Sunday, May 31, 2009

Economics Lessons from 'A Beautiful Mind'

by Len Hart, The Existentialist Cowboy

The Greek tradition found virtue in the pursuit of rational self interest, a tradition that later found expression in Adam Smith's "Wealth of Nations" in which is posited "rational self-interest" as an "invisible hand" upon "free markets". Recent bank failures, recession, accounting crimes and corporate scandals, however, amount to enormous empirical evidence that "laissez faire" capitalism is a myth, and if not a myth, an impractical ideology. The "invisible hand" --as modern conservatives have defined and appropriated it --is mere "wishful thinking".

If there is an "invisible hand" it does not militate against crooks, charlatans, and fast buck artists who have now firmly ensconced themselves as much in board rooms as among sleazy fly-by-nighters. The Reagan administration alone, like that of Warren Harding before it, is proof that, left to its own devices, an elite, robber-baron class will act to enrich itself and, in the process, imperil the nation. Business is not the business of America or, indeed, any nation which wishes to remain solvent or, in other ways, ensure the defense and futures of its people. A 'robber baron' era, a 'Gilded Age' did not merely precede the Great Depression, it caused it by impoverishing every other class but the upper crust. While there has never been a bust without the 'bubble' that precedes it, the 'bubble' itself is the result of the deliberate transfer of wealth to an increasingly small elite. Today, in America, that elite is but one percent of the total population. It owns more than some 95 percent of the rest of us combined.

Markets left to their own devices trend toward oligopoly in which oligarchs effect political plutocracy through the exercise of sheer political muscle, intimidation, fraud, and outright bribery. The "invisible hand" does not moderate the rich and powerful. If a ruling cabal is to be moderated it must be done by political action and the power of cooperative or, perhaps, 'socialist' interventions. This much is implied by Adams himself.
In civilized society he stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely*43 independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them.

--Adam Smith, The Wealth of Nations, Book I, Chapter II, Of the Principle which gives Occasion to the Division of Labour
Whenever I hear a modern Republican spout Smith on the one hand and 'laissez-faire' Capitalism on the other, I suspect that they have not bothered to read Smith. Certainly, my concerns are less a criticism of Smith himself than of modern economic conservatives and/or 'supply-siders' who find in Smith a rationalization for many rapacious and monopolistic behaviors lately witnessed among the ruling one percent and the combination of both greed and incompetence among the big banks.

Smith is no more to be faulted for this than Darwin should be faulted for the excesses of "Social Darwinism" --neither Social nor Darwin. "Social Darwinists" are most often associated with the age of the Robber Barons, providing them the ideological bias with which they justified all manner of corporate crookedness and sleazy practices. Likewise, the contemporary GOP believes 'greed is good' , a neat slogan by which, during the Reagan years in particular, the transfer of wealth upward by way of inequitable tax cuts of trillions of dollars to the ruling elite led inexorably to Reagan's depression of some two years --the deepest and longest depression since 1929. The maxim: "from each according to his ability, to each according to his need' was, of course, not merely dismissed but reviled. Communism -- it was dismissively called!

To his credit, Smith himself feared the rise of monopoly power --a fear which modern conservative commentary either does not understand or omits entirely. Moreover, Smith subscribed to a 'labor theory of value' which 'wingnuts' would have you believe was the radical, 'seditious' brainchild of that 'Satan incarnate' --Karl Marx. Not so! Smith subscribed to a 'labor theory' of value as have almost every major economist since the 18th Century.
The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. What is bought with money or with goods is purchased by labour as much as what we acquire by the toil of our own body. That money or those goods indeed save us this toil. They contain the value of a certain quantity of labour which we exchange for what is supposed at the time to contain the value of an equal quantity. Labour was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased; and its value, to those who possess it, and who want to exchange it for some new productions, is precisely equal to the quantity of labour which it can enable them to purchase or command.

--Adam Smith, The Wealth of Nations, Chapter 5: Of the Real and Nominal Price of Commodities, or their Price in Labour, and their Price in Money
Immanuel Kant however, assailed the pursuit of self interest in favor of "good in and of itself" --a "categorical imperative", a moral standard that no one I know is capable of living up to. Nevertheless, Kant has became the other great influence upon American conservative thought --though I cannot give most contemporary conservatives credit for having actually read Kant or understanding him. It is not Kant himself but the many misconceptions about him that may be found lurking beneath the ideological surface of the extremist right-wing and the religious right.

It is unfortunate that Kant himself defined this "transcendent reality" --which he called the noumena --as being unknowable. By definition, nothing meaningful can be said about whatever is "unknowable". One cannot make sense about the unknowable; there is no 'knowledge' of the unknowable. Nevertheless, righteous ideologues will insist upon 'deducing' from the unknowable a veritable gestalt of gibberish which they profess to know as 'fact' and, upon that basis, will seek to impose it upon you!

We are given the false choice between two mutually exclusive alternatives: "selfishness" or "selfless transcendentalism". Neither position, however, is entirely true and neither is completely understood even by the conservative mentality that espouses them. Adam Smith's "invisible hand" is no more valid than Laffer's "trickle down" theory and it is highly doubtful that even Kant lived up to his own moral dictum --though I credit Kant with sincerity and doubt it among his followers. Mankind is probably neither entirely selfish nor entirely selfless but somewhere in between.

The truth is most likely found in the middle. The work of mathematician John Nash, celebrated in the motion picture "A Beautiful Mind", wrote a brilliant paper on "binding agreements" that casts grave doubts upon many "conservative" fables, shibboleths, and fairy tales --including those whose origins lie in "mutually exclusive" intellectual traditions.
Next in my mini-series about the great economic thought leaders who were seminal in the development and success of modern outsourcing is one of my favorites, the mathematician John F. Nash, who took economists a step or two beyond Adam Smith with his ideas on Game Theory and Behavioral Economics.

His conclusions are right in the Vested Outsourcing wheelhouse; that is, playing nice and playing cooperatively from the start of a business or contract relationship is good for everyone.

If you’ve seen the movie A Beautiful Mind, which is loosely based on the life of Nash, there’s a brief scene in it that captures in an entertaining nutshell his great breakthrough in the use of games – especially non-cooperative games – as a basis for understanding complicated economic issues.

In the scene Nash, as portrayed by Russell Crowe, has a revelatory moment in a campus bar as he and his mates ponder the best ways to produce optimum results in their approach to and pursuit of a beautiful blonde and her friends.

Nash’s inspiration was that Adam Smith’s principle that the “best result comes from everyone in a group doing what’s best for themselves” was incomplete and needed revision: The best result comes from everyone in a group doing what’s best for themselves and the group.

--The Big Thinkers – Part 2 John Nash: Game Theory (or Playing Nice is Good for Everyone)
The American right wing is locked into 'competition' whether it works or not. The American right wing is not prepared to consider facts that prove that in many if not all cases, cooperation is more practical, more efficient and, in the longer term, more successful. It must be especially annoying for the right wing mentality that this principle was proven by three horny intellectuals --geeks --in a bar, in the northeast.

A Beautiful Mind