Adam Smith’s Fallacy of Productive Labor

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Adam Smith’s Fallacy of Productive Labor

Adam Smith was the brilliant moral philosopher who dispelled us of the persistent myths of mercantilism. However, as prescient as Smith was, he was far from being above reproach. One example was his inability to solve the Diamond-Water Paradox. Smith being unable to explain the Diamond-Water Paradox was not his only shortcoming. In his economic treatise, The Wealth of Nations (Book II, Chapter III) (1776), Smith surmises that any work that does not result in producing tangible goods is unproductive labor.

Smith writes: “…The labor of some of the most respectable orders in society…unproductive of any value.. does not realize itself in any…vendible commodity..”(p.423). Smith was even bold enough to add lawyers and physicians to the list of unproductive contributors in the workforce. This mistake is a corollary of the labor theory of value, the same principle that hindered his ability to address the value paradox. The value of a product or service is not determined by the amount of labor required to produce it but by whether consumers value it. If consumers values an intangible service and firms can provide such services and yield profits, then whether the enterprise creates tangible goods is immaterial.

The Paradox of Protectionism and Domestic Production

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This concept has been submitted to the Journal of Brief Ideas.

The Paradox of Protectionism and Domestic Production:

Economic protectionism is a fallacy that has never been extinguished but persists with varying degrees of political support from elected officials. Although, most economists agree that protectionist measures such as tariffs have a detrimental impact on the economy. Per William Poole’s Federal Reserve paper Free Trade: Why Are Economists and Noneconomists So Far Apart? (2004), 90 % of economists oppose tariffs citing that “.. tariffs…reduced the average standard of living..”. It is well established that tariffs operate like an implicit tax to consumers, but how do restrictions on imported goods impact domestic production?

Currently, many domestic industries rely on imported intermediate goods for producing finished consumer goods. Adam Smith was one of the first theorists to realize that tariffs harmed domestic production. Smith suggests in the Wealth of Nations (Book IV, Chapter II) that domestic production of inputs is economically efficient only if it is cheaper than importing the goods. Policies that restrict imports may be favoring one segment of the supply chain; simultaneously, harming another, resulting in outcomes contrary to the purposed purpose of these measures. 

Against Self-Discover: The Irrationality of Finding Your True Self

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Frequently we hear about people undergoing the process of “finding themselves”. This concept is kind of preposterous once we truly contemplate it. This is not to say that it is impossible for an individual to not know “thy self”. Denying our true essence through methodically crafted facades acts as a social survival mechanism. Effectively shielding us from censure and other forms of social opprobrium. Self-deception being as common and conformity highly valued it would be foolish to question the desire for self-discovery. How much of our sense of self is truly a byproduct of internal processes and is absent of external influence? That is a question that remains to be satisfactorily answered.

It is more reasonable to question if the process of self-discovery is even worthwhile. It does seem to be somewhat of a hapless endeavor. Why? Simply because we are not stagnating. Our thoughts, opinions, and values are always being tested. Almost as if we are nothing more than the organic personification of Bayesian probability. Sure, we may have some attributes, normative preferences, enduring opinions. Do these semi-fixed characteristics truly signify resistance to the dynamism of existence?  No. When people do not adapt to new information, they merely find new ways of justifying their old beliefs. Holding the same premise, but adapting their reasoning. Someone may be a lifelong gun-rights activist, but their rationale for maintaining their principles may have evolved.

Self-exploration fails to capture the true quiddity of ourselves because we are ever-changing. Attend all of the vision quest retreats and peyote ceremonies you like, these experiences may very well lead you down a dead-end. Your perception of these experiences will likely change over time. Your opinions of the experience may even change while you are engrossed in such enveloping sensory journeys. The very malleable nature of man, especially from a psychological perspective, it is difficult to find a fixed sense of self. Layered upon the various cultural and normative identities we ascribe to ourselves, it possible that we perceive ourselves differently at various times and in divergent contexts.

Eg.) A man can be an American, veteran, Grandfather, Father, son, friend, baker, neighbor all at various times to various people.

All of these various categorical titles that can be ascribed to an individual may mean different things to them at different times.  Placing a get weight on the temporal and contextual influences driving our sense of selfhood.  To a certain extent, we may not even be the same person we are today that we will be tomorrow. The alterations may not be drastic, but although subtle substantial enough to cause minor qualitative changes in personality, cognition,  thought processes, normative values, etc. Colloquially we often hear young people talking about the need to “find themselves”. This analogous to Sisyphus perpetually rolling a boulder up a hill.  Due to our dynamic nature which is highly adaptive from an evolutionary perspective, progress is illusory.  This perceptual stalemate is only compounded by the fact that we often perceive ourselves incorrectly. Typically,  in an exaggeratedly positive light. Validating Adam Smith’s observations in The Theory of Moral Sentiments (1759). People do not want to believe view themselves in a negative light. Making self-depiction a form of self-pacification. The futility of attempting to pinpoint our selfhood cannot be understated. Unfortunately, our sense of self is subject to the illusions and psychological coping mechanisms that afflict human perception.

Cooperation and Conflict

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Staying within the structure of methodological individualism it is important to see how Smith’s Pin factory example (p.54-55) exemplifies the coordination of a group of economic agents. All working in unison towards the common goal of producing pins. All of these individual works comprise the overall assembly line. The totality of all the adjacent departments related to manufacturing makes up the internal structure of the firm. Any social institution whether it be a hobbyist club, social club, buyers club (e.g. Sam’s Club, BJ’, Costco), government, business, trade association, private governing bureau/authority (e.g. homeowners association), charitable foundation, research institute, study group, etc. are comprised of multiple individuals forming the group. It is flat-out erroneous to speak of the entire organization without any consideration for its members. The collective action of all the group members acting harmoniously to achieve the same ends is much more complex than treating these collective efforts as lumped together aggregate.

Each member of an organization has their internal objectives, thoughts, feelings, and desires. It can be said that all the active participants have their utility functions (p.25-26). Meaning that to some extent their wants, needs, and desires align with the overall group goals. For example, very few people like their jobs, but they voluntarily consent to the terms of employment because of their desire to earn money. Whether it is for the intrinsic satisfaction of possessing money or what currency can be redeemed for. Keeping within the theme of a Smithian analysis of social institutions, it is important to note that more than tangible goods are exchanged through interaction with others. We exchange ideas, culture, skills, knowledge, friendship, guidance, sympathy, morality, and moral support among other forms of desirable forms of social currency. Political activities tend to be a form of social association that is frequently marred by corruption and various forms of abuse. However, is the dynamic of politics overtly a zero-sum game? Not necessarily. As it can be viewed as a form of exchange, individual actors engage in various exchanges for mutual benefits (p.25). One example being logrolling the practice of lawmakers trading votes/favors.

