invisible hand

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Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen

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Smith's References to the Invisible Hand Surprisingly, Adam Smith uses the expression "invisible hand" only three times in his writings. The references are so sparse that economists and political commentators seldom mentioned the invisible hand idea by name in the nineteenth century. No references were made to it during the celebrations of the centenary of The Wealth of Nations in 1876. In fact, in the famed edited volume by Edwin Cannan, published in 1904, the index does not include a separate entry for "invisible hand." The term only became a popular symbol in the twentieth century (Rothschild 2001, 117-18). But this historical fact should not imply that Smith's metaphor is marginal to his philosophy; it is in reality the central element to his philosophy. The first mention of the invisible hand is found in Smith's "History of Astronomy," where he discusses superstitious peoples who ascribed unusual events to the handiwork of unseen gods: Among savages, as well as in the early ages of Heathen antiquity, it is the irregular events of nature only that are ascribed to the agency and power of their gods.

"His vision of the way in which the voluntary actions of millions of individuals can be coordinated through a price system without central direction . . . is a highly sophisticated and subtle insight" (Friedman 1978, 17; cf. Friedman 1981). Not to be outdone are Keynesian economists. Despite its imperfections, "the invisible hand has an astonishing capacity to handle a coordination problem of truly enormous proportions," declare William Baumol and Alan Blinder (2001, 214). Frank Hahn honors the invisible hand theory as "astonishing" and an appropriate metaphor. "Whatever criticisms I shall level at the theory later, I should like to record that it is a major intellectual achievement. . . . The invisible hand works in harmony [that] leads to the growth in the output of goods which people desire" (Hahn 1982, 1, 4, 8). The First Fundamental Theorem of Welfare Economics The invisible hand theory of the marketplace has become known as the "first fundamental theorem of welfare economics."8 George Stigler calls it the "crown jewel" of The Wealth of Nations and "the most important substantive proposition in all of economics."

[A]nd by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. (Smith 1965 [1776], 423) A Positive or Negative Interpretation? Most observers believe that Adam Smith uses the invisible hand in a positive way, but in her recent book, Economic Sentiments, Cambridge professor Emma Rothschild dissents. Using "indirect" evidence, she concludes, "What I will suggest is that Smith did not especially esteem the invisible hand." According to Rothschild, Smith views the invisible hand imagery as a "mildly ironic joke."

 

The Darwin Economy: Liberty, Competition, and the Common Good by Robert H. Frank

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Rewards that depend on relative performance spawn collective action problems that can cause markets to fail. For instance, the same wedge that separates individual and group interests in Darwinian arms races also helps explain why the invisible hand might not automatically lead to the best possible levels of safety in the workplace. The traditional invisible-hand account begins with the observation that, all other factors the same, riskier jobs tend to pay more, for two reasons. Because of the money employers save by not installing additional safety equipment, they can pay more; and because workers like safety, they will choose safer jobs unless riskier jobs do, in fact, pay more. According to the standard invisible-hand narrative, the fact that a 10 CHAPTER ONE worker is willing to accept lower safety for higher wages implies that the extra income was sufficient compensation for the decrement in safety.

They believe regulation is unnecessary because they believe unbridled market forces can take care of things quite nicely on their own. Darwin’s view of the competitive process was fundamentally different. His observations persuaded him that the interests of individual animals were often profoundly in conflict with the broader interests of their own species. In time, I predict, the invisible hand will come to be seen as a special case of Darwin’s more general theory. Many of the libertarians’ most cherished beliefs, which are perfectly plausible within Smith’s framework, don’t survive at all in Darwin’s. Giving the Invisible Hand Its Due Even so, the invisible-hand theory remains a genuinely revolutionary insight, all the more so because in hindsight it seems so obvious. Why does a business owner go to the trouble of designing a new product that consumers are likely to find appealing? Why does he invest such effort to revamp his production process to reduce costs?

People with less extreme preferences on these two dimensions do best by choosing jobs with intermediate values of wages and safety. According to the traditional invisible-hand account, then, workers get as much safety on the job as they’re willing to pay for. Since making jobs safer requires real resources that could be used for other things we value, that’s as it should be. If a worker doesn’t get the extra safety he claims he wanted, that must mean he didn’t value it enough to be willing to pay its cost. Why Skepticism about the Invisible Hand Persists Market skeptics often respond, tellingly, by citing behavior by employers that seems transparently at odds with the invisible hand’s rosy portrayal of market outcomes. Walmart, the nation’s largest retailer, has often been their target. On numerous occasions, for example, the company has locked overnight maintenance workers into stores with no supervisor present to let them out in case of emergency.

 

pages: 483 words: 134,377

The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor by William Easterly

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This system has nobody in charge, yet finds the best solutions for your problems and helps you find your own best role as a problem-solver for others. This is the Invisible Hand. Again, the wonder of Adam Smith’s breakthrough is often lost under a thick layer of ideological abuse of the Invisible Hand by both its proponents and opponents. The Invisible Hand is not utopia; it is not perfect; it is always a work in progress. There are genuine concerns about income distribution, in which the rich get their needs met so much more than the poor. There are still so many things wrong with the private suppliers of our needs that we could also describe the Invisible Hand in reverse: it is the process of driving out of business the incompetent in favor of the mediocre, the mediocre in favor of the good, and the good in favor of the excellent.

The top three six-digit specialties in Lesotho generated only $87 for each and every person in Lesotho. The Invisible Hand helps with scaling up success as well as with finding success in the first place. Once workers get into a virtuous circle of learning by doing and increasing production on your chosen specialty, they still need the Invisible Hand to keep scaling up. They need it to efficiently get them the scale of the inputs, both domestic and imported, that go into producing the increasing scale of specialized output at which they are becoming so good. To free up those inputs, the Invisible Hand has to shut down many other specialties at which they are not so good. One way this happens is probably the most hated and misunderstood part of the Invisible Hand. There is one type of trade in the market that has always seemed sinister: trading money today for money tomorrow.

Finally, Smith understood that not all problems could be solved by the Invisible Hand of the market. Only the government can solve some problems, and government may need to intervene in some malfunctioning markets, such as public goods that do not deliver enough of a private return. Smith said the government should supply, for example, public schools, roads, bridges, and canals.13 Let’s declare a temporary truce in the market-versus-government wars, so that an appreciation of the Invisible Hand does not automatically imply some extreme view that government has no role in anything. All free societies today, from social-democratic Scandinavia to industrial-policy Japan to the more free-market United States, have relied heavily on the Invisible Hand. SMITH’S PROBLEM-SOLVING SYSTEM We can now get to the guts of Smith’s vision of a successful problem-solving system.

 

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How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Between the collapse of communism and the outbreak of the subprime crisis, an understandable and justified respect for market forces mutated into a rigid and unquestioning devotion to a particular, and blatantly unrealistic, adaptation of Adam Smith’s invisible hand. Milton Friedman, who died in 2006, said the test of an economic theory is that it should explain a lot with a little. But the modern theory of the invisible hand that Friedman and others promoted explains too much with too little. At its core, it says simply: self-interest plus competition equals nirvana. There is no mention in this equation of the institutions of modern capitalism, such as multinational corporations, derivatives markets, universal banks, and mutual funds. Information asymmetries, uncertainty, copycat behavior, network effects, and disaster myopia—the invisible hand metaphor abstracts from all of these awkward features of reality, too. Don’t worry, its defenders say, the market will take care of things.

As the historian of economic thought Mark Blaug has commented, “no-one can continue to believe in the spontaneous co-ordination of private and social interests who has digested Pigou’s insistence on the possible interdependence of firms and households.” In introducing the concept of social cost, Pigou pinpointed a central problem with the invisible hand that many free market economists had deliberately obscured or ignored. He also proposed some simple ways of correcting the market’s shortcomings, sometimes through the tax system, but also by the provision of public services and the introduction of regulations. Moreover, he accomplished all this using the same tools of “marginal analysis” that Walras, Pareto, and others had used to extol the virtues of the invisible hand. The defenders of free market orthodoxy could hardly dismiss Pigou’s conclusions as the product of an inappropriate methodology: his method was theirs! Still, as time went on, economic conservatives launched a sustained and partially successful effort to discredit Pigou’s work—a task in which they found an unlikely ally.

eISBN: 978-1-429-99069-1 Date of eBook conversion: 07/17/2010 1. Financial crises. 2. Stock exchanges. 3. Monetary policy. 4. Banks and banking. I. Title. HB3722.C37 2009 381—dc22 2009029529 www.fsgbooks.com To Lucinda, Beatrice, and Cornelia CONTENTS Copyright Dedication Introduction PART ONE: UTOPIAN ECONOMICS 1. Warnings Ignored and the Conventional Wisdom 2. Adam Smith’s Invisible Hand 3. Friedrich Hayek’s Telecommunications System 4. The Perfect Markets of Lausanne 5. The Mathematics of Bliss 6. The Evangelist 7. The Coin-Tossing View of Finance 8. The Triumph of Utopian Economics PART TWO: REALITY-BASED ECONOMICS 9. The Prof and the Polar Bears 10. A Taxonomy of Failure 11. The Prisoner’s Dilemma and Rational Irrationality 12. Hidden Information and the Market for Lemons 13.

 

pages: 105 words: 18,832

The Collapse of Western Civilization: A View From the Future by Naomi Oreskes, Erik M. Conway

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anti-communist, correlation does not imply causation, en.wikipedia.org, energy transition, invisible hand, laissez-faire capitalism, market fundamentalism, means of production, oil shale / tar sands, road to serfdom, Ronald Reagan, stochastic process, the built environment, the market place

L e x i c o n o f A r c h A i c T e r m s 59 invisible hand A form of magical thinking, popularized in the eighteenth century, that economic markets in a capitalist system were “balanced” by the actions of an unseen, immaterial power, which both ensured that markets functioned efficiently and that they would address human needs. Belief in the invisible hand (sometimes also called the invisible hand of the marketplace) formed a kind of quasi-religious foundation for capitalism (see capitalism; external costs; market failure; market fundamentalism). market failure The social, personal, and environmental costs that market economies imposed on individuals and societies were referred to as “market failures.” The concept of market failure was an early recognition of the limits of capitalist theory (see external costs; invisible hand ). market fundamentalism A quasi-religious dogma (see invisible hand) promoting unregulated markets over all other forms of human socioeconomic organization.

Even at the time, some recognized this system as a quasi-religious faith, hence the label market fundamentalism. 38 M a r k e t F a i l u r e Market fundamentalism—and its various strands and interpretations known as free market fundamentalism, neoliberalism, laissez-faire economics, and laissez-faire capitalism—was a two-pronged ideological system. The first prong held that societal needs were served most efficiently in a free market economic system. Guided by the “invisible hand” of the marketplace, individuals would freely respond to each other’s needs, establishing a net balance between solutions (“supply”) and needs (“demand”). The second prong of the philosophy maintained that free markets were not merely a good or even the best manner of satisfying material wants: they were the only manner of doing so that did not threaten personal freedom. The crux of this second point was the belief that marketplaces represented distributed power.

Among other reforms, the federal government introduced antitrust laws to prevent monopolistic practices, established worker protections such as limits on the length of the working day and prohibitions on child labor, and developed a progressive income tax. By the early twentieth century, it was clear that capitalism in its pure, theoretical form did not exist, and few could argue for its desirability: the failures were too obvious. Intellectuals came to see the invisible hand, akin to the hand of God, as the quasi-religious notion that it was. The Great Depression of the 1930s—from which Europe and the United States emerged only through the centralized mobilization of World War II—led scholars and political leaders to view the idea of self-regulating markets as a myth. After WWII, most non-communist states became “mixed” economies with a large degree of both individual and corporate freedom and significant M a r k e t F a i l u r e 41 government involvement in markets, including extensive systems of taxes, tariffs, subsidies, regulation of banks and exchanges, and immigration control.6 Meanwhile communism, which had spread through- out Eurasia and to some parts of Africa and Latin and South America, was revealing even worse failures than capitalism.

 

The Armchair Economist: Economics and Everyday Life by Steven E. Landsburg

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Albert Einstein, Arthur Eddington, diversified portfolio, first-price auction, German hyperinflation, Golden Gate Park, invisible hand, means of production, price discrimination, profit maximization, Ralph Nader, random walk, Ronald Coase, sealed-bid auction, second-price auction, second-price sealed-bid, statistical model, the scientific method, Unsafe at Any Speed

CHAPTER 8 WHY PRICES ARE GOOD Smith Versus Darwin I recently attended a party where a learned man—a prominent physicist— held forth. His topic was the analogy between Darwinian evolution, advancing the species biologically by allowing only the fittest to survive, and the Invisible Hand of the marketplace, advancing our species economically by eliminating all but the most efficient producers. I suspect that he didn't know much about biology. I'm sure that he didn't know much about economics. And his analogy, though familiar, was profoundly wrong. In biology, there is no equivalent of the Invisible Hand. Survival of the fittest is a different thing altogether. Nothing in evolutionary theory either promises or delivers the spectacular efficiency of the competitive marketplace. Male birds of paradise have ridiculously long tails. Evolution has cursed them with tails far too long for any practical purpose, and in fact long enough to be a substantial hindrance in locomotion.

If rationality cannot save us, what can? Remarkably—incredibly—miraculously—there is an answer. Under quite general conditions, when goods are produced and exchanged in competitive free markets in which people trade at market prices, economic activity leads to efficient outcomes. This fact is what economists have in mind when they talk about the Invisible Hand. In the eighteenth century, Adam Smith described the economic actor who "intends only his own gain" but is nevertheless led "by an invisible hand to promote an end which was no part of his intention," that end being the welfare of society, which economists call efficiency. The metaphor endures, having survived countless misinterpretations. It has been said that Smith was expressing a religious sentiment, a faith that Providence oversees our affairs. It has been said more often—most recently by my physicist friend—that Smith meant something like this: Individual rationality, coupled with the ruthless pressure of natural selection (in the marketplace as in the biosphere) must necessarily serve the social good and the ultimate advancement of the species.

What he did mean was something far more subtle, and far more remarkable: Individual rationality, coupled with competition and prices, leads to efficient outcomes; that is, outcomes in which there remain no unex-ploited opportunities to improve everybody's welfare. This is so even though individual rationality and competition without prices rarely leads to such desirable outcomes. The Invisible Hand Theorem is not at all obvious, but it is true. In the 1950s, the economists Gerard Debreu and Lionel Why Prices Are Good 77 McKenzie, working separately, successfully translated the Theorem into a statement about pure mathematics and rigorously proved that statement. Their accomplishment is one of the triumphs of modern economics. Along with its modern formulation, the Invisible Hand Theorem has acquired a modern name. It is now called the First Fundamental Theorem of Welfare Economics, and it can be stated succinctly: Competitive markets allocate resources efficiently. There is also a Second Fundamental Theorem of Welfare Economics, which deals with the fact that there are many different ways to allocate resources efficiently.

 

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Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

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It is not at all evident, on its face, that millions of consumers, workers, firms, savers, investors, banks, and speculators, each of them pursuing strictly their own personal advantage, would collectively arrive at anything other than economic chaos. Yet the model says the outcome is actually efficient. The First Fundamental Theorem of Welfare Economics is colloquially known among economists as the Invisible Hand Theorem. It was Adam Smith, perhaps the father of economics, who first stated it in broad terms. Though he did not use the term “invisible hand” in quite this context, Smith argued that decentralized decision making by individual consumers and producers in a market would nonetheless provide collective benefit. “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner,” he famously wrote, “but from their regard to their own interest.”2 Smith’s point that price incentives turn markets into a stupendously effective coordination machine running on autopilot was brought home powerfully by Milton Friedman in his popular TV series Free to Choose in 1980, on the eve of a wave of market reforms under the Reagan and Thatcher governments.

It was first formulated fully in the early 1950s by Kenneth Arrow and Gerard Debreu, using mathematics that was then unfamiliar to most economists.4 The first sentence of Debreu’s 1951 article gives a sense of the nature of the exercise: “The activity of the economic system we study can be viewed as the transformation by n production units and the consumption by m consumption units of l commodities (the quantities of which may or may not be perfectly divisible).”† Even though the Arrow and Debreu articles are foundational, having earned each economist a Nobel Prize, they are rarely read. (I confess I looked at them for the first time as I was writing this.) Economists study them instead from textbooks and other secondhand treatments. The First Fundamental Theorem is a big deal because it actually proves the Invisible Hand hypothesis. That is, it shows that under certain assumptions, the efficiency of a market economy is not just conjecture or possibility; it follows logically from the premises. The payoff from all the mathematics is that we actually have a precise statement. The model shows us exactly how the result is produced. It reveals, in particular, the specific assumptions that we have to make to be sure efficiency is achieved.

Information has to be complete—meaning, for example, that consumers are knowledgeable about all attributes of a good even before purchasing and experiencing it. We need to rule out monopolistic behavior on the part of producers, increasing returns to scale, and “externalities” (such as pollution or learning spillovers from R&D). Economists from Adam Smith on knew, of course, that such complications might interfere with the invisible hand. But Arrow and Debreu put it all together and made it all explicit and precise. The First Fundamental Theorem is about a purely hypothetical world; it does not claim to describe any actual markets. Taking it to the real world requires judgment, evidence, and further theorizing. How one interprets its relevance for economic policy is a Rorschach test of sorts. For economic liberals and political conservatives, the theorem establishes the superiority of a market-based society.

 

Exploring Everyday Things with R and Ruby by Sau Sheong Chang

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This is due to the market economy again. Remember that the consumer always buys the cheapest goods first. This means the producer with the higher prices will have unsold goods, which in turn forces the prices to go down. The end results are that the average price goes down until it nears the cost of producing the goods. Finally, we see the invisible hand! The invisible hand of Adam Smith has weighed in on our simulation and pushed the prices down. Now that we have witnessed the invisible hand and charted its effects, let’s get slightly more complicated. Resource Allocation by Price In the previous simulation, every producer creates only one type of goods, which we imaginatively called goods. This, of course, is not realistic (nothing modeled in economics is realistic, but that’s a different point). In our next simulation, we will have producers creating two types of goods.

His book An Inquiry into the Nature and Causes of the Wealth of Nations (excerpted here) is considered the first modern work of economics, while he himself is often regarded as the father of economics: It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Smith coined the metaphor of the “invisible hand” to label this natural inclination, effectively describing what we know today as the market economy. In this chapter, we will simulate a market economy to see if we can observe the invisible hand in action. A Simple Market Economy First, let’s take stock of the different roles and features of an ideal market economy (which are what we want to simulate). Producers The people who produce the goods. Producers create the goods and sell them to the consumers at a price. Consumers The people who consume the goods created by the producers.

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Simulation–The Third Simulation, The Final Simulation–The Final Simulation, Number of Messages by Day of the Month–Number of Messages by Hour of the Day, Implementation waveforms, Generating the Heart Sounds Waveform–Generating the Heart Sounds Waveform, Generating the Heartbeat Waveform and Calculating the Heart Rate–Generating the Heartbeat Waveform and Calculating the Heart Rate class methods, Ruby, Class methods and variables class variables, Ruby, Class methods and variables–Class methods and variables classes, R, Programming R classes, Ruby, Classes and objects–Classes and objects code examples, Using Code Examples (see example applications) colon (:), Symbols, Vectors creating R vectors, Vectors preceding Ruby symbols, Symbols comma-separated value (CSV) files, Importing data from text files (see CSV files) Comprehensive R Archive Network (CRAN), Packages conditionals, R, Conditionals and Loops conditionals, Ruby, Conditionals and loops–case expression contact information for this book, How to Contact Us conventions used in this book, Conventions Used in This Book cor() function, R, The R Console Core library, Ruby, Requiring External Libraries corpus, Text Mining correlation, R, The R Console CRAN (Comprehensive R Archive Network), Packages CSV (comma-separated value) files, Importing data from text files, The First Simulation–The First Simulation, The First Simulation, Interpreting the Data, The Simulation, Extracting Data from Sound–Extracting Data from Sound, Extracting Data from Video extracting video data to, Extracting Data from Video extracting WAV data to, Extracting Data from Sound–Extracting Data from Sound reading data from, Interpreting the Data writing data to, The First Simulation–The First Simulation, The Simulation csv library, Ruby, The First Simulation, The Simulation, Grab and Parse curl utility, Ruby Version Manager (RVM) D data, Data, Data, Everywhere–Data, Data, Everywhere, Bringing the World to Us, Importing Data–Importing data from a database, Importing data from text files, The First Simulation–The First Simulation, Interpreting the Data, How to Be an Armchair Economist, The Simulation, Grab and Parse–Grab and Parse, The Emailing Habits of Enron Executives–The Emailing Habits of Enron Executives, Homemade Digital Stethoscope–Extracting Data from Sound, Extracting Data from Sound–Extracting Data from Sound, Homemade Pulse Oximeter–Extracting Data from Video, Extracting Data from Video analyzing, Data, Data, Everywhere–Data, Data, Everywhere, Bringing the World to Us, How to Be an Armchair Economist charts for, How to Be an Armchair Economist (see charts) obstacles to, Data, Data, Everywhere–Data, Data, Everywhere simulations for, Bringing the World to Us (see simulations) audio, from stethoscope, Homemade Digital Stethoscope–Extracting Data from Sound CSV files for, Importing data from text files, The First Simulation–The First Simulation, Interpreting the Data, The Simulation, Extracting Data from Sound–Extracting Data from Sound, Extracting Data from Video from Enron, The Emailing Habits of Enron Executives–The Emailing Habits of Enron Executives from Gmail, Grab and Parse–Grab and Parse importing, R, Importing Data–Importing data from a database video, from pulse oximeter, Homemade Pulse Oximeter–Extracting Data from Video data frames, R, Data frames–Data frames data mining, The Idea data.frame() function, R, Data frames database, importing data from, Importing data from a database–Importing data from a database dbConnect() function, R, Importing data from a database dbGet() function, R, Importing data from a database DBI packages, R, Importing data from a database–Importing data from a database Debian system, installing Ruby on, Installing Ruby using your platform’s package management tool def keyword, Ruby, Classes and objects dimnames() function, R, Matrices distribution, normal, Money dollar sign ($), preceding R list item names, Lists doodling example, Shoes doodler–Shoes doodler double quotes (" "), enclosing Ruby strings, Strings duck typing, Ruby, Code like a duck–Code like a duck dynamic typing, Ruby, Code like a duck–Code like a duck E economics example, A Simple Market Economy–A Simple Market Economy, The Producer–The Producer, The Consumer–The Consumer, Some Convenience Methods–Some Convenience Methods, The Simulation–The Simulation, Analyzing the Simulation–Analyzing the Simulation, The Producer–The Producer, The Consumer–The Consumer, Market–Market, The Simulation–The Simulation, Analyzing the Second Simulation–Analyzing the Second Simulation, Price Controls–Price Controls charts for, Analyzing the Simulation–Analyzing the Simulation, Analyzing the Second Simulation–Analyzing the Second Simulation Consumer class for, The Consumer–The Consumer, The Consumer–The Consumer Market class for, Some Convenience Methods–Some Convenience Methods, Market–Market modeling, A Simple Market Economy–A Simple Market Economy price controls analysis, Price Controls–Price Controls Producer class for, The Producer–The Producer, The Producer–The Producer simulations for, The Simulation–The Simulation, The Simulation–The Simulation email example, Grab and Parse–Grab and Parse, The Emailing Habits of Enron Executives–The Emailing Habits of Enron Executives, Number of Messages by Day of the Month–Number of Messages by Day of the Month, Number of Messages by Day of the Month–Number of Messages by Hour of the Day, MailMiner–MailMiner, Number of Messages by Day of Week–Number of Messages by Hour of the Day, Interactions–Comparative Interactions, Text Mining–Text Mining charts for, Number of Messages by Day of the Month–Number of Messages by Hour of the Day content of messages, analyzing, Text Mining–Text Mining data for, Grab and Parse–Grab and Parse Enron data for, The Emailing Habits of Enron Executives–The Emailing Habits of Enron Executives interactions in email, analyzing, Interactions–Comparative Interactions number of messages, analyzing, Number of Messages by Day of the Month–Number of Messages by Day of the Month, Number of Messages by Day of Week–Number of Messages by Hour of the Day R package for, creating, MailMiner–MailMiner emergent behavior, The Origin of Boids (see also flocking example) Enron Corporation scandal, The Emailing Habits of Enron Executives Epstein, Joshua (researcher), It’s a Good Life Growing Artificial Societies: Social Science from the Bottom Up (Brookings Institution Press/MIT Press), It’s a Good Life equal sign (=), assignment operator, R, Variables and Functions Euclidean distance, Roids evolution, Evolution example applications, Using Code Examples, Shoes stopwatch–Shoes stopwatch, Shoes doodler–Shoes doodler, The R Console–Sourcing Files and the Command Line, Data frames–Introducing ggplot2, qplot–qplot, Statistical transformation–Geometric object, Adjustments–Adjustments, Offices and Restrooms, A Simple Market Economy, Grab and Parse, My Beating Heart, Schooling Fish and Flocking Birds, Money artificial utopian society, Money (see Utopia example) birds flocking, Schooling Fish and Flocking Birds (see flocking example) doodling, Shoes doodler–Shoes doodler economics, A Simple Market Economy (see economics example) email, Grab and Parse (see email example) fuel economy, qplot–qplot, Adjustments–Adjustments heartbeat, My Beating Heart (see heartbeat example) height and weight, The R Console–Sourcing Files and the Command Line league table, Data frames–Introducing ggplot2 movie database, Statistical transformation–Geometric object permission to use, Using Code Examples restrooms, Offices and Restrooms (see restrooms example) stopwatch, Shoes stopwatch–Shoes stopwatch expressions, R, Programming R external libraries, Ruby, Requiring External Libraries–Requiring External Libraries F factor() function, R, Factors, Text Mining factors, R, Factors–Factors FFmpeg library, Extracting Data from Video, Extracting Data from Video field of vision (FOV), Roids fish, schools of, Schooling Fish and Flocking Birds (see flocking example) flocking example, Schooling Fish and Flocking Birds–The Origin of Boids, The Origin of Boids, Simulation–Simulation, Roids–Roids, The Boid Flocking Rules–Putting in Obstacles, The Boid Flocking Rules–The Boid Flocking Rules, A Variation on the Rules–A Variation on the Rules, Going Round and Round–Going Round and Round, Putting in Obstacles–Putting in Obstacles Boids algorithm for, Schooling Fish and Flocking Birds–The Origin of Boids centering path for, Going Round and Round–Going Round and Round obstacles in path for, Putting in Obstacles–Putting in Obstacles research regarding, A Variation on the Rules–A Variation on the Rules Roid class for, Roids–Roids rules for, The Origin of Boids, The Boid Flocking Rules–The Boid Flocking Rules simulations for, Simulation–Simulation, The Boid Flocking Rules–Putting in Obstacles flows, Shoes, Shoes stopwatch fonts used in this book, Conventions Used in This Book–Conventions Used in This Book for loop, R, Conditionals and Loops format() function, R, Number of Messages by Day of the Month FOV (field of vision), Roids fuel economy example, qplot–qplot, Adjustments–Adjustments function class, R, Programming R functions, R, Variables and Functions–Variables and Functions G GAM (generalized addictive model), The Changes gem command, Ruby, Requiring External Libraries .gem file extension, Requiring External Libraries generalized addictive model (GAM), The Changes Gentleman, Robert (creator of R), Introducing R geom_bar() function, R, Interpreting the Data, The Second Simulation, The Final Simulation geom_histogram() function, R, Geometric object geom_line() function, R, Analyzing the Simulation geom_point() function, R, Plot, Interpreting the Data, Generating the Heart Sounds Waveform geom_smooth() function, R, Interpreting the Data ggplot() function, R, Plot ggplot2 package, R, Introducing ggplot2–Adjustments Gini coefficient, Money Git utility, Ruby Version Manager (RVM) Gmail, retrieving message data from, Grab and Parse–Grab and Parse graphics device, opening, Basic Graphs graphics package, R, Basic Graphs graphs, Charting (see charts) Growing Artificial Societies: Social Science from the Bottom Up (Brookings Institution Press/MIT Press), It’s a Good Life H hash mark, curly brackets (#{ }), enclosing Ruby string escape sequences, Strings hashes, Ruby, Arrays and hashes–Arrays and hashes heart, diagram of, Generating the Heart Sounds Waveform heartbeat example, My Beating Heart, My Beating Heart, My Beating Heart, Homemade Digital Stethoscope, Homemade Digital Stethoscope, Homemade Digital Stethoscope–Extracting Data from Sound, Generating the Heart Sounds Waveform–Generating the Heart Sounds Waveform, Generating the Heart Sounds Waveform, Finding the Heart Rate–Finding the Heart Rate, Homemade Pulse Oximeter–Homemade Pulse Oximeter, Homemade Pulse Oximeter–Extracting Data from Video, Generating the Heartbeat Waveform and Calculating the Heart Rate–Generating the Heartbeat Waveform and Calculating the Heart Rate, Generating the Heartbeat Waveform and Calculating the Heart Rate–Generating the Heartbeat Waveform and Calculating the Heart Rate charts for, Generating the Heart Sounds Waveform–Generating the Heart Sounds Waveform, Generating the Heartbeat Waveform and Calculating the Heart Rate–Generating the Heartbeat Waveform and Calculating the Heart Rate data for, Homemade Digital Stethoscope–Extracting Data from Sound, Homemade Pulse Oximeter–Extracting Data from Video audio from stethoscope, Homemade Digital Stethoscope–Extracting Data from Sound video from pulse oximeter, Homemade Pulse Oximeter–Extracting Data from Video heart rate, My Beating Heart, Finding the Heart Rate–Finding the Heart Rate, Generating the Heartbeat Waveform and Calculating the Heart Rate–Generating the Heartbeat Waveform and Calculating the Heart Rate finding from video file, Generating the Heartbeat Waveform and Calculating the Heart Rate–Generating the Heartbeat Waveform and Calculating the Heart Rate finding from WAV file, Finding the Heart Rate–Finding the Heart Rate health parameters for, My Beating Heart heart sounds, My Beating Heart, My Beating Heart, Homemade Digital Stethoscope, Generating the Heart Sounds Waveform health parameters for, My Beating Heart recording, Homemade Digital Stethoscope types of, My Beating Heart, Generating the Heart Sounds Waveform homemade pulse oximeter for, Homemade Pulse Oximeter–Homemade Pulse Oximeter homemade stethoscope for, Homemade Digital Stethoscope height and weight example, The R Console–Sourcing Files and the Command Line here-documents, Ruby, Strings hex editor, Extracting Data from Sound histograms, Statistical transformation, Geometric object, Money–Money Homebrew tool, Installing Ruby using your platform’s package management tool hyphen (-), Variables and Functions, Variables and Functions -> assignment operator, R, Variables and Functions <- assignment operator, R, Variables and Functions I icons used in this book, Conventions Used in This Book if expression, R, Conditionals and Loops if expression, Ruby, if and unless–if and unless Ihaka, Ross (creator of R), Introducing R ImageMagick library, Extracting Data from Video IMAP (Internet Message Access Protocol), Grab and Parse importing data, R, Importing Data–Importing data from a database inheritance, Ruby, Inheritance–Inheritance initialize method, Ruby, Classes and objects inner product, Roids–Roids installation, Installing Ruby–Installing Ruby using your platform’s package management tool, Installing Shoes–Installing Shoes, Introducing R, Installing packages–Installing packages R, Introducing R R packages, Installing packages–Installing packages Ruby, Installing Ruby–Installing Ruby using your platform’s package management tool Shoes, Installing Shoes–Installing Shoes Internet Message Access Protocol (IMAP), Grab and Parse Internet Message Format, The Emailing Habits of Enron Executives invisible hand metaphor, The Invisible Hand irb application, Running Ruby–Running Ruby J jittering, Adjustments jpeg() function, R, Basic Graphs L Landsburg, Stephen E. (author), How to Be an Armchair Economist Armchair Economist (Free Press), How to Be an Armchair Economist layer() function, R, Plot league table example, Data frames–Introducing ggplot2 left angle bracket (<), Strings, Variables and Functions <- assignment operator, R, Variables and Functions << preceding Ruby string here-document delimiter, Strings length() function, R, Vectors libraries, Requiring External Libraries, Requiring External Libraries–Requiring External Libraries, The First Simulation (see also specific libraries) for Ruby, The First Simulation for Ruby, Requiring External Libraries–Requiring External Libraries library() function, R, Importing Data line charts, Interpreting the Data–Interpreting the Data, Analyzing the Simulation–Analyzing the Simulation, Analyzing the Second Simulation–Analyzing the Second Simulation linear PCM (pulse-code modulation) format, Extracting Data from Sound Linux, Installing Ruby using third-party tools, Installing Shoes, Introducing R, Using R, Basic Graphs installing R on, Introducing R installing Ruby on, Installing Ruby using third-party tools installing Shoes on, Installing Shoes opening graphics device, Basic Graphs R user interface for, Using R list() function, R, Lists lists, R, Lists–Lists Loess algorithm, The Changes loops, R, Conditionals and Loops–Conditionals and Loops loops, Ruby, Loops Lorenz curve, Money, Money–Money Lorenz, Edward (coined "butterfly effect"), The Changes M Mac, Installing Ruby using third-party tools, Installing Ruby using your platform’s package management tool, Installing Shoes, Using R, Basic Graphs installing Ruby on, Installing Ruby using third-party tools, Installing Ruby using your platform’s package management tool installing Shoes on, Installing Shoes opening graphics device, Basic Graphs R user interface for, Using R mail library, Ruby, Grab and Parse Manhattan Project, The Simple Scenario matrices, R, Matrices–Matrices matrix library, Ruby, Roids matrix() function, R, Matrices Matsumoto, Yukihiro (creator of Ruby), Why Ruby max() function, R, Interpreting the Data mean() function, R, The R Console, Interpreting the Data–Interpreting the Data median() function, R, Interpreting the Data–Interpreting the Data merge() function, R, Data frames methods, Ruby, Methods mgcv library, The Changes mixin mechanism, Ruby, Inheritance modules, Ruby, Inheritance Monte Carlo simulation method, The Simple Scenario–The First Simulation movie database example, Statistical transformation–Geometric object N natural selection, Evolution normal distribution, Money O objects, R, Programming R objects, Ruby, Classes and objects–Classes and objects "Occupy Wall Street" movement, Money open classes, Ruby, Roids order() function, R, Data frames output formats, R, Basic Graphs overplotting, Adjustments oximetry, Oximetry–Homemade Pulse Oximeter P package management tool, Installing Ruby using your platform’s package management tool packages, R, Packages–Using packages, MailMiner–MailMiner par() function, R, Plotting charts pdf() function, R, Basic Graphs peppered moth, natural selection of, Evolution plot characters, Interpreting the Data plot() function, R, The R Console, Plotting charts–Plotting charts png() function, R, Basic Graphs Poisson process, The Simple Scenario pulse oximeter, Homemade Pulse Oximeter–Homemade Pulse Oximeter puts statement, Ruby, Running Ruby Pythagoras's theorem, Roids Q %q, preceding Ruby strings, Strings %Q, preceding Ruby strings, Strings qplot() function, R, qplot–qplot quartz() function, R, Basic Graphs question mark (?)

 

pages: 252 words: 73,131

The Inner Lives of Markets: How People Shape Them—And They Shape Us by Tim Sullivan

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Airbnb, airport security, Al Roth, Andrei Shleifer, attribution theory, autonomous vehicles, barriers to entry, Brownian motion, centralized clearinghouse, clean water, conceptual framework, constrained optimization, continuous double auction, deferred acceptance, Donald Trump, Edward Glaeser, experimental subject, first-price auction, framing effect, frictionless, fundamental attribution error, George Akerlof, Goldman Sachs: Vampire Squid, helicopter parent, Internet of things, invisible hand, Isaac Newton, iterative process, Jean Tirole, Jeff Bezos, Johann Wolfgang von Goethe, John Nash: game theory, John von Neumann, Joseph Schumpeter, late fees, linear programming, Lyft, market clearing, market design, market friction, medical residency, multi-sided market, mutually assured destruction, Nash equilibrium, Occupy movement, Peter Thiel, pets.com, pez dispenser, pre–internet, price mechanism, price stability, prisoner's dilemma, profit motive, proxy bid, RAND corporation, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, school choice, school vouchers, sealed-bid auction, second-price auction, second-price sealed-bid, sharing economy, Silicon Valley, spectrum auction, Steve Jobs, Tacoma Narrows Bridge, technoutopianism, telemarketer, The Market for Lemons, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, two-sided market, uranium enrichment, Vickrey auction, winner-take-all economy

“For much of the post–World War II period,” Fourcade writes, “flexing one’s mathematical and statistical muscles and stripping down one’s argument to a formal and parsimonious set of equations was indeed the main path to establishing scientific purity in economics.”3 Radford, writing after the war, found himself in deep conversation with the classical economists of the nineteenth and earlier centuries—even as the profession was on the cusp of its mathematical transformation. Radford’s larger message about the efficiency of markets was, after all, one of the main points of Adam Smith’s metaphor of the invisible hand, an idea that first appeared in Book IV of his epic Wealth of Nations in 1776. To Smith, the power of the market was clear, requiring no formal proof of its veracity or elucidation of the precise circumstances where it would be truer than others. Smith largely asserted that individuals can pursue their own self-interest and make society as a whole better off.4 It was a revelation. Generations of economists that followed—collectively referred to by economic historian Heilbroner as “the worldly philosophers”—extended Smith’s ideas.

Building from his calculation that the richest 20 percent of Italians owned 80 percent of the country’s land, Pareto posited that incomes in an economy tend to be distributed according to a “power law.” (Power law distributions will often generate extreme inequality, making Pareto an unlikely hero of the Occupy movement.) Most memorably, though, he used his mathematical skills to extend Smith’s invisible hand arguments, introducing a particular criterion by which economists could assess social well-being.5 This welfare principle, named Pareto efficiency by British economist I. M. D. Little, suggests that we may judge an economic system by whether it’s possible, through some series of trades or exchanges, to make at least one individual better off without making anyone worse off. This is a fairly minimalist view on social welfare—for example, if a tax policy brought millions of people out of poverty but in the process left Donald Trump with ten fewer dollars in his bank account, it would fail to be a Pareto improvement because someone—even someone as rich and odious as Trump—is made worse off.

The models are absurd caricatures of the true skyscraper-to-be, but look enough like the real thing to help figure out whether it’ll get knocked over in a hurricane. In a sense, Arrow and Debreu’s model was a stress test of the market, an attempt to understand the conditions that would guarantee that a market would arrive at that happy state where society’s means and wants exactly coincide. This may seem an esoteric point. And in a way it is. But think back to Smith’s timeless description of the magic of the invisible hand: in a well-functioning market, each individual acts only in self-interest but nonetheless ends up promoting the public good. He’s describing, essentially, the glories of market equilibrium: there’s no way that the economy’s resources could be put to use so that any one individual is better off without making someone else worse off (that is, market equilibrium is a Pareto optimum). There’s no waste, no mixed-up allocations where you and I might barter my bread for your eggs to make us both happier, no company that could be more profitable by altering what it chose to produce.

 

pages: 25 words: 7,179

Why Government Is the Problem by Milton Friedman

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affirmative action, Bretton Woods, floating exchange rates, invisible hand, rent control, urban renewal

Again, let me emphasize, the problem is not that bureaucrats are bad people. The problem, as the Marxists would say, is with the system, not with the people. The self-interest of people in government leads them to behave in a way that is against the self-interest of the rest of us. You remember Adam Smith's famous law of the invisible hand: People who intend only to seek their own benefit are "led by an invisible hand to serve a public interest which was no part of" their intention. I say that there is a reverse invisible hand: People who intend to serve only the public interest are led by an invisible hand to serve private interests which was no part of their intention. I believe our present predicament exists because we have gradually developed governmental institutions in which the people effectively have no voice. A recent study by James Payne brought this home to me very clearly.

 

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

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Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, Berlin Wall, Big bang: deregulation of the City of London, California gold rush, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Edward Lloyd's coffeehouse, equity premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, financial innovation, Francis Fukuyama: the end of history, George Akerlof, George Gilder, greed is good, haute couture, illegal immigration, income inequality, invention of the telephone, invention of the wheel, invisible hand, John Nash: game theory, John von Neumann, Kevin Kelly, knowledge economy, labour market flexibility, late capitalism, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, pets.com, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, risk tolerance, road to serfdom, Ronald Coase, Ronald Reagan, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, telemarketer, The Chicago School, The Death and Life of Great American Cities, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Washington Consensus, women in the workforce, yield curve, yield management

Part IV: THE TRUTH ABOUT MARKETS Chapter 17: Neoclassical Economics and After ••••••••••••••••••••••••••••••••••••• 1. For example, for James Tobinn the invisible hand is "one of the great ideas of history and one of the most influential." Tobin (1992), 117. 2. Yergin and Stanislaw (1998), 398. More or less the same phrase is found at the beginning of the book, page 24. 3. Leacock (1936). These are not Leacock's own views. 4. Smith (1759), 184-85 For a discussion of the role of the "invisible hand" metaphor in Smith's work, see Rothschild (2001), chapter 5. The original "invisible hand" seems to be found in Shakespeare: { 378} Notes Come seeling night Scarf up the tender eye of pitiful day And with thy bloody and invisible hand Cancel and tear to pieces that great bond Which keeps me pale. -Macbeth) act 3) sc. 2) l. 119. 5. See the discussion of DIY economics in chapter 15. 6.

The importance of Darwin's theory outside biology is that it demonstrates the extraordinary potential of spontaneous order. No one who has fully understood it ever thinks the same way again. Coordination in Market Economies Adam Smith was the great economist of the Scottish Enlightenment. And his metaphor of the invisible hand is the most famous expression of order without design. Smith had described how the division of labor had fueled economic growth, "the natural progress of opulence." But how was that division of labor organized and coordinated? The answer was the invisible hand. As I shall discuss in chapter 17, I am not sure this interpretation of Smith is right. But whether or not it was Smith's answer, it is a good question. We can imagine Khrushchev in the supermarket posing his own version: "Who is in charge of the supply of groceries to California?"

The widely quoted passage is: "By directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention." Yet on careful reading Smith does not say that selfish behavior is praiseworthy, is bound to pay, or necessarily promotes the best interests of society. When we join the shortest queue at the supermarket, we intend only our own gain and promote an end that is not part of our intention. It does not follow that our behavior is governed by self-regarding materialism, or that such behavior leads, cumulatively or otherwise, to the overall betterment of society. The passage containing the invisible hand metaphor is not about general equilibrium theory: its purpose is to explain why merchants would continue to buy British products even if tariffs were removed.

 

pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

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affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, George Akerlof, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, New Urbanism, Plutocrats, plutocrats, price stability, profit maximization, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, working-age population, Y2K, Yom Kippur War

These stories, embellished by oft told vignettes of newly successful people, and in their mostly justified enthusiasm for expanded free markets, led to too much economic tolerance. Underlying this revolution is the powerful principle of the “invisible hand”—that market forces should be the fundamental framework of resource allocation. Recognition of this principle has produced the surge of economic growth that has defined our age. And yet, today, with the recent economic crisis, unregulated free markets are being questioned. We believe that the unvarnished invisible hand story, although right in a fundamental way, is wrong at the level of detail and approximation that is necessary to explain what we need to know about macroeconomies. The old story about capitalism is correct: it gives us what we think we want.

According to this classical economics, private markets, of their own accord and with no government interference, would, “as if by an invisible hand,” assure full employment. According to the classical logic in its simplest form, if a worker was willing to work for less than she was able to produce, an employer could make a profit by giving her a job. The folks with these views urged the balancing of budgets and insisted on minimal government regulation. On the other end of the spectrum in 1936 were the socialists. They thought that recovery from the joblessness of the 1930s could be accomplished only if the government took over business. It would then eliminate joblessness by doing the hiring itself. But Keynes took a more moderate approach. In his view the economy is not just governed by rational actors, who “as if by an invisible hand” will engage in any transaction that is to their mutual economic benefit, as the classicists believed.

Historians may disagree with us on the details of these changes of story, but since much of history is about such shifts, they are unlikely to argue with us about their existence. Nor are they likely to disagree with us about the most recent such shift, coinciding with the election of Ronald Reagan. At that time the explanation of how the economy worked turned to the conservative image with which we began this book, the “invisible hand.” This shift was, of course, not just an American phenomenon. Britain had elected Margaret Thatcher eighteen months earlier. Other countries, from India to China to Canada, would follow, sometimes zealously so. The story of the “invisible hand” and its consequences gives surprisingly detailed prescriptions regarding the role of government, even pertaining to questions of great specificity. But now people are asking these questions anew. Here is a small sampling: How can we allow people of varying abilities and financial sophistication to express their preferences for investments without making them vulnerable to sales-people selling “snake oil”?

 

pages: 565 words: 151,129

The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism by Jeremy Rifkin

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3D printing, additive manufacturing, Airbnb, autonomous vehicles, back-to-the-land, big-box store, bioinformatics, bitcoin, business process, Chris Urmson, clean water, cleantech, cloud computing, collaborative consumption, collaborative economy, Community Supported Agriculture, computer vision, crowdsourcing, demographic transition, distributed generation, en.wikipedia.org, Frederick Winslow Taylor, global supply chain, global village, Hacker Ethic, industrial robot, informal economy, intermodal, Internet of things, invisible hand, Isaac Newton, James Watt: steam engine, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Julian Assange, Kickstarter, knowledge worker, labour mobility, Mahatma Gandhi, manufacturing employment, Mark Zuckerberg, market design, means of production, meta analysis, meta-analysis, natural language processing, new economy, New Urbanism, nuclear winter, Occupy movement, oil shale / tar sands, pattern recognition, peer-to-peer lending, personalized medicine, phenotype, planetary scale, price discrimination, profit motive, RAND corporation, randomized controlled trial, Ray Kurzweil, RFID, Richard Stallman, risk/return, Ronald Coase, search inside the book, self-driving car, shareholder value, sharing economy, Silicon Valley, Skype, smart cities, smart grid, smart meter, social web, software as a service, spectrum auction, Steve Jobs, Stewart Brand, the built environment, The Nature of the Firm, The Structural Transformation of the Public Sphere, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, transaction costs, urban planning, Watson beat the top human players on Jeopardy!, web application, Whole Earth Catalog, Whole Earth Review, WikiLeaks, working poor, Zipcar

Nor could he have foreseen that the petrochemicals used to extrude the polyethylene would emit carbon dioxide and play a key role in altering the climate of the planet. Reflecting on my own father’s career, it is clear to me that the invisible hand that Adam Smith alluded to 237 years ago in The Wealth of Nations is really not all that invisible. It’s the entrepreneurial spirit that drove my dad and countless other entrepreneurs to innovate, reduce marginal costs, bring cheaper products and services to the market, and spur economic growth. That entrepreneurial spirit is now taking us to near zero marginal costs and into a new economic era of history where more goods and services will be nearly free and shared on a Collaborative Commons. For those who were long skeptical of the operating assumptions of the invisible hand of supply and demand, the approach of a near zero marginal cost society—the optimum efficient state—is “visible” proof that the system first described by Smith did indeed work, in part, although I would add four caveats.

For those who were long skeptical of the operating assumptions of the invisible hand of supply and demand, the approach of a near zero marginal cost society—the optimum efficient state—is “visible” proof that the system first described by Smith did indeed work, in part, although I would add four caveats. First, the invisible hand was often slowed or blocked altogether for long periods of time by the inevitable concentration of monopoly power that continually thwarted innovation in virtually every commercial sector. Second, the invisible hand did little to ensure that the increase in productivity and profits was shared with the workforce that jointly created the largesse. The workers had to fight management at every step of the journey by organizing themselves into trade unions and political lobbies to ensure a fair return on their labor. Third, while capitalism dramatically improved the lives of everyone inside the system, its track record at the margins of the system, where human resources were, more often than not, ruthlessly exploited to benefit those cocooned inside, was horrendous by any reasonable standard.

Third, while capitalism dramatically improved the lives of everyone inside the system, its track record at the margins of the system, where human resources were, more often than not, ruthlessly exploited to benefit those cocooned inside, was horrendous by any reasonable standard. And fourth, the operating logic of the invisible hand of supply and demand never extended beyond the confines of the market mechanism itself and was, therefore, never able to account for the damage that the capitalist system inflicted on the larger environment from which it drew its raw materials and where it dumped its wastes. Still, Smith’s invisible hand proved to be a formidable social force, but not for the philosophical reasons he put forth. Smith’s theory revolves around the notion that in a market economy each individual pursues his or her own self-interest in the acquisition and exchange of property, without any intention of promoting the public interest, and by doing so, “inadvertently” advances the general well-being of society as a whole.

 

pages: 75 words: 22,220

Occupy by Noam Chomsky

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corporate governance, corporate personhood, deindustrialization, Howard Zinn, income inequality, invisible hand, Martin Wolf, Nate Silver, Occupy movement, Plutonomy: Buying Luxury, Explaining Global Imbalances, precariat, Ralph Nader, Ronald Reagan, too big to fail, union organizing

Adam Smith considered the possibility that merchants and manufacturers in England might decide to do their business abroad—invest abroad and import from abroad. He said they would profit, but England would be harmed. However, he went on to say that the merchants and manufacturers would prefer to operate in their own country—what’s sometimes called a “home bias.” So, as if by “an invisible hand,” England would be saved from the ravages of what is now called neoliberal globalization. That’s a pretty hard passage to miss. In his classic Wealth of Nations, that’s the only occurrence of the phrase, “invisible hand.” Maybe England would be saved from neoliberal globalization by an “invisible hand.” The other great classical economist, David Ricardo, recognized the same thing and hoped that it wouldn’t happen—kind of a sentimental hope—and it didn’t for a long time. But now it is happening. Over the last thirty years that’s exactly what has been underway.

So yes, it’s a highly democratic conception of a structured, organized society with power at the base. It doesn’t mean that it doesn’t have representatives—it can have, but they should be recallable and under the influence and control of participants. Who’s in favor of a society like that? You can say Adam Smith, for example, who believed—you can question whether his beliefs were accurate, but he believed—that market systems and the “invisible hand” of individual choices would lead to egalitarian societies of common participation. You can question the logic of the argument, but the goals are understandable and they go far back. You can find them in the first serious book of politics that was ever written, Aristotle’s Politics. When Aristotle evaluated various kinds of systems, he felt that democracy was the least bad of them. But he said democracy wouldn’t work unless you could set things up so that they would be relatively egalitarian.

 

pages: 376 words: 118,542

Free to Choose: A Personal Statement by Milton Friedman, Rose D. Friedman

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affirmative action, agricultural Revolution, air freight, back-to-the-land, bank run, banking crisis, Corn Laws, Fractional reserve banking, full employment, German hyperinflation, invisible hand, labour mobility, means of production, minimum wage unemployment, oil shale / tar sands, oil shock, price stability, Ralph Nader, RAND corporation, rent control, road to serfdom, school vouchers, Simon Kuznets, The Wealth of Nations by Adam Smith, union organizing, Unsafe at Any Speed, Upton Sinclair, urban renewal, War on Poverty, working poor, Works Progress Administration

One government policy after another has been set up to "regulate" our "pursuits of industry and improvement," standing Jefferson's dictum on its head (Chapter 7). These developments have been produced by good intentions with a major assist from self-interest. Even the strongest supporters of the welfare and paternal state agree that the results have been disappointing. In the government sphere, as in the market, there seems to be an invisible hand, but it operates in precisely the opposite direction from Adam Smith's: an individual who intends only to serve the public interest by fostering government intervention is "led by an invisible hand to promote" private interests, "which was no part of his intention." That conclusion is driven home again and again as we examine, in the chapters that follow, the several areas in which government power has been exercised—whether to achieve security (Chapter 4) or equality (Chapter 5), to promote education (Chapter 6), to protect the consumer (Chapter 7) or the worker (Chapter 8), or to avoid inflation and promote employment (Chapter 9).

So far, in Adam Smith's words, "the uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived," has been "powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of governments and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor."3 So far, that is, Adam Smith's invisible hand has been powerful enough to overcome the deadening effects of the invisible hand that operates in the political sphere. The experience of recent years—slowing growth and declining productivity—raises a doubt whether private ingenuity can continue to overcome the deadening effects of government control if we continue to grant ever more power to government, to authorize a "new class" of civil servants to spend ever larger fractions of our income supposedly on our behalf.

The obvious inefficiencies that have resulted from the command system have led to much discussion by planners in socialist countries—Russia, Czechoslovakia, Hungary, China—of the possibility of making greater use of the market in organizing production. At a conference of economists from East and West, we once heard a brilliant talk by a Hungarian Marxist economist. He had rediscovered for himself Adam Smith's invisible hand—a remarkable if somewhat redundant intellectual achievement. He tried, however, to improve on it in order to use the price system to transmit information and organize production efficiently but not to distribute income. Needless to say, he failed in theory, as the communist countries have failed in practice. A BROADER VIEW Adam Smith's "invisible hand" is generally regarded as referring to purchases or sales of goods or services for money. But economic activity is by no means the only area of human life in which a complex and sophisticated structure arises as an unintended consequence of a large number of individuals cooperating while each pursues his own interests.

 

pages: 692 words: 127,032

Fool Me Twice: Fighting the Assault on Science in America by Shawn Lawrence Otto

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affirmative action, Albert Einstein, anthropic principle, Berlin Wall, Brownian motion, carbon footprint, Cepheid variable, clean water, Climategate, Climatic Research Unit, cognitive dissonance, Columbine, cosmological constant, crowdsourcing, cuban missile crisis, Dean Kamen, desegregation, double helix, energy security, Exxon Valdez, fudge factor, ghettoisation, Harlow Shapley and Heber Curtis, Harvard Computers: women astronomers, informal economy, invisible hand, Isaac Newton, Louis Pasteur, mutually assured destruction, Richard Feynman, Richard Feynman, Ronald Reagan, Saturday Night Live, shareholder value, sharing economy, smart grid, Solar eclipse in 1919, stem cell, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, University of East Anglia, War on Poverty, white flight, Winter of Discontent, working poor

—LORD CHRISTOPHER MONCKTON, 20101 HOUSTON, WE HAVE A PROBLEM “Whenever the people are well informed,” Thomas Jefferson wrote, “they can be trusted with their own government.”2 This sentiment lies at the heart of the American-style democracy that has for more than two centuries inspired the world. Much like the “invisible hand”3 that guides Adam Smith’s economic marketplace,* so too does the invisible hand of the people’s will guide the affairs of men and women through the democratic process. But today the invisible hand seems confused and indecisive. Congress seems paralyzed, unable to act on many key issues that increasingly threaten the economic and environmental vitality of the nation and the planet. Ideology and rhetoric increasingly guide policy discussion, often bearing little relationship to factual reality.

Hardin’s paper was remarkable because it offered such a sound rebuttal to the ideas of the Scottish economist Adam Smith, whose collaborator and mentor was David Hume. In 1776 Smith argued in The Wealth of Nations that in a shared economy, an individual, who “intends only his own gain,” was in effect “led by an invisible hand” to promote the greater public interest, since willing buyers and willing sellers will always arrive at a natural price for things, and the highest value and efficiency will be obtained. “Nor is it always the worse for the society that [the individual’s intention to do social good] was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”2 The argument of the invisible hand was so well made that it has become an axiom of economics: Just get out of the way and let the market work. But, Hardin asked, did the same reasoning still hold true in the economics not of 1768, when the world seemed unlimited, but of 1968?

But we may also slip into decline, sliding day by day, almost without notice, into an environmental and economic morass, resentful and angry with each other over what we are losing, not realizing it is because of our own actions. For health and prosperity to continue, science can no longer be separated from policy making, religion, and economics. In this new age of connectivity, these four great houses of power must learn to work more closely together. But can they? THE SILENCE OF THE INVISIBLE HAND Science provides us with increasingly clear pictures of how to solve our great challenges, but policy makers are increasingly unwilling to pursue many of the remedies science presents. Instead, they take one of two routes: Deny the science, or pretend the problems don’t exist. In fact, political and religious institutions the world over are experiencing a reactionary pull-back from science and reason that is threatening planetary stability and long-term viability at the very time we need science the most, and nowhere in the world is this pullback more pronounced than in the United States.

 

pages: 350 words: 103,988

Reinventing the Bazaar: A Natural History of Markets by John McMillan

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accounting loophole / creative accounting, Albert Einstein, Andrei Shleifer, Anton Chekhov, Asian financial crisis, congestion charging, corporate governance, crony capitalism, Dava Sobel, Deng Xiaoping, experimental economics, experimental subject, fear of failure, first-price auction, frictionless, frictionless market, George Akerlof, George Gilder, global village, Hernando de Soto, I think there is a world market for maybe five computers, income inequality, income per capita, informal economy, invisible hand, Isaac Newton, job-hopping, John Harrison: Longitude, John von Neumann, land reform, lone genius, manufacturing employment, market clearing, market design, market friction, market microstructure, means of production, Network effects, new economy, offshore financial centre, pez dispenser, pre–internet, price mechanism, profit maximization, profit motive, proxy bid, purchasing power parity, Ronald Coase, Ronald Reagan, sealed-bid auction, second-price auction, Silicon Valley, spectrum auction, Stewart Brand, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, War on Poverty, Xiaogang Anhui farmers, yield management

We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantage.” Guided by prices, people make their choices. Goods get produced and delivered to the people who want and can pay for them. Self-interest is harnessed to the greater good. Intending only his own gain, a producer or a buyer is “led by an invisible hand,” Smith famously concluded, “to promote an end which was no part of his intention.”10 The metaphor of the invisible hand Smith formulated in 1776 is the classic account of what drives a market economy. It was nearly two centuries before Adam Smith’s insight was taken beyond the metaphor of the invisible hand and given a rigorous theoretical foundation. Are competitive markets able to harmonize the actions of millions? Léon Walras took the first big step toward answering this question in the late nineteenth century, formulating a mathematical model of an economy in which, for each good or service in the economy, there was an equation representing the balance of supply and demand.

Glickman, Mark M. 2001 “Beyond Gas Taxes,” Redefining Progress. www.rprogress.org. Goldman, Eitan, and Gorton, Gary. 2000. “The Visible Hand, the Invisible Hand, and Efficiency.” Working paper 7587, National Bureau of Economic Research, Washington, D.C. Grafton, R. Quentin, Squires, Dale, and Fox, Kevin J. 2000. “Private Property and Economic Efficiency: A Study of a Common-Pool Resource.” Journal of Law and Economics 43, 679–714. Grafton, R. Quentin, Squires, Dale, and Kirkley, James E. 1996. “Private Property Rights and Crises in World Fisheries.” Contemporary Economic Policy 14, 89–99. Grampp, William D. 2000. “What Did Smith Really Mean by the Invisible Hand?” Journal of Political Economy 108, 441–465. Green, W. M. 1989. “Early Cuneiform.” Wayne W. Senner, ed., In The Origins of Writing.

The essence of life is infinitely and mysteriously multiform, and therefore it cannot be contained or planned for, in its fullness and variability, by any central intelligence.”6 Some have invoked the supernatural to explain what they find extraordinary: that markets can work with no one in charge. The Reverend Richard Whately, a professor of political economy at Oxford University in the eighteenth century, believed the coherence of the market to be proof that God exists. If no human planner is guiding the market to the optimal outcome, God must be. The invisible hand is the hand of God. A religious fervor characterizes some of today’s fans of the free market. “The true spirit capital of the current capitalist economy is not material. It is moral, intellectual, and spiritual,” declared George Gilder, an evangelist for libertarianism. He also said that entrepreneurship “most deeply springs from religious faith and culture” and that entrepreneurs “embody and fulfill the sweet and mysterious consolations of the Sermon on the Mount.”

 

pages: 695 words: 194,693

Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann

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Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, Cass Sunstein, collective bargaining, colonial exploitation, compound rate of return, conceptual framework, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, delayed gratification, Detroit bankruptcy, disintermediation, diversified portfolio, double entry bookkeeping, Edmond Halley, en.wikipedia.org, equity premium, financial independence, financial innovation, financial intermediation, fixed income, frictionless, frictionless market, full employment, high net worth, income inequality, index fund, invention of the steam engine, invention of writing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, laissez-faire capitalism, Louis Bachelier, mandelbrot fractal, market bubble, means of production, money: store of value / unit of account / medium of exchange, moral hazard, new economy, passive investing, Paul Lévy, Ponzi scheme, price stability, principal–agent problem, profit maximization, profit motive, quantitative trading / quantitative finance, random walk, Richard Thaler, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, spice trade, stochastic process, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, time value of money, too big to fail, trade liberalization, trade route, transatlantic slave trade, transatlantic slave trade, tulip mania, wage slave

The two big factors that distinguished Athens from most prior ancient societies were the reliance on maritime trade and the development of a unique governance system. Athens in classical antiquity was quite different from the early Sumerian city-states. Despite its magnificent Acropolis, it was not centered on a temple-based, local, agricultural redistribution system. The overseas grain trade relied in part on the invisible hand to attract risk capital—both wealth and human-risk capital. The invisible hand played an important role in creating an incentive structure to pull grain toward the city to replace the grain it could not produce on its own. That said, Athens was not simply a laissez-faire society. Strict regulatory constraints prevented grain re-exports and the financing of non-Athenian grain trade. The secondary sale and storage of grain were likewise restricted.

To make these audacious economic models work required a novel financial structure. Athens and Rome had to make grain flow toward the center. The economy had to motivate farmers overseas to grow grain for export, to motivate sailors and captains to risk their lives to bring the grain, to motivate investment in ships and trade goods, and to create a system of payment that was robust to uncertainties of international commerce. The solutions involved the invisible hand of the market, financial technologies for dealing with the unpredictability of the sea, and a monetary economy that relied on universally accepted measures of value. Much of what we know about the ancient Athenian financial system comes from surviving judicial orations. The courts themselves were key elements in the financial system. The Athenian court system resolved disputes between plaintiffs and defendants through trial by jury.

No doubt Anytus was well meaning—perhaps he expected that the collusion would give the dealers greater leverage in negotiations with importers—however, the prosecutor in the trial recognized that the cartel would have a long-term detrimental effect. Merchants would no longer ship grain to Athens if they could not obtain a fair market price. As the Greek orator Lysias, the author of the prosecutor’s closing argument, put it: If you condemn them you will do what is just and make corn cheaper; if you acquit them you make it dearer.4 His argument was that the crucial flow of grain would shift elsewhere in response to the invisible hand of the market, making corn (i.e., grain) dearer. Investors in the grain trade would no longer make loans on grain voyages if prices at the dock were too low. Captains would have little incentive to brave the risks of sea if they could not sell their cargo at a profit. The text of the trial is incomplete. We do not know the fate of the grain dealers, but the trial is famous as the earliest evidence of antitrust prosecution.

 

Nuclear War and Environmental Catastrophe by Noam Chomksy

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British Empire, cuban missile crisis, David Ricardo: comparative advantage, energy security, Howard Zinn, interchangeable parts, invisible hand, Malacca Straits, mutually assured destruction, Naomi Klein, Occupy movement, oil shale / tar sands, Ralph Nader, Ronald Reagan, South China Sea, The Wealth of Nations by Adam Smith, trade route, University of East Anglia, uranium enrichment, WikiLeaks

It’s kind of interesting if you look back at the classical economists, Adam Smith and David Ricardo. They were sort of aware of this—they didn’t put it in precisely these terms—but if you take a look at Adam Smith’s The Wealth of Nations, the famous phrase “invisible hand” appears once. It appears essentially in a critique of what’s going on right now. What he pretty much says is that, in England, if merchants and manufacturers preferred to import from abroad and sell abroad, they might make profit, but it would be bad for England. He says they’re going to have what sometimes is called a home bias—they’ll prefer to do business at home, so as if by an invisible hand, England will be saved the ravages of a global market.82 David Ricardo was even stronger. He said that he knows perfectly well that his comparative advantage theories would collapse if English manufacturers, investors, and merchants did their business elsewhere, and he said he hopes very much that this will never happen—that they’ll have, perhaps, a sentimental commitment to the home country—and he hopes this attitude never disappears.

Environmental disasters. I. Polk, Laray. II. Title. QH545.N83C56 2013 363.325’5--dc23 2012046137 Printed in the United States 9 8 7 6 5 4 3 2 1 Contents Preface Abbreviations 1. Environmental Catastrophe 2. Protest and Universities 3. Toxicity of War 4. Nuclear Threats 5. China and the Green Revolution 6. Research and Religion (or, The Invisible Hand) 7. Extraordinary Lives 8. MAD (Mutually Assured Dependence) Appendix 1: Conversation between Gen. Groves and Lt. Col. Rea, August 25, 1945 Appendix 2: Flyer for UCPV Event, October 10, 1967 Appendix 3: Scientists Condemn the Destruction of Crops in Vietnam, January 21, 1966 Appendix 4: Nelson Anjain’s Open Letter to Robert Conard, April 9, 1975 Appendix 5: Marshallese Medical Records in Hands of Gensuikin, July 27, 1976 Appendix 6: Memorandum on Iraqi Use of Chemical Weapons, November 1, 1983 Appendix 7: Open Letter to Africa, December 12, 2011 Appendix 8: Anjali Appadurai’s Speech in Durban, December 9, 2011 Appendix 9: Point Hope Protest Letter to JFK, March 3, 1961 Appendix Acknowledgments About the Authors About Seven Stories Press Preface If humans choose to work to minimize the existential threats of our time, perhaps the most improbable aspect of remedy is that we will accept modalities based on collaboration and creative adaptation, rather than perpetual combat and domination.1 It is a stark fact that present and future economies are predicated on a finite energy resource: carbon-based fuels.2 Consensual science on climate change presents another fact: we may only have a few years to make adjustments in the collective carbon load before we are faced with irreversible consequences.

President’s Council of Advisors on Science and Technology, “Sustaining the Nation’s Innovation Ecosystems,” January 2004. The Bureau of Labor Statistics projects US employment in manufacturing will continue to trend as an area of rapid decline. Richard Henderson, “Industry Employment and Output Projections to 2020,” Monthly Labor Review, January 2012. 6. Research and Religion (or, The Invisible Hand) Laray Polk: Forty percent of the electorate in most states identify as evangelical. Pew Research indicates evangelical Christians largely reject anthropogenic climate change and are skeptical there is even solid evidence that the earth is warming.74 So I think the extreme beliefs of the religious right benefit business interests and vice versa. Noam Chomsky: That’s an interesting combination because the business leadership tends to be secular.

 

The Techno-Human Condition by Braden R. Allenby, Daniel R. Sarewitz

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airport security, augmented reality, carbon footprint, clean water, cognitive dissonance, conceptual framework, Credit Default Swap, decarbonisation, facts on the ground, friendly fire, invisible hand, Isaac Newton, Jane Jacobs, land tenure, life extension, Long Term Capital Management, market fundamentalism, mutually assured destruction, nuclear winter, Peter Singer: altruism, planetary scale, prediction markets, Ralph Waldo Emerson, Ray Kurzweil, Silicon Valley, smart grid, stem cell, Stewart Brand, technoutopianism, the built environment, The Wealth of Nations by Adam Smith, transcontinental railway, Whole Earth Catalog

So let us dispose here of a tempting analogy between transhumanist claims (rooted as they are in defense of individual liberty) and Adam Smith's famous "invisible hand." Just as innovation and productivity are optimized as individuals, driven by self-interest, strive for economic benefit, won't society be made better by individuals striving after various enhancements? The analogy would be false. The "invisible hand" is just a recognition of an information-processing mechanism; it integrates decisions made on the basis of individual preference into supply and demand curves that describe the efficient distribution of scarce resources. Unlike central planning, the "invisible hand" is effective with complex adaptive systems (i.e., the economy), in part because it decentralizes decision making across active agents and in part because the only outcome it aims to deliver is efficient allocation of information, prices, and stuff.

A more socially stable and, yes, advanced (if 98 Chapter 5 still highly imperfect) capitalism evolved only when dampers on rampant market freedom, such as unions, anti-monopolistic policies, and unemployment insurance, were adopted-almost always after bruising political battles and occasional paroxysms of civil unrest. There is no invisible hand to guide society toward more justice and tolerance, with or without radical enhancement of human capabilities. But now there is another possible complication to this story. The invisible hand of the economic market works because we can assume that humans generally behave as they always have: selfishly. Might human-enhancement technologies threaten even that fundamental assumption? (Put another way, could we design "selfishness" out of the human?) We doubt it, yet the larger point is this: Even if it seems as if we are simply modifying the constitution of humanness at the individual level, the systems-level effects of tens of millions of such modifications may plausibly begin to manifest in system-wide changes in human values and behaviors that cannot possibly be predicted.

., 93, 94 "Human," as cultural construct, 103 Humanity+, 6, 7 Hutchins, Eo, 95, 96 Hydrologic cycle, 10 IBM, 89, 146 IEEE Spectrum, 82 Immortality, 82, 83 India, 99, 129, 139 Industrial ecology, 168 Industrial time, 71 Infant mortality,S 8, 60 Influenza, 68 Information and communication technology (ICT), 8, 80, 179 Institute of Electrical and Electronics Engineers (IEEE), 179 219 Institutional review boards (IRBs),l77 Integrated Vector Management (IVM), 48ff, 53 Integration of human and machine, 20 Intercollegiate Genetically Engineered Machine competition,68 Intergovernmental Panel on Climate Change, l11ff, 122, 124 Internet, 112, 118, 139, 166 Inuit, 183, 186, 187 "Invisible hand," 97, 98 iPhone,l iPod,l Iraq war, 3, 24, 76, 91ff, 94, 127,135,150-153 Jacobs,]., 168 James, W, 81 Japan, 131,133, 150 Jenner, Eo, 16 John Paul II, 101 Joy, W, 68 Kass, L., 21 Kepler,]., 101, 173 Kondratieff waves, 79ff, 192 Koniggriitz, Battle of, 75, 76 Krishna, 119 Kurzweil, Ro, 8, 18,68 Kyoto Protocol, 67, 109, 111, 193 Land mines, 150 Las Vegas, 152 Lawrence Livermore National Laboratory, 89 Leopold, Ao, 181 Libertarian approach to human enhancement,21ff 220 Index Lindblom, c., 93 Long-Term Capital Management,92 "Long waves" of innovation, 79££ Maginot Line, 135 Malaria, 47££, 53 Malaysia, 139 Maoism, 31, 121 Marlboro Man, 135 Marne, Battle of, 76 Marxism, 110, 114, 121, 172 Marx, K., 64, 70, 173 Maslow, A., 33 McKibben,~.,21, 101 McKinsey & Company, 49 McNeill, ].

 

pages: 302 words: 73,581

Platform Scale: How an Emerging Business Model Helps Startups Build Large Empires With Minimum Investment by Sangeet Paul Choudary

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3D printing, Airbnb, Amazon Web Services, barriers to entry, bitcoin, blockchain, business process, Clayton Christensen, collaborative economy, crowdsourcing, cryptocurrency, data acquisition, frictionless, game design, hive mind, Internet of things, invisible hand, Kickstarter, Lean Startup, Lyft, M-Pesa, Mark Zuckerberg, means of production, multi-sided market, Network effects, new economy, Paul Graham, recommendation engine, ride hailing / ride sharing, shareholder value, sharing economy, Silicon Valley, Skype, Snapchat, social graph, social software, software as a service, software is eating the world, Spread Networks laid a new fibre optics cable between New York and Chicago, TaskRabbit, the payments system, too big to fail, transport as a service, two-sided market, Uber and Lyft, Uber for X, Wave and Pay

Increasingly, many industries that have traditionally been considered non-tech, including retail, transportation, and consumer goods, are opening up APIs to encourage innovation by coalescing an external ecosystem of developer-partners. THE INVISIBLE HAND IS THE NEW IRON FIST The business processes that enabled pipe scale have historically been managed via hierarchies. As value creation in a platformed world moves to networks, we need a new form of management and culture, both inside and outside the organization. Hierarchies are based on rules and compliance, which require a unidirectional flow of information from the top down. This iron fist is giving way to the invisible hand. This is most evident in the rise of on-demand labor platforms where the invisible hand of algorithms and APIs dispatches supply to meet demand. The invisible hand – typically taking the form of algorithmic decisions – nudges producers to continue creating value on the platform.

The invisible hand – typically taking the form of algorithmic decisions – nudges producers to continue creating value on the platform. In a networked age, we are moving from a world of command and control to a self-serve world where user participation is encouraged through an invisible hand powered by data, APIs, and algorithms. PLATFORM SCALE IMPERATIVE A world of pipes creates value through linear processes managed through command-and-control mechanisms, contractual integration, and internal labor and resource allocation. Platforms move away from closed, controlled processes to open, enabled interactions. The management of platforms must be designed around the goal of enabling interactions between producers and consumers in a platform’s ecosystem. The platform manifesto lays out the changes in business principles that are occurring as we move from a world of managing processes to a world of enabling interactions on plug-and-play platforms.

User journeys are the new sales funnels 9. Distribution is the new destination 10. Behavior design is the new loyalty program 11. Data science is the new business process optimization 12. Social feedback is the new sales commission 13. Algorithms are the new decision makers 14. Real-time customization is the new market research 15. Plug-and-play is the new business development 16. The invisible hand is the new iron fist 1.3 THE RISE OF THE INTERACTION-FIRST BUSINESS A Fundamental Redesign Of Business Logic Platforms compete with each other on the basis of their ability to enable interactions sustainably. Platforms do not compete merely on the strength of better features or larger user bases. They build sustainable businesses when producers and consumers participate regularly in interactions.

 

The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

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air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business process, call centre, capital controls, central bank independence, collateralized debt obligation, collective bargaining, conceptual framework, Corn Laws, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Hernando de Soto, income inequality, income per capita, invisible hand, Joseph Schumpeter, labor-force participation, labour market flexibility, laissez-faire capitalism, land reform, Long Term Capital Management, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, new economy, North Sea oil, oil shock, open economy, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, reserve currency, risk tolerance, Ronald Reagan, shareholder value, short selling, Silicon Valley, special economic zone, the payments system, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, working-age population, Y2K

T H E AGE OF T U R B U L E N C E phasize personal initiative: "The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security is so powerful a principle, that it is alone, and without any assistance . . . capable of carrying on the society to wealth and prosperity" He concluded that to enhance the wealth of a nation, every man, consistent with the law, should be "free to pursue his own interest his own way" Competition was a key factor because it motivated each person to become more productive, often through specialization and division of labor. And the greater the productivity, the greater the prosperity This led Smith to his most famous turn of phrase: individuals who compete for private gain, he wrote, act as if "led by an invisible hand" to promote the public good. The metaphor of the invisible hand, of course, captured the world's imagination—possibly because it seems to impute a godlike benevolence and omniscience to the market, whose workings are in reality as impersonal as natural selection, which Darwin came along and described more than half a century later. The expression "invisible hand" does not seem to have been very important to Smith; in all his writings, he used it only three times. The effect it describes, however, is something he discerns at every level of society, from the great flows of goods and commodities between nations to everyday neighborhood transactions: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."

The resulting advance of global financial markets has markedly improved the efficiency with which the world's savings are invested, a vital indirect contributor to world productivity growth.* As I saw it, from 1995 forward, the largely unregulated global markets, with some notable exceptions, appeared to be moving smoothly from one state of equilibrium to another. Adam Smith's invisible hand was at work on a global scale. But what does that invisible hand do? Why do we experience extended periods of stable or rising employment and output and only gradually changing exchange rates, prices, wages, and interest rates? Are we fools to trust such stability when we see it in the markets? Or, as a newly anointed finance minister once asked, "How can we control the inherent chaos of unregulated international trade and finance without significant governmental intervention?"

After being forced into retreat by its failures of the 1930s and the subsequent expansion of state intervention through the 1960s, market capitalism slowly reemerged as a potent force, beginning in earnest in the 1970s, until it now pervades 14 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright. I NTRODUCTION almost all of the world to a greater or lesser extent. The spreading of a commercial rule of law and especially the protection of the rights to property has fostered a worldwide entrepreneurial stirring. This in turn has led to the creation of institutions that now anonymously guide an ever-increasing share of human activity—an international version of Adam Smith's "invisible hand." As a consequence, the control of governments over the daily lives of their citizens has lessened; the forces of the marketplace have gradually displaced some significant powers of the state. Much regulation promulgating limits to commercial life has been dismantled. Throughout the early post-World War II years, international capital flows were controlled and exchange rates were in the grip of finance ministers' discretion.

 

pages: 561 words: 87,892

Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

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Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, Francis Fukuyama: the end of history, full employment, George Akerlof, German hyperinflation, Gini coefficient, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, knowledge economy, labour market flexibility, labour mobility, low skilled workers, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

The price mechanism, in turn, is a remarkably efficient way of allowing us to make informed choices about scarcity. If something is expensive, its opportunity cost may be high. If something is cheap, its opportunity cost might be correspondingly low. Adam Smith (1723–1790), one of the economic greats and now deservedly immortalized on the Bank of England £20 note, called the price mechanism the ‘invisible hand’.8 Many people have been seduced by Smith’s ideas, sufficiently so as to claim that free markets are the sole reason behind the West’s ongoing prosperity. Yet markets do not always work very well. They are not very good at identifying the environmental consequences of our actions. They do not cope well when there is a lack of well-established property rights. Why invest, for example, if your profits are siphoned off by an avaricious government or by a Mafia-style protection racket?

But if inflation moves away from the target by more than 1 percentage point … I shall expect you to send an open letter to me … setting out … the reasons why inflation has moved away from target … the policy action which you are taking to deal with it … [and] the period within which you expect inflation to return to the target.8 In other words, price stability is, like the UK prime minister, first among equals. Even for those central banks with more than one economic objective, price stability is typically the most important. The central bank’s job is thus to safeguard the value of the currency. Price stability matters because Adam Smith’s invisible hand works best free of distortions. But in both the American and British mandates, there is no explicit recognition that inflation is determined not just by domestic policies but also by developments elsewhere in the world, other than by reference to ‘shocks and disturbances’. The rise of the emerging economies appears to be of no significant consequence. Yet exchange rates, interest rates, commodity prices, manufactured-goods prices and all sorts of other prices are now increasingly under the emerging economies’ spell.

The philosophies of the British East India Company are beginning to return, but, this time, they’re being embraced by the emerging world. This is economics at its most political. *This is unashamedly a paraphrase: the actual language used is not fit to print. CHAPTER SEVEN WHO CONTROLS WHAT? THE RISE OF STATE CAPITALISM OVERRULING THE MARKET Globalization creates winners and losers. The benefits and costs of globalization are randomly distributed by the market’s invisible hand across and within sovereign states. State capitalism, arguably, can be seen as an attempt to overrule this process. It offers a chance to exert government control over resources that might otherwise be lost through market forces to higher bidders elsewhere. State capitalism can be used to ensure resources are either retained for domestic consumption or used as bargaining chips in the exertion of global economic and political power.

 

pages: 255 words: 75,172

Sleeping Giant: How the New Working Class Will Transform America by Tamara Draut

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affirmative action, Affordable Care Act / Obamacare, battle of ideas, big-box store, blue-collar work, collective bargaining, David Brooks, declining real wages, deindustrialization, desegregation, Detroit bankruptcy, Donald Trump, Edward Glaeser, ending welfare as we know it, Ferguson, Missouri, financial deregulation, full employment, immigration reform, income inequality, invisible hand, job satisfaction, knowledge economy, knowledge worker, low skilled workers, minimum wage unemployment, mortgage tax deduction, new economy, obamacare, occupational segregation, payday loans, pink-collar, Plutocrats, plutocrats, profit motive, race to the bottom, Ralph Nader, rent-seeking, rising living standards, Ronald Reagan, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, trickle-down economics, union organizing, upwardly mobile, War on Poverty, white flight, women in the workforce, young professional

Brady, Kay Lehman Scholzman, and Sidney Verba, The Unheavenly Chorus: Unequal Political Voice and the Broken Promise of American Democracy (Princeton, N.J.: Princeton University Press, 2012), p. 361. 26. Kim Phillips-Fein, Invisible Hands: The Businessmen’s Crusade Against the New Deal (New York: W. W. Norton & Company, 2010), p. 153. 27. Ibid., pp. 151–56. 28. Lewis Powell, “Attack on American Free Enterprise System,” August 23, 1971. The Washington and Lee University School of Law, which Lewis Powell attended, maintains an archive of his writing and work. The complete text of the Powell Memorandum is available on the website http://law2.​wlu.​edu/​powell​archives/​page.​asp?​pageid=​1251, and from many other sources on the Internet. 29. Phillips-Fein, Invisible Hands, p. 154. 30. Jacob S. Hacker and Paul Pierson, Winner-Take-All-Politics: How Washington Made the Rich Richer and Turned Its Back on the Middle Class (New York: Simon and Schuster, 2010), p. 116. 31.

Hacker and Paul Pierson, Winner-Take-All-Politics: How Washington Made the Rich Richer and Turned Its Back on the Middle Class (New York: Simon and Schuster, 2010), p. 116. 31. Powell, “Attack on American Free Enterprise System.” 32. Phillips-Fein, Invisible Hands, pp. 166–70. 33. Ibid., p. 188. 34. Hacker and Pierson, Winner-Take-All-Politics, p. 117. 35. Ibid., p. 119. 36. Ibid. 37. Ibid., p. 121. 38. Phillips-Fein, Invisible Hands, p. 187. 39. Alyssa Katz, The Influence Machine: The U.S. Chamber of Commerce and the Corporate Capture of American Life (New York: Spiegel & Grau, 2015), p. 15. 40. Lee Drutman, The Business of America Is Lobbying: How Corporations Became Politicized and Politics Became More Corporate (New York: Oxford University Press, 2015), pp. 8–9. 41. John Logan, “The Union Avoidance Industry in the USA,” British Journal of International Relations (December 2006): p. 653. 42.

CEOs passed the memo along to each other, and in short order several rich capitalists stepped up to respond to the call, establishing and generously funding what are now the dominant conservative think tanks in America: the Heritage Foundation, the American Enterprise Institute, the Manhattan Institute, and the Cato Institute.32 It didn’t take long for Powell’s call to arms to be realized. Kim Phillips-Fein catalogs in Invisible Hands the growing army that was assembled to advance the free enterprise idea. The number of corporate PACs grew from 89 in 1974 to 821 in 1978. These PACs quickly became a giant tributary of political campaign funding, rapidly outpacing the number of union PACs, which stabilized at 250.33 The business lobbying brigade was also formed during the 1970s, mushrooming from only 175 companies employing lobbyists in 1971 to over 2,500 by 1982.34 Meanwhile, the Chamber of Commerce grew exponentially, doubling in membership and tripling its budget between 1974 and 1980, while the National Federation of Independent Businesses doubled its membership over the same time.35 The membership of these two groups covered a wide range of American small and midsized businesses.

 

pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

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Albert Einstein, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, Berlin Wall, Bernie Madoff, Black-Scholes formula, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, market clearing, Mason jar, mental accounting, meta analysis, meta-analysis, More Guns, Less Crime, mortgage debt, Nash equilibrium, Nate Silver, New Journalism, nudge unit, payday loans, Ponzi scheme, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Walter Mischel

In fact, an early pioneer of what we would now call a behavioral treatment of self-control was none other than the high priest of free market economics: Adam Smith. When most people think about Adam Smith, they think of his most famous work, The Wealth of Nations. This remarkable book—the first edition was published in 1776—created the foundation for modern economic thinking. Oddly, the most well-known phrase in the book, the vaunted “invisible hand,” mentioned earlier, appears only once, treated with a mere flick by Smith. He notes that by pursuing personal profits, the typical businessman is “led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it.” Note the guarded language of the second sentence, which is rarely included (or remembered) by those who make use of the famous phrase, or invoke some version of the invisible handwave.

Chapter 6: The Gauntlet 44 whether real managers actually behaved this way: See Mongin (1997) and Frischmann and Hogendorn (2015) for a review of this debate on marginal analysis. 45 “This paper raises grave doubts”: Lester (1946). 45 “He would simply rely on his sense or his ‘feel’ of the situation”: Machlup (1946). 46 billiard players: Friedman (1953), p. 21. 48 “preference reversals”: Lichtenstein and Slovic (1973). 49 Raising the stakes made things worse: Grether and Plott (1979). 51 “Suppose there were people doing silly things”: Markets can actually exacerbate welfare losses resulting from the presence of consumer biases. Firms may not have an incentive to debias consumers since under some circumstances, firm profits are increasing in the degree of naiveté: credit card late payment fees (Heidhues and Kszegi, 2010); gym memberships (DellaVigna and Malmendier, 2006); printer cartridges and hotel room shrouded fees (Gabaix and Laibson, 2006). 51 Adam Smith’s invisible hand: For a thoughtful take on how to think about the concept of the invisible hand, see Ullmann-Margalit (1997). 52 transform people into rational agents: The study of how profit-maximizing firms interact with Human consumers is the subject of the exciting field of behavioral industrial organization. For a textbook treatment see Spiegler (2011). The examples discussed in chapter 13 are also relevant. 52 failing to act in accordance with the rational agent model is not fatal: For a thorough analysis of these kinds of arguments see Russell and Thaler (1985), Haltiwanger and Waldman (1985), and Akerlof and Yellen (1985). 53 “An Economic Theory of Self-Control”: Thaler and Shefrin (1981).

I have not been able to find such an argument in Friedman’s writings, but at Rochester at that time, people attributed it to Uncle Miltie, as he was lovingly called. The speech goes something like this. “Suppose there were people doing silly things like the subjects in your experiments, and those people had to interact in competitive markets, then . . .” I call this argument the invisible handwave because, in my experience, no one has ever finished that sentence with both hands remaining still, and it is thought to be somehow related to Adam Smith’s invisible hand, the workings of which are both overstated and mysterious. The vague argument is that markets somehow discipline people who are misbehaving. Handwaving is a must because there is no logical way to arrive at a conclusion that markets transform people into rational agents. Suppose you pay attention to sunk costs, and finish a rich dessert after a big dinner just because you paid for the dessert.

 

pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

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Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business process, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, Commodity Super-Cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, family office, fiat currency, fixed income, follow your passion, full employment, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, invisible hand, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, market microstructure, moral hazard, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, purchasing power parity, quantitative easing, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, savings glut, Sharpe ratio, short selling, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, The Great Moderation, time value of money, too big to fail, transaction costs, unbiased observer, value at risk, Vanguard fund, yield curve

Through another series of interviews, this time with top global hedge fund traders who managed risk well through 2008 and into 2009, the book highlights certain valuable elements of the global macro approach that could be applied to other mandates within money management. The Invisible Hands begins by defining and discussing the importance of real money management. It then discusses the evolution of real money management and raises some important questions about how real money portfolios are constructed. Next, the experts speak for themselves. First, my business partner Dr. Andres Drobny, “The Researcher,” discusses where the global economy is headed. Then, “The Family Office Manager,” Jim Leitner, addresses the lessons he learned in 2008 and offers his own thoughts on rethinking real money. Next, the “Invisible Hands”—10 anonymous global macro hedge fund managers, the Philosopher, the House, the Professor, et al—discuss how they approach money management, how they managed to make money or avoid large losses in the crisis, and how they would address some of the challenges faced by real money managers.

Focusing on 2007-2008 brings into stark focus the possibility of buying cheap insurance when the market is willing to sell it, before the horse has left the barn. Part Two The Invisible Hands [E]every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Table of Contents Title Page Copyright Page Dedication Praise Foreword Preface Part One - REAL MONEY AND THE CRASH OF ‘08 Chapter 1 - Rethinking Real Money I. Why Real Money? II. The Evolution of Real Money III. RETHINKING REAL MONEY—MACRO PRINCIPLES Chapter 2 - The Researcher Chapter 3 - The Family Office Manager Part Two - The Invisible Hands Chapter 4 - The House Chapter 5 - The Philosopher Chapter 6 - The Bond Trader Chapter 7 - The Professor Chapter 8 - The Commodity Trader Chapter 9 - The Commodity Investor Chapter 10 - The Commodity Hedger Chapter 11 - The Equity Trader Chapter 12 - The Predator Chapter 13 - The Plasticine Macro Trader Part Three - FINAL WORD Chapter 14 - The Pensioner Conclusion Acknowledgements Bibliography About the Author Index Copyright © 2010 by Steven Drobny.

 

pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, invisible hand, Isaac Newton, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, New Journalism, Nikolai Kondratiev, Paul Lévy, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, South Sea Bubble, statistical model, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, volatility smile, Yogi Berra

“They do not understand that all parts of society hold together,” he wrote in 1883 in one of a series of Harper’s articles later bundled into the classic tract What the Social Classes Owe to Each Other, “and that forces which are set into action act and react throughout the whole organism, until an equilibrium is produced by a readjustment of all interests and rights.”10 The concept of equilibrium, in which competing influences balance each other out, lends itself naturally to mathematical treatment (all it takes is an equal sign) and was crucial to the early development of chemistry and physics. Hints of it had already appeared in economics—Scotsman Adam Smith’s notion of an “invisible hand” steering selfish individuals toward societally beneficial results was the most famous example11—but attempts to build a unified theory of economics around it had foundered upon the imprecision of the field. Economists were long stuck, for example, on the crucial question of what gave a product value. Was it the labor that went into producing it? Its abundance or scarcity? Its usefulness? Some combination of all three?

The abstract high point of the economic theorizing enabled by such simplifying assumptions came from two young scholars who had worked at the Cowles Commission, Kenneth Arrow and Gerard Debreu.9 In one paper written together and in several separate works in the 1950s, the two men rebuilt economic equilibrium theory from the ground up. What has since come to be known as “Arrow-Debreu equilibrium” (or the “Arrow-Debreu framework,” the “Arrow-Debreu paradigm,” or just plain “Arrow-Debreu”) amounted to a mathematical proof of the existence of Adam Smith’s invisible hand. This version was far more logically consistent and mathematically sophisticated than its predecessors. Crucially, it made room for economic actors who couldn’t see perfectly into the future. What was needed to achieve equilibrium under uncertainty was what Arrow termed a “complete” securities market, in which one could bet on or insure against every possible future state of the world. No such market existed, of course, and Arrow spent much of the rest of his career exploring ways that economic reality diverged from equilibrium theory.

“A lot of us who took the antitrust course or the economics course underwent what can only be called a religious conversion,” said Robert Bork, who studied law at Chicago in the early 1950s. “It changed our view of the entire world.”18 Many of Director’s students went on to make his economics teachings the focal point of their careers. An academic movement had been launched. Director’s main message was that things happened in the business world for a reason, and that when one looked hard enough one would usually find Adam Smith’s invisible hand at work—even at General Motors. “In each of the various practices he has analyzed (tie-in sales, patents, resale price maintenance, etc.) he has sought the profit-seeking reason that led businessmen to adopt the practice,” wrote Chicago economist and kindred spirit George Stigler. “Sometimes the reason was the exercise of monopoly power, but other times an important efficiency was achieved by the practice.”19 As a result, Director argued, there was far less need for antitrust laws, or consumer protection regulations, than was commonly believed.

 

pages: 400 words: 94,847

Reinventing Discovery: The New Era of Networked Science by Michael Nielsen

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Albert Einstein, augmented reality, barriers to entry, bioinformatics, Cass Sunstein, Climategate, Climatic Research Unit, conceptual framework, dark matter, discovery of DNA, double helix, Douglas Engelbart, en.wikipedia.org, Erik Brynjolfsson, fault tolerance, Fellow of the Royal Society, Firefox, Freestyle chess, Galaxy Zoo, Internet Archive, invisible hand, Jane Jacobs, Jaron Lanier, Kevin Kelly, Magellanic Cloud, means of production, medical residency, Nicholas Carr, publish or perish, Richard Feynman, Richard Feynman, Richard Stallman, semantic web, Silicon Valley, Silicon Valley startup, Simon Singh, Skype, slashdot, social web, statistical model, Stephen Hawking, Stewart Brand, Ted Nelson, The Death and Life of Great American Cities, The Nature of the Firm, The Wisdom of Crowds, University of East Anglia, Vannevar Bush, Vernor Vinge

By being so credited they can build up a reputation, which can be turned into a paying job. It’s a type of property rights in ideas, leading to an economy based on reputation, and establishing an invisible hand for science that strongly motivates scientists to share their results. The foundation for this reputation economy is a set of very strong social norms: scientists must credit other people’s work; they cannot plagiarize; and scientists judge other scientists’ work by their record of publishpapers. But these norms focus on just one way of sharing scientific knowledge: the scientific paper. If we could establish similar norms and a reputation economy that encourages broader sharing of scientific knowledge, then the invisible hand of science would become stronger, and the process of science would be greatly accelerated. How can we expand science’s reputation economy in this way?

(When Polanyi was writing, the grant agencies had far smaller budgets, anonsequently much less power.) I agree with Polanyi’s concerns—indeed, it’s tempting to write a follow-up essay on “The Oligarchy of Science”—but the point of the current discussion is, of course, to find best actions in the world we find ourselves in, not in some idealized world. p 193: On property rights in ideas and the invisible hand in science, see [172,48]; an interesting general article on invisible hand explanations is [230]. I don’t know where the term “reputation economy” originates; it has been in wide use since the 1990s (and perhaps earlier), but the idea is much older. p 194: SPIRES is at http://www.slac.stanford.edu/spires/. The physics preprint arXiv is, as previously noted, at http://arxiv.org. p 195: On new ways of measuring science, see, for instance, [175] and references therein.

