Economics and Ethics

Norquist’s Nonsense

Jonathan Wight

The Richmond Times Dispatch, which is generally Republican-leaning but with a strong dose of libertarianism and Hayekianism, recently gave Norquist the boot. 

The editorial noted that by setting up a litmus test of no new taxes Norquist helped eviscerate some of society’s important  assets and institutions, in particular the transportation infrastructure  “That is not good stewardship. It also has serious implications for business, which today’s conservatives (unlike, say, Burke) value above almost all else.”

In conclusion: 

“Real conservatism is at least as much a character of mind and a set of virtues – prudence, temperance, moderation, rationality and responsibility, for instance – as a set of dogmas. The adoption by American conservatives of rigid litmus tests, the failure of which means banishment from the tribe, has not ennobled the movement but, ironically, deracinated it.”

Right on the mark.  Great leaders, like Abraham Lincoln, upheld great principles and moved us closer to them through compromise.  Adam Smith was likewise a great idealist in theory, but thoroughly pragmatic in implementation. 

Romney’s Taxes

Jonathan B. Wight

So how could Romney amass up to $100 million in his IRA account when official rules limit contributions to about $6,000/year?

Easy—you contribute an undervalued asset to your account, which then mysteriously explodes in value! Not something the average investor can do, but if you're the CEO of Bain Capital you might accomplish with deft accounting and legal maneuvering.

Here's a fascinating discussion of how Romney could indeed have earned millions and paid very little income tax, through structured sale of his Bain shares. This is all speculation.

Like it or not, Americans would like to know if a President is dealing from a straight deck. So far, Romney's denials have only inflamed speculation he has played loosely with the tax code, even if acting legally but thwarting its intent (e.g., the IRA rules).

Contrary to Romney's assertions, vast sums of money spent inventing legal and accounting gimmicks do not create useful jobs. It is called "rent seeking." It is reallocating resources from useful activity to wasteful activity, trying to get around the rules others are playing by. Are people who adhere to rules simply "saps"?

Is rent-seeking immoral? It all depends on the circumstances. Are we at war-time and are you selling secrets to the enemy? Romney's alleged sins don't come close to this. But they might reflect a rejection of the view that "we're in this together" and "everyone should do their part." Bottom line: Can you lead the nation and ask for sacrifice if you appear to have run from it yourself?

Charles E. Wilson is misquoted saying "What's good for General Motors is good for the country." Likewise, many today seem to think that what's best for the hedge fund industry is best for America. That's not a mistake Adam Smith would have made. When appointed Commissioner of Customs in Scotland Smith burned all his old clothes, admitting they had been smuggled in from the continent without paying duty. While Smith could have maintained his wardrobe by not becoming a government agent, he clearly saw the contradiction and hypocrisy of trying to do both. Is there a lesson here for Romney?

Group Selection Theory

Jonathan B. Wight

E. O. Wilson has an essay in today's NY Times on "group selection" theory. For those not familiar with this term, it represents a companion idea to "individual selection" theory. In the familiar survival-of-the-fittest story, an individual mutation gives rise to an adaptation that allows for greater procreation, hence more of the mutated genes survive and get transmitted down the line. The story is about individual adaptation.

In group selection theory individuals live and survive in small tribes. The group that works together best using trust and members showing some altruism can overcome other tribes in which the predominant portion of individuals are free-loaders. Hence, the genes for trust and altruistic behaviors can increase in the population, even though altruists lose out in head-to-head contests with free-loaders.

Wilson believes both theories are simultaneously right. Some part of natural selection has to do with our individual strivings and some has to do with the concerted action of the group. For a book that shows the math behind how selfish individualists AND altruists can co-exist in natural selection, see Elliott Sober and David Sloan Wilson (no relation), Unto Others: The Evolution and Psychology of Unselfish Behavior (1998), pp. 24-25.

All of this is contentious in biological circles, despite the fact that Darwin himself endorsed group selection theory for humans in The Descent of Man (1871).

Those who endorse selfish individualism and greed (like Walter Williams) as a bulwark against government in markets will likewise be unhappy with group selection theory.

But we should clarify: the type of group behavior being identified is not forced collectivized behavior, as in a colony of ants or bees or a Stalin work gang! Instead, Wilson identifies natural instincts that people have to bond with others voluntarily—and to alter their own behaviors in a way that allows for both benevolence and justice. This sounds very much like Adam Smith—who equally railed against big government.

The first line of defense against big government is having societies that work reasonably well without coercion. And that implies something like a voluntary system of natural liberty based on natural moral sentiments, honed though several millions of years of group evolution.

