Hi Harry, Thank you for your piece -- most enjoyable. To save space, I've deleted my original message but yours is still appended below.
I have two points to discuss with you. I. CONCEPTS My first point occurs towards the end of your message where you imply that the format for economics was fixed (by Keynes/Harrod) for all time as Land, Labour, Capital and Wealth. And that these are mutually exclusive. I look forward to your definitions to justify this. I would suggest to you (subject to being corrected by your goodself!) that the above are not mutually exclusive, and that bits of one are to be found in the other. They are useful terms to use in discussing economics, but no more. (I might add here that, far from bringing clarity to the picture and "making progress in economics possible", Keynesian ideas actually justified the action of governments as economic players in addition to their basic role as protectors of the public. As such, since then we have since seen the greatest devaluation of currency ever since money was invented [approaching 50-fold in most developed countries] and the most enormous confusion in economic thought -- Nobel Prizes notwithstanding.) I've mentioned the terms Land, Labour, Capital, Energy and Information, not because I'm laying down any sort of new economic philosophy -- I'm hardly qualified for that -- but simply because, today, the latter two terms have become much more important. With England apparently floating on a sea of coal, Keynes hardly gave Energy a thought as an important factor. (And, as a non-scientist, he would not have any idea that energy is always required to be injected into any closed system before anything new takes place, even though there may be an abundance of the other factors.) As to Information, Keynes would not have been aware of Information Theory which was yet to be initiated by Shannon and Neumann and which is now becoming increasingly important in almost every aspect of science (and economics). I've used the categories Land, Labour, Capital, Energy and Information as merely useful terms -- not exclusive variables. As to my non-selection of Wealth (as non-invested 'valuables'), I don't regard this as being an important factor simply because it is normally re-cycled or destroyed, usually within three generations, and is a matter of subjective/cultural fashion rather than taking part in daily economic activity. 2. PRIMARY LAWS Now back to your major point. I'll grant you that Comparative Advantage has less primacy than Supply & Demand and is a special case. However, it deserves to be given equal treatment because it made all the difference between the survival of Homo Sapiens and the extinction of Homo Neanderthalensis. (And this,interestingly, is an example where economics must be considered a 'literary' discipline and not a 'scientific' one because human nature, both genetic and cultural, must also be taken into account when considering our economic activites.) Roughly 50-100,000 years ago, there were two species of mankind (probably the resultant of half-a-dozen 'man-primates' in the previous one or two million years or so). What was the difference between these two species? The crucial physiological difference was probably language (which enabled negotiation between tribes -- see below) but so far there's no evidence (future DNA research will probably elucidate this). But there is abundant evidence that soon after his evolution Homo Sapiens had already started to migrate deeply into Euro-Asia whereas the Neanderthals were confined to small pockets in Europe. Later (at around 20,000BC when man invented the spring-launched spear) man began spreading over the whole world.) What enabled man to migrate like this? How could man migrate into the most inhospitable parts of the world, often greatly deficient in basic resources such as food or tool-materials? Man could only do so if newly-cloned tribal groups could trade resources from its parent tribe. For example, man needed very hard flints, such as obsidian. This is only found in isolated areas and thus had to be consecutively traded across hundreds, sometimes thousands of miles. Salt has to be traded too. Late stone-age man needed at least a dozen different sorts of wood in order to make the different types of tools and weapons. Trading would not have made sense unless both parties gained from the exchange. A newly-cloned tribe could only become economically viable unless it exploited a resource in its new habitat more efficiently than its parent tribe had done. It thus benefited the parent tribe to swop some of its more abundant resources for the resources of the daughter tribe. And this, of course, is the basis of Comparative Advantage which David Ricardo first enunciated clearly. Any individual, group, tribe, nation, what-have-you, should concentrate hard on whatever activity it can best do. Even if it is hard, gruelling work (such as Third World country populations have to do, unfortunately), this is still the only way by which a country can trade for more advanced products that will, ultimately, make its standard of life better and enable it to advance into more labour-saving technologies -- as indeed, countries like South Korea have done and China is now doing. As a non-economist I'm amazed when I read some of the writings of so-called economists that, though they may grasp the concept of Supply & Demand, they are still hazy about Comparative Advantage -- and they still advise their governments to impose tarrifs and so forth. It is so sad that if the anti-globalizers had their way and substituted aid for trade then all that would happen (as has already happened repeatedly) is that the politicians of the recipient countries would line their pockets and the people would get even poorer. (I am not against aid by private charities which get the money/education/health care straight into the hand of the poor.) ------ Just one minor quibble. When you wrote: <<<<< You can, at this point, dump all your supply/demand curves in the trash, for you have what you need to understand the free market. Yet, I only know one major economist, Kirshner, who has had the nerve to criticize the curves that are the mantra of modern economics. >>>>> There are surely many economists (such as David Simpson) who say that supply/demand curves are not particularly useful because they imply that the path to the clearing price of any product is smooth and almost effortless. As you rightly say elsewhere, any corporation that can strangle competition and hold up the price of a product will do so, and its only by untramelled competition and innovation that a product will finally arrive at a 'true' price. ---- I've been racing along in writing the above in order to send before British Telecom impose higher charges at 9.00am. I hope the above is coherent, therefore. Keith >>>> Keith, Sorry I gave you the impression that Land is uniquely collectible. Practically any item can be collected and held for a future. My favorite is a Rosalie beer can that helped point my thinking many years ago - and I've been teaching it ever since. An empty Rosalie can was sold for $4,000 at auction. The buyer was offered $10,000 for it as he left the room. He refused. Think about that. Not just the offer, but the refusal. It points to the difference between people in the price mechanism controlled market, and those who are part of the collectible market. The current price of a Rosalie beer can on the collectible market is $10,250. Our original buyer should have taken the $10,000 offer!) But, he was a collector and this is the way they behave. On the other hand, if he had sold it, why did the collector buy? Presumably, because he expected it to appreciate. The collectible market would have recorded the $10,000 price and expectations of a higher price would have pushed the collectible price far above the present $10,250. I'll go into the psychology of the collector in another post. Collectibles cause no harm to an economy. The problem is that Land is part of the collectible market and that unhappy situation does harm the economy. But, let me go back to the original classical concepts. These are not mine (in fact I've made some adjustments in recent years, but without changing the character, or intent of the originals) - but this is how it began. Their Science of Political Economy began with two basic assumptions of human behavior. "Man's desires are unlimited." "Man seeks to satisfy his desires with the least exertion." For almost 50 years, I've asked students at high school, college, university, post-doc, and adult levels, to come back next class with two examples of a person who does not conform to both assumptions. No-one has managed it yet. People don't like rigor. They much prefer to be fuzzy when thinking. But a science shouldn't allow fuzziness - though incompleteness is always the enemy. When making assumptions, the fewer the better. As Bertrand Russell said: "Two assumptions are better than sixteen." So, we have two. So, the absoluteness of the two assumptions frightens people, yet there is nothing to be frightened about. In fact, the first assumption is what FutureWork is all about. If it is true, then if we all worked 24 hours a day, 7 days a week, we could never satisfy our unsatisfiable desires. Which leads to the question - not how do we find work for people - but why is there involuntary unemployment? I fear modern reformers are so busy finding ways to put people to work, they never wonder why they are unemployed. Surely, unemployment should only occur when everyone has everything they desire, whereupon we can all go fishing, or something. I should add that the classicals put no restriction on desires. Each person has his own. One may desire a dozen Cadillacs, another may desire to lie on a grassy hill counting the clouds, yet another may desire to listen to Ray's choral music all day. Your two "incontrovertibles" are Supply & Demand and Comparative Advantage. Comparative advantage is no more than an extension of the second assumption. Supply and demand are really the same thing. If I trade my chair for your table, then supply is a chair and a table, demand is a chair and a table. Trade always balances no matter what government statisticians say. It is perhaps better to use "Price Mechanism". and "Market Clearing Price". The price mechanism describes the normal action of the free market - which everyone knows (any kid can observe that when Burger King drops their hamburger prices by 50% the line (queue) will extend around the block. You delightfully brought up the 99p air fares to Europe. The Market Clearing Price can be said to be "the highest price a seller can get while clearing his shelves". A lower price will clear the shelves but he'll lose some money. A higher price will cause goods to "stick to the shelves". You can, at this point, dump all your supply/demand curves in the trash, for you have what you need to understand the free market. Yet, I only know one major economist, Kirshner, who has had the nerve to criticize the curves that are the mantra of modern