Reading appraisal - systems, info, prices (donahue, upward) v1.21

Editor's Notes

• #3 My notes: *We really enjoyed the Lawn and Hayek readings because it illustrated an important challenge with respect to how to use the enormous amount of information we have available (from personal preferences, to natural resources, production, distribution and supply chains); information that comes from various scales (from personal, household, firms, and states) and how to effectively aggregate that information into a system that best maximizes welfare on a planet of limited resources. Classical economists such as Hayek argued that the market was the best means to achieve this goal. Lawn on the other hand, has suggested giving the market a much more limited role in this task. *There were many interesting elements in these two readings and it was difficult to decide what approach we wanted to take in presenting this material. For instance, the era in which Hayek was writing had enormous influence on his economic philosophy and he in turn influenced some of the most important politicians and economists of the 20th century. Similarly, we could have presented an analysis of the ethical systems reflected in Hayek and Lawn’s writings. Ultimately we decided to present a synthesis of both articles so as to compare the prescriptions put forward by each to achieve maximum human welfare, and to identify where the “average” Canadian economic advisor fits with respect to these two positions today. I will first present this synthesis and then Antony will drill down into each article to look at the specific claims central to Hayek and Lawn’s economic theory and our assessment of these arguments, which will include pointing out several omissions from both articles. Lastly we’ll take your questions before asking you to address our discussion questions.
• #4 National can mean sub-national (aka provinces) Explain/define different quadrants: Distributional Fairness – i.e. ensure we meet the (Maslow) needs of everyone as fairly as possible Allocative Efficiency – i.e ensure we are as efficient (i.e. economically fair in a competitive sense) in our use of “earthbound” sources of energy and matter in our meeting of needs (and wants). Hayek: Hayek was working from the position that price was the only system that could successfully aggregate all relevant information and relay that information to people so that they can base their ‘plans’ upon it. Therefore an unfettered market is essential in assuring that supply and demand are effectively communicated through price and that allocative efficiency is achieved. *** Did Hayek say anything specific about this in the reading or did we extrapolate from outside sources? The environment simply did not exist as a point of consideration. Lawn: While the price system has been good at facilitating the efficient allocation of resources, ecological economists have shown that resource inflow and outflow is ecologically unsustainable. So Lawn starts from the opposite end of the spectrum. According to Lawn, the first policy goal should be to “ensure the throughput of matter-energy is within the ecosphere’s regenerative and waste assimilative capacities.” Since human society and economy are embedded within the natural world, goals of equity and efficiency would be irrelevant if we could not go on living. The second goal is to promote equity Last is to ensure the conditions for allocative efficiency. However, allocative efficiency necessarily operates within a bounded economy/ecosphere. *Central planning necessarily has a role in each of these areas because it is assumed that the market will not otherwise respect/operate within ecological limits or support social welfare goals. “ Average” Canadian economist: ***There is still a strong emphasis in free trade. However the government does involve itself in the market (eg agricultural subsidies, farm income support) Regarding distributional fairness, there is a certain degree of recognition that government social policy is necessary to mitigate the effects of the market WIBNI: Environmental problems are still not taken seriously (eg environment always dumped during economic crises). In an ideal world we would love to deal with the environment however the economy is our priority.
• #5 War was still underway while writing (although D-Day had happened, VE and VJ days were some time away) – publication of article days after the war ended Fascists, communists, dictatorships and democracies had all used centralized planning of all kinds during the war Included production planning, price controls, rationing, etc. Although the same techniques were used by the victors and the vanquished, many in the victorious attributed their success to such techniques and wanted them to be continued Hayek attributed the rise of (at least) the vanquished fascists and dictatorships to centralization of planning † He worried that continuing their use post-victory by democratic socialist would inevitably lead the democracies to fascism / dictatorships His “duty, which I must not evade” was therefore to provide a rationale to connect the approach to planning which according to many in the democracies had “successfully won the war” (and not incidentally “solved” the problems of the depression) to the original rise of fascism in Germany and elsewhere Article was written around same time as Hayek’s classic ‘The Road to Serfdom’ YouTube - Friedrich Hayek's 'The Road to Serfdom' in 5 Minutes (Music is from Richard Wagner's Tannhauser; the "Pilgrim's Chorus". ) Article likely written in response to early criticism of ‘The Road to Serfdom’ * Glen Beck – would he get the irony of us quoting him in a “left wing-pinko” Environmental Studies class?
