January, 2009

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Conspiracy, Hayek and Spelunking…A Moral dilemma

Friday, January 30th, 2009

In the Road to Serfdom, Hayek argues…

“The principle that the end justifies the means is in individualist ethics regarded as the denial of all morals.  In collectivist ethics it becomes necessarily the supreme rule; there is literally nothing which the consistent collectivist must not be prepared to do if it serves “the good of the whole” because “the good of the whole” is to him the only criterion of what ought to be done.  The raison d’etat in which collectivist ethics has found its most explicit formulation, knows no other limit than that set by expediency — the suitability of the particular act for the end in view.

In light of our materials this week, consider the following questions, Can a collective morality be derived from individual morality? Once decision making flows to the social arena to determine which interests will be served, are we not forced to decide who will win and at whose expense?  How might the consequences of subordinating individual interest to the interests of the collective be minimized in modern policy arenas?

How much for a hot dog?

Wednesday, January 28th, 2009

Jacob Peterson

Daily in downtown Manhattan you can hear the same question yelled over and over, “How much for a hot dog?”  My buddies and I once tried to equilibrate the prices by asking as many venders as possible, and of course we would do so in our authentic Brooklyn accent.  The prices tended to equilibrate around $2 and we considered that our marginal benefit certainly outweighed the cost and a scrumptious hot dog was well worth the price.  Boy we were wrong.

According to Adam Smith, the first price you pay is your labor.  In other words, every time I perform a productive action, my time is priced and should be accounted for.  At the time, I was in high school.  I was on the basketball team, getting paid $0/ hour,  I studied about 20 hours a week, getting paid $0/ hour, and I was a pretty good kid around the house, barely getting reimbursed for my responsible economic decisions and expenditures.  I was putting a ton of labor into the market and hardly pulling out a dime.  So how much did that hot dog really cost me?  More than ALL of my combined hours, being that I was not getting paid at all.  My labor was the first the first price, after which came the actual price of the hot dog, $2.

Obviously I am a rational person and only consider the marginal costs and benefits, sunk costs do not matter.  I agree with Smith in the fact that labor is the first cost, but when it comes to economic decisions, it should not have an influential power.  We work where we will get paid the most, we buy what costs the least, and we sell for as much as we possibly can.  All of these costs equilibrate through the magic of the invisible hand.  This is the power of a market theory of economics.  

Wednesday, January 28th, 2009

Andrew Bjork

Men are not so different one from another.  However, the difference in men lies in the path or direction that each takes in the road of life.  Capitalism, as taught by Adam Smith, is one way of protecting natural freedoms and gives every citizen the ability to select personal preferences.  Adam Smith writes that, “the most dissimilar geniuses are of use to one another; the different produces of their respective talents, by the general disposition to truck, barter, and exchange, being brought, as it were, into a common stock, where every man may purchase whatever part of the produce of other men’s talents he has occasion for.”  The advantage of such a system is that it occasions a society that indirectly promotes altruism, while allowing each individual to look after his own desires.  Capitalism plays upon the self-interest of the individual for the benefit of a society as a whole.

How does this play into to price and labor?  Well if capitalism depends on the interaction of individuals looking after their own self-interests, then there must be a means to calculate the worth of the things men desire.  By weighing the opportunity cost of an item in relation to the labor needed to obtain that item, citizens are able to best accommodate themselves with the time that they have.  They tend to use that time more efficiently, because they know that there is a means to achieve the goal they desire.  Their freedom is given full freedom within the boundaries that are allowed by the free market.  It is just as Smith declares, “Labor, therefore, it appears evidently, is the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the values of different commodities at all times and at all places.”

 

Adam Smith’s Benevolence

Wednesday, January 28th, 2009

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As I read the Wealth of Nations I discovered something very interesting that I had not realized before. I had always assumed that Adam Smith was a firm believer in self interest and free market, and that those were the sole factors driving his theory about the most effective economic system with which a nation should operate. Throughout his writings though are found various clues as to his compassion toward the well being of others. For example he writes about values such as justice and poverty which at first seem contrary to this.

