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Ethical Economics

by rdf Sat Feb 28th, 2009 at 10:28:35 AM EST

There is much talk about how best to get the world out of the current economic downturn. One of the bits of arcana has to do with whether tax cuts or spending will provide the most bang for the buck. The measure of this is called the "multiplier". Discussions about multipliers are what happens when economic policy is viewed as a mathematical exercise rather than as the physical manifestation of ethical principles.

All economic and policy recommendations are based upon (unacknowledged) ethical foundations. I discuss these below.


There are two basic ethical views in play these days. In one view people are responsible for their own lives and government's role is restricted to enforcing property rights in the broadest sense. This leads to support for policing, a legal framework for commerce, a military and only enough social services to prevent anarchy.

Disturbances in the capitalist system are to be handled at a macro level via broad-brush policy adjustments such as those dealing with taxes. Suffering by individuals is tolerated for the "greater good" which will happen - eventually.

The second view is that government is an expression of the public desire for empathy and compassion. Individuals sacrifice by paying taxes, restraining themselves from committing acts of theft or cheating (even when they will be undetected) and helping the less fortunate.

In this view, taxes are not a burden, but more like a tithe that we have agreed to because certain functions must be managed at a society-wide level. In a democratic society the majority get to determine how much of a tithe we want to pay by electing representatives who are supposed to carry out the policies we favor. The more closely the democratic system conforms to the idea, the more likely the policies will favor more social and economic equality. The least democratic states tend to have the widest disparities in wealth, just look at Saudi Arabia or the other Middle East petro states. Notice how Russia is simultaneously becoming less economically balanced and less democratic. Then look at Scandinavia to see the opposite extreme. The US is an outlier, it has great wealth, but it is unevenly distributed and has gotten more so over the past 40 years. This has also coincided with a period where democratic institutions were subverted by the rise of money in politics to an unprecedented degree.

So back to multipliers. If we give money directly to those in need, whether through payments or tax cuts, then these people will be less in need. It's that simple. Humanitarian aid helps humans. Whether this ultimately is the best course of action to affect things like the GDP is not a primary consideration.

All that need concern us is whether money spent on large-scale infrastructure programs has lasting value or not. So building F22's does not, building high speed rail does. This type of multiplier is relatively easy to determine.

Why we have such a large group in positions of influence who are bereft of any feelings of empathy for those in need is something for social scientists or philosophers to ponder.

I'm constantly reminded of the last days of the French royalty. The aristocracy was clueless as to the state of society. They even built themselves fake farms with clean animals so that they could experience the rural life. Their version of Disneyland. Advancement of careers and programs was done on the basis of cronyism, bribes and flattery at court. We know how that ended.

Bring down social and economic disparity and things will get better. While you are doing it there will be less suffering. After you have reached your goal society may be back at the prior level of GDP or it may not, but at least all will be sharing a common fate.

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For the state/provincial and local taxes described in this diary, a third view is that taxes are pooling individual resources to achieve ends that cannot be achieved individually.

However, all three ethical views fall apart at the level of the currency authority, because the government at the level of the currency authority can spend its own IOU's, so taxes are not needed to "finance" spending ... rather, they are needed because the issue of new fiat currency at the level consistent with national spending needs would destabilize the value of the fiat currency and undermine its ability to act as a store of value.

Therefore, taxation at the level of the currency authority is required to protect the ability of fiat currency to act as a store of value, and to protect the ability to write financial contracts that rely on the presumption that state-enforceable contracts can be written in terms of some asset that can act as an effective form of money.

Of course, for multi-state fiat currencies monies like the Euro, it implies that the nation-state lapses to a certain extent back to the public finance status of a province, and there is an institutional lacunea if there is no fiscal authority attached to the region of the multi-state fiat currency.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Feb 28th, 2009 at 01:25:57 PM EST
In the U.S., according my unofficial totals gleaned from reading a wide variety of sources, we are now up to at least 1.5 trillion USD of "stimulus" provided to private enterprise and government agencies and at least 2 trillion USD created out of thin air by the Federal Reserve for the purposes of their finacial system recovery plan.
If you add that up and divide it by the approximately 300 million residents in the U.S., you get about 11,600 USD per person. I simply cannot understand how it would not have been better to write the checks out to each individual and let them spend or save it as they see fit. If they need a new car, that will get them a huge down payment on any reasonably-priced vehicle. If they need to catch up on mortgage payments, that should cover at least several months of payments on any reasonable dwelling in almost any city. If they have medical debts, this amount would help considerably for a lot of sick people. If they don't need to spend it, it will go into a bank or stock market account where it will reinject capital into the financial system.
Will someone, anyone, PLEASE tell me why this isn't a better way to spend U.S. "stimulus" money?!...