• #6 From Wikipedia page on Hayek: http://en.wikipedia.org/wiki/Friedrich_Hayek Thatcher : During Thatcher's only visit to the Conservative Research Department in the summer of 1975, a speaker had prepared a paper on why the "middle way" was the pragmatic path the Conservative Party should take, avoiding the extremes of left and right. Before he had finished, Thatcher "reached into her briefcase and took out a book. It was Friedrich von Hayek's The Constitution of Liberty . Interrupting our pragmatist, she held the book up for all of us to see. 'This', she said sternly, 'is what we believe', and banged Hayek down on the table". Reagan : Ronald Reagan at his time listed Hayek as among the 2 or 3 people who most influenced his philosophy, and welcomed Hayek to the White House as a special guest Freidman : Hayek also played a central role in Milton Friedman's intellectual development: ”My interest in public policy and political philosophy was rather casual before I joined the faculty of the University of Chicago. Informal discussions with colleagues and friends stimulated a greater interest, which was reinforced by Friedrich Hayek’s powerful book The Road to Serfdom, by my attendance at the first meeting of the Mont Pelerin Society in 1947, and by discussions with Hayek after he joined the university faculty in 1950. In addition, Hayek attracted an exceptionally able group of students who were dedicated to a libertarian ideology. They started a student publication, The New Individualist Review, which was the outstanding libertarian journal of opinion for some years. I served as an adviser to the journal and published a number of articles in it...“ First task – cite examples e.g. p522, 2 nd para, where he is reacting to communists, socialist and others; p523, criticising communists, 2 nd para for the end of history, i.e. no more change; most of section VI and VII
• #7 Without considering any biophysical limits this is perhaps correct – although perhaps obvious? (Another way of saying this is) Management of scarcity cannot, even in theory, be done by a “single mind” because the information cannot so gathered The social knowledge of individuals looses its information content in aggregation In time, it changes quickly, invalidating it before aggregation is complete By place, averages remove the very information required for decisions Valid; examples in the article are good – e.g. manager worried about cost control rings true from personal practical experience p523 para 4, p524 para 1-2 Hayek implies in this article, and claims (need to confirm) in Road to Serfdom that this means all central planning of all kinds always has no value and is (worse) morally wrong since it impinges on personal freedom Further Hayek states the only choice between centralized and decentralized planning is monopoly, is this really correct? For example ignores Macro-economic: improved average welfare is higher in western countries that have heath systems with some degree of centrally planned / control. Micro-economic: Very sucessful/application systemic thinking of continuous improvement to a complex open system by centralized management/planning via Plan-Do-Check-Act process (Quality Management) using statistical quality control and other techniques. Deming, W. E. (1986). Out of the crisis Massachusetts Institute of Technology, Center for Advanced Engineering Study. These were the techniques that applied at micro-economic level allows Japanese to recover and then overtake the US in product quality.
