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    February 2011

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    Maxine's Essays

    • 21st Century Regress
      Sometimes it seems like the world is going to hell and there's absolutely nothing a girl economist can do about it.
    • What Exactly Are We Crowding Out?
      The current economic downturn isn't a random draw of a black ball from an urn containing white balls and black balls. There's no sampling distribution. Very specific policies and actions landed us here. Now we must decide not only what policies need to be put in place to prevent it happening again, but also what policies would best drive us out of the ditch faster and sustainably.
    • I Wish It Were Only Butter
      We should be giving up some butter if we must. We should not give up education or health investment (or infrastructure or the environment (hello, BP). They may be the only legacies of any value that we pass on to our children and grandchildren.
    • Rational Health Investment?
      The obvious "market solution" is to improve the long run return on investments in health among the disadvantaged through meaningful and effective publicly funded education. The obvious short run "market solution" is to reduce the costs of investment and the shadow price of health for the disadvantaged by providing health insurance cover and reduced out-of-pocket costs.
    • The Socrates Parameter
      To the extent that our limbic systems respond to such engineering by over-riding the judgment of our frontal lobe and to the extent that our frontal lobe is deprived of the information it requires to make a rationally self-interested judgment, we are not only pigs and fools, we are slaves.
    • The Economic Rewards of Virtue
      If individual virtue tempers our "piggy" desires and conditions our choices to something that is both individually and socially better, then the economic rewards of virtue as embodied in and promoted by societal norms and institutions are far greater than we have ever suspected. As economists, we would do well to recognize this when we teach U max.
    • The Market for Morals
      Markets then are places where more is exchanged than goods and services, labor and product, credit, and interest. They are places where we also develop the personal virtues of temperance and prudence and the social virtues of benevolence and justice. When they function well, they produce trust, loyalty, and sympathy among those who trade there.
    • Post-Modern Applied Economics: It’s the Error Term, Stupid
      Maxine believes it’s time to refocus attention and discussion on the error term. It is often where much of the action is in our models. It is where unexpectedly catastrophic events dwell resulting in fat tails. It is where our animal spirits manifest and cause us to do the right thing or the wrong thing or the thing everyone else is doing rather than the self-interested, fully-informed rational thing. It is where God and miracles and chance dwell.
    • Intergenerational Win-Win: Health Insurance, Education, Environment, Infrastructure
      So when we’re talking about fiscal stimulus packages and we’re borrowing from our grandchildren to finance them, we should be thinking about how to use stimulus monies to create value for those grandchildren AND stimulate our economy.
    • Short-term Private Payoffs, Long-term Social Costs
      The real health reform discussion, the one we should be having, is “What must we do to create a health system that is both efficient and fair?” The answer will almost certainly include relegating the private sector to markets where market forces or regulation are effective at aligning short-term private incentives and goals with long-term societal interests. If such markets are scarce or non-existent in health, then the private health sector will be of limited value.
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    A lot of the problem is that people don't realise what a dead metaphor is. In Aristotle's time, and long aterwards, markets were real places, and functioned as social as well as economic centres. Already by Smith's time, with long-distance and foreign trade, "market" was starting to become a metaphor for a much more complicated series of transactions. Now, the metaphor is dead and means nothing. What are described as "markets" have nothing in common with a free exchange between individuals who benefit equally, but are really a form of fraud practised upon the weak by the strong. There is nothing called "the market" and it is naive to suppose there is.

    The problem is that self-interest as Adam Smith used it is now confused with self-interest in the way that Ayn Rand used it. Unfortunately, Rand is more influential now than Smith. I wonder how many people know that she modeled John Galt on a sociopathic murder name William Edward Hickman, whom Rand admired for his absolute self-centeredness and complete indifference to others. The evidence is reported here.

    Unfortunately, we are not we ... as in a representative government, we are instead increasingly dissocaited from those who hold elective office. For markets to be effective, there needs to be more than buyers and sellers, else predatory behavior will not be contained. Intelligent regulation to support markets and transparency has been abandoned - sold - almost at open auction (Pay to Play). It seems that under our purchased government, the invisible hand was not guiding the market so much as taking the graft.

    "Much of what we took for granted in our free market system and assumed to be human nature was not nature at all, but culture. The dismantling of the central planning function in an economy does not, as some had supposed, automatically establish a free market entrepreneurial system. There is a vast amount of capitalist culture
    and infrastructure underpinning market economies that has evolved over generations: laws, conventions, behaviors, and a wide variety of business professions and practices that have no important functions in a centrally planned economy. "--Alan Greenspan,

    maxine, dont know if you knew this post is excerpted & recommended here:
    but i wanted an excuse to stop in anyway & thank you for showing up on my blog... sometimes i get to thinking im working in a vacuum and a little attention is encouraging...

