Folk economics: introduction

Although my thinking about economics is more in disarray than it has ever been, I think it’s time for me to put together a collection of posts on the topic. I say “collection” rather than “series” because I am nowhere near being able to organize my thoughts into a nice, neat progression. But those thoughts are now far enough outside the mainstream that they will probably make for reading that is at least thought-provoking, if not instructive.

I am collecting these posts under the phrase “folk economics” for a reason. Back in my early computer career I worked in an artificial intelligence research lab, and one of the topics of study was called “naive physics” or “folk physics”, referring to physics as people intuitively understand it as opposed to physics as a scientific theory. Folk physics would never make it as a scientific theory, since it is not comprehensive and sometimes inconsistent. But folk physics will get you through the day, that is, it is sufficient for navigating everyday life. More important, I think a case can be made that when folk physics clashes with scientific physics, it is not enough to discard our intuitions as unreliable; something reasonable must be said about why people misunderstand, or else we need to take a long skeptical look at what the scientific theory is telling us.

Folk economics, then, is an intuitive as opposed to a scientific understanding of economic behavior. This is not to say, though, that it is simply an account of the average person’s intuitive understanding. That understanding is often mistaken, but I would say the mistakes are due to not having thought things through; one’s intuitions can be corrected, so to speak, by further thinking and observation. Unlike a scientific theory, though, the goal of folk economics is not to give a comprehensive and consistent account of economic behavior, but instead to develop a set of intuitions which will serve a person well in dealing with any economic situation he might encounter.

(Incidentally, a professor of economics at Emory University, Paul Rubin, has written a paper entitled “Folk Economics,” but his idea of folk economics is different than mine. Since the term doesn’t seem to be used otherwise, I hope it won’t be confusing if I fill it with my own meaning.)

I am not working out an idea of folk economics because I am too lazy or too stupid to grasp the real, scientific version. I understand scientific economic theory well enough, at least in broad outline. But as I’ve been looking at the history of economic behavior, especially in agrarian cultures, I have found that the standard classical theory developed by Adam Smith and his followers not only does not give a very satisfying account of what actually happens between people, in many instances it makes claims that are simply hard for an average person to swallow. It violates our intuitions about how things are or should be. And so I’ve spent more and more time looking at the various claims of classical economic theory, and asking naive questions about them: is this how people actually behave? Is this how they ought to behave? Is this result a good result?

As I’ve asked these questions, I’ve discovered that others have also had serious questions about classical economic theory, people who are much smarter than me and so have been able to propose alternative theories that address the flaws they claim the classical theory suffers from. None of those alternatives has fully persuaded me, but most of them have taught me something. Although this collection of posts is primarily devoted to raising questions about the classical theory, I will also discuss those alternatives if and when it seems useful.

What I’ve written above sounds way more formal than I hoped it would. If it suggests in any way that I will be formulating some kind of alternative theory, even an informal one, rest assured that I won’t. All I intend to do is to raise some questions about the current conventional economic wisdom, and most of those questions will be wrapped up in stories. For example, I will start out taking a look at how prices are set, doing so by telling a bunch of anecdotes about how my experiences with prices haven’t synced up very well with what the classical theory tells me about prices.

Economic collapse in post-Soviet Russia

This is not about Henry Hazlitt’s book, but since Cindy raised the specter of economic collapse I thought it might interest folks to look back at some posts I’ve made which link to stories of what life was like in Russia during the 1990s, the most complete economic collapse in recent memory.

Dmitry Orlov has spent a lot of time thinking about the mechanics of the Russian collapse, and this post links to a slideshow and a long three-part article which compares and contrasts how Russian society actually handled collapse with how American society is likely to experience it. Orlov has also written another three-part article, “Thriving in the Age of Collapse” (Part I, Part II, Part III), which gives advice to three different kinds of people on how to prepare for collapse: yuppies, baby boomers, and high school students.

Finally, here are two articles that give contrasting accounts of how rural Russia handled the collapse. In Our Village, Dmitry Orlov paints a warts-and-all picture of a rural village that was fairly well situation to endure the crisis. And in my previous post I comment on an anonymous account by a man about ten years younger than Orlov, who claims that small towns in Russia did well but villages actually did rather badly.

Economic collapse up close

I’ve linked before to Dmitri Orlov’s essays about the experiences of average Russian citizens during the post-Soviet economic collapse of the 1990s. Now he is putting together a book on the topic, Reinventing Collapse. Here’s what James Howard Kunstler had to say about it (I reproduce this section rather than linking to it in order to spare the reader some of Kunstler’s more colorful language):

Dmitry Orlov’s publisher sent me the galley proof to get a blurb for the dust-jacket, and I’ll furnish one in short order because Reinventing Collapse is an exceptionally clear, authoritative, witty, and original view of our prospects. The thesis is that the United States is headed for troubles as broad and deep as the ones that brought down the Soviet system in Russia, though we will get there via a somewhat different route. Orlov has been in the privileged position of living under both systems at critical times, and the parallels are striking, but the differences even more so.

