The Logic Off Topic list

Since it necessarily deals with people and the behaviour of people, every 
economic theory is in the end also a political one. A theory of economics 
requires a massaging of people so that they fulfill the roles that the 
given economic theory requires. Historically, the Emperors Constantine and 
Charlemagne and their descendants, for example, had an economic theory ... 
and they were perfectly happy to massage their societies into the shape it 
required to make those theories work. This was partly responsible for what 
historians call 'the Middle Ages' or 'the Dark Ages'.

That kind of massaging of people is a lot easier to do when the 
mathematical and scientific basis of that theory bears some relation to the 
reality that people perceive around them. The contemporary classic example 
of this is Karl Marx's theory where he tried to explain a set of political 
observations by allying them to what he thought was a sound economic 
theory. The iniquities that Marx observed were very real -- the oppression 
of large communities of people in factories etc while the Industrial 
Revolution occurred around them in such a way that a few benefitted while 
many suffered. Marx's big problem, however, was that the economic theory he 
devised to explain this phenomenon, and then to counter it, was 
mathematically bogus. His theory about rates of return and rates of capital 
were just plain wrong as Samuelson was later able to prove by using some 
sophisticated arguments based upon an econometric model using matrix 
mathematics. Samuelson simply studied the observed behaviour of economies 
and demonstrated that the economic behaviour Marx was alluding to had never 
in fact been observed anywhere, and that the relative prices of labour and 
capital never in fact behaved in the way he said they would. The patent 
failure of Communist regimes to deliver on their promises is in no small 
measure linked to the fact that Karl Marx was a very poor mathematician, 
and that the model he devised was simply incapable of delivering the 
results he promised. No amount of tinkering with large scale economic 
structures or at a governmental scale (5-year plans or whatever), be this 
in Russia or elsewhere, was going to make an erroneous scientific-economic 
theory work. No matter how great was the political and social control that 
the governments who practised that system exercised, they simply could not 
deliver appropriate economic results.

This has got nothing to do with whether or not Marx's actual political 
ideas or ideals, based as they were on ideas of 'the brotherhood of man' 
are or are not laudable. This is simply to do with the fact that it was not 
possible to realize those ideas through the economic theory that he 
produced in order to support them.

In complete contrast to Karl Marx, Adam Smith produced a very different 
economic model. Smith, however, took a very different approach. He started 
by looking at the very best physical, and therefore mathematical, model of 
his day, which was Newton's theory of gravitation. Smtih then set out 
explicitly to construct a model of economic behaviour that was as 
mathematically sound and logically rigorous as Newton's. The 'force' that 
he came up with, and which was intended to act as the mathematical analogue 
to Newton's theory of gravitation, he called 'competition'.

By competition Smith meant that in the face of uncertain information, all 
economic entities were to be regarded as acting in one very simple way: 
they all set out to procure goods and resources at the minimum possible 
prices that they could; and they all set out to dispense and sell goods at 
the maximum possible price they could attain. Price therefore became the 
sole method of interaction between economic entities. This system became 
called capitalism. The only thing then necessary was for governments and 
societies to put into being the social organizations that would make it 
work. It had, of course, a corollary. The information available to actors 
was uncertain, and so also their responses were uncertain. In the face of 
this no-one could predict exactly what economic actors would do. The only 
thing the model could predict was that no matter what they did they would 
maximize profits and find ways to acquire resources and produce goods. 
Therefore, the best thing any government could do would be to leave 
economic actors to get on with such transactions, conducted through the 
medium of price, and to interfere with it as little as possible.

And ... since Adam Smith came up with an explanation that made a lot of 
sense, both citizens and governments proved willing to do whatever it took 
to bring about the relevant economic and political reality. Adam Smith's 
theory remains, to this day, the most sound and best working economic 
model, and it therefore spreads itself wherever it can simply because when 
presented with a choice people tend to go for something that can produce 
results, and Smith's system does tend to produce results.

However ... every economic model has its political consequences. One of the 
problems with the Smith model is that of 'uncertain information'. What are 
people going to do in the face of 'uncertain information'? And what efforts 
are people going to make to come by 'more certain' information? And how are 
they going to behave as their stock of information increases?

What drives the Smith model is the proposition that when a consumer is 
confronted with two goods, one at a lower price than the other, they do not 
immediately know WHY one of the goods is being offered at a lower price. 
The brutal political reality of the world is that it is very likely priced 
more cheaply because a lot of rape and pillaging and exploitation of 
workers has gone on to make the good cheaper, but without specific and 
convincing information upon this point the 'average' consumer will tend to 
presume that one set of goods is lower in price for entirely 'altruistic' 
reasons having to do with the e.g. willingness of one party to offer goods 
for a lower price simply because in the long run they will make a bigger 
profit that way -- and not because some group of people has gone out of its 
way to make very sure that those providing the goods are paid considerably 
less than 'the minimum wage'. Whether or not such things do or do not 
happen you will have to judge for yourself.

