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January 2019 posts

The Shutdown

By Jonathan B. Wight

Thank goodness it’s over, at least for three weeks. We should never have had it.

Asking workers to work for “free” is a form of slavery.

  • You can counter by saying federal workers should know the deal by now, and have willingly signed on knowing the risks of a shutdown.
  • You can counter by saying federal workers will eventually be paid; a shutdown cannot last forever.

But many federal workers may not have a large cash cushion, and will have to take out loans or carry higher credit card debt. Those fees and penalties for late payments will not be reimbursed.  That is a hidden tax on federal workers.

Federal contractors will lose untold millions in lost wages and profits that will not be compensated. 

The bottom line is that in the future the federal government will have a harder time recruiting and retraining high quality individuals at a reasonable wage. 

We should recall that the professional civil service system (of desirable jobs and desirable wages) was set up to counter the corrupt system that preceded it. If you want widespread government corruption (try Zimbabwe, try Brazil, try China) pay your government employees bad wages or expose them to high hidden costs or risks. 

One of Trump’s longest legacies will be to promote the exodus of talented and motivated civil servants from government, to the detriment of public ethics.  (Yes, most civil servants, including economists who work in Treasury, Commerce, or other agencies are generally ethically minded!)

Federal contractors will have to factor in the greater risk of a shutdown in making their bids on government projects—thereby raising the costs to taxpayers of carrying out public works.

Stiffing workers and contractors is not the way to run a business or a government.

Adam Smith on Externalities

By Jonathan B. Wight

A friend recently inquired about Adam Smith’s view on externalities. A much longer post is needed to break apart several important ideas.  First, one would need to disentangle the invisible hand concept from market “efficiency.” (See J. Wight, The Treatment of Smith’s Invisible Hand, The Journal of Economic Education 38(3)(2007): 341-358.)

Second, while Smith does not discuss (to my awareness) externalities arising from environmental pollution, he did write that private market transactions could pollute or corrupt one’s mind. Here are two examples, one negative and one positive.

Negative externalities:  When market forces lead to an extreme form of labor specialization, people become “stupid and ignorant” and this mental weakening has a deleterious effect on civil society.  This is why Smith proposes publicly-funded education as a remedy: 

“The man whose whole life is spent in performing a few simple operations, of which the effects 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. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expense of his intellectual, social, and martial virtues. But in every improved and civilised society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.” (Wealth of Nations)

This is pretty clear evidence that in Smith’s mind private market transactions can produce deleterious effects for third parties, and that there is a role for government in remedying the situation. 

Positive externalities: In The Theory of Moral Sentiments, Smith claims that people make fundamental misjudgments about means and ends (he is a precursor to behavioral economics).  In the story of the poor man’s son, we learn that extreme striving and ambition never produce the expected happiness or peace of mind—it is all a psychological “deception.”  The beneficiaries of this striving accrue to others, namely society at large—through greater wealth and innovation. 

“And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth.” (The Theory of Moral Sentiments). 

No doubt there are other examples of Smith’s awareness of third party effects.  See, for example, this blog about relative standing

[Thanks to Rob Garnett for raising the question.]

Social Entanglement

By Jonathan B. Wight

Rob Garnett (at TCU) is presenting a paper on Adam Smith at the ASSA meetings in Atlanta this Friday.  He sent an advance copy of it, of which I will share just a snippet:

“[There are] four underappreciated features of Smith’s moral philosophy:

(1) self-love as socially entangled self-approval;

(2) exchange as socially entangled bargaining and learning;

(3) assistance and harm as normal byproducts of duty, sympathy, and beneficence; and

(4) commercial society as a hybrid web of cooperation (a social division of labor and responsibility, pecuniary and non-pecuniary) in which self-love both enables and undermines the achievement of a “flourishing and happy” society."

These are tantalizing ideas.  I love the phrase “social entanglement.” It captures the not-very-neat and oh-so-messy way that we interact with others: it is not only a potentially logical ordering and sorting of goals, desires, means, and incentives, but there is chaos, misunderstanding, hurt, grudge, and other impediments to Getting to Yes (the title of a famous book on negotiation strategy). 

Social entanglements are the reality of many economic relationships, imposing pretty large transaction costs, including psychic ones.  In this context, virtue ethics plays an important role in reducing those costs. 

Would you rather your business partner adhere to virtue ethics (honesty for the sake of honesty), or be opportunistically honest (honest if the benefits outweigh the costs)?  Won’t take many people long to make this choice.  Social entanglement does not require social strangling.