The intangible exchange of social commodities cannot be understated in formulating effective working relationships. One crucial assumption of Smith’s Theory of Moral Sentiments (1759) that we seek the “approbation” of others. In other words, we seek to praise and approval from others. We are constantly seeking the acceptance of our peers. Being well-liked on the individual level wields a significant amount of social currency. If the ability to seek acceptance and cooperation is applicable on the individual level, couldn’t it also apply to the harmonious relationships between groups of people? After all the scope of social and economic interactions operates on a continuum of scale, what is applicable on a minuscule level should also work on a larger scale. The principle is a general maxim governing social interactions, therefore it should be transferrable. One of the best ways to overcome cultural barriers is through finding a form of social exchange desired by both parties. It does not mean that it must take the form of economic exchange. It possibly manifests itself in alliances and treaties among nations. Special agreements, pacts, contracts among nonpolitical social units. Most often it takes the form of economic trade between foreign nations. The necessity of unilateral trade agreements is refutable. Consumer sovereignty is the true impetus of international trade. Despite the bluster and theatrics of vociferous diplomats and other garden variety elected representatives.

Why voluntary association over other coercive means do we yield harmonious interactions? There isn’t a magic bullet answer to this question. However, some insights from Public Choice pioneer Gordon Tullock may help elucidate a potential variable that sheds some light on this occurrence. It is the ability to choose our partners in voluntary social arrangements that reduce the instance of Prisoner’s Dilemma. If our trading partner is not being cooperative, we can easily do business with someone else. Because of the mobility of free association (which is purportedly protected under the First Amendment) we do not need to be held captive by aggressive or hostile social relations. Due to this consideration, it is easy to see the original sentiment behind antitrust laws, but much like all laws, they suffer from loopholes and other issues. Even from the standpoint of the definition of a monopoly. One of the common attributes of monopolistic market behavior is assessed by is market concertation. However, this is problematic how do we determine which market is categorically correct for the assessment of market concentration? Nevertheless, we can freely choose our partners whether in trade or other forms of social situations it reduces the occurrence of the perverse incentives to be noncooperative. Sullying our reputation deprives us of the esteem that Adam Smith surmised we all crave.

Considering that trade is one of the forms of association that fosters cooperation. Even if free trade is not the key to world peace, it still makes us less apt to raise the sword to our geographic neighbors. To repudiate the previous administration’s trade policy, international trade should be encouraged. It is only natural to perceive David Ricardo’s concept of comparative advantage as an extension of Smith’s pin factory.  The premise of comparative advantage is that it can make production global and explains why we tend to import higher-order goods to produce commodities domestically. No one climate can best produce glass, grapes, and corkwood in the Cognac region of France. However, all of these components are required for assembling a commercially produced bottle of Cognac brandy. This specific region in France has some of the best grapes in the world for brandy production. The climate is wholly inappropriate for cultivating and harvesting the wood used in the stopper placed in every Cognac bottle. To avoid placing great restrictions on our ability to manufacture sophisticated goods, we need to trade with other nations. We can only truly achieve this through peaceful relations. Free trade in itself helps to facilitate peaceful relations.

Adam Smith’s Pin Factory

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Below is Adam Smith’s famous Pin Factory example detailing the benefit of a specified Division of Labor. This single paragraph has evolved to be one of the most heavily referenced tropes in all of political economy. Detailing the advantage of job specialization over having one person complete production from start to finish. The proliferation of job specialization is what has allowed for technological advancement and the development of more complex goods.

“…TO take an example, therefore,’-‘ from very trifling manufacture; making, but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business (which the division of labour has rendered a distinct trade), _ nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head ; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; mad the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day…”(Wealth of Nations, 1776, p.54-55)

See Interactive Pin Factory at Adam Smith Works (Click Here).

How Adam Smith Beat the Prisoner’s Dilemma

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Public Choice founder Gordon Tullock in his paper Adam Smith and the Prisoner’s Dilemma (1985) applies a game-theoretical lens to the Smithian assumption of “the discipline of continuous dealings”. In other words, the famous game theory trope of the Prisoner’s Dilemma actually substantiates the idea that vendors are less likely to cheat customers if there is the chance of repeat business. Often in a Prisoner’s Dilemma, there is a strong incentive for defection, as we do not know how the other person will respond to our cooperation. It’s possible that we sustain a loss due to being double-crossed by the other player, even if the reward is greater if both parties choose to cooperate. In situations where the is a degree of asymmetry in the behavioral information and risks of losing is too high, cooperation is not likely.

Tullock shrewdly points out that market transactions differ radically from most Prisoners Dilemma scenarios in one crucial way. In commerce, our partners are chosen and can change at any given time (p.1074). Meaning that not only is trade less static than the typical Prisoners model, but the characteristic of fluidity also alters the rules of the game. If our trading partner is opting to be non-compliant, we can always choose to do business with someone else. Versus being limited to only one partner who may or may not have an adequate incentive to be cooperative. Also, unlike the controlled experimental conditions under which most Prisoner’s dynamics are observed, in commerce the relationships are ongoing (barring death, bankruptcy, or termination of the relationship) (p.1075). Under such conditions maintaining a positive reputation as a trading partner is much more crucial. Engaging in dishonesty or uncooperative behavior could be the death knell of that relationship.

Due to the desire to establish credibility among other firms and potential customers the “… prisoner dilemma vanishes..”(p.1076). If a firm is not cooperating with its customers and suppliers this will impact future interactions. The Masterpiece Cake Shop case is a classic example of this. Yes, the Cake Shop owners were well within their First Amendment rights to not bake a cake for a gay wedding due to religious convictions. However, that does not mean that their decision was a prudent one for the longevity of their enterprise. The bakery received a massive amount of bad press and poor reviews from socially conscious consumers. Resulting in a substantial loss in revenue. Providing the shrewd observer with an allegory conveying the importance of working with your customer base rather than against them. Ultimately, bad press can be the kiss of death for any mom-and-pop establishment.

Consequently, unfettered trade is uniquely insolated from the occurrence of Prisoners Dilemmas due to being able to choose trading partners for extended periods of time. Tullock details a scenario that reflects the typical cartel arrangement among competing firms in a specific industry. If there are five domain firms and one decides not to comply with reducing production there is not much the other participating firms can do (p.1076). Providing some insight into why most price-fixing agreements have a proclivity of failing. There is no safeguard preventing participants from reneging. The inability to choose our partners also explains the issue surrounding international relations. As we cannot choose our “neighboring countries” (p.1077).

Tullock also describes how to trust in business is established. It goes beyond merely providing a superior level of service or a high-quality product. In society, we are judged on a multitude of criteria, even when some of these characteristics do not pertain to the nature of our business. A business person may attend religious services or engage in philanthropy to cultivate the image of being a “safe partner” (p.1077). In the process of establishing one’s self as a “safety partner” what they really are doing is conforming to societal norms. This is precisely what fostering a good reputation entails. Through conforming to societal norms you are presenting yourself as a trustworthy person, who given a Prisoner’s contingency you will be more apt to cooperate (p.1077). Whereas an individual of a more subversive disposition would be more likely to defect. The true irony is that the customer is able to better trust the vendor than the vendor is the customer. Why? The high degree of costs involved in vetting and validating the integrity of the customer (p.1078). Outside of the customer writing a bad check (if anyone still writes checks anyone more) or is caught stealing it is difficult to monitor the myriad of patrons flowing in and out of the store.

