by Gavin Kennedy

Spare Us From the Invisible Hand

Patrick Kilbride writes in Chamber Post HERE:

“Free People, Free Minds, Free Markets”

‘In the 18th-century, Adam Smith left us with the indelible image of markets producing desirable social outcomes through the work of an "invisible hand." ’

Comment
In an otherwise neat argument for both liberty and free markets, Patrick Kilbride spoils his case with modern nonsense about Adam Smith and his use of the metaphor of “an invisible hand”.

Smith did not use the metaphor when explaining either how markets work generally (Books I and II, Wealth Of Nations) or how some, but not all, merchant traders preferred to invest locally following their concerns about the higher risks of investing abroad or in shipping (Book IV.ii, Wealth Of Nations).

In fact, a close reading of the only place in Wealth Of Nations where he used the metaphor of an invisible hand, shows that he first explains in detail the circumstances leading some, but not all, merchant traders to behave as they did (paragraphs 1 to 8, chapter 2, Book IV), and only then deploys the metaphor for the consequences of their specific behaviour (“intending their own security”), conforming to the arithmetic rule that the whole (the national annual output of wealth, including local employment) is the sum of its parts – the more merchant traders who are risk averse, despite the high profits from foreign and colonial trade, the greater the total annual wealth, including domestic employment.

Modern economists have invented a whole new meaning to Smith’s singular use of the metaphor, giving it the characteristics of a “law” of markets, though it was never stated as such by Adam Smith.

The modern invented meaning is commonly taught in first year economics courses and textbooks, and such is the effect of it on modern economists, it is extremely difficult to dislodge it – they seldom actually read Wealth Of Nations or even the relevant paragraphs (1 thru 8) and, by relying on a truncated extract from paragraph 9 only, they remain solidly convinced that Adam Smith explicitly stated what their tutors told them he wrote.

This gives succour to hostile critics of markets who throw the “invisible hand” back at them (“invisible fist” or, as seen recently, “invisible middle finger”, and such like). But there is no actual “invisible hand”, it does not exist and never did. The metaphor is just that, a metaphor, and one that was popular in literature, sermons, and poems in the 17th and 18th centuries – I have a list of 59 examples of its uses, besides Smith’s.

Mathematicians called it into being when “proving” that general equilibrium in an imaginary market, loaded with assumptions that removed all semblances of real world economies, was a theoretical possibility (Debreu, Arrow). Others (Samuelson, Freidman) and among them propagandists against Soviet communist planning, used the metaphor to good effect – Stalin needed the gulags to enforce planning, but free markets had an “invisible hand” that did its work without menace.

Editors of Time, Newsweek, Wall Street Journal, Financial Times and assorted media journalists loved the “invisible hand”, Nobel Prize winners sang it praises, and the epigones believed in its miraculous powers with the passionate certainties of Jihadists.

Worse, the invisible hand became an alibi of last resort, flaunted all round as if it existed. When it “failed”, the invisible hand was dumped among wails and the gnashing of teeth in wholesale “confessionals” (Alan Greenspan).

Markets suddenly became naked – they always were naked, but the veil of the invisible hand obscured their nakedness. It never was the answer to everything that could go awry in the normal condition of disequilibrium in all economies, much of it excited to crises by public policy interventions by legislators and those who influenced them.

Smith was right about them and the damage they could inflict – fortunately “there is a lot of ruin” in an economy, as he might have put it in another context...

The tax code seems to foster one boondoggle after another. The ones getting my attention this week are the alternative fuel tax credits enacted in the 2005 highway bill. This was intended as a credit to encourage the development of alternative fuels for vehicles to cut our reliance on global warming-causing fossil fuels. See Natural Gas Vehicles for America, "Regulatory Summary: Alternative Fuel Credit-IRS Notice 2006-92" (Sept. 30, 2006) (discussing the alternative fuel credit of 50 cents a gallon under section 11113 of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users). But it was modified in 2007 , and as a result the paper mills discovered a credit for a process the industry had been using since the 1930s --it just had to add (in some cases) enough diesel fuel to qualify.

The paper industry essentially cooks wood pulp to turn it into paper, and a byproduct of that process is a dark sludge called "black liquor". The companies use the black liquor as a fuel to generate steam for electricity. And by adding just a small amount of real diesel fuel to the mix, they qualify for the alternative fuel mixture tax credit. And, not surprisingly, they love the "extra cash flow and income." See Sharon, Paper Industry: Don't Kill Fuel Credit, NPR (June 6, 2009) (reporting a $10 million savings from the credit in the past year for one company).