Why we have such a large group in positions of influence who are bereft of any feelings of empathy for those in need is something for social scientists or philosophers to ponder.

I've pondered it quite a bit, though I'm neither social scientist nor philosopher. I have found some illuminating insights into this issue in the areas of medicine and psychology. I invite anyone who is interested in such an approach to this problem to google the word "ponerology" and follow the research where it leads you.

Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has. -Margaret Mead

by blueneck on Sat Feb 28th, 2009 at 03:23:34 PM EST
... wasted in the first stage of the bail-out ...

... because, after all, welfare for the rich is less effective as stimulus than welfare for everybody.

However, there is no $1.5b in stimulus. The TARP money was not stimulus, it was a financial bail-out. It ought to have been intended to prevent a complete collapse of the finance sector and assist the restructuring of the finance sector from egregiously expensive and grossly inefficient master of the productive and household sectors to a regulated utility providing essential services to the productive and household sector.

And of course because it was instead mostly spent trying to uncrack the broken eggs, the first half was mostly wasted, and much but not all of the second half will be wasted.

The Fed creation of money and playing 1990's commercial banking games with the national monetary authority ... that's also part of that same unholy mess.

The Stimulus is the $500b in government spending over 2 and a half years, or in other words $200b a year ... less than half the GDP accounts value for the cost of Federal defense spending.

As far as why the $200b a year should not be distributed on a per person basis ... because then we would get less stimulus per dollar added to the national debt to be serviced.

As to whether the $700b from the TARP would not be better distributed on a per person basis ... I just don't know. I wouldn't be surprised if the impact of handing the TARP money out to each person to either retire a debt or to establish a medium term (say, minimum three years) income earning deposit might not have more effectively directed the bail out to those financial institutions that are of some use to ordinary people.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Feb 28th, 2009 at 03:45:08 PM EST
[ Parent ]
jsut a note to point out that i did place the word stimulus in scare quotes, as a catch-all word, in my original comment, though your analysis still stands.

By some estimates, the "lost" monies in CDO's, CDS's or whatever alphabet soup acronyms are being used range well up into the 10's of trillions of USD, so I am not really surprised that two or three trillion of giveaways to the financial sector has not improved the situation of the high finance system much, if at all. For Joe The Plumber, the money given to him directly would certainly decrease his reliance on the financial sector at least temporarily and give the REAL economy a much-needed jumpstart.

I do see the merit in your suggested modification of a direct payment to individuals to be used to retire a debt or establish a new investment. I do believe that would be a better use of financial bailout funds as opposed to what happened with the first TARP monies, and possibily the rest of them, too.  So, split the 11,600 USD for each individual in half.  One half for such a program, the other half left to individual discretion for use in the automobile/healthcare/foreclosure/etc crises. Do you think that would work?

I'm no economist, just an observer, so I realize that my simplification may not be the most nearly correct way of approaching the gargantuan problem we see. My plea for explanation is real, and thus I appreciate and thank you for your reply.

Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has. -Margaret Mead

by blueneck on Sat Feb 28th, 2009 at 05:18:26 PM EST
[ Parent ]
I did leave out the $200b or so of tax cuts ... but apart from the tax cuts that were originally promised before the full extent of the economic crisis became clear, the rest were just the political cost of the obsolete institution of the filibuster and of the PAYGO legislation (which was obsolete on passage).

The magnitude of the borrowing with "hoped for recovery" does show the challenge in getting actual stimulus done.

As to why the stimulus spending should be government spending rather than private spending ... we live in an economy where 2.2% of spending on GDP is federal government, non-defense spending, and 70% of spending on GDP is consumption spending. IOW, as JK Galbraith pointed out long ago, an economy of private affluence and public poverty. For a large number of the actual stimulus spending programs, the long term payoff really is substantial.

And it is really important for the US government to get back to the Hamiltonian system which served us reasonably well from 1790 to 1970 of the government investing in infrastructure that would support the development of new industry. Gaining the ability to do new things, and the ability to do the things we are presently doing better, is quite urgent, after a decade of reversing course and over two decades of heading rapidly in the wrong direction.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Feb 28th, 2009 at 05:40:52 PM EST
[ Parent ]
Thanks for the reply. You do make sense, and I actually agree with much of your analysis.  However, it is still difficult to understand.  I guess, as is usually the case, most simple answers don't prove to be completely correct.

Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has. -Margaret Mead
by blueneck on Sun Mar 1st, 2009 at 12:41:26 AM EST
[ Parent ]
... confuse matters for political ends, and the normal media often (+) just reports them as part of the mix in their "he said / she said" style of reporting. "Concerns have been raised ...", when just a little research will show that the 'concerns' are simply political noise to create doubt and confusion and nothing more.

(+ not invariably, though ... I did enjoy seeing a Republican Congressman trying to push the "$8b for Harry Reid's magnetic levitation train from Disneyland to Sin City" line and get smacked down by the television reporter asking "questions" along the lines of, "isn't that just untrue? There is a list of designated high speed rail corridors and that line is not on the list.")


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Mar 1st, 2009 at 10:40:08 AM EST
[ Parent ]
You've outlined two of the various schools of ethics regarding economics and economic policy: The utilitarian school of Nozick and Friedman, and the 19th century socialist school which posits that altruism is the organizing principal of natural law, not self-interest as Hayek and Friedman believe.

There's some problems, however, with the ethics of altruism that explain why socialism (the philosophy, not the political slogan) lost favor long ago with social scientists of both the right and the left, and the most embarrassing one is the consistent lack of strong empirical evidence that altruism is an important explanatory variable for human behavior in any setting, least of all economics. Self interest, on the other hand, can usually be shown to be among the strongest explanatory variables for human behavior in virtually any setting.  This helps explain why neoclassical economics, which is simply the application of assuming rational self interest as the principal element for individual, and by extension, collective action, has such rhetorical power in policy circles -- it's just really compelling based on factual observation, cynical or not.

Altruism, for which you are arguing, can still provide an apparently powerful political image for which to create some support for helping people in need, but most of the important academic work in social science has found that it just doesn't hold up upon analysis. Welfare policies, in Europe or anywhere else, can almost always be shown to have been instituted not for the purpose of helping people in need, but rather because they served the political interests one or more powerful groups.  

Thus we come back to multipliers -- that we need to redistribute wealth from the richer to the poorer in a severe recession because the poor MUST spend it to live, while the rational, self-interested rich WON'T sped it because of fear about tomorrow's lack of income.

by santiago on Sat Feb 28th, 2009 at 10:27:06 PM EST
... would be far more compelling:
This helps explain why neoclassical economics, which is simply the application of assuming rational self interest as the principal element for individual, and by extension, collective action, has such rhetorical power in policy circles -- it's just really compelling based on factual observation, cynical or not.

However, there is a shell game going on here ... it is not in fact defining "rational" as would be commonly understood in ordinary parlance, but rather in the context of a model of human decision making which is known to be a false model.

The mainstream has a number of those "happy misunderstandings" that allow the heirs of the collapsed neoclassical program to say things that are technically in line with their mathematico-logical approach to emulating economic behavior, and be understood as saying something more reasonable.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Mar 1st, 2009 at 10:45:50 AM EST
[ Parent ]
There is ample behavioral evidence to support the idea that altruism is a fundamental characteristic of human nature just as much as selfishness.

However, an ethical argument doesn't depend upon appeals to psychology, it depends upon fundamental notions of equity, compassion and fairness.

Just because the utilitarian measures are popular these days doesn't mean things have to stay that way. What I'm arguing is that the fact that these measures of "success" are used without realizing that they are the unacknowledged assumptions is what needs to be considered.

Thus using GDP as a measure of anything having to do with policy decisions creates a framework which leads to certain decisions inevitably.

You don't cite any evidence that the better level of social services in Europe is a disguised effort to promote the interests of the powerful.

I would argue that a history of 300 years of wars led in the post WWII era to an understanding that there was a need for a new social contract. It's worked out fairly well. Europe has had a generally good level of economic development, including bringing along some very poor states. It has also resisted the most extreme distortions of wealth and power that have infected the US.

What are the big failures that you see that make you so cynical?

