Unorthodox Economics: 4. A Parable of Political Economy

This is the fourth entry in what I hope will become a book-length series of posts. That result, if it comes to pass, will amount to an unorthodox economics textbook. This first chapter gives a hint of things to come. Here are the chapters that have been posted to date:

1. What Is Economics?
2. Pitfalls
3. What Is Scientific about Economics?
4. A Parable of Political Economy

Imagine a simple society in which Jack and Jill own neighboring farms that are equally endowed in natural resources, tools, and equipment. Jack makes bread and Jill makes butter. Jack also could make butter and Jill also could make bread, but both of them have learned that they are better off if they specialize. Thus:

  • Jack can make 1 loaf of bread or 0.5 pound of butter a day. (The rate of transformation is linear; e.g. Jack could make 0.5 loaf of bread and 0.25 pound of butter daily.)
  • Jill can make 1 loaf of bread or 1 pound of butter a day. (Again, the rate of transformation is linear; Jill could make 0.5 loaf of bread and 0.5 pound of butter daily.)
  • If both Jack and Jill make bread and butter their total daily output might be 1 loaf and 0.75 pounds.
  • Alternatively, if Jack specializes in bread and Jill specializes in butter their total daily output could be 1 loaf and 1 pound.

Jill is more intelligent than Jack, and thus more innovative. That’s why she is able to reap as much wheat and make as much bread as Jack, even though he’s stronger. That’s also why she’s able to produce twice as much butter as Jack.

Jill has an absolute advantage over Jack, in that she can make as much bread as he can, and more butter than he can. But Jack has a comparative advantage in the production of bread; if he specializes in bread and Jill specializes in butter, he and Jill will be better off than if they both produce bread and butter for themselves.

Jack and Jill negotiate the exchange rate between bread and butter. Each ends up with 0.5 loaf of bread; but Jill gets 0.6 pound of butter to Jack’s 0.4 pound. Jill ends up with more butter than Jack because her greater productivity puts in her in superior bargaining position. In sum, she earns more because she produces more.

Jack and Jill have another neighbor, June, who makes clothing. Jack and Jill are more productive when they’re properly clothed during the colder months of the year. So they’re willing to trade some of their output to June, in return for heavy clothing.

Jerry, another neighbor, is a laborer who used to work for Jack and Jill, but has been unemployed for a long time because of Jill’s technological innovations. Jerry barely subsists on the fruit and game that he’s able to find and catch. Jack and Jill would hire Jerry but he insists on a wage that they can’t afford to pay unless they spends less to maintain their equipment, which would eventually result in a lower rate of output.

Along comes Juan, a wanderer from another region, who has nothing to offer but his labor. Juan is willing to work for a lower wage than Jerry, but has to be fed and clothed so that he becomes strong enough to deliver the requisite amount of labor to be worthy of hire.

Jack, Jill, and June meet to discuss Jerry and Juan. They are worried about Jerry because he’s a neighbor whom they’ve known for a long time. They also empathize with Juan’s plight, though they’re not attached to him because he’s a stranger and doesn’t speak their language well.

Jake — the gunslinger hired by Jack, Jill, and June to protect them from marauders — invites himself the meeting and brings Jerry with him. Jake likes to offset his stern image by feigning compassion. He tells Jack and Jill that they have a duty to pay Jerry the wage that he demands. He also requires Jack and Jill to feed and clothe Juan until he’s ready to work, and then they must hire him and pay him the same wage as Jerry. Jack and Jill demur because they can’t afford to do what Jake demands and make enough bread and butter to sustain their families and put something aside for retirement. June, who reacts with great sympathy to every misfortune around her — perceived and real — sides with Jake. Jerry argues that he should be helped, but Juan shouldn’t be helped because he’s just a stranger with a strange accent who’s looking for a handout.

Jake the gunslinger, disregarding Jerry’s reservation about Juan, announces that Jack and Jill must abide by his decision, inasmuch as there are 3 votes for it and only 2 votes against it — and he has the gun.

What happens next? Several things:

Jack and Jill quite properly accuse Jake of breach of contract. He has assumed a power that wasn’t given to him by Jack, Jill, and June when they hired him. Jake merely laughs at them.

Jack, Jill, and June (though she doesn’t understand it) have lost control of their businesses. They can no longer produce their goods efficiently. This means less output, that is less to trade with each other. Less output also means that they won’t be able to invest as much as before in the improvement and expansion of their operations.

June is happy, for the moment, because Jake sided with her. But she will be unhappy when Jake abuses his authority in a way that she disapproves, and when she finally understands what Jake has done to her business.

Jack and Jill have good reason to resent Juan and Jerry for using Jake to coerce them, and June for siding with Jerry and Juan. There is now a rift that will hinder cooperation for mutual benefit (e.g., willingness to help each other in times of illness).

Juan and Jerry have become dependent on Jake, thus undermining their ability to develop marketable skills and good work habits. Their dependency will keep them mired in near-poverty.

In a sane world, Jack and Jill would get rid of Jake, and the others would applaud them for doing it.

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Related posts:
The Sentinel: A Tragic Parable of Economic Reality
Liberty, General Welfare, and the State
Monopoly and the General Welfare
Gains from Trade
Trade
A Conversation with Uncle Sam

The Kennedy Legacy

Luci Baines Johnson:

Senator Kennedy was our family’s cherished friend and the defender of the flame for social justice our parents believed in – decent health care, education, and civil rights for every American. He could have had a life of self service; he chose a life of public service.

Jeff Jacoby:

Born into riches and influence, he could have lived a life of ease, indulging his appetites and paying scant attention to those less fortunate. He chose a different life, and became a towering advocate for the deprived, the disabled, and the dispossessed. I didn’t always like his answers, but I honor him for caring so greatly about the questions.

Don Boudreaux:

While Kennedy didn’t choose a life of ease, he did something much worse: he chose a life of power. That choice satisfied an appetite that is far grosser, baser, and more anti-social than are any of the more private appetites that many rich people often choose to satisfy.

Americans would have been much better off had Ted Kennedy spent his wealth exclusively, say, on the pursuit of sexual experiences and the building of palatial private homes in which to cavort, or to take drugs, or to engage in whatever private dissipations his wealth afforded him.

Instead, Mr. Kennedy spent much of his wealth and time pursuing power over others (and of the garish ‘glory’ that accompanies such power). He did waste his life satisfying unsavory appetites; unfortunately, the appetites he satisfied were satisfied not only at his expense, but at the expense of the rest of us. Mr. Kennedy’s constant feeding of his appetite for power wasted away other people’s prosperity and liberties.

I am squarely with Boudreaux.

As for Kennedy’s “public service” and “caring,” which might be called altruistic, I say this:

There is no essential difference between altruism . . . and the pursuit of self-interest. . . . In fact, the common belief that there is a difference between altruism and the pursuit of self-interest is one cause of (excuse for) purportedly compassionate but actually destructive government intervention in human affairs.*

Americans — poor and rich alike — have paid, and paid dearly, for the assuagement of Edward Kennedy’s ego.

That notwithstanding, Kennedy will be remembered, for the most part, as a “compassionate” politician. But his “compassion” was purchased with our liberty and prosperity.

Related reading: “Red Ted” (at Classical Values), “The Dark Side of Ted Kennedy’s Legacy” (at Carpe Diem), and “Kennedy’s Big Government Paternalism” (at Real Clear Politics).

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* I do not mean to disparage acts that have beneficial consequences, merely the assumptions that (a) behavior labeled “altruistic” is unselfish and (b) motivation is more important than result. For more on the second point, see this post.