Sen. Bingaman suggested that the paper industries discovery of this black gold hasn't got much to do with the development of alternative fuels.

The alternative fuel mixture credit was originally intended to encourage
the development and use of alternative fuels as a way to decrease global warming
pollution. But by adding fossil fuel to their black liquor mix, Bingaman
says, paper companies are rewarded 50 cents a gallon for doing the
opposite. Id.

Bingaman wasn't the only critic. Canada joined with other countries to demand that the US end the paper industry subsidy, threatening a trade action because of the way the credit had distorted global pulp markets. Schott's Vocab: Black Liquor, NY Times, June 11, 2009.

Some companies had in fact used diesel all along in their effort to burn their own byproduct to produce energy, while others had changed the fuel blend to benefit from the tax credit. Companies claimed that they are doing exactly what the law intended. The Natural Resources Defense Council disagreed, calling it a "travesty" because it has meant reduced reliance on biomass fuels and increased consumption of fossil fuels "in order to rip off the American taxpayer." Lawmakers May Limt Paper Mills' Windfall, NY Times (Apr. 17, 2009).

This particular credit is supposed to sunset at the end of 2009, but companies wanted it continued. Let's face it, few corporations that have found a piece of corporate welfare in the Code are interested at all in seeing that "entitlement" turned off. The amounts are significant--for International Paper, $71.6 million for just one month from mid-November to mid-December last year. See Papermakers Dig Deep in Highway Bill to Hit Gold, Washington Post, Mar. 28, 2009. Not surprisingly, representatives of pulp mill states seem to think the credit is great--Republican Olympia Snowe called it a "critical lifeline to thousands of paper mills". Snowe, What the Black Liquor Tax Credit Means for Maine, Apr. 25, 2009.

The Obama administration wanted to stop the billions flowing under this provision to the paper industry, we were told in May. See Obama Seeks to Halt Alternative Fuel Tax Credit for Paper Industry, Washington Post, May 9, 2006. At $6 billion a year, eliminating the credit--even retroactively for 2009 (it expires in December, unless extended)-- for the paper industry could generate some revenue and at least some in Congress were considering just that. See Black Liquor Tax Credits: A Closing Loophole for the Pulp & Paper Industries, Accuval, Sept. 2009. Of course, the companies lobbied for maintaining it through 2009 and in fact for extending it for at least three years. See Appleton Papers et al, Comments to the Senate Finance Committee on the Alternative Fuel Mixture Tax Credit (July 9, 2009).

Now, it turns out that there is another biofuel tax credit that already extends through 2013, passed as part of the 2008 Farm Bill. See Voegele, IRS: Cellulosic biofuels are eligible for tax credit, BioMass Magazine (Dec. 29, 2008) (describing Notice 2008-110, which describes the tax credits under sections 40A, 6426, and 6427(e) for biodiesel and cellulosic biofuels, enacted in the 2008 Farm Bill for the years 2010-2013). See Committee on Finance, Finance Committee Leaders Detail Elements of Farm Bill Tax Package, page 3, Apr. 14, 2008.

Black Liquor is certainly cellulosic, so the mills may have something even better to replace the expiring black liquor alternative fuels tax credit--instead of 50 cents a gallon, they may qualify for the cellulosic biofuel credit amounting to $1.01 a gallon! Let's see. That'd apparently mean a subsidy double the current one invested in "incentivizing" paper mills into doing what they've already been doing since 1930--converting wood waste into a source of energy to power the mills. See Donville, U.S. Paper Makers' Black-Liquor Tax Break May Reach $25 Billion, Bloomburg.com (Oct. 15, 2009) (quoting Mark Connelly that we should "Think of this as a potential black-liquor II" and Marty Sullivan as forecasting "$25 billion in tax reductions for pulp producers claiming the cellulosic biofuel tax credit over the next three years").

This credit for the paper industry is of slightly smaller magnitude than the bailout we gave the auto industry. In both cases, the argument is that these industries employ many who would otherwise lose their jobs, and who but the government will be willing to help them through these extraordinarily tough times. Yet both industries produce a product that we ought to learn to do without--the gas guzzlers that Detroit was producing pollute the air, require the destruction of vast land for roads, and use enormous amounts of energy in the process, while pulp mills chew up world forests at a frightening rate producing tons of waste that must be absorbed.