Another consideration arises from the observation of the Public Choice pioneer that penned the cited paper. What if a firm or vendor already has a sullied reputation? It is insurmountable difficult to mend a shattered public image. Those with a poor reputation will “rationally respond” by continuing to engage in off-color behavior and practices (p.1079). From a prima facie standpoint, this self-defeating behavior may appear to be anything but rational. However, due to the high costs of repairing a damaged reputation, it is most effective to continue down the path of poor business practices (p.1080). Once trust has been broken it requires a lot of time and effort to win over the hearts and minds of the public.

Considering all of Tullock’s observations, it would appear that Smith’s notion of “the discipline of continuous dealings” is an enduring maxim of economic exchange. If we are accessible to multiple trading partners and are not held hostage by a monopoly, the potential for a Prisoner’s Dilemma dissolves (p.1081). Tullock also notes that with more potential vendors there is “improved” market information (p.1081). Meaning that proprietors will be much more knowledgeable about industry trends and intricacies of the product market. This partially due to having to keep one leg up on the competition. A bigger impetus for this accumulation of market knowledge is observable trends present in daily transactions. Hence why prices serve as the great information bridge between vendors and patrons. It can also be assumed that in a highly competitive market that customers are also savvier in markets where there are many vendors to choose from. As they are too beneficiaries of the follow of market information.

Free Trade: Closing the Cultural Gap

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If the direct feedback from social interactions can help facilitate morality and positive social relations, how can this be done on a larger scale? Corporations, nations, communities, coalitions, etc. are institutions comprised of many individuals. Staying within the framework of methodological individualism, we assume that the collective action of a single institution represents the unanimous will of all the individual agents affiliated with the organization. In a sense, the collective action “speaks” for the group. How does social distance influence the interaction between various institutions, nations, collectives, etc.? Per the insights in Smith’s book The Theory of Moral Sentiments (1759), a person’s socialization and moral development are shaped by their peers. How would we go about socializing an entire culture? What factors enable us to peacefully co-exist with our neighbors? There certainly are not any clear-cut answers to these vast questions. The best we can do is hone in on the variables that help support human flourishing and social stability.

Some people assert that a common cultural identity is a cohesive glue that keeps the fibers of society together. There may be some veracity to this opinion as possessing a common culture can reduce the potential for conflict. However, there are some profound issues with holding culture as the variable that unites mankind as a whole. For one, commerce is global. Anyone in the business world cannot merely associate with people sharing the same cultural experience. In theory, you can, however, you would be severely limiting the potential reach of your business. Due to globalization and technological advancements, clinging to cultural identity has become more futile. Another consideration is that associating with people of a similar cultural background (closer social distance) is detrimental to our ongoing moral development. Demonstrating the fallacy of nationalism from both practical and moral perspectives.

If the cultural distance is inevitable what is one way we can bring people of various cultures together? Many people may suggest the use of international treaties. The parameters of such an agreement serve as nothing more than a compulsive obligation. Outside of state-sanctioned compulsory inclusion (which is not limited to treaties, but also pertains to sections of The Civil Rights Act of 1964), there is also social pressure to force the association between different cultural groups. We see this in the aggressive push for multiculturalism. The intentions of some proponents may be laudable, however, too often it is utilized as Trojan Horse for political opportunists. It should also be mentioned that does not arrive at cultural diversity through voluntary association. But rather from a form of informal social cohesion. While Smith may point out that conforming to this new norm would be an example of our peers shaping our moral development, this simply is not the case. Most of this rhetoric comes from the deepest fringes of academia. These norms are enforced through immense social pressure by a small minority of people who are out of touch with the real world. Cultural diversity is not something that can be forced by legal statutes nor by social cohesion. Rather it exists through the voluntary movement of people, which is a spontaneous phenomenon that cannot be artificially manufactured.

It is evident what fails to bridge the gulf between different cultures and societies. However, what can succeed at this seemingly insurmountable task? Here is where the themes of  The Theory of Moral Sentiments (1759) and the Wealth of Nations (1776)  converge. The social arrangement that keeps the appropriate distance for peaceful relations between strangers is commercial societies (p.13). Please keep in mind that this is not the recipe for sustained and eternal peace. No thinker has been able to formulate a tried-and-true solution for eradicating violent conflicts. Our propensity for violence may be an unfortunate proclivity of human nature that cannot be contained by reason or by institutional means. Providing validation of David Hume’s assertion that we are essential “slaves to our passions”. Voluntary trade may reduce the frequency of armed conflict between nations. In commerce, we do need to maintain a certain level of professionalism (self-command) to establish an effective working relationship (p.14).

To perceive free trade as a magic bullet would be a complete fallacy. For one, if it was the key to enduring peace, world peace would have been achieved back in 1776. Ultimately, Smith viewed trade as a potential source of tensions between nations. It has been argued that Regan/Thatcher-era proponents of Neo-Liberalism overstated the role free trade plays in facilitating peaceful relations. If the tides of economic nationalism are not stifled international trade continues to serve as a weapon against rival countries (p.4). The growth of military strength tends to coincide with an expansion of the division of labor (p.5). Economic development reduces the perceived costs of entering armed conflicts (p.2 &5). Smith contended that the root of international conflict was power imbalances among nations (p.34). The prospect of an imbalance of economic power in global trade is the core assumption behind mercantilism. Exemplified in the rhetoric surrounding trade imbalances.

Even though Smith did see trade as a potential source of tension, does that mean that free trade could not reduce the social distance between different culturally distinct nations? No. It may not be the cure for global conflict, but it can reduce the instance of it occurring. There is something of a reciprocal relationship between social stability and economic advancement. The “violence trap” of the feudal era stymied economic growth due to instability in property rights (p.41). Coping with the constant upheaval of violent conflict is destabilizing enough to inhibit economic flourishing. While the prosperity of neighboring countries may conjure the envy of less fortunate nations, Smith suggested that the better-off countries should act as a model of what to aspire to. Rather than an adversary to hold in contempt (p.31). The rise of government and free trade may not conclusively prevent war, per Smith’s treatises that balance power and foster respect among nations helps reduce the instance of armed conflicts (p.32). Such agreements help align interests among different countries. From an economic perspective, unilateral trade agreements help balance the concentration of economic power among trading partners. Loosening the barriers to international trade not only broadens the market for domestic production but also works to reduce hostilities (p.33). Providing the power gap isn’t too wide and nationalistic sentiments can be dispensed with.

“By opening a more extensive market for whatever part of the produce of their labor may exceed the home consumption, it encourages them to improve its productive powers, and to augment its annual produce to the utmost, and thereby to increase1 the real revenue and wealth of the society. These great and important services foreign trade is continually occupied in performing, to all the different countries between which it is carried on. They all derive great benefit from it, though that in which the merchant resides generally derives the greatest, as he is generally more employed in supplying the wants, and carrying out the superfluities of his own, than of any other particular country. To import the gold and silver which may be wanted, into the countries which have no mines, is, no doubt, a part of the business of foreign commerce. It is, however, a most insignificant part of it. A country which carried on foreign trade merely upon this account could scarce have occasion to freight a ship in a century. (Wealth of Nations, p.358-359)”.