• #8 P525 para 4 – possibly theoretically correct, but does pricing convey all the types of information needed to make the optimal decision; ignores the problem that prices don’t describe scarcity well and ones actions in the case of absolute scarcity might well be different than for other causes of price rise Not everything is priced, and morally not everything should be commoditized (and priced) Implies there are current practical limits to pricing without exploring what these might be “he is still very far from having learned to make best use of (pricing)” (p528, para 2) Seems to ignore aspects of origins of pricing in barter trades, related to fairness – claiming man “stumbled upon (pricing) without understanding it” (p528, para 2) Didn’t pricing in monetary terms “simply” replace evaluating a fair value (expressed in a quantity of differing trade goods) given two parties environments relative ability to provide those goods And 5. Offers no proof for this conjecture. Doesn’t behaviour according to ones ethics increase psychic income and hence having / not having additional information is economically important What about the reality that people will plan differently for short term price increases (due to factors of production) vs. long term / absolute scarcity; If everyone was to ignore absolute scarcity society would suffer – disproving Hayek’s argument What about people gaming with the prices based on local knowledge – you can never perfectly prevent this – so should you proceed assuming its true at all
• #9 It is important to be clear about the nature and relationships between elements of the bio-physical and economic systems in order to provide the most appropriate kinds of information to enable the optimal decision making strategies and processes
• #10 2a. Determining the limit situation requires bio-physical assessment of required stocks and maximum sustainable flows There is no purpose of economic valuation in the limit since the required flow from these stocks happens outside the edge of the monetary economy It is possible for a centralized planning body to gather this information and set these limits (disagree with Hayek) (Implied) Hence, (Pigouvian) taxes can not be effective at setting and ensuring compliance to these limits (p380) 2b. Determining the (smaller) optimal situation does require economic valuation, since this is a social / economic question Requires valuation of stocks and flows within the economy in order to allow market based pricing and incentive mechanisms to work (agree, at least partially with Hayek), albeit within imposed limits of bio-physical material and energy flows 4. By making clear distinctions between types of efficiencies and growths in the bio-physical-economic system it is possible to clearly identify which socio-economic processes influence each, and hence provide highly directive policy recommendations Applicable socio-economic processes (p374-section 4) include: Redistribution and institution building to impact “service efficiency” via un-cancelled benefits (ratio 1) Social and natural science technology research, development and application to impact “maintenance efficiency” and “exploitive efficiency” and “growth efficiency” un-cancelled costs (ratio 2, 3, 4) Policy recommendations must be implemented in a specific sequence based on relationships between these efficiencies in order to stop rebound effect (Jevons paradox) (p379) Control throughput of non-solar energy and all matter via bio-physically quantified limits Ensure optimal distributional efficiency via rights, privileges, taxes, transfers, assurance bonds, licenses Ensure increasing allocative efficiency via market prices and bio-physical valuation
• #11 1) Lawn didn’t engage with the question of what the implications of a high degree of central planning (in terms of economic and social policy) would be for personal freedom. **Last part? 2) Lawn takes a broader view towards human welfare than classical economists and the concept of economic utility--the ability of a good or service to satisfy a consumers wants or needs--to include (in addition to the welfare gained from human-made capital) enjoyment from being engaged in production activities, and the enjoyment that comes from nature. The combination of these three components is what Lawn refers to as ‘psychic income.” While we were happy that Lawn had this broader notion of the enjoyment that people get from production and consumption activities, we wonder if there was perhaps other components lawn could have included, such as enjoyment from social relationships associated with work. (ask Antony for other examples). Also, this section could have been developed more fully in general. For instance, lawn suggests that there is a limit to psychic net income. We were wondering what factors were considered in reaching this conclusion. *Does nirvana have limits? Perhaps more ecological psychologists and sociologists are needed to further develop the concept of psychic income. 3) Second, in considering Australia’s Ecological Economic Efficiency Ratio, Lawn shows that the EEE ratio rose between 1966-1967 AND 1973-1974, and has since fallen in most financial years thereafter. According to Lawn, this decline was due to the inefficient allocation of resources and the depletion of natural capital. We were wondering if the rebound effect had a role to play. *Rebound Effect: Is the extent of the energy saving produced by an efficiency investment that is taken back by consumers in the form of higher consumption, either in the form of morehours of use or a higher quality of energy service. 4) Lawn throws in some pretty radical policy suggestions ( E.g. transferable birth licenses, assurance bonds) without going into very much depth of what the social implications would be. Also, we wonder whether a concept like transferable birth licenses would be so shocking to people that they would ignore the validity of the rest of the argument
• #12 Could SNB*1 be to the right of UC? (what would this mean, would it matter) – Can technology increase both the maximum size of the sustainable macro-economy (Ss to Ss1) and increase the optimal size (S*1) to above the previous maximum (Ss)? Lawn argues that central planning is required for sustainable macro-economic policies to be effective. Do you believe that central planning can work in these cases, given Hayek’s arguments against all central planning? What should we do / how could we (as quickly as possible) influence the opinions of the “average Canadian economic advisor/public servant” towards Lawn’s perspective (and way from the absolutist position of pricing taken by Hayek)?
