"The End Of Worldly Philosophy?"

In Heilbroner's book The Worldy Philosophers he ends his book with the chapter called "The End of Worldly Philosophy" and in this chapter he elaborates on the idea the end of theoretical economic thinking has finally approached an end and mathematics has taken over. Although Heilbroner believes this is not the crucial change in economics of our time. "Numbers abound in any social order that relies on modern technology. All industrial systems generate and require a mass of quantitative information that would have been unimaginable before the advent of high speed production and near instantaneous communication. Today's economics are more interdependent than were the workers in Adam Smith's pin factory, and as this interdependency grows, so do both the quantity of, and the demand for, information on a wholly new scale. Here is where statistics and mathematics enter modern economics (314)". I believe what Heilbroner is trying to say is that due to the mathematical shift in economics it has produced large amounts of information. This large amount of information has only been possible by the development of technology and peoples ability to communicate at a faster speed.

This leads me to question where economics will be in years to come? What other factors could influence economics in the future?

The Road to Development

At the end of chapter 13 in Backhouse’s The Ordinary Business Life, the topic changes to that of development economics. What really drives development in underdeveloped countries? Is primarily based out of the development of the private sector, or is the public sector’s presence needed. On page 303 of Backhouse Arthur Lewis “distinguish[es] between a modern sector in which firms maximize profits and use mechanized production methods and a ‘traditional’ sector in which family relationship ensured that everyone was employed on the land, even if their presence did not raise output….Economic development involve[s] the growth of the modern sector. Labour move[s] out of a sector in which its productivity was zero into one where it was productive”. From studies in my development economics course, I have found this movement from a traditional sector to a modern one to be one of the most essential parts of undeveloped countries catching up. My only question to this remains, what is the best way of going about this transformation?

Many times developing countries lack the resources and education to simply start up private sector growth. If this is the case, then countries may be stuck in the realm of poverty and unemployment that Keynes touched on. However, what effects does the mobilization of the public sector have? Bringing in foreign investors to utilize what resources third world countries have often results in those outside of the country getting richer, while those within stay poor. Government spending may do the trick in a sense, however, there can be grave consequences. Mass borrowing on the part of the government is often necessary for this to happen, which may cause colossal inflation and the further loss of purchase power in the already poor countries. Government intervention may also disrupt the communication that prices and things related have. This disruption of communication amongst the markets may lead to the misallocation of capital and labor, and set up the chance for economic bubble bound to burst. The final problem with government interaction, which I have seen the grave effects of in my development economics course, is the amount of power that is placed in the hands of the government when they are the ones spearheading development. Often times, because they are the ones receiving the massive amount of funds they are able to use the money to increase their power by, allocating resources in a way that makes themselves richer and forces the citizens of the developing countries to obey their rule in order to receive enough to just survive. Even if the country is seeing some form of economic growth because none of it is being passed down to the people, they can remain poor.

Despite all that was said about the negative consequences that can come from the public sector’s initiation of development, I believe this to be the most viable option as long as those in charge have the people’s best interest in mind. While the initiation of development from this angle will initially leave the people of the country excluded and remaining poor, the effects of economic development along with increased opportunities in growing markets will trickle wealth down to the at the bottom. With the increase in production within a country, standards will rise as competition breeds innovation into the lands. Even if in the short term there is massive poverty and inequality, over time the bottom lines of developing countries will be pulled up with the growing economy and private sector will begin to see improvements. The only prerequisite to this is a competent government, which in many of these countries is not the case. This trickle down growth is better than the rut a developing country may find itself in waiting for the private sector to kick start itself. What is your take on the development of the third world? Which way do you think is the route to take for developing countries? Are there other viable options not touched on or given enough attention? 

Social Justice and Inequality

Today's issue of The Wall Street Journal included this small quote by Friedrich Hayek on the topic of Social Justice and Inequality.

From economist Friedrich Hayek's "Law, Legislation and Liberty, Vol. 2: The Mirage of Social Justice" (1976):

Nobody capable of useful work need today lack food and shelter in the advanced countries, and for those incapable of themselves earning enough these necessities are generally provided outside the market. Poverty in the relative sense must of course continue to exist outside of any completely egalitarian society: so long as there exists inequality, somebody must be at the bottom of the scale. But the abolition of absolute poverty is not helped by the endeavour to achieve 'social justice'; in fact, in many of the countries in which absolute poverty is still an acute problem, the concern for 'social justice' has become one of the greatest obstacles in the elimination of poverty. In the West the rise of the great masses to tolerable comfort has been the effect of the general growth of wealth and has been merely slowed down by measures interfering with the market mechanism. It has been this market mechanism which has created the increase of aggregate income, which also has made it possible to provide outside the market for the support of those unable to earn enough. But the attempts to 'correct' the results of the market in the direction of 'social justice' have probably produced more injustice in the form of new privileges, obstacles to mobility and frustration of efforts than they have contributed to the alleviation of the lot of the poor.

What do you think Hayek is referring to and do you agree or disagree with him and why? Are there other economists we have studied that would support his view or disagree with him? And what was the basis for their view?

