Monday, 11 February 2013

First Principles of Political Economy

I recently exchanged a series of e-mails with someone who holds very conservative economic views. I wanted to explore our differences a bit and try to discover the most basic point at which we differ. I want to give him some privacy, though, so I won't post his name.

A point at which he became upset, and considered me an out-and-out communist, was when I suggested that businesses desired a degree of unemployment in the working population. A degree of unemployment has the following benefits, I said: it made it easier and cheaper to start new businesses; it reduced the wage demands of employees (since there were many who would work for less); and (here we step into psychology) it increased the gap between the wealth of the owners and the wealth of the workers. I rely here on an article on the BBC which states that people perceive themselves as well-off or not because of their wealth relative to others. The point was, in order to do well, people feel that others must do less well. A related point is that wealth reduces compassion.

Those are the reasons I gave, and I also mentioned an article that I read (years ago) about business owners in Southern Alberta complaining about the difficulties that low unemployment caused them. Jobs were left empty, especially if they paid little! Employees would leave if they were not treated well! Obviously this is terrible for the economy. (Please note the irony).

If a degree of unemployment is good for the economy, we can expect that the amount of unemployment would be standardized as an ideal unemployment rate. Thus, economists have determined an ideal unemployment rate range of 4 to 5.6 percent (BLS, 2003). This is not so far from the 7% unemployment rate in Canada in January 2012.

The gentleman's problem with these statements is that Marx had made very similar ones. Marx called the unemployed people the Reserve Army of Labour which, frankly, is a very good metaphor.

I found out about Marx's concept only after I had developed it independently. I explained to the gentleman that I had worked it out from my own first principles of political economy, which are these:
The very first principle: The world isn't fair.

Restatement of the first principle: Those who are poor and powerless are likely to get screwed over.

Corollary of the first principle: As my dad put it, "Those as has, gets." Or, as Matthew puts it, "Whoever has will be given more, and he will have an abundance. Whoever does not have, even what he has will be taken from him."

Second principle: Those who have much are likely to collude to safeguard and increase their wealth and power. This can take place through cartels or through influence on lawmakers, or by being lawmakers.

Restatement of the second principle: House rules means the House always wins.

To take an American example, the dispossession of the Cherokee for the economic benefit of those who had better access to the American Executive and Legislative branches, despite the opposition of the Judicial branch. To take a Canadian one, a small group of families, called the "Family Compact" would buy up government lands for low prices as they became available for development. They had the money to buy it as a block and the inside knowledge, since the legislative and executive branches of government were comprised of members of those families. Then they sold small parcels to the immigrant farmers at inflated prices.

Government still sets the rules for private enterprise, does it not? It also sets the boundaries for what is an "externality" in terms of business accounting, which lets legal economic activity damage others without paying for it.

Corollary to the second principle: The power of the rich and well-connected can only be balanced by the poor through collective action of some sort. In its most direct form, this collective action is protest (with its implicit threat of revolution), unionization, or revolution itself, as in France. ("The sans culottes" of that revolution were the poor).

The poor can act collectively through the vote, if they have it, to create rules and programs that help to expand the middle class. For example, universal education from grades 1 to 12, funded through taxes, is now a good that is beyond pubic debate. Everyone in public life, almost everyone not in public life, supports it. But this would not have been possible if the mass of its beneficiaries, those who could not afford a private education for their children, had not had access to the vote. Do we agree here?

When the poor could not vote, they could not influence the rules of the game, so they were, at various times, put in prison, or workhouses, or indentured, or  shipped to Australia, or killed by man-traps set for poachers, or were set on by the army when they protested.
As for my correspondent's assertion that socialism causes higher unemployment, that certainly doesn't always seem to be the case. That's why the UK is looking to Sweden as an economic model. However, it may not be importable, since Sweden's success is at least partially based on the fact that Swedes trust each other. From the same article:
The fact is there is mutual trust between Swedish unions and employers and Scandinavian countries rank highest in the world when it comes to social trust - 70% of Swedes say they trust one another; just 35% of Brits feel the same way.

The trust between Swedish citizens ranks among the highest in the world.
That trust allows Swedish governments to make bold decisions that would be met with apprehension or cynicism in Britain.
It stems from a unique relationship between the individual and the state established back when most of Europe was operating a feudal system.

Swedish peasants were unusual in owning their land says Lars Tragardh, professor of history at Ersta Skondal University College in Stockholm.

When the nobles wanted to subjugate them, the peasants united with the king to defend their freedom.

"So, there has been this long-standing positive view of the state as the vehicle for liberating individuals from these ties of dependency," says Prof Tragardh, "this has been the critical dynamic in the building of the welfare state."
If a woman depends on a man for income and wealth, how does either party really know that they are together because they love each other rather than that they need each other?"”
Prof Lars Tragardh Ersta Skondal University College
The welfare state was designed to do away with dependency of all kinds: whether on charity - or even on family members.

Professor Tragardh calls it a "Swedish theory of love". It says that love can exist only when neither party is dependent on the other.
 Another article with approximately the same idea.


  1. Gareth, Gareth, Gareth! I'm laughing as I read this, because the course I'm teaching on Thursday the 21st of this month, Banks Skanks, concludes that the primary purpose of money supply manipulation is not the management of inflation, but the management of the unemployment level so as to keep a surplus of labour which benefits the business owners and their courtiers. I also came to this realization independently of Marx, of whom I've read very little.

    Another interesting note is that the so-called 'free trade' advocates who cite Adam Smith haven't actually read his magnum opus, The Wealth of Nations. In it Smith's observation, 'the vile maxim of the masters', is basically the same argument. He even argues that unions are an absolutely necessary requirement in a properly functioning democracy because it helps prevent the full wage-enslavement of labour by their owners who otherwise have full control of the government and thus the force of law.

    When I get the arguments against this, I point out that the practice of using children as chimney sweeps is perhaps a near epitome of how ruthless the powerful will be to enforce the division between the haves and the have nots. Young children would be forced into flues as small as 4" in diameter with flames burning their toes as encouragement. Oftentimes the fires were not extinguished during the human cleaning because of the business cost such an interruption would cause. In my 'Economics Debunked' course I make the argument that the primary purpose of currency/money is to provide an efficient mechanism that allows for the haves to keep themselves separated from the have nots.

    1. I'm glad you enjoyed it.

      I think those who trust too much in the "invisible hand" to even out opportunity and wealth are like those who would speak in general terms about the average temperature or pressure of a swirling gas. Hot and cold spots, rapid and still spots, would exist in it until all movement had ceased. And certainly the average temperature would conceal the effect of a "Maxwell's Demon" systematically adding to the heat on one side of a wall while decreasing it on the other.

    2. I just found this. An essay called "Being Poor" by John Scalzi. Here: