Wednesday, July 16, 2008

Personal Economics--The Second Law--Individual Truth

The second law also stems from Adam Smith. It says that whatever is true, correct, beautiful, or wise for the individual or "private family" does not alter when we add a group of individuals or families. This is a common theme running through all of Adam Smith's work, but probably the most direct (and most famous) statement is, "what is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom." It is precisely on this point that most modern economists disagree with Smith. Having read very little about economics, but having been exposed to a few quotes by Adam Smith, including, this one, I was surprised in reading the introduction to my Econ 101 text (Samuelson 5th ed.) to read this statement so directly contradicted and without any real evidence, as though it was obvious that what may be prudence for the individual may be folly for a kingdom. Since, until that time, I had assumed that Adam Smith was to economics what Isaac Newton was to physics, this statement came as a surprise to me. Of course, I knew that modern physics did not agree with Newton on every point, but I would have been surprised to find an elementary text--or any physics text--that contradicted him without any evidence or proofs. In our labs (I was a physics major) when we did contradict Newton (notably on his optics) we very carefully did experiments with gratings and slits to convince ourselves that the Great Man may have made a minor error. Here the Great Man of Economics was being flat out contradicted. Obviously, in the minds of modern economists, he was anything but the Great Man.

Of course, because he did not elaborate, I am not sure what Samuelson had in mind, but among other things he may have been thinking of the so-called Paradox of Thrift. This is the idea that although we teach that it is smart for an individual or a family to be thrifty, if everyone is thrifty it is in some mysterious way, a national disaster. This comes from the idea that spending is the road to national prosperity--an idea that we will look at more closely in the next section.

Obviously, much political action in modern day America is built on the idea that the crowd, the union, the city, the state, the nation, can and even should, operate under different rules than the individual. We sometimes get that idea because some of these entities, ideally only the government are given the right to use force. But, ideally force would only be used in those cases when it would be equally appropriate for the individual to use force, e. g. for the protection of life and property or to enforce a contract. Under this rule it is as wrong for a labor union to hire thugs to beat up on strike breakers as it would be for me to hire them to beat up on people going to work, if I wanted a raise and felt that I could get it by preventing anyone else from going to work.

There are innumerable examples of ways in which we tend to think a group of people can operate under different rules than an individual, but one good example uses Adam Smith's defense of free trade. If I work in a hardware store and my neighbor in a grocery store, most of us would admit that it would be wrong for me to go over to him and threaten to start taking away his property because I spent more in his grocery store than he did in my hardware store. Few people would justify this on the basis that I am merely trying to even out the "balance of trade" or that I am demanding "fair trade". We do not even justify this in trade between cities or states. At present, at least, if the people of Utah spend 100 million dollars in California and the people in California spend only 10 million dollars in Utah, we do not start passing laws, rules, ordinances, restricing trade to even out the "balance of trade". This sort of nonsense goes on only when the group becomes large enough to become a nation. In my lifetime I have seen the people of at least three countries demonized (first, Germany, then Japan, now China) because they don't spend as much in our country as we spend in theirs. The fact of the matter is, of course, that "America" does not spend money in "China" and vice-versa. Individual Americans make exchanges with individual Chinese. Ultimately, this has to balance out, in exactly the same way as the money spent at the grocery store and the hardware store has to balance out, if it doesn't one goes out of business.

What happens when we begin to assign different standards of right/wrong, true/false to groups we cease to use any absolute values and begin to use statistical values of right and wrong. Politicians in modern America live by statistical values. Everyone is grouped. They belong to "the Rich" or "the Poor", by race or color or national origin. The second law says merely that this is wrong.

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