I wish it were as easy to get Congress to increase the taxes owed by the superrich as it is to get them to add boondoggles for one industry or another in the form of a tax break in the tax code. I want to see alternative energy succeed, but I'm not sure these tax credits are targeted sufficiently at the new technologies that we should be encouraging.

rdan

Stereotypes and the brain suggests that older folk (over 60-88) are more susceptible to stereotypical thinking than younger people (age 18-25).

A decade ago, a research team led by William von Hippel of the University of Queensland challenged that assumption. The psychologists proposed that older people may exhibit greater prejudice because they have difficulty inhibiting (bolding mine) the stereotypes that regularly get activated in all of our brains. They suggested an aging brain is not as effective in suppressing unwanted information — including stereotypes.

In two recently published papers, von Hippel and Gabriel Radvansky of the University of Notre Dame provide compelling support for this concept. In the Journal of Experimental Social Psychology, they describe a series of experiments designed to assess whether older adults were relatively more likely to draw and remember stereotypic inferences.

Forty-eight older adults (age 60 to 88) and 71 younger adults (age 18 to 25), read four stories, each of which "allowed for stereotypic inferences." Two of the tales featured African Americans, one dealt with people from Appalachia, and one involved Jews. After finishing the stories, the participants were shown a series of statements relevant to the tale, and asked to rate them as true or false. Some of these statements were strictly factual, while others contained inferences of stereotypes.

The results revealed "significantly greater memory strength among older adults for stereotype-consistent situation models," the researchers write. "This finding supports our suggestion that older adults are more likely to make stereotypic inferences during comprehension, and that this stereotyping carries over into their later memory for that information."

This process "appears to be a more general phenomenon of aging," they note, adding that some older adults "may be relying on stereotypes despite their best intentions to the contrary."

The second paper, published earlier this year in the journal Aging, Neuropsychology and Cognition, contains a way around this problem. It describes a study in which older and younger adults read a story in which a central character was employed in a sex-stereotyped profession. In half the stories, the character's gender was consistent with the stereotype (a male plumber), while in the other half it was inconsistent (a female plumber).

"Results revealed that with explicit labeling, older adults were able to discount their stereotypes and avoid processing difficulties when subsequent stereotype-inconsistent information was encountered," the researchers write. "These data suggest that when counter-stereotypical information is explicitly provided at encoding (that is, the first stage of the memory process, in which stimuli are initially registered), older adults are no more likely than younger adults to rely on stereotypes, and are similarly capable of altering their interpretation of a situation when information suggests that information is incorrect."

In real life, of course, no one is pointing out biased statements as they emerge from the mouths or friends, family members or talk-show hosts. So for older adults, the best advice might be to avoid acquaintances who speak in stereotypes. This research suggests prejudice can be contagious, and we become more susceptible as our brains age.

I have not read the protocols nor the material, but several thoughts occur:

1.) Since the age gap is so wide, can one measure the common thread of stereotypical thinking from only one set of examples? Can you fashion a story that is common to both generations and isolate from socialization?

2.) Part of the theory involves brain based cognition, as the brain enters a more fluid phase of brain cell connections during the teens to early twenties. However, connections in older adults might be fewer overall but can be more complex in connections. What that means is not clear.

Sort of like blonde jokes, you know. Substitute brunette and the joke isn't funny anymore.

Robert Waldmann

I think that something has changed at www.washingtonpost.com, because I am infuriated by many headlines and abstracts of articles. I don't know if the same headlines appear in the dead trees version.

Today we get

Record-High U.S. Deficit May Dash Obama Goals
Budget gap of $1.4T, while an improvement over worst projections, means less to spend on White House's ambitious jobs and stimulus packages.

So the news is that the deficit is smaller than predicted, but the headline stresses the fact that it is huge, just as we knew it would be. The phrase "means less to spend" asserts that the size of a stimulus is limited by available funds -- that is that they can't stimulate in a way which adds to the deficit -- not that one sholdn't but that they are limited by a current year budget constraint (an intertemporal budget constraint plus a liquidity constraint). I have difficulty imagining what sort of entity could make such an assertion in the same sentence which notes a $ 1.4T deficit.




Can an actual human with a human brain think that spending by the federal government with a $1.4T deficit is limited by how much it has to spend? I ask for information -- my current guess is that the headline and abstracts are being written by a script which takes phrases at random from the latest RNC press release.