[Thanks to biologist Peter Smallwood for the initial link.)

What’s a Class B-Corporation?

Jonathan B. Wight

When asked about their plans after graduation, many of my students say they want to work for government or non-profits. "That is soooo 20^th century," I say. Instead, consider the market alternative!

The growing 21^st century wave, I think, is to be part of the for-profit sector, using entrepreneurial skills to create new products and services that make society better. The for-profit sector is sustainable without requiring the benevolence of strangers or the coercion of big brother. Many companies provide meaningful work and desirable social and environmental outcomes, using the price signals within markets to guide resource allocations.

The for-profit sector just got a boost in Virginia with the creation of a new type of business designation—the Benefit Corporation. A Benefit Corp has the legal right—and the obligation—to consider a multitude of stakeholders including workers, suppliers, customers and the community.

The Benefit Corps has a mandate to make profits within the context of the community and envisioned social mission. This is far more attractive for many young people whose moral imaginations have rightly been aroused. Robert Frank has found that many students are willing to accept 30% below market wages in order to work for a company with a strong social or environmental mission.

Benefit corporation laws have been enacted in 7 states (California, Hawaii, Maryland, Virginia, New Jersey, New York, and Vermont) with others in progress. The main advantage is that if a Benefit Corp is sold, the founders are not required to sell to the highest bidder, but can instead sell to the bidder who most closely can carry out the multiple missions. Removed is the fear of minority shareholder law suits.

A related but entirely separate concept is a "Certified" B-Corp. Certification is provided by B Lab, a non-profit organization "dedicated to using the power of business to address the world's most pressing challenges." B Lab ensures that companies that market themselves as green and social are actually living up to that pledge. A recent company to be certified is Patagonia; Yvon Chouinard, the founder, stated that:

"I hope five or ten years from now we'll look back on this day and say this was the start of a revolution, because the existing paradigm isn't working anymore. This is the future."

So far B-Corp companies are a tiny fraction of the market, 532 businesses with combined revenues of $3 billion.

I can hear the cynics, moaning that all this blather about social responsibility is simply a marketing gimmick. I don't doubt that this is so for many companies who want to market themselves as green.

Adam Smith's moral sentiments model helps explain why motives to help society and the environment can be authentic, not calculated. For more on this, read my critique of Friedman's claim that only profits should matter to a firm. Briefly: Friedman's concept relies on a duty-bound manager who puts shareholder interests first. But a duty-bound person cannot turn duty on-and-off. There's the rub. Transformational leadership connects people's morals to their work in an authentic way, not to manipulate but to engage.

And that is why Benefit Corporations (and the B-Corps designation) can help companies clarify and carry out their missions within a capitalist system.

Smith on Top

Jonathan B. Wight

Oh the fickleness of surveys. In the early 1970s, no one was thinking of Adam Smith. Kenneth Boulding quipped, tongue-in-cheek, "[W]ho needs Adam Smith?"

The meteoric resurgence of Adam Smith's reputation began after 1975. The reasons for it are complex and worthy of elaboration, which I did in "The Rise of Adam Smith" (2002).

A recent survey of economists found that among members of twelve economic associations, the favorite pre-20^th century economist was overwhelmingly Adam Smith. Smith won more than twice as many votes as the runner up, David Ricardo.

The Union of Radical Political Economists (URPE), however, gave as many votes to Karl Marx as it did to Smith. The Society for the Development of Austrian Economics (SDAE) gave an equal vote to Carl Menger.

Overall it was a romp for the Scot, winning a majority of the votes.

Smith the wordsmith satisfies diverse tastes. Jacob Viner noted that "[A]n economist must have peculiar theories indeed who cannot quote from The Wealth of Nations to support his special purposes." Smith's genius was in constructing layers of analysis that give philosophers material to ponder for decades and centuries.

No.	%	Favorite Economist
221	56%	Adam Smith
106	27%	David Ricardo
67	17%	Alfred Marshall
394	100%	Total

Being Rich Makes You Less Ethical?

Jonathan B. Wight

The Proceedings of the National Academy of Sciences (PNAS) recently published a study entitled "Higher social class predicts increased unethical behavior."

The authors claim to have found in various experiments that those with "Greater resources, freedom, and independence from others among the upper class give rise to self-focused social cognitive tendencies (3–7), which .. will facilitate unethical behavior…. [T]he recent economic crisis has been attributed in part to the unethical actions of the wealthy."

This supports Adam Smith's view, which is that the poor are more ethical because they are constrained by income and wealth to be so: they have little room for error. The rich, according to Smith, can get away with more and do so.