While voluntary exchange may not bring about world peace, it does help close the gap between different nations. Resources that could theoretically be dedicated to warfare are reallocated to production for the global consumer market. Providing a practical example of Frédéric Bastiat’s Broken Window Fallacy.  War does not generate wealth, but rather rearranges the disposal of resources. Wealth may be correlated with the advancement of military technology. The development of military technology does not necessarily generate wealth. Beyond free trade re-directing resources from armed conflict to the consumer market, there are also other intangible effects. When we engage in trade with foreign countries we are also exchanging culture and ideas. Attending a business meeting in Japan, American executives may consume food that they are not accustomed to. May even learn some of the subtleties of Japanese business etiquette. Through their Japanese counterparts providing the social ques imperative in business transactions in Japan. Talk about challenging a person’s impartial spectator. The American businessmen walk away with more than a new business partner. They are also exporting cultural traditions, new business practices, and even new types of food when they arrive back home. When we have more familiarity with another culture we are less apt to fear them. In turn meaning, we are less apt to bomb them. Closing the cultural gap requires not only a certain degree of openness but also an effective working relationship.

Calibrating Our Impartial Spectator is An Ongoing Process

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In my previous blog post, I address the role of social distance in moral development. Per Paganelli’s interpretation of Smith’s TMS (1759), we reduced our self-command when we are around people we are emotionally attached to (p.12-13). Much of our moral development arise from socialization. Making our self-restraint a combination of learned behavior and social conformity. The schoolyard may be the proper environment for individuals to fine-tune their social awareness. Does our moral development stop once are no longer school age? I would suggest not. If anything it a continual and lifelong process that is always in progress. If anything as we grow older, the expectation of others and social norms become much more intricate. Some of the basic principles learned on the playground are social conventions that are applicable in any social dynamic. The etiquette learned in the schoolyard is too rudimentary to comprehensively cover all the social nuisances of professional situations.

For instance, what is the proper attire for a job interview? How do I politely reject my boss’s dinner invitation? These are just a few examples of social scenarios of greater complexity that cannot be learned even in High School (arguably even in college). The reserved awkwardness of new hires fresh out of college exemplifies this deficit in workplace social skills. Outside of there being a likely age gap between the new employee and the rest of their co-workers, they are afraid of making a faux-pas. They are deathly afraid of being the person who takes the last of the breakroom coffee without making more (this individual is universally hated). They do not want to be disliked by their new pool of peers. To not look like a self-absorbed young person, it going to take time. The new employee will go through an acclimation process. The primary drive of this adjustment is going to be the feedback of their co-workers.

I would go so far as to even suggest that each new social environment requires some duration of social learning. The phrase “.. reading the room..” comes to mind. For example, even if an individual has worked as a salesperson for twenty years, as soon as they take a job at another company they now become the “new guy”. A new job entails new co-workers, a new boss, new corporate policies, new corporate culture. Despite this individual’s extensive experience they still need to go through an adjustment period. This seasoned salesperson now has to learn to adapt to the personalities, culture, and rules in their new work environment. Even in social situations where we are familiar with the location and the people, various factors lead us to constantly adjust to the feedback from others. If you were attending a dinner party at your brother’s house (only family members were in attendance) you would still have to mold yourself to the social conditions of the moment. You will taper your behavior to the dispositions of the other dinner guests. Social settings are dynamic and even the slightest change to one variable can profoundly alter the course of events. To a certain extent, we are always fine-tuning our Impartial Spectator to maintain social harmony. Social situations much like all complex systems have a loose structure with a set of informal rules. Although there is a resolute structure the one altered variable can drastically change the trajectory of the interaction. As the expression goes “high school never ends”, actually we never leave the playground.

Social Distance: The Foundation of Our Morality

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Adam Smith is arguably one of the most misunderstood thinkers in all of philosophy. The public reduces the corpus of his work to a one-dimensional caricature of The Wealth of Nations (1776). Such characterizations of Smith’s work are carelessly painting with a broad brush. It can be suggested that when to draw new insights from Smith’s work we should be even more cautious. So much has been written on the body of his work, as Donald Boudreaux keenly points out, it is difficult to formulate any new meaningful insights (p.487). This issue is only compounded by the fact that new interpretations of Smith’s work run the risk of misrepresenting his brand of moral philosophy. Which is equally as shameful as representing a shallow representation of his insights.

One development springing from modern interpretations of Smith’s philosophical ideas comes from professor Maria Pia Paganelli. Back in 2010, she wrote a paper entitled The Moralizing Distance in Adam Smith: The Theory of Moral Sentiments as Possible Praise of Commerce. In her paper, professor Paganelli analyzes smith’s emphasis on the impact of relational distance and moral development. As Smith points out in The Theory of Moral Sentiments because we are subject to “self-deception” due to our immense self-love (Paganelli [TMS III.4.2–6], 2010, p.6). Due to human nature, who wants to view their conduct in a negative light? In many regards, the moral tuning of our impartial spectator occurs due to social influences (Coase, 1976, p.5-7) It exceedingly difficult to admit when we are wrong. Never mind disclosing an outrageous oversight or a profound moment of weakness. Both are humiliating and are the kind gaffs we attempt to bury. The true interest insight from Paganelli is the fact that Smith contended that if our relationship is too close to a person, we do a poor job of shaping their moral development.

Surely, this does not apply to parents? After all, aren’t parents one of the greatest impetuses of moral development of children? Per Paganel’s research Smith’s TMS does emphasize that socialization is a byproduct of the impressions of others (p.7). It is unquestionably true that our emotional attachment to an individual has the potential of skewing our impartiality. The more emotionally attached we are to a person there is greater the aptitude we will perceive the course of events from a similar perspective (p.8). Paganel points out that Smith believed that parents were too “partial and indulgent” of their children to be the prime mover in facilitating their moral maturity (p.9). There is some qualitative validity to this observation. Anecdotally we have all heard a parent proclaim “… not my child..” in regards to the potential of their son or daughter engaging in unruly behavior. Most parents want to hold their children in high regard and implicitly view them as a genetic extension of themselves. To acknowledge the unpleasant truth little Johnnie is capable of stealing Mr. Johnson’s car is excruciatingly painful on two accounts. First, there is the discomfort of acquiescing your child’s capacity to engaging in morally abject behavior (despite years of the parents’ efforts to socialize their child). The second and more damaging pressure point is a sense of having failed as a parent. This extension of yourself is presenting you with challenges that could easily be interpreted as a sign of personal failure.

The emotional distance to aid children in developing moral precepts also cannot be too far. Helicopter parents fail to help their children erect a strong moral foundation. Smith also observed the same being true of children that are sent away to boarding schools. A parent being too aloof can have the same effect as being too indulgent, a child with a lack of respect (p.9). This phenomenon parallels what happens in foreign countries with opposing interests. If there is too much social distance between the two nations, factions will form (p.10). Creating a self-congratulatory echo chamber where there is not any room for negotiations or compromise. Rather the ire is driven by unconstrainted passions shouting the valiant chants and battle cries of nationalism. Too often nationalist fervor results in actual battle cries. Firmly illustrating how social distance has an impact on both the micro and macro scale of social interaction. Achieving the precarious balance of the correct social distance between various groups and individuals is key in achieving stable relations.