Internet groupware for scientific collaboration. 2000. http://jonudell.net/GroupwareReport.html. [228] Jon Udell. Sam’s encounter with manufactured serendipity. Jon Udell’s Radio blog, March 4, 2002. http://radio-weblogs.com/0100887/2002/03/04.html. [229] UK Medical Research Council policy on data sharing and preservation. http://www.mrc.ac.uk/Ourresearch/Ethicsresearchguidance/ Datasharinginitiative/Policy/index.htm. [230] Edna Ullmann-Margalit. Invisible-hand explanations. Synthese, 39(2): 263–291, 1978. [231] Vernor Vinge. Rainbows End. New York: Tor, 2007. [232] Steven S. Vogt, R. Paul Butler, Eugenio J. Rivera, Nader Haghighipour, Gregory W. Henry, and Michael H. Williamson. The Lick-Carnegie Exoplanet Survey: A 3.1 M_Earth planet in the habitable zone of the nearby M3V star Gliese 581. eprint arXiv:1009.5733, 2010. [233] Eric von Hippel.

 

pages: 340 words: 91,387

Stealth of Nations by Robert Neuwirth

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accounting loophole / creative accounting, big-box store, British Empire, call centre, collective bargaining, corporate governance, full employment, Hernando de Soto, illegal immigration, income inequality, informal economy, invisible hand, Jane Jacobs, jitney, joint-stock company, Joseph Schumpeter, megacity, microcredit, New Urbanism, pirate software, profit motive, Shenzhen was a fishing village, Simon Kuznets, special economic zone, The Wealth of Nations by Adam Smith, thinkpad, upwardly mobile

A century later, here’s what Adam Smith had to say about inequality in The Theory of Moral Sentiments, his first book, which he published in 1759: The rich … consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same division of necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants; and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. This was Smith’s first use of “invisible hand,” the phrase that would become his most captivating, most enduring, and most controversial literary creation. It’s a great economic fantasy: the master unwittingly shares everything equally with his slaves; lords and ladies with their servants; royalty with the plebes; bosses with their workers; and capitalism is really communism.

Even in his time, the rich didn’t restrict their consumption to little more than the poor (King George II received an annual allotment of almost £900,000 from the national treasury to support his retinue, while the average clerk at a joint stock company earned perhaps £200 a year and the average laborer more likely on the order of £50) and, left to their own devices, didn’t ensure that the necessities of life were apportioned equally among all (otherwise there would have been no need for the aristocracy to pass the Poor Laws, which treated unemployment and poverty as crimes rather than as consequences of other people’s economic decisions). Perhaps this was why Smith lowered the profile of the invisible hand the single time he mentioned it in The Wealth of Nations. Sixty years after Smith died, the French journalist and utopian thinker Pierre-Joseph Proudhon articulated a revolutionary plan to spur growth and reduce inequality based on superabundant credit (Proudhon proposed forcing interest rates down to between one-fourth and one-half of 1 percent), and increasing local control (his plan called for the creation of a massive number of cooperative associations to manage the economy based on reciprocity, voluntary contract, and buying and selling at a just price).

It allows previously disenfranchised and disempowered people to reach a level of economic empowerment. It encourages illegal migrants—like the recycler from Henan province—to build a future in a place they are not allowed to live (and, perhaps, over time, to emerge as a constituency that can organize against restrictive rules like the five-decade-old houkou system). There’s no doubt that it’s hard to reconsider or reformulate cherished notions like Adam Smith’s invisible hand. But, as Kuznets pointed out in his Nobel speech, if those notions simply don’t fit reality, and if the things the market has tried so far have not ameliorated the problem—if they had, lack of employment and income inequality would not continue to plague the world—then it’s not too much to suggest that we at least should ask why the dominant economic theories and conventional market institutions are not working.

 

pages: 791 words: 85,159

Social Life of Information by John Seely Brown, Paul Duguid

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AltaVista, business process, Claude Shannon: information theory, computer age, cross-subsidies, disintermediation, double entry bookkeeping, Frank Gehry, frictionless, frictionless market, future of work, George Gilder, global village, Howard Rheingold, informal economy, information retrieval, invisible hand, Isaac Newton, Just-in-time delivery, Kevin Kelly, knowledge economy, knowledge worker, loose coupling, Marshall McLuhan, medical malpractice, moral hazard, Network effects, new economy, Productivity paradox, rolodex, Ronald Coase, shareholder value, Silicon Valley, Steve Jobs, Superbowl ad, Ted Nelson, telepresence, the medium is the message, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, Turing test, Vannevar Bush, Y2K

De Long and Froomkin even suggest that such frictionlessness might disable the "Invisible Hand." The great classical economist Adam Smith used the image of the invisible hand to describe forces that reconcile the pursuit of private interests through markets with the public good and with what we have called the social fabric. If not actually producing good, at least the invisible hand prevents the pursuit of private interests from doing harm. "Assumptions which underlie the microeconomics of the Invisible Hand," de Long and Froomkin conclude, "fray badly when transported to the information economy."26 Better bots, then, will require a better understanding of human negotiation, the contribution of the social fabric, and the role of human restraint in the functioning of the invisible hand. Development will be ill served by people who merely redefine elaborate social processes in terms of the things that bots do well.

The second includes "time users spend in a befuddled state while clearing up unexplained happenings [and] overcoming the confusion and panic when computers produce enigmatic messages that stop work." 24 Home office workers usually lack this sort of cash. More significantly, they lack necessary peer support. Consequently, with Page 78 current technology, money-losing futzing, late at night and early in the morning, is endemic to the home office. Lacking the boundaries and structures provided by office life, work spills relentlessly over into private and family life. Invisible Hands Within organizations, this stealth spending is readily hidden from those at the top. Unfortunately, so is the need for such spending. Life at Xerox brought us face to face with this issue, too, this time over the matter of copier design. Xerox has long made usability a critical issue for the design and marketing of its photocopiers. With one series of copiers, however, reports came back from the field saying that machines were proving unmanageable for most people.

 

pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

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Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, invisible hand, Jean Tirole, joint-stock company, Kenneth Rogoff, knowledge economy, l'esprit de l'escalier, labor-force participation, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, payday loans, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, War on Poverty, Washington Consensus, We are the 99%, working poor

They fall from the presses, not stillborn, but clone-dead. The cynic might say: Leave it to academics to turn a pervasive human disaster into another unsustainable growth industry. What could be the purpose of yet another jokey variation on the metaphor of the “Invisible Hand” on the cover of some text that purports to convince us that a very few select events or principles (usually a prime number) constitute the Rosetta Stone for decoding recent events? The distance from self-help books (Six Things Momma Taught Me to Succeed When Good People Do Bad Things) to crisis prescription books (Dunk That Invisible Hand in Talcum Powder and Snap on the Handcuffs) and get-rich-quick books (Who’s Afraid of the Big Black Swan?) narrows precipitously in the modern marketplace of ideas. Rest assured this will not be another of those books “about the crisis,” in the sense of purveying yet one more play-by-play account of who did what to whom.

There was a short interlude when editorial cartoonists and TV comedians tried to turn the whole thing into a joke, portraying how buffoon bankers bemoaned that the restive public just could not understand that they were the only ones who could clean up the godawful mess they had made, and proved petulant and unrepentant when Uncle Sam unloaded truckloads of money to pay them to do just that. As usual, reality outpaced satire when the former CEO of AIG, Hank Greenberg, brought suit against the U.S. government for not bailing out AIG at a sufficiently munificent rate.13 Bitter comic mordancy can be ripping fun; but a nagging voice whispers: isn’t it just too easy to make fun of the Invisible Hand? Isn’t there something lazy about Stephen Colbert and Jon Stewart? Is the right response to the nightmare of crisis fatigue to laugh it off? What if the people who helped bring on the crisis were quite literally laughing all the way to the bank as the financial system approached the precipice? Gales of merriment apparently rocked the meetings of the Federal Reserve Open Market Committee, as revealed by a tabulation of all the recorded instances of stipulated “[laughter]” in meetings transcripts from 2001 to 2006, reproduced in Figure 1.1.14 Figure 1.1: Hilarity at the Federal Reserve * * * * * * Source: Federal Reserve FOMC Transcripts, Graph created by Daily Stag Hunt Sometimes the best response to crisis fatigue is not an injunction to recover your flagging sense of humor, or to aspire to the status of he who laughs last.

Paul Krugman, feeling secure in his status, has conveniently confessed to the derangement: The brand of economics I use in my daily work—the brand that I still consider by far the most reasonable approach out there—was largely established by Paul Samuelson back in 1948, when he published the first edition of his classic textbook. It’s an approach that combines the grand tradition of microeconomics, with its emphasis on how the invisible hand leads to generally desirable outcomes, with Keynesian macroeconomics, which emphasizes the way the economy can develop magneto trouble, requiring policy intervention. In the Samuelsonian synthesis, one must count on the government to ensure more or less full employment; only once that can be taken as given do the usual virtues of free markets come to the fore. It’s a deeply reasonable approach—but it’s also intellectually unstable.

 

pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Washington Consensus

Experience suggests that it will—and that the main mechanism for this survival will be the Micawber Principle: the seemingly improvident assumption that a problem postponed long enough is, effectively, a problem solved. Hoping that “something will turn up” may sound like deluded wishful thinking, but it is really just an extension into politics and macroeconomics of Adam Smith’s arguments about the self-organizing dynamics of the capitalist economy. Smith showed how the “invisible hand” of competitive markets automatically coordinates the actions of millions of individuals pursuing their own self-interest so that they satisfy each other’s needs, despite the fact that no one is thinking consciously about the common good. This same invisible hand steers individual initiative and creativity toward solutions of society’s collective problems, provided two conditions are satisfied. First, the process of spontaneous self-organization must be given enough time to produce new adaptations after each of capitalism’s periodic crises.

But they were crystallized by Adam Smith in The Wealth of Nations, producing some astonishingly counterintuitive revelations. Smith observed that a market economy, although it involves millions of unconnected individuals who work at highly specialized and narrow tasks, is a naturally self-organizing mechanism provided a few simple rules of commerce and mutual trust are generally obeyed and enforced. This self-organizing system produces mutually satisfactory outcomes as if it were guided by an “invisible hand,” but without the need for supernatural or divine intervention. And individuals, as long as they act predictably within this mutually agreed social framework, can satisfy each other’s material needs simply by pursuing their own self-interest. To provide useful services to other people, we do not need to know them, love them, or anticipate their desires. As Smith said: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.”3 The miraculous efficiency of the market system, taken for granted everywhere today, was far from obvious to half of humanity just a few decades ago, as illustrated by the famous, though probably apocryphal, anecdote about Nikita Khrushchev’s first trip to the United States.

One, 3 billion new consumers, producers, and savers joined the global capitalist system from the late 1980s onward, roughly doubling the potential size of the world economy and vastly increasing its potential growth rate for decades ahead. What set off this dynamic megatrend was the interaction between three historic events described in the last chapter—the breakup of the Soviet bloc, the opening up of China, and the end of proxy wars between communism and capitalism in the developing world. The result was that almost the entire world’s population found their lives guided for the first time by the invisible hand of market forces, instead of being ruled by the iron fists of communism and feudalism or the clumsy robotic grip of central planning. Two, globalization transformed almost every economic activity in every country, as the principles of market competition, private enterprise, and free trade won universal acceptance after the breakdown of central planning and state ownership. In effect, the entire world economy started moving toward a NAFTA-style free trade area, if not quite a European-style single market.

 

pages: 590 words: 153,208

Wealth and Poverty: A New Edition for the Twenty-First Century by George Gilder

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affirmative action, Albert Einstein, Bernie Madoff, British Empire, capital controls, cleantech, cloud computing, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversified portfolio, Donald Trump, equal pay for equal work, floating exchange rates, full employment, George Gilder, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, Jane Jacobs, Jeff Bezos, job automation, job-hopping, Joseph Schumpeter, knowledge economy, labor-force participation, margin call, Mark Zuckerberg, means of production, medical malpractice, minimum wage unemployment, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, mortgage debt, non-fiction novel, North Sea oil, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, post-industrial society, price stability, Ralph Nader, rent control, Robert Gordon, Ronald Reagan, Silicon Valley, Simon Kuznets, skunkworks, Steve Jobs, The Wealth of Nations by Adam Smith, Thomas L Friedman, upwardly mobile, urban renewal, volatility arbitrage, War on Poverty, women in the workforce, working poor, working-age population, yield curve

Increasing revenues come not from a mere scheme of carrots and sticks but from the development and application of productive knowledge. By focusing on incentives rather than on information, free market economists have encouraged the idea that capitalism is based on greed. But greed, in fact, prompts capitalists to seek government guarantees and subsidies that denature and stultify the works of entrepreneurs. Greed, as I put it in Wealth & Poverty, leads as by an invisible hand to an ever-growing welfare state—to socialism. It is not the enlargement of incentives and rewards that generates growth and progress, profits for the entrepreneur and revenues for the government, but the expansion of information and knowledge. The competitive pursuit of knowledge is not a dog-eat-dog Darwinian struggle. In capitalism, the winners do not eat the losers but teach them how to win through the spread of information.

Some apologists will say that Mark Zuckerberg’s Facebook billions were a reward for his brilliant entrepreneurship and software coding, while penury is the just outcome of alcoholism and improvidence. But Suzy Saintly, Barack Obama, and Dan Bricklin are neither improvident nor necessarily less brilliant than Mark. All these arguments are beside the point. The distributions of capitalism make sense, but not because of the virtue or greed of entrepreneurs, nor as inevitable byproducts of the invisible hand. The reason capitalism works is that the creators of wealth are granted the right and burden of reinvesting it. Warren Buffett worries that his average personal tax rate of 17 percent is “unfair” when his secretary pays more. The accuracy of his 17 percent calculation aside (it ignores the 39 percent corporate rate and 55 percent inheritance and other levies), the reason Buffett pays 17 percent has nothing to do with “fairness.”

The dilemma was resolved, however, at the very beginning of the industrial revolution by the leading philosopher of classical liberal economics. Adam Smith was at once an intellectual who shared all the typical prejudices against the business class and a libertarian conservative who knew the value of freedom and enterprise. His solution was to locate the source of wealth not in the creative activities of businessmen but in the “invisible hand” of the market. Smith believed that capitalism worked not because of the virtues of capitalists but because of the “great machine” of exchange that converted their apparent greed and vices into economic value. Businessmen may be vulgar and avaricious, full of “childish vanities” and selfish indulgences, said Smith, and “seldom do they gather but to conspire against the public.” But it was their very “self-love,” their avarice, their desire for self-indulgence that impelled the growth of economies.

 

pages: 304 words: 22,886

Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler, Cass R. Sunstein

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Al Roth, Albert Einstein, asset allocation, availability heuristic, call centre, Cass Sunstein, choice architecture, continuous integration, Daniel Kahneman / Amos Tversky, desegregation, diversification, diversified portfolio, endowment effect, equity premium, feminist movement, framing effect, full employment, George Akerlof, index fund, invisible hand, late fees, libertarian paternalism, loss aversion, Mahatma Gandhi, Mason jar, medical malpractice, medical residency, mental accounting, meta analysis, meta-analysis, Milgram experiment, pension reform, presumed consent, profit maximization, rent-seeking, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Saturday Night Live, school choice, school vouchers, transaction costs, Vanguard fund, Zipcar

After all, managers in the public sector have to answer to voters, and managers in the private sector have as their mandate the job of maximizing profits and share prices, not consumer welfare. Indeed, some of those who are most suspicious of governments think that the only responsibility of private managers is to maximize share prices. As we have emphasized, the invisible hand will, in some circumstances, lead those trying to maximize profits to maximize consumer welfare too. But when consumers are confused about the features of the products they are buying, it can be profit maximizing to exploit their confusion, especially in the short run but possibly in the long run too. The invisible hand works best when products are simple and purchased frequently. We worry very little about consumers being ripped off by their dry cleaners. A dry cleaner who loses shirts or suddenly doubles prices will not be in business long. But a mortgage broker who fails to point out that the teaser rate will disappear quickly is long gone by the time the customer gets the bad news.

And what is to stop lobbyists, axe-grinders and busybodies of all kinds hijacking the whole effort?”2 We agree that government officials, elected or otherwise, are often captured by private-sector interests whose representatives are seeking to nudge people in directions that will specifically promote their selfish goals. That is one reason that we want to maintain freedom of choice. But if private-sector interests are just following the invisible hand in furthering the interests of their customers, what’s the problem?3 The more serious point is that we should be worried about all choice architects, public and private alike. We should create rules of engagement that reduce fraud and other abuses, that promote healthy competition, that restrict interest-group power, and that create incentives to make it more likely that the architects will serve the public interest.

In the environmental domain, we have suggested that disclosure can be an effective, and low-cost, monitoring device. We would love to see similar principles used to monitor governments. Require government officials to put all their votes, earmarks, and contributions from lobbyists on their Web sites. Require those determining the future of energy policy (to cite a random example) to reveal which profitmaximizing firms were invited to lend their all-too-invisible hands to the process of designing the rules. Require those determining the future of educational policy to reveal which interest groups, and which unions, gave them money in the most recent campaign. Require government agencies, not merely the private sector, to disclose their contributions to air and water pollution, and their greenhouse gas emissions. Supreme Court Justice Louis Brandeis urged that “sunlight is the best of disinfectants.”

 

pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

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accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, disintermediation, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, Hyman Minsky, If something cannot go on forever, it will stop, illegal immigration, income inequality, income per capita, invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey

What’s the right weight for policymakers to put on different indicators? How should they assess the metrics? One answer, the one many people would have given until recently, is that this challenge is best left to markets. Markets automatically reflect information widely dispersed through the economy and also the preferences of countless individuals, and aggregate all of that to match supply with demand, “as if by an invisible hand,” to use Adam Smith’s famous phrase. For a generation—certainly for the twenty years after the end of the Cold War and fall of communism—relying on market mechanisms seemed the obvious way to ensure the economy delivered for all. Questions of value and values fell out of fashion. For obvious reasons, the earlier big ideological questions of communism versus capitalism seemed to have been settled by history.

He believed that the moral foundations of both communism and capitalism were shaky; that the efficiency of the American economy in delivering on its citizens’ desires would threaten the ability to define a consensus on matters of public morality. Galbraith, in one of his most famous works, The Affluent Society (1958), challenged the assumption that the continual increase in material production was a sign of economic and societal health. Because of this he is considered to be one of the first postmaterialists. Fred Hirsch, in The Social Limits to Growth, argued that Adam Smith’s invisible hand was no longer operative in developed economies. He argued that the luxuries of one generation became necessities for the next as if society were a column moving steadily forward with the rich tasting the fruits that would eventually be conveyed to the rest of humanity. He predicted a future of increasing personal competition in an ever more vicious rat race and that such a process would have a detrimental impact on the moral fabric of society.

The Bottom Billion. New York: Oxford University Press. ———. 2010. The Plundered Planet. New York: Oxford University Press. Corrado, Carol, Charles Hulten, and Daniel Sichel. 2006. “Intangible Capital and Economic Growth.” Working Paper No. 11948. Cambridge, MA: Na: National Bureau of Economic Research. Cosmides, Leda, and John Tooby. 1994. “ Better than Rational: Evolutionary Psychology and the Invisible Hand.” The American Economic Review 84:2, pp. 327–32. Coyle, Diane. 1996. The Weightless World. Oxford: Capstone. ———. 2001. Paradoxes of Prosperity. New York: Texere. ———. 2003. “Corporate Governance, Public Governance, and Global Governance: The Common Thread.” Manchester, UK: University of Manchester, Institute of Political and Economic Governance. ———. 2007. The Soulful Science: What Economists Really Do and Why It Matters.

 

pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus

Just as it didn’t start the run on the repo, amplify the crash, or cause risk blindness, so the state had nothing to do with the design of the new instruction sheet. Indeed, the new instruction sheet was designed to keep the state as far away from market processes as possible. Morality was present to be sure, but it was an upturned morality where the naked self-interest of financial market actors was taken to be the most positive virtue because its pursuit led to optimal outcomes despite moral intention. Smith’s invisible hand had just given the public the finger. These new ideas were indeed a kind of morality play, but of a very odd type. But what mattered fundamentally was the failure of a set of ideas that justified finance doing whatever it liked because whatever it did was by definition the most efficient thing that could be done. These ideas were supposed to be “the way the world works.” So when it turned out that the world didn’t work that way, it was hardly a surprise that the rest of the edifice based on them came crashing down.

The difference between Hume and Smith is that while Hume identifies the problem, he offers no solution, seeing the slide into insolvency and enfeeblement as unavoidable. Smith goes one step better. He identifies both the problem and the solution. To solve the problem of debt we should embrace the principal of austerity—otherwise known as the parsimony of the Scots. Smith’s economics are a bit like Shakespeare—often quoted, seldom read. From his notes on the division of labor in the eponymous pin factory to the “invisible hand” guiding selfish actions to common purposes, Smith’s sound bites are well known. The details of what Smith said about the economy are far less well known and quite surprising. Smith brought together much of the scattered work of early economists on the nature of money, economic growth, the role of capital and labor, and a host of other issues, and then had the good sense to put it in one accessible place: The Wealth of Nations.25 As Albert Hirschman observed, this book was no academic project.

First, he showed that although any worker can accept a wage cut to price himself into employment, if all workers did this, it would in the aggregate lower consumption and prices, and thus increase the real wage (the wage-minus-price effects), leaving the worker who “adjusted” poorer and just as unemployed.106 Second, he showed that under conditions of uncertainty about the future, it is irrational for any investor to invest rather than sit on cash, with the result that if investors look to each other for signals about what to do, they all sit on cash and no one will invest.107 Thus we bring about, by our collective self-interested actions, the very depression we are individually trying to avoid. Smith’s invisible hand may well have arthritis, and austerity may make it worse. Keynes showed that decisions to save and invest were temporally separate, and that savings did not necessarily lead to investment. Saving could just as easily lead to hoarding and reduced consumption. The job of the state was, then, to alter the investors’ investment expectations by raising prices so that profits could be made, thereby making it rational to begin hiring workers again and, by doing so, to get out of the slump.

 

pages: 382 words: 92,138

The Entrepreneurial State: Debunking Public vs. Private Sector Myths by Mariana Mazzucato

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Apple II, banking crisis, barriers to entry, Bretton Woods, California gold rush, call centre, carbon footprint, Carmen Reinhart, cleantech, computer age, credit crunch, David Ricardo: comparative advantage, demand response, deskilling, energy security, energy transition, eurozone crisis, everywhere but in the productivity statistics, Financial Instability Hypothesis, full employment, Growth in a Time of Debt, Hyman Minsky, incomplete markets, information retrieval, invisible hand, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, natural language processing, new economy, offshore financial centre, popular electronics, profit maximization, Ralph Nader, renewable energy credits, rent-seeking, ride hailing / ride sharing, risk tolerance, shareholder value, Silicon Valley, Silicon Valley ideology, smart grid, Steve Jobs, Steve Wozniak, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, total factor productivity, trickle-down economics, Washington Consensus, William Shockley: the traitorous eight

‘me too’ 64–7; see also pharmaceutical companies (‘pharma’); specific drugs Duhigg, Charles 173–4 DuPont 178–9 economic crisis: boosting clean technologies 142–3; causes of 12, 182; public sector blamed for 15, 17; varied impact of in EU 41 Economist, view on State and enterprise 16 ‘ecosystems’: see innovation ecosystems electric cars/vehicles 108, 123, 124, 133 Electric Power Research Institute (EPRI) 151 Elias, John 102–3 email 104 End of Laissez Faire, The (Keynes) 4, 194 endogenous growth theory: see ‘new growth’ theory energy crisis 137, 144–5; see also green industrial revolution Energy Frontier Research Centers (EFRCs) 133 Enron 148 ‘enterprise zones’ 54 ‘entrepreneurial’ State: building of 54, 196–7; growth and inequality in 183; risk assumption and vision of 24; role of 6, 10, 21, 23; see also State Entrepreneurial State, The (report) 2, 3 entrepreneurs: DARPA’s brokering role with 77; financing of 57; investment choices of 136; myth of in Silicon Valley 63; risk types and 58–9; SBIR funding to 80, 188 EPA (Environmental Protection Agency) 150 equitable growth 13, 177, 185 European Organization for Nuclear Research (CERN) 101 ‘European Paradox’ 53 European Union: approach to green initiatives 124; ‘Big State’ behind innovation in 166; feed-in tariffs in 153; ‘fiscal compact’ of 42, 197; green transition targets in 115n2; gross R&D spending as percentage of GDP 43; growth producing spending in 196; investment in renewable energy 120, 121; public sectors in 17–18; R&D targets of 41; weaknesses of countries in 52–3 Evans, Peter 4 Evergreen Solar 151–2, 162 Evolutionary Theory of Economic Change, An (Nelson and Winter) 34–5 ‘evolutionary theory’ of production 34–5 ‘exogenous growth theory’ 34 externalities 4, 7, 21, 168; see also Apple Fadell, Tony 100n8; see also Apple Fairchild Semiconductor 76 fast Fourier transform (FDT) algorithm 109 feed-in tariffs: in energy technology 114; in European markets 153; German 122, 138, 149, 156; policy changes in 125n7; UK 124 Fert, Albert 96 Fiegerman, Seth 171n3 finance firms 182 financialization 25–8 FingerWorks 103 Finland 120n4, 121, 190 First Solar (formerly Solar Cells Inc.) 128–9, 151, 159–60; see also green industrial revolution Fiscal Investment Loan Program (Japan) 40 flat panel display (FPD) industry 106 Florida, Richard 107 Forbes on WuxiSuntech 153 ‘Fordist’ model of production in 38–9 Foxconn 170–71 France 61, 120, 120n4, 121 Freeman, Chris 193 Fuchs, Erica 133 Funding a Revolution: Government Support for Computing Research 63 G4S, security company 16 game theory 36 GDP, balance in categories of 30 Gedser turbine 145 Genentech Inc. 57, 69, 81 General Electric (GE) 125, 137, 147–8, 160–61, 174n5 general purpose technologies (GPTs) 62, 83 Genzyme 81, 181 Germany: feed-in tariffs 122, 138, 149, 156; government energy R&D spending 121; green revolution in 115n2, 116, 120, 122; long-term support provided by 158; public R&D spending in 61, 144–6; solar resources of 144; State investment bank 190; systems of innovation in 37; wind energy and R&D projects in 144–6, 149, 156 Ghosh, Shikhar 127 giant magnetoresistance (GMR) 96–7 GlaxoSmithKline 66–7, 82 Global Wind Energy Council (GWEC) 138–9 Goldwind 149 Goodenough, John B. 108 Google 20, 174–5 government energy R&D spending 121, 121 GPS (global positioning system) 105, 105n12 Great Transformation, The (Polanyi) 194–5 Greece, R&D/GDP 52 Green, Martin 152 green industrial revolution: ARPA-E 133–5; ‘carbon lock-in’ 117; China’s ‘green’ 5 year plan 122–4; climate change 117, 123, 135; development banks funding of 139–40, 139n14; DoE role in 132–3; Economist on 16; financial commitment for 116; funding of 116–19; global new investment in renewable energy 120; government energy R&D spending 121; government support to 114–15, 119, 129, 141–2; hurdles to 138, 156, 160; leaders in 11–12, 126; national approaches to 119–22; ‘No More Solyndras Act’ 130–31n12; patient capital 138–40; policies impacting 113–15, 119; pushing green development 136–7; renewable energy credits (RECs) 115n1; smart grid technology in 115, 118; sustainability 117, 119, 123; UK’s approach to 124–6; US approach to 126–35; venture capital in 127–9, 128n9; venture capital subsectors in 128; see also clean technology; solar power; wind power Green Investment Bank 125n7 Gronet, Chris 151 growth: economy-wide 62; effect of venture capital on 49; of firms and R&D benefit 44; firm size relationship to 45–6; ‘inclusive’ 167, 183, 195; inequality and 31, 54, 177; innovation as key source of 9, 177; measures of 33; myths about innovation and 10; national debt relationship to 18; ‘smart’ 167, 183; and technology 33–4; theories of 33–4; variables important for 18; see also equitable growth Grünberg, Peter 96, 97 Grunwald, Michael 113, 136 Haltiwanger, J 45 Hamilton, Alexander 73 Hanwha Group 157 hard disk drives (HDD) 96–7, 109 Harrison, Brian 154 Harrod, Roy F. 33 Haslam, Karen 171n3 Heymann, Matthias 145 Hoffman Electronics 150, 150n4 Hopkins, Matt 129n10, 160 House of Commons Energy and Climate Change Committee 125 Hsieh, Chang-Tai 46 HTTP/HTML 103–5, 109 Hughes, Alan 45 Hurst, Samuel 101 IBM 50, 97, 104, 107 ‘iGesture Numpad’ 103 Ill Fares the Land (Judt) 1 Immelt, Jeffrey 126 income-contingent loans and equity 189–90 income distribution 30n1 India 45–6, 120 industrial policy: challenges to 13; decentralized 78; in ‘rebalancing’ of economies 27; recent US history of 10, 21; redistributive tools needed in 167; State led 40; see also ‘picking winners’ inequality: as debilitating economic issue 177; growth impacted by 31; reducing 166, 186; shareholders as source of 183; tax cut impact on 54 information and communications technology (ICT) 50, 118 Information Processing Techniques Office (DARPA’s) 76 Innovalight 158 innovation: collective character of 183–7, 193; ‘culture’ of 87; as cumulative 167, 187; Death Valley stage of 47, 48, 122; development banks fostering 139–40; development of 3, 41–2; and distribution 186; economic growth driven by 9; firms resisting pressure for 77; global process of 155; government support for 31; in Japan 37–8; macro models on 44; myths about 10, 22; myths of R&D being about 44; ‘open innovation’ model of 25, 27; patent increase relationship to 50–51; process in energy technology 114; Schumpeterian innovation economics 5; State as a force in 5, 166; State leading in risky 62–4; stock market speculation and 49–50; tax policy impact on 51; threatened in US 24; undermining of in US 53, 183, 187; US 24; see also ‘systems of innovation’ approach innovation ecosystems: cumulative innovation curve in 167–8; open systems 193; socioeconomic prosperity dependence on 179; symbiotic vs. parasitic 23–5, 155, 162–3, 179; types of 2; see also actors ‘innovation fund’ 189 innovation networks 36, 40 innovation policy 22–3, 44, 46, 54, 167 Inquiry into the Nature and Causes of the Wealth of Nations, An (Smith) 1; see also ‘Invisible Hand’ Institute for Fiscal Studies (IFS) 51–2 institutional change, assessment of 36 integrated circuits 98, 98n6 Intel 130n11 intellectual property protection 110 intellectual property rights 174 International Bank for Reconstruction and Development (IBRD) 5 Internet: Apple’s use of 109; commercialization of 22; DARPA’s role in 76; and HTTP/HTML 103–5, 109; origin of 63; public funding behind 105 interventionist policy 83 investment returns, social vs. private 3–4 ‘Invisible Hand’ 30 iOS mobile operating system 89–90 iPad 102, 105, 109, 111n14 iPhone 101–3, 105–6, 109 iPlayer 16 iPod 95–6, 100–102, 105, 109, 110 Ireland 120n4, 121, 121 IRS 529 plans 111, 111n15 Italy 17, 39, 41, 52, 121 Jacobs 149 Janeway, William H. 49–50 Japan: Apple entering market of 110; computer electronics competition by 97, 98, 98n7, 106–7; economic growth of 37–8; finance system coordination by 40; flat panel display (FPD) industry of 106; government energy R&D spending 121; lithium-ion battery perfection by 108; MITI 37–8, 40; public R&D spending in 61; systems of innovation in vs.

(Lent and Lockwood 2010, 7) This is the view that asks little of government other than correcting market failures – such as through investment in basic science, education and infrastructure. The ‘appropriate’ role of the State is not a new debate, but it is one that benefits from a broader understanding of the academic literature on the role of innovation in creating economic growth. Over two hundred and fifty years ago, when discussing his notion of the ‘Invisible Hand’, Adam Smith argued that capitalist markets left on their own would self-regulate, with the State’s role being limited to that of creating basic infrastructure (schools, hospitals, motorways) and making sure that private property, and ‘trust’ (a moral code) between actors, were nurtured and protected (Smith 1904 [1776]). Smith’s background in politics and philosophy meant that his writings were much more profound than the simple libertarian economics position for which he is usually acknowledged, but there is no escaping that he believed that the magic of capitalism consisted in the ability of the market to organize production and distribution without coercion by the State.

Battelle, J. 2005. The Search. New York: Penguin. Berners-Lee, T. 1989. ‘Information Management: A Proposal’. CERN. Available online at http://info.cern.ch/Proposal.html (accessed 22 January 2013). Block, F. L. 2008. ‘Swimming against the Current: The Rise of a Hidden Developmental State in the United States’. Politics and Society 36, no. 2 (June): 169–206. _____. 2011. ‘Innovation and the Invisible Hand of Government’. In State of Innovation: The U.S. Government’s Role in Technology Development, edited by F. L. Block and M. R. Keller. Boulder, CO: Paradigm Publishers. Block, F. L. and M. R. Keller, eds. 2011a. State of Innovation: The U.S. Government’s Role in Technology Development. Boulder, CO: Paradigm Publishers. _____. 2011b. ‘Where do innovations come from?’ In State of Innovation: The U.S.

 

pages: 338 words: 92,465

Reskilling America: Learning to Labor in the Twenty-First Century by Katherine S. Newman, Hella Winston

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blue-collar work, collective bargaining, deindustrialization, desegregation, factory automation, interchangeable parts, invisible hand, job-hopping, knowledge economy, low skilled workers, performance metric, reshoring, Ronald Reagan, Silicon Valley, two tier labour market, union organizing, upwardly mobile, War on Poverty, Wolfgang Streeck, working poor

It was, instead, a kind of statistical prejudice. Rising above these assumptions is a tall order, particularly when the labor market is crowded. Employers don’t have to settle for anyone they have suspicions about. Black teenagers coming out of poor neighborhoods are left on the sidelines regardless of their personal qualities. New York University sociologist Deirdre Royster showed in her book Race and the Invisible Hand2 that equally qualified black and white students who completed the same blue-collar training programs end up in very different jobs because of these background factors, which have nothing to do with their individual abilities and everything to do with differences they cannot change. Connections are important to all job seekers because they confer advantages over competitors who cannot bring the same influence to bear.

John Hildebrand, “Regents: High School Students Can Seek Waiver of One History Exam,” Newsday, January 12, 2015, http://www.newsday.com/long-island/regents-high-school-students-can-seek-waiver-of-one-history-exam-1.9800090. 4. What Industry Needs 1.   Joleen Kirschenman and Kathryn M Neckerman, “‘We’d Love to Hire Them, But…’: The Meaning of Race for Employers,” Urban Underclass 203 (Washington, DC: Brookings Institution, 1991), 203–32. 2.   Deirdre Royster, Race and the Invisible Hand: How White Networks Exclude Black Men from Blue-Collar Jobs (Berkeley: University of California Press, 2003). 3.   Rosenbaum, Beyond College for All, 136. 4.   Despite the bad name that standardized tests have garnered, especially for bias of various kinds, in employment it has been shown that firms making use of tests are fairer in their hiring decisions than those that rely on interviews.

Christopher Tilly, “Skills and Race in Hiring: Quantitative Findings from Face-to-face Interviews” (with Philip Moss), Eastern Economic Journal 21, no. 3 (1995): 357–74. 5.   Deirdre Royster’s work shows that even when black and white students are trained in the same vocational programs, the homegrown, kinship, and neighborhood-based networks of whites advantage them in job seeking. This is why institutions need to step in and cultivate employer connections. Royster, Race and the Invisible Hand. 6.   John H. Bishop and Ferran Mañe, “The Impact of School-Business Partnerships,” in The School-to-Work Movement: Origins and Destinations, ed. William J. Stull and Nicholas Sanders (Westport, CT: Praeger, 2003), 189–202. 7.   The report touted public-private partnerships as a way of creating new schools that would be better aligned with opportunities in the job market and set forth a list of broad and vague recommendations for improvement, including: defining core competencies all students need to succeed; expanding beyond core competencies to skills and knowledge needed for successful postsecondary transitions; empowering industry to define sector-specific skills; creating innovative courses and programs of study; and putting more students on a path to success.

 

pages: 383 words: 108,266

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely

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air freight, Al Roth, Bernie Madoff, Burning Man, butterfly effect, Cass Sunstein, collateralized debt obligation, computer vision, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, endowment effect, financial innovation, fudge factor, Gordon Gekko, greed is good, housing crisis, invisible hand, lake wobegon effect, late fees, loss aversion, market bubble, Murray Gell-Mann, payday loans, placebo effect, price anchoring, Richard Thaler, second-price auction, Silicon Valley, Skype, The Wealth of Nations by Adam Smith, Upton Sinclair

Neoclassical economics is built on very strong assumptions that, over time, have become “established facts.” Most famous among these are that all economic agents (consumers, companies, etc., are fully rational, and that the so-called invisible hand works to create market efficiency). To rational economists, these assumptions seem so basic, logical, and self-evident that they do not need any empirical scrutiny. Building on these basic assumptions, rational economists make recommendations regarding the ideal way to design health insurance, retirement funds, and operating principles for financial institutions. This is, of course, the source of the basic belief in the wisdom of deregulation: if people always make the right decisions, and if the “invisible hand” and market forces always lead to efficiency, shouldn’t we just let go of any regulations and allow the financial markets to operate at their full potential?

I wish I could tell you that I would often persuade my conversational partner to accept my point of view, but in almost all cases it would become very clear that neither of us was going to be converted to the other’s viewpoint. Of course, I ran into the biggest difficulties when arguing for irrationality with card-carrying rational economists, whose disregard of my experimental data was almost as intense as their nearly religious belief in rationality (if Adam Smith’s “invisible hand” doesn’t sound like God, I don’t know what does). This basic sentiment was expressed succinctly by two fabulous Chicago economists, Steven Levitt and John List, suggesting that the practical usefulness of behavioral economics has been shown to be marginal at best: Perhaps the greatest challenge facing behavioral economics is demonstrating its applicability in the real world. In nearly every instance, the strongest empirical evidence in favor of behavioral anomalies emerges from the lab.

If competition was sufficient to overcome irrationality, wouldn’t that eliminate brawls in sporting competitions, or the irrational self-destructive behaviors of professional athletes? What is it about circumstances involving money and competition that might make people more rational? Do the defenders of rationality believe that we have different brain mechanisms for making small versus large decisions and yet another yet another for dealing with the stock market? Or do they simply have a bone-deep belief that the invisible hand and the wisdom of the markets guarantee optimal behavior under all conditions? As a social scientist, I’m not sure which model describing human behavior in markets—rational economics, behavioral economics, or something else—is best, and I wish we could set up a series of experiments to figure this out. Unfortunately, since it is basically impossible to do any real experiments with the stock market, I’ve been left befuddled by the deep conviction in the rationality of the market.

 

Who Rules the World? by Noam Chomsky

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Albert Einstein, anti-communist, Ayatollah Khomeini, Berlin Wall, Bretton Woods, British Empire, capital controls, corporate governance, corporate personhood, cuban missile crisis, deindustrialization, Donald Trump, Doomsday Clock, Edward Snowden, en.wikipedia.org, facts on the ground, failed state, Fall of the Berlin Wall, Howard Zinn, illegal immigration, invisible hand, Malacca Straits, Martin Wolf, Mikhail Gorbachev, Monroe Doctrine, nuclear winter, Occupy movement, oil shale / tar sands, Plutonomy: Buying Luxury, Explaining Global Imbalances, precariat, Ralph Waldo Emerson, Ronald Reagan, South China Sea, Stanislav Petrov, structural adjustment programs, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trade route, union organizing, uranium enrichment, wage slave, WikiLeaks, working-age population

In Adam Smith’s defense, it should be added that he recognized what would happen if Britain followed the rules of sound economics, now called “neoliberalism.” He warned that if British manufacturers, merchants, and investors turned abroad, they might profit but England would suffer. But he felt that they would be guided by a home bias, so that as if by an “invisible hand” England would be spared the ravages of economic rationality. The passage is hard to miss. It is the one occurrence of the famous phrase “invisible hand” in The Wealth of Nations. The other leading founder of classical economics, David Ricardo, drew similar conclusions, hoping that what is called “home bias” would lead men of property to “be satisfied with the low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations”—feelings that, he added, “I should be sorry to see weakened.”16 Their predictions aside, the instincts of the classical economists were sound.

Watergate was doubtless criminal, but the furor over it displaced incomparably worse crimes at home and abroad, including the FBI-organized assassination of black organizer Fred Hampton as part of the infamous COINTELPRO repression and the bombing of Cambodia, to mention just two egregious examples. Torture is hideous enough; the invasion of Iraq was a far worse crime. Quite commonly, selective atrocities have this function. Historical amnesia is a dangerous phenomenon not only because it undermines moral and intellectual integrity but also because it lays the groundwork for crimes that still lie ahead. 4 The Invisible Hand of Power The democratic uprising in the Arab world has been a spectacular display of courage, dedication, and commitment by popular forces—coinciding, fortuitously, with a remarkable uprising of tens of thousands in support of working people and democracy in Madison, Wisconsin, and other U.S. cities. If the trajectories of revolt in Cairo and Madison intersected, however, they were headed in opposite directions: in Cairo toward gaining elementary rights denied by the Egyptian dictatorship, in Madison toward defending rights that had been won in long and hard struggles and are now under severe attack.

Michael Kinsley, “Down the Memory Hole with the Contras,” Wall Street Journal, 26 March 1987. 27. Patrick Cockburn, “Torture? It Probably Killed More Americans than 9/11,” Independent (London), 6 April 2009. 28. Rajiv Chandrasekaran, “From Captive to Suicide Bomber,” Washington Post, 22 February 2009. 29. Chomsky, Hopes and Prospects, 266. 30. Ibid., 267. 31. Ibid., 268. 4. THE INVISIBLE HAND OF POWER   1. Tareq Y. Ismael and Glenn E. Perry, The International Relations of the Contemporary Middle East: Subordination and Beyond (London: Routledge, 2014), 73; Noam Chomsky, Hegemony or Survival: America’s Quest for Global Dominance (New York: Metropolitan Books, 2003), 150; Daniel Yergin, The Prize: The Epic Quest for Oil, Money and Power (New York: Free Press, 1991).   2. Noam Chomsky, Hopes and Prospects (Chicago: Haymarket Books, 2010), 55.   3.

 

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Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right by Jane Mayer

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affirmative action, Affordable Care Act / Obamacare, anti-communist, Bakken shale, bank run, battle of ideas, Berlin Wall, Capital in the Twenty-First Century by Thomas Piketty, carried interest, centre right, clean water, Climategate, Climatic Research Unit, collective bargaining, crony capitalism, David Brooks, desegregation, diversified portfolio, Donald Trump, energy security, estate planning, Fall of the Berlin Wall, George Gilder, housing crisis, hydraulic fracturing, income inequality, invisible hand, job automation, low skilled workers, market fundamentalism, Mont Pelerin Society, More Guns, Less Crime, Nate Silver, New Journalism, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, oil shock, Plutocrats, plutocrats, Ralph Nader, Renaissance Technologies, road to serfdom, Ronald Reagan, school choice, school vouchers, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, the scientific method, University of East Anglia, Unsafe at Any Speed, War on Poverty, working poor

Carrying out this attack: In The Rise of the Counter-establishment: From Conservative Ideology to Political Power (Times Books, 1986), Sidney Blumenthal made the term “counter-establishment” famous and for the first time told much of the early intellectual history of the movement. “Attack on American Free Enterprise System”: For more on the origins and impact of Lewis Powell’s memorandum, see Phillips-Fein, Invisible Hands, 156–65. “We didn’t have anything”: Piereson’s comments were made in a panel discussion with Gara LaMarche at an Open Society Institute forum, Sept. 21, 2006. “lay siege to corporations”: Staughton Lind, quoted in Phillips-Fein, Invisible Hands, 151. Powell’s defense of the tobacco companies: See Jeffrey Clements, Corporations Are Not People (Berrett-Koehler, 2012), 19–21. Income in America: Isaac William Martin, Rich People’s Movements, 155. Powell called on corporate America: Some have questioned whether too much has been made of Powell’s memo.

Hayek’s ideas arrived in America during the post-Depression years, when conservative businessmen were scrambling to salvage the credibility of the laissez-faire ideology that had been popular before the 1929 market crash. Since then, Keynesian economics had taken its place. Hayek’s genius was to recast the discredited ideology in an appealing new way. As Kim Phillips-Fein writes in her book Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan, rather than describing the free market as just an economic model, Hayek touted it as the key to all human freedom. He vilified government as coercive, and glorified capitalists as standard-bearers for liberty. Naturally, his ideas appealed to American businessmen like Charles Koch and the other backers of the Freedom School, whose self-interest Hayek now cast as beneficial to all of society.

In August, Powell delivered a seething memo that was nothing less than a counterrevolutionary call to arms for corporate America, warning the business community that its very survival was at stake if it didn’t get politically organized and fight back. The five-thousand-word memo was marked “confidential” and titled “Attack on American Free Enterprise System.” A virtual anti–Communist Manifesto, it laid out a blueprint for a conservative takeover. As Kim Phillips-Fein describes it in her history, Invisible Hands, Powell’s memo transformed corporate America into a “vanguard.” Also heeding the battle cry were the heirs to some of America’s greatest corporate fortunes, including Scaife, who were poised to enlist their private foundations as the conservative movement’s banks. Foundations had several advantages for both the donors and the recipients of this largesse. Unlike most businesses, few people controlled them, so they could move quickly on controversial projects.

 

pages: 391 words: 22,799

To Serve God and Wal-Mart: The Making of Christian Free Enterprise by Bethany Moreton

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affirmative action, anti-communist, Berlin Wall, big-box store, Bretton Woods, Buckminster Fuller, collective bargaining, corporate personhood, deindustrialization, desegregation, Donald Trump, estate planning, Fall of the Berlin Wall, Frederick Winslow Taylor, George Gilder, global village, informal economy, invisible hand, market fundamentalism, Mont Pelerin Society, mortgage tax deduction, Naomi Klein, new economy, New Urbanism, post-industrial society, postindustrial economy, prediction markets, price anchoring, Ralph Nader, RFID, road to serfdom, Ronald Reagan, Silicon Valley, Stewart Brand, strikebreaker, The Wealth of Nations by Adam Smith, union organizing, walkable city, Washington Consensus, white flight, Whole Earth Catalog, Works Progress Administration

Individual academicians were sponsored by corporations like Bristol-Â�Meyers, Caterpillar, Dupont, and Westinghouse.7 Read wrote “I, Pencil: My Family Tree as Told to Leonard E. Read,” in 1958, laying out the theory of the invisible hand of the market in the first-Â�person voice of a humble pencil. The lesson I have to teach is this: Leave all creative energies uninhibited. Merely orÂ�gaÂ�nize society to act in harmony with this lesson. Let society’s legal apparatus remove all obstacles the best it can. Permit these creative know-Â�hows freely to flow. Have faith that free men and Â�women will respond to the Invisible Hand. This faith will be conÂ�firmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth. 8 Friedman’s example on the nationally broadcast Free to Choose thus adapted the former public relations man’s homily aimed at schoolchildren.