But Deirdre McCloskey and Benjamin Friedman, among many others, have reached a different conclusion: that the rise of general prosperity leads to an enhanced sense of moral imagination, and the improvement in the ethical climate measured by trust and by the enhancement of rights of individuals.

Perhaps the paradox can be resolved by admitting that rises in absolute income and that of relative income have different effects, including on morality. Lots more work to do here.

More on Smith and Paternalism

Jonathan B. Wight

Adam Smith's paternalism has previously been discussed here and here and here.

This week I came across some more examples:

1. Workers destroy their own human capital. Smith notes that workers who are paid for piece-work labor harder than those who work for a salary. Incentives matter. But Smith goes on:

Workmen, on the contrary, when they are liberally paid by the piece, are very apt to over-work themselves, and to ruin their health and constitution in a few years. A carpenter in London, and in some other places, is not supposed to last in his utmost vigour above eight years. Something of the same kind happens in many other trades, in which the workmen are paid by the piece….

The solution is an imposed limit on overall pay or work hours:

[W]hen soldiers have been employed in some particular sorts of work, and liberally paid by the piece, their officers have frequently been obliged to stipulate with the undertaker, that they should not be allowed to earn above a certain sum every day, according to the rate at which they were paid. Till this stipulation was made, mutual emulation and the desire of greater gain, frequently prompted them to over-work themselves, and to hurt their health by excessive labour…

If masters would always listen to the dictates of reason and humanity, they have frequently occasion rather to moderate, than to animate the application of many of their workmen. It will be found, I believe, in every sort of trade, that the man who works so moderately, as to be able to work constantly, not only preserves his health the longest, but, in the course of the year, executes the greatest quantity of work (Wealth of Nations, I.viii, p. 100 in Liberty Fund edition, emphasis added).

In the passages above, Smith argues that a) incentives matter; and b) that workers are irrational and don't understand their own interests. If they did, they would moderate their efforts so as to produce over the course of a year and preserve their mental and physical health. A caring and wise employer has more time to study these matters and should moderate work efforts!

Note that Smith never says the employer is smarter than the worker—Smith is an egalitarian. Rather, he argues that some people's circumstances give them greater freedom to study and to learn things. The poor are too overwhelmed by hard labor to take on more study:

It is otherwise with the common people. They have little time to spare for education…. As soon as they are able to work, they must apply to some trade by which they can earn their subsistence. That trade too is generally so simple and uniform as to give little exercise to the understanding; while, at the same time, their labour is both so constant and so severe, that it leaves them little leisure and less inclination to apply to, or even to think of any thing else…. the common people cannot, in any civilized society, be so well instructed as people of some rank and fortune…. (Wealth of Nations, V.i.f, pp. 784-5 in LF edition).

So Smith is an egalitarian who is still an elitist—some people do know better than others because they have both the leisure and wealth to acquire experience and wisdom.

2. Workers may not appreciate the value of education. Hence, some minimum mastery of education can be imposed by government:

The public can impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education, by obliging every man to undergo an examination or probation in them before he can obtain the freedom in any corporation, or be allowed to set up any trade either in a village or town corporate (Wealth of Nations, V.i.f, p. 786 in LF edition).

This is essentially an education mandate. Part of Smith's insistence for the education mandate has to do with his belief that maintaining a free society requires a standing military. To make this function the society at large must embody the "martial spirit" that allows the military to operate. If society does so, a smaller standing army can be maintained than otherwise.

Excessive Specialization Leads to “Ignorance”

Jonathan B. Wight

Peter Radford, in a recent issue of the Real-World Economics Review (no. 58), writes on "Ethics in Economics - Where Is It?" Here is an excerpt:

[E]conomics allows itself to defy the laws of physics. It pretends that a market system can provide allocation solutions without actually doing work. This error introduces something akin to Maxwell's demon: information moves weightlessly around, levitated instantaneously, at no cost, with no loss of accuracy, and no regard to entropy. Somehow the system defies physics. Economists have created their own version of the impossible: a perpetual motion machine. It is as if they never heard of the second law of thermodynamics. If they have, they certainly ignore its ramifications. This is alchemy: especially in a world well aware of the advances within physics and biology that take such real world constraints seriously. Yet economics soldiers on building its macro policy advice on these tenuous, deficient, and other worldly micro foundations….