According to Smith what is precisely the correct amount of social distance? It is too herculean of a task to determine this balance at the level of nations. If this could have been achieved in a philosophic treatise back in 1759, wars would become a relic of the eighteenth century. Smith does suggest that the best platform for moral development is a child’s peers. Through a child adjusting themselves to the expectation of their fellow playmates, they gain a sense of self-command (p.11). Above all, we tend to have better deportment around strangers than we do our own family (p.12). This goes right back to the concept of social distance. When we are closer to someone on an emotional level we exhibit less self-command. One example would be a small business that attempts to foster a family-like dynamic. Most observers’ prima facie impression would be that such an ethos would create a “hospitable work environment”. Even though the idea of a workplace that creates a culture of close-knit comfort may sound endearing, it possesses a lot of pitfalls. For example, if an employee makes an error the business owner may take it personally. Since the business proprietor is not constrained by the formality of a corporate environment, they are free to curse and scold the offending employee. Like how a parent censures a misbehaving child. Demonstrating how the voice of the impartial spectator becomes more salient when others are in the room. A CEO of a company has their conduct limited to the expected deportment that the employees and board of directors find to be acceptable. Behavior outside of these norms will result in disapproval.

Can Adam Smith Help Us Recover From COVID-19?

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Over the past year, the COVID-19 pandemic has completely turned society upside down. Plagued by uncertainty the entire planet was alarmed in went into full panic mode. Leading us to the immediate question of how do we contain a novel virus when its origins are shrouded in mystery? Many of these reactionary policies may have modestly slowed down the spread of COVID-19, however, most of the state-sanctioned restrictions ended up causing unforeseen problems. The shelter-in-place orders resulted in the highest recorded rate of job loss since The Great Depression. The economic ramifications of various lockdown measures go beyond the immediate consequences. There was a November 2020 study conducted by USC projecting an overall GDP loss of $3-4 Trillion over the next two years.

Lengthy book treatments could be composed to fully detail all of the intricacies of the economic carnage of COVID-19. Unfortunately, the fall-out of the pandemic reaches well beyond the economic repercussions. Our overall health has been impacted. Not necessarily by the direct symptoms of COVID-19, but by a result of the lockdown orders. People have been less active leading to weight gain, which may lower an individual resistance to the virus. While physical health may be most salient to us because it can be observed by the naked eye, what about mental health? It is well documented that social isolation is a contributing factor to depression. A multitude of stories has been published describing the psychological struggles of Americans during the pandemic. The hardnosed statistician may be quick to dismiss these narratives as being purely anecdotal. However, many of the risk factors for suicide have been magnified since the beginning of the pandemic. There has been a notable increase in the suicide rate from 2019 to 2020.

The pandemic has also fractured relations between us and our fellow citizens. Clinging to our inner circles to avoid spreading COVID-19, we begin to become more tribal. The trust we once held for our neighbors has become eroded over the past year. Anytime someone sneezes we give them the side-eye. Fostering a climate of distrust and paranoia. This distrust has manifested itself in actual hate crimes and discrimination. Some reports estimate that hate crimes against Asian-Americans increased by 150 percent in 2020. What does this have to do with COVID-19? Quite a bit. It is speculated that the outbreak originated in the Wuhan province of China (p.2). Leading some to erroneously blame people of Asian ancestry for the spread of the virus. Creating friction between various communities across the country and only serving to make an already tumultuous situation worse. Asian Americans much like all other Americans have been grappling with the stresses of the pandemic. Adding racial tensions to the mix only serves to create more division and distrust. We need trust to have a stable society. 

Could a voice from the past help us navigate these difficult times? Provide us direction in helping us heal from the carnage caused by a global pandemic? I would argue yes. That voice of reason comes from no other than The Enlightenment-era moral philosopher Adam Smith Many readers are probably thinking to themselves “… isn’t this the guy that told us to follow our self-interest. In other words, to be selfish?”. In a sense, yes. However, limiting the body of Smith’s work to the following passage is nothing more than a caricature of his overall contributions to economics, never mind moral philosophy.

“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 interest. We address ourselves, not to their humanity but their self-love, and never talk to them of our necessities but their advantages. (The Wealth Of Nations, Book IV, Chapter II, p. 456, para. 9)”

The above paragraph may be the most famous one ever written by Smith, but it does not wholly define his breadth of work. Smith believes that markets and morality were inseparable, and you could not have one without the other. At the crux of voluntary trade is interaction. If we treat each other poorly and do not foster a good-working relationship trade cannot take place. To foster strong relationships, we as a society need a firm moral backbone. Morality provides us with the precepts to facilitate just and fair interactions despite conventional wisdom, this is crucial to success in business. If you are not running your enterprise justly your client will eventually find out and choose to do patronize another vendor. 

Business ethics and social morality are intimately interconnected, one cannot exist without the other. That is why the two great works of Smith were meant to be read in tandem. The Theory of Moral Sentiments (1759) addresses social morality and The Wealth of Nations (1776) details the inner mechanics of economic exchange (catallactics). Both books dovetail together so well, reading one leaves you with a missing piece of the puzzle. COVID-19 has unquestionably harmed society economically and socially and both books contain the wisdom to help us get back on the right track. I am a great admirer of economist Don Boudreaux, but I do have to take issue with his recent assessment of Smith’s possible perception of the impact of social isolation resulting from COVID-19. Dr. Boudreaux states that Smith could certainly empathize with and rationally understand the distress caused by social isolation. I do not disagree with his inference, but I would surmise that Smith would want us to draw lessons from his work. To apply the concepts in both books to help us as a society overcome the hardships imposed by COVID-19. His work was not intended to be confined to the postulations of lofty ivory tower discussions, but also for practical application. What good is moral philosophy if it is never put to practical use? Why not look to the works of Adam Smith for guidance and solutions to help us navigate the uncertainty that is the COVID-19 pandemic?

Success By Default is Not Truly Success

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In terms of formulating effective rules, one needs to have a panoramic understanding of the potential consequences. Even the downstream outcomes are not easily foreseen. Providing some validation of F.A. Hayek’s notion of the Pretense of Knowledge. No one person, organization, or collection of governing institutions has all of the information required to plan for every scenario. Making it foolhardy to enact inflexible rules that operate as if the definite outcomes can be methodically calculated. Treading down the path of the socialist calculation debate is fruitless as the refutations on both sides of the aisle have already been exhausted. The fall of the Soviet Union alone should serve as a historical anecdote of the fallacy of planned economies.

It should be noted that information asymmetries and unforeseeable outcomes are a natural consequence of having limited information. Explaining phenomena such as cobra effects, because certain repercussions cannot be known until it is too late. These distorted outcomes as the result of flawed rules can happen on a much smaller scale than that of the national economy or a country’s legal system. Something as mundane as a birthdate cutoff to participate in youth hockey can spur some surprise inequities in the trajectory of young hockey players. This example springing from the pages of Malcolm Gladwell’s 2008 book Outliers gives us some keen insights into the potential for implicit flaws in rule formulation. Gladwell details the observations of psychologist Roger Barnsley (p.22-23) upon perusing the program of the Canadian national youth hockey championship. Barnsley noticed that the majority of the players had birthdays ranging between January and March. Is it possible that there is a certain qualitative factor distinguishing children with birthdays earlier on in the year? If we examine the zodiac symbols of those born in January and February there are characteristics that are conducive to success. However, there is little scientific merit to astrology anyhow. Barnsley had another explanation for this discrepancy between Canadian Hockey players born in January versus July. 

