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February 24, 2006

Economic Idiot Award VIII

Please, step forward Mr. Neal Lawson:

The market relentlessly creates winners - and therefore losers -

As fine a piece of economic idiocy as you are likely to see. Markets are voluntary, the participants only engaging in trade if both of them gain. It’s not the creation of winners that is incorrect, but the assumption that this therefore means losers. It isn’t a zero sum game, it’s net positive.

For the slower ones at the back there, those socialists with knitted brows, think of it this way.

Mr. Lawson himself has voluntarily given up some of his time to pen this little piece for The Guardian. The Guardian has (I assume) given up some of its money in return for that time. Lawson values the money (and perhaps publicity that he’s giving to his ignorance of matters economic) more than he values his time. The Guardian values his public explanation of his idiocy more than it does the money.

We therefore have a trade, in a market, of Mr. Lawson’s time for The Guardian’s money which creates two winners and no losers, both parties have something they value more than what they possessed at the beginning of the transaction. It isn’t, unless one wants to go to absurd lengths, possible to identify a loser in this transaction (the losers, at such absurd length, being the children who are more likely to suffer an incompetent education system as a result of the publicity...an externality if you wish). Even I have gained from their interaction according to their own enlightened self-interest as I am able to pen this little piece of snark about it.

So, a worthy winner I feel, a secret masonic handshake, pat yourself on the back Mr. Lawson and lashings of ginger beer all round. Well Done.

February 24, 2006 in Economic Idiot Award | Permalink


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And to think I've been buying food and housing all my life, and working to boot, without realising it was voluntary.

Posted by: constablesavage | Feb 24, 2006 10:55:01 AM

As you imply, Tim, this passage is not strictly true:

>We therefore have a trade, in a market, of Mr. Lawson’s time for The Guardian’s money which creates two winners and no losers

Having glanced at the article myself, I view myself as materially worse off for having wasted precious minutes on it. Two winners, then, and hundreds of thousands of losers.

Posted by: Mr Eugenides | Feb 24, 2006 11:21:11 AM

Tim is right. When one engages in a voluntary exchange, it is done with the expectation that one values more what one is getting than giving up. That is not to say that people don’t make mistakes. This goes not only for voluntary exchanges, but any choice that one makes.

Ex ante, Mr. Eugenides made the choice of spending his precious time reading the article, rather than spending his time doing something else, with the expectation that reading the article was his best choice at the time. Now, ex post, Mr. Eugenides has decided that he has made a mistake. Reading the article was not the best way to spend his time.

The market is a win-win game. Although, that is not to say that human’s are infallible and incapable of making a mistake. Perhaps, ex post, the Guardian thinks they have made a mistake. But I doubt it. Ex post, I think the Guardian got exactly what they wanted: economic non-sense.

Posted by: Tom | Feb 24, 2006 3:40:44 PM

And to think I've been buying food and housing all my life, and working to boot, without realising it was voluntary.

Had you joined a Young Socialists club, you'd have soon learned that working is not compulsory, and nor is buying housing. But even in the Soviet Utopia people were expected to feed themselves, which is probably why it collapsed in failure.

Posted by: Tim Newman | Feb 24, 2006 4:23:15 PM

Mr. Eugenides:

If you re-read Tim's piece, you'll see that he didn't overlook the aspect you've cited--even going so far as to dub it an "externality."

Insofar as I can see, the propagation of bad ideas cannot be staunched; even the method of forcible suppression of opposing ideas is far more likely to be used by those seeking supremacy for bad ideas than by their opponents: it is a feature of those resorting to reason in their espousals to rely as far as possible on that method as being, ultimately, more efficacious. And the proponents of inferior ideas evince their own subscription to the same principle when resorting to other means, whether by shouting down, "stacking" the educational and academic "deck," or by more nakedly physical means.

The problem (which Tim did not mean to raise but did nonetheless) is that of the "battle of ideas."

The ideas men hold govern their actions. Over the span of man's existence, men have (rightly) learned to adopt the ideas which "work"--or, at least seem to do so and, as well, have taken steps to codify, both for themselves and their posterity, these recipes into categories like law, religion, science, etc. Particularly in the last-mentioned, the salutory effect of employing the better ideas has had astounding success in raising levels of material prosperity to a such clear, demonstrable height that virtually no one wishes to employ the technology of yesteryear or even yesterday. This is so, not because the newer, more correct theories and methods based on them have greater logical force or employ finer analytical working out (though they very well might) but because of a peculiarity common to matters material: they can, more or less routinely, be tested for "correctness" through
subjection to reality via what has come to be called the "scientific method." And, to the extent that men replace the older, less-productive ideas with the newer, they are successful and happier than they would otherwise have been. And, particularly because men achieve these successes in a market environment where those not as agile are diminished in competitive position until more completely "persuaded," the better ideas achieve their victories with a minimum of unpleasantness.