There is another 'problem' with the Smith model -- although whether or not 
this is 'really' a problem depends upon your political point of view. 
Please remember that the Smith model is based upon a model analogous to 
gravitation. And ... gravity is about height. What this means is that since 
all goods begin at 'zero height' and are 'in the environment' (i.e. they 
are all initially resources and not goods) then if one object ends up at a 
higher location than another (i.e. it has somehow become a 'more valuable' 
good), then something must have happened to get it there.

There are two possibilities. Either, someone worked upon it to make it more 
valuable; or else it has somehow been taken away from one person by 
another. By the same token ... if some economic group is 'wealthy' or 
'high-up', then something must have happened to 'elevate' those wealthy 
groups relative to the non-wealthy ones. The only question now is -- how, 
when, and why did that relative elevation occur? Again you will have to 
ponder upon such things for yourself. The important factor here is what 
people are inclined to presume given a world of uncertain information ... 
or, of course, given a world in which obfuscation of facts is likely to 
occur when that obfuscation is in someone's interests because that 
obfuscation helps them increase the size of their profits in that the vast 
bulk of economic actors simply shrug their shoulders and pick the lower 
price -- when they do not have information to tell them why they shouldn't.

The question of exactly what processes have been imposed upon goods and or 
groups so that they can have a higher value and/or worth is, of course, 
very hard to answer without immediately straying into more overtly 
political considerations. It is a big argument that has gone on within the 
capitalist system pretty much ever since Smith invented it.

Some say that certain groups are wealthy simply and entirely because of the 
workings of 'the free market'. They append that argument by saying that the 
free market is totally dispassionate, it is 'natural', and it is inherently 
'fair' and 'just'. Others, of course, say that people can only get wealthy 
off the backs of others who are perforce obliged to remain poor and at the 
bottom of the ladder of wealth. In such a view the system is itself obliged 
to work in such a way that poor and exploited people are kept deliberately 
'out-of-sight' and 'out-of-mind' of economic actors who might well behave 
differently if they knew more about the processes involved in given 
economic transactions. To pick a reasonably current example doing the 
rounds at present, if Nike can manage to keep the vast bulk of its 
consumers unaware of exactly what it is doing to those of its workers 
located in 'less fortunate' countries and whom they force to work for no 
benefits and at extremely low wages, then given that the world is filled 
with uncertain and imperfect information it is very likely that those 
consumers will keep happily buying those goods because the 'best thing' 
that each of those consumers can do (for Nike, for themselves, and for the 
workers) is pay the lowest possible price they can to get the maximum 
possible benefits. They are additionally entitled to assume, without 
further evidence to the contrary, that Nike will act as they do -- which is 
do its best to make sure that those foreign workers are treated 'reasonably 
comparably' to the workers that they know about and who are located rather 
closer to home. Whether such things are so or not is, again, for you to 
judge. Please note, however, that the reality of the Smith model is still 
that it is a thesis about how consumers behave in a world of uncertain 
information.

Smith's system, uncertain information and all, works so well (at a 
governmental and predictive level) that it has survived the introduction of 
a new set of economic models. Economic theorists and politicians use game 
theory quite a lot now. And ... game theory is also about the kinds of 
decisions that individuals are likely to make when they are surrounded by 
uncertain information, given the need to attain a specific goal or target. 
In economic game theory that target is the same as in the Smith model 
namely: benefitting one's own self to the maximum possible degree and at 
the minimum possible cost. Interestingly enough, game theory is also used 
to help create strategies in war. And ... economics is about war because 
war (along with slavery and other forms of repression) is a very good way 
of extracting the maximum quantity of resources without having to 
recompense the people who provide those resources. In the Smith model, of 
course, if making war is felt by economic actors to be cheaper than 
engaging in acts of trade then a given economic group is likely to go to 
war or engage in other acts of aggression -- and particularly if it can be 
obfuscated so that there is uncertain information about the causes of war, 
its progress and the like.

The big question of our age, from an economic historical point of view, is 
the fact that information about 'others' on the planet is becoming less and 
less uncertain all the time; as also is information about the long-term 
consequences of economic actors being constantly encouraged to maximize 
their short-term economic gains. This means that the actions of governments 
(and corporations) in pursuit of economic goals are becoming less uncertain 
to potential economic actors. And ... whether or not capitalism as we know 
it can stand up against the fact that the system works at its best when all 
players in the market are forced to play with uncertain information is a 
big question that will probably be addressed over the next century or so.

As the G7/G8 powers are increasingly finding out to their cost, whenever 
they try to have a conference about the global economy, all the social 
sciences suffer from a very particular difficulty. Human beings are not in 
fact insensitive, unintelligent, or uninformed economic actors. They do 
have knowledge and information. They also often have strong beliefs about 
how human beings should conduct themselves. Their future actions are all 
too often tempered by that kind of knowledge, information or belief. And 
... the suspicion is growing amongst a significant proportion of 'the 
wealthy' of this planet that the wealth they currently enjoy has its roots 
in unpalatably low prices foisted upon others somewhere along the line. 
Somewhere along the line, steps have been taken to create their wealth that 
necessitated that other human beings could not in fact maintain 'a decent 
standard of living'. Political assassinations, economic disadvantaging, 
political repressions ..... And ... the suspicion amongst some regarding 
such things is now so high that they are beginning to use those suspicions 
to in their turn massage the political environment in which economic 
actions take place so that proper recompense is offered to those whom in 
their eyes were previously mistreated. Many of the economic actors 
concerned are perfectly willing to go out on the streets and demonstrate 
against such a system, to participate in environmental groups and the like.