    Thank you for letting me know about this, rjs. I'm pleased and honored to be recommended by one of my favorite blogs.

    You are not working in a vacuum. Someday I will blog about the loneliness of being "outside the mainstream." :-)

    Thanks so much to you, the others who have offered excellent comments, Mark Thoma, and my many silent, but regular visitors. :-)


    You might enjoy a short and excellent book by Albert O. Hirschman: The Passions and the Interests: Political Arguments for Capitalism before its Triumph. Hirschman argues that pre-Smith, "interest" (as in economic self-interest" was argued to be a powerful force for taming the other "passions", like avarice or the lust for power. Hirschman also published a related article, "Rival interpretations of market society: civilizing, destructive, or feeble?" in 1982. That piece was updated, in a sense, by a pair of economic sociologists, Fourcade and Healy (2007) "Moral views of market society" (Annual Review of Sociology). They review some of the recent literature, largely in sociology, on exactly this sort of question.

    Maxine - I like this essay very much. I sometimes worry that the optimism that seems to underlie our society will in the end prove a curse. It is as though we have come to believe that we can indulge in all manner of destructive polarization, but that in the end it will all work out somehow. After all we're just playing at extremism. We're only under-educating a portion of the next generation. We're only letting parts of our cities to fall into ruin and lawlessness. I am hopelessly optimistic myself, and though I believe things can work out, I do not believe that they necessarily will. It is up to us, each of us, all of us, but the tenor of our public conversation is now feeding the danger. I believe that if there is a way back from the edge of this maelstrom, it will be found by renewed examination of the fundamental value propositions of the human condition in the context of our times. Sort of like what you are doing here. So thanks.

    Dan, Thank you very much for the references to Hirschman's work. I will for sure track it down and read it as well as the updated piece by Fourcade and Healy. Some of my best friends are sociologists. I'm always interested in understanding their perspective, especially when there may be common ground. :-)

    Peter, wonderful to see you back here! I share your concerns and your beliefs about the way back. The recognition that each piece is a "part of the main" would help, I think. Unfortunately, human nature being what it is, it may take another great depression to bring us together. Even then, I worry that we will have grown so far apart and untrusting that we will not be able to cooperate back to something good. Not so optimistic I'm afraid. I think I'm just tired. :-)

    Thank you for your comment and kind words.

    I probably overstated my optimism. Now that I think about it, the phrase “hopelessly optimistic” seems apt. By conventional perceptions I am as pessimistic as anyone. My optimism is rooted in the belief that our collective perceptions of the world are highly combustible. A kid speaks up in innocence and suddenly no one can plausibly deny that the emperor is naked (or that his tailor is a swindler), and yet a moment before, it was unutterable.

    I am not a particularly religious fellow, but I believe with every fiber of my being in the validity of the phrase “the truth shall set you free”. It is for me every bit as self-evident as that “all men are created equal”. A big part of that truth is that when conventional social arrangements are interrupted, it is obvious that, in the main, we care profoundly about each others' welfare. Yes, there is a self-interested side to our nature and that is a part of what we must deal with, but the better angels of our nature, in an honest accounting, have at least an equal claim in defining who we are.

    The earth shakes and buildings crack open. When we find our neighbor, our first thought is not if their prized tea set broke or if their cable is out. We want to know if they are OK and if they need anything. As the crisis resolves, we are swept up in establish patterns of commerce and life and the intimacy of those moments recede. Is the fault in ourselves, or in social structures and patterns predicated on the poorer side of our nature?

    One doctor crosses borders to endure hardship and danger to treat the destitute. Another defends their right to drive a Bentley around West L.A. sucking the fat out of wealthy patrons. Most people can correctly identify the poorer man, but our accounting system fails the test.

    Peter, I hope you have a blog because you have a true gift for words and I like your worldview. If you have a blog, please post the URL as I would like to read it. If you do not, I think you should start one. :-)


    I do not have a blog. Your kind words are encouraging me though. I've always been doubtful that I can sustain the effort that it requires. When the intensity of my day job ramps up, the more creative side of my life can go dark for months at a time.

    Yes, Peter. I understand. Totally and completely.

    This book looks like a good start at remedies:

    "Agenda for a New Economy: From Phantom Wealth to Real Wealth" by David C. Korten

    The comments to this entry are closed.

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