Many sources contributed to the late-twentieth-century prestige of neoliberalism, or the belief that individual entrepreneurship, vigorous private property rights, and minimal barriers to trade best provide for personal freedom and well-being.2 The economists who coined the term in the years around World War II blended the free-market enthusiasm of some nineteenth-century political economists with Adam Smith’s classic image: the invisible hand of the market that mysteriously guided the most venal human concerns into the collective good. Thus neoliberalism envisions the economy as a sphere inÂ�deÂ�penÂ�dent of other social institutions and relationships. It understands the market to operate by natural laws that will, if left to their own devices, optimize the conditions of human existence. In this logic, there is no such thing as society or community, only individuals; the commons are a crime against efÂ�fiÂ� ciency; and government action intrudes illegitimately on the sovereign territory of economics, to the detriment of all.

The pencil arose from miners in Ceylon who dug up the graphite, and the people who made the string that tied the sacks in which the graphite was shipped, and those who loaded the sacks onto boats, and so forth, at exhaustive length. The miracle in this proÂ�cess was said to lie in the ab193 TO SERVE GOD AND WAL - Â�M ART sence of any central mastermind, or even any intent to make a pencil on the part of most of those implicated in the proÂ�cess. So what brought it all together? SIFE’s answer was clear: The invisible hand of the market. The Harding students who toured with their giant pencil referred to themselves as followers of Milton Friedman, the passionate laissez-Â�faire economist and 1976 Nobel Prize winner. Soon after retiring from his teaching duties at the University of Chicago in the late 1970s, Friedman and his wife, fellow economist Rose Friedman, were approached by the renegade CEO of a Public Broadcasting Service (PBS) affiliate in Erie, Pennsylvania.

 

pages: 462 words: 150,129

The Rational Optimist: How Prosperity Evolves by Matt Ridley

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23andMe, agricultural Revolution, air freight, back-to-the-land, banking crisis, barriers to entry, Bernie Madoff, British Empire, call centre, carbon footprint, charter city, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, colonial exploitation, colonial rule, Corn Laws, credit crunch, David Ricardo: comparative advantage, decarbonisation, dematerialisation, demographic dividend, demographic transition, double entry bookkeeping, Edward Glaeser, en.wikipedia.org, everywhere but in the productivity statistics, falling living standards, feminist movement, financial innovation, Flynn Effect, food miles, Gordon Gekko, greed is good, Hans Rosling, happiness index / gross national happiness, haute cuisine, Hernando de Soto, income inequality, income per capita, Indoor air pollution, informal economy, invention of agriculture, invisible hand, James Hargreaves, James Watt: steam engine, Jane Jacobs, John Nash: game theory, joint-stock limited liability company, Joseph Schumpeter, Kevin Kelly, knowledge worker, Kula ring, Mark Zuckerberg, meta analysis, meta-analysis, mutually assured destruction, Naomi Klein, Northern Rock, nuclear winter, oil shale / tar sands, out of africa, packet switching, patent troll, Pax Mongolica, Peter Thiel, phenotype, Plutocrats, plutocrats, Ponzi scheme, Productivity paradox, profit motive, purchasing power parity, race to the bottom, Ray Kurzweil, rent-seeking, rising living standards, Silicon Valley, spice trade, spinning jenny, stem cell, Steve Jobs, Steven Pinker, Stewart Brand, supervolcano, technological singularity, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, ultimatum game, upwardly mobile, urban sprawl, Vernor Vinge, wage slave, working poor, working-age population, Y2K, Yogi Berra

Human beings are a species that stops its own population expansions once the division of labour reaches the point at which individuals are all trading goods and services with each other, rather than trying to be self-sufficient. The more interdependent and well-off we all become, the more population will stabilise well within the resources of the planet. As Ron Bailey puts it, in complete contradiction of Garrett Hardin: ‘There is no need to impose coercive population control measures; economic freedom actually generates a benign invisible hand of population control.’ Most economists are now more worried about the effects of imploding populations than they are about exploding ones. Countries with very low birth rates have rapidly ageing workforces. This means more and more old people eating the savings and taxes of fewer and fewer people of working age. They are right to be concerned, though they would be wrong to be apocalyptic, after all, today’s 40-year-olds will surely be happier to continue operating computers in their seventies than today’s 70-year-olds are to continue operating machine tools.

Even John Stuart Mill, conceding that returns were showing no signs of diminishing in the 1840s, put it down to a miracle, innovation, he said, was an external factor, a cause but not an effect of economic growth, an inexplicable slice of luck. And Mill’s optimism was not shared by his successors. As discovery began to slow, so competition would drive the profits of enterprise out of the increasingly perfect market till all that was left was rent and monopoly. With Smith’s invisible hand guiding infinite market participants possessed of perfect information to profitless equilibria and vanishing returns, neo-classical economics gloomily forecast the end of growth. It was a description of an entirely fictional world. The concept of a steady final state, applied to a dynamic system like the economy, is as wrong as any philosophical abstraction can be. It is Pareto piffle. As the economist Eamonn Butler puts it, the ‘perfect market is not just an abstraction; it’s plain daft ...

In the mega-droughts of the ice ages, Africa could support very few early hunter-gatherers; in a warm and moist interglacial, it can support a billion mostly urban exchanger-specialisers. Chapter Eleven The catallaxy: rational optimism about 2100 In this book I have tried to build on both Adam Smith and Charles Darwin: to interpret human society as the product of a long history of what the philosopher Dan Dennett calls ‘bubble-up’ evolution through natural selection among cultural rather than genetic variations, and as an emergent order generated by an invisible hand of individual transactions, not the product of a top-down determinism. I have tried to show that, just as sex made biological evolution cumulative, so exchange made cultural evolution cumulative and intelligence collective, and that there is therefore an inexorable tide in the affairs of men and women discernible beneath the chaos of their actions. A flood tide, not an ebb tide. Somewhere in Africa more than 100,000 years ago, a phenomenon new to the planet was born.

 

pages: 1,205 words: 308,891

Bourgeois Dignity: Why Economics Can't Explain the Modern World by Deirdre N. McCloskey

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Admiral Zheng, agricultural Revolution, Albert Einstein, BRICs, British Empire, butterfly effect, Carmen Reinhart, clockwork universe, computer age, Corn Laws, dark matter, David Ricardo: comparative advantage, Donald Trump, Edward Lorenz: Chaos theory, European colonialism, experimental economics, financial innovation, Fractional reserve banking, full employment, George Akerlof, germ theory of disease, Gini coefficient, greed is good, Howard Zinn, income per capita, interchangeable parts, invention of agriculture, invention of air conditioning, invention of writing, invisible hand, Isaac Newton, James Watt: steam engine, John Maynard Keynes: technological unemployment, John Snow's cholera map, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, means of production, Naomi Klein, New Economic Geography, New Urbanism, purchasing power parity, rent-seeking, road to serfdom, Robert Gordon, Ronald Coase, Ronald Reagan, Scientific racism, Scramble for Africa, Shenzhen was a fishing village, Simon Kuznets, Slavoj Žižek, spinning jenny, Steven Pinker, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, tulip mania, union organizing, Upton Sinclair, urban renewal, V2 rocket, very high income, working poor, World Values Survey, Yogi Berra

They came to what the novelist Philip Roth calls “a civilized person’s tolerant understanding of the puzzle of inequality and misfortune.”38 Or at least they shifted away from a belief in highly personal politics and witchcraft, such as in the early seventeenth century provoked the burning of thousands of witches along the German borderlands with France, towards a disenchanted belief in the impersonal, such as Them or the Government or the Invisible Hand or That’s Just How It Is. Accepting creative accumulation and destruction, it turned out, provided a near-guarantee that almost all the boats rose on its tide. You didn’t even need a boat. Pomeranz and Topik are not wrong to note the exploitation when, say, rising demand for binding twine to bale American wheat straw led to Mayans and Yaqui Indians being bound in the Yucatán to harvest cactus to make the twine.39 But they are often wrong in assigning (without argument) the exploitation to the innovation itself rather than to the pre-capitalist structures of power that 28 allowed the tyrants to exploit the opportunity to trade in twine or coffee or sugar or rubber.

In fact, precisely because of its advantages in transport costs to its numerous consumers at home and abroad, greater London before the eighteenth centurywas the manufacturing center of England, having fully ten percent of the English population in the mid-seventeenth century. Once you introduce the possibility of economies of scale, in other words, the balance of swings and roundabouts has to be calculated, not merely asserted—after all, that is the anti-invisible-hand point of industrial policy and infant-industry protection and path dependence and other allegedly practical implications of what economists call “nonconvexities.” Manufacturers did relocate to Manchester and Birmingham at the call of a little cheaper labor and a little cheaper transport. So? **** Sector by sector the older heroes have fallen before the research of the economists and historians.

As Hume put it in the 1740s, “if strangers will not take any particular commodity of ours, we must cease to labor in it.” Of course. But, he continued, in another of his astonishing anticipations of modern economics, “the same hands will turn themselves towards some refinement in other commodities, which may be wanted at home.”30 Or rather, will be wanted at home, since that is how the alternative employment will be guided, as though by an invisible hand. The exporting of cotton cloth is not sheer gain. It comes at the cost of something else that its makers could have done, such as building more houses in Cheshire or making more wool cloth in Yorkshire. That is, nothing like all the income received from exports is a net gain. Think of the opportunity costs of producing American medical equipment for exports. Pittsburg doesn’t produce such things out of the air.

 

Goddess of the Market: Ayn Rand and the American Right by Jennifer Burns

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anti-communist, bank run, barriers to entry, centralized clearinghouse, collective bargaining, desegregation, feminist movement, financial independence, George Gilder, invisible hand, jimmy wales, Joseph Schumpeter, knowledge worker, laissez-faire capitalism, lone genius, Menlo Park, minimum wage unemployment, Mont Pelerin Society, new economy, offshore financial centre, Ponzi scheme, profit motive, RAND corporation, rent control, road to serfdom, rolodex, Ronald Reagan, side project, Stewart Brand, The Chicago School, The Wisdom of Crowds, union organizing, urban renewal, white flight, Whole Earth Catalog

Rand and libertarianism more generally are given a thorough, albeit brief, treatment by John Kelley in Bringing the Market Back In: The Political Revitalization of Market Liberalism (1997). As historians have begun to locate the origins of conservatism in reaction against the New Deal and thereby accord more weight to business libertarianism, Rand has emerged as a figure of greater consequence. In Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan (2009), Kimberly Phillips-Fein asserts the centrality of libertarian businessmen to the conservative renaissance, an important new line of interpretation that is being followed by a host of emerging scholars. Phillips-Fein notes Rand’s popularity among businessmen and describes her early political activism. Although not academic in nature, Brian Doherty’s celebratory Radicals for Capitalism: A Freewheeling History of the Modern American Libertarian Movement (2007) also recognizes Rand as a foundational thinker of libertarianism, alongside F.

Recently historians have begun to trace the connections between this Old Right and the postwar conservative movement. See Gregory L. Schneider, The Conservative Century: From Reaction to Revolution (New York, Rowman and Littlefield, 2008); Donald Critchlow, The Conservative Ascendancy: How the GOP Right Made Political History (Cambridge, MA: Harvard University Press, 2007); Kimberly Phillips-Fein, Invisible Hands: The Making of the Conservative Movement from the New Deal to Ronald Reagan (New York: Norton, 2009); Joseph Lowndes, From the New Deal to the New Right (New Haven, CT: Yale University Press, 2008). 28. Although it did not become widely used until the 1950s, “libertarian” was in circulation prior to the New Deal. It emerged after Roosevelt popularized a new understanding of “liberal,” the term formerly used by advocates of limited government.

Chamber of Commerce, and the Pamphleteers are taken from Greg Eow, “Fighting a New Deal: Intellectual Origins of the Reagan Revolution, 1932–1952,” PhD diss., Rice University, 2007. Read’s influence and the libertarian climate of southern California more generally is described in Lisa McGirr, Suburban Warriors: The Origins of the New American Right (Princeton, NJ: Princeton University Press, 2001), 34. 6. The national business movement against the New Deal is described in Kimberly Phillips-Fein, Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan (New York: Norton, 2009). For state activities, see Elizabeth Tandy Shermer, “Counter-Organizing the Sunbelt: Right-to-work Campaigns and Anti-Union Conservatism, 1943–1958,” Pacific Historical Review 78, no. 1 (2009): 81–118. Interestingly, Rand later came out in opposition to right-to-work laws, which she saw as an infringement upon freedom of contract.

 

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Company: A Short History of a Revolutionary Idea by John Micklethwait, Adrian Wooldridge

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affirmative action, barriers to entry, Bonfire of the Vanities, borderless world, business process, Corn Laws, corporate governance, corporate social responsibility, credit crunch, crony capitalism, double entry bookkeeping, Etonian, hiring and firing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, knowledge worker, laissez-faire capitalism, manufacturing employment, market bubble, mittelstand, new economy, North Sea oil, race to the bottom, railway mania, Ronald Coase, Silicon Valley, six sigma, South Sea Bubble, Steve Jobs, Steve Wozniak, strikebreaker, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, tulip mania, wage slave, William Shockley: the traitorous eight

In the nineteenth century, the gains to be had from integrating mass production with mass distribution were enormous—as Alfred Chandler, the doyen of business historians, puts it, the “visible hand of managerial direction” replaced “the invisible hand of market mechanisms.” In the twenty-first century, technology and globalization are helping to reduce barriers to entry—and thus helping to unbundle the corporate package. At the touch of a button, a mere journalist can get access to more information than a corporate giant could amass a decade ago. The fashion nowadays is for virtual companies—for airlines that do not own their own planes, for banks that do not have branches, for the invisible hand to claw back ground from the visible one. That should not imply that the company is beginning a slow, inevitable decline. Despite the seductive charm of frictionless capitalism, most people seem to like being in companies.

Even the parsimonious Andrew Carnegie, whose writings included The Advantage of Poverty, owned a Scottish castle, Skibo, with a staff of eighty-two and a New York mansion with sixty-four rooms.5 FIRST CAME THE RAILROADS Why did these extraordinary organizations take off when they did? Alfred Chandler has provided the classic answer: “Modern business enterprise” became viable “only when the visible hand of management proved to be more efficient than the invisible hand of market forces.” For that to happen, a new system of transport and communication was necessary. The railroads were not just great enablers for modern business; they were also the first modern businesses.6 It took gigantic quantities of capital—much of it from Britain—to build 31,000 miles of railroad, as America had in 1860 (let alone the 240,000 miles it had by 1910).7 Railroads had equally little choice about being the first firms to employ large armies of full-time managers.

 

pages: 823 words: 220,581

Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

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accounting loophole / creative accounting, banking crisis, banks create money, barriers to entry, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, Fractional reserve banking, full employment, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, invisible hand, iterative process, John von Neumann, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, open economy, place-making, Ponzi scheme, profit maximization, quantitative easing, RAND corporation, random walk, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave

The critics were right: society is more than the sum of its individual members, and a society’s behavior cannot be modeled by simply adding up the behaviors of all the individuals in it. To see why the critics have been vindicated by economists, and yet economists still pretend that they won the argument, we have to take a trip down memory lane to late eighteenth-century England. The kernel Adam Smith’s famous metaphor that a self-motivated individual is led by an ‘invisible hand’ to promote society’s welfare asserts that self-centered behavior by individuals necessarily leads to the highest possible level of welfare for society as a whole. Modern economic theory has attempted, unsuccessfully, to prove this assertion. The attempted proof had several components, and in this chapter we check out the component which models how consumers decide which commodities to purchase.

The first assumption in fact amounts to assuming that there is only one person in society (or that society consists of a multitude of identical drones) – since how else could ‘everybody’ have the same tastes? The second amounts to assuming that there is only one commodity – since otherwise spending patterns would necessarily change as income rose. These ‘assumptions’ clearly contradict the case economists were trying to prove, since they are necessarily violated in the real world – in fact, they are really a ‘proof by contradiction’ that Adam Smith’s invisible hand doesn’t work. Sadly, however, this is not how most economists have interpreted these results. When conditions (a) and (b) are violated, as they must be in the real world, then several important concepts which are important to economists collapse. The key casualty here is the vision of demand for any product falling as its price rises. Economists can prove that ‘the demand curve slopes downward in price’ for a single individual and a single commodity.

TABLE 4.3 Sales and costs determine the level of output that maximizes profit It’s no wonder, then, that, despite all the criticisms leveled at it, neoclassical economists cling to the model of the ‘perfect’ competitive market. In a competitive market, since marginal revenue equals price, profit-maximizing behavior leads to an output level at which price equals marginal cost. This is the embodiment of Smith’s ‘invisible hand’ metaphor about the capacity of market economy to reconcile private interest and public virtue, and that is the real message of the ‘Totem of the Micro.’8 Perfect competition The main distinguishing feature of the perfectly competitive market is the number of firms in it. Whereas a monopoly has just one firm – which therefore has the entire market demand curve to itself – a perfectly competitive market has many little firms, each competing for a tiny slice of total demand.

 

pages: 279 words: 87,910

How Much Is Enough?: Money and the Good Life by Robert Skidelsky, Edward Skidelsky

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banking crisis, Bertrand Russell: In Praise of Idleness, Bonfire of the Vanities, call centre, David Ricardo: comparative advantage, death of newspapers, financial innovation, Francis Fukuyama: the end of history, full employment, happiness index / gross national happiness, income inequality, income per capita, informal economy, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, lump of labour, market clearing, market fundamentalism, profit motive, purchasing power parity, Ralph Waldo Emerson, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, union organizing, University of East Anglia, wage slave, World Values Survey

Smith took himself to have refuted “the selfish system” of Mandeville, but he had not in fact left it all that far behind.17 Mandeville’s central mechanism—the utilization of vice for public benefit—lives on in his invisible hand, purged of its demonic flavor by the simple expedient of redefining “vice” as an innocuous natural quality. With a few exceptions, this has been the strategy of economics ever since. The value-neutral language of “utility” and “preferences” renders capitalism’s Faustian bargain necessarily invisible. Only in a few places does Smith reveal the extent of his debt to Mandeville. One is the famous passage in The Theory of Moral Sentiments describing how the vices of the wealthy redound to the benefit of society as a whole. (This, incidentally, is the first time Smith uses the metaphor of the “invisible hand.”) Though the rich, he writes, mean only their own conveniency, though the sole end which they propose … be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements.

His French contemporary Montesquieu talked of the douceur of commerce.14 Once money-making had been stripped of its ethical opprobrium, it became open to treatment in terms of cause and effect. Hume’s friend, the Scottish philosopher Adam Smith, took the lead. The Wealth of Nations, his masterpiece of 1776, presents humans as driven by a natural desire for self-improvement, which under conditions of free competition leads them “as if by an invisible hand” to promote the public well-being. Newton’s mechanical science of nature was thereby extended to economic relations, with self-interest in the role of gravity. This was a revolutionary invention. Traditional morality had conceived of society as an enterprise devoted to the common good. For Smith, by contrast, it is a purely causal nexus of self-regarding individuals. God, whom Smith quaintly calls “The Great Director of the Universe,” has merely set the machinery in motion, leaving it to self-love to work its benefits.

Though the rich, he writes, mean only their own conveniency, though the sole end which they propose … be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society.”18 Here Smith reverts openly to the old moral language of rapacity, vanity and insatiability. The mask has temporarily slipped. Nor could Smith ignore, despite his best efforts to gloss it, the bad effects of the commercial system on the lives and characters of workers. His description of the warping effects of the division of labor anticipates Marx: The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur.

 

pages: 329 words: 85,471

The Locavore's Dilemma by Pierre Desrochers, Hiroko Shimizu

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air freight, back-to-the-land, British Empire, Columbian Exchange, Community Supported Agriculture, edge city, Edward Glaeser, food miles, Food sovereignty, global supply chain, intermodal, invention of agriculture, inventory management, invisible hand, Jane Jacobs, labour mobility, land tenure, megacity, moral hazard, mortgage debt, oil shale / tar sands, oil shock, peak oil, planetary scale, profit motive, refrigerator car, Steven Pinker, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, trade liberalization, Upton Sinclair, urban sprawl

Monocultures Overspecialization and Food Security Locavorism and Military Security Peak Oil and Locavorism Climate Change, Locavorism, and Food Security Chapter 6 - Myth #5: Locavorism Offers Tastier, More Nutritious, and Safer Food The Changing Human Body Taste Nutrition Food Safety Chapter 7 - Well-Meaning Coercion, Unintended Consequences, and Bad Outcomes A Brief Historical Overview of Government Intervention in Food Markets Public Food Reserves Food Export Restrictions and Bans Price Floors Price Ceilings On Appointing “Good” Czars Unleashing the Invisible Hand CONCLUSION EPILOGUE NOTES INDEX Copyright Page To Ferenc (“Ferko”) Csillag (1955–2005), dear friend and mentor. You are sorely missed. [T]he time has arrived . . . when the various portions of the earth will each give forth their products for the use of each and of all; that the over-abundance of one country will make up for the deficiency of another; the superabundance of the year of plenty serving for the scant harvests of its successor . . .

Perhaps this is because, as Adam Smith observed more than two centuries ago, it is typically “the industry which is carried on for the benefit of the rich and powerful that is principally encouraged” by the political system “while that which is carried on for the benefit of the poor and the indigent is too often either neglected or oppressed.”43 In other words, the poor and middle-class can’t afford top lobbyists while the path of least resistance for politicians has always been the creation of new programs rather than the phasing out or redirecting of existing ones. If history is again any guide, however, beneficial change can sometimes happen in the wake of a crisis (although plenty of bad things can happen, too . . . ), as we will now discuss. Unleashing the Invisible Hand For nearly a century and a half, food activists and small producers of all kinds have argued that unbridled competition will destroy family farms and empower “monopolistic” corporations. True, in a free market inefficient firms are continuously being driven out of business while the most efficient ones are rewarded by consumers and growth as long as there are economies of scale to be realized—but only until the day they stop providing the best alternative available and are themselves driven out of business or absorbed by more efficient competitors.

Human body agribusiness and changing evolution of Human intellect Hundred Years War Hunger See also Famine; Food shortage Hunter, William Wilson Hurst, Blake Hybridization Imperfections Imports rice urbanization and India Initiatives, local food economic depression and history of support wartime(photo) Inner cities Innovation Integrated Regional Information Networks Intermediaries Invasive species Invisible hand Irish potato famine Jacks, Graham Vernon Jacobs, Jane Japan famine in World War II and Jefferson, Lorian P. Jeffrey, Clara Jensen Farms Johnson, Paul Juche The Jungle (Sinclair) Junk food Kautsky, Karl Kenyan exports King, Clyde Lyndon Kingsolver, Barbara Know Your Farmer, Know your Food program Ladies’ Home Journal (magazine) Land abandoned grabs management urban Land use debate over trade-off Landsburg, Steven Latitude LCA.

 

Remix: Making Art and Commerce Thrive in the Hybrid Economy by Lawrence Lessig

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Amazon Web Services, Andrew Keen, Benjamin Mako Hill, Berlin Wall, Bernie Sanders, Brewster Kahle, Cass Sunstein, collaborative editing, disintermediation, don't be evil, Erik Brynjolfsson, Internet Archive, invisible hand, Jeff Bezos, jimmy wales, Kevin Kelly, late fees, Netflix Prize, Network effects, new economy, optical character recognition, PageRank, recommendation engine, revision control, Richard Stallman, Ronald Coase, Saturday Night Live, SETI@home, sharing economy, Silicon Valley, Skype, slashdot, Steve Jobs, The Nature of the Firm, thinkpad, transaction costs, VA Linux

No doubt, every age will be marked with battles waged by the previous generation’s giants. But the giants always fall to a better way of making money. And the RO culture that digital technologies will support will provide lots of new ways for content producers to make money. “As if by an invisible hand,” this market will radically change the nature of access to culture in the next ten years. As a result, our children will be unable to understand a world where Thursday at 10 p.m. was more significant in cultural terms than Friday at 5 a.m. By invoking Adam Smith’s “invisible hand,” I don’t mean to say that policy makers have nothing to worry about here. Smith’s 80706 i-xxiv 001-328 r4nk.indd 49 8/12/08 1:54:46 AM 50 REMI X Wealth of Nations teaches us about the phenomenal power of markets to adjust. But these markets adjust, as Yochai Benkler’s The Wealth of Networks powerfully teaches, in light of the baseline allocation of rights.

But these markets adjust, as Yochai Benkler’s The Wealth of Networks powerfully teaches, in light of the baseline allocation of rights. Policy makers must assure that rights are not allocated in a way that distorts or weakens competition. A costly overlay of spectrum rights, for example, or an inefficient market of copyrights, can stifle competition and drive markets to unnecessary concentration. These factors must be regulated by policy makers. They will not be “solved” by an invisible hand. But for my purposes here, the most important policy mistake is one that stifles the Sousarian instinct: a policy driven by the view that the only way to protect RO culture is to render RW culture illegal. That choice is a false choice. In the next chapter, I want to sketch a future for RW culture that might motivate us to see just why we should avoid this false choice. 80706 i-xxiv 001-328 r4nk.indd 50 8/12/08 1:54:46 AM FOUR RW, REVIVED O ne of my closest (if most complicated) friends at college was an English major.

., 260, 275 “Content Is Not King” (Odlyzko), 89 Convergence Culture (Jenkins), 28 copies, 98–102, 255, 276–77, 290–91 decriminalization of, 268–71, 279 copyright law, 96, 97, 244–45, 276–77, 289–94 Baker on, 89 clear title in, 260–65 commercial vs. noncommercial use and, 55, 254 competition and, 90, 270 decriminalizing copies and, 268–71, 279 decriminalizing file sharing and, 271–72 decriminalizing youth and, 248–49, 283, 293 de minimis exception to, 104 deregulating amateur creativity and, 254–59 destructive and self-defeating aspects of, 109–14 externalities and, 289, 291, 292–93 fair use and, 91, 99, 100, 103, 123, 255–56, 260, 266–67 8/12/08 1:56:30 AM IND E X history of, 100–101, 103, 262–63, 268–69 hybrid economies and, 248–49 importance of limits in, 31–33, 56 licenses and, see licenses as opt-in system, 262–63 as opt-out system, 263 proper function of, 85 property law and, 264–65 reforming, 253–73, 278, 279 registration and, 262–65 RO culture and, 97–100, 105 RW culture and, 97, 100–105, 108 simplification of, 266–68 Sousa and, 23–27, 31–33 work for hire and, 244 copyright wars, xv–xxii, 34, 39–40, 293–94 collateral damage in, 17–18 Corely, Eric, 2 “Cornucopia of the Commons, The” (Bricklin), 132–34, 173 corruption, 283, 293, 294 craigslist, 187–91, 195 Creative Commons (CC), 15–17, 172, 192, 226, 227, 228, 244, 277–79 creativity, 18, 19 amateur, see amateur creativity cultures of, see culture(s) Long Tail and, 130, 131 original, 91–92, 93, 95 Cult of the Amateur, The (Keen), 90–91 cultural literacy, 81, 107 cultural references, 74–75 culture(s), 18 access to, 43–49, 67, 106, 255, 261, 291 diversity of, 42 found, 75 RO, see RO culture RW, see RW culture Sousa’s view of, 24–29, 32–33, 35, 36, 50 standards in, 96–97 Currier, Frank Dunklee, 32 Cuse, Carlton, 213 Daily Prophet, 206 Daley, Elizabeth, 80 Danger Mouse, 255 80706 i-xxiv 001-328 r4nk.indd 321 321 Dash, Anil, 233 Dean, Howard, 62 defamation, 275 del.icio.us, 59, 60, 233 democracy, 27, 67, 142, 249, 282 democratization, 25, 52–53, 54–55, 90, 107, 140–41, 252 De Sola Pool, Ithiel, 96 Dickens, Charles, 94–95 Diebold, 62 Digg, 59 Digital Rights Management (DRM), 41, 42, 47–48, 67, 98, 99, 235, 290–91 Digital Sky Project, 170–71 Digital Storytelling project, 80–81, 261–62 digital technologies, 38–43, 69, 83, 84, 98–100, 103, 252, 253, 262 and access to media, 46–49 advertising and, 48 Disney, 55, 102, 122 distributed computing, 167–68 Distributed Proofreaders, 167 diversity, 185, 186, 231, 252 Dogster, 186–87, 213 doujinshi, 79, 80 Doyle, Michael, 11–12 Duffy, Kevin Thomas, 53–54 DVDs, 2, 30, 37, 38, 94, 124, 129, 144–45 DVRs, 44 economies, 116, 117–18, 225–49 commercial, see commercial economies crossovers in, 227–28 hybrid, see hybrid economies parallel, 225–26 sharing, see sharing economies spillovers and, 229–31 tools to signal types of, 226–27 value in, 88–90 education, 85–86, 274 legal, 86 remixes and, 80–82 Einstein@Home, 167–68 election of 2004, 62–63 Electronic Frontier Foundation (EFF), 3, 271 Ellis, Jim, 57 8/12/08 1:56:30 AM 322 eMusic, 12, 42 Everything Bad Is Good for You (Johnson), 93–94 Ewing, Marc, 181, 182 externalities, 289, 291, 292–93 eyeVio, 249 fair use, 91, 99, 100, 103, 123, 255–56, 260, 266–67 Fake, Caterina, 191–92, 233 fan cultures, 205–13, 245–48, 258–59, 276 Fight Censorship, 197 file sharing, see peer-to-peer file sharing films, see movies Fisher, William, 109, 271, 272 Flickr, 191–94, 233 found culture, 75 fourstones, 95 Fox, 71, 227 Franks, Charles, 167 “free” content, 47–48 Free Culture (Lessig), xvi–xvii, 80, 89, 113 Future of Ideas, The (Lessig), xvi Gansky, Lisa, 192 Geilhufe, David, 191 Ghosh, Rishab, 173 Gift, The (Hyde), 147–48, 149 gifts, 147–48 GigaOmniMedia, 232 Gil, Gilberto, 66–67, 256 Gillis, Gregg, 11–15 Girl Talk, 11–13, 17, 18, 69–70, 104 global warming, 292, 293, 294 GNU, 162, 163, 182, 184, 240–41 Goddard Space Flight Center, 180 Godwin, Mike, 156 Goethe Institute, 92 Gomes, Lee, 130 Google, 127–28, 141, 142, 190, 197, 224, 234, 241 books digitized by, 260–61 Little Brother and, 132, 136–37 mash-ups, 138 YouTube acquired by, 194 Google Application Programming Interfaces (APIs), 128, 137, 138 80706 i-xxiv 001-328 r4nk.indd 322 IND E X Gore, Al, 293 Gracenote, 134, 237–39 Green, Rich, 232 Grokster, xxi, 110 Guggenheim, Davis, 275 “Hard Working George” (Sadler), 72–73 Harry Potter, 206–12, 245, 246, 258–59 Hart, Michael, 166, 167 Hastings, Reed, 124 Hollywood, 205–13, 291, 292, 294; see also movies Hosler, Mark, 70, 71, 75, 76, 81, 107 Hurley, Chad, 194 Hurricane Katrina, 189–91 Hutchinson, Thomas, 147 hybrid economies, 34, 35, 116, 118, 119, 177–224, 225, 252, 253, 274, 294 collaboration spaces and, 196–213 communities and, 213–20 community spaces and, 186–96 decriminalizing youth and, 248–49 fairness in, 231–43 free software, 163–66, 172, 173–75, 179–85, 219, 220, 240–43, 291 incentives for commercial entities to become, 228–31 Internet, 116 sharecropping in, 243–48 Hyde, Lewis, 147–48, 149 IBM, 241–42 ideas, 290 innovation, 25, 221, 228–29 LEGO-ized, 137–41, 143 spillovers and, 229–31 Innovator’s Dilemma, The (Christensen), 143 integrity, 87, 92 International Federation of the Phonographic Industry, 39 Internet, 30, 34, 40, 58, 68, 69, 102–3, 116, 163, 230, 252 commercial economies and, 119, 121–43 hybrid economies and, 116, 177, 178; see also hybrid economies Keen on, 90–91 8/12/08 1:56:31 AM IND E X LEGO-ized innovation and, 137–41, 143 Little Brother and, 132–37, 143 sharing economies and, 119, 155–72 Internet Archive, 168, 175, 232, 236 Internet Movie Database (IMDb), 239–40 “invisible hand,” 49–50 iPod, 41, 46, 47, 88 Iraq, 281–82 Ito, Joi, 200, 218–19 Ito, Mimi, 78, 79, 80 iTunes, 41–42, 134 Girl Talk and, 12, 13 Jackson, Andrew, 275 Jackson, Michael, 5 Jarvis, Jeff, 233–34 Jay-Z, 255 Jefferson, Thomas, 27, 106, 131–32, 262, 290–91 Jenkins, Henry, 28, 78, 81, 94, 206–7, 212, 276 Jobs, Steve, 40 Johnson, Mark, xiv Johnson, Steven, 93–94 Jones, Scott, 238 Joyce, Don, 54, 70, 71, 272–73 Jupiter Research, 110 juries, 87 Kahle, Brewster, 58, 168, 232, 236–37, 239 Kan, Ti, 237–38 Karim, Jawed, 194 Kasem, Casey, 13, 75 Keen, Andrew, 90–91, 127 Kelly, Kevin, 59 Kerry, John, 72 Kind, Jonathan, 149 Kodak, 192 Kollock, Peter, 174 Lakoff, George, xiv, xv Lasica, J.

 

pages: 265 words: 15,515

Nomad Citizenship: Free-Market Communism and the Slow-Motion General Strike by Eugene W. Holland

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capital controls, cognitive dissonance, Colonization of Mars, complexity theory, deskilling, Firefox, Frederick Winslow Taylor, full employment, informal economy, invisible hand, Jane Jacobs, means of production, microcredit, money: store of value / unit of account / medium of exchange, Naomi Klein, New Urbanism, peak oil, price mechanism, Richard Stallman, Ronald Coase, slashdot, The Death and Life of Great American Cities, The Wisdom of Crowds, transaction costs, Upton Sinclair, urban renewal, wage slave, working poor

For it turns out that spontaneous order is not the only thing that can emerge unplanned from complex systems: something like spontaneous collective intelligence or distributed decision making can emerge from free mar­ kets as an unplanned consequence of the interactions of multiple agents, in much the same way. Of course, communism must intervene here, in turn, and modify certain features of the so-called free market: after all, a kind of distributed intelligence has been attributed to markets at least since the notorious invisible hand of Adam Smith, with results that bear no resemblance whatsoever to communism.37 Construction of a viable concept of free-market communism will thus depend on spelling out the conditions—both positive and negative—under which truly free markets can be expected to generate an acceptable approximation of the Common Good immanently, from the bottom up. On the basis of extensive historical studies, Fernand Braudel has pro­ posed an Important distinction between markets and antimarkets that can serve as one point of departure.38 Along similar lines, but on the basis of M arx’s theoretical investigations, Deleuze and Guattari distinguished be­ tween the positive, economic component of markets and their negative, power component.39 More specifically, James Surowiecki, in his recent work The Wisdom of Crowds, lays out the conditions under which largescale interactive systems such as markets can produce surprising results in the domains of coordination and cooperation as well as cognition.40 The prerequisites for the wisdom of crowds to emerge, as he shows, include diversity and independence of knowledge or opinion, decentralization of decisions, and some mechanism to aggregate multiple decisions to pro­ duce a result—prerequisites that truly free free markets often realize.

But the main task for the concept of free-market communism will be to draw careful distinctions between markets and capitalism, for the potential benefits of market organization are almost completely offset by the command and control that private capital exercises over them. The suprahuman decision­ making abilities of the market as a paragon of collective or distributed intelligence have long been touted, from Adam Smith’s invisible hand to Friedrich von Hayek’s notion of catallaxy.1 But insufficient attention is paid by most such champions of the market to the dynamics and effects of capital accumulation, for specifically capitalist markets are not often vehicles for distributed decision making or collective intelligence but rather exercises in collective stupidity, as the effects of advertising, overconsump­ tion, and the looming environmental crisis make patently clear.

To be sure, invoking the economic theories of von Hayek is almost as problematic as invoking the political theory of Carl Schmitt: although not himself a Nazi, von Hayek was a severe critic of socialism and (for slightly different rea­ sons) an obdurate foe of organized labor; what’s more, ideas of his were championed by the likes of Margaret Thatcher, among others. Yet despite all this, his analysis of the market as a mechanism for distributed decision making is too valuable to dismiss as mere right-wing cant (regardless of how much of this it may have inspired). Taking up a position made popular centuries earlier by Adam Smith with his image of the providential but invisible hand of the market, von Hayek both updates Smith’s notion for the information age and uses it to attack the centralized planning models typical of State socialism. Given the his­ torical context of emerging capitalist hegemony, Smith’s model had been aimed against traditional collective or corporatist values such as noblesse oblige: instead of respecting traditional obligations to act for the Com­ mon Good of the whole society, Smith’s market agents were to act strictly out of self-interest.

 

pages: 323 words: 92,135

Running Money by Andy Kessler

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Andy Kessler, Apple II, bioinformatics, British Empire, business intelligence, buy low sell high, call centre, Corn Laws, family office, full employment, George Gilder, happiness index / gross national happiness, interest rate swap, invisible hand, James Hargreaves, James Watt: steam engine, joint-stock company, joint-stock limited liability company, knowledge worker, Long Term Capital Management, mail merge, margin call, market bubble, Maui Hawaii, Menlo Park, Network effects, packet switching, pattern recognition, pets.com, railway mania, risk tolerance, Sand Hill Road, Silicon Valley, South China Sea, spinning jenny, Steve Jobs, Steve Wozniak, Toyota Production System

Plus, someone constantly had to seal the cylinder to make a strong vacuum and prevent steam from leaking out of the craggy-edged cylinder. Wet hemp, Jamaica’s finest, was the sealant of the day. The professor in charge of Watt at Glasgow University, Dr. Joseph Black, was teaching courses, theorizing about a concept known as latent heat, starting back in 1761. Another professor at U of G around the same time was Adam Smith (of the invisible hand). In fact, Smith and Black were good friends. Latent heat is the reason a watched pot never boils or why you put ice cubes in soda. Latent heat means you can add heat to a pot of water, but it won’t boil and give off steam until the entire pot of water is at 212° Fahrenheit. And no matter how much heat is applied by the hot sun at a baseball game, all the ice has to melt before a soda increases in temperature, right before the kid behind you spills it on your shoes.

Even after spending billions on research, they make 50% operating margins and can afford to spend more each and every year on research. Nothing static about it. Wealth is a process. If I learned nothing else from running money, that is it. Running money is supposed to be unemotional. Get conviction Why It’s Imperative to Drive a Beemer 279 on things others don’t or can’t know about and find future returns. But the stock market is also a force of change. It is the embodiment of Adam Smith’s invisible hand. It funds growth and starves dying businesses and pushes progress. Not always, I suppose, but enough. With intellectual property and the margin surplus the U.S. is running, the stock market plays a key role in balancing payments and currencies and how the world now works. In an odd way, being a player in the stock market is a form of activism, albeit indirect and invisible activism, in pushing a model that increases living standards.

It’s about finding waterfalls that create massive growth and monster markets and change for the better to the status quo. One hundred thousand or more people running money all day, every day, most staring at their screens, doing trades, providing access to capital, sloshing capital around. Whether we realize it or not, we are all driving progress, not individually, but collectively. Adam Smith’s invisible hand? If you like. That’s what a stock market does. But in this postindustrial, intellectual property world, it’s more like Doug Engelbart’s visible hands, clasped together, rising up, scaling knowledge, augmenting humans. > > > Ghana a Goner This virtuous model of the margin surplus creating jobs and a middle class in the developing world at the same time it increases wealth in the U.S. and other intellectual property economies is pretty counterintuitive.

 

When the Money Runs Out: The End of Western Affluence by Stephen D. King

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Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

This was a reaction to the excess inflation of the 1970s, a period during which central banks were too often required to do the bidding of their political masters. For a while, inflation was endemic, leading to losses for those on 77 4099.indd 77 29/03/13 2:23 PM When the Money Runs Out fixed monetary incomes – most obviously pensioners – and huge distortions to the price mechanism – Adam Smith’s ‘invisible hand’. By making central banks independent, and thus no longer subject to the temptations of the electoral cycle, the hope was that inflation would eventually be brought back under control, leaving the world a much happier place. The financial crisis has destroyed this separation of monetary church from state. By altering the yield on government debt, quantitative easing has, in effect, brought governments and central banks back together again.

The first is for the central bank to buy a much wider range of assets – not just government paper but also asset backed-­securities, corporate bonds, foreign currency or maybe even equities. Central banks have dabbled in all of these areas in the past and many continue to do so today.14 There is, however, an obvious drawback. A central bank simply doesn’t have the resources to manage credit risk. Allocating capital is supposed to be the job of the invisible hand, not the long arm of the central banker. Widening the range of assets to be purchased turns a central bank slowly but surely into the financial equivalent of a state planner. It is not an edifying vision. The second option is to dig holes or to send for the helicopters. Quantitative easing is designed to bypass the banking system in a bid to put cash directly in people’s pockets. One reason why it hasn’t been particularly successful is simply that people already feel heavily indebted and have no desire to borrow any more.

Collective undertakings of any kind, not merely governmental, become difficult or impossible 132 4099.indd 132 29/03/13 2:23 PM Loss of Trust, Loss of Growth not only because A may betray B but because even if A wants to trust B he knows that B is unlikely to trust him.11 The loss of trust witnessed in recent years – from within the financial system – has been nothing short of extraordinary. Pre-­crisis, faith in the power of the market – and its invisible hand – was sky high. That faith, however, depended on the idea that the market could somehow be trusted to deliver not just outcomes better than under any alternative system of resource allocation but also outcomes that were genuinely good for all. Yet, slowly but surely, trust has been chipped away, so much so that financial markets are no longer capable of delivering the outcomes of old. Creditors and debtors – and all those who lie in-­between – eye each other with suspicion.

 

pages: 320 words: 87,853

The Black Box Society: The Secret Algorithms That Control Money and Information by Frank Pasquale

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Affordable Care Act / Obamacare, algorithmic trading, Amazon Mechanical Turk, asset-backed security, Atul Gawande, bank run, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, bonus culture, Brian Krebs, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chelsea Manning, cloud computing, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, Debian, don't be evil, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, Filter Bubble, financial innovation, Flash crash, full employment, Goldman Sachs: Vampire Squid, Google Earth, Hernando de Soto, High speed trading, hiring and firing, housing crisis, informal economy, information retrieval, interest rate swap, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, Julian Assange, Kevin Kelly, knowledge worker, Kodak vs Instagram, kremlinology, late fees, London Interbank Offered Rate, London Whale, Mark Zuckerberg, mobile money, moral hazard, new economy, Nicholas Carr, offshore financial centre, PageRank, pattern recognition, precariat, profit maximization, profit motive, quantitative easing, race to the bottom, recommendation engine, regulatory arbitrage, risk-adjusted returns, search engine result page, shareholder value, Silicon Valley, Snapchat, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical arbitrage, statistical model, Steven Levy, the scientific method, too big to fail, transaction costs, two-sided market, universal basic income, Upton Sinclair, value at risk, WikiLeaks

Of course, as Richard Bronk observes, “Hayek’s analysis falls short by ignoring the role of dominant narratives, analytical monocultures, self-reinforcing emotions, feedback loops, information asymmetries and market power in distorting the wisdom of prices.” Richard Bronk, “Hayek on the Wisdom of Prices: A Reassessment,” Erasmus Journal for Philosophy and Economics 6, no. 1 (2013): 82–107. 6. Lee H. Fang, “The Invisible Hand of Business in the 2012 Election,” The Nation, November 19, 2003, http://www.thenation .com /article /177252 /invisible-hand-business-2012-election. 7. In philosophy, the term is also polysemic. For example, if enough people simply accept the outputs of a given process as valid, it is a quite useful black box. Some aspects of reality are simply assumed to be true, without need for further investigation. Graham Harman stated, “We have a true black box when a statement is simply presented as raw fact without any reference to its genesis or even its author.

“Unknown unknowns,” “black swans,” and “deep secrets” are popular catchphrases for our many areas of social blankness.3 There is even an emerging field of “agnotology” that studies the “structural production of ignorance, its diverse causes and conformations, whether brought about by neglect, forgetfulness, myopia, extinction, secrecy, or suppression.” 4 2 THE BLACK BOX SOCIETY Gaps in knowledge, putative and real, have powerful implications, as do the uses that are made of them. Alan Greenspan, once the most powerful central banker in the world, claimed that today’s markets are driven by an “unredeemably opaque” version of Adam Smith’s “invisible hand,” and that no one (including regulators) can ever get “more than a glimpse at the internal workings of the simplest of modern financial systems.” If this is true, libertarian policy would seem to be the only reasonable response. Friedrich von Hayek, a preeminent theorist of laissez-faire, called the “knowledge problem” an insuperable barrier to benevolent government interventions in the economy.5 But what if the “knowledge problem” is not an intrinsic aspect of the market, but rather is deliberately encouraged by certain businesses?

Moreover, those concerned about the power of Silicon Valley and Wall Street need to do more than complain about the limited availability of crucial information. We can imagine a future in which the power of algorithmic authority is limited to environments where it can promote fairness, freedom, and rationality. We do not have to live in a world where hidden scores determine people’s fates, or human manipulations of the stock market remain as inscrutable as the “invisible hand.” We should not have to worry that the fates of individuals, businesses, and even our fi nancial systems are at the mercy of hidden databases, dubious scores, and shadowy bets. The same technological and legal revolutions that have so far eviscerated personal privacy can be used to protect it and to advance, rather than curtail, our freedoms and our understanding of the social world. Directed at the right targets, data mining and pervasive surveillance might even prevent the kinds of financial crises and massive misallocations of resources that have devastated the U.S. economy over the past decade.