But the battle is waged differently in spheres other than the material, even in those (such as "economics") with every bit as much import for mens' material well-being and happiness as those in the strictly "scientific" disciplines. Men are just as eager to know the better methods in these fields, maybe even more so. Here, also, they want to know "what works." But, in these fields, there are no methods for the duplication of reality, for the arrangement of a "laboratory," where all
the relevant conditions may be controlled so that the effect of varying the magnitude of one such may be observed and measured. In these fields, there is space for virtually endless dispute and argument over which representation of reality is most accurate and, by extension, over which method of proceeding is best.

But let's go back to the "cut-and-dried" universe of strictly "scientific" matters for a moment. People live today on a material level virtually unimaginable not that long ago. Two US agricultural workers feed not only themselves but nearly 100 others as well--on far less land than when most were engaged in that pursuit. Nearly every place of habitation or industry is climate-controlled--heated and cooled as necessary--for both comfort and production. We have antibiotics, CT-scans and MRIs, fertility clinics, and laboratories for the most minute analysis of blood and other tissues for detection of pathogenesis. Ipods, X-boxes, GPS doohickies in your vehicle so you can't get lost or even miss a scheduled oil change. The triumph of science, right? Or, at least of material science?

But, at the same time, we've got homeopaths, accupuncurists, "healing touch" practitioners, aroma therapists, and experts on "chi" or other nonsense--tracing ailments to how your office or home is laid out or decorated. And those are just the ones linked to accredited hospitals and medical schools and "certified" to have their bills paid by insurance plans. Otherwise, we've got to mention astrologers, psychic healers and detectives, dowsers, makers of a bewildering, ever-changing array of remedies for everything that has ever ailed man or his imagination, and, relatedly, an enormous market in highly individualistic fad-type foods, diets, and supplements. Governments nearly everywhere sell lottery tickets with a "vig" (not even including income taxes on the winners) that would have made Don Corleone somewhat embarrassed--and, in every place that sells 'em, there are "dream books"--little, up-to-date compendiums of "how to win"--sometimes including personalized "lucky"
numbers. Remember, this is all on the "nailed-down" side of life dominated by science and clarity--the side of life where it's a lot easier to see what works and what doesn't.

Now, over on the side of what might be termed "social" matters, where there is no accepted method for distinguishing better and inferior theories and methods, do you think that there is room for charlatanry? A lttle? Just as much? Or, as it seems to me--a very great deal more? Let me give you my irrefutable LAW of BAD IDEAS. It's simple--just the way such important stuff should be. Once come into existence, no social idea is ever eliminated, no matter how disproven, as long as it can command a "following" sufficient for the physical and psychic maintenance of a "leader." Worse yet, even bad ideas long "dead" may be resurrected and polished up if they fulfil that minimum requirement. And, if that might suggest to you that, in that particular sphere, charlatanry might actually be the usual, the dominant, the "order of the day," far surpassing in influence whatever is actually better, then I haven't wasted my time.

Posted by: gene berman | Feb 24, 2006 4:53:32 PM

"Socialism punishes winners and rewards losers ensuring less wealth and more losers" That's why it's better.

Coerced collectivists really ARE stupid.

Posted by: Rob Read | Feb 24, 2006 5:39:32 PM

constablesavage has the point so succintly that I don't really want to expand, but perhaps it might help people understand.

The exchange of labour-time for money cannot ever be an equal exchange, because a) the worker needs the money to survive and more fundamentally b) time is the ultimate perishable good, whereas money is the canonical store of value. The person with only time to offer is by the nature of the bargain at a disadvantage.

This is how bargains get struck under which the person giving up their labour time gets less than the value of what he can produce, which allows someone else to accumulate a surplus without producing anything himself. You can call this a "win win" bargain because the worker has achieved an outcome which is better than literally starving to death, but it seems just as good a use of language to call it "win lose", because someone has managed to buy a valuable resource (labour power) for less than its value and accumulate a surplus that allows him to consume without producing.

It also creates "winners and losers", because of course winning one round of the game puts you in a better position for the next.

Tim adds: Very much the Marxist explanation there isn’t it? If the labourer will always receive less than the value of his production then how do you explain companies that make a loss? Clearly, the workforce in aggregate is getting more than they produce in such a situation.

Posted by: dsquared | Feb 24, 2006 6:36:04 PM

Where to begin with d-squared:
1) Market exchanges are not equal exchanges – they are unequal exchanges. I make an exchange for something I value MORE than what I am giving up. When I buy bread, I value the loaf of bread more than the $2 I give up and the grocery store values my $2 more than the loaf of bread. Both parties gain from the transaction.
2) Labor is not exchanging time; labor is exchanging services that the employer values as an input into the production of some good or service. Nor is time one-sided, time affects everyone.
3) The price of labor is not set by “bargaining” but by the (discounted) marginal value product of labor. Those labor services that produce lots of value to the employer receive more than labor services that do not. Engineers receive higher salaries than hamburger flipper because engineers produce more value to the employer, not because engineers are better bargainers than hamburger flippers.
4) If a laborer refuses to work and starves to death, is in not a fault of the employer for not paying for idleness, but is the fault of nature. But in this day and age of the welfare state one does not starve if one does not work. Labor can be idle for a very long time without fear of starvation.
5) If labor is getting less than what he can produce then he should produce it himself and get his full product. The fact that he doesn’t do this tells me that what he can produce himself is less than what he can produce working for his employer.
6) Labor is paid in advance, before the final product is produced. Because the money is received in advance before the sale of the product, they receive the discounted value of their marginal product. To demand to receive full value is to not understand the nature of interest.