Meanwhile, the mainstream profession is teeming with highly educated folks who have no inkling of large parts of its hinterland. They have been taught just one strand of a multi-strand web of ideas. They stand on just one small island within the archipelago and imagine they inhabit a vast continent. They believe, profoundly and erroneously, that they know economics. In fact they are functionally ignorant. They are deeply immersed in only one thing, and oblivious to all others. They are thus not well-rounded professionals. Their training is a license to train others in a limited way. They thus perpetuate – and possibly accentuate - the limitation. Their training is not a license to give advice. This is where a serious ethical problem crops up….

Professional economics is thus a sham. The public is not receiving fully formed advice. It is receiving opinions based upon a narrow education designed exactly to eliminate large, and possibly vitally relevant, knowledge. Economics has willingly reduced itself to a series of scarcely related specialties built without a general base. It produces doctors without a general knowledge of medicine, but all of whom also claim to be generalists….

I do not think for a moment that students entering an economics education desire to emerge as narrow minded and potentially dangerous to society. On the contrary, most want to learn something useful and view economics as socially beneficial. They are unaware of the amnesia that bedevils the subject, its intellectual poverty, and the naive view of humanity that infests its models despite the glitter of their math.

Strong words. Adam Smith said it also [with my additions]:

The man [economist] whose whole life is spent in performing a few simple [theoretical] operations, of which the effects too are, perhaps, always the same, or very nearly the same, has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become.… His dexterity at his own particular trade seems, in this manner, to be acquired at the expense of his intellectual, social, and martial virtues (Wealth of Nations, p. 506 in Liberty Fund edition).

The Pedagogy of the Pixel

Jonathan B. Wight

David Brooks is avowedly a devotee of Adam Smith's moral sentiments model. In today's New York Times he discusses the coming "tsunami" of electronic courses on the Internet. Brooks tackles this question: In the future, what is the role of the physical classroom with a flesh-and-blood person? He notes:

A brain is not a computer. We are not blank hard drives waiting to be filled with data.

And the most important part:

People learn from people they love and remember the things that arouse emotion.

That can certainly happen in on-line courses (think of the television stars you "love"). But some aspects of that interconnection demand a closer proximity. Pixels on a screen are not people.

The link between emotion and pedagogy, by the way, is not only found in Adam Smith's Moral Sentiments, it is also found in the work of Brazilian educator, Paulo Freire (1921-1997). Freire noted that if you want to teach adult sugarcane cuttters to read, don't give them primers on "Dick and Jane." Instead, give them stories that resonate with their experiences and feelings. Freire, a Marxist, might have favored something like: "Look at the lazy patron in the big plantation house with all his food and wealth. The oppressed workers have nothing to lose but their chains…." Education is fundamentally a political act because pedagogy builds on the context of one's life.

The bottom line is that information is rapidly becoming a cheap commodity—which is a good thing. But "learning"—through debate, through writing essays—requires more than information. It is a "complex social and emotional process" (Brooks) in which the ideology of one's world view come into debate with the ideology of science. Parts of this complex learning process can happen well in face-to-face interactions, which is where colleges have a comparative advantage.

Photography: Celebrating Margaret Bourke-White

Jonathan B. Wight

The arts are a major vehicle for understanding ourselves and society. The arts arouse and crystallize our moral imaginations. Today's blog celebrates the enduring work of photographer Margaret Bourke-White (1904-1971).

Bourke-White worked for Life magazine, gracing its first cover in 1936. Her famous photograph of food lines of 1937 (above) showed some of the million people homeless after a devastating Ohio River flood. (Despite the irony implied in the advertisement in the rear, the immediate cause of the hunger was a natural disaster and not the Great Depression.)

Bourke-White took some of the last photographs of Mohandas Gandhi a few hours before his assassination. The ethic of simplicity (bare walls, no furniture) is combined with the powerful anti-trade image of the spinning wheel. Gandhi favored self-sufficiency, arguing that India, which grew its own cotton, could spin its own yarn in homes and did not need British textile mills. This lingering ideology in opposition to colonialism lasted in India until the early 1990s, and meant that for half a century India neglected the main avenue for increasing living standards—through global trade.

As the first female war correspondent, Bourke-White's Buchenwald photos are moving, but a bit too grizzly for this website. Below is her 1956 view of segregation in South Carolina at the start of the civil rights movement.

Great art moves our emotions—and prepares our intellects for the arguments that will ultimately change our institutions. It's hard to imagine reforming institutions before the emotions are properly riled up. There is a danger, of course, that emotions can lead one in the wrong direction—lynchings and anti-trade. But it's not a coincidence that major institutional upheavals followed or were coincident with major works of art. One can think of Uncle Tom's Cabin (1852) that stirred abolitionists and The Jungle (1906) that stirred urban progressives. This is why dictators like Mao took extreme steps to manipulate the arts.