He writes, “Justice…is the main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society…must in a moment crumble into atoms (10).

He was very sensitive to the issue of poverty. He saw that it at times led nations to adopt inhumane customs and was “unfavorable to the rearing of children.” In certain parts of his native Scotland it was not uncommon for a woman to have 2 children alive out of 20. (97)

I believe that he wanted to help society grow and prosper as a whole and was not solely concerned with acquiring wealth. Even though inequality was bound to come forth through a free market system, he believed that such a system would be the most beneficial for the society as a whole.

Regarding the relationship between price and labor, He, like Locke, believed that labor was the factor that gave a person the right to property. It also determined the value of a certain commodity. The more labor that was giving toward the securing of a good, the more value that a particular good was given. The price of a good was simply determined by the scarcity or plenitude of that resource. The relationship between price and labor is guided by his “invisible hand.” Which he argues will always secure equilibrium in the market so that prices are not too high or too low, but reflect the value of a good or service.

Free Market

Wednesday, January 28th, 2009

Adam Smith refers to labor as the real value of all commodities and money as representing their nominal value. Out of the “three or four” factors of production it is labor the one that represents the real value of everything. The division of labor allows individuals to specialize and perform those activities which one is more efficient at. After specialization (division of labor) as one produces more and more goods that surplus is naturally exchanged for other goods which we may lack.

Such exchange of one’s  goods for somebody else’s’, the demand and supply of goods (valued in real terms as labor) is the “invisible hand”, which allows people acting in their own self- interest, and maximizing their own satisfaction from the goods he is able to purchase, that generates a well-being to society as whole perhaps greater than his own.

Also, as Smith mentions the intervention of the government in the economical affairs of a country either by imposing tariffs, quotas, duties, etc., as opposed to the principles of mercantilism prevents free-trade and thus the  market from achieving a state of equilibrium and thus reduces the well-being of society. Although Smith advocated for a significant reduction of government in the affairs of a country in favor of the forces of the market he was by no means promoting a state of anarchy but to a “natural system” in which to allocate resources the most efficient way possible.

Smith’s Concept of Value Added

Wednesday, January 28th, 2009

Adam Smith, in the fore mentioned paragraph makes a broad statement about what adds value to a commodity.  Even though this loosely parallels Karl Marx’s labor theory of value, it does imply in the least bit that the “father of modern economics” is communist.  What it means is that both scholars came to the same conclusion about what adds value to commodities.  It is at this point that their philosophies go different directions. 

Through his life experiences, Smith realized that labor can take an item of little worth and increase its value proportionately to what the buyer does not have to do himself.  This concept holds true if the government will take a laissez-faire approach to managing the economy.  Contrary to this idea, the governments at the time of Smith, as well as now, often step in and try to control prices through the use of tariffs, subsidies, taxes, and many other methods that keep items from trading at the true value as perceived by the market.  This supersedes the value that should be added based on marginal utility or labor investment. 

In Chapter XI, Of the Rent of Land, Smith gives the following example of how this system functions.  “The rent of land, therefore, considered as the price paid for the use of the land, is naturally a monopoly price.  It is not proportionate to what the landlord may have laid out upon the improvement of the land, or to what he can afford to take; but to what the farmer can afford to give.”  This helps the reader to understand the true price of an item is based on what benefit it will yield the buyer.  In this case the owner [landlord] can not set the price, but is held to what amount the farmer [renter] is willing to pay.  The amount will leave the renter room to make at least a normal profit beyond the rent.  Paying the true price for an item is the basis for a free market economy where price meets value. 

Surplus of labor- now there’s the rub

Tuesday, January 27th, 2009

                It’s clear that at its base Smith did agree with the Labor Theory of Value.  This is displayed when he says “What is bought with money or with goods is purchased by labour, as much as what we acquire by the toil of our own body.” Marx and Smith fundamentally agreed that labor is what leads to wealth and labor is the means by which everything is created and carries its value.