Posted by: tom | Feb 24, 2006 7:43:14 PM


Not too bad, except in omitting the paramount role of the consumer in setting the price of the product and, by extension, the aliquot portions of specific labor functions, as well as those of managerial functions (including that of an owner-manager). Also, a portion is due to the capital assets themselves and will accrue less or more as they are superior or inferior to other complexes of such assets devoted to similar, competing enterprise. (And, if these are not "paid" in favor of making more available to the workers, someone else will buy the place and restore the
proper balance between these sources of productivity--and make himself a "pile" in the process--think whatsisname in "Other Peoples'

Posted by: gene berman | Feb 24, 2006 8:41:46 PM


It's hard to believe that you actually believe that ancient Marxist/Ricardianism yourself!

Marx, whatever may have been his deficits (and near-religious committment to logically incompatible positions) needs at least to be excused for an ignorance shared by everyone up to his time: he had long-since published and (I believe) passed on before Jevons, Walras, and Menger found the right nail--the subjective nature of value--and the last-mentioned, Menger, began to drive that nail with the right hammer: marginal analysis.

There's about 50 years worth of excruciating analysis from Menger (about 1870) through Bohm-Bawerk, culminating with Mises, who, by 1922, had
defined precisely wherein lay not only the theoretical deficits of all types of socialism but also the paramount "problem of economic calculation," with which no socialist commonwealth
could ever contend and which would bring down the (then-new) USSR "like a house of cards," though, even then, he allowed as how it might take quite some time for that to occur.

A bright boy like yerself oughtta get out more.

Posted by: gene berman | Feb 24, 2006 9:02:28 PM

"The price of labor is not set by “bargaining” but by the (discounted) marginal value product of labor. Those labor services that produce lots of value to the employer receive more than labor services that do not. Engineers receive higher salaries than hamburger flipper because engineers produce more value to the employer, not because engineers are better bargainers than hamburger flippers."

Wages are set by a standoff between worker and employer (bargaining) ... the (marginal) "value" of the work surely caps the most the employer will pay but surely does not set the rate. Consider a time of food shortage when a potato is worth $10 - it won't much reflect in the rate paid to the farm workers.

Normally, if there's a big discrepancy between the "value" of labour and wage, then we might suppose abnormal profits which will (where possible) attract competition, which forces down the "value" of the work (notwithstanding that the work may remain identical).

Where competition cannot remove the excess "value" it will NOT accrue to the worker, but to the owner/employer.(Aforementioned food shortage).

Engineers receive more than burgerflippers precisely because they are better bargainers, they have other options (burger flipping being one) and can tell the employer to shove the job cos the wage sucks. This means that the employer will only hire engineers for high "value" jobs and then only if the engineer's skills are required - aformentioned food shortage, employer does not suddenly hire engineers to pick the crops just because prices have risen.

Should burgerflippers decide they don't like flipping burgers and they would all rather drive vans, then the rate for burgerflipping will rise commensurate with the least value burgerflipping jobs (tattiest burgerjoints) going out of existence. So the "value" of the job and the wage paid are related, but the relationship is determined by bargaining.

The "value" only sets a maximum rate - its a standoff that usually determines wage rates. Of course in the long run there is a reasonably correlation between "value" and wage, but that's because competition moves the relative bargaining powers of the employers and workers. All this without entering into the nightmare of what "value" is.

Posted by: johnny bonk | Feb 24, 2006 11:18:56 PM

Marginal values don't work as a theory of the rate of wages and the rate of profit. This was proved conclusively during the Cambridge Capital Controversy and Paul Samuelson ended up admitting that the marginalists were wrong on this one. I've read a frightening amount of Austrian theory on subjective values and to be honest, I don't think it's all that good. I wouldn't consider myself an LTV cultist, but it at present seems to me to be the least worst value theory going.

Posted by: dsquared | Feb 25, 2006 2:59:45 PM

Sure the wage can be below the (discounted) marginal value product of labor, but the tendency is for the wage to rise to its (discounted) marginal value product. If an entrepreneur is making abnormally high profits by paying wages below the (discounted) marginal value product of labor other entrepreneurs will not stand idly by and do nothing. These other entrepreneurs will also attempt to make profits by offering a higher wage to attract workers to work for them. Entrepreneurs will compete for these profits by bidding up the wage until it equals its (discounted) marginal value product.

“Normally, if there's a big discrepancy between the "value" of labour and wage, then we might suppose abnormal profits which will (where possible) attract competition, which forces down the "value" of the work (notwithstanding that the work may remain identical).”

Actually, the opposite will happen as I describe above. If the wage is below its (discounted) marginal value product, entrepreneurs will compete for these profits by bidding away labor by offering a higher wage. They will keep bidding up the wage until it equals its (discounted) marginal value product.

Posted by: Tom | Feb 25, 2006 9:03:41 PM