 

pages: 510 words: 120,048

Who Owns the Future? by Jaron Lanier

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3D printing, 4chan, Affordable Care Act / Obamacare, Airbnb, augmented reality, automated trading system, barriers to entry, bitcoin, book scanning, Burning Man, call centre, carbon footprint, cloud computing, computer age, crowdsourcing, David Brooks, David Graeber, delayed gratification, digital Maoism, en.wikipedia.org, facts on the ground, Filter Bubble, financial deregulation, Fractional reserve banking, Francis Fukuyama: the end of history, George Akerlof, global supply chain, global village, Haight Ashbury, hive mind, if you build it, they will come, income inequality, informal economy, invisible hand, Jacquard loom, Jaron Lanier, Jeff Bezos, job automation, Kevin Kelly, Khan Academy, Kickstarter, Kodak vs Instagram, life extension, Long Term Capital Management, Mark Zuckerberg, meta analysis, meta-analysis, moral hazard, mutually assured destruction, Network effects, new economy, Norbert Wiener, obamacare, packet switching, Peter Thiel, place-making, Plutocrats, plutocrats, Ponzi scheme, post-oil, pre–internet, race to the bottom, Ray Kurzweil, rent-seeking, reversible computing, Richard Feynman, Richard Feynman, Ronald Reagan, self-driving car, side project, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Skype, smart meter, stem cell, Steve Jobs, Steve Wozniak, Stewart Brand, Ted Nelson, The Market for Lemons, Thomas Malthus, too big to fail, trickle-down economics, Turing test, Vannevar Bush, WikiLeaks

Our successes will be our undoing. As we approach abundance, we will overpopulate and overconsume, or otherwise screw up, until catastrophe strikes. The Malthusian humor suggests a fatal, deterministic ineptitude in politics. • Rousseau: Technology is the means to spiritual malaise. As we approach Abundance, we become inauthentic and absurd. • Invisible Hand: Information technology ought to subsume politics. Adam Smith sketched a character known as the “Invisible Hand,” who can serve as a figurehead for subsuming politics under information technology. Markets (or more recently, other, fundamentally similar algorithms) make decisions instead of human, political deliberations. This humor either ignores or rejects Abundance, for markets become absurd as supply approaches infinity. • Marx: Politics ought to subsume information technology.

Turing’s humor also provides a destination, or an eschatology that the Invisible Hand’s humor lacks. Turing’s algorithms could inherit the world in a way that the Hand could not. This is because we can imagine software, improperly, I’ll argue, operating without the need for human operators, and even in an era of Abundance depopulated of people. Abundance kills the hand, but not Turing’s ghosts. • Nelson: Information technology of a particular design could help people remain people without resorting to extreme politics when any of the other, creepily eschatological humors seem to be imminent. Ted Nelson, in 1960, came up with a brand-new, still-emerging humor, which suggests information as a way to avoid excesses of politics even as we approach an inevitably imperfect Abundance. It essentially proposes a consilience between the Invisible Hand and Abundance.

., 129–30, 261, 328 “Forum,” 214 Foucault, Michel, 308n 4chan, 335 4′33″ (Cage), 212 fractional reserve system, 33 Franco, Francisco, 159–60 freedom, 13–15, 32–33, 90–92, 277–78, 336 freelancing, 253–54 Free Print Shop, 228 “free rise,” 182–89, 355 free speech, 223, 225 free will, 166–68 “friction,” 179, 225, 230, 235, 354 Friendster, 180, 181 Fukuyama, Francis, 165, 189 fundamentalism, 131, 193–94 future: chaos in, 165–66, 273n, 331 economic analysis of, 1–3, 15, 22, 37, 38, 40–41, 42, 67, 122, 143, 148–52, 153, 155–56, 204, 208, 209, 236, 259, 274, 288, 298–99, 311, 362n, 363 humanistic economy for, 194, 209, 233–351 361–367 “humors” of, 124–40, 230 modern conception of, 123–40, 193–94, 255 natural basis of, 125, 127, 128–29 optimism about, 32–35, 45, 130, 138–40, 218, 230n, 295 politics of, 13–18, 22–25, 85, 122, 124–26, 128, 134–37, 199–234, 295–96, 342 technological trends in, 7–18, 21, 53–54, 60–61, 66–67, 85–86, 87, 97–98, 129–38, 157–58, 182, 188–90, 193–96, 217 utopian conception of, 13–18, 21, 30, 31, 37–38, 45–46, 96, 128, 130, 167, 205, 207, 265, 267, 270, 283, 290, 291, 308–9, 316 future-oriented money, 32–34, 35 Gadget, 186 Gallant, Jack, 111–12 games, 362, 363 Gates, Bill, 93 Gattaca, 130 Gawker, 118n Gelernter, David, 313 “general” machines, 158 General Motors, 56–57 general relativity theory, 167n Generation X, 346 genetic engineering, 130 genetics, 109–10, 130, 131, 146–47, 329, 366 genomics, 109–10, 146–47, 366 Germany, 45 Ghostery, 109 ghost suburbs, 296 Gibson, William, 137, 309 Gizmodo, 117–18 Global Business Network (GBN), 214–15 global climate change, 17, 32, 53, 132, 133, 134, 203, 266, 295, 296–97, 301–2, 331 global economy, 33n, 153–56, 173, 201, 214–15, 280 global village, 201 God, 29, 30–31, 139 Golden Goblet, 121, 121, 175, 328 golden rule, 335–36 gold standard, 34 Google, 14, 15, 19, 69, 74, 75–76, 90, 94, 106, 110, 120, 128, 153, 154, 170, 171, 174, 176, 180, 181–82, 188, 191, 192, 193, 199–200, 201, 209, 210, 217, 225, 227, 246, 249, 265, 267, 272, 278, 280, 286, 305n, 307, 309–10, 322, 325, 330, 344, 348, 352 Google Goggles, 309–10 Googleplex, 199–200 goops, 85–89, 99 Gore, Al, 80n Graeber, David, 30n granularity, 277 graph-shaped networks, 241, 242–43 Great Britain, 200 Great Depression, 69–70, 75, 135, 299 Great Recession, 31, 54, 60, 76–77, 204, 311, 336–37 Greece, 22–25, 45, 125 Grigorov, Mario, 267 guitars, 154 guns, 310–11 Gurdjieff, George, 215, 216 gurus, 211–13 hackers, 14, 82, 265, 306–7, 345–46 Hardin, Garrett, 66n Hartmann, Thom, 33n Hayek, Friedrich, 204 health care, 66–67, 95, 98–99, 100, 132–33, 153–54, 249, 253, 258, 337, 346 health insurance, 66–67, 95, 98–99, 100, 153–54 Hearts and Minds, 353n heart surgery, 11–13, 17, 18, 157–58 heat, 56 hedge funds, 69, 106, 137 Hephaestus, 22, 23 high-dimensional problems, 145 high-frequency trading, 56, 76–78, 154 highways, 79–80, 345 Hinduism, 214 Hippocrates, 124n Hiroshima bombing (1945), 127 Hollywood, 204, 206, 242 holographic radiation, 11 Homebrew Club, 228 homelessness, 151 homeopathy, 131–32 Homer, 23, 55 Honan, Mat, 82 housing market, 33, 46, 49–52, 61, 78, 95–96, 99, 193, 224, 227, 239, 245, 255, 274n, 289n, 296, 298, 300, 301 HTML, 227, 230 Huffington Post, 176, 180, 189 human agency, 8–21, 50–52, 85, 88, 91, 124–40, 144, 165–66, 175–78, 191–92, 193, 217, 253–64, 274–75, 283–85, 305–6, 328, 341–51, 358–60, 361, 362, 365–67 humanistic information economy, 194, 209, 233–351 361–367 human reproduction, 131 humors (tropes), 124–40, 157, 170, 230 hunter-gatherer societies, 131, 261–62 hyperefficient markets, 39, 42–43 hypermedia, 224–30, 245 hyper-unemployment, 7–8 hypotheses, 113, 128, 151 IBM, 191 identity, 14–15, 82, 124, 173–74, 175, 248–51, 283–90, 305, 306, 307, 315–16, 319–21 identity theft, 82, 315–16 illusions, 55, 110n, 120–21, 135, 154–56, 195, 257 immigration, 91, 97, 346 immortality, 193, 218, 253, 263–64, 325–31, 367 imports, 70 income levels, 10, 46–47, 50–54, 152, 178, 270–71, 287–88, 291–94, 338–39, 365 incrementalism, 239–40 indentured servitude, 33n, 158 India, 54, 211–13 industrialization, 49, 83, 85–89, 123, 132, 154, 343 infant mortality rates, 17, 134 infinity, 55–56 inflation, 32, 33–34 information: age of, 15–17, 42, 166, 241 ambiguity of, 41, 53–54, 155–56 asymmetry of, 54–55, 61–66, 118, 188, 203, 246–48, 285–88, 291–92, 310 behavior influenced by, 32, 121, 131, 173–74, 286–87 collection of, 61–62, 108–9 context of, 143–44, 178, 188–89, 223–24, 225, 245–46, 247, 248–51, 338, 356–57, 360 correlations in, 75–76, 114–15, 192, 274–75 for decision-making, 63–64, 184, 266, 269–75, 284n digital networks for, see digital networks duplication of, 50–52, 61, 74, 78, 88, 223–30, 239–40, 253–64, 277, 317–24, 335, 349 economic impact of, 1–3, 8–9, 15–17, 18, 19–20, 21, 35, 60–61, 92–97, 118, 185, 188, 201, 207, 209, 241–43, 245–46, 246–48, 256–58, 263, 283–87, 291–303, 331, 361–67 in education, 92–97 encrypted, 14–15, 175, 239–40, 305–8, 345 false, 119–21, 186, 275n, 287–88, 299–300 filters for, 119–20, 200, 225, 356–57 free, 7–9, 15–16, 50–52, 61, 74, 78, 88, 214, 223–30, 239–40, 246, 253–64, 277, 317–24, 335, 349 history of, 29–31 human agency in, 22–25, 69–70, 120–21, 122, 190–91 interpretation of, 29n, 114–15, 116, 120–21, 129–32, 154, 158, 178, 183, 184, 188–89 investment, 59–60, 179–85 life cycle of, 175–76 patterns in, 178, 183, 184, 188–89 privacy of, see privacy provenance of, 245–46, 247, 338 sampling of, 71–72, 191, 221, 224–26, 259 shared, 50–52, 61, 74, 78, 88, 100, 223–30, 239–40, 253–64, 277, 317–24, 335, 349 signals in, 76–78, 148, 293–94 storage of, 29, 167n, 184–85; see also cloud processors and storage; servers superior, 61–66, 114, 128, 143, 171, 246–48 technology of, 7, 32–35, 49, 66n, 71–72, 109, 110, 116, 120, 125n, 126, 135, 136, 254, 312–16, 317 transparency of, 63–66, 74–78, 118, 190–91, 306–7 two-way links in, 1–2, 227, 245, 289 value of, 1–3, 15–16, 20, 210, 235–43, 257–58, 259, 261–63, 271–75, 321–24, 358–60 see also big data; data infrastructure, 79–80, 87, 179, 201, 290, 345 initial public offerings (IPOs), 103 ink, 87, 331 Inner Directeds, 215 Instagram, 2, 53 instant prices, 272, 275, 288, 320 insurance industry, 44, 56, 60, 66–67, 95, 98–99, 100, 153–54, 203, 306 intellectual property, 44, 47, 49, 60, 61, 96, 102, 183, 204, 205–10, 223, 224–26, 236, 239–40, 246, 253–64 intelligence agencies, 56, 61, 199–200, 291, 346 intelligence tests, 39, 40 interest rates, 81 Internet: advertising on, 14, 20, 24, 42, 66, 81, 107, 109, 114, 129, 154, 169–74, 177, 182, 207, 227, 242, 266–67, 275, 286, 291, 322–24, 347–48, 354, 355 anonymity of, 172, 248–51, 283–90 culture of, 13–15, 25 development of, 69, 74, 79–80, 89, 129–30, 159, 162, 190–96, 223, 228 economic impact of, 1–2, 18, 19–20, 24, 31, 43, 60–66, 79–82, 117, 136–37, 169–74, 181, 186 employment and, 2, 7–8, 56–57, 60, 71–74, 79, 117, 123, 135, 149, 178, 201, 257–58 file sharing on, 50–52, 61, 74, 78, 88, 100, 223–30, 239–40, 253–64, 277, 317–24, 335, 349 free products and services of, 7n, 10, 60–61, 73, 81, 82, 90, 94–96, 97, 128, 154, 176, 183, 187, 201, 205–10, 234, 246–48, 253–64, 283–88, 289, 308–9, 317–24, 337–38, 348–50, 366 human contributions to, 19–21, 128, 129–30, 191–92, 253–64 identity in, 14–15, 82, 173–74, 175, 283–90, 315–16 investment in, 117–20, 181 legal issues in, 63, 79–82, 204, 206, 318–19 licensing agreements for, 79–82 as network, 2–3, 9, 11, 12, 14, 15, 16, 17, 19–21, 31, 49, 50–51, 53, 54–55, 56, 57, 75, 92, 129–30, 143–48, 228–29, 259, 286–87, 308–9 political aspect of, 13–15, 205–10 search engines for, 51, 60, 70, 81, 120, 191, 267, 289, 293; see also Google security of, 14–15, 175, 239–40, 305–8, 345 surveillance of, 1–2, 11, 14, 50–51, 64, 71–72, 99, 108–9, 114–15, 120–21, 152, 177n, 199–200, 201, 206–7, 234–35, 246, 272, 291, 305, 309–11, 315, 316, 317, 319–24 transparency of, 63–66, 176, 205–6, 278, 291, 308–9, 316, 336 websites on, 80, 170, 200, 201, 343 Internet2, 69 Internet service providers (ISPs), 171–72 Interstate Highway System, 79–80, 345 “In-valid,” 130 inventors, 117–20 investment, financial, 45, 50, 59–67, 74–80, 115, 116–20, 155, 179–85, 208, 218, 257, 258, 277–78, 298, 301, 348, 350 Invisible Hand humor, 126, 128 IP addresses, 248 iPads, 267 Iran, 199, 200 irony, 130 Islam, 184 Italy, 133 Jacquard programmable looms, 23n “jailbreaking,” 103–4 Japan, 85, 97, 98, 133 Jeopardy, 191 Jeremijenko, Natalie, 302 jingles, 267 jobs, see employment Jobs, Steve, 93, 166n, 192, 358 JOBS Act (2012), 117n journalism, 92, 94 Kapital, Das (Marx), 136 Keynesianism, 38, 151–52, 204, 209, 274, 288 Khan Academy, 94 Kickstarter, 117–20, 186–87, 343 Kindle, 352 Kinect, 89n, 265 “Kirk’s Wager,” 139 Klout, 365 Kodak, 2, 53 Kottke, Dan, 211 KPFA, 136 Kurzweil, Ray, 127, 325, 327 Kushner, Tony, 165, 189 LaBerge, Stephen, 162 labor, human, 85, 86, 87, 88, 99–100, 257–58, 292 labor unions, 44, 47–48, 49, 96, 239, 240 Laffer curve, 149–51, 150, 152 Las Vegas, Nev., 296, 298 lawyers, 98–99, 100, 136, 184, 318–19 leadership, 341–51 legacy prices, 272–75, 288 legal issues, 49, 63, 74–82, 98–99, 100, 104–5, 108, 136, 184, 204, 206, 318–19 Lehman Brothers, 188 lemonade stands, 79–82 “lemons,” 118–19 Lennon, John, 211, 213 levees, economic, 43–45, 46, 47, 48, 49–50, 52, 92, 94, 96, 98, 108, 171, 176n, 224–25, 239–43, 253–54, 263, 345 leveraged mortgages, 49–50, 61, 227, 245, 289n, 296 liberal arts, 97 liberalism, 135–36, 148, 152, 202, 204, 208, 235, 236, 251, 253, 256, 265, 293, 350 libertarianism, 14, 34, 80, 202, 208, 210, 262, 321 liberty, 13–15, 32–33, 90–92, 277–78, 336 licensing agreements, 79–82 “Lifestreams” (Gelernter), 313 Lights in the Tunnel, The (Ford), 56n Linux, 206, 253, 291, 344 litigation, 98–99, 100, 104–5, 108, 184 loans, 32–33, 42, 43, 74, 151–52, 306 local advantages, 64, 94–95, 143–44, 153–56, 173, 203, 280 Local/Global Flip, 153–56, 173, 280 locked-in software, 172–73, 182, 273–74 logical copies, 223 Long-Term Capital Management, 49, 74–75 looms, 22, 23n, 24 loopholes, tax, 77 lotteries, 338–39 lucid dreaming, 162 Luddites, 135, 136 lyres, 22, 23n, 24 machines, 19–20, 86, 92, 123, 129–30, 158, 261, 309–11, 328 see also computers “Machine Stops, The” (Forster), 129–30, 261, 328 machine translations, 19–20 machine vision, 309–11 McMillen, Keith, 117 magic, 110, 115, 151, 178, 216, 338 Malthus, Thomas, 132, 134 Malthusian humor, 125, 127, 132–33 management, 49 manufacturing sector, 49, 85–89, 99, 123, 154, 343 market economies, see economies, market marketing, 211–13, 266–67, 306, 346 “Markets for Lemons” problem, 118–19 Markoff, John, 213 marriage, 167–68, 274–75, 286 Marxism, 15, 22, 37–38, 48, 136–37, 262 as humor, 126 mash-ups, 191, 221, 224–26, 259 Maslow, Abraham, 260, 315 Massachusetts Institute of Technology (MIT), 75, 93, 94, 96–97, 157–58, 184 mass media, 7, 66, 86, 109, 120, 135, 136, 185–86, 191, 216, 267 material extinction, 125 materialism, 125n, 195 mathematics, 11, 20, 40–41, 70, 71–72, 75–78, 116, 148, 155, 161, 189n, 273n see also statistics Matrix, The, 130, 137, 155 Maxwell, James Clerk, 55 Maxwell’s Demon, 55–56 mechanicals, 49, 51n Mechanical Turk, 177–78, 185, 187, 349 Medicaid, 99 medicine, 11–13, 17, 18, 54, 66–67, 97–106, 131, 132–33, 134, 150, 157–58, 325, 346, 363, 366–67 Meetings with Remarkable Men (Gurdjieff), 215 mega-dossiers, 60 memes, 124 Memex, 221n memories, 131, 312–13, 314 meta-analysis, 112 metaphysics, 12, 127, 139, 193–95 Metcalf’s Law, 169n, 350 Mexico City, 159–62 microfilm, 221n microorganisms, 162 micropayments, 20, 226, 274–75, 286–87, 317, 337–38, 365 Microsoft, 19, 89, 265 Middle Ages, 190 middle class, 2, 3, 9, 11, 16–17, 37–38, 40, 42–45, 47, 48, 49, 50, 51, 60, 74, 79, 91, 92, 95, 98, 171, 205, 208, 210, 224–25, 239–43, 246, 253–54, 259, 262, 263, 280, 291–94, 331, 341n, 344, 345, 347, 354 milling machines, 86 mind reading, 111 Minority Report, 130, 310 Minsky, Marvin, 94, 157–58, 217, 326, 330–31 mission statements, 154–55 Mixed (Augmented) Reality, 312–13, 314, 315 mobile phones, 34n, 39, 85, 87, 162, 172, 182n, 192, 229, 269n, 273, 314, 315, 331 models, economic, 40–41, 148–52, 153, 155–56 modernity, 123–40, 193–94, 255 molds, 86 monetization, 172, 176n, 185, 186, 207, 210, 241–43, 255–56, 258, 260–61, 263, 298, 331, 338, 344–45 money, 3, 21, 29–35, 86, 108, 124, 148, 152, 154, 155, 158, 172, 185, 241–43, 278–79, 284–85, 289, 364 monocultures, 94 monopolies, 60, 65–66, 169–74, 181–82, 187–88, 190, 202, 326, 350 Moondust, 362n Moore’s Law, 9–18, 20, 153, 274–75, 288 morality, 29–34, 35, 42, 50–52, 54, 71–74, 188, 194–95, 252–64, 335–36 Morlocks, 137 morning-after pill, 104 morphing, 162 mortality, 193, 218, 253, 263–64, 325–31, 367 mortgages, 33, 46, 49–52, 61, 78, 95–96, 99, 224, 227, 239, 245, 255, 274n, 289n, 296, 300 motivation, 7–18, 85–86, 97–98, 216 motivational speakers, 216 movies, 111–12, 130, 137, 165, 192, 193, 204, 206, 256, 261–62, 277–78, 310 Mozart, Wolfgang Amadeus, 23n MRI, 111n music industry, 11, 18, 22, 23–24, 42, 47–51, 54, 61, 66, 74, 78, 86, 88, 89, 92, 94, 95–96, 97, 129, 132, 134–35, 154, 157, 159–62, 186–87, 192, 206–7, 224, 227, 239, 253, 266–67, 281, 318, 347, 353, 354, 355, 357 Myspace, 180 Nancarrow, Conlon, 159–62 Nancarrow, Yoko, 161 nanopayments, 20, 226, 274–75, 286–87, 317, 337–38, 365 nanorobots, 11, 12, 17 nanotechnology, 11, 12, 17, 87, 162 Napster, 92 narcissism, 153–56, 188, 201 narratives, 165–66, 199 National Security Agency (NSA), 199–200 natural medicine, 131 Nelson, Ted, 128, 221, 228, 245, 349–50 Nelsonian systems, 221–30, 335 Nelson’s humor, 128 Netflix, 192, 223 “net neutrality,” 172 networked cameras, 309–11, 319 networks, see digital networks neutrinos, 110n New Age, 211–17 Newmark, Craig, 177n New Mexico, 159, 203 newspapers, 109, 135, 177n, 225, 284, 285n New York, N.Y., 75, 91, 266–67 New York Times, 109 Nobel Prize, 40, 118, 143n nodes, network, 156, 227, 230, 241–43, 350 “no free lunch” principle, 55–56, 59–60 nondeterministic music, 23n nonlinear solutions, 149–50 nonprofit share sites, 59n, 94–95 nostalgia, 129–32 NRO, 199–200 nuclear power, 133 nuclear weapons, 127, 296 nursing, 97–100, 123, 296n nursing homes, 97–100, 269 Obama, Barack, 79, 100 “Obamacare,” 100n obsolescence, 89, 95 oil resources, 43, 133 online stores, 171 Ono, Yoko, 212 ontologies, 124n, 196 open-source applications, 206, 207, 272, 310–11 optical illusions, 121 optimism, 32–35, 45, 130, 138–40, 218, 230n, 295 optimization, 144–47, 148, 153, 154–55, 167, 202, 203 Oracle, 265 Orbitz, 63, 64, 65 organ donors, 190, 191 ouroboros, 154 outcomes, economic, 40–41, 144–45 outsourcing, 177–78, 185 Owens, Buck, 256 packet switching, 228–29 Palmer, Amanda, 186–87 Pandora, 192 panopticons, 308 papacy, 190 paper money, 34n parallel computers, 147–48, 149, 151 paranoia, 309 Parrish, Maxfield, 214 particle interactions, 196 party machines, 202 Pascal, Blaise, 132, 139 Pascal’s Wager, 139 passwords, 307, 309 “past-oriented money,” 29–31, 35, 284–85 patterns, information, 178, 183, 184, 188–89 Paul, Ron, 33n Pauli exclusion principle, 181, 202 PayPal, 60, 93, 326 peasants, 565 pensions, 95, 99 Perestroika (Kushner), 165 “perfect investments,” 59–67, 77–78 performances, musical, 47–48, 51, 186–87, 253 perpetual motion, 55 Persian Gulf, 86 personal computers (PCs), 158, 182n, 214, 223, 229 personal information systems, 110, 312–16, 317 Pfizer, 265 pharmaceuticals industry, 66–67, 100–106, 123, 136, 203 philanthropy, 117 photography, 53, 89n, 92, 94, 309–11, 318, 319, 321 photo-sharing services, 53 physical trades, 292 physicians, 66–67 physics, 88, 153n, 167n Picasso, Pablo, 108 Pinterest, 180–81, 183 Pirate Party, 49, 199, 206, 226, 253, 284, 318 placebos, 112 placement fees, 184 player pianos, 160–61 plutocracy, 48, 291–94, 355 police, 246, 310, 311, 319–21, 335 politics, 13–18, 21, 22–25, 47–48, 85, 122, 124–26, 128, 134–37, 149–51, 155, 167, 199–234, 295–96, 342 see also conservatism; liberalism; libertarianism Ponzi schemes, 48 Popper, Karl, 189n popular culture, 111–12, 130, 137–38, 139, 159 “populating the stack,” 273 population, 17, 34n, 86, 97–100, 123, 125, 132, 133, 269, 296n, 325–26, 346 poverty, 37–38, 42, 44, 53–54, 93–94, 137, 148, 167, 190, 194, 253, 256, 263, 290, 291–92 power, personal, 13–15, 53, 60, 62–63, 86, 114, 116, 120, 122, 158, 166, 172–73, 175, 190, 199, 204, 207, 208, 278–79, 290, 291, 302–3, 308–9, 314, 319, 326, 344, 360 Presley, Elvis, 211 Priceline, 65 pricing strategies, 1–2, 43, 60–66, 72–74, 145, 147–48, 158, 169–74, 226, 261, 272–75, 289, 317–24, 331, 337–38 printers, 90, 99, 154, 162, 212, 269, 310–11, 316, 331, 347, 348, 349 privacy, 1–2, 11, 13–15, 25, 50–51, 64, 99, 108–9, 114–15, 120–21, 152, 177n, 199–200, 201, 204, 206–7, 234–35, 246, 272, 291, 305, 309–13, 314, 315–16, 317, 319–24 privacy rights, 13–15, 25, 204, 305, 312–13, 314, 315–16, 321–22 product design and development, 85–89, 117–20, 128, 136–37, 145, 154, 236 productivity, 7, 56–57, 134–35 profit margins, 59n, 71–72, 76–78, 94–95, 116, 177n, 178, 179, 207, 258, 274–75, 321–22 progress, 9–18, 20, 21, 37, 43, 48, 57, 88, 98, 123, 124–40, 130–37, 256–57, 267, 325–31, 341–42 promotions, 62 property values, 52 proprietary hardware, 172 provenance, 245–46, 247, 338 pseudo-asceticism, 211–12 public libraries, 293 public roads, 79–80 publishers, 62n, 92, 182, 277–78, 281, 347, 352–60 punishing vs. rewarding network effects, 169–74, 182, 183 quants, 75–76 quantum field theory, 167n, 195 QuNeo, 117, 118, 119 Rabois, Keith, 185 “race to the bottom,” 178 radiant risk, 61–63, 118–19, 120, 156, 183–84 Ragnarok, 30 railroads, 43, 172 Rand, Ayn, 167, 204 randomness, 143 rationality, 144 Reagan, Ronald, 149 real estate, 33, 46, 49–52, 61, 78, 95–96, 99, 193, 224, 227, 239, 245, 255, 274n, 289n, 296, 298, 300, 301 reality, 55–56, 59–60, 124n, 127–28, 154–56, 161, 165–68, 194–95, 203–4, 216–17, 295–303, 364–65 see also Virtual Reality (VR) reason, 195–96 recessions, economic, 31, 54, 60, 76–77, 79, 151–52, 167, 204, 311, 336–37 record labels, 347 recycling, 88, 89 Reddit, 118n, 186, 254 reductionism, 184 regulation, economic, 37–38, 44, 45–46, 49–50, 54, 56, 69–70, 77–78, 266n, 274, 299–300, 311, 321–22, 350–51 relativity theory, 167n religion, 124–25, 126, 131, 139, 190, 193–95, 211–17, 293, 300n, 326 remote computers, 11–12 rents, 144 Republican Party, 79, 202 research and development, 40–45, 85–89, 117–20, 128, 136–37, 145, 154, 215, 229–30, 236 retail sector, 69, 70–74, 95–96, 169–74, 272, 349–51, 355–56 retirement, 49, 150 revenue growth plans, 173n revenues, 149, 149, 150, 151, 173n, 225, 234–35, 242, 347–48 reversible computers, 143n revolutions, 199, 291, 331 rhythm, 159–62 Rich Dad, Poor Dad (Kiyosaki), 46 risk, 54, 55, 57, 59–63, 71–72, 85, 117, 118–19, 120, 156, 170–71, 179, 183–84, 188, 242, 277–81, 284, 337, 350 externalization of, 59n, 117, 277–81 risk aversion, 188 risk pools, 277–81, 284 risk radiation, 61–63, 118–19, 120, 156, 183–84 robo call centers, 177n robotic cars, 90–92 robotics, robots, 11, 12, 17, 23, 42, 55, 85–86, 90–92, 97–100, 111, 129, 135–36, 155, 157, 162, 260, 261, 269, 296n, 342, 359–60 Roman Empire, 24–25 root nodes, 241 Rousseau, Jean-Jacques, 129 Rousseau humor, 126, 129, 130–31 routers, 171–72 royalties, 47, 240, 254, 263–64, 323, 338 Rubin, Edgar, 121 rupture, 66–67 salaries, 10, 46–47, 50–54, 152, 178, 270–71, 287–88, 291–94, 338–39, 365 sampling, 71–72, 191, 221, 224–26, 259 San Francisco, University of, 190 satellites, 110 savings, 49, 72–74 scalable solutions, 47 scams, 119–21, 186, 275n, 287–88, 299–300 scanned books, 192, 193 SceneTap, 108n Schmidt, Eric, 305n, 352 Schwartz, Peter, 214 science fiction, 18, 126–27, 136, 137–38, 139, 193, 230n, 309, 356n search engines, 51, 60, 70, 81, 120, 191, 267, 289, 293 Second Life, 270, 343 Secret, The (Byrne), 216 securitization, 76–78, 99, 289n security, 14–15, 175, 239–40, 305–8, 345 self-actualization, 211–17 self-driving vehicles, 90–92, 98, 311, 343, 367 servants, 22 servers, 12n, 15, 31, 53–57, 71–72, 95–96, 143–44, 171, 180, 183, 206, 245, 358 see also Siren Servers “Sexy Sadie,” 213 Shakur, Tupac, 329 Shelley, Mary, 327 Short History of Progress, A (Wright), 132 “shrinking markets,” 66–67 shuttles, 22, 23n, 24 signal-processing algorithms, 76–78, 148 silicon chips, 10, 86–87 Silicon Valley, 12, 13, 14, 21, 34n, 56, 59, 60, 66–67, 70, 71, 75–76, 80, 93, 96–97, 100, 102, 108n, 125n, 132, 136, 154, 157, 162, 170, 179–89, 192, 193, 200, 207, 210, 211–18, 228, 230, 233, 258, 275n, 294, 299–300, 325–31, 345, 349, 352, 354–58 singularity, 22–25, 125, 215, 217, 327–28, 366, 367 Singularity University, 193, 325, 327–28 Sirenic Age, 66n, 354 Siren Servers, 53–57, 59, 61–64, 65, 66n, 69–78, 82, 91–99, 114–19, 143–48, 154–56, 166–89, 191, 200, 201, 203, 210n, 216, 235, 246–50, 258, 259, 269, 271, 272, 280, 285, 289, 293–94, 298, 301, 302–3, 307–10, 314–23, 326, 336–51, 354, 365, 366 Siri, 95 skilled labor, 99–100 Skout, 280n Skype, 95, 129 slavery, 22, 23, 33n Sleeper, 130 small businesses, 173 smartphones, 34n, 39, 162, 172, 192, 269n, 273 Smith, Adam, 121, 126 Smolin, Lee, 148n social contract, 20, 49, 247, 284, 288, 335, 336 social engineering, 112–13, 190–91 socialism, 14, 128, 254, 257, 341n social mobility, 66, 97, 292–94 social networks, 18, 51, 56, 60, 70, 81, 89, 107–9, 113, 114, 129, 167–68, 172–73, 179, 180, 190, 199, 200–201, 202, 204, 227, 241, 242–43, 259, 267, 269n, 274–75, 280n, 286, 307–8, 317, 336, 337, 343, 349, 358, 365–66 see also Facebook social safety nets, 10, 44, 54, 202, 251, 293 Social Security, 251, 345 software, 7, 9, 11, 14, 17, 68, 86, 99, 100–101, 128, 129, 147, 154, 155, 165, 172–73, 177–78, 182, 192, 234, 236, 241–42, 258, 262, 273–74, 283, 331, 347, 357 software-mediated technology, 7, 11, 14, 86, 100–101, 165, 234, 236, 258, 347 South Korea, 133 Soviet Union, 70 “space elevator pitch,” 233, 342, 361 space travel, 233, 266 Spain, 159–60 spam, 178, 275n spending levels, 287–88 spirituality, 126, 211–17, 325–31, 364 spreadsheet programs, 230 “spy data tax,” 234–35 Square, 185 Stalin, Joseph, 125n Stanford Research Institute (SRI), 215 Stanford University, 60, 75, 90, 95, 97, 101, 102, 103, 162, 325 Starr, Ringo, 256 Star Trek, 138, 139, 230n startup companies, 39, 60, 69, 93–94, 108n, 124n, 136, 179–89, 265, 274n, 279–80, 309–10, 326, 341, 343–45, 348, 352, 355 starvation, 123 Star Wars, 137 star (winner-take-all) system, 38–43, 50, 54–55, 204, 243, 256–57, 263, 329–30 statistics, 11, 20, 71–72, 75–78, 90–91, 93, 110n, 114–15, 186, 192 “stickiness,” 170, 171 stimulus, economic, 151–52 stoplights, 90 Strangelove humor, 127 student debt, 92, 95 “Study 27,” 160 “Study 36,” 160 Sumer, 29 supergoop, 85–89 supernatural phenomena, 55, 124–25, 127, 132, 192, 194–95, 300 supply chain, 70–72, 174, 187 Supreme Court, U.S., 104–5 surgery, 11–13, 17, 18, 98, 157–58, 363 surveillance, 1–2, 11, 14, 50–51, 64, 71–72, 99, 108–9, 114–15, 120–21, 152, 177n, 199–200, 201, 206–7, 234–35, 246, 272, 291, 305, 309–11, 315, 316, 317, 319–24 Surviving Progress, 132 sustainable economies, 235–37, 285–87 Sutherland, Ivan, 221 swarms, 99, 109 synthesizers, 160 synthetic biology, 162 tablets, 85, 86, 87, 88, 113, 162, 229 Tahrir Square, 95 Tamagotchis, 98 target ads, 170 taxation, 44, 45, 49, 52, 60, 74–75, 77, 82, 149, 149, 150, 151, 202, 210, 234–35, 263, 273, 289–90 taxis, 44, 91–92, 239, 240, 266–67, 269, 273, 311 Teamsters, 91 TechCrunch, 189 tech fixes, 295–96 technical schools, 96–97 technologists (“techies”), 9–10, 15–16, 45, 47–48, 66–67, 88, 122, 124, 131–32, 134, 139–40, 157–62, 165–66, 178, 193–94, 295–98, 307, 309, 325–31, 341, 342, 356n technology: author’s experience in, 47–48, 62n, 69–72, 93–94, 114, 130, 131–32, 153, 158–62, 178, 206–7, 228, 265, 266–67, 309–10, 325, 328, 343, 352–53, 362n, 364, 365n, 366 bio-, 11–13, 17, 18, 109–10, 162, 330–31 chaos and, 165–66, 273n, 331 collusion in, 65–66, 72, 169–74, 255, 350–51 complexity of, 53–54 costs of, 8, 18, 72–74, 87n, 136–37, 170–71, 176–77, 184–85 creepiness of, 305–24 cultural impact of, 8–9, 21, 23–25, 53, 130, 135–40 development and emergence of, 7–18, 21, 53–54, 60–61, 66–67, 85–86, 87, 97–98, 129–38, 157–58, 182, 188–90, 193–96, 217 digital, 2–3, 7–8, 15–16, 18, 31, 40, 43, 50–51, 132, 208 economic impact of, 1–3, 15–18, 29–30, 37, 40, 53–54, 60–66, 71–74, 79–110, 124, 134–37, 161, 162, 169–77, 181–82, 183, 184–85, 218, 254, 277–78, 298, 335–39, 341–51, 357–58 educational, 92–97 efficiency of, 90, 118, 191 employment in, 56–57, 60, 71–74, 79, 123, 135, 178 engineering for, 113–14, 123–24, 192, 194, 217, 218, 326 essential vs. worthless, 11–12 failure of, 188–89 fear of (technophobia), 129–32, 134–38 freedom as issue in, 32–33, 90–92, 277–78, 336 government influence in, 158, 199, 205–6, 234–35, 240, 246, 248–51, 307, 317, 341, 345–46, 350–51 human agency and, 8–21, 50–52, 85, 88, 91, 124–40, 144, 165–66, 175–78, 191–92, 193, 217, 253–64, 274–75, 283–85, 305–6, 328, 341–51, 358–60, 361, 362, 365–67 ideas for, 123, 124, 158, 188–89, 225, 245–46, 286–87, 299, 358–60 industrial, 49, 83, 85–89, 123, 132, 154, 343 information, 7, 32–35, 49, 66n, 71–72, 109, 110, 116, 120, 125n, 126, 135, 136, 254, 312–16, 317 investment in, 66, 181, 183, 184, 218, 277–78, 298, 348 limitations of, 157–62, 196, 222 monopolies for, 60, 65–66, 169–74, 181–82, 187–88, 190, 202, 326, 350 morality and, 50–51, 72, 73–74, 188, 194–95, 262, 335–36 motivation and, 7–18, 85–86, 97–98, 216 nano-, 11, 12, 17, 162 new vs. old, 20–21 obsolescence of, 89, 97 political impact of, 13–18, 22–25, 85, 122, 124–26, 128, 134–37, 199–234, 295–96, 342 progress in, 9–18, 20, 21, 37, 43, 48, 57, 88, 98, 123, 124–40, 130–37, 256–57, 267, 325–31, 341–42 resources for, 55–56, 157–58 rupture as concept in, 66–67 scams in, 119–21, 186, 275n, 287–88, 299–300 singularity of, 22–25, 125, 215, 217, 327–28, 366, 367 social impact of, 9–21, 124–40, 167n, 187, 280–81, 310–11 software-mediated, 7, 11, 14, 86, 100–101, 165, 234, 236, 258, 347 startup companies in, 39, 60, 69, 93–94, 108n, 124n, 136, 179–89, 265, 274n, 279–80, 309–10, 326, 341, 343–45, 348, 352, 355 utopian, 13–18, 21, 31, 37–38, 45–46, 96, 128, 130, 167, 205, 207, 265, 267, 270, 283, 290, 291, 308–9, 316 see also specific technologies technophobia, 129–32, 134–38 television, 86, 185–86, 191, 216, 267 temperature, 56, 145 Ten Commandments, 300n Terminator, The, 137 terrorism, 133, 200 Tesla, Nikola, 327 Texas, 203 text, 162, 352–60 textile industry, 22, 23n, 24, 135 theocracy, 194–95 Theocracy humor, 124–25 thermodynamics, 88, 143n Thiel, Peter, 60, 93, 326 thought experiments, 55, 139 thought schemas, 13 3D printers, 7, 85–89, 90, 99, 154, 162, 212, 269, 310–11, 316, 331, 347, 348, 349 Thrun, Sebastian, 94 Tibet, 214 Time Machine, The (Wells), 127, 137, 261, 331 topology, network, 241–43, 246 touchscreens, 86 tourism, 79 Toyota Prius, 302 tracking services, 109, 120–21, 122 trade, 29 traffic, 90–92, 314 “tragedy of the commons,” 66n Transformers, 98 translation services, 19–20, 182, 191, 195, 261, 262, 284, 338 transparency, 63–66, 74–78, 118, 176, 190–91, 205–6, 278, 291, 306–9, 316, 336 transportation, 79–80, 87, 90–92, 123, 258 travel agents, 64 Travelocity, 65 travel sites, 63, 64, 65, 181, 279–80 tree-shaped networks, 241–42, 243, 246 tribal dramas, 126 trickle-down effect, 148–49, 204 triumphalism, 128, 157–62 tropes (humors), 124–40, 157, 170, 230 trust, 32–34, 35, 42, 51–52 Turing, Alan, 127–28, 134 Turing’s humor, 127–28, 191–94 Turing Test, 330 Twitter, 128, 173n, 180, 182, 188, 199, 200n, 201, 204, 245, 258, 259, 349, 365n 2001: A Space Odyssey, 137 two-way links, 1–2, 227, 245, 289 underemployment, 257–58 unemployment, 7–8, 22, 79, 85–106, 117, 151–52, 234, 257–58, 321–22, 331, 343 “unintentional manipulation,” 144 United States, 25, 45, 54, 79–80, 86, 138, 199–204 universities, 92–97 upper class, 45, 48 used car market, 118–19 user interface, 362–63, 364 utopianism, 13–18, 21, 30, 31, 37–38, 45–46, 96, 128, 130, 167, 205, 207, 265, 267, 270, 283, 290, 291, 308–9, 316 value, economic, 21, 33–35, 52, 61, 64–67, 73n, 108, 283–90, 299–300, 321–22, 364 value, information, 1–3, 15–16, 20, 210, 235–43, 257–58, 259, 261–63, 271–75, 321–24, 358–60 Values, Attitudes, and Lifestyles (VALS), 215 variables, 149–50 vendors, 71–74 venture capital, 66, 181, 218, 277–78, 298, 348 videos, 60, 100, 162, 185–86, 204, 223, 225, 226, 239, 240, 242, 245, 277, 287, 329, 335–36, 349, 354, 356 Vietnam War, 353n vinyl records, 89 viral videos, 185–86 Virtual Reality (VR), 12, 47–48, 127, 129, 132, 158, 162, 214, 283–85, 312–13, 314, 315, 325, 343, 356, 362n viruses, 132–33 visibility, 184, 185–86, 234, 355 visual cognition, 111–12 VitaBop, 100–106, 284n vitamins, 100–106 Voice, The, 185–86 “voodoo economics,” 149 voting, 122, 202–4, 249 Wachowski, Lana, 165 Wall Street, 49, 70, 76–77, 181, 184, 234, 317, 331, 350 Wal-Mart, 69, 70–74, 89, 174, 187, 201 Warhol, Andy, 108 War of the Worlds, The (Wells), 137 water supplies, 17, 18 Watts, Alan, 211–12 Wave, 189 wealth: aggregate or concentration of, 9, 42–43, 53, 60, 61, 74–75, 96, 97, 108, 115, 148, 157–58, 166, 175, 201, 202, 208, 234, 278–79, 298, 305, 335, 355, 360 creation of, 32, 33–34, 46–47, 50–51, 57, 62–63, 79, 92, 96, 120, 148–49, 210, 241–43, 270–75, 291–94, 338–39, 349 inequalities and redistribution of, 20, 37–45, 65–66, 92, 97, 144, 254, 256–57, 274–75, 286–87, 290–94, 298, 299–300 see also income levels weather forecasting, 110, 120, 150 weaving, 22, 23n, 24 webcams, 99, 245 websites, 80, 170, 200, 201, 343 Wells, H.

 

Making Globalization Work by Joseph E. Stiglitz

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affirmative action, Andrei Shleifer, Asian financial crisis, banking crisis, barriers to entry, Berlin Wall, business process, capital controls, central bank independence, corporate governance, corporate social responsibility, currency manipulation / currency intervention, Doha Development Round, Exxon Valdez, Fall of the Berlin Wall, Firefox, full employment, Gini coefficient, global reserve currency, happiness index / gross national happiness, illegal immigration, income inequality, income per capita, incomplete markets, Indoor air pollution, informal economy, inventory management, invisible hand, Kenneth Rogoff, low skilled workers, manufacturing employment, market fundamentalism, Martin Wolf, microcredit, moral hazard, North Sea oil, offshore financial centre, oil rush, open borders, open economy, price stability, profit maximization, purchasing power parity, quantitative trading / quantitative finance, race to the bottom, reserve currency, rising living standards, risk tolerance, Silicon Valley, special drawing rights, statistical model, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, trickle-down economics, union organizing, Washington Consensus

I hope that this book, like its predecessor, will help transform the globalization debate—and, ultimately, the political processes which shape globalization. Globalization is the field on which some of our major societal conflicts—including those over basic values—play out. Among the most important of those conflicts is that over the role of government and markets. It used to be that conservatives could appeal to Adam Smith's "invisible hand"—the notion that markets and the pursuit of self-interest would lead, as if by an invisible hand, to economic efficiency. Even if they could admit that markets, by themselves, might not engender a socially acceptable distribution of income, they argued that issues of efficiency and equity should be separated. In this conservative view, economics is about efficiency, and issues of equity (which, like beauty, so often lies in the eyes of the beholder) should be left to politics.

In this conservative view, economics is about efficiency, and issues of equity (which, like beauty, so often lies in the eyes of the beholder) should be left to politics. Today, the intellectual defense of market fundamentalism has largely disappeared.2 My research on the economics of information showed that whenever information is imperfect, in particular when there are information asymmetries—where some individuals know something that others do not (in other words, always)—the reason that the invisible hand seems invisible is that it is not there.3 Without appropriate government regulation and intervention, markets do not lead to economic efficiency.' In recent years we have seen dramatic illustrations of these theoretical insights. As I described in my book The Roaring Nineties,' the pursuit of self-interest by CEOs, accountants, and investment banks did not lead to economic efficiency, but rather to a bubble accompanied by massive misallocations of investment.

This alternative view has some semblance to the "Third Way" commonly associated with U.K. prime minister Tony Blair, U.S. president Bill Clinton, and German chancellor Gerhard Schroeder. The annual Economic Report of the President in the early years of the Clinton presidency articulated these views, relating what the government should do closely to the limitations of the market. 3. The quest for understanding the circumstances under which Adam Smith's idea that markets do or do not lead "as if by an invisible hand" to economic efficiency has been at the center of economic research for two centuries. Kenneth J. Arrow and Gerard Debreu won Nobel Prizes for their rigorous mathematical analyses. They defined the ideal conditions under which Smith was right, but also identified the numerous instances of market failures, where he was not—when, for 9. 10. 11. 12. 297 instance, there are externalities (like pollution) where the actions of one individual have effects on others for which they are not compensated.

 

pages: 479 words: 144,453

Homo Deus: A Brief History of Tomorrow by Yuval Noah Harari

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23andMe, agricultural Revolution, algorithmic trading, Anne Wojcicki, anti-communist, Anton Chekhov, autonomous vehicles, Berlin Wall, call centre, Chris Urmson, cognitive dissonance, Columbian Exchange, computer age, Deng Xiaoping, don't be evil, European colonialism, experimental subject, falling living standards, Flash crash, Frank Levy and Richard Murnane: The New Division of Labor, glass ceiling, global village, invention of writing, invisible hand, Isaac Newton, job automation, Kevin Kelly, means of production, Mikhail Gorbachev, Minecraft, Moneyball by Michael Lewis explains big data, mutually assured destruction, new economy, pattern recognition, Peter Thiel, placebo effect, Ray Kurzweil, self-driving car, Silicon Valley, Silicon Valley ideology, stem cell, Steven Pinker, telemarketer, too big to fail, trade route, Turing machine, Turing test, ultimatum game, Watson beat the top human players on Jeopardy!

And as I process more data more efficiently – answering more emails, making more phone calls and writing more articles – so the people around me are flooded by even more data. This relentless flow of data sparks new inventions and disruptions that nobody plans, controls or comprehends. No one understands how the global economy functions or where global politics is heading. But no one needs to understand. All you need to do is answer your emails faster – and allow the system to read them. Just as free-market capitalists believe in the invisible hand of the market, so Dataists believe in the invisible hand of the data flow. As the global data-processing system becomes all-knowing and all-powerful, so connecting to the system becomes the source of all meaning. Humans want to merge into the data flow because when you are part of the data flow you are part of something much bigger than yourself. Traditional religions told you that your every word and action was part of some great cosmic plan, and that God watched you every minute and cared about all your thoughts and feelings.