Barnsley astutely directs us towards the factor of birthday cutoffs for eligibility to play youth hockey in Canada. This fact was substantiated when Barnsley discovered that roughly 40 percent of all elite hockey players were born between January-March, 30 percent between April-June (p.23) Demonstrating the role of the individual player’s birthday in determining success. Having a January first cutoff, privileged prospective players born in the earlier months of the year (p.24). The main difference being that the boys born in earlier months were more physically mature. In turn, received more attention from the coaches lending this dynamic to an early delineation between talented and untalented players (p.25). Due to the difference in age eligibility cutoffs in American youth football and basketball leagues, they did not exhibit the same distortions in the distribution of talent (p.26). Engendering a Matthew Effect or what is otherwise known as an accumulative advantage. Adam Smith even points to the concept of accumulative advantage in The Wealth of NationsExplaining how in a sense the poor pay the price for the poor decisions of their forefathers. 

Many proponents of meritocratic social arrangements may scoff at the idea of making rules that are fair. However, if the rules are providing a lopsided advantage to one group, are the results truly the result of superior performance or the distortion created by the rules? Few would ever view the occurrence of instances of regulatory capture or rent-seeking as a triumph of free-market competition. Rather just the opposite, it is an example of interest groups bending the rules to suit their own needs. Careful consideration needs to be made in how we set and enforce rules to avoid distorted effects that handsomely benefit a few and harm a great many. Gladwell succinctly sums up this point very eloquently: 

“Because we cling to the idea that success is a simple function of individual merit and that the world in which we all group up and then we choose to write society don’t matter at all.” (p.33)

While variables such as luck, talent, ingenuity, and hard work can all have a role in success, we cannot forget that how the rules are written can also have an inseparable impact on outcomes. Even rules that are inadvertently written in a manner to favor one group over another without consideration of merit is a flawed rule. Marred by an unforeseeable blind spot that nevertheless has generated distorted outcomes. These outcomes are not truly the byproduct of talent or work ethic but by technicalities that create illusory perceptions of actual skill. 

The Whisk(e)y Wars- A Conflict Fought With Tariffs

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“…When there is no probability that any such repeal [of a tariff in a foreign country] can be procured, it seems a bad method of compensating the injury done to certain classes of our people to do another injury ourselves, not only to those classes but to almost all the other classes of them. When our neighbors prohibit some manufacture of ours, we generally prohibit, not only the same, for that alone would seldom affect them considerably, but some other manufacture of theirs. This may no doubt encourage some particular class of workmen among ourselves, and by excluding some of their rivals, may enable them to raise their price in the home market. Those workmen, however, who suffered from our neighbors’ prohibition will not be benefited by ours. On the contrary, they and almost all the other classes of our citizens will thereby be obliged to pay dearer than before for certain goods. Every such law, therefore, imposes a real tax upon the whole country, not in favor of that particular class of workmen who were injured by our neighbors’ prohibition, but of some other class…” (Bk. 4, Ch. 2)

 The Wealth of Nations- Adam Smith

The Biden Administration’s commitment to free trade is questionable at best. The extent to which he will champion laissez-faire policies is a difficult determination to make in the nascent period of his presidency. Biden being a centrist is more concerned with appeasing the median voter than taking principled policy positions. Only time will tell whether or not he will capitulate to the anti-market sentiment of the vociferous and passionate populous wing of the Democratic party. Epitomized in the heated rhetoric of elected officials such as Elizabeth Warren and Alexandria Ocasio-Cortez. However, there may be some light at the end of the tunnel. Free trade may not necessarily be dead in the water. Despite the multitude of flawed policies that have so far been supported and promulgated by the Biden Administration they may have done one thing correctly. Repeal some of the Trump-era tariffs. Arguably one of the most disturbing aspects of the Trump administration was his hostility towards foreign trade. Biden has taken one small step to repair America’s tarnished image in the arena of international trade. This attempt at redemption has manifested itself in an unlikely form, the abolition of the importation tariff on Scotch Whisky

The previous statement is not wholly accurate. The United States agreed to relinquish all tariffs on goods imported from the United Kingdom. Responding to the UK’s lift all of its tariffs on US imports back in January. Scotch Whisky is one of Scotland’s most highly esteemed exports. Making it an iconic symbol of the UK’s presence in the arena of global trade. Considering back in 2012 the United States was estimated to be the largest export market for Scotland’s prized spirit, it stands to reason that the tariffs were detrimental to United Kingdom’s economy. Even in light of the Trump tariffs the United States still maintained this position as top consumer nearly a decade later in 2020. Despite the United States remaining big-time scotch imbibing nation the tariffs still sent shock waves throughout the industry. It projected that since the 25 percent tariff was imposed back in 2019, Scotch producers lost an aggregate “$682 million (£500 million)” in sales. In 2019, the United States imported $2.07 billion worth of distilled spirits from the U.K., the majority of it being scotch whisky. The year 2020, delivered a two-punch blow to Scotland’s whisky producers. The COVID-19 pandemic also eroded profit. Leading to an overall 23 percent dip in global scotch sales. The US tariffs have been attributed to a 32 percent decline in overall whisky exports. As recent as last month the losses incurred by the tariffs have been described as “unsustainable” for some producers.

The United States did not escape with impunity from retaliatory tariffs being imposed by the United Kingdom. It should not be ignored that the UK is a significant trading partner of the United States. Approximately 20.3 percent of all agricultural exports from America to the UK were alcoholic beverages. The United Kingdom slapped a 25 percent tariff on American whiskey after Trump applied tariffs on steel imported from the UK. As predicted by several experts and commentators American whiskey serves as a salient target for reciprocal tariffs. The United Kingdom was previously viewed as the largest market for bourbon exports. Since the application of the tariffs overall exports declined by 35 percent. Overall, bourbon sales in the United Kingdom decreased by a staggering 50 percent. The United Kingdom did relax tariffs on American Brandy, Rum, and Vodka. However, the UK and other European Union countries will continue to maintain tariffs on American whiskey as a result of a “two-year trade war on steel and aluminum”. 

The question become what was the impetus behind this fatuous trade dispute between the US and the UK? It all came to a head in 2019, after a 16-year dispute between aerospace rivals Boeing and Airbus. The UK applying tariffs on up to $4 billion worth of goods over subsidies received by Boeing. The United Kingdom started to ratchet down the conflict by easing tariffs on some US goods and Biden reciprocated by lifting tariffs on UK imports. While Biden is not a perfect free trader, this was a shrewd decision on his part. Not from the standpoint of political strategy, but the point-of-view of sound economic theory. The words once-famous uttered by Ronald Regan ring true here: “If you want more of something, subsidize it; if you want less of something tax it”. Here is the crux of the idiocy of protectionism. Proponents seek to limit imports to encourage domestic consumption-based out on a sense of nationalism. However, they ignore the fact that their hostility towards foreign goods may stir the ire of lateral trade partners. Resulting in defensive actions that will result in the decreased consumption of American goods globally. Wouldn’t a proud nationalist prefer to see American goods consumed all across the world? After all, the two best-selling whiskies globally in 2019 were Jack Daniels and Jim Beam. This was not the byproduct of using taxation to punish Americans who enjoy drinking imported whiskies, but through many years of savvy marketing, product consistency, and rightfully earned brand recognition. 