And ... of course ... there are (at least) two different kinds of 
'uncertain information'. There is uncertain information because people 
genuinely cannot be expected to have more information; and there is 
uncertain information because people can't be bothered to make the effort 
to acquire it. Increasingly, people are pointing to the fact that the 
latter kind of uncertain information is inexcusable and that people SHOULD 
make the effort to acquire information about exactly what is involved in 
creating and producing the goods that they consume. (And, since America is 
the wealthiest collection of people on the planet and consuming far and 
away the most goods, this criticism is the most forcefully directed at US 
citizens to the point where its social and economic institutions are often 
accused of deliberately keeping its citizens uninformed so that the present 
economic situation can continue).

Uncertain information also has an interesting consequence in military and 
political actions. An interesting strategic imperative that wormed its way 
into both the Vietnam and Gulf Wars, to take but two recent and well known 
examples, was that so much of it was played out on TV. This had the 
consequence that those on behalf of whom the war was ostensibly being waged 
no longer had uncertain information about what was supposedly being done in 
their name. They could see very well what was being done 'in their name' 
... and many of them indicated that the price that they were being asked to 
pay in order to maintain the life-style that they had was not one that they 
were prepared to pay. This was also a big motivating factor in the Gulf 
War. The Head of State of a large military power was forced to make 
decisions about military objectives based upon the fact that the citizens 
in his nation could see what was happening on TV. For good or ill, military 
decisions were made in the light of that.

And, of course, one of the most important things about terrorism is that it 
is at its most effective when its actions are played out in the media. 
Terrorism can be regarded as a way of putting information before economic 
and political actors so that, with more information, they will modify the 
way that they live and realize that the profits that they are enjoying have 
come at a cost they might well not have been aware of. Possibly as a 
consequence of such factors we have the interesting military and political 
situation where a bomb is dropped by one hand at one minute, while seconds 
later parcels of food are dropped by the other hand. As any aid worker will 
attest, this is a near-100% wasteful way of donating humanitarian aid. As 
but one example, in the very area where those food parcels are being 
dropped the countryside is still full of minefields left by the Soviets -- 
and on average there are about a dozen incidents a day of mines going off. 
However, it is very likely that those food drops are not being dropped with 
the intention of helping the citizens of any beleaguered nation, but simply 
to massage the political opinions of those who can see the war upon their 
TV's, and who can see the parcels being dropped. They are the economic 
actors on behalf of whom the war is supposedly being waged. I leave you to 
draw conclusions. Please do not shoot the messenger. My intention is only 
to speak about an economic model.

Quite what will replace the Adam Smith model once global TV, radio and the 
Internet have knitted the whole world together even more than they do now 
nobody quite knows. There is also the issue of what human beings will do as 
it gradually dawns upon them that uncertain information can be very 
expensive politically. But ... seems like we are living in exactly that 
kind of age ... an age in which it does seem to bother some people that 
while they are able to make a high profit and have a high standard of 
living, others do not seem able to do so ... and rightly or wrongly they 
link these two together ... and then institute social movements based upon 
that perception. A large number of US citizens, for example, still refuse 
to link the poor economic and political status of Black Americans with the 
prior existence of slavery, while others say that they are linked. Linked 
or not, what is a fact is that alleviating the status of Black Americans, 
if anybody wants to do it, is very expensive economically and politically. 
This therefore boils down to the question of whether or not there is the 
economic and political will to do something about the situation. Most 
consumers, in a world of uncertain information, tend to favour the status 
quo or to carry on leaving their information uncertain in the belief that 
eventually price will solve everything.

But ... whatever replaces the Smith model it had better and also have a 
sound mathematical basis ... or else incorporate into it parameters that 
take into account what it is that people do, and how they behave 
politically and economically, once they are aware of the conditions under 
which live the people who are forced -- by the system -- to receive low 
prices and low wages for everything they have to offer.

One thing is certain though. If anybody wants to set up a new economic 
order then they are going to have to come up with a better predictive and 
economic model than Smith's because whatever may be its faults the Adam 
Smith model allows governments to make plans and bring about results. As 
the Communists found out to their cost, governments that cannot deliver on 
the promises they make are in the end in serious trouble. But ... for as 
long as Western governments can deliver results on the promises that they 
make (and what they always promise is that those who believe in the system 
they propagate will be better off tomorrow than they are today) then for so 
long will they have a method for making sure that the system continues in 
existence and that others also want to copy it. It is likely that the Smith 
model will only break down for one of two reasons: (a) a better model comes 
along; and (b) consumers indicate that the premise of uncertain knowledge 
is no longer an acceptable way of doing business and conducting economic 
affairs.

We seem to be living in such an age.

Kool Musick
Keep Musick Kool


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