It convinced human collectives that equilibrium is far more frightening than chaos, and because avarice fuels growth, it is a force for good. Modernity accordingly inspired people to want more, and dismantled the age-old disciplines that curbed greed. The resulting anxieties were assuaged to a large extent by free-market capitalism, which is one reason why this particular ideology has become so popular. Capitalist thinkers repeatedly calm us: ‘Don’t worry, it will be okay. Provided the economy grows, the invisible hand of the market will take care of everything else.’ Capitalism has thus sanctified a voracious and chaotic system that grows by leaps and bounds, without anyone understanding what is happening and where we are rushing. (Communism, which also believed in growth, thought it could prevent chaos and orchestrate growth through state planning. After initial successes, it eventually fell far behind the messy free-market cavalcade.)

Complying with it could easily have resulted in a dark world, devoid of ethics, aesthetics and compassion. Yet the fact remains that humankind is today not only far more powerful than ever, it is also far more peaceful and cooperative. How did humans manage that? How did morality, beauty and even compassion survive and flourish in a world devoid of gods, of heaven and of hell? Capitalists are, again, quick to give all the credit to the invisible hand of the market. Yet the market’s hand is blind as well as invisible, and by itself could never have saved human society. Indeed, not even a country fair can maintain itself without the helping hand of some god, king or church. If everything is for sale, including the courts and the police, trust evaporates, credit vanishes and business withers.6 What, then, rescued modern society from collapse?

 

pages: 300 words: 77,787

Investing Demystified: How to Invest Without Speculation and Sleepless Nights by Lars Kroijer

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Andrei Shleifer, asset allocation, asset-backed security, Bernie Madoff, bitcoin, Black Swan, BRICs, Carmen Reinhart, cleantech, compound rate of return, credit crunch, diversification, diversified portfolio, equity premium, estate planning, fixed income, high net worth, implied volatility, index fund, invisible hand, Kenneth Rogoff, market bubble, passive investing, pattern recognition, prediction markets, risk tolerance, risk/return, Robert Shiller, Robert Shiller, sovereign wealth fund, too big to fail, transaction costs, Vanguard fund, yield curve, zero-coupon bond

Now ask the same people to do the same thing for all listed stocks and they will tell you that you are crazy – it’s not realistic to have this kind of expectation for more than a small portfolio of shares, and besides, risk and return expectations, and correlations, change all the time. It simply can’t be done. The beautiful shortcut – follow the crowd But here is the beautiful thing. If you generally believe in efficient markets, you don’t need to worry about the portfolio theory above or collecting millions of correlations and thousands of risk-return profiles. The market’s ‘invisible hand’ has already done all that for you. We don’t think we are able to reallocate between securities in such a way that we have a higher risk/return profile than what the aggregate knowledge of the market provides. Buying the entire market is essentially like buying the tangency point T. To some people it will seem like too bold an assumption that capital has seamlessly flowed between countries and industries in such a way that world markets are efficiently allocated.

In order to keep things simple, we typically refer to the markets as the listed equity markets. If you invest in a combination of the minimal-risk asset and broad-listed equity markets in a cheap and tax efficient way, you are doing better than most. If you are willing to add a bit of complexity there’s a lot of merit in adding other government and corporate bonds to your portfolio (see later). Summary The ‘invisible hand’ of the markets has optimised the values of the investments available. We should celebrate this simplicity and buy the whole market. We don’t think we can reallocate between securities to get a better risk/return profile. Combine the world equity markets with investing in the minimal risk asset to get to the kind of risk profile you want. The markets could mean for you only a broad range of equities, but adding other government and corporate bonds has a lot of merit. 1 An important point on portfolio theory and the minimal risk asset that will be discussed later.

Index accountants active managers compared with index trackers, 2nd performance over time active personal portfolio management adding up the costs of advisory charges age life stages of financial planning and risk profile AIG allocations see investment allocations alternative investments alternative weightings ‘angel’ investing, 2nd annuities IRR (internal rate of return), 2nd apocalypse investing avoiding fraud and financial disasters and gold as security assets asset classes to avoid concentration risk customisation and noninvestment growth of, and overpayment of fees and institutional investors intangible and liabilities and portfolio theory in the rational portfolio, assets split tangible see also minimal risk assets avoiding fraud banks bailouts cash deposits with and financial disaster and gold as security and property investment Barclays US High Yield index Bernstein, William The Intelligent Asset Allocator bid/offer spread black swan events, 2nd, 3rd Bogle, John bonds bond indices, 2nd dollar domination of ETFs, 2nd and financial planning income from coupon payments indices and the rational portfolio adding other bonds to risk preferences, 2nd rebalancing your portfolio ‘risky’ bonds and liquidity shortterm, 2nd see also corporate bonds; government bonds; minimal risk assets Brazil government bonds broad-based portfolios and liquidity world equities, 2nd, 3rd, 4th, 5th Buffett, Warren, 2nd fee structure capital gains tax (CGT), 2nd, 3rd and gifts car insurance Case-Shiller House Price index, 2nd cash deposits deposit insurance government guarantees risk of CGT see capital gains tax (CGT) civil unrest collectibles commercial property market commodities, 2nd returns form company shares comparison sites, 2nd enhanced independent Contagion (film) corporate bonds adding to minimal risk assets, 2nd, 3rd and financial planning and credit quality ETFs, 2nd and financial planning liquidity of and minimal risk assets and portfolio theory, 2nd and the rational portfolio, 2nd, 3rd adjusting allocations, 2nd risk preferences real return expectations world corporate debt yields, 2nd costs see fees and expenses CRB Commodity index CRB Total Return index, 2nd credit ratings government bonds, 2nd, 3rd, 4th adding to minimal risk assets currency and government bonds, 2nd, 3rd, 4th matching and world equities currency-hedged investment products custody charges customisation Cyprus defined benefits pension schemes defined contribution pension schemes diversification and assets benefits of and corporate bonds, 2nd and equity market risk geographical and government bonds, 2nd and the rational portfolio, 2nd and world equities, 2nd Dow Jones index Industrial Average recovery from losses drop dead allocation early savers edge over the markets see investment edge efficiency frontiers EIS (Enterprise Investment Schemes) Elton, Edwin Modern Portfolio Theory and Investment Analysis emerging market companies listed on Western exchanges Enterprise Investment Schemes (EIS) equities and government and corporate bonds performance and portfolio theory and property investment and the rational portfolio allocations risk preferences, 2nd rebalancing your portfolio risk of diversification and false sense of security recovering from large losses standard deviation, 2nd, 3rd view that markets will always bounce back see also world equities equity risk premium and financial planning ETFs (exchange traded funds), 2nd, 3rd, 4th advantages to owning buying bonds, 2nd, 3rd commodity trading customisation fees and expenses in global property and gold trading implementing and index funds leveraged maturities and minimal risk bonds, 2nd physical or synthetic rebalancing your portfolio and taxes total expense ratio (TER) tracking errors European Union bonds, 2nd expenses see fees and expenses fat tails fees and expenses, 2nd adding up costs alternative investments benefits of paying lower fees and comparison websites financial advisers index trackers compared with active managers and investment edge pension plans and performance impact over time mutual funds, 2nd and the rational investor and the rational portfolio, 2nd rebalancing your portfolio Ferri, Richard All About Asset Allocation financial advisers, 2nd and comparison websites financial crisis 2008–09 and commodities trading and currency matching and government bonds yields and high risk preferences and liquidity and longterm financial planning, 2nd and market risk, 2nd, 3rd, 4th financial planning building your savings and the financial crisis 2008–09, 2nd and investment allocations, 2nd, 3rd and life stages and risk, 2nd risk surveys rules of thumb to consider supercautious savers financial software packages France government bonds fraud, avoiding frequent trading FTSE All-Share index FTSE All-Share Tracker fund FTSE NAREIT Global index, 2nd, 3rd fund pickers future performance mutual funds GDP and corporate bonds and world equity market value, 2nd Germany government bonds gifts and capital gains tax gold, 2nd as security Goldman Sachs government bonds adding to minimal risk assets, 2nd and financial planning and bank deposits banks and government defaults buying in base currency, 2nd credit ratings, 2nd, 3rd, 4th and diversification earnings ETFs, 2nd and the financial crisis (2008) and financial planning inflationprotected liquidity of longerterm maturity minimal risk and world equities, 2nd, 3rd and portfolio theory, 2nd, 3rd and the rational portfolio, 2nd, 3rd adjusting, 2nd, 3rd allocations, 2nd risk preferences real return expectations time horizons yields Greece government debt and bond yields hedge funds, 2nd, 3rd, 4th Japanese government bonds and liquidity high risk preferences home markets overinvestment in Icelandic banks income tax index funds, 2nd and ETFs and government bonds implementing maturities and minimal risk bonds, 2nd total expense ratio (TER) tracking errors index-tracking products, 2nd and active managers adding bonds to a portfolio compared with active managers, 2nd comparison sites, 2nd enhanced independent costs of fund changes and taxes future product development implementing license fees for and liquidity and mutual funds and the rational portfolio, 2nd, 3rd different risk preferences total expense ratio (TER), 2nd versus mutual fund returns over time world equities, 2nd see also ETFs (exchange traded funds); index funds India government bonds inflation earnings from minimal risk bonds inflation-adjusted government bonds inflation-protected bonds returns on world equities information/research costs institutional investors insurance buying deposit insurance schemes intangible assets interest rates cash deposits in banks government bonds, 2nd international investment investment allocations adding other government and corporate bonds and financial planning, 2nd, 3rd flexibility of financial goals life stages rebalancing your portfolio, 2nd investment edge, 2nd absence of, 2nd adding up the costs asset classes to avoid and commodities trading, 2nd and the competition different ways of having and expenses and performance picking your moment and private investments and the rational portfolio reconsidering your edge and world equities ‘invisible hand’ of the market IOUs (promissory notes) IRR (internal rate of return) annuities, 2nd iShares, 2nd Ishikawa, Tets How I Caused the Credit Crunch Japan commodities trading government bonds Nikkei index jewellery leverage ETFs and mortgages portfolios liabilities and the rational portfolio life insurance, 2nd life stages and financial planning liquidity equity portfolio and ‘risky’ bonds and ETFs minimal risk and private investments and the rational portfolio, 2nd, 3rd returns on illiquid investments selling your investment, 2nd localised risks avoiding and noninvestment assets Madoff, Bernie market capitalisation and world equities, 2nd market efficiency and inefficiency Mexico government bonds Microsoft investors, 2nd, 3rd and liquidity, 2nd mid-life savers minimal risk assets, 2nd adding other bonds to corporate bonds, 2nd, 3rd government bonds, 2nd adjusting the risk profile asset classes to avoid buying and diversification and equity markets ETFs and financial planning 50/50 split with world equities, 2nd, 3rd allocations government bonds earnings inflation-protected time horizons of inflationprotected bonds and liquidity as optimal portfolio and portfolio theory, 2nd in the rational portfolio, 2nd, 3rd, 4th, 5th, 6th real return expectations and world equities, 2nd Morgan Stanley mortgages and currency matching and leverage MSCI World Index, 2nd, 3rd, 4th mutual funds fees and performance, 2nd and index trackers national economies and equity market risk OEICs (openended investment companies) oil trading, 2nd optimal portfolio theory minimal risk asset past performance and future performance Paulson, John pension funds, 2nd, 3rd benefits and charges defined benefits schemes underfunded performance and fees index trackers versus active managers versus mutual funds portfolio theory and government bonds optimal and the rational investor price impact private equity capital, 2nd private investments, 2nd and liquidity privatisations and world equities professional investment managers property market investments, 2nd avoiding and financial disasters institutional investors and liquidity and the rational portfolio US subprime housing markets, 2nd, 3rd rational investing, 2nd core of ongoing tasks of rational portfolio adding other bonds to adjusting allocations and equity risk return expectations asset classes to avoid assets and liabilities assets split checklist corporate bonds, 2nd diversification financial benefits of and financial disasters geographical diversification government bonds, 2nd, 3rd, 4th, 5th implementation incorporating other assets and investment edge key components of a and liquidity, 2nd, 3rd and pension plans and portfolio theory and risk preferences risk/return profile, 2nd, 3rd, 4th tailoring to specific needs and circumstances tax adjustments tax benefits of holding and tax efficiency, 2nd, 3rd, 4th world equities, 2nd, 3rd, 4th see also minimal risk assets rebalancing your portfolio ticket size REITs (Real Estate Investment Trusts) residential property market retirees investment allocation retirement annuities and financial planning risk cash deposits credit risk and corporate bonds of equity markets equity risk premium high risk preferences and longterm financial planning, 2nd and the optimised market and the rational portfolio, 2nd, 3rd asset split risk preferences risk expertise websites risk surveys risk/return profile equity markets and financial planning, 2nd, 3rd and long-term financial planning minimal risk assets adding government and corporate bonds to pension plans and portfolio theory and the rational portfolio, 2nd, 3rd, 4th, 5th rebalancing your portfolio world equities riskless investment choice, 2nd S&P 500 index and the CRB Commodity index Index Tracker Portfolio standard deviation stocks volatility savings ‘doing nothing’ with and long-term financial planning life stages SD see standard deviation (SD) selling investments and liquidity software packages Spain government bonds standard deviation (SD) building your savings and equity market risk, 2nd, 3rd synthetic ETFs Taleb, Nassim Nicholas The Black Swan, 2nd tangency points tangible assets tax efficient proxies tax wrappers, 2nd taxes, 2nd advisers or accountants questions to ask benefits of the rational portfolio capital gains tax (CGT), 2nd, 3rd, 4th creating trading lots and financial disaster and pension plans, 2nd rational portfolio adjustment realising losses against tax advice websites tax efficiency and the rational portfolio, 2nd, 3rd, 4th tax schemes tax-sheltered or optimised products transaction tax, 2nd technology-focused funds, 2nd TER (total expense ratio), 2nd This Time is Different: Eight Centuries of Financial Folly (Reinhart and Rogoff) total expense ratio (TER), 2nd transaction taxes, 2nd, 3rd transfer charges turnover costs unit trusts, 2nd United Kingdom bank deposits and credit guarantee equities government bonds credit rating earnings from sterling investors United States corporate bonds, 2nd Dow Jones index, 2nd equity market, 2nd risk, 2nd, 3rd and total expense ratio government bonds credit ratings dollar investors earnings from versus property investment sub-prime housing market, 2nd, 3rd Vanguard, 2nd, 3rd, 4th, 5th, 6th FTSE AllShare index venture capital, 2nd Virgin FTSE All-Share Tracker fund volatility and financial planning predicting future Waal, Edmund de The Hare with Amber Eyes world equities adjusting the rational portfolio alternative weightings defining diversification benefits, 2nd, 3rd ETFs expected returns and financial planning 50/50 split with minimal risk assets, 2nd, 3rd investment allocation and high risk preferences indices liquidity of market value and minimal risk assets, 2nd overweighing ‘home’ equities and portfolio theory and the rational portfolio, 2nd, 3rd, 4th allocations risk preferences real return expectations US market, 2nd ‘Investing Demystified delivers, with great clarity and lucidity, the best possible advice you can get when it comes to personal investments and financial planning.’

 

pages: 257 words: 64,763

The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street by Robert Scheer

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banking crisis, Bernie Madoff, Bernie Sanders, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, facts on the ground, financial deregulation, housing crisis, invisible hand, Long Term Capital Management, mortgage debt, new economy, Ponzi scheme, profit motive, Ralph Nader, Ronald Reagan, too big to fail, trickle-down economics

Early in the campaign, Obama had shown a sophisticated grasp of the causes of the crash, and one in line with the central thesis of this book. Speaking at Manhattan’s Cooper Union on March 27, 2008, the Democratic Primary candidate provided what still stands as one of the best analyses of the extent and causes of the economic crisis:The American experiment has worked in large part because we have guided the market’s invisible hand with a higher principle. Our free market was never meant to be a free license to take whatever you can get, however you can get it. That is why we have put in place rules of the road to make competition fair, and open, and honest. We have done this not to stifle—but rather to advance prosperity and liberty. As I said at NASDAQ last September: the core of our economic success is the fundamental truth that each American does better when all Americans do better; that the well-being of American business, its capital markets, and the American people are aligned.

Partial deregulation of the electricity sector enabled market manipulation. Companies like Enron and WorldCom took advantage of the new regulatory environment to push the envelope, pump up earnings, disguise losses, and otherwise engage in accounting fraud to make their profits look better—a practice that led investors to question the balance sheet of all companies, and severely damaged public trust in capital markets. This was not the invisible hand at work. Instead, it was the hand of industry lobbyists tilting the playing field in Washington, an accounting industry that had developed powerful conflicts of interest, and a financial sector that fueled over-investment. A decade later, we have deregulated the financial services sector, and we face another crisis . . . When subprime mortgage lending took a reckless and un-sustainable turn, a patchwork of regulators was unable or unwilling to protect the American people.

Hendrickson, “The Long and Bumpy Road to Glass-Steagall Reform: A Historical and Evolutionary Analysis of Banking Legislation,” American Journal of Economics and Sociology 60, no. 4 (2001): 849-879. 52 “They have announced a $70 billion merger”: Editorial, “A Monster Merger,” New York Times, April 8, 1998. 53 “In a single day, with a single bold merger, pending”: Leslie Wayne, “Shaping a Colossus: The Politics; Deal Jump-Starts a Stalled Banking Bill,” New York Times, April 8, 1998. 54 “Indeed, within 24 hours of the deal’s”: Ibid. 55 “Over the [past] seven years, we have tried”: Statement by President Bill Clinton at the Signing of the Financial Modernization Bill, Office of Public Affairs, U.S. Department of the Treasury, November 12, 1999, www.ustreas.gov/press/releases/ls241.htm. 56 “In the 1930s, at the trough of the Depression”: Ibid. 57 “a nation of whiners”: Patrice Hill, “McCain Adviser Talks of ‘Mental Recession,’” Washington Times, July 9, 2008. 57 “I think we will look back in ten”: David Leonhardt, “Washington’s Invisible Hand,” New York Times, September 26, 2008. 57 “Citigroup threatens no one”: “A Monster Merger.” 58 “Sandy suddenly suggested, ‘We should call Clinton’”: Monica Langley, Tearing Down the Walls: How Sandy Weill Fought His Way to the Top of the Financial World . . . and Then Nearly Lost It All (New York: Simon & Schuster, 2003), 5593-5598, Kindle2 2. 60 “I would compartmentalize the industry”: Bob Ivry, “Reed Says ‘I’m Sorry’ for Role in Creating Citigroup,” Bloomberg, November 6, 2009, www.bloomberg.com/apps/news?

 

pages: 998 words: 211,235

A Beautiful Mind by Sylvia Nasar

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Al Roth, Albert Einstein, Andrew Wiles, Brownian motion, cognitive dissonance, Columbine, experimental economics, fear of failure, Henri Poincaré, invisible hand, Isaac Newton, John Conway, John Nash: game theory, John von Neumann, Kenneth Rogoff, linear programming, lone genius, market design, medical residency, Nash equilibrium, Norbert Wiener, Paul Erdős, prisoner's dilemma, RAND corporation, Ronald Coase, second-price auction, Silicon Valley, Simon Singh, spectrum auction, The Wealth of Nations by Adam Smith, Thorstein Veblen, upwardly mobile

His style is that of a central banker rather than a chief executive officer. As his longtime friend Mäler put it, “Assar never controlled with commands.”18 In an article Lindbeck wrote on the economic prize in the mid-1980s, he bragged: “So far the proposals of the prize committee to the Academy have been unanimous. A consensus has in fact developed quite ’automatically’ within the committee, as if by some kind of invisible hand, after intensive discussions.”19 The invisible hand, of course, was his own. “You could put it that way,” said Lofgren, laughing. “You can say it’s unanimous… . But he’s a dominating person. We don’t vote officially. You agree.”20 Kerstin Fredga, the president of the Swedish Academy of Sciences, said at one point, “Very few people have ever dared say no to Assar.”21 Ironically, by December 1994, when Fredga made the remark, it was no longer true.

The leap was a short one, from his observations of his hometown to his focus on the logical strategy necessary for the individual to maximize his own advantage and minimize his disadvantages. The Nash equilibrium, once it is explained, sounds obvious, but by formulating the problem of economic competition in the way that he did, Nash showed that a decentralized decision-making process could, in fact, be coherent — giving economics an updated, far more sophisticated version of Adam Smith’s great metaphor of the Invisible Hand. By his late twenties, Nash’s insights and discoveries had won him recognition, respect, and autonomy. He had carved out a brilliant career at the apex of the mathematics profession, traveled, lectured, taught, met the most famous mathematicians of his day, and become famous himself. His genius also won him love. He had married a beautiful young physics student who adored him, and fathered a child.

Since 1950, the Prisoner’s Dilemma has spawned an enormous psychology literature on determinants of cooperation and defection.23 On a conceptual level; the game highlights the fact that Nash equilibria — defined as each player’s following his best strategy assuming that the other players will follow their best strategy — aren’t necessarily the best solution from the vantage point of the group of players.24 Thus, the Prisoner’s Dilemma contradicts Adam Smith’s metaphor of the Invisible Hand in economics. When each person in the game pursues his private interest, he does not necessarily promote the best interest of the collective. The arms race between the Soviet Union and the United States could be thought of as a Prisoner’s Dilemma. Both nations might be better off if they cooperated and avoided the race. Yet the dominant strategy is for each to arm itself to the teeth. However, it doesn’t appear that Dresher and Flood, Tucker, or, for that matter, von Neumann, thought of the Prisoner’s Dilemma in the context of superpower rivalry.25 For them, the game was simply an interesting challenge to Nash’s idea.

 

pages: 725 words: 221,514

Debt: The First 5,000 Years by David Graeber

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Admiral Zheng, anti-communist, back-to-the-land, banks create money, Bretton Woods, British Empire, carried interest, cashless society, central bank independence, colonial rule, corporate governance, David Graeber, delayed gratification, dematerialisation, double entry bookkeeping, financial innovation, full employment, George Gilder, informal economy, invention of writing, invisible hand, Isaac Newton, joint-stock company, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, oil shock, payday loans, place-making, Ponzi scheme, price stability, profit motive, reserve currency, Ronald Reagan, seigniorage, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transatlantic slave trade, transatlantic slave trade, tulip mania, upwardly mobile, urban decay, working poor

Newton had represented God as a cosmic watchmaker who had created the physical machinery of the universe in such a way that it would operate for the ultimate benefit of humans, and then let it run on its own. Smith was trying to make a similar, Newtonian argument.2 God—or Divine Providence, as he put it—had arranged matters in such a way that our pursuit of self-interest would nonetheless, given an unfettered market, be guided “as if by an invisible hand” to promote the general welfare. Smith’s famous invisible hand was, as he says in his Theory of Moral Sentiments, the agent of Divine Providence. It was literally the hand of God.3 Once economics had been established as a discipline, the theological arguments no longer seemed necessary or important. People continue to argue about whether an unfettered free market really will produce the results that Smith said it would; but no one questions whether “the market” naturally exists.

Glyn Davies (1996:11–13) thus describes even Kwakiutl potlatches as “barter.” 2. We often forget that there was a strong religious element in all this. Newton himself was in no sense an atheist—in fact, he tried to use his mathematical abilities to confirm that the world really had been created, as Bishop Ussher had earlier argued, sometime around October 23, 4004 bc. 3. Smith first uses the phrase “invisible hand” in his Astronomy (III.2), but in Theory of Moral Sentiments IV.1.10, he is explicit that the invisible hand of the market is that of “Providence.” On Smith’s theology in general see Nicholls 2003:35–43; on its possible connection to Medieval Islam, see chapter 10 below. 4. Samuelson 1948:49. See Heinsohn and Steiger 1989 for a critique of this position; also Ingham 2004. 5. Pigou 1949. Boianovsky 1993 provides a history of the term. 6. “We do not know of any economy in which systematic barter takes place without the presence of money” (Fayazmanesh 2006:87)—by which he means, in the sense of money of account. 7.

One much-repeated story held that the Prophet himself had refused to force merchants to lower prices during a shortage in the city of Medina, on the grounds that doing so would be sacrilegious, since, in a free-market situation, “prices depend on the will of God.”82 Most legal scholars interpreted Mohammed’s decision to mean that any government interference in market mechanisms should be considered similarly sacrilegious, since markets were designed by God to regulate themselves.83 If all this bears a striking resemblance to Adam Smith’s “invisible hand” (which was also the hand of Divine Providence), it might not be a complete coincidence. In fact, many of the specific arguments and examples that Smith uses appear to trace back directly to economic tracts written in Medieval Persia. For instance, not only does his argument that exchange is a natural outgrowth of human rationality and speech already appear both in both Ghazali (1058–1111 ad), and Tusi (1201–1274 ad); both use exactly the same illustration: that no one has ever observed two dogs exchanging bones.84 Even more dramatically, Smith’s most famous example of division of labor, the pin factory, where it takes eighteen separate operations to produce one pin, already appears in Ghazali’s Ihya, in which he describes a needle factory, where it takes twenty-five different operations to produce a needle.85 The differences, however, are just as significant as the similarities.

 

pages: 602 words: 120,848

Winner-Take-All Politics: How Washington Made the Rich Richer-And Turned Its Back on the Middle Class by Paul Pierson, Jacob S. Hacker

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accounting loophole / creative accounting, affirmative action, asset allocation, barriers to entry, Bonfire of the Vanities, business climate, carried interest, Cass Sunstein, clean water, collective bargaining, corporate governance, Credit Default Swap, David Brooks, desegregation, employer provided health coverage, financial deregulation, financial innovation, financial intermediation, full employment, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, knowledge economy, laissez-faire capitalism, Martin Wolf, medical bankruptcy, moral hazard, Nate Silver, new economy, night-watchman state, offshore financial centre, oil shock, Ralph Nader, Ronald Reagan, shareholder value, Silicon Valley, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, union organizing, very high income, War on Poverty, winner-take-all economy, women in the workforce

If you’re especially smart—like Lehman chief executive Dick Fuld—you take a lot of money off the table. During his tenure as CEO, Fuld made $490 million (before taxes) cashing in stock options and stock he received as compensation.”68 Friends in High Places The myth of America’s winner-take-all economy is that government does not have much to do with it. Skyrocketing gains at the top are simply the impersonal beneficence of Adam Smith’s “invisible hand,” the natural outcome of free-market forces. Listen to Sanford Weill, the former chairman of Citigroup: “People can look at the last twenty-five years and say this is an incredibly unique period of time. We didn’t rely on somebody else to build what we built.”69 Weill may not have relied on “somebody else” during this “unique period.” He did, however, rely a great deal on government. When Citigroup formed in 1998, one of the top bankers involved joked at the celebratory press conference that any antitrust concerns could be dealt with easily: “Sandy will call up his friend, the President.”70 Within a few months, the financial industry had mounted a successful campaign to repeal the Glass-Steagall Act, which since the 1930s had prohibited powerful financial conglomerates of the sort Weill now headed on the grounds that they created conflicts of interest and impaired financial transparency and accountability.

They have talked about the minimum wage, the Earned Income Tax Credit, Medicaid for vulnerable children and families—in short, programs that help those at the bottom. The real story, however, is what our national political elites have done for those at the top, both through their actions and through their deliberate failures to act. We have our suspect. The winner-take-all economy was made, in substantial part, in Washington. Yet identifying the main suspect only makes the core mystery more perplexing: How could this happen? No one expects the invisible hand of the market to press for equality. Yet there are good reasons for thinking that the visible hand of government will. Indeed, as we shall see in the next chapter, a long line of thinkers has argued that popular representation through democratic government creates powerful pressures for greater equality, as less-advantaged majorities use their political power to offset the economic power of those at the top.

The Politics of Organized Combat 1 National Journal, 1974, 14. 2 David Vogel, Fluctuating Fortunes: The Political Power of Business in America (New York: Basic Books, 1989), 59; R. Shep Melnick, “From Tax-and-Spend to Mandate-and-Sue: Liberalism After the Great Society,” in The Great Society and the High Tide of Liberalism, Sidney Milkis and Jerome Mileur, eds. (Amherst, MA: University of Massachusetts Press, 2005). 3 Lewis Powell, “Confidential Memorandum: Attack on the Free Enterprise System,” August 23, 1971, quoted in Kim Phelps-Fein, Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan (New York: Norton, 2009), 158, 160. 4 Thomas Byrne Edsall, The New Politics of Inequality (New York: Norton, 1984), 114. 5 Vogel, Fluctuating Fortunes, ch. 8. 6 Calculated from http://www.bea.gov/national/xls/gdplev.xls. 7 Ibid., 198. 8 Vogel, Fluctuating Fortunes, 198; John Judis, The Paradox of American Democracy: Elites, Special Interests, and the Betrayal of Public Trust (Pantheon: New York, 2000), 121. 9 Quoted in Sidney Blumenthal, The Rise of the Counter-Establishment: From Conservative Ideology to Political Power (New York: Times Books, 1986), 80. 10 Quoted in Leonard Silk and David Vogel, Ethics and Profits: The Crisis of Confidence in American Business (New York: Simon & Schuster, 1976), 65. 11 Blumenthal, Rise of the Counter-Establishment, 78. 12 Taylor E.

 

pages: 443 words: 112,800

The Third Industrial Revolution: How Lateral Power Is Transforming Energy, the Economy, and the World by Jeremy Rifkin

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3D printing, additive manufacturing, Albert Einstein, barriers to entry, borderless world, carbon footprint, centre right, collaborative consumption, collaborative economy, Community Supported Agriculture, corporate governance, decarbonisation, distributed generation, en.wikipedia.org, energy security, energy transition, global supply chain, hydrogen economy, income inequality, informal economy, invisible hand, Isaac Newton, job automation, knowledge economy, manufacturing employment, marginal employment, Martin Wolf, Masdar, megacity, Mikhail Gorbachev, new economy, oil shale / tar sands, oil shock, open borders, peak oil, Ponzi scheme, post-oil, purchasing power parity, Ray Kurzweil, Ronald Reagan, Silicon Valley, Simon Kuznets, Skype, smart grid, smart meter, Spread Networks laid a new fibre optics cable between New York and Chicago, supply-chain management, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, transaction costs, trickle-down economics, urban planning, urban renewal, Yom Kippur War, Zipcar

The Third Industrial Revolution is a common sense approach to transitioning into a post-carbon era. The wildcard is public perception. And here is where we are running up against a wrong-headed idea of how economic revolutions occur that borders on the delusional. HOW ECONOMIC REVOLUTIONS ARE REALLY MADE Many Americans have long harbored the notion that the great economic advances are always the result of the government getting out of the way and allowing the invisible hand of capitalism free reign in an unfettered market. Europeans, and other societies around the world, are far less convinced of the virtues of wide-open, libertarian capitalism and have historically shown a preference for proactive government involvement in the economic process in order to maintain a more balanced social market model. Still, even among the more temperate social welfare economies, there is a growing populist sentiment—but still a minority—for pushing back on the government’s traditional role in the economy, right at the time when we need more activist government involvement with the private sector to regrow commerce and trade.

Early on, every school-child is introduced to Newton’s three laws, which state that A body at rest remains at rest and a body in motion remains in uniform motion in a straight line unless acted upon by an external force; the acceleration of a body is directly proportional to the applied force and in the direction of the straight line in which the force acts; [and] for every force, there is an equal and opposite force in reaction.1 Anxious to ground their musings in the mathematical certainties of physics, Adam Smith and his contemporaries argued that just as the universe, once set in motion, acts automatically like a well-balanced mechanical clock, so too does the marketplace. While God is the prime mover of the universe, man’s innate competitive self-interest is the prime mover of the marketplace. Just as the laws of gravity govern the universe, an invisible hand rules over the affairs of the marketplace. Picking up on Newton’s observation that “for every action there is an equal and opposite reaction,” Smith and others argued that the self-regulating market operated in the same fashion, with supply and demand continually reacting and readjusting to one another. If consumers’ demand for goods and services goes up, sellers will raise their prices accordingly.

Despite the incontrovertible fact that all economic activity creates only temporary value, at the expense of the degradation of the resource base on which it depends, most economists don’t look at the economic process from a thermodynamic perspective. Enlightenment philosophers, by and large, came to believe that the pursuit of economic activity is a linear process that invariably leads to unlimited material progress on Earth, if only the market mechanism is left uninhibited so that the “invisible hand” can regulate supply and demand. French Enlightenment philosopher and revolutionary Marquis de Condorcet captured the euphoria of the new age of progress when he proclaimed, No bounds have been fixed to the improvement of the human faculties . . . the perfectibility of man is absolutely indefinite; . . . the progress of this perfectibility, henceforth above the control of every power that would impede it, has no other limit than the duration of the globe upon which Nature has placed us.16 Giddy over the prospect of creating a material cornucopia on Earth, the classical economists, with the exception of Thomas Malthus, were united in their belief that human industriousness could create a utopian paradise.

 

pages: 418 words: 128,965

The Master Switch: The Rise and Fall of Information Empires by Tim Wu

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accounting loophole / creative accounting, Alfred Russel Wallace, Apple II, barriers to entry, British Empire, Burning Man, Cass Sunstein, Clayton Christensen, don't be evil, Douglas Engelbart, Howard Rheingold, Hush-A-Phone, informal economy, intermodal, Internet Archive, invention of movable type, invention of the telephone, invisible hand, Jane Jacobs, Joseph Schumpeter, Menlo Park, open economy, packet switching, PageRank, profit motive, road to serfdom, Ronald Coase, shareholder value, Silicon Valley, Skype, Steve Jobs, Steve Wozniak, Telecommunications Act of 1996, The Chicago School, The Death and Life of Great American Cities, the market place, The Wisdom of Crowds, too big to fail, Upton Sinclair, urban planning

His reasoning was moralistic: competition was giving American business a bad name. “The vicious acts associated with aggressive competition are responsible for much, if not all, of the present antagonism in the public mind to business, particularly to large business.”5 Adam Smith, whose vision of capitalism is sacrosanct in the United States, believed that individual selfish motives could produce collective goods for humanity, by the operation of the “invisible hand.” But Vail didn’t buy it. “In the long run … the public as a whole has never benefited by destructive competition.” Smith’s key to efficient markets was Vail’s cause of waste. “All costs of aggressive, uncontrolled competition are eventually borne, directly or indirectly, by the public.” In his heterodox vision of capitalism, shared by men like John D. Rockfeller, the right corporate titans, monopolists in each industry, could, and should, be trusted to do what was best for the nation.6 But Vail also ascribed to monopoly a value beyond mere efficiency and this was born of a high-mindedness that was his own.

From industry’s perspective, the invention may inspire other dissatisfactions: a threat to the revenues of existing information channels that the new technology makes less essential, if not obsolete; a difficulty commoditizing (i.e., making a salable product out of) the technology’s potential; or too much variation in standards or protocols of use to allow one to market a high quality product that will answer the consumers’ dissatisfactions. When these problems reach a critical mass, and a lost potential for substantial gain is evident, the market’s invisible hand waves in some great mogul like Vail or band of them who promise a more orderly and efficient regime for the betterment of all users. Usually enlisting the federal government, this kind of mogul is special, for he defines a new type of industry, integrated and centralized. Delivering a better or more secure product, the mogul heralds a golden age in the life of the new technology. At its heart lies some perfected engine for providing a steady return on capital.

Furthermore, the human element always introduces an irrationality, even to the point of such paranoia as Bell evinced concerning magnetic recording. Thus if everything is entrusted to a single mind, its inevitable subjective distortions will distort, if not altogether disable, the innovation process. By contrast, Nelson and Winter argued, the most rapid or efficient innovation typically results when the widest range of variations are proposed and the invisible hand of competition, as proxy of the future, picks among them. It is rather like Darwin’s idea of the relative fitness of individuals in determining the evolution of species, and like natural selection it depends on the power of accidents.10 Hush-A-Phone was a forerunner in this latter-day approach to innovation. Looking at the telephone and AT&T’s network, Tuttle saw what we today would call an innovation platform.

 

pages: 386 words: 122,595

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

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affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, capital controls, Cass Sunstein, central bank independence, clean water, collapse of Lehman Brothers, congestion charging, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, Joseph Schumpeter, Kenneth Rogoff, libertarian paternalism, low skilled workers, lump of labour, Malacca Straits, market bubble, microcredit, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional

It was a money-losing proposition in the short run; the East German currency was still worthless—scraps of paper to the rest of the world. But it was a brilliant business decision made faster than any government body could ever hope to act. By 1995, per capita consumption of Coca-Cola in the former East Germany had risen to the level in West Germany, which was already a strong market. In a sense, it was Adam Smith’s invisible hand passing Coca-Cola through the Berlin Wall. Coke representatives weren’t undertaking any great humanitarian gesture as they passed beverages to the newly liberated East Germans. Nor were they making a bold statement about the future of communism. They were looking after business—expanding their global market, boosting profits, and making shareholders happy. And that is the punch line of capitalism: The market aligns incentives in such a way that individuals working for their own best interest—passing out Coca-Cola, spending years in graduate school, planting a field of soybeans, designing a radio that will work in the shower—leads to a thriving and ever-improving standard of living for most (though not all) members of society.

Fisheries managed with transferable quotas were half as likely to collapse as fisheries that use traditional methods.14 Two other points regarding incentives are worth noting. First, a market economy inspires hard work and progress not just because it rewards winners, but because it crushes losers. The 1990s were a great time to be involved in the Internet. They were bad years to be in the electric typewriter business. Implicit in Adam Smith’s invisible hand is the idea of “creative destruction,” a term coined by the Austrian economist Joseph Schumpeter. Markets do not suffer fools gladly. Take Wal-Mart, a remarkably efficient retailer that often leaves carnage in its wake. Americans flock to Wal-Mart because the store offers an amazing range of products cheaper than they can be purchased anywhere else. This is a good thing. Being able to buy goods cheaper is essentially the same thing as having more income.

Anybody who has suffered a 12-hour flight with a bawling baby in the row immediately ahead or a bored youngster viciously kicking their seat from behind, will grasp this as quickly as they would love to grasp the youngster’s neck. Here is a clear case of market failure: parents do not bear the full costs (indeed young babies travel free), so they are too ready to take their noisy brats with them. Where is the invisible hand when it is needed to administer a good smack?”2 Mobile phone use is under stricter scrutiny, both in public places, such as restaurants and commuter trains, where the behavior is fabulously annoying, but also in vehicles, where it has been linked to a higher rate of accidents. Texting is the second-most dangerous thing you can do while driving a car, next to driving drunk. In Chicago, Mayor Richard Daley attempted to impose a 1-cent tax on every $2 of take-out food purchases, arguing that the “litter tax” would reimburse the city for the costs of picking up litter, much of which consists of discarded fast-food containers.

 

pages: 409 words: 145,128

Fighting Traffic: The Dawn of the Motor Age in the American City by Peter D. Norton

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clean water, Frederick Winslow Taylor, garden city movement, invisible hand, jitney, new economy, New Urbanism, Ralph Nader, Silicon Valley, smart transportation, Thorstein Veblen, Unsafe at Any Speed, urban planning, urban renewal

In 1926 the editor of The American City surveyed leading national traffic experts and found them in agreement that “streets are primarily provided for general public use” and that therefore “the rights of the different classes of traffic to unlimited use of the streets” were “subject to the public and civic welfare.”67 The New American Economics Beyond the courts, developments in economics contributed to this widening field of action, and engineers found justification for their work in the economists’ writings.68 The invisible hand seemed unable to restrain railroads and other “center” firms, and their excesses gave the progressives’ new political and legal views a receptive audience. The discoveries that monopolies corrupt free enterprise, and that they can be a normal consequence of a largely unregulated advanced economy, contributed to the popularity of progressivism at least as much as “the discovery that business corrupts politics.”69 These trends were shadowed by a decline in the influence of British classical economics in America, as institutional and marginalist economic ideas spread.

Streets as Public Utilities 119 Neoclassical economists continued to take their cue from Britain, but by the turn of the century their new master was not Mill but Alfred Marshall, described as “perhaps the most eminent and widely influential economist” of his time in “the English-speaking world.”79 To save classical economics, Marshall and his American followers accepted considerable amendments to its principles, sacrificing its neatness to preserve its applicability to an advanced industrial economy.80 They agreed with the institutional economists that the pure competition upon which Smith’s analysis depended could not exist, and that in many exchanges the unassisted invisible hand did not fashion the optimum result. Even the neoclassical economists allowed room for positive regulation.81 Natural Monopolies Mill’s modification of classical economics came on the eve of a great surge in the category of enterprises that did not behave according to the price law Smith had expounded. These exceptions lay in the realm Mill designated “natural monopolies,” which included most of the services lawyers and regulators came to term “public utilities.”82 Nineteenth-century cities grew to depend upon natural monopolies for the amenities by which civilization measured itself.

In the 1920s, Herbert Hoover’s Notes to Chapter 4 309 rapid success was due in part to the assumption that as an engineer, he would be an expert administrator. 42. Taylor, Principles, 7, 16. For general treatments of the trend toward formalization and organization in politics, business, and social reform, see especially Robert H. Wiebe, The Search for Order, 1877–1920 (Hill and Wang, 1967), chapters 5–7 (111– 195); Guy Alchon, The Invisible Hand of Planning: Capitalism, Social Science, and the State in the 1920s (Princeton University Press, 1985), chapter 1 (8–20); Alfred D. Chandler, The Visible Hand: The Managerial Revolution in American Business (Belknap, 1977), 377–500; Stephen Skowronek, Building a New American State: The Expansion of National Administrative Capacities (Cambridge University Press, 1982); Morton Keller, Regulating a New Economy: Public Policy and Economic Change in America, 1900–1933 (Harvard University Press, 1990). 43.

 

pages: 442 words: 39,064

Why Stock Markets Crash: Critical Events in Complex Financial Systems by Didier Sornette

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Asian financial crisis, asset allocation, Berlin Wall, Bretton Woods, Brownian motion, capital asset pricing model, capital controls, continuous double auction, currency peg, Deng Xiaoping, discrete time, diversified portfolio, Elliott wave, Erdős number, experimental economics, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, global village, implied volatility, index fund, invisible hand, John von Neumann, joint-stock company, law of one price, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, market design, market fundamentalism, mental accounting, moral hazard, Network effects, new economy, oil shock, open economy, pattern recognition, Paul Erdős, quantitative trading / quantitative finance, random walk, risk/return, Ronald Reagan, Schrödinger's Cat, short selling, Silicon Valley, South Sea Bubble, statistical model, stochastic process, Tacoma Narrows Bridge, technological singularity, The Coming Technological Singularity, The Wealth of Nations by Adam Smith, Tobin tax, total factor productivity, transaction costs, tulip mania, VA Linux, Y2K, yield curve

Smith’s masterpiece [384], An Inquiry into the Nature and Causes of the Wealth of Nations, introduced the then-radical notion that selfish, greedy individuals, if allowed to pursue their interests largely unchecked, would interact to produce a wealthier society as if guided by an “invisible hand.” Smith never worked out a proof that this invisible hand existed. Not all subsequent economists agreed with his optimistic assessment. T. Malthus thought people would have too many children and overpopulate the world. Karl Marx thought capitalists would be so greedy they would 84 chapter 4 bring down the system. But they all shared Smith’s view of economics as the study of people trying to maximize their material well being. In 1954, K. Arrow and G. Debreu [16] published an article that in essence mathematically proved the existence of Adam Smith’s invisible hand. This “general equilibrium” proof, which relies on a set of very restricted assumptions of an idealized world, has been a mainstay of graduate-level economics training ever since.

., 1990. 90. Conference on “The Collapse of Complex Societies,” San Francisco, Feb. 2001. 91. Conway, G. and Toenniessen, G. (1999). Feeding the world in the twenty-first century, Nature 402, c55–c58. 92. Cootner, P. H., Editor (1967). The Random Character of Stock Market Prices (Cambridge, MA, MIT Press). 93. Cosmides, L. and Tooby, J. (1994). Better than rational—evolutionary psychology and the invisible hand, American Economic Review 84, 327–332. 94. Costanza, R., dArge, R., deGroot, R., Farber, S., Grasso, M., Hannon, B., Limburg, K., Naeem, S., O’Neill, R. N., Parvelo, J., Raskin, R. G., Sutton, P., and van den Belt, M. (1997). The value of the world’s ecosystem services and natural capital, Nature 387, 253–260. 95. Cox, J. C., Ingersoll, J. E., and Ross, S. A. (1985). A theory of the term structure of interest rates, Econometrica 53, 385–407. 96.

 

Year 501 by Noam Chomsky

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anti-communist, Bartolomé de las Casas, Berlin Wall, Bolshevik threat, Bretton Woods, British Empire, capital controls, colonial rule, corporate governance, cuban missile crisis, declining real wages, Deng Xiaoping, deskilling, Dissolution of the Soviet Union, European colonialism, experimental subject, Fall of the Berlin Wall, Howard Zinn, invisible hand, land reform, land tenure, means of production, Monroe Doctrine, non-tariff barriers, offshore financial centre, Plutocrats, plutocrats, price stability, Ralph Nader, Ralph Waldo Emerson, RAND corporation, Ronald Reagan, Simon Kuznets, strikebreaker, structural adjustment programs, the scientific method, The Wealth of Nations by Adam Smith, trade liberalization, trickle-down economics, union organizing, War on Poverty, working poor

The policies they contrived were reasonable enough in terms of narrow self-interest, however others may have been harmed, including the general population of England.17 Smith’s conclusion that “Under the present system of management, therefore, Great Britain derives nothing but loss from the dominion which she assumes over her colonies” is highly misleading. From the point of view of policy choices, Great Britain was not an entity. “The wealth of nations” is no concern of the “architects of policy,” who, as Smith insists, seek private gain. The fate of the common people is no more their concern than that of the “mere savages” who stand in the way. If an “invisible hand” sometimes provided others with benefits, that is merely incidental. The basic focus on “wealth of nations” and what “Great Britain derives” is faulty from the start, undermined by illegitimate idealization, though at least it is qualified and corrected in Smith’s fuller discussion. The crucial qualifications have commonly been dropped, however, as they enter contemporary ideology in the hands of Smith’s latter-day disciples.

That being so, “the man whose life is spent in performing a few simple operations, of which the effects too are, perhaps, always the same, or very nearly the same, has no occasion to exert his understanding...and generally becomes as stupid and ignorant as it is possible for a human creature to be...But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.” Society must find some way to overcome the devilish impact of the “invisible hand.” Other major contributors to the classical liberal canon go much further. Wilhelm von Humboldt, who inspired John Stuart Mill, described the “leading principle” of his thought as “the absolute and essential importance of human development in its richest diversity,” a principle that is not only undermined by the narrow search for efficiency through division of labor, but by wage labor itself: “Whatever does not spring from a man’s free choice, or is only the result of instruction and guidance, does not enter into his very nature; he does not perform it with truly human energies, but merely with mechanical exactness”; when the laborer works under external control, “we may admire what he does, but we despise what he is.”19 Smith’s admiration for individual enterprise was tempered still further by his contempt for “the vile maxim of the masters of mankind”: “All for ourselves, and nothing for other people.”