The Soviet experience was a collapse of consensual reality as much as of economy. Nobody could continue to support the credibility of a one-party, centrally-planned, “command” economy best represented by the joke: “We pretend to work and they pretend to pay us.” An economy in which nobody had any real stake other than ideological finally ground ignominiously to a halt. Once the state surrendered its authority, the society was stripped of assets. The social safety net dissolved. A lot of people on the margins slipped through the cracks and died. Eventually, the Russian economy (and government) reorganized on a different basis—largely because its remaining oil resources and annual production exceed its domestic consumption. So, this reorganized new oil-exporting state, with its shocking poles of extreme wealth and poverty, will go on for a while until the oil is gone, and then it will face more transformations.

The comparison with the American situation is chilling. For all its gross faults, Soviet Russia was ironically better prepared for economic collapse and political turmoil than we will be. For one thing, all housing there was owned by the state, and allocated under bare nominal rents, so when the economy collapsed, people just stayed in their apartments. Nobody got evicted. There was scant private car ownership in pre-1990 Russia, so gasoline allocation problems did not paralyze movement. Train service was excellent and cheap, and the cities all had a rich matrix of underground metros, on-street electric trams, and trolley-buses, which continued to run even when central authority flickered out. There was no suburban sprawl to strand and isolate people (in homes owned by banks, that can be taken away after the third monthly failure to make a mortgage payment). Official Soviet agriculture was such a fiasco for half a century that the Soviet people were long-conditioned to provide for themselves. For decades, 90 percent of the food was coming from tiny household gardens, wherever it was possible to grow stuff. When America’s just-in-time supermarket resupply system wobbles, and the Cheez Doodles disappear from the WalMart shelves, few Americans will have a Plan B.

Perhaps most striking is that the Soviet collapse provoked almost no bloodshed (at least in Russia itself). The political failure was so comprehensive that the party leadership didn’t even have the will to defend its prerogatives anymore, and for a while politics simply slipped into a vacuum—until Mr. Putin came along and revived the oil industry and managed to get the police back on a payroll that inspired them to do their jobs. Meanwhile, the tremendous drain of the Soviet armed forces and all their equipment—apart from the nuclear arsenal (as far as we know)—was allowed to wither away, along with its monumental demands on the nation’s resources.

As we wait for Orlov’s book, we can learn a few more things about the Russian collapse from this essay I just ran across. The anonymous writer’s conclusions are not all that profound, but some of the details he offers are helpful.

As I was thinking about this topic, I was struck by the following realization, counterintuitive but supported by evidence. The limiting factor in the survival, on both the level of the individual and the community, was not the ability to produce your own products and not even the available resources or lack of them. It was transport and infrastructure – the ability to trade, deliver your surplus elsewhere and from there get other things you need.

This is why rural areas and small towns in Russia took a very hard hit in the 90s, and may never fully recover, as some say. One would think it should be exactly the opposite—people would have gone into the remote villages and live off the land and the woods. However, even in the most self-sufficient household one cannot produce or make everything needed. And being in a remote location makes it difficult to deliver surplus to others in a timely manner for trading or exchange, especially with the roads being as atrocious as they were (a problem endemic to Russia, but can be an important factor elsewhere as well). Plus, as the government budgets dry up, the collective farms go bust, the village school is closed, the general store (already empty) is closed; there is no library, no cars and no gas for them, no TV reception—in short, absolutely nothing to do other than to drink yourself into oblivion, making bad home-made vodka from your decaying surplus grain. The sense of community is gone, people flee like rats from a sinking ship. The “dachas”, mentioned earlier were a different matter—they were clustered in suburbs and used by town dwellers and they were flourishing, but in the villages there are still many deserted houses to this day.

A similar thing happened in small towns. For example, in the town where my relatives had resided (population 15, 000), the only industrial enterprise—an assembly line for radio-transmitters—had closed; the rest of the industry (a bakery and a milk and cheese processing facility) served local needs only. In a town such as that, the roads are better and one can bring in things to trade—but one can only sell as much as people can purchase, and people can’t purchase much since there is no other way to make money besides the meager salaries of teachers and doctors. Again, the sense of community weakens, people begin to leave.

Those who stayed back and managed to work in the new conditions—reorganizing collective farms efficiently, running their own personal farms, organizing local industries (my relatives had a small fish-smoking plant that was making good profit) and revitalizing their communities through those activities—did well though.