economics. We know how the price mechanism works in the market. When demand increases, prices rise. This has two effects. It turns off demand and turns on supply. Goods rush to market and prices return to Market Clearing. This constant stabilization of the market, this continual adjustment of peoples desires, happens so quickly and effectively that it is difficult to understand why government controls are ever advocated. Except for something that Free Trade and free market advocates don't seem to want to know. It is perhaps the reason for much antipathy to Free Trade. The market provides the highest quality at he cheapest price. That's why we like it. Unfortunately, that also applies to labor. Market pressures forces down wages. This downward pressure on wages was recognized 200 years ago and became "Ricardo's Iron Law of Wages". His contemporary Tom Malthus, said almost the same thing, except that he concentrated on population, whereas Ricardo focused on land. Essentially, Ricardo said that the best land would be used first at high wages, then poorer land at lower wages, then even poorer land for subsistence wages. We have to ceteris paribus a bit here to get the thought straight. (We are essentially Aristotelian linear thinkers not "network" thinkers - though practice and experience can, at times, make us appear to think in "multi-valued" ways. So, we'll stay with the basic Iron Law. We can bring in all the possible variations later.) Anyway, Ricardo forecast wages dropping to subsistence. Malthus thought we would breed ourselves into absolute poverty. Thus, economics became known as the "dismal science". It should be understood that the wages in question belong of those at the bottom of the heap. A doctor might get a lot higher wage than the peasant - but there is argument that the wages of those higher up in the wage pyramid depend on those at the bottom. If the subsistence worker gets more, so will everyone else. We have to take a closer look at wages. As the engineers might say, the price mechanism is simply a negative feedback mechanism. When prices stray from the equilibrium, forces arise which drive them back. (I don't really like equilibrium - preferring the physicists' "steady state" which implies a moving equilibrium.) All the price mechanism does therefore is hunt around a point. So, the question of the hour is - what fixes the point, the wage around which the price mechanism hunts. Why is the wage $2, or $5, or $10? Came the idea of the "alternative". Labor will not work for subsistence wages if there is a higher wage alternative - a sensible notion. The alternative brings us back to Ricardo. If there is land available on which a subsistence laborer could earn $20 an hour, he wouldn't work for less for an employer in the city. When land on which a worthwhile wage can be earned is available for settlement, laborers will not work for less. Does this mean that everybody becomes a farmer? Of course not, but when enough workers leave the city to turn a labor surplus into a labor shortage - watch wages rise. And to bring them back, wages will have to rise to, or above, the "alternative". A case to point. Most good land in the US was taken up pretty quickly. In fact the 1890 census declared there was no more free land of any kind in the US. When silver was found not too far from San Francisco - the Comstock Lode - it raised the Alternative for subsistence labor in the city. One could not claim as much of the Lode as one wished. Each miner was given a small claim - enough for him to work. This meant that over a period claims were readily available for those willing to work. (You were obliged to work your claim, or you lost it. Obviously, everyone didn't leave San Francisco, but enough did to cause a labor shortage and a consequent wage increase. Whereupon, ships couldn't sail out of the city. Captains couldn't find sailors who would take the low wage. Ships without crews were forced to stay in the harbor. Finally, the Lode was played out, the higher alternative disappeared, wages dropped back - and again ships sailed out of San Francisco. So that's a brief rundown of the beginning ideas of Classical Political Economy - particularly of its connection to wages - which should be of some interest to our friends of FutureWork. If I may trespass on your time a little further, I'll show in another post the "mutually exclusive" concepts that are named Land, Labor, Capital and Wealth. In other words, something that falls into one concept cannot be part of another. Everything on earth (or for that matter in the universe) will, however, be in one concept, or another. So, the first thing the Classical Political Economists did was to reduce the mighty complexity of the universe into four bite-sized chunks. Economist Roy Harrod - protege and biographer of Keynes - said that being able separate all things into four classifications made all progress in economics possible. Unfortunately, economists nowadays seem to make up defined concepts at the drop of the hat. The latest seems to be "transaction costs" - which I can't find in my latest college text. It's as if they are determined to make this simple and essential science into an arcane property of the priesthood. Harry >>>> ___________________________________________________________________ Keith Hudson, General Editor, Calus <http://www.calus.org> 6 Upper Camden Place, Bath BA1 5HX, England Tel: +44 1225 312622; Fax: +44 1225 447727; mailto:[EMAIL PROTECTED] ________________________________________________________________________