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Sun Mar 1st, 2009 at 10:45:59 AM EST
[ Parent ]
Selfishness is not the same as self interest.  Not even neoclassical economics allows for selfishness.  Altruism, however, is just as misplaced as selfishness is, and, contrary to what you've just said, there really isn't very much evidence for it in any field of social science.  What there is more evidence for is that people act out of expectations of reciprocity in some way.  For example, Alberto Alesina has done a lot of work showing that altruism is based on racial affinity -- racism.  People are generous to others like them, not to everyone, and that explains a lot of the variation in welfare state generosity between countries.  Those countries which are more racially homogeneous are more generous than those countries which have high degrees of racial diversity, with the US having the most racial diversity of all.  
by santiago on Sun Mar 1st, 2009 at 03:17:38 PM EST
[ Parent ]
Of course, high racial diversity also correlates strongly with being a colonial power and/or a slave economy, both of which undercut organised labour as a power bloc (for reasons that should be obvious).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Mar 1st, 2009 at 03:38:35 PM EST
[ Parent ]
Quite true, but what Alesina finds is more important in undercutting labor is a winner-take-all electoral system rather than proportional representation which allows for radical parties to have direct political representation, rather than negotiated representation with one of two major parties.
by santiago on Sun Mar 1st, 2009 at 06:07:31 PM EST
[ Parent ]
It's one of the key stupidities of neoclassical economics that it confuses selfishness with self interest. I doubt you'll find many neoliberals who could explain the difference in practice. And their actions certainly don't support a reading with any particular evidence of nuance.

Altruism isn't just reliably observed in the social sciences, it has a biological foundation - mirror neurons seem to explain it quite adequately.

There's no uncontrived Darwinian explanation which explains why people get incredibly attached to their pets, but they do.

Anyone who's ever paid a vet's bill can tell you about non-reciprocal altruism. There's no objective benefit to owning a pet - e.g. most cats aren't even that good at keeping vermin at bay, never mind defending anyone against hostile people or larger predators, and pet fish don't do much of anything at all - but humans will lavish food, attention, affection and resources on them all the same.

There may be a perceived subjective benefit, but once you accept that, it's no step at all to accepting why altruism exists too.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Mar 1st, 2009 at 03:48:15 PM EST
[ Parent ]
There is no dispute that unreciprocal altruism exists.  The problem is that it does not occur systematically enough to explain why people behave the way they do to each other.  Social science has tried for two centuries now, and there has been little success (although some studies do claim to find it).
by santiago on Sun Mar 1st, 2009 at 06:10:49 PM EST
[ Parent ]
how systematically is systematically enough?  I'd say that that is to vague an argument to philosophically employed, capble of salami slicing any opposing argument.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Sun Mar 1st, 2009 at 06:38:25 PM EST
[ Parent ]
That you can make a mental model of it good enough to make a prediction and observe the evidence that the prediction is true.  Same standard that applies to self-interest as the principal motivation for human behavior.  There aren't many good models of altruism that explain much about what happens in the real world.  But there are lots of good models of self-interest and lots of evidence to back them up.
by santiago on Sun Mar 1st, 2009 at 10:57:09 PM EST
[ Parent ]
I'm ssure thats down to results being more easily experimentally observed. Altruistic results tend to be more indirect, and so less easily testable.

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Mon Mar 2nd, 2009 at 08:33:33 AM EST
[ Parent ]
That's not necessarily true, although certainly a possibility. Quite a bit of work is currently being done in this area related to the phenomenon of migrants sending remittance payments to family members in their countries' of origin, which has exploded in volume in the last 20 years all over the world.  Sociologists (Massey and Stark being the most prominent in this) have tested specifically for altruism or reciprocity, and most of the evidence comes down on the side of reciprocity -- migrants' families provide something, or provide a source of security of the migrant's interests, in return for remittance payments which smooth consumption patterns of their families back home.  
by santiago on Mon Mar 2nd, 2009 at 11:14:18 AM EST
[ Parent ]
A I recall we had some discussion in relation to Robin Upton's

Altruistic Economics

here in the past.

I remember attending his presentation with Ros Stock at LSE of this paper a few years ago.

Altruistic Economics: a Framework for Interaction Between Sympathetic Peers

In particular I was struck by the concept of Sympathy

s where 0 < s < 1

No doubt such a parameter (essentially "indifference value") is a staple of Heterodox Economics of which I am sublimely unaware, but the analysis that followed interested me until I found my maths getting a little rusty....

Abstract

We present a numeric framework for explicit modeling care relations between peers.

By allowing agents to express their sympathy for their friends in such a concrete form, it provides a mathematical underpinning for the notion of 'wealth as relationships'.

A procedure is derived for the calculation of indirect sympathy relationships, permitting appropriately sympathetic treatment of friends of friends, friends of friends of friends and so on.

This is set in context as the basis for a collaborative, non-zero sum, network-based economy that could reward rather than punish altruism as a basic assumption.

2/ Sympathy

Sympathy is understood as an expression of the strength of feeling of one party for another, as evidenced by preparedness of one party to forego a gain to self so as to bring about a gain to the other.