It’s surprising to me that non-local trade played such an important role in keeping the society going. The writer also mentions that many people who either couldn’t or chose not to produce goods for sale survived by transporting goods, i.e. they would travel to border locations where goods were available for purchase, then bring them inland for resale. One critical element seems to have been cheap public transportation; I wonder how they kept it running? And would things unfold differently for us, given that we are much more widely dispersed and don’t have much public transportation to begin with?

And I’m puzzled by the idea that in the villages a loss of modern services—schools, stores, libraries, cars, television—translated into a loss of the will to live. Given that they were surviving, was there no value to spending time in one another’s company?

Small discoveries

Sometimes small discoveries can have a huge impact. Here’s one: we like canned greens, and greens as served at restaurants and cafeterias. And we know that greens should be a staple in any Appalachian stalwart’s diet—long growing season, easy to grow, satisfying, good for you. Unfortunately, whenever we cooked fresh greens we hated them: bitter, pungent, overwhelming.

Puzzled but undaunted, we decided to try it again. We bought a bunch of mustard greens and prepared them according to what seemed to be the standard recipe: wash and stem the leaves, fry up some onions and garlic in bacon grease, add some chopped bacon, add water, add the leaves, stir briefly until the leaves wilt enough that the water covers them, then simmer. Everything we read said that twenty minutes was long enough, but at the twenty minute mark the leaves still looked bright green and smelled awfully pungent.

Other things came up, and so we left them simmering for another forty minutes, figuring it wouldn’t hurt. Looking again, the leaves had cooked down completely and had that nice, dark look you expect. I tasted a bit of the pot likker (juice), and it was excellent, mellow and satisfying. As were the greens when we served them. So, the simple answer to our vexing problem was: just cook them longer.

Economics in One Lesson, Chapters 13-18

I think I finally understand the source of my frustrations in trying to engage Hazlitt’s arguments. Each of the policies he analyzes is an effort to improve on the behavior of laissez-faire economics, and he is quite right in pointing out that such efforts invariably lead to worse results that simply letting the market operate freely—at least as laissez-faire economics defines “worse”.

I’m also sympathetic to the fact that, wherever the policies that Hazlitt examines are implemented, you are sure to find special interests involved who are unfairly benefiting from them. Thus it is tempting to put two and two together, and conclude that these policies are primarily efforts on the part of unscrupulous people to gain unfair benefits.

But as I run down the list of chapter titles in Hazlitt’s book, it strikes me that every one of these misguided policies can be viewed as a response to human misery that is caused by the operation of the free market. Is it really the case that, after two hundred years of experimenting with laissez-faire economics in various contexts, we simply can’t get it through our heads to just step back and let the machine operate without interference? Or is it possible that we continue to interfere with its operation because we simply can’t stand to see what it does to people when uncontrolled?

In any case, a discussion of Hazlitt’s book isn’t the proper place to confront those particular questions, and so I think I’ll save myself further frustration by dropping out at this point.

Economics in One Lesson, Chapters 7-12

Here is how Hazlitt begins Chapter 7:

Among the most viable of all economic delusions is the belief that machines on net balance create unemployment. Destroyed a thousand times, it has risen a thousand times out of its own ashes as hardy and vigorous as ever. Whenever there is long-continued mass unemployment, machines get the blame anew.

Hazlitt’s argument hinges on the phrase on net balance. One page later he admits that machines do in fact create unemployment, as in the case of the English stocking knitters who rioted against the introduction of knitting machines:

Now it is important to bear in mind that insofar as the rioters were thinking of their own immediate or even longer futures, their opposition to the machine was rational. […] the larger part of the 50,000 stocking knitters and their families did not fully emerge from the hunger and misery entailed by the introduction of the machine for the next forty years.

The next sentence I find disingenuous; exactly how much comfort is a displaced stocking knitter supposed to take from the following fact?

But insofar as the rioters believed, as most of them undoubtedly did, that the machine was permanently displacing men, they were mistaken, for before the end of the nineteenth century the stocking industry was employing at least a hundred men for every man it employed at the beginning of the century.

Here Hazlitt is simply following through with a fundamental assumption of classical economics: the free market tends to reallocate resources and labor within a region such that production is maximized. But as Hilare Belloc points out in Economics for Helen, resources and labor will not be reallocated equally within the region. In the case of the rioting knitters, resources and labor were being reallocated away from them, and in such a case it is cold comfort to know that things will work out “on net balance,” i.e. for someone somewhere, if not for them.