• #14 Glen Beck – would he get the irony of us quoting him in a “left wing-pinko” Environmental Studies class?
• #15 From Wikipedia page on Hayek: http://en.wikipedia.org/wiki/Friedrich_Hayek Thatcher : During Thatcher's only visit to the Conservative Research Department in the summer of 1975, a speaker had prepared a paper on why the "middle way" was the pragmatic path the Conservative Party should take, avoiding the extremes of left and right. Before he had finished, Thatcher "reached into her briefcase and took out a book. It was Friedrich von Hayek's The Constitution of Liberty . Interrupting our pragmatist, she held the book up for all of us to see. 'This', she said sternly, 'is what we believe', and banged Hayek down on the table". Reagan : Ronald Reagan at his time listed Hayek as among the 2 or 3 people who most influenced his philosophy, and welcomed Hayek to the White House as a special guest Freidman : Hayek also played a central role in Milton Friedman's intellectual development: ”My interest in public policy and political philosophy was rather casual before I joined the faculty of the University of Chicago. Informal discussions with colleagues and friends stimulated a greater interest, which was reinforced by Friedrich Hayek’s powerful book The Road to Serfdom, by my attendance at the first meeting of the Mont Pelerin Society in 1947, and by discussions with Hayek after he joined the university faculty in 1950. In addition, Hayek attracted an exceptionally able group of students who were dedicated to a libertarian ideology. They started a student publication, The New Individualist Review, which was the outstanding libertarian journal of opinion for some years. I served as an adviser to the journal and published a number of articles in it...“ First task – cite examples e.g. p522, 2 nd para, where he is reacting to communists, socialist and others; p523, criticising communists, 2 nd para for the end of history, i.e. no more change; most of section VI and VII
• #16 Without considering any biophysical limits this is perhaps correct – although perhaps obvious? (Another way of saying this is) Management of scarcity cannot, even in theory, be done by a “single mind” because the information cannot so gathered Hayek implies in this article, and claims (need to confirm) in Road to Serfdom that this means all central planning of all kinds always has no value and is (worse) morally wrong since it impinges on personal freedom Further Hayek states the only choice between centralized and decentralized planning is monopoly, is this really correct? For example ignores very sucessful systemic thinking of continuous improvement to a complex open system by centralized management/planning via Plan-Do-Check-Act process (Quality Management) using statistical quality control and other techniques. Deming, W. E. (1986). Out of the crisis Massachusetts Institute of Technology, Center for Advanced Engineering Study. These were the techniques that applied at micro-economic level allows Japanese to recover and then overtake the US in product quality. Valid; examples in the article are good – e.g. manager worried about cost control rings true from personal practical experience p523 para 4, p524 para 1-2
• #17 P525 para 4 – possibly theoretically correct, but does pricing convey all the types of information needed to make the optimal decision; ignores the problem that prices don’t describe scarcity well and ones actions in the case of absolute scarcity might well be different than for other causes of price rise Not everything is priced, and morally not everything should be commoditized (and priced) Implies there are current practical limits to pricing without exploring what these might be “he is still very far from having learned to make best use of (pricing)” (p528, para 2) Seems to ignore aspects of origins of pricing in barter trades, related to fairness – claiming man “stumbled upon (pricing) without understanding it” (p528, para 2) Didn’t pricing in monetary terms “simply” replace evaluating a fair value (expressed in a quantity of differing trade goods) given two parties environments relative ability to provide those goods And 6. Offers no proof for this conjecture. Doesn’t behaviour according to ones ethics increase psychic income and hence having / not having additional information is economically important What about the reality that people will plan differently for short term price increases (due to factors of production) vs. long term / absolute scarcity; If everyone was to ignore absolute scarcity society would suffer – disproving Hayek’s argument What about people gaming with the prices based on local knowledge – you can never perfectly prevent this – so should you proceed assuming its true at all Offers no proof for this conjecture. Seems to ignore the reality that we embed social science thinking into our “habits and institutions”