Comparative Advantage = Global Extension of The Division of Labor

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Observation: The concept of comparative advantage operates as a natural extension of the division of labor. If it is most efficient for each worker and firm to focus on what they are most proficient at producing, this naturally gives way to vocational specification. The more specification within the division of labor the more complex and advanced the economy. As technological innovation drives the consumer demand for intricate technologies, the need for specialization within the workforce becomes more pressing. An advanced technological product such as a smartphone could not possibly have all of its components harvested, processed, and manufactured by one firm. Generally, the constituents of such a device are produced by multiple companies. These parts serve as the higher-order goods in the production of a smartphone. It would be naïve to assume that all of the companies that possess a comparative advantage at crafting these components all reside in the same country. If we look to Leonard Read’s iconic essay I, Pencil it becomes evident that even a commodity as simple as a pencil requires the services of companies across the globe to be satisfactorily produced. Demonstrating that the principle of comparative advantage extends the division of labor to an international scale. It is impossible that one nation would possess all the conditions necessary to efficiently make one product of any degree of complexity. Never mind a gadget as elaborate as a smartphone. Providing another concise yet realistic reputation of the obstinate justifications for protectionism.

Is Free Trade Dead?

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The Wealth Of Nations, Book IV Chapter II, pp. 456-7, paras. 11-12.

“By means of glasses, hotbeds, and hot walls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?”

The Trump era will forever be distinguished by its notable shift away from free trade economic policies. Generating a resurgence passionate resurgence in the advocacy of protectionism. This rhetoric was salient even in the nascent period of the Trump phenomenon, dating back to his iconoclastic speeches on the campaign trail in 2015. Championing a quasi-neo-mercantilism that challenged the decades-long conventional wisdom of the Republican Party. This prevalent truism being that liberalized trade is a core component of any sound economic platform. Taking into account the modest reforms we saw under the Regan Administration. The wave of neoliberal trade policy continued through the 1990s with the bipartisan support of the NAFTA bill. It seemed as if the trend towards globalized trade was seemingly unstoppable. Until right-wing populism swept the United States indicating a change in public perception of moderately unfettered international free trade.

The Trumpian position on international trade dates back to the years of the NAFTA bill of the 1990s. Vocal high-profile opponents of the bill included columnist and former Presidential aide Pat Buchanan and Ross Perot. Expressing concern over the outsourcing of production and its direct impact on the American economy. Mainly, all of the U.S. workers have been displaced by outsourcing jobs to foreign countries. From a prima facie standpoint, this argument seems sound. However, after closer examination, it becomes quite clear that economically it is profoundly flawed. There is a moral dimension embedded in this argument because people do suffer from losing their jobs. The unfortunate economic vicissitudes of the American Rust Belt can be speculated to have been greatly impacted by the outsourcing of domestic labor.

On a deeper level, most of the variable causing the shift towards foreign production of goods has been engendered by faulty economic policies. Economic behavior is guided by the unwavering laws of economic exchange. Analogous to the laws of physics they cannot be indefinitely contradicted without serious repercussions. Since each economic agent acts in their self-interest they respond accordingly to government initiatives and laws that violate these immutable laws and informal laws guiding commerce. Domestic regulations laws governing minimum wage, production, transportation, and taxation become so onerous that firms become incentivized to move to manufacture abroad. While policies such as minimum wage laws are billed as means of improving the quality of life for low-skilled workers, it tends to have the opposite effect. Such measures only serve to benefit a few while harming many through increasing the unemployment rate. Raising the price floor for labor will impact profitability that leaves employers with a difficult choice. Either cut labor expenses through automation, outsourcing and working with a skeleton crew or succumb to bankruptcy.

Driving the shift to off-shore production is the comparative advantage that many countries have over the United States when it comes to manufacturing and other services. Classical economists such as Adam Smith and David Ricardo believed that it was more advantageous for each economic unit (whether it be an individual worker, firm, or national economy) to focus on the goods and services they produced most efficiently. In a sense comparative advantage logically extends the anything else that can be obtained through various trading partners.  For example, it is well known that Adam Smith was a big fan of Claret wine, a beverage fermented in France. The soil in Scotland is not generally unsuited to winemaking, therefore it would not be sensible to produce Claret in the United Kingdom. But Scotland does have climate amendable to the production of some of the world’s finest Single Malt whiskies.

The comparative advantage that countries such as China as over the United States are lower labor costs and fewer regulations. Due to measures such as minimum wage laws operating as price controls (functioning as a  price floor), they are bound to create disruptions in the labor market. Tempting producers to take actions such as outsourcing jobs to curtail losses. A sensible reaction to policies that effectively undermine the core purpose of prices. That purpose is to serve as a quantifiable signal that communicates the market supply and demand of a commodity. Suppliers and producers need to respond to the inflated value of labor accordingly to stay solvent. That unfortunately requires workers to be laid off and to find more affordable labor alternatives. To quote Milton Friedman manipulating prices is never a “free lunch”! The disutility of mandating a higher minimum is evident not only from the qualitative reason of human nature but also in quantifiable data. While estimates suggest that raising the national minimum wage to $15/hr would lift 900,000 Americans out of poverty. Simultaneously, such a change would also be projected to put 34 million Americans out of work. Demonstrating how the costs of raising the national price floor outweigh the minor benefits.

From a superficial standpoint, it is easy to label the competition of foreign as being the taproot of our economic woes. It makes for wonderfully succinct bumper sticker slogans that are catchy and fun to chant at rallies and protests. The protectionist approach of blaming others for our economic problems ignores the inherent issues with our domestic policies. Its restrictive regulations and high corporate tax rates drive businesses to go abroad. There was a lot of social currency in placing the blame on other countries for our inefficiencies in production during the Trump years. These admonishments of free trade are predicated upon economic fallacies and illusory thinking. For a politician, it is easier to play the blame game than to encourage innovation to stay competitive. It is also much quicker to mobilize crowds through economically illiterate bluster than to tell them to take control of their destiny.

The Law of Diminishing Returns Applied to The Division of Labor

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Most economists from Adam Smith onward have sung the praises of the division of labor. It has even been said that the more specificity a labor pool is the more advanced the economy. A more productive economy has more task specialization. However, doesn’t the law of diminishing turns apply even to the division of labor? At some point,  does specialization shift beyond the equilibrium point of the utility function / production frontier and result in inefficiency?  I am not the biggest fan of neoclassical methodology, but in certain areas of economic life, Pareto-efficiency makes sense. It should not be rigidly applied without any qualitative context. That only provides us with a one dimensional account of economic activity.

At work, I am being assigned to help out with some of the workload in our parent division of the company. I can’t help but be awed by how inefficient their process is. This is where my observation of applying the law of diminishing returns to the division to labor becomes pertinent. The way the process was devised for processing orders for the headquarters of our company, requires actions to be passed off to multiple teams. The total process can take up to forty-eight hours. The process that was originally trained on, takes only four hours and a transfer between only two departments to complete.  Does having a hyper-diversified and stringently delineated process help the customer? I would argue that it does not. Giving tasks that could easily be done by one person to three people means there could be a time gap in between task serving only to make the process more lethargic. Making the premise of utilizing a  proverbial “assembly line” method counterproductive and detrimental to the customer.

