SOEs or whatever and Say's Law would not be affected. Say's Law just implies that in aggregate it is impossible for all goods to be produced in relative excess. That is, general overproduction is impossible. Also Say's Law had nothing to do with mercantilism. I am sure Say would have rejected mercantilism, as do modern economists.

Note also that that in perfect competition a profit maximising firm will make zero economic profit and will, in partial equilibrium terms, maximise welfare by maximising the sum of consumer plus producer surplus. So within a standard economic model, maximum profits equals minimum profits, ie zero, and benefits to all members of society is  also maximised.

The dominance in economics of using the idea that firms maximise profits is, in part, due to the obvious point that most firms in an economy are for-profit firms.

One more point about this comment,
Economics needs many regulations because its underlying philosophy is utility or personal desire, begun by Say and Mill.
Actually thinking in terms of utility goes back well before Say or Mill. As D. P. O'Brien has written,
He [Smith] inherited a subjective value theory: and, instead of developing this, he largely substituted for it a "cost of production" theory of value. A developed subjective theory was available in the works of Pufendorf, Smith's teacher Hutcheson, and Hutcheson's teacher Carmichael. These writers made value dependent on usefulness and relative scarcity-just as has been done in economics since the Marginal Revolution of the 1870s. Adam Smith himself advanced a somewhat similar value theory in his Lectures and there solved the paradox that water is very useful but valueless, while diamonds are useless but valuable, on the basis of relative scarcity.

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