Tuesday, July 5, 2011

In earlier posts I've referred to Bill the drug dealer and the forces facing him as he decides what price to charge for his marijuana. We've seen several forces that have been applied to pricing of his weed, from the introduction of externalities that have absolutely nothing to do with cost, but can determine price.

The importance of this essay lies in the simple discovery that costs don't determine price.

There is a great deal of literature that offers a different conclusion. It is all, simply, wrong.

I bring this up in response to a great deal of what is offered as public debate, over current policies adopted by our states and our federal governments' attempts to direct the market's allocation of scarce resources into enterprises which don't, in my opinion, merit such allocation.

Bill has one externality, his view of what value is. Bill is an adherent of the Labour Theory of Value. The Labour Theory, in short, advances the belief that it is only the touch of labour's hand that creates value. Unfortunately for the labour theorist, this is also the mainstay of Capitalism, that the touch of the hand creates ownership. And ownership is property.

When I go into the wilderness and tame the wilderness to my bidding, I create property. As rules of ownership have evolved, the taming of the wilderness as a prelude to property has been eliminated, in most cases. Just ask the Foreign Secretary of Israel. Typically, in a State of Nature, Man is left to his own devices when it comes to survival. It is through the consolidation that occurs as a society develops, that laws are developed that help to smooth the relationships between competing claims of ownership. In early societies, much of what is claimed as ownership is more dependent upon the owner's ability to back up his claims, through violence, that gives credence to his claims. Something along the order of "a man's reach should exceed his grasp." How much a man could claim to own was based upon his ability to have his grasp defended by force. As societies developed, it became clear that property rights, and the concomitant benefits of property rights, were one of the essential responsibilities of a civil society.

Property allowed a person to own a thing. Property, as clearly defined as that chattel or land that is held by a property owner, was an asset of the property owner. In bookkeeping terms, we know that Assets equal Liabilities plus Equity. The claim of property is an important claim. It is a thing, provable as itself. What are things that we know we own?

The first, and easiest argument is, I own myself.

This claim, of self-ownership, isn't that old.

I know that there is a movement afoot to deal with the crime of slavery. That is, that slavery was legal during the first few hundred years of America's establishment. Slavery is viewed as "America's peculiar institution." What is ignored in this view is that slavery was as much a product of improvements in transportation as anything else. Slavery, as defined, was the common mode of existence for most of the pre-Renaissance world. Freedom and liberty are the new concepts. And freedom and liberty as existential rights of man are as new as the Enlightenment.

Slavery was the name given to persons imported into a region. The common name of indigenous slaves was serf. Serf or slave, the economic and political rights of the serf or slave was equivalent. Whether serf or slave, you did your master's bidding upon threat of death. Since few of us can actually track our heritage back to an ancestor who was a member of the nobility, I would suggest that most of us were, through our ancestors, nothing more than that of the stock of serf or slave. Several critical moments occurred in Western Civilization that advanced the notion that humans were not, indeed, subject to the tyrannies imposed by others, either as a class, or as a condition of birth. I identify two; the works of Martin Luther; and the writings of Rene Descartes.

Luther's reformation had important ramifications in terms of what we determine are the conditions of property. That God is all powerful and all knowing is a constant. But the terms and conditions under which we have a relationship with our God shifted. It shifted from being dependent upon a class of clergy, to a class of the individual; that our relationship with God was not dependent upon our relationship with the clergy. That the clergy could be wrong.

It is this human characteristic, our intelligence, that is the key to our humanity. Luther taught us that we no longer needed the clergy to have a relationship with our God. That God was knowable. Independently of the clergy.

Descartes' contribution to our current understanding of our humanness is likewise dependent upon the singular quality humans have that differentiates us from all other forms of known existence; I think, therefore, I am. Not only am I not limited to the knowledge of God, independent of all intercessors, my very existence is proven through the paradigm of self-knowledge. My knowledge of God is independent of all intercessors and I have proof and knowledge of my self, Q.E.D.