The phenomenon is a well-known concomitant of the integration of the South into the world order in the service role; reports of sale of children are, in fact, some of the more benign that are familiar to those who do not choose to shield themselves from the wrong kind of facts. The “side effects” of the subjection of the South to market forces are not in the least unexpected, except to the laser-like vision of the trained ideologue. “Unexpected side effects” of the invisible hand have also been found in Russia, again eliciting much surprise. A front-page New York Times headline reads: “The Russians’ New Code: If It Pays, Anything Goes.” “It is not just a matter of crime, corruption, prostitution, smuggling, and drug and alcohol abuse,” all on the rise: “There is also a widespread view that...people are out for themselves and anything goes”—unlike the United States, where pursuit of “the vile maxim of the masters” is unknown, or the Third World domains that have been subject to our helping hand.

 

pages: 425 words: 122,223

Capital Ideas: The Improbable Origins of Modern Wall Street by Peter L. Bernstein

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Albert Einstein, asset allocation, backtesting, Benoit Mandelbrot, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, buy low sell high, capital asset pricing model, debt deflation, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, full employment, implied volatility, index arbitrage, index fund, interest rate swap, invisible hand, John von Neumann, Joseph Schumpeter, law of one price, linear programming, Louis Bachelier, mandelbrot fractal, martingale, means of production, new economy, New Journalism, profit maximization, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, stochastic process, the market place, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, transfer pricing, zero-coupon bond

Though this hypothesis was developed by others during the 1960s, Samuelson gave it its embryonic prologue in his 1957 paper on the theory of speculation. He mentioned the idea again, calling it “Balanced Ignorance,” upon becoming a member of the American Philosophical Society. “My pearls were well received,” he recalls.23 The views of the classical economists underlie the rationale for the invisible hand that guides the free-enterprise system of competitive markets and private ownership of the means of production, propelled by workers, employers, and customers free to seek their own self-interest. In theory, at least, this system is more likely to arrive at optimal outcomes and bring greater satisfaction to a larger number of people than any other economic system. Speculative capital markets, despite their occasional penchant for distorting values, probably come as close as markets anywhere to approaching this ideal set of conditions.

The clatter of the computer and the roar of the trading floor are the sounds of a great battle in which investors compete with one another to determine who can buy at the lowest and sell at the highest. In no other market, regardless of product, structure, or institutional arrangement, is competition as free, as vigorous, as effective as here. In no other market do prices convey so much information about what people are buying and selling. Harry Markowitz himself, in a recent address to his students, reminded them that. “Granted that the invisible hand is clumsy, heartless, and unfair, it is ever so much more deft and impartial than a central planning committee.”4 This is what fascinated the instigators of the revolution in finance. It was not the fun and games of investing that caught their fancy. It was the purity of the free market dynamics, the best that the study of economics can offer. Remember Paul Samuelson’s reaction when he heard about Kendall’s Demon of Chance: “Work the other side of the street!

See also Portfolio insurance Insurance companies, investments of Intelligent Investor, The (Graham) Interactive Data Corporation (IDC) Interest/interest rates corporate debt junk bonds and payments risk-free stock indexes and stock prices and stock valuations swaps International Flavors and Fragrances Intertemporal capital asset pricing model Institute for Quantitative Analysis in Finance Investment Company Institute (ICI) Investors active vs. passive corporate/institutional equity individual response of to risk Invisible hand market theory “Is American Business Worth More Dead Than Alive?” (Graham) Journal of the American Statistical Association Journal of Business Journal of Finance Journal of the History of Ideas Journal of Political Economy (JPE) Journal of Portfolio Management, The Journal of the Royal Statistical Society Kidder Peabody Law of the Conservation of Investment Value Law of One Price: see Arbitrage Leland O’Brien Rubinstein Associates, Inc.

 

pages: 387 words: 110,820

Cheap: The High Cost of Discount Culture by Ellen Ruppel Shell

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barriers to entry, Berlin Wall, big-box store, cognitive dissonance, computer age, Daniel Kahneman / Amos Tversky, delayed gratification, deskilling, Donald Trump, Edward Glaeser, fear of failure, Ford paid five dollars a day, Frederick Winslow Taylor, George Akerlof, global supply chain, global village, greed is good, Howard Zinn, income inequality, interchangeable parts, inventory management, invisible hand, James Watt: steam engine, Joseph Schumpeter, Just-in-time delivery, knowledge economy, loss aversion, market design, means of production, mental accounting, Ponzi scheme, price anchoring, price discrimination, race to the bottom, Richard Thaler, Ronald Reagan, side project, Steve Jobs, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, traveling salesman, ultimatum game, Victor Gruen, washing machines reduced drudgery, working poor, yield management

A professor of moral philosophy, Smith was a deist who believed that world events are guided by a benevolent system of natural laws. He reasoned that the common good was best served not by government regulation but by individuals making economic decisions that served their own interests. Given this, he said that good would be done as if by an “invisible hand.” In his words:Every individual intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

Yet consumers then generally knew more about what they purchased than do consumers in the Internet age where information is both ubiquitous and free. Smith’s hero was the prudent man who behaved virtuously even when it was in his material interest to do otherwise. A prudent man, a practitioner of “frugality, and even some degree of parsimony” would likely not squander $7.99 a pound at the Whole Foods salad bar. But that doesn’t mean he has no interest in where his food is grown or in his community, or is out of reach of the “invisible hand.” Rather, a prudent man is likely to shop where his interests are best served. In Boston, for example, he might be at the Haymarket, a raucous open-air market favored by foodies on a budget. Every Friday afternoon and Saturday morning fifty or so vendors vie for business by hawking fruit, vegetables, and fish from ramshackle stalls. The place is packed with regulars, many of them newcomers to the United States who would no more patronize Whole Foods than they would a Rolls-Royce dealership.

 

pages: 274 words: 93,758

Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller, Stanley B Resor Professor Of Economics Robert J Shiller

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Andrei Shleifer, asset-backed security, Bernie Madoff, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, en.wikipedia.org, endowment effect, equity premium, financial intermediation, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, late fees, loss aversion, Menlo Park, mental accounting, Milgram experiment, moral hazard, new economy, payday loans, Ponzi scheme, profit motive, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Silicon Valley, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, too big to fail, transaction costs, Unsafe at Any Speed, Upton Sinclair, Vanguard fund, wage slave

As exceptions, behavioral economists, especially for the past forty years, have been studying the relationship between psychology and economics. That means that they have brought the consequences of the monkeys to center stage. But, curiously, to the best of our knowledge, they have never interpreted their results in the context of Adam Smith’s fundamental idea regarding the invisible hand. Perhaps it was just too obvious. Only a child, or an idiot, would make an observation like that and expect anyone to notice. But we will see that this observation, simple as it may be, has real consequences. Especially so, because, as Adam Smith might say, as if by an invisible hand, others out of their own self-interest will satisfy those monkeyon-the-shoulder tastes. Thus we may be making only a small tweak to the usual economics (by noticing the difference between optimality in terms of our real tastes and optimality in terms of our monkey-on-the-shoulder tastes).

So, in the absence of some curbs on markets, we reach an economic equilibrium where the monkeys on the shoulder are substantially calling the shots. The Alleged Optimality of a Free-Market Equilibrium There is a perhaps surprising result that, indisputably, lies at the very heart of economics. Back in 1776, the father of the field, Adam Smith, in The Wealth of Nations, wrote that, with free markets, as if “by an invisible hand … [each person] pursuing his own interest” also promotes the general good.16 It took a bit more than a century for Smith’s statement to be precisely understood. According to the modern version, commonly taught even in introductory economics, a competitive free-market equilibrium is “Pareto optimal.”17 That means that once such an economy is in equilibrium, it is impossible to improve the economic welfare of everyone.

 

pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, labour market flexibility, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, means of production, Menlo Park, moral hazard, moveable type in China, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, We are the 99%, Wolfgang Streeck

By preferring the support of domestic to that of foreign industry, he intends only his own security, and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. That reference to the invisible hand is perhaps the most celebrated positive example of the law of unintended consequences. While the expression is original, the thought is not. Similar ideas had been articulated not only by Hugh of St Victor but by Pascal in the mid-seventeenth century and by the Italian political philosopher Gianbattista Vico in his Scienza Nuova of 1725.

In his efforts to push back the sea, the entrepreneurial Faust, epitomising capitalist exploitation, drives his workers furiously to build a dyke that creates the space for his prosperous new realm. To finance the scheme and pay the workers, he uses paper money created by the emperor who rules over the territory. Where Goethe, who had been finance minister to the Duke of Saxe-Weimar, shows particular foresight is in identifying unintended consequences of capitalist enterprise – consequences that, unlike those associated with Adam Smith’s invisible hand, are far from positive. Environmental damage results from the creation of Faust’s dyke because he failed to provide an outlet for putrid water. His land consequently becomes a foetid quagmire that has to be drained. His insatiable desire for more land leads him to drive out long-standing residents of the dunes. He asks Mephistopheles and his acolytes to remove Philemon and Baucis – an old couple borrowed by Goethe from Ovid’s Metamorphoses – from their home.

 

pages: 323 words: 95,939

Present Shock: When Everything Happens Now by Douglas Rushkoff

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algorithmic trading, Andrew Keen, bank run, Benoit Mandelbrot, big-box store, Black Swan, British Empire, Buckminster Fuller, cashless society, citizen journalism, clockwork universe, cognitive dissonance, Credit Default Swap, crowdsourcing, Danny Hillis, disintermediation, Donald Trump, double helix, East Village, Elliott wave, European colonialism, Extropian, facts on the ground, Flash crash, game design, global supply chain, global village, Howard Rheingold, hypertext link, Inbox Zero, invention of agriculture, invention of hypertext, invisible hand, iterative process, John Nash: game theory, Kevin Kelly, laissez-faire capitalism, Law of Accelerating Returns, loss aversion, mandelbrot fractal, Marshall McLuhan, Merlin Mann, Milgram experiment, mutually assured destruction, Network effects, New Urbanism, Nicholas Carr, Norbert Wiener, Occupy movement, passive investing, pattern recognition, peak oil, price mechanism, prisoner's dilemma, Ralph Nelson Elliott, RAND corporation, Ray Kurzweil, recommendation engine, Silicon Valley, Skype, social graph, South Sea Bubble, Steve Jobs, Steve Wozniak, Steven Pinker, Stewart Brand, supply-chain management, the medium is the message, The Wisdom of Crowds, theory of mind, Turing test, upwardly mobile, Whole Earth Catalog, WikiLeaks, Y2K

Adam Smith had already observed back in the 1700s how free markets did a great job of coordinating people’s actions. They seemed to self-regulate even though no one was aware of anyone else’s intentions. This “invisible hand” of the marketplace ensured that as individuals try to maximize their own gains in a free market, prices find the appropriate levels, supply meets demand, and products improve. But Smith only got so far as to argue that, through the market, competition channels individual ambitions toward socially beneficial results. The mechanisms through which that happened were still poorly understood and expressed. In 1945 famed Hungarian economist Friedrich Hayek came up with a new way of talking about the “invisible hand” of the marketplace. Instead of seeing some magical, inexplicable method through which markets solved its problems fairly, Hayek saw markets working through a more systemic process.

(FAA), 89 Federal Reserve, 5, 148 feedback: apocalypto and, 263; definition of, 207; fractalnoia and, 205–19, 220, 221, 222, 224–25, 226–27, 236; speed of, 208, 209 Feldmar, Andrew, 156 Ferriss, Timothy, 95 field hospitals, 191 Filippi, Mark, 103–6 “filter failure,” 116–17 financial markets: algorithmic-driven, 178–79, 180; apocalypto and, 8, 257, 264; black box trading and, 179, 180; commodity trading and, 185–86; crashes in, 181, 230; dark pools for, 182; digiphrenia and, 1, 99–100; fractalnoia and, 201–2, 203, 226–27, 229–30; free, 226, 227; high-frequency trading in, 181–82; “invisible hand” of, 226–27; “meet me” room for, 180; narrative collapse and, 11–12; new “now” and, 5; overwinding and, 7, 8, 136, 173, 175–80, 181–83, 184, 185–86; physicial location of network and, 179–80; time as money and, 173, 175–80 flash pictures, 71 flashbacks, 28, 29 flow: apocalypto and, 265; of information, 141–42, 145–49; overwinding and, 189, 192, 194; of time, 141–42, 145–49 Forrest Gump (movie), 29–30 fox and hedgehog prototypes, 232–33, 235 Fox News, 49, 55–56 fractalnoia: “always-on” philosophy and, 211; apocalypto and, 245–46, 264; change and, 224, 235–37; chaos and, 202, 209, 219–30; choices and, 202, 215, 227; conversations and, 211; cybernetics and, 224–26, 227; definition/characteristics of, 201, 240–41; everything is everything concept and, 197, 199, 204, 205, 210, 212, 213, 228; feedback and, 205–19, 220, 221, 222, 224–25, 226–27, 236; game theory/gaming and, 220–21, 222–23, 224; impact of, 209–10; as manifestation of present shock, 7, 197–241; narrative collapse and, 212; patterns and, 197–205, 209, 216, 217–19, 229, 230–41; sharing and, 203–4; systems theory, 226–28.

 

pages: 357 words: 110,017

Money: The Unauthorized Biography by Felix Martin

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bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, call centre, capital asset pricing model, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, credit crunch, David Graeber, en.wikipedia.org, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, Fractional reserve banking, full employment, Goldman Sachs: Vampire Squid, Hyman Minsky, inflation targeting, invention of writing, invisible hand, Irish bank strikes, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, mobile money, moral hazard, mortgage debt, new economy, Northern Rock, Occupy movement, Plutocrats, plutocrats, private military company, Republic of Letters, Richard Feynman, Richard Feynman, Robert Shiller, Robert Shiller, Scientific racism, seigniorage, Silicon Valley, smart transportation, South Sea Bubble, supply-chain management, The Wealth of Nations by Adam Smith, too big to fail

The feudal lords who had been the prime beneficiaries of traditional society had been bewitched by the magic of money. Their love of luxury had made them encourage the monetisation of their feudal rents: “thus, for the gratification of the most childish, the meanest and the most sordid of all vanities, they gradually bartered their whole power and authority.”31 Smith’s metaphor for Mandeville’s paradoxical process—the “invisible hand” which ensures that “by pursuing his own interest [the individual] frequently promotes that of the society more effectually than when he really intends to promote it”—is so famous that it has long ago taken on a life of its own.32 Smith also emphasised that this pleasing outcome is a feature not so much of the individual’s decisions, as of the system itself: the individual “generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it.”33 Smith articulated a vision of society in which economic value had become the measure of all things, and static traditional social relations were being replaced by dynamic monetary ones.

The more widespread that belief in the economists’ story of monetary society’s miraculous ability to regulate itself became, the greater became the capacity for moral disaster when policy-makers succumbed to the simplistic charms of its Looking-Glass world. The story of one of the most shameful episodes in the history of economic policy-making testifies to quite how bad things could get. THE INVISIBLE HAND IN ACTION In 1845, Ireland had been a full constituent nation of the United Kingdom for more than four decades, and an accessory of the British economy and polity, if often by force, for several centuries before that. Yet in its religion, politics, and language, Ireland retained a quite distinct culture from its neighbour: economically and socially speaking, it was almost of another era. By the early nineteenth century, Britain was the greatest manufacturing economy in the world, while Ireland was one of the most backward in Europe.

Mimeo: available at http://​delong.​typepad.​com/​20120411-​russell-​sage-​delong-​paper.​pdf. De Rubys, C. (1604), Histoire Veritable de la Ville de Lyon. Lyon. Dickson, P. (1967), The Financial Revolution in England: A Study in the Development of Public Credit, 1688–1756. London: Macmillan. Douglas, C.H. (1924), Social Credit. London: C. Palmer. Eatwell, J., Milgate, M., and Newman, P., eds (1989), The New Palgrave: The Invisible Hand. London: Macmillan. Elliot, G. (2006), The Mystery of Overend and Gurney. York: Methuen Publishing Ltd. Feavearyear, A.E. (1931), The Pound Sterling. Oxford: Clarendon Press. Fisher, I. (1936) [1935], 100% Money. New York: Adelphi Company. Flandreau, M. and Uglioni, S. (2011), “Where It All Began: Lending of Last Resort and the Bank of England During the Overend, Gurney Panic of 1866.” Norges Bank Working Paper 2011/3: available at http://​papers.​ssrn.​com/​sol3/​papers.​cfm?​

 

pages: 324 words: 92,805

The Impulse Society: America in the Age of Instant Gratification by Paul Roberts

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, accounting loophole / creative accounting, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, asset allocation, business process, Cass Sunstein, centre right, choice architecture, collateralized debt obligation, collective bargaining, corporate governance, corporate social responsibility, crony capitalism, David Brooks, delayed gratification, double helix, factory automation, financial deregulation, financial innovation, full employment, game design, greed is good, If something cannot go on forever, it will stop, impulse control, income inequality, inflation targeting, invisible hand, job automation, Joseph Schumpeter, knowledge worker, late fees, Long Term Capital Management, loss aversion, low skilled workers, new economy, Nicholas Carr, obamacare, Occupy movement, oil shale / tar sands, performance metric, postindustrial economy, profit maximization, Report Card for America’s Infrastructure, reshoring, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, shareholder value, Silicon Valley, speech recognition, Steve Jobs, technoutopianism, the built environment, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, Walter Mischel, winner-take-all economy

Not only is a society shaped by our impulses the very manifestation of freedom; but an economy shaped by our desires is the best possible economy precisely because it is desire-shaped. As Adam Smith argued more than two centuries ago, when individuals freely pursue their own self-interests—presumably, even their most trivial desires—the aggregate effect is an economy that most efficiently and naturally delivers the most benefits to the greatest majority. (In Smith’s famous phrasing, by pursuing our own self-interests, it’s as if we “are led by an invisible hand to promote an end that was no part of [our] intention.”) And the truth is our self-centered economy delivers a lot of benefits. It generates a lot of wealth, a lot of innovation, and, perhaps most important, a lot of individual adaptability, which you and I can use to shape our lives, our feelings, and our very identities. For these unprecedented powers of self-creation, shouldn’t we be willing to tolerate periodic meltdowns, partisan politics, and a selfish, narcissistic culture?

.† For advocates of “shareholder value” theory, it was this very idea of social obligations (that business somehow owed workers, or any other part of society, anything beyond efficient operations) that led so many firms to fail in their real social obligation: maximizing the wealth upon which all social progress depends. As economist Milton Friedman argued in a much-quoted article in The New York Times, “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.” Here was the corporate variation on Adam Smith’s “invisible hand.” Companies turned loose to maximize their own wealth would improve society’s fortunes far more efficiently than would any government-induced strategy based on an ideal of social responsibility. By the 1980s the logic of efficient markets and shareholder value had expanded into a political philosophy. The market was not only the most efficient arbiter of corporate strategy, but also the most efficient means to organize a free society.

From the very beginnings of the Industrial Revolution, it was understood that “commercial society,” as Adam Smith called capitalism, would need constant poking and prodding and nudging to ensure that its massive efficiencies benefited as wide a public as possible. As Smith wrote in The Wealth of Nations,1 “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” Today, conservatives routinely invoke Smith and his invisible hand to argue for unfettered markets. But in fact, Smith recognized that markets needed occasional fettering—he favored, among other things, a progressive tax on the wealthy and, especially, hefty regulation of finance to prevent the consolidation of economic power in the hands of the few. Such regulatory intrusions, Smith readily acknowledged, were “in some respect a violation of natural liberty” of bankers and others with economic power.

 

pages: 440 words: 108,137

The Meritocracy Myth by Stephen J. McNamee

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affirmative action, Affordable Care Act / Obamacare, Bernie Madoff, British Empire, collective bargaining, computer age, conceptual framework, corporate governance, deindustrialization, delayed gratification, demographic transition, desegregation, deskilling, equal pay for equal work, estate planning, failed state, fixed income, gender pay gap, Gini coefficient, glass ceiling, helicopter parent, income inequality, informal economy, invisible hand, job automation, joint-stock company, labor-force participation, low-wage service sector, marginal employment, Mark Zuckerberg, mortgage debt, mortgage tax deduction, new economy, New Urbanism, obamacare, occupational segregation, pink-collar, Plutocrats, plutocrats, Ponzi scheme, post-industrial society, prediction markets, profit motive, race to the bottom, random walk, school choice, Scientific racism, Steve Jobs, The Bell Curve by Richard Herrnstein and Charles Murray, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, upwardly mobile, We are the 99%, white flight, young professional

Such efforts to reduce the nonmeritocratic effects of social capital, however, are still the exception rather than the rule since most employment occurs in private settings where such efforts are typically not required or employed. The Invisible Hand of Social Capital Having friends in high places increases the likelihood of receiving useful information in routine exchanges even without actively seeking such information (Lin 2000a). People with networks yielding access to substantial job information will be more apt to be presented with opportunities to change jobs without an active search. In short, having friends in high places is associated with the routine flow of useful information—“the invisible hand of social capital.” Only when such useful information is not available and not forthcoming would mobilization of social contacts become necessary. Those with friends in lower places, however, must call more often upon whatever contacts they have to actively seek out useful information (Lin 2000a, 792).

Economic Origins Freedom from political tyranny, however, is not the same as “market freedom,” although the two are often mistakenly viewed as inextricable. Free markets mean that prices, profits, and wages are determined by the “free” operation of market forces—the outcome of innumerable matches of supply and demand for goods and services unregulated by governments. In free-market societies, “the invisible hand of the market” operates: the sole determinant of investment—the sale and purchase of land, labor, and business—is individual calculation of costs and benefits intended to maximize profits. But free markets themselves do not guarantee democracy, civil liberties, or political freedom. In one of the great coincidences of American history, America’s economic blueprint for a free-market economy was laid out in the same year, 1776, as its political blueprint for a democratic government.

 

Undoing the Demos: Neoliberalism's Stealth Revolution by Wendy Brown

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Affordable Care Act / Obamacare, bitcoin, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, corporate governance, credit crunch, crowdsourcing, David Brooks, Food sovereignty, haute couture, immigration reform, income inequality, invisible hand, labor-force participation, late capitalism, means of production, new economy, obamacare, occupational segregation, Ronald Reagan, shareholder value, sharing economy, The Chicago School, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trickle-down economics, Washington Consensus, Wolfgang Streeck, young professional

re v isin g f o u c au lt   83 Moreover, the idea and practice of responsibilization — forcing the subject to become a responsible self-investor and self-provider — reconfigures the correct comportment of the subject from one naturally driven by satisfying interests to one forced to engage in a particular form of self-sustenance that meshes with the morality of the state and the health of the economy.20 Thus, neoliberalism differs from classical economic liberalism not only in that there ceases to be what Smith formulated as an “invisible hand” forging a common good out of individual, self-interested actions, 21 and not only because the naturalism is replaced by constructivism, although both of these are the case. Equally important, reconciling individual with national or other collective interests is no longer the contemporary problem understood to be solved by markets. Instead, the notion of individuals naturally pursuing their interests has been replaced with the production through governance of responsibilized citizens who appropriately self-invest in a context of macroeconomic vicissitudes and needs that make all of these investments into practices of speculation.

This citizen releases state, law, and economy from responsibility for and responsiveness to its own condition and predicaments and is ready when called to sacrifice to the cause of economic growth, competitive positioning and fiscal constraints. Thus, again, does a political rationality originally born in opposition to fascism turn out to mirror certain aspects of it, albeit through powers that are faceless and invisible-handed and absent an authoritarian state. This is not to say that neoliberalism is fascism or that we live in fascist times. It is only to note convergences between elements of twentieth-century fascism and inadvertent effects of neoliberal rationality today. These convergences appear in the valorization of a national economic project and sacrifice for a greater good into which all are integrated, but from which most must not expect personal benefit.42 They appear as well in the growing devaluation of politics, publics, intellectuals, educated citizenship, and all collective purposes apart from economy and security.

See, for example, The First Amendment, Democracy, and Romance (Princeton: Princeton University Press, 1990) where he argues: “A . . . commitment to sponsoring dissent does not require a belief that what emerges in the ‘market’ is usually right or that the ‘market’ is the best test of truth. Quite the contrary, the commitment to sponsor dissent assumes that societal pressures to conform are strong and that incentives to keep quiet are 256  n o t e s often great. If the marketplace metaphor encourages the view than an invisible hand or voluntaristic arrangements have guided us patiently, but slowly, to Burkean harmony, the commitment to sponsoring dissent encourages us to believe that the cozy arrangements of the status quo have settled on something less than the true or the just. If the marketplace metaphor encourages the view that conventions, habits, and traditions have emerged as our best sense of the truth from the rigorous testing ground of the marketplace of ideas, the commitment to sponsoring dissent encourages the view that conventions, habits, and traditions are compromises open to challenge.

 

pages: 417 words: 109,367

The End of Doom: Environmental Renewal in the Twenty-First Century by Ronald Bailey

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3D printing, additive manufacturing, agricultural Revolution, Albert Einstein, autonomous vehicles, Cass Sunstein, Climatic Research Unit, Commodity Super-Cycle, conceptual framework, corporate governance, credit crunch, David Attenborough, decarbonisation, dematerialisation, demographic transition, diversified portfolio, double helix, energy security, failed state, financial independence, Gary Taubes, hydraulic fracturing, income inequality, invisible hand, knowledge economy, meta analysis, meta-analysis, Naomi Klein, oil shale / tar sands, oil shock, pattern recognition, peak oil, phenotype, planetary scale, price stability, profit motive, purchasing power parity, race to the bottom, RAND corporation, rent-seeking, Stewart Brand, Tesla Model S, trade liberalization, University of East Anglia, uranium enrichment, women in the workforce, yield curve

This conclusion is further bolstered by a 2005 study by University of Helsinki economists Ulla Lehmijoki and Tapio Palokangas; according to this study, in the short run trade liberalization boosts birth rates, but in the long run it cuts fertility. Again, this is true largely because trade liberalization encourages the development of women’s human capital (education), which makes childbearing relatively more costly. The Invisible Hand of Population Control In 2002, Seth Norton, an economics professor at Wheaton College in Illinois, published a remarkably interesting study, “Population Growth, Economic Freedom, and the Rule of Law,” on the inverse relationship between prosperity and fertility. Norton compared the fertility rates of over a hundred countries with their index rankings for economic freedom and another index for the rule of law.

Japan is now experiencing a fall in its population due largely to reduced fertility, as are Germany, Russia, Italy, Poland, and some 20 other countries and territories. And as we have seen, the global total fertility rate is rapidly decelerating. Of the 231 countries and territories listed in the 2013 CIA World Factbook, 122 are at or below replacement fertility rates. Norton persuasively argues that Hardin’s fears of a population tragedy of the commons are actually realized when the invisible hand of economic freedom is shackled. Many poor countries have weakly specified and enforced property rights. Poor property rights means that many resources are effectively left in open-access commons where the incentive is to grab what one can before another individual gets it. Norton points out that in such situations, more children mean more hands for grabbing unowned and unprotected resources such as water, fodder, timber, fish, and pastures, and for the clearing of land.

Throughout history, most people lived in the institutional equivalents of open-access commons overseen by rapacious elites who encouraged high fertility rates and the plundering of natural resources. It turns out that economic freedom and the rule of law are the equivalent of enclosing the open-access breeding commons, causing parents to bear more and more of the costs of rearing children. In other words, economic freedom actually serves as an invisible hand of population control. Hope for Africa? The United Nations’ 2012 Revision forecasts that more than half of global population growth between now and 2050 will take place in Africa, rising from 1.1 billion to 2.4 billion. The middle-variant trend for sub-Saharan Africa projects that total fertility rate will fall from 4.9 children now to 3.1 by 2050, reaching 2.1 by 2100. As noted above, a more worrying study published in an October 2014 issue of the journal Science suggested that by 2100 Africa’s population would grow even faster, rising from 1.1 billion to between 3.1 and 5.7 billion, with a median projection of 4.2 billion.

 

pages: 306 words: 85,836

When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants by Steven D. Levitt, Stephen J. Dubner

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Affordable Care Act / Obamacare, airport security, augmented reality, barriers to entry, Bernie Madoff, Black Swan, Broken windows theory, Captain Sullenberger Hudson, Daniel Kahneman / Amos Tversky, deliberate practice, feminist movement, food miles, George Akerlof, invisible hand, loss aversion, mental accounting, Netflix Prize, obamacare, oil shale / tar sands, peak oil, pre–internet, price anchoring, price discrimination, principal–agent problem, profit maximization, Richard Thaler, security theater, Ted Kaczynski, the built environment, The Chicago School, the High Line, Thorstein Veblen, transaction costs

But with tensions growing between the U.S. and the ragtag confederation of Somali pirates, we thought it might be worth looking to the past for clues on how to tame the outlaw seas. Peter Leeson is an economist at George Mason University and author of The Invisible Hook: The Hidden Economics of Pirates. Leeson agreed to answer some important piratical questions for us: Q. The Invisible Hook is more than just a clever title. How is it different from Adam Smith’s invisible hand? A. In Adam Smith, the idea is that each individual pursuing his own self-interest is led, as if by an invisible hand, to promote the interest of society. The idea of the invisible hook is that pirates, though they’re criminals, are still driven by their self-interest. So they were driven to build systems of government and social structures that allowed them to better pursue their criminal ends. They’re connected, but the big difference is that, for Adam Smith, self-interest results in cooperation that generates wealth and makes other people better off.

., 96–99 rigged, 136 Twitter, 94–96 Cook, Phil, 246 Cope, Myron, 215, 216 corporate sponsorships, 81 cover-ups, 121, 157 Cowen, Tyler, 329, 331–33 Cowher, Bill, 218 Craig, Larry, 45 crime: and abortion, 288 bank robberies, 223–26 “broken windows” theory of, 163 burglary, 242 child abduction, 133 in China, 226–28 gun deaths, 245–51 and gun laws, 243–45 intruders, 241–43 priming criminals, 228–29 prison sentences, 128, 224, 242, 245, 248, 260 street gangs, 229–36, 246–47, 248–49 and The Wire, 229–33 volatile rates of, 244 Cuban, Mark, 329, 333 cyclists, Tour de France, 151–53 Cyrus, Miley, 306 Daily Show, The, 273–74 Dal Bó, Ernesto, 33–34 Daly, John, 277 dangerous activities: horseback riding, 101–3 obesity as result of, 116–19 walking drunk, 101 Daschle, Tom, 158, 160 Dawkins, Richard, 286 decision making, 120–21, 208–9 democracy, alternative to, 29–31 Dennett, Daniel, 286 dental wisdom, 275–76 diapers, cloth vs. disposable, 167 diminishing marginal returns, 203 disasters, and charitable giving, 324–28 discrimination, statistical, 321–22 divorce, statistics on, 345 Dohmen, Thomas, 212 Doleac, Jennifer, 320–21 Donohue, John, 288 doomsday prophets, 109–10 doping, in Tour de France, 151–53 driving: and the environment, 166–67 incivility in, 161–64 drugs, prescription, prices of, 51–54 Duke, Annie, 188 Duncan, Arne, 103–4 Duskiewicz, Bernie, 348–49 ecological invalidity, 335 economics: behavioral, 120, 122, 206, 308–9 invisible hand in, 315 morality vs., 288 visible hand in, 319–22 writing about, 287–88 Edlin, Aaron, 88 Ehrenreich, Barbara, 329, 333–34 Ehrlich, Paul, 109, 114 Eikenberry (funeral director), 46 Endangered Species Act, 165–66 Engelberger, Perfect, 40 environment: cloth vs. disposable diapers, 167 and conspicuous consumption, 184–85 and driving, 166–67 eating meat, 179–84 Endangered Species Act, 165–66 global warming, 87–89, 179–84 greenhouse gas (GHG) emissions, 171–72, 177, 180 locavores, 168–72 and packaging, 175–78 paper vs. plastic bags, 167 petroleum extraction, 109–16 Prius “green halo,” 185 and profitability, 172–74 saving the rain forest, 174–75 veganism, 179–84 Ericsson, Anders, 199, 201 escort (high-end call girl), 261–67 evaluation function (EV), 197 experts, ten thousand hours of practice, 199, 201–2 Fanning, Dakota, 305 fear of strangers, 130–33 Feinstein, Dianne, 53 Feldman, Paul, 69 feminist movement, 346–47 Ferraz, Claudio, 33 films, animated, 305–7 Finan, Frederico, 33 first-grade data hound, 219–20 fishing, 348–49 flight attendants, 19–20 food: chicken wings, 75–77 decayed, 177 deliciousness of, 170 kiwifruits, 77–80 locavores, 168–72 nutritional value of, 170 and obesity, 116–18 packaging of, 175–78 poor service, 272–73 rancid chicken, 307–11 shrimp, 341–44 transportation inefficiencies of, 170–72 wasting, 177–78 football: Immaculate Reception, 216 loss aversion, 206–9 Pittsburgh Steelers, 212–19 rookie symposium, 239–41 Fox, Kevin, 253 Frakes, Michael, 117 Frankfurt, Harry, 276 Freakonomics (Levitt & Dubner), 1–2, 37, 40, 54, 69, 101, 105, 135, 160, 223, 253–4, 261, 274, 277, 280, 297–98, 305, 322, 351 Freakonomics.com, 1–4, 8, 233 Freakonomics radio, 268–69 Frederick, Shane, 341–43 Freed, Pam, 342 Friedman, Milton, 23 Frost, Robert, 218 Fryar, Irving, 239–40 Fryer, Roland, 228, 288, 328–29, 337, 339 Fuller, Thomas, 194–95 Gacy, John Wayne Jr., 39 Gagné, Éric, 149 gambling: on athletes, 73 backgammon, 195–98 blackjack, 189–91 on horse racing, 191, 220–22 how not to cheat, 153–55 Internet poker, 127–30, 157 on newspaper circulation, 233 one card away from final table, 192–95 Rochambeau (Rock, Paper, Scissors), 188–89 on teams, 125–26 unbreakable record, 192 World Series of Poker, 187–88, 192–95 GAME (Gang Awareness Through Mentoring and Education), 248–49 gas, moratorium on, 311–14 gas prices, 86–90 Gates, Bill, 16 Geiger, Bernice, 224 Geithner, Tim, 158 gender identity, 228 Gladstone, Bernard, 258, 259 global warming, 88–89, 179–84 Gly-Oxide, 275–76 God, in book titles, 285–87 Goeree, Jacob, 31 Goldstein, Dan, 335 golf, 198–206 Goodall, Chris, 167 Good to Great (Collins), 283–84, 285 Goolsbee, Austan, 160 Gordon, Phil, 187–89, 192, 193 Goss, Pat, 200–201 government: and gambling income, 129 paying politicians, 32–36 voting mechanisms, 29–31 Greatest Good, 28, 300–301 Greene, Mean Joe, 216 greenhouse gas (GHG) emissions, 171–72, 177 Grossman, Michael, 116 Gruber, Jonathan, 117 Grzelak, Mandi, 268–69 guns: anonymous tips about, 247 athletes carrying concealed weapons, 240–41 concealed weapons laws, 242 D.C. ban on, 243–45 deaths from, 245–51 illegal use of, 245 ownership of, 245 shooting intruders with, 241–43 Hagen, Ryan, 314–19 happiness, 122–23, 344–47 Harold’s Chicken Shack, 75–77 Harris, Franco, 216 Hatcher, Teri, 305 hate mail, cost of, 49–51 health care: British National Health Service, 26–29 decisions in, 122 Hemenway, David, 249–50 Henderson, Kaya, 160 herd mentality, 143–46 Hitchens, Christopher, 286 hoaxes, 282–83 Holmes, Santonio, 214–16 home, building your own, 170 home field advantage, 209–12 homelessness, 330–31 horseback riding, 101–3 horse racing, 220–22 housing prices, 67–69 Hurricane Katrina, 42–43, 325–28 Hussein, Saddam, 58 identity, concept of, 162–63 Immaculate Reception, 216 impure altruism, 328 incentives, 17, 32–36, 65, 95–96, 110, 113, 122, 136, 166, 337–40 inefficiencies, transportation, 170–72 INS (Immigration and Naturalization Service), Form N-400, 237–38 In Search of Excellence (Peters and Waterman), 284 Internet poker, 127–30, 157 iPad, 124–25 Irfan, Atif, 130–32 irrational decisions, 120–21 IRS, 11–14, 159–60, 257 Jackson, Vincent, 215 Jacob, Brian, 160 Jagger, Mick, 74 Jarden Zinc, 63 J.F.K. airport, 21–22 Jines, Linda Levitt: brother’s eulogy for, 297–301 father’s interventions, 289–97 and Freakonomics, 277, 297–98 Jingjing Zhang, 31 Johnson, Larry, 207 Johnston, David Cay, 11–12 Kaczynski, Ted (Unabomber), 287 Kahneman, Daniel, 3, 119–24, 206 Katrina (popular name), 42–43 Kennedy, Bobby, 279 Kentucky Derby, 220–22 Keyes, Alan, 279 KFC, 272–73 Killefer, Nancy, 158 kiwifruits, 77–80 Kormendy, Amy, 169 Kranton, Rachel, 162 Kulkarni, Ganesh, 140–41 Laffer curve, 72 LaGuardia Airport, 21–23 LaHood, Ray, 21, 103–6 Lake George, boat accident on, 118–19 Lancaster, Barbara, 219 Landsburg, Steven, 259 Lane, Mary MacPherson, 173 Las Vegas: blackjack, 189–91 poker, 127–30, 153–58, 187–89, 192–95 risk aversion in, 126–27 Lee, Jennifer 8., 41 Lee Hsien Loong, 32 Leeson, Peter, 314–19 Levitt, Michael, “When a Daughter Dies,” 289–97 libraries, public, 14–16 lies of reputation, 137–40 Limberhand (masturbator), 45–46 List, John, 125, 165, 228, 327–28, 338 lobbyists, 62–63 locavores, 168–72 loss aversion, 206–9 Loveman, Gary, 127 ludicity (ludic fallacy), 335 Ludwig, Jens, 246–48 Maass, Peter, 109, 114 Madoff, Bernie, 133 Malthus, Rev.

 

words: 49,604

The Weightless World: Strategies for Managing the Digital Economy by Diane Coyle

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barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, blue-collar work, Bretton Woods, clean water, computer age, Corn Laws, cross-subsidies, David Ricardo: comparative advantage, dematerialisation, Diane Coyle, Edward Glaeser, everywhere but in the productivity statistics, financial deregulation, full employment, global village, hiring and firing, Howard Rheingold, income inequality, informal economy, invisible hand, Jane Jacobs, Joseph Schumpeter, knowledge economy, labour market flexibility, laissez-faire capitalism, lump of labour, Marshall McLuhan, McJob, microcredit, Network effects, new economy, Nick Leeson, night-watchman state, North Sea oil, offshore financial centre, pension reform, pensions crisis, Ronald Reagan, Silicon Valley, spinning jenny, The Death and Life of Great American Cities, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tobin tax, two tier labour market, very high income, War on Poverty, winner-take-all economy, working-age population

The next few chapters explore the most obvious manifestation of the weightless world and its risks and challenges: unemployment, new patterns of work and inequality. They are all features of the transition to weightlessness. Notes 1. 2. 3. 4. 5. Statistical Abstract for the United Kingdom 1871-1885, facsimile edition HMSO 1986. Interview in The Independent, London, 24 October 1996. In The Invisible Hand and the Weightless Economy, LSE, March 1996. OECD Communications Outlook, 1996. Published by the BIS, July 1996. The Weightless World 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 25 Computer Industry Almanac, Glenbrook, Nevada, December 1996. ‘We’d better watch out’, New York Times Book Review, 12 July 1978. For example, Computers and Output Growth Revisited: How Big is the Puzzle?

See Krugman’s Geography and Trade for the full explanation. See The Rise and Fall of Regional Inequalities, Diego Puga, CEPR paper no. 1575. In Geography and Trade, MIT Press 1991. In Scientific American, February 1990. In Justice, Nature and the Geography of Distance. ‘Transeconomics’ in The Transparency of Evil. Conference speech in London, May 1995. In City of Bits. In ‘The Weightless Economy’ column in Centrepiece, February 1997. In The Invisible Hand and the Weightless Economy, CEP discussion paper, March 1996. In the New York Times magazine, October 1996. After the Nation State. See, for example, Making Sense of Subsidiarity, Begg et al. Speech at Future London conference, 11 December 1996. Chapter Ten. Redesigning Government The opinions of the philosopher Jean-Jacques Rousseau, one of the early architects of democratic thought, are as fresh now as they were two and a half centuries ago.

Diego Puga (February 1997) ‘The rise and fall of regional inequalities’, Discussion Paper 1575, Centre for Economic Policy Research, London. Robert Putnam (1993) Making Democracy Work: Civic Traditions in Modern Italy, Princeton University Press, Princeton, NJ. Bibliography 241 Robert Putnam (January 1995) ‘Bowling alone: America’s declining social capital’, Journal of Democracy, 6 (1). Danny Quah (March 1996) ‘The invisible hand and the weightless economy’, Centre for Economic Performance working paper, London School of Economics, London. Danny Quah (July 1996) ‘Twin Peaks: growth and convergence in models of distribution dynamics’, Economic Journal. Danny Quah (October 1996) Discarding Non-stick Frying Pans for Economic Growth, Centrepiece, Centre for Economic Performance, London School of Economics, London. Gregory Rawlins (1996) Moths to the Flame, MIT Press, Cambridge, MA.

 

pages: 375 words: 88,306

The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism by Arun Sundararajan

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3D printing, additive manufacturing, Airbnb, Amazon Mechanical Turk, autonomous vehicles, barriers to entry, bitcoin, blockchain, Burning Man, call centre, collaborative consumption, collaborative economy, collective bargaining, corporate social responsibility, cryptocurrency, David Graeber, distributed ledger, employer provided health coverage, Erik Brynjolfsson, ethereum blockchain, Frank Levy and Richard Murnane: The New Division of Labor, future of work, George Akerlof, gig economy, housing crisis, Howard Rheingold, Internet of things, inventory management, invisible hand, job automation, job-hopping, Kickstarter, knowledge worker, Kula ring, Lyft, megacity, minimum wage unemployment, moral hazard, Network effects, new economy, Oculus Rift, pattern recognition, peer-to-peer lending, profit motive, purchasing power parity, race to the bottom, recommendation engine, regulatory arbitrage, rent control, Richard Florida, ride hailing / ride sharing, Robert Gordon, Ronald Coase, Second Machine Age, self-driving car, sharing economy, Silicon Valley, smart contracts, Snapchat, social software, supply-chain management, TaskRabbit, The Nature of the Firm, total factor productivity, transaction costs, transportation-network company, two-sided market, Uber and Lyft, Uber for X, universal basic income, Zipcar

Markets and Hierarchies Let’s start by getting a better feel for what we mean by the terms “market” and “hierarchy.” Capitalist economies have at least two ways of organizing economic activity. There are markets, in which individuals buy and sell from other individuals and invest their time and money into producing goods and services using their own equipment, sometimes perhaps financed by others who lend money. Markets are where Adam Smith’s famed “invisible hand” determines the prices that balance supply and demand. And then there is the “visible” hand—the “hierarchies” that we typically think of as firms or organizations (or government entities). These entities contain within them a set of operating units that are managed by a hierarchy of salaried employees. Each operating unit has additional salaried employees who engage in various economic activities; there is coordination and exchange between the units that is facilitated by this hierarchy of executives, and the unit as a whole interacts with customers, as well as with suppliers, through the market.

No matter whether our visitor approached the United States or the Soviet Union, urban China or the European Union, the greater part of the space below it would be within the green areas, for almost all of the inhabitants would be employees, hence inside the firm boundaries. Organizations would be the dominant feature of the landscape. A message sent back home, describing the scene, would speak of “large green areas interconnected by red lines.” It would not likely speak of “a network of red lines connecting green spots.”4 The transition of economies from market transactions governed by Adam Smith’s “invisible hand” to the ones we observe today has been gradual. In The Visible Hand,” a book I cite in the introduction and for the epigraph to this chapter, the economic historian Alfred Chandler traces this transition from the early 1800s through the late 20th century, documenting how although the United States in Adam Smith’s time was largely a market economy, there began a steady transition to hierarchies of increasing complexity as a consequence of a series of technological changes spanning 200 years.5 Chandler chronicles the creation of plantations, the emergence of textile mills, the use of armories, the revolutions in transportation and communication induced by the railroad and the telegraph in the mid-19th century, followed by the emergence first of mass distribution and then of mass production.

In chapter 1, I gave you a first lens through which to consider the odd meld of the economic and the social in the sharing economy, highlighting how what we are seeing unfold has elements of both a commercial economy and a gift economy. In chapter 2, I used a technology-centric lens, drawing on an evolving understanding of digital technologies to help you think about the future of capitalism as shaped by its digital and trust determinants. In chapter 3, you encountered the lens of transaction costs, of markets and hierarchies, thinking through what kinds of institutions this blurring of boundaries between the visible and invisible hands might yield. In chapter 4, through a short discussion about the new wave of digital enablers as well as their historical precedents, I hope you have a better lens through which to view how the decentralized peer-to-peer revolution unfolds, and, despite the surrounding idealism, recognize the significant possibility for value re-aggregation by large intermediaries. These first four chapters focused on cause.

 

pages: 162 words: 51,473

The Accidental Theorist: And Other Dispatches From the Dismal Science by Paul Krugman

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Bonfire of the Vanities, Bretton Woods, clean water, collective bargaining, declining real wages, floating exchange rates, full employment, George Akerlof, George Gilder, Home mortgage interest deduction, income inequality, indoor plumbing, informal economy, invisible hand, knowledge economy, life extension, lump of labour, new economy, Nick Leeson, paradox of thrift, Plutocrats, plutocrats, price stability, rent control, Ronald Reagan, Silicon Valley, trade route, very high income, working poor

You may quarrel with the Fed chairman’s judgment—you may think that he should keep the economy on a looser rein—but you can hardly dispute his power. Indeed, if you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God. But putting Greenspan (or his successor) into the picture restores much of the classical vision of the macroeconomy. Instead of an invisible hand pushing the economy toward full employment in some unspecified long run, we have the visible hand of the Fed pushing us toward its estimate of the noninflationary unemployment rate over the course of two or three years. To accomplish this, the board must raise or lower interest rates to bring savings and investment at that target unemployment rate in line with each other. And so all the paradoxes of thrift, widow’s cruses, and so on become irrelevant.