                Marx and Smith differ in their economic theories drastically from this point because of each respective opinion on the use of surplus value and surplus labor.  Marx believed that any surplus should be controlled by the state and distributed to the populous while Smith argued that this surplus should go to the individual and thus back into the economy.  Smith says, “It’s value, (referring to wealth) to those who possess it, and who want to exchange it for some new productions, is precisely equal to the quantity of labour which it can enable them to purchase or command.”  Wealth is equal to the amount of labor that created it and this can be exchanged for the desires of the holder, here is the fundamental difference from Marxian economics.          

                For Smith labor, and thus wealth, should be divided creating specialists according to need, demand and desire.  Specialization will lead to advancement and progression because the surplus of each individual’s labor is within their own control.

Jayme

 

A Means to an End

Tuesday, January 27th, 2009

In comparing Marx and Smith, at first glance, they both seem to profess similar ideas, especially when dealing with the idea of labor. But, one must remember that although they both entertain the same ideas about labor, that these theories are a somewhat similar means to a very different ends.

One thing that this “labor theory of value” doesn’t directly address (although Smith does address this a bit later on) is the impact that “price” has on a commodity. Although they agree that the “value” of a commodity may not change, the price can still be volatile. In today’s world, the price of a good is what drives the market, not the “value” per se. For example, even if diamonds took a large amount of labor to retrieve, cut, etc., if the masses disliked diamonds as a commodity and preferred another gem, the price of diamonds would be less than the nominal value.

Next, one must incorporate the idea of supply and demand. Coming up is the vital difference between Marx and Smith. Both theories support the creation of a specialized work force, but Smith advocates progress, while Marx does not necessarily. Smith, by instilling competition, an important part of capitalism, fosters ingenuity, technological innovation, and risk. Using these tools, a competitive market drives down the value and price of a commodity: this end is mutually beneficial to producers and consumers alike. Marx on the other hand, by creating equal opportunities and equal results for all, does not foster ingenuity: this end can create stagnant values and prices for commodities.

Although it is debated which of these are more beneficial to society, we can see in our present day how capitalism has fared us. There may be a time when Marxism has the opportunity to flourish and we can all draw our conclusions then.

-Erika Morris

That little piece of yellow metal

Tuesday, January 27th, 2009

Bryson White

My time and toil are really all I have to offer.  I honestly cannot afford to give anyone any money at all.  Unfortunately, I don’t seem to have much time either.  But it is easy to see how the amount of time required for a task can substitute as the price I am willing to pay.  And for most people, rich or poor, that is still the foundation upon which purchasing decision are based.  I could build my own tennis racket or I could pay you $250 to save me the 150 hours it would take me to figure it out.  This is the idea behind opportunity cost, and it is really measured as a unit of labor.

 

Labor is the price driver.  When less labor is required to obtain something, its price drops.  Smith gives the example of the falling price of gold after the discovery of American mines.  “The discovery of the abundant mines of America reduced, in the sixteenth century, the value of gold and silver in Europe to about a third of what it had been before.  As it cost less labor to bring those metals from the mine to the market, so when they were brought thither they could purchase or command less labor.”  When less labor is required to produce a good, less labor will be required to purchase the good.  Where more labor is exerted in production, more is required in acquisition.  Only labor can be used as the scale.  It is the only constant measurement.  The price of everything else (even gold) is dependent on the amount of labor it can command.  However, labor is always constant.  An hour today is the same as an hour 10 years from now.  There is no time-value of labor.  Mechanization drives prices down because it reduces labor inputs.  Lean-manufacturing practices reduce price because they make more efficient use of labor.