This digression is important, since it points out the basis for all property; it is dependent solely upon my own independence, and the solitary independence of my mind. You may wish me to believe any manner of things, from social justice, to a view of what normal behaviour is, but the final arbiter of what is true is me. Fortunes have been made based upon this simple distinction. From Alexander Graham Bell, to Madam Curie, to Steve Jobs, men have made their names based upon their intellects, the source of all wealth.

The end of slavery, the end of serfdom, the end of forced capitulation to the State, created a climate where men were free to use their own ideas, beliefs, effort and enterprise to create unknown wealth and a standard of living that had never before been seen. Freedom and liberty were internal, or endogenous, variables that had always existed, but due to constraints imposed externally, or exogenously, were never allowed the latitude to inspire, create and produce the products of our sensibilities. Our curiosity, our imagination, our determination and our affections.

Bill's inability to price his product efficiently had been limited to exogenous forces; first, his adherence to a model of value that inappropriately determined price based upon a moral form that dealt with value as being dependent upon labour as the only determinant of price; second, his association with his drug dealing overlord, Mikey, who imposed price and quality restrictions on Bill, in order to further his own self-interest.

All of this discussion, to date, has focused upon the activities of Bill, Mikey and some chick, whose name I forget. Bill and Mikey are representative of the supply side of the economic equation. Too often, we believe that "price" qua price, is determined by the seller of a good. Again, not the case. But we can disregard this for the moment. The question raised by this post is, "Why do we divide the study of economics into two schools?"

Economics is a funny school. And the divisions within the academy are silly. But important to the professors who sit on committees and determine the curriculum with which our nation's students are exposed. The two schools of economics are the studies of microeconomics, and the studies of macroeconomics. It's as if the study of humans were to be divided in the academy into the study of maleness, and the study of femaleness. Describe to me a curriculum that could be designated as "Women's Studies" that could possibly have any meaning to a normal human being?

But that is the kind of silliness that occurs in the academy on a daily basis within the School of Economics. Macro-economists are devout in their assertion that micro-economic concerns are beneath them. The macro deals with aggregation. The micro deals with the small or individual.

The madness of this is apparent to me, what is an aggregation without the aggregation of the small or individual? And yet, textbooks have been, and are being, written on the face of this inability to deal with the principles of aggregation and dis-aggregation.

When everyone is a member of the chattel class, there is no problem with slavery. When some escape from the chattel class, there is a difference between being born a serf, and being born a free-man. When someone is imported to slavery, there is a distinction between the serf and the slave. When a leap occurs, between living under duress, to living without duress, from serfdom, from slavery to liberty, there is a shift that cannot be undone.

I forget where, but recently I read of the debate between the words "unalienable,” and "inalienable." I would ask the academy to consider the difference. And ask that the separation between between macro and micro be re-thought. Statistically, we cannot remove the impulses of the individual from any macro-economic model. Sure, we can deal with large groups, and large groups are easier to both identify and to motivate. But a great deal of error creeps into calculations that disregard micro-economic impulses. And probably explains a great deal of macro-economic analysis' failure to describe our current failure in national economic policy. Macro simply disregards most of the lessons of micro.


1 comment:

ZZMike said...

"For every made shot in the NBA, there were thousands of missed shots in practice."

Two key words there: "thousands" and "practice".

Somewhere it is written that mastery of any art (or subject, or skill) comes only after about 10,000 hours of work.

I think that the thing that separates the master/champion/achiever is that he makes fewer mistakes along the way. Call it "better intuition".

Nowhere does this show up more strikingly than in the military. The commander who makes a lot of mistakes early on doesn't make it to the pages of military history.

"Their handwriting? Barely legible."

There's a long thread on another blog about the loss of teaching cursive writing any more. Got to push "more relevant" stuff. Besides, who takes pen[cil] to paper any more? But still, we lost a little bit when that went away. (Have you ever noticed how young people hold a pencil nowadays?)

"No points for truth, logic or clear thinking."

Exactly. We have to push "self-esteem" (even when it only comes from outside).

I saw the Judge Judy clip earlier. His argument seemed to be "why should I give someone else my free money?" And when he said "I could go rent a room somewhere", she could have replied, "That's a great idea. We'll see that you go do it."

Congratulations on taking on the mantle of mentor.