If a person is involved, he or she might say that he or she is predicting the political debate -- Republicans and conservadems will say that the huge deficit means the federal goverment must tighten its belt (I assume they refer to the beltway as otherwise the phrase makes no sense). They can block bills in the Senate so they will win the debate over further stimulus in the sense of having enough power to block further stimulus (win the debate in the might makes right sense that is).

Therefore The Post employee merely notes that idiotic arguments will determine policy, because there are more than 40 idiots in the Senate. He or she doesn't make the claims which appear on www.washingtonpost.com, that wouldn't be proper stenography journalism. Of course the Post is obliged to make in its own voice any idiotic argument against action which is supported by 41 senators, because it is a newspaper dammit and must not contribute to the debate, but only report who has the power to win it (which is almost always the advocate of no further action given the way the Senate works). The fact that the current forecast of the deficit is smaller than previous forecasts can't be denied, but it is unimportant, because it is inconvenient to obstructionists who have the power to prevent further stimulus and therefore will win the debate (in the sense of successfully filibustering and making sure it would last forever before a vote is called).

by Gavin Kennedy (cross posted from Adam Smith's Lost Legacy)

Elinor Ostrom - An End to Homo Economicus?

Mario Rizzo writes (13 Oct) in Wall Street Pit HERE and Here:

“Elinor Ostrom and the Relevance of Economics”

“In fact, I would venture the guess than most economists had not heard of her before the prize was announced yesterday morning.

Two reasons for this are that her degree is in political science and she has written for publications outside of the mainstream economics journals. Additionally, her work, by and large, lacks the high degree of mathematical formalism now so characteristic of economics.

Yet the Nobel Prize Committee has done a great service to economics and the greater social-scientific community. When a well-known economist receives the prize little is gained apart from the recognition of a job well done and perhaps some wider public recognition. I do not think that great contributions are made in any discipline because of the incentive effects of an improbable prize. However, in this case the Nobel Committee has brought extraordinary work to the attention of an economics discipline that has become excessively specialized and, perhaps increasingly irrelevant to the real world, as Paul Krugman and others have recently suggested.

Professor Ostrom’s work is highly relevant to important issues in economic development, common-pool resources, the development of social norms, and the solution of various collective action problems. Her work is also methodologically diverse. She uses experimental methods, field research, and evolutionary game theory. She is not afraid to draw on various disciplines when appropriate: economics, political science, evolutionary psychology, cultural anthropology and so forth.

Update: rdan here...Barkley Rosser comments on Elinor as well.

“She is a very worthy intellectual descendant of Adam Smith who realized that the study of trade based on self-interest needed to be supplemented by a broader view of humankind – individuals capable of the so-called “moral sentiments” like honesty, benevolence, and loyalty, as well as the standard vices.”

“The central problem on which her employment of the notion of “thick rationality” can shed light is what she calls “social dilemmas.” These are circumstances in which interacting individuals can easily succumb to maximizing their short-term interests to the detriment of their long term interests. To return to our irrigation example, suppose farmers share the use of a creek for irrigation. They face a collective problem of organizing to clear out the fallen trees and brush from the previous winter. Each farmer would like to have the others do it. There are incentives to free-ride on the “public spiritedness” of others – however, everyone may think this way and nothing will get done. Ostrom finds that cooperation will often take place while the “thin” theory of rationality predicts that it will not. She finds that factors such as face-to-face contact (likely when there are small numbers), the equality of each farmer’s stake in the benefits of irrigation, and the ease of monitoring the farmer’s contribution to brush removal all make the likelihood of cooperation greater.”

Comment
If, like me, you are unfamiliar with the new Nobel Prize winner, Elinor Ostom’s work, you should start by reading this short piece by Mario Rizzo. It is a continuation of Adam Smith’s approach to moral philosophy and political economy.

It also rejects the sanitized neo-classical formalism, locked into abstract maths and non-human theories of rationality, but which claims “scientific” status despite the evidence that little of it applies to the real world and real humans – and when it is applied and policy conclusions are drawn from it and tried, they fail miserably, as the billions spent on development have shown from their unspecified, though visible and obvious, unintended outcomes.

From what I have read so far, Adam Smith’s legacy is safer in Elinor’s hands than almost the entire discipline of modern neo-classical economists put together.