2.1 Linear Sympathy

The simplest non-trivial sympathy model makes a crude but useful approximation. Sympathy is expressed as a scalar, s, defined with respect to a particular resource as follows: One party has sympathy for another if they are indifferent between receiving s units of a resource themselves and the other party
receiving 1 unit of that resource....


7/ Discussion

Classical market-based economics assumes that trading occurs only between independent self-maximisers disinterested in one another's welfare. Since it conflicts absolutely with what is known of human behaviour from psychological and sociological angles, this represents a serious flaw in the foundations of the theoretical edifice of modern economics.

A corollary to this is that many people in capitalist societies have come to draw a sharp distinction between their personal lives, where personal relationships are important, and their professional lives, in which they appear to be incapable of legitimate expression.

Altruistic Economics is a quantitative framework for structuring expressions of sympathy between peers.....



"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sun Mar 1st, 2009 at 04:03:59 PM EST
[ Parent ]
This doesn't appear to be, strictly speaking, a model of altruism as socialist political theory would define altruism (fraternity).  Rather it is merely a conventional model of self interest with altruism defined as one of the self interests around which an actor maximizes utility. From what I can see briefly, it appears to be completely consistent with neoclassical economic theory.
by santiago on Sun Mar 1st, 2009 at 11:02:03 PM EST
[ Parent ]
Altruism, however, is just as misplaced as selfishness is, and, contrary to what you've just said, there really isn't very much evidence for it in any field of social science.

Repeating what you said before without any more evidence does not make for a stronger case.

I'm really not in the mood to dig out the vast literature on altruism. In fact one of the philosophical issues that presents a problem from the Darwinian point of view is why would someone (or animal) sacrifice itself for other. Nevertheless we see instances of this all the time.

From the dictionary:
Selfishness - devoted to or caring only for oneself; concerned primarily with one's own interests, benefits, welfare, etc., regardless of others.
Synonym -  self-interested, self-seeking, egoistic; illiberal, parsimonious, stingy.

The key is that one type of behavior is focused on self and altruism is focused on the other.

You have not added anything to your case. And as I said ethical principles don't depend upon psychology they are a matter of fairness and equity.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Sun Mar 1st, 2009 at 04:16:41 PM EST
[ Parent ]
There is a large, not vast, literature on altruism, and it is the basis for socialism as a political philosophy.  I'm pretty familiar with it, but, like most social scientist ranging from Marxists to Austrian School rightists, I don't find it very convincing, empirically.  With all its faults, even simplistic selfishness just explains the data on human behavior better, and classic self-interest, which includes as a subset the desire to help others, explains it even better, both theoretically and empirically.  That's why the literature is so much more vast for non-altruistic assumptions.  
by santiago on Sun Mar 1st, 2009 at 06:17:13 PM EST
[ Parent ]
Welfare policies, in Europe or anywhere else, can almost always be shown to have been instituted not for the purpose of helping people in need, but rather because they served the political interests one or more powerful groups.

This argument strikes me as either falling perilously close to kapitallogik, or as an exercise in stating the obvious, depending a little on how you define "political interests."

If something does not serve the "political interests" of group A, then that something will not be on group A's agenda - "stuff that makes it onto the agenda" is kinda the definition of "political interest," isn't it? And in order to enact the kind of sweeping social changes that characterise the birth of a modern, functioning welfare state, group A would have to be pretty powerful - after all, that's the definition of power: The ability to implement your political agenda (possibly over the objections of dissenters).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Mar 1st, 2009 at 11:31:44 AM EST
[ Parent ]
But this is important regarding redistribution policies because it means that unless altruism can be shown to be the reason any redistriution must have provided enough benefits to the haves as it did to the have-nots. So, in order to make the case the diarist is making you have to assume that altruism is a powerful enough motivator for collective political action.  I'm arguing that although it's been studied pretty deeply, there just isn't very convincing evidence of that, so it's better to bet on multipliers.
by santiago on Mon Mar 2nd, 2009 at 12:29:48 PM EST
[ Parent ]
You do not need to have the wealthy on board for redistribution. You only need 50 % plus one.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Mar 2nd, 2009 at 01:58:54 PM EST
[ Parent ]
Not true, especially in Europe with proportional representation legislatures and the lack of need for a majority to govern, with the resultant log rolling. A powerful minority can usually be shown to carry the day (that's what the whole academic literature on Political Economy is about) over the majority due to the fact of concentrated versus diffuse interests.  
by santiago on Mon Mar 2nd, 2009 at 04:01:32 PM EST
[ Parent ]
by das monde on Tue Mar 3rd, 2009 at 06:18:00 AM EST


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