 

I had never thought of this principle as being the basis of a free market theory of economics.  Perhaps the answer to this question is that whenever a third party (i.e. government) attempts to control price (whether via tariff or subsidy) it indirectly attempts to dictate the value of labor by putting a dollar amount on it.  However, money cannot determine the value of labor, for it is in fact labor that determines the value of money.  The temperature of the earth does not determine the proximity of the sun, but rather the proximity of the sun determines the temperature of the earth.  Basically, it’s just backasswards to try to set the price of labor.  Whenever law gets involved in the details of commerce, particularly in the setting of wages, it simply creates inequality.  Smith observed how incoprporation, apprenticeship, minimum wage, restriction of “free circulation labor,” and even abundance of education all affected the wages to be paid for labor.  These laws and programs only created inequality among the workforce.  Because of these laws, blue-collar laborers received much less compensation for their labor while white-collar laborers received far more than they ever deserved.  Ironically, this is the very problem that government intervention is supposed to rectify.  This inequality would not have existed had man been free to exchange his labor for whatever it was worth instead of having a third party determine its value.

Labour: equality of result or freedom of opportunity?

Tuesday, January 27th, 2009

Andrew Barnard-

The value of labour as the “real price of everything” has led to two divergent theories:  Marxism or free market capitalism.  The difference between the two comes from the desired ends of each philosophy.  The debate is over which is more favorable, equality of result or freedom of opportunity.  I see the laissez-faire capitalism espoused by Smith as a natural evolution or application of Locke, who, of course, suggested this labour value of property prior to Smith.  Karl Marx on the other hand took the concept in a new, original direction. Smith however, predicted in the last sentence of Book I, Chapter X, that any such revolution will not last for any considerable amount of time. (I paraphrased, obviously)

While recent history has proven the seeming impossibility of orthodox Communism, this debate over equality of result and freedom of opportunity is still being played out across the developed nations of the world.  Western Europe has evolved into both an acknowledged and de facto socialist society.  They have chosen to strive for an economy with the end result of relative equality.  This has had a number of consequences; consequences following nearly exactly the predictions of Adam Smith.

I would like to use Germany as a sort of case study.  I am quite familiar with the country and feel able to engage in a decent discussion of socialism as it is present there.  Against the explicit warnings of Smith as found in Chapter X of Book I, the Germans have embraced the concept of Unions with open arms.  One of their major holidays is Tag der Arbeit celebrating the Haymarket Square Riot; an American historical event of which few Americans are even aware.  Labor Unions are the norm in Germany, perpetrating nearly every aspect of their national economy.  Perhaps most interesting and relevent to our discussion however, is what the consequences of this have been.  True to the wise warnings of Adam Smith, the mass unionization of Germany has resulted in the institutionalization of “long apprenticeships”.  To engange in any sort of industry in Germany you must first complete an apprenticeship and obtain a certain certificate. This has indeed lead to the “break down of the natural equality… of the free circulation of labor.”  They have in short sacrificed the liberty of opportunity for a more relative equal distribution of wealth. This has had major societal reprecussions, most notably in public education.  This apprenticeship system has become such a requirement of employment that students, after the fourth grade, who appear to be unable to suceed in the liberal arts (acadamia), are put in different high schools- the objective of which is to end their formal education after the 10th grade; thus putting the student into the apprentince system sooner.  I consider this the most shameful aspect of German culture.  The government has effectualy and legaly taken the perogative of deciding who will have the opportunity to prove themselves worthy of a college education.  Surely this constitutes an infringement on personal liberties.

Adam Smith took the labour value of property and understood it for its egalitarian nature which Locke was implying.  Even though it must necessarily rid itself of many regulations which try to ensure an equality of result, the egalitarian freedom of opportunity which labour provides is, in my opinion, irreplaceable and should not be sacraficed for any percieved “forced equality.”  To do so would be to rob me of my personal capacity for “industry and ingenuity.”

Of course reality is never as simple as presented in theory and concessions must be made providing for exceptional circumstances.  Those for whom the capacity for labour is involuntarily impossible- owing to such handicaps as age, physical abnormalities, or mental complications- it seems must be provided for in a just and humane society.  Such particulars however should be dealt with as exceptions, not as the theoratical principle.

In summary, labour confronts us with a decision: equality of result, or freedom of opportunity.  A real good balance of the two has, to my knowledge, yet to be realized on the this earth.  I would submit however that my personal autonomy, liberty, and freedom must be given higher consideration than the natural inequalities of human existance.