The mathematical shift in Economics

The idea that economics is more mathematically based and driven is a modern view many economists take today. Jevons was a major proponent of this movement, "as he started the Theory of Political economy by arguing that economics was inherently mathematical because it dealt with quantities" (Backhouse 168). He believed that you could measure the value of economic quantities, and all numerical data that we work with in government and the economy today. This was an interesting perspective to take back in Jevon's time considering the political economy is what many people recognized as the foundation of economics. Now Jevons did have a scientific background which heavily influenced his approach on economics, and led to his belief that you could quantify economics. Jevons placed serious importance on the link between value depending directly on utility. I personally agree with this perspective because I think the amount of consumer's utility attained by a single product or service is what decides the value of it.
Jevons went on to use different algebraic and calculus based formulas to drive utility maximization. "For example he derived the condition that utility would be maximized when the ratio of the marginal utility of two goods was equal to the relative price of two goods" (Backhouse 169). Now approaching this mathematical shift in economics from a larger perspective. Do you think the way of the future in resolving difficult economics decisions should be based off formulas and derivations, or primarily worked on through politics?

Distribution in Society

             Throughout the course, the topic of the distribution and redistribution of goods has frequently been referenced.  Adam Smith believed in three types of justice which included distributive justice, whereby “goods are distributed to people in proportion to their merit” (Backhouse 20).  Marshall supported a progressive tax system in which the rich paid more in taxes than the poor (270).  In the 1790s, the “‘Speenhamland System’” was introduced in Europe that used taxation to fund payments to low-wage workers who worked but had trouble supporting themselves (132-133).  Henry Sidgwick developed the idea of a system where the wealth of society, measured by utility, could be increased by redistributing goods in a way that items were taken from those who received less utility and given to those who received more utility from those goods (271).  The example of a loaf of bread is given where “the value of an additional loaf of bread to a poor person may be higher than its value to a rich person; it may therefore be possible to increase welfare by taking a loaf from the rich person and giving it to the poor person” (271).  Backhouse goes on to further say that this system was proposing the idea that “a community’s welfare depends on how goods are distributed, not simply on the value of goods being consumed” (271).

             Is taking or giving to someone because they are in a certain position just?  Similarly, is it ethical to take from people who are in a better economic position to support those who are less fortunate?  Or would it be unethical to allow some to live in great economic health while so many suffer and live in poverty?  Do we have an ethical duty to one another?  Does the government have the right/obligation to help those in need at the expense of the more fortunate?  When the government does get involved, are they doing so because they truly want to help those in need or are they doing so because they are seeking their own self-interests and attempting to gain votes, as described by Buchanan (on page 284 of Backhouse)?

Profit:Who should reap the benefits of the gain?

Looking into the discussion from Schumpeter in The Worldly Philosophers beginning on page 294, one sees the discussion of profit origin in the form of adding innovations from the entrepreneur.  Forcing the model of capitalism into a static model, that it was never meant to occupy, as the very nature of a capital is dynamic, Schumpeter tries his utmost to determine where profits originate from.

Suggesting that profits come from neither the workers nor the earnings of capital, Schumpeter uses the static model to show that profits appear when the economy does not follow its regular tracks.   This derailment comes through the addition of technology and is attributable to neither the worker or the company owners, both of whom are the traditionally chosen producers of capital.  This technology, according to Schumpeter, then allows the innovating capitalist to compete at lower costs.  This allows for a higher difference between the cost of production and profits, thereby allowing "rent" to be received by the capitalist.  This gain can be attributed to the actions and thoughts of the innovator, but will disappear according to Schumpeter as soon as other capitalists catch up.  Therefore, instead of rent, Schumpeter labels the origin of this increase as profit, because it is not permanent and is a one time occurrence.

 Naming entrepreneurs as the source of profit within the capitalist system, Schumpeter notes that though the entrepreneur is not necessarily the profit receiver, even though they are the profit generator.  In this situation the system itself Schumpeter indicates as taking the gains provided from the innovation of the individual.

Observing this loss of gain by the entrepreneur, I again put forth the question that has been asked multiple times over the years.  Is it ethical to take from one individual to give to the many?  A utilitarian view might consider that the system under which Schumpeter's entrepreneurs operate is ethical and just because it allows for the greater good of all by taking from the innovations that are created.  However, this action could impede upon the rights of the entrepreneur because they would not benefit at all from their contributions to society.  Is the system ethical in its use of the entrepreneurs, or should it be changed?

Gary Becker

Some of you are probably already aware of this. Gary Becker, an economist at the University of Chicago and a winner of the Nobel Prize in Economics died over the past weekend. I know I've mentioned him in class prior to this and I believe he is mentioned in the Backhouse text. He is a significant figure in late 20th century economics. He felt that economics and economic thinking played a significant role in decisions people make that most consider outside economics (discrimination, relationships, children, crime, etc.). At the same time, he chastised the profession for thinking too narrowly about what incentives people react to when making choices.

He also was a strong believer in the power of human capital to change economic circumstances on both a micro and macro level.

There are numerous obituaries in major newspapers and numerous tributes on various economics blogs. You might want to consider looking them over, either in preparation for our discussions on Dr. Becker or just as a response to this blog.