Pontificating about globalization is an easy way to get attention at events like the World Economic Forum in Davos, Switzerland, and Renaissance Weekends in Hilton Head, S.C. But there is also a deeper cause—an odd sort of tacit agreement between the Left and the Right to pretend that exotic global forces are at work even when the real action is prosaically domestic. Many on the Left dislike the global marketplace because it epitomizes what they dislike about markets in general: the fact that nobody is in charge. The truth is that the invisible hand rules most domestic markets, too, a reality that most Americans seem to accept as a fact of life. But those who would like to see us revert to a more managed society in all ways hope that popular unease over the economic influence of people who live in far-off places and have funny-sounding names can be used as the thin end of an ideological wedge. Meanwhile, many on the Right use the rhetoric of globalization to argue that business can no longer be expected to meet any social obligations.

 

pages: 168 words: 46,194

Why Nudge?: The Politics of Libertarian Paternalism by Cass R. Sunstein

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Affordable Care Act / Obamacare, Andrei Shleifer, availability heuristic, Cass Sunstein, choice architecture, clean water, Daniel Kahneman / Amos Tversky, Edward Glaeser, endowment effect, energy security, framing effect, invisible hand, late fees, libertarian paternalism, loss aversion, nudge unit, randomized controlled trial, Richard Thaler

Choice Architecture and Inevitable Nudges We have seen an immediate objection to the rule-consequentialist suggestion, and it cannot be repeated often enough, simply because it is so often ignored (and so please forgive the italics): Choice architecture is inevitable. The social environment influences choices, and it is not possible to dispense with a social environment. This point holds whether the social environment is a product of self-conscious designers or of some kind of invisible-hand mechanism. There can be (and often is) choice architecture without choice architects.36 Default rules are omnipresent, and they matter. Do we have an opt-in design or an opt-out design? Whenever there is an answer, there is an effect on outcomes. Does this mean that paternalism is also unavoidable? Suppose that we use the definition set out above, so that paternalism is involved when public officials do not believe that people’s choices will promote their welfare, and hence are taking steps to influence or alter people’s choices for their own good.

See Christopher Snowden, The Proof of the Pudding: Denmark’s Fat Tax Fiasco (2013), available at http://www.iea.org.uk/publications/research/the-proof-of-the-pudding-denmark’s-fat-tax-fiasco. 33. See Glaeser, supra note 10; Wright & Ginsburg, supra note 5. 34. See Glaeser, supra note 10, which has a rule-consequentialist flavor, but which is qualified through a recognition that (optional) nudging is justified in identifiable cases. 35. Mill, supra note 2. 36. For a valuable discussion, see Edna Ullmann-Margalit, Invisible Hand Explanations, 39 Synthese 263 (1978). 37. For discussion, see Richard H. Thaler & Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness (2008). Richard Thaler et al., Choice Architecture, in Behavioral Foundations of Policy 428, 428–31 (Eldar Shafir ed. 2012). I am bracketing here the potential effects of the kinds of choice architecture that are established by the basic rules of contract law, property law, tort law, and criminal law. 38.

 

Profit Over People: Neoliberalism and Global Order by Noam Chomsky

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Bernie Sanders, Bretton Woods, declining real wages, deindustrialization, full employment, invisible hand, joint-stock company, land reform, manufacturing employment, means of production, Monroe Doctrine, Ronald Reagan, strikebreaker, structural adjustment programs, Telecommunications Act of 1996, The Wealth of Nations by Adam Smith, Thomas Malthus, union organizing, Washington Consensus

Not if we take seriously the doctrines of classical liberalism. Adam Smith’s praise of division of labor is well known, but not his denunciation of its inhuman effects, which will turn working people into objects “as stupid and ignorant as it is possible for a human creature to be,” something that must be prevented “in every improved and civilized society” by government action to overcome the destructive force of the “invisible hand.” Also not well advertised is Smith’s belief that government “regulation in favour of the workmen is always just and equitable,” though not “when in favour of the masters.” Or his call for equality of outcome, which was at the heart of his argument for free markets. Other leading contributors to the classical liberal canon go much further. Wilhelm von Humboldt condemned wage labor itself: when the laborer works under external control, he wrote, “we may admire what he does, but we despise what he is.”

According to some specialists, half of US trade worldwide consists of such centrally managed transactions, and much the same is true of other industrial powers,35 though one must treat with caution conclusions about institutions with limited public accountability. Some economists have plausibly described the world system as one of “corporate mercantilism,” remote from the ideal of free trade. The OECD concludes that “oligopolistic competition and strategic interaction among firms and governments rather than the invisible hand of market forces condition today’s competitive advantage and international division of labor in high-technology industries,”36 implicitly adopting a similar view. Even the basic structure of the domestic economy violates the neoliberal principles that are hailed. The main theme of the standard work on US business history is that “modern business enterprise took the place of market mechanisms in coordinating the activities of the economy and allocating its resources,” handling many transactions internally, another large departure from market principles.37 There are many others.

 

Imperial Ambitions: Conversations on the Post-9/11 World by Noam Chomsky, David Barsamian

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British Empire, collective bargaining, cuban missile crisis, declining real wages, failed state, feminist movement, Howard Zinn, invisible hand, Joseph Schumpeter, Monroe Doctrine, offshore financial centre, Ronald Reagan, The Wealth of Nations by Adam Smith, Thomas L Friedman, Upton Sinclair, uranium enrichment

In fact, Smith’s famous phrase “the invisible hand,” which everyone totally misuses, appears only once in The Wealth of Nations, in the context of an argument against what we now call neoliberalism.5 He says that if English manufacturers and investors imported from abroad and invested overseas, rather than here, it would be harmful to England. In other words, if they followed what are now called the principles of Adam Smith, it would be harmful to England. He said, however, there was no reason to worry about that because “upon equal or nearly equal profits, every wholesale merchant naturally prefers the home-trade to the foreign trade of consumption.” That is, British capitalists will individually prefer to use domestically produced goods and to invest at home. So, therefore, as if “led by an invisible hand to promote an end which was no part of his intention,” the threat of what’s now called neoliberalism will be avoided.

 

pages: 540 words: 168,921

The Relentless Revolution: A History of Capitalism by Joyce Appleby

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1919 Motor Transport Corps convoy, agricultural Revolution, anti-communist, Asian financial crisis, asset-backed security, Bartolomé de las Casas, Bernie Madoff, Bretton Woods, BRICs, British Empire, call centre, collateralized debt obligation, collective bargaining, Columbian Exchange, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, Doha Development Round, double entry bookkeeping, epigenetics, equal pay for equal work, European colonialism, facts on the ground, failed state, Firefox, Ford paid five dollars a day, Francisco Pizarro, Frederick Winslow Taylor, full employment, Gordon Gekko, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Hernando de Soto, hiring and firing, illegal immigration, informal economy, interchangeable parts, interest rate swap, invention of movable type, invention of the printing press, invention of the steam engine, invisible hand, Isaac Newton, James Hargreaves, James Watt: steam engine, Jeff Bezos, joint-stock company, Joseph Schumpeter, knowledge economy, land reform, Livingstone, I presume, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, moral hazard, Ponzi scheme, profit maximization, profit motive, race to the bottom, Ralph Nader, refrigerator car, Ronald Reagan, Scramble for Africa, Silicon Valley, Silicon Valley startup, South China Sea, South Sea Bubble, special economic zone, spice trade, spinning jenny, strikebreaker, the built environment, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thorstein Veblen, total factor productivity, trade route, transatlantic slave trade, transatlantic slave trade, transcontinental railway, union organizing, Unsafe at Any Speed, Upton Sinclair, urban renewal, War on Poverty, working poor, Works Progress Administration, Yogi Berra, Yom Kippur War

Integral to Smith’s theorizing was the law of unintended consequences, an arresting insight of the Scottish philosophers that explained how acts could be willed by self-interested individuals but still turn out to be beneficial to a larger group. The most famous example of course was the invisible hand of the market that used competition to convert the profit motive into a force for good. As Smith explained, it is “not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regards to their own interest.”51 Here was a concept that contributed to the strong impression that reality was often obscured by appearances. Smith was responding to the developments of his lifetime, 1723–1790, when it was still relatively easy for an ambitious young baker to get the money to set himself up to compete effectively with established competitors. Later the concentration of capital took a lot of the optimizing agility out of the “invisible hand.” Smith and his fellow Scots proposed a conjectural history of mankind that traced human society from hunters and gatherers to herders, then to sedentary farmers, and finally to commercial society.

At the end of the eighteenth century, the intellectual effort to understand the phenomenon of capitalism found its Aristotle in Adam Smith, whose An Inquiry into the Nature and Causes of the Wealth of Nations appeared in 1776. Smith presented a brilliantly detailed explanation of the causes of the unparalleled wealth in Great Britain. (After the Scottish and English crowns were joined in 1706, England was called Great Britain or the United Kingdom.) Building on the new conception of human beings as responsibly pursuing their own interest, he advocated a system of “natural liberty” because he thought that the “invisible hand” of the market would function better if left free of most regulation. With few opportunities to choose among options, men and women had appeared as fickle, impulsive, and given over to their passions. From the Christian point of view, they were also bathed in sin. With such a picture of human nature, it would have been a form of madness to leave them free to do as they wished with their resources.

What stands out is their single-mindedness and their inability to stop their upward climb until they’ve reached the top or even created a top higher than anyone had ever imagined. Vanderbilt in railroads, Carnegie in steel, and Rockefeller in oil rode the tiger of fixed capital costs into the new world of giant corporations and trusts. They and their peers changed the landscape of capitalism. Adam Smith had argued that the invisible hand of competition would work to deliver goods at lower prices as entrepreneurs strove for a larger share of the market. But this assumed easy entries for new competitors. Instead high fixed costs limited competition to those with ready funds. German Entrepreneurs When August Thyssen died, the New York Times obituary dubbed him “the Rockefeller of the Ruhr.” This was a concession to the alliteration of r’s, for Thyssen was more like Andrew Carnegie.

 

pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, merger arbitrage, Mikhail Gorbachev, Milgram experiment, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Naomi Klein, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, pets.com, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond

Schumpeter saw the Great Depression as part of the adjustment that would wipe out unsustainable debts and poor investments, allowing economic renewal. Keynesian economics was legitimizing interference in the natural process. For many politicians and economists, the severity of the Great Depression, the inability of markets to restore full employment and the rising human cost highlighted the failure of the invisible hand. Keynes gained credence and, for the next four decades, dominated economic thinking and policy. The ability of governments and central banks to fine-tune the economy through a judicious mix of budgetary and monetary policy as well as regulation became accepted faith. In the 1960s, the University of Chicago’s Milton Friedman challenged Keynes as the foremost public figure in economics of the twentieth century.

He believed that any attempt to improve public policy was doomed to failure: The probability of the people in power being individuals who dislike the possession and exercise of power is on a level with the probability that an extremely tender-hearted person would get the job of whipping master in a slave plantation.24 New Old Deal Politicians and governments, irrespective of ideology, accepted market fundamentalism. Free markets were considered better at regulating competing forces, allocating resources, and meeting consumer demand. The role of government was to remove impediments to and ensure the proper institutional framework for free and competitive markets. Harvard economist and U.S. Treasury Secretary Lawrence Summers “tried to leave [his] students with...the view that the invisible hand is more powerful than the [un]hidden hand. Things will happen in well-organized efforts without direction, controls, plans. That’s the consensus among economists.”25 Tony Blair’s New Labour government’s unalloyed support for the City reflected this belief. Upon succeeding Blair as the UK prime minister, Gordon Brown even invited Thatcher to No. 10 Downing Street for tea, seemingly to lend authority to his economic credentials.

Thomas Frank in One Market, One God captured this spirit: Efficient markets theory holds that stock markets process economic data quickly and flawlessly...commentators...believe that stock markets perform pretty much the same operation with general will, endlessly adjusting and modifying themselves in conformity with the vast and enigmatic popular mind.38 American Nobel-prize-winning economist Joseph Stiglitz dissented: “[Adam Smith’s] invisible hand often seems invisible [because] it is often not there.”39 Nineteenth-century Danish philosopher Søren Kierkegaard differentiated between objective truths and subjective truths. Objective truths are filtered and altered by our subjective truths. Financial economics, in its prioritization of evidence and its models, converted objective truths into subjective truths consistent with the Chicago Interpretation.

 

pages: 710 words: 164,527

The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order by Benn Steil

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Albert Einstein, Asian financial crisis, banks create money, Bretton Woods, British Empire, capital controls, currency manipulation / currency intervention, currency peg, deindustrialization, European colonialism, facts on the ground, fiat currency, financial independence, floating exchange rates, full employment, global reserve currency, imperial preference, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, margin call, means of production, money: store of value / unit of account / medium of exchange, Monroe Doctrine, New Journalism, open economy, Potemkin village, price mechanism, price stability, psychological pricing, reserve currency, road to serfdom, seigniorage, South China Sea, special drawing rights, The Great Moderation, the market place, trade liberalization, Works Progress Administration

But we were not handled in a way which made apprehension easy.”26 A strange strain of optimism seemed to suffuse Keynes’s economic thinking in late March and early April. Writings and conversations now pointed toward “the invisible hand” as a possible way out of Britain’s huge financial problems27—an “invisible hand which I had tried to eject from economic thinking twenty years ago,” Keynes noted. This was, observed former Bank of England economist Henry Clay in a letter to now-retired Montagu Norman, “an interesting confession for our arch-planner.” “I think he relied on intellect, which perhaps means that he ignored the ‘invisible hand,’” Norman responded, “and I guess he was led astray by Harry White. But surely it is easy to arrange a loan if you ignore its repayment, and is there any hope of that, unless there is to be such an inflation across the Atlantic as will affect their claims and provide an easy way out?”

British visions of, 301–5; architecture of, 301; Articles of Agreement and, 216, 290, 339; Article VIII and, 332; bancor alternative and, 335; beginning operations of, 316; Bernstein and, 356; capital outflows and, 218; Coe and, 358; day-to-day organization of, 303; delegation issues over, 226–28, 288; exchange parity and, 331; financial assistance requests and, 316; fund articles amendments and, 316–17; resistance to, 342; Schweitzer and, 337–39, 366; Special Drawing Right (SDR) and, 335–36, 344–45, 404n18; symbolism of location of, 301–2; Taft and, 367; “Text of Address by Truman Explaining to Nation His Actions in the White Case” and, 352; Triffin model and, 335; U.S. hegemony and, 334; Washington base for, 300; White and, 7, 127–28, 214, 216, 297–99, 315–17, 324, 331–32, 348, 357, 368; Witteveen and, 339, 369 invasion currency, 155, 388n1 invisible hand, 305 Iron Battalion, 19 Iron Curtain, 306–7 isolationism: Kennedy and, 105–6; Neutrality Act and, 106; “Quarantine the Aggressors” speech and, 47; Roosevelt and, 47; United States and, 40, 47, 99, 105–6, 121, 176, 184, 206, 255, 259–60, 306 Italy, 43, 47, 49, 70, 101, 172 Jamaica, 102 Japan, 43; Atlantic Charter and, 127; Battle of the Coral Sea and, 129; Hiroshima bombing and, 276; Hull and, 54; Kurusu and, 54–55; modus vivendi and, 54–55; Morgenthau and, 58–59; Nagasaki bombing and, 276; Nomura and, 54–55; occupation of China and, 47–48, 55–58, 377n103; Operation Snow and, 56–58; Pearl Harbor and, 53–58, 126; postwar policy and, 266; Saipan Island and, 216; Stalin and, 56; Ten-Point Note and, 55; ultimatum to, 55–56; yen and, 337–38, 377n103 Jews, 3, 17–18, 20, 27, 79, 112, 174, 201–2, 288, 306–8, 356, 359 Jinnah, Mohammad Ali, 308 Johnson Act, 106 Joint Statement by Experts of United and Associated Nations on the Establishment of an International Stabilization Fund, 175–85, 187, 191 Joint Statement of Principles, 198, 210, 215, 248 J.

Churchill and, 77; The Economic Consequences of the Peace and, 71, 73, 77, 369; Economic Journal and, 64–65; education of, 61–62; Egyptian borrowing and, 305–6; exchange rate and, 73, 76, 139–41, 143, 150, 162, 166–67, 171, 173, 193–94, 196, 217, 289, 331; financial speculation of, 79, 88; as First Baron Tilton, 142, 204; first meeting with White and, 112; foreign policy and, 66–68; free trade and, 65–66, 74, 82–83, 141, 160, 278; General Theory and, 3, 5, 46, 73, 80, 84, 88–95, 365–66, 381n95; gold standard and, 64–65, 75–76, 131, 133, 137–47, 252; Grand Design negotiation and, 289; Halifax and, 4; Harrod and, 63, 146, 152, 168, 171, 173, 361; Hayek and, 85–86; health of, 61–62, 93, 95, 218–19, 278–80, 304; Henderson and, 81–83, 93, 141, 177–78, 361, 380n63; homosexuality of, 63; Hopkins and, 113–14; hotel room number of, 372n12; House of Lords speech of, 169; How to Pay for the War and, 95–96; IMF issues and, 301–4; inaugural encounter with Morgenthau, 112; Indian Currency and Finance and, 64; intelligence of, 61–64; Inter-Ally Council and, 69; International Clearing Bank (ICB) and, 143–53; internationalism and, 140–41; “in the long run we are all dead” aphorism of, 62; invisible hand and, 305; Jewish quips of, 174–75; Kahn and, 81, 86, 282, 302, 362; legacy of, 4; Lend-Lease and, 14, 110–19, 123–24, 180, 190–91, 261, 279–80; Liberal politics and, 65–66, 74, 82–83, 85, 88, 93, 95; lingering Bretton Woods issues and, 251–54, 258–67, 276–83, 285–89; Lloyd George and, 70–72, 362, 379n32; Lopokova and, 11–12, 73, 111, 283, 300, 363; McKenna and, 66, 68, 70; Macmillan Committee and, 81; marginalization of, 85; mathematical skill of, 1; The Means to Prosperity and, 86–87; Moggridge and, 304, 392n6; monetary duel of, 187–88; monetary reform and, 64–65, 75, 137; Morgenthau and, 369; Mosley and, 85; “National Self-Sufficiency” and, 87; New Deal and, 6, 87, 89, 113; New Statesman article and, 94; no-interest American loan and, 279–80; “Notes on the War for the President” and, 96–97; output of newspaper articles of, 73; Phillips and, 97–98, 159, 163, 165, 168, 170–71, 176; “Post War Currency Policy” and, 142; postwar global peace and, 1; “Proposals for an International Currency Union” and, 142; protectionism and, 74, 82–83, 87; quotas and, 230–31, 237, 243–47; “Recent Economic Events in India” and, 64; Robbins and, 12, 31, 82–83, 140, 170, 192–93, 203, 205, 218–19, 224, 279, 282–83, 392n6; on role of government, 77–85; Roosevelt and, 26, 96–97, 114; Rueff and, 73, 91–93; Say’s Law and, 90, 366; siting of International Monetary Fund and World Bank buildings and, 221–26; stabilization and, 3, 31–32, 65, 75–76, 89, 97, 138–40, 147, 149–51, 159–60, 166–67, 170, 173, 175–76, 179, 188, 193–94, 260, 340; sterling-dollar peg and, 68–69; style of, 3–4, 65–73, 113, 159–60, 173–76, 194, 208, 252–53; Supranational Bank and, 81; theory refinement of, 85–93; Treasury strategy and, 97; A Tract on Monetary Reform and, 75–76, 80, 137; Treatise on Money and, 79–81, 85, 91–92, 137, 142; on unemployment, 73–74, 78, 80–93, 142, 151, 186; U.S. dollar and, 3, 149–53, 169–73, 176–77, 180, 184, 188, 195–96, 212, 214, 252, 262, 301–3, 305, 310; U.S.

 

pages: 77 words: 18,414

How to Kick Ass on Wall Street by Andy Kessler

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Andy Kessler, Bernie Madoff, buttonwood tree, call centre, collateralized debt obligation, family office, fixed income, hiring and firing, invention of the wheel, invisible hand, London Whale, margin call, NetJets, Nick Leeson, pets.com, risk tolerance, Silicon Valley, sovereign wealth fund, time value of money, too big to fail, value at risk

They can sell few shares and dilute fewer existing shareholders to raise the $1 billion for the new factory. When a stock goes down, the market is, in effect, starving the company for capital, making it more expensive to raise money. Management can lower costs, change product plans, whatever it takes to please investors to lower their cost of capital. For you economics majors, this is Adam Smith’s Invisible Hand writ large, pushing great companies (or ones the markets thinks their prospects are great) along, and spanking the ones it doesn’t like. Economists are often confused by the stock market and its seemingly Wild West way of allocating capital. Probably because most economists would rather be Central Planners and do the job themselves. Anyway, Wall Street firms live to help companies sell shares to investors, they trade those shares, they trade put and call options on those shares, they have funds that pool investors money to own these shares, and sometimes they even own them themselves.

 

pages: 275 words: 77,955

Capitalism and Freedom by Milton Friedman

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affirmative action, Berlin Wall, central bank independence, Corn Laws, Deng Xiaoping, floating exchange rates, Fractional reserve banking, full employment, invisible hand, Joseph Schumpeter, liquidity trap, market friction, minimum wage unemployment, price discrimination, rent control, road to serfdom, Ronald Reagan, secular stagnation, Simon Kuznets, the market place, The Wealth of Nations by Adam Smith, union organizing

In such an economy, there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud. Similarly, the “social responsibility” of labor leaders is to serve the interests of the members of their unions. It is the responsibility of the rest of us to establish a framework of law such that an individual in pursuing his own interest is, to quote Adam Smith again, “led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”4 Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.

The United States has continued to progress; its citizens have become better fed, better clothed, better housed, and better transported; class and social distinctions have narrowed; minority groups have become less disadvantaged; popular culture has advanced by leaps and bounds. All this has been the product of the initiative and drive of individuals co-operating through the free market. Government measures have hampered not helped this development. We have been able to afford and surmount these measures only because of the extraordinary fecundity of the market. The invisible hand has been more potent for progress than the visible hand for retrogression. Is it an accident that so many of the governmental reforms of recent decades have gone awry, that the bright hopes have turned to ashes? Is it simply because the programs are faulty in detail? I believe the answer is clearly in the negative. The central defect of these measures is that they seek through government to force people to act against their own immediate interests in order to promote a supposedly general interest.

 

pages: 193 words: 11,060

Ethics in Investment Banking by John N. Reynolds, Edmund Newell

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accounting loophole / creative accounting, banking crisis, capital controls, collapse of Lehman Brothers, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, financial independence, index fund, invisible hand, margin call, moral hazard, Nick Leeson, Northern Rock, quantitative easing, shareholder value, short selling, South Sea Bubble, stem cell, the market place, The Wealth of Nations by Adam Smith, too big to fail

Economics and business raise a number of issues of justice primarily related to distribution. For instance, it is often argued that markets are “just” or “fair” in that they determine, through the interacting forces of supply and demand, the prices of goods and services and their allocation in a way that takes into account the various needs of consumers and producers. However, not all ethical questions of distribution are dealt with by the “invisible hand” of the market, to use Adam Smith’s famous term. As was discussed earlier, for reasons of equity some market participants may need protection from adverse market forces. An influential contemporary theory of justice, which has been applied to economics, is that developed by the philosopher John Rawls. Rawls’ theory of justice centres on two principles, which can be used to determine whether or not an action is just.

The basic principle of this form of ethical thinking is that it is paramount to assess what would be the best or the most desirable result when making a decision. An influential consequentialist thinker was Thomas Hobbes (1588– 1679), who argued that humans are fundamentally self-interested and should act in ways that maximise their own long-term interests. Similarly, Adam Smith (1723–90) argued that the pursuit of individual self-interest was permissible because it produced a morally desirable outcome through the workings of the “invisible hand” of the market. However, the bestknown and most influential form of consequentialist ethics is utilitarianism, the underlying principle of which is that we should act in such a way that maximises the good, happiness, pleasure or “utility” of the greatest number of people. Associated in particular with the work of Jeremy Bentham (1748–1832) and John Stuart Mill (1806–73), utilitarianism has provided the philosophical underpinning of much economic theory, where utility maximisation is a key guiding principle, and applied economics.

 

pages: 261 words: 64,977

Pity the Billionaire: The Unexpected Resurgence of the American Right by Thomas Frank

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Affordable Care Act / Obamacare, bank run, big-box store, bonus culture, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Deng Xiaoping, financial innovation, housing crisis, invisible hand, Naomi Klein, obamacare, payday loans, profit maximization, profit motive, road to serfdom, Ronald Reagan, shareholder value, strikebreaker, The Chicago School, The Myth of the Rational Market, Thorstein Veblen, too big to fail, union organizing, Washington Consensus, white flight, Works Progress Administration

Their heroes, they quivered to learn, were victims of “persecution,” their nation was under “systematic assault” by its own leaders, and they who had defeated Soviet communism; they who rejoiced to see their enemies writhe in the dungeons of Guantánamo—why, now they were “Gulag Bound,” as a popular website of the day moaned rapturously.5 This time it was apocalypse that moved the needle, that swayed the undecided, that made the sale. We the Market And what it sold was the great god Market. The market’s invisible hand would lift the threat of “destruction” from the land. It would restore fairness to a nation laid waste by cronyism and bailouts. It would let the failures fail, at the same time comforting the thrifty and the diligent. Under its benevolent gaze, rewards would be proportionate to effort; the lazy and the deceiving would be turned away empty-handed, and once again would justice and stability prevail.

., The Politics of Upheaval (Boston: Houghton Mifflin, 1960), p. 85. The president of the American Liberty League was Jouett Shouse, a former Kansas congressman, but its main backers were the DuPont family, the Koch brothers of their day. The speech in which this passage occurs was called “The New Deal vs. Democracy” and was issued as a pamphlet by the league in 1936. 15. See the account of the American Liberty League in Kim Phillips-Fein’s Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan (New York: Norton, 2009), p. 13. 16. Remley J. Glass, “Gentlemen, the Corn Belt!” Harper’s, July 1933, pp. 199–202. 17. “Virtually impossible”: cited in Theodore Saloutos and John D. Hicks, Twentieth Century Populism: Agricultural Discontent in the Middle West 1900–1939 (Lincoln, NE: University of Nebraska Press, 1951), p. 448.

 

pages: 259 words: 73,193

The End of Absence: Reclaiming What We've Lost in a World of Constant Connection by Michael Harris

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4chan, Albert Einstein, AltaVista, Andrew Keen, augmented reality, Burning Man, cognitive dissonance, crowdsourcing, dematerialisation, en.wikipedia.org, Filter Bubble, Firefox, Google Glasses, informal economy, information retrieval, invention of movable type, invention of the printing press, invisible hand, James Watt: steam engine, Jaron Lanier, jimmy wales, Kevin Kelly, Loebner Prize, Marshall McLuhan, McMansion, Nicholas Carr, pattern recognition, pre–internet, Republic of Letters, Silicon Valley, Skype, Snapchat, social web, Steve Jobs, the medium is the message, The Wisdom of Crowds, Turing test

We can presume that in the future much more will be selected by public consensus—and that we’ll be vaguely unaware of those selections, too. The computer scientist (and virtual reality pioneer) Jaron Lanier writes angrily against this “invisible hand” in Who Owns the Future?: If market pricing is the only legitimate test of quality, why are we still bothering with proving theorems? Why don’t we just have a vote on whether a theorem is true? To make it better we’ll have everyone vote on it, especially the hundreds of millions of people who don’t understand the math. Would that satisfy you? This invisible hand is at work each time you search online. When Google delivers your search results, its algorithm (mimicking an academic tradition) assumes that work that receives more citations has a greater authority. Google, then, privileges search results that are linked to more Web pages and shuttles more popular (that is, relevant) results to page one of the 142 million results for “Glee,” for example.

 

pages: 218 words: 63,471

How We Got Here: A Slightly Irreverent History of Technology and Markets by Andy Kessler

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Albert Einstein, Andy Kessler, automated trading system, bank run, Big bang: deregulation of the City of London, Bretton Woods, British Empire, buttonwood tree, Claude Shannon: information theory, Corn Laws, Edward Lloyd's coffeehouse, fiat currency, floating exchange rates, Fractional reserve banking, full employment, Grace Hopper, invention of the steam engine, invention of the telephone, invisible hand, Isaac Newton, Jacquard loom, Jacquard loom, James Hargreaves, James Watt: steam engine, John von Neumann, joint-stock company, joint-stock limited liability company, Joseph-Marie Jacquard, Maui Hawaii, Menlo Park, Metcalfe's law, packet switching, price mechanism, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, railway mania, RAND corporation, Silicon Valley, Small Order Execution System, South Sea Bubble, spice trade, spinning jenny, Steve Jobs, supply-chain management, supply-chain management software, trade route, transatlantic slave trade, transatlantic slave trade, tulip mania, Turing machine, Turing test, William Shockley: the traitorous eight

The creation of the East Indies Company was the first of many government-anointed trading companies that formed the backbone of mercantilism. Free enterprise was not yet ready for primetime, the 62 HOW WE GOT HERE monarchy was having too much fun doling out favors to friends of the crown. It worked for a while. There was so little trade with India that giving out a monopoly was no big deal. The next 200 years would see the growth of this mercantilism system until Adam Smith hallucinated the Invisible Hand. In the meantime, it turned out that Elizabeth I was way ahead of her time. She figured out that world trade and a strong navy were interdependent; she couldn’t afford the navy without the wealth created by trade, and a capital markets system to fund it. *** England had almost no colonies in the New World while Spain had spent the past 100 years exploring and controlling Central and South America and what is now Florida, Texas and California, giving it not only plenty of gold, but enough electoral votes to win any election.

Around the same time, he set up the Mississippi Company, whose stock ballooned concurrent with the English South Sea Company, eventually being worth more than all the gold and silver in France, which from the looks of the reserves of Banque Generale, was FOOL’S GOLD 79 not very much. A bursting of the Mississippi Bubble in 1720 caused a run on the Banque and a depression in France for years to come. Almost three hundred years later, the French don’t call their banks, Banques, but Credits, as in Credit Lyonnais. John Law proved economists shouldn’t be businessmen and his reputation killed the Real Bills Doctrine. Even when “invisible hand” Adam Smith backed Real Bills the Bullionists weren’t swayed. Too bad. Real Bills was only slightly flawed in that it didn’t check the amount of speculative loans a bank could issue, since loans are the source of bank profits. A floating reserve requirement, putting limits on fractional reserve banking in good times, could have fixed that flaw. Perhaps a Real Bills Doctrine could automate the creation of money supply today, in a modern non-gold standard world.

 

pages: 243 words: 66,908

Thinking in Systems: A Primer by Meadows. Donella, Diana Wright

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affirmative action, agricultural Revolution, Albert Einstein, Buckminster Fuller, clean water, Dissolution of the Soviet Union, game design, illegal immigration, invisible hand, Just-in-time delivery, means of production, Mikhail Gorbachev, peak oil, race to the bottom, Ralph Waldo Emerson, Ronald Reagan, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Whole Earth Review

Bounded Rationality As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of greatest value. . . he generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. . . . He intends his own security; . . . he intends only his own gain and he is in this . . . led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. —Adam Smith,9 18th century political economist It would be so nice if the “invisible hand” of the market really did lead individuals to make decisions that add up to the good of the whole. Then not only would material selfishness be a social virtue, but mathematical of the economy would be much easier to make. There would be no need to think about the good of other people or about the operations of complex feedback systems.

 

pages: 193 words: 63,618

The Fair Trade Scandal: Marketing Poverty to Benefit the Rich by Ndongo Sylla

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British Empire, carbon footprint, corporate social responsibility, David Ricardo: comparative advantage, deglobalization, Doha Development Round, Food sovereignty, global value chain, illegal immigration, income inequality, income per capita, invisible hand, Joseph Schumpeter, labour mobility, land reform, market fundamentalism, means of production, Mont Pelerin Society, Naomi Klein, non-tariff barriers, offshore financial centre, open economy, Plutocrats, plutocrats, price mechanism, purchasing power parity, Ronald Reagan, Scientific racism, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, transatlantic slave trade, trickle-down economics, Washington Consensus

Is it a tool that can really help the poor of the world? Indeed, if placing a label on global poverty was enough to eliminate it, there would hardly be any reasons to disapprove of Fair Trade. The problem is that things are not quite what they seem. Between intentions and outcomes, there is a gap, often filled only with rhetoric. As I shall demonstrate, Fair Trade is but the most recent example of another sophisticated ‘scam’ by the ‘invisible hand’ of the free market. This noble endeavour for the salvation of the free market was tamed and domesticated by the very forces it wanted to fight. With its usual efficiency, the free market triggered the implosion of the Fair Trade universe and hijacked its mission, without Fair Trade supporters and stakeholders even realising it. The free market was especially cunning in letting these celebrate their perceived victories with glee and carelessness, while it secretly and relentlessly pushed on with its dark designs.

According to Magnusson, Smith saw a significant difference between the general principles and practical problems of economic policy. For Smith, economic principles could not logically produce economic policy 63 Sylla T02779 01 text 63 28/11/2013 13:04 the fair trade scandal recommendations that would be valid in all circumstances. The specific histories, the role of institutions, human nature, unforeseen consequences (symbolised by the notorious ‘invisible hand’) are, according to Smith, so many parameters that can create a gap between the general principles and the practical uses that these can lead to; hence, from a methodological point of view, his frequent digressions and his use of historical illustrations. Thus, Smith considered the ‘perfect freedom of trade’ as the ‘general principle of wealth and opulence’. Nevertheless, in terms of economic policy, the adoption of free trade should generally be balanced against other considerations relating to national sovereignty or national interests.

 

pages: 277 words: 80,703

Revolution at Point Zero: Housework, Reproduction, and Feminist Struggle by Silvia Federici

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Community Supported Agriculture, declining real wages, equal pay for equal work, feminist movement, financial independence, global village, illegal immigration, informal economy, invisible hand, labor-force participation, land tenure, means of production, microcredit, neoliberal agenda, new economy, Occupy movement, planetary scale, Scramble for Africa, statistical model, structural adjustment programs, the market place, trade liberalization, UNCLOS, wages for housework, Washington Consensus, women in the workforce, World Values Survey

Taken as a whole, these phenomena show that far from being a means of female emancipation the NIDL is the vehicle of a political project that intensifies the exploitation of women, and brings back forms of coerced labor that we would have thought extinct with the demise of the colonial empires. It also relaunches the image of women as sexual objects and breeders, and institutes among women a relation similar to that between white and black women under the apartheid regime in South Africa. The antifeminist character of the new international division of labor is so evident that we must ask to what extent it has been the work of the “invisible hand” of the market, or it has been a planned response to the struggles women have made against discrimination, unpaid labor and “underdevelopment” in all its forms. In either case, feminists must organize against the recolonization attempt of which the NDIL is a vehicle and reopen the struggle on the terrain of reproduction. It is no use, in fact, to criticize women who employ domestic workers, as some feminists do.

We know, for instance, that it was King Leopold of Belgium who had a personal responsibility for the killing of millions of people in the Congo.24 By contrast, today, millions of Africans are dying every year because of the consequences of structural adjustment but no one is held responsible for it. On the contrary, the social causes of death in Africa are increasingly becoming as invisible as the “invisible hand” of the capitalist market.25 Finally, we have to realize that we cannot mobilize against the bombings alone, nor demand that bombing stops and call that “peace.” We know from the postwar scenario in Iraq, that the destruction of a country’s infrastructure produces more deaths than the bombs themselves. What we need to learn is that death, hunger, disease, and destruction are currently a daily reality for most people across the planet.

 

pages: 251 words: 67,801

And Then All Hell Broke Loose: Two Decades in the Middle East by Richard Engel

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East Village, friendly fire, invisible hand, Mohammed Bouazizi, Skype, Yom Kippur War

Al-Qaeda is a Salafi jihadi movement. Salafism is Islam as Allah recited it, and jihadi means “through war,” so it is a militant movement seeking an “originalist” form of Islam and willing to use force to get there. Salafism is often associated with the Wahhabi movement, an equally austere branch of Sunni Islam that arose in the early part of the eighteenth century. Wahhabis dominate Saudi Arabia, the paymaster and invisible hand behind many political machinations in the Middle East. In Cairo, living among the Muslim Brotherhood, Salafi dreamers, and seeing the horrors of what Salafi jihadis did at the Egyptian Museum and in Luxor, I delved deeper into the political side of the Islamic movement. I came in contact with a group called Tabligh wa Dawa. Tabligh means “to inform” and dawa means “to call,” so roughly speaking the name of the group is “inform and call.”

Sunnis expected to win 40–60 percent of the vote, which was unrealistic. Because of their long years in power, and their grandiose sense of entitlement, some Sunnis were convinced they comprised a majority of Iraqis, a self-deceiving mythology of arithmetic. They wound up with only 21 percent of the vote. They said the election was a fraud and blamed Iran, their ancient Persian and Shiite enemy, for rigging the vote. To them, Iran was the invisible hand, aiding its favorite Shia candidates. Zarqawi’s group lashed out at fellow Sunnis for voting this time, accusing them of legitimizing a Shiite project cooked up by Iran and Washington. Stressed-out by a year of violence and by covering the elections, journalists at the Hamra threw a New Year’s Eve bacchanalia, drinking to excess, dancing wildly, and knocking over any furniture that got in the way.

 

pages: 86 words: 27,453

Why We Work by Barry Schwartz

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Atul Gawande, call centre, deskilling, Frederick Winslow Taylor, future of work, if you build it, they will come, invisible hand, job satisfaction, meta analysis, meta-analysis, Silicon Valley, The Wealth of Nations by Adam Smith, Toyota Production System

In It for the Money In Jeffrey Pfeffer’s telling, supported by the Gallup survey on work satisfaction, the striking thing about good management practices is how rare they are. We may not expect business leaders to ask themselves “How can I make my employees’ lives better by restructuring their jobs?” But we surely would expect them to ask themselves “How can I make my business better by restructuring employees’ jobs?” As Adam Smith famously imagined in describing the “invisible hand” of market competition, when markets are competitive, we don’t need good intentions to improve human welfare; competition among selfish individuals does it for us. If competition will improve the lives of consumers of goods and services, as no doubt it has, surely it should also improve the lives of producers of goods and services as well. Good practices should drive out the bad. To some degree, in some occupations, this has happened.

 

pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

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accounting loophole / creative accounting, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, corporate governance, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, interest rate swap, Internet Archive, invisible hand, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, moral hazard, mortgage debt, mortgage tax deduction, oil shock, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

In a speech reprinted in the Wall Street Journal, Harry Markowitz (1991), one of the creators of modern portfolio theory and CAPM, predictably summoned Adam Smith to defend program trading, Salomon Brothers' mortgage-backed bond depart- WALL STREET merit, and junk bond finance: "My own view is that the invisible hand could work its magic through mere humans is an essential part of Adam Smith's insight. Not many thousands of years ago, men like this would have clubbed each other over hunting rights. A few hundreds of years ago they would have hacked each other with axes and swords. Now they yelled at trainees while they brought together the supply and demand of [sic] home mortgages on a world-wide scale." Through mere humans? Smith, a man of his time, saw the invisible hand as attached to God's invisible arm; are we to believe that Milken & Co. were divine agents? Has modern finance really made war obsolete? And what about this sublime matchmaking that Salomon Brothers was allegedly performing in the mortgage markets?

The point of this little review is not just to embarrass official wisdom, though certainly that is always fun, but to undermine confidence in the entire enterprise of conventional mathematized economics. And few sub-fields are as math-dense as finance. A lot of neat theories grew up in the 1950s, 1960s, and 1970s, only to be challenged by some neater theories in the 1980s and 1990s, but the entire project of clever, influential, and largely empty theorizing about capital markets and the invisible hand has yet to be severely questioned. Even the extensive empirical work by a number of financial economists, often based on thousands, even millions, of data points, fails to provide any significant enlightenment, because it asks such self-contained, even puerile, questions."* As Leontief argued — in the presidential address to the AEA given 20 years before Debreu's — that self-contained quality is a significant reason for the failings of econometric analysis.

 

pages: 790 words: 150,875

Civilization: The West and the Rest by Niall Ferguson

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Admiral Zheng, agricultural Revolution, Albert Einstein, Andrei Shleifer, Atahualpa, Ayatollah Khomeini, Berlin Wall, BRICs, British Empire, clean water, collective bargaining, colonial rule, conceptual framework, Copley Medal, corporate governance, credit crunch, David Ricardo: comparative advantage, Dean Kamen, delayed gratification, Deng Xiaoping, discovery of the americas, Dissolution of the Soviet Union, European colonialism, Fall of the Berlin Wall, Francisco Pizarro, full employment, Hans Lippershey, haute couture, Hernando de Soto, income inequality, invention of movable type, invisible hand, Isaac Newton, James Hargreaves, James Watt: steam engine, John Harrison: Longitude, joint-stock company, Joseph Schumpeter, land reform, land tenure, Louis Pasteur, Mahatma Gandhi, market bubble, Martin Wolf, means of production, megacity, Mikhail Gorbachev, new economy, probability theory / Blaise Pascal / Pierre de Fermat, profit maximization, purchasing power parity, quantitative easing, rent-seeking, reserve currency, road to serfdom, Ronald Reagan, savings glut, Scramble for Africa, Silicon Valley, South China Sea, sovereign wealth fund, special economic zone, spice trade, spinning jenny, Steve Jobs, Steven Pinker, The Great Moderation, the market place, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, total factor productivity, trade route, transaction costs, transatlantic slave trade, transatlantic slave trade, upwardly mobile, uranium enrichment, wage slave, Washington Consensus, women in the workforce, World Values Survey

.* Yet perhaps the greatest achievement of the era was Smith’s analysis of the interlocking institutions of civil society (The Theory of Moral Sentiments) and the market economy (The Wealth of Nations). Significantly, by comparison with much else that was written in the period, both works were firmly rooted in observation of the Scottish bourgeois world Smith inhabited all his life. But where Smith’s ‘Invisible Hand’ of the market manifestly had to be embedded in a web of customary practice and mutual trust, the more radical Francophone philosophes sought to challenge not just established religious institutions but also established political institutions. The Swiss Jean-Jacques Rousseau’s Social Contract (1762) cast doubt on the legitimacy of any political system not based on ‘the general will’. Nicolas de Caritat, marquis de Condorcet, questioned the legitimacy of unfree labour in his Reflections on Negro Slavery (1781).

The black cloud halted, wavered, closed its ranks and rolled nearer and nearer, irresistible, crushing, devastating! A wall of lead and iron suddenly hurled itself upon the attackers and the entanglements just in front of our trenches. A deafening hammering and clattering, cracking and pounding, rattling and crackling, beat everything to earth in ear-splitting, nerve-racking clamor. Our machine guns had flanked the blacks! Like an invisible hand they swept over the men and hurled them to earth, mangling and tearing them to pieces! Singly, in files, in rows and heaps, the blacks fell. Next to each other, behind each other, on top of each other.100 Eleven days before the battle, the Germans had in fact obtained detailed plans of the attack from a captured French NCO. They were well protected from the French bombardment by a complex of deep quarries known as the Dragon’s Grotto, which they used as bomb shelters.

This kind of pattern – known as a ‘power-law distribution’ – is remarkably common in the natural world. It can be seen not just in forest fires but also in earthquakes and epidemics. Only the steepness of the line varies.11 The political and economic structures made by humans share many of the features of complex systems. Indeed, heterodox economists such as W. Brian Arthur have been arguing along these lines for decades, going far beyond Adam Smith’s notion of an ‘Invisible Hand’, seeming to guide multiple profit-maximizing individuals, or Friedrich von Hayek’s later critique of economic planning and demand management.12 To Arthur, a complex economy is characterized by the interaction of dispersed agents, a lack of any central control, multiple levels of organization, continual adaptation, incessant creation of new market niches and no general equilibrium. In contradiction to the core prediction of classical economics that competition causes diminishing returns, in a complex economy increasing returns are quite possible.

 

pages: 412 words: 113,782

Business Lessons From a Radical Industrialist by Ray C. Anderson

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Albert Einstein, banking crisis, carbon footprint, centralized clearinghouse, clean water, cleantech, corporate social responsibility, Credit Default Swap, dematerialisation, distributed generation, energy security, Exxon Valdez, fear of failure, Gordon Gekko, greed is good, Indoor air pollution, intermodal, invisible hand, late fees, Mahatma Gandhi, market bubble, music of the spheres, Negawatt, new economy, oil shale / tar sands, oil shock, peak oil, renewable energy credits, shareholder value, Silicon Valley, six sigma, supply-chain management, urban renewal, Y2K

The selfsame natural world that we depend on and are part of, too. There is the flawed view that when accumulating all that stuff gets us into trouble technology will see us through, even though it’s the extractive, abusive attributes of technology—especially when coupled with numbers-driven, unemotional, results-oriented, left brain intelligence—that got us into the fix to begin with. And there is the flawed view that relies on the invisible hand of the market to be an honest broker, even though we know the market can be very dishonest. Does the price of a pack of cigarettes reflect its true cost? Not even close! How about the price tag on a lead-tainted toy from China? A box of contaminated infant formula? I don’t think so. And the price of a barrel of oil? Last time I looked the oil companies weren’t deploying armies or naval forces to the Middle East to protect the oil fields and tankers.

Will a new president step back from leadership and place blind trust in what he perceives to be an all-seeing, all-knowing market? Will he succumb to temptation and issue more regulations, unfunded mandates, and edicts? Or is there a better way here, too? The kind of future our children and grandchildren will live to see depends on getting this thing right. What should he do? Well, I expect you already know my thoughts about placing too much faith in that mythical invisible hand of the market. Trusting in its ultimate wisdom ( just like mistrusting anything government comes up with) may be bred into the bones of most business people. But as long as the market is steered by invisible subsidies and perverse incentives, as long as it remains blind to the real costs—economic, social, and environmental—it cannot steer a safe course through the storm any better than a blind helmsman can keep a ship off a reef.

Technology must stop destroying the true wealth of nations by its extractive, linear, fossil fuel–driven, abusive, wasteful nature that is focused on labor productivity. It has proven itself all too capable of being a big part of the problem. It must become an even bigger part of the solution. In a sustainable society, technologies will share different general characteristics. They will be renewable, cyclical, solar-driven, waste-free, benign, and focused on resource-productivity. That old flawed view of reality holds that the invisible hand of the market is an honest broker. Yet the market is as blind as a bat if prices are dishonest. A sustainable society will insist on ecologically honest prices that will enable a sighted market to work for sustainability rather than against sustainability. The old, flawed view of reality holds that increasing labor productivity is the route to abundance for all, when it is obvious in a world of diminishing nature and increasing human population that the route to abundance for all is through increasing resource-productivity.

 

pages: 480 words: 138,041

The Book of Woe: The DSM and the Unmaking of Psychiatry by Gary Greenberg

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Albert Einstein, Asperger Syndrome, back-to-the-land, David Brooks, impulse control, invisible hand, Isaac Newton, John Snow's cholera map, late capitalism, Louis Pasteur, McMansion, meta analysis, meta-analysis, neurotypical, phenotype, placebo effect, random walk, statistical model, theory of mind, Winter of Discontent