I was also annoyed that Hazlitt invoked a common appeal to ridicule concerning labor-saving machinery:

As late as 1970, a book appared by a writer [Gunnar Myrdal] so highly regarded that he has since received the Nobel Prize in economics. His book opposed the introduction of labor-saving machines in the underdeveloped countries on the ground that they “decrease the demand for labor”! The logical conclusion from this would be that the way to maximize jobs is to make all labor as inefficient and unproductive as possible.

Perhaps, if you believe along with Hazlitt (Chapter 10) that “The economic goal of any nation, as of any individual, is to get the greatest results with the least effort. The whole economic progress of mankind has consisted in getting more production with the same labor.” But individuals (and, I suppose, nations) can have other economic goals, e.g. the sustainability of an enterprise. The Amish, for example, recognize that automating away the labor that has traditionally been done by children will result in adults who do not know how to work; therefore, they are very careful not to adopt labor-saving devices that will leave their children without useful work to do, even if they are less productive than a machine might be.

Another questionable maxim of classical economics shows up in Chapter 11, taken directly from Adam Smith:

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificiers. […] What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.

First, I doubt that in 1776 when Smith published those words that the divisions of labor were anywhere near as sharp as he describes them; at least in colonial America plenty of folks made their own clothes, at least repaired their own shoes, and grew their own food. Second, it is certainly not clear that the kind of outsourcing that Smith describes is “prudent” for a family; I’ve argued elsewhere that it is just the opposite, and here is Robert Heinlein’s famous quote on the subject:

A human being should be able to change a diaper, plan an invasion, butcher a hog, conn a ship, design a building, write a sonnet, balance accounts, build a wall, set a bone, comfort the dying, take orders, give orders, cooperate, act alone, solve equations, analyze a new problem, pitch manure, program a computer, cook a tasty meal, fight efficiently and die gallantly. Specialization is for insects.

As this reading of Hazlitt forces me to rethink classical economics in light of the study I’ve made of agrarianism, I’m beginning to see that the evidence is mounting, in the form of failed predictions, that this is not the way man was meant to conduct economic activity. Consider how Hazlitt ends his chapter on full employment:

It would be far better … to have maximum production with part of the population supported in idleness by undisguised relief than to provide “full employment” by so many forms of disguised make-work that production is disorganized. The progress of civilization has meant the reduction of employment, not its increase. It is because we have become increasingly wealthy as a nation that we have been able virtually to eliminate child labor, to remove the necessity of work for many of the aged and to make it unnecessary for millions of women to take jobs.

Wait a minute. Aren’t our meals being passed through drive-thru windows to us by our children? Isn’t the percentage of women in the workforce greater than it has ever been? And isn’t this full employment within the family—father, mother, teenaged children—what it takes to generate the income that keeps the engines of consumption running at a speed that can prop up the economy?

But not all predictions of classical economics have proved false, and I think we in this country are about to experience the truth of the maxim we began with, namely that the market tends to reallocate resources and labor within a region such that production is maximized. In our case, though, the reallocation of labor and resources will happen away from us and towards some part of the globe where people still remember how to work, perhaps China or India.

Distributism without the cow

Here is a good article about what the writer, John Peterson, calls Urban Distributism. I love the title, “Distributism without the cow,” because it points exactly to what makes most folks uneasy about agrarian living:

Chesterton’s Distributism was an agrarian movement. While not everyone is a farmer in the Distributist society — there are merchants, craftsmen, doctors, teachers — most are farmers. Now, I ask you this: how many people do you personally know who are ready and willing to move onto the land and to operate a family farm? As you meet other Chestertonians you discover that most of them have no interest in agrarianism. You discover that many find the idea utterly ridiculous. “Put me on a farm and I’ll starve to death,” they say. “I’m not milking any cow,” they say. “I’ll get my milk at the supermarket, thank you very much.”

Peterson is in favor of developing an Urban Distributism, one that leaves out the cow, not as a substitute for the agrarian version but as an alternative. He recognizes that, whatever blessings an agrarian Distributism may promise, it doesn’t hold much attraction for the average modern:

Distributists find themselves in a frustrating situation. We have the remedy for our diseased society’s ills, but nobody is buying — because nobody is aware of the pain. We have medicine, but nobody thinks he’s sick. We have a state of ignorance so profound as to be astonishing. The whole of our society is in a state of denial that appears to be limitless.

Peterson goes on to describe his alternative, listing ten ideals towards which he thinks Urban Distributists should strive in order to escape the bonds of modern industrial living.

I’m not one who thinks that agrarianism is morally superior because of the cow. But since so many folks object to the presence of the cow (and all it implies), I do have to wonder: can agrarianism work without it? So I’m looking at Peterson’s outline of how an Urban Distributist and wondering if it is workable.