U.S. Trade with South Korea

 

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Doing some research on trade policy I happened to come across a very interesting website. It is hosted by the Korean Trade Association and details the by state,  what the state imports from South Korea, and what each state exports to South Korea. Many of you may be wondering why would I take arbitrary interest in such a specific topic? My interest isn’t t arbitrary. My first professional job after college was working for the Korean steamship line Hanjin Shipping. I stayed with the company until they closed the doors to their Chandler, Arizona office on December 31st, 2016.

 

To this very day, I miss working there. More importantly, working at Hanjin taught me a lot about applied economics. Working primarily with freight being imported from the Trans-Pacific corridor, you begin to intimately understand how crucial international trade is for the U.S. economy. Adam Smith’s proverbial “invisible hand” finally began to take on a life of its own. Animating Leonard Read’s iconic essay I, Pencil.Seeing for myself that markets are self-guiding with the seemingly endless flows of goods from Asia coming into U.S. shores. Witnessing the invisible hand at work helped insulate me from the straw man arguments and other fallacies supporting protectionist rhetoric. Much of which has come back in vogue amid the rise of the Trump presidency. Imports do not destroy jobs, but rather creates them.

 

Many who use the displaced factory worker as the poster-child for the downtrodden victims of outsourcing are not seeing the whole picture. The displaced factor worker toiling to produce widgets is only a small sliver of the national economy. When you impose tariffs and other trade restrictions there are many unintended consequences. Frédéric Bastiat’s premise of the seen and unseen (later clarified by Henry Hazlitt). The superficial effect of trade barriers is that such restrictions keep out foreign competition.  The what is not seen are all the jobs lost due to these restrictions. Many jobs rely on the importation of goods.  Everything from stevedoring, freight forwarding services, to even trucking, are vocations highly dependent on imports. Demonstrating a natural shift in the job market. The economy is subject to economic laws such as the law of supply and demand and the law of comparative advantage. Any time we try to implement policies that go against these immutable laws there are adverse consequences. Attempting to work around economic law is analogous to attempting to defy gravity. Eventually, you will be pulled down by the gravitational force of the Earth.

Social Media – A Virtual Cave

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The topic of reality is one that has been highly discussed in the discipline of philosophy. From the extensive discourse has generated a litany of postulations pertaining to the nature of reality. A natural corollary of examining reality is the extent to which our perception of reality is a delusion. How do we know what we believe to be real is truly real?  This is a daunting question that humans have been grappling with since the days of  Greek antiquity. No other than the philosopher Plato. Plato provides a firm demonstration of the illusory nature of reality in The Allegory of the Cave [1].

 

In a nutshell, The Allegory of the Cave details a group of people held captive since infancy in a cave. The only visual stimulus they have “shadow puppets”. Produced by the fire-light silhouetted hand gestures of their captors. The prisoners only know the forms of our world through these two-dimensional figures projected on the cave wall. As we all know from our own experience with shadows they lack texture and detail. Only provide a general outline of the for of an object. One day, one of the prisoners breaks free from their shackles and decides to leave the cave. That prisoner was in for a shock.

Blinded by the blaring sunlight the prisoner’s eyes adjust to the lighting of the external environment. Then realizes the true vibrancy of the world outside of the cave. The prisoner comes to the realization that the “shadow puppets” projected on the cave walls were only a caricature of the true objects. For example, a shadow puppet of a tree does not convey all of the veins in the leaves or the crevices and grooves in the bark.  Upon this monumental discovery, the prisoner comes back to the cave to announce his new findings to his captive peers. Unfortunately, they were not receptive to this new perspective of the world. The looked at him as if he was crazy. Defended the validity of perceiving the world as depicted on the cave walls. They continued to intently watch the motions of the shadow puppets on the cave wall.

 

The Allegory of the Cave demonstrates some important points about human perception. Clearly, the shadows simulating the animals on the cave walls are not an accurate representation of their actual forms. We can believe that we know the true form of the depicted animals, however, due to our faulty perception, we do not have an accurate account of their essence. The prisoners believe that they were seeing a dog, however, it was merely the shadows being formed by their captors. By referring to the shadows as a dog does not mean they truly comprehend the essence of a dog. What a dog truly is. It is possible to gain knowledge through perception. However, there is a gulf between our perception and truth [2]. Meaning there is a giant gap between true knowledge and illusion.

 

Illusion tends to be a problem that has continuously plagued humans in the pursuit of truth. On a biological level, we are susceptible to optical illusions.  This is a by-product of evolutionary adaptions that help facilitate easier navigation of our environment. The human mind has a limited capacity for sensory input, therefore our eyes are designed to operate on preassumptions.  Hence, why we tend to enjoy looking at the Impressionist paintings of Claude Monet. We are reading into the painting with our perceptual assumptions. His painting is comprised of a myriad of loose, formless, and broad brush strokes. Anyone of us would swear up-and-down that we see a sailboat or a springtime picnic. In reality, our brain is imposing that form on the sensory input. Such misconceptions are innocent in terms of visual aesthetics. In areas where moral considerations are more pressing, this can be dangerous.

 

Throughout Machiavelli’s flagship book The Prince there are multiple references to perception being more important than reality. He clearly asserts that appearing to be righteous takes primacy over actually being so (Machiavelli, 1532, Transl. Mansfield, 1985, P. 62) [3]. This sentiment is quite often reflected throughout modern society. The idiomatic statement “fake it until you make it” a perennial favorite of every aspiring salesman. Above all, this reflects a dishonest mentality and a facade that cannot indefinitely be maintained. Due to our strong proclivity towards a plethora of biases, we will continue to trust those exuberating confidence over people who are competent. At least until charade starts to unravel. Needless to say, we are wired to fall into the trap of faulty perception. If we are easily tricked by smoke-and-mirrors it is reasonable to question the validity of our perception.

 

While Plato may have used The Allegory of the Cave as an abstract model it still has countless potential for real-world applications. One of the best examples is social media. I really could not even fabricate a better example of a metaphorical cave. The emergence of the occupation of social media influencer has only compounded the extent to which reality is distorted. Even for the average social media consumer you only get a brief glimpse of their life. Often it only details vacations, happy hours, good times with friends, and rarely displays hardship. This brief snapshot of your friend’s life is somewhat illusory. It only illustrations only a fraction of the story. It does not detail the mundanity of day to day life or family disputes.  As people we all have struggles. What those struggles are and their magnitude is what varies. No one has a perfect life. Therefore, I would suggest stop looking at the exploits of your Facebook “friends” with envy. Realize that odds are their life isn’t much better than yours.  In fact, theirs could be worse. Hence, why they are putting up an impenetrable front.

 

In the instance of social media influencers, this effect is only compounded. They are frequently paid to promote a service or product through the channels of social media platforms. There is nothing inherently wrong with that. I am a proponent of capitalism after all. It should be noted that many of these influencers are also paid to embellish upon their lifestyle. Make it seem as if they have more freedom, wealth, and sex appeal than what they actually possess. Ultimately, a great lifestyle is the best selling point for a product or brand. Regardless of the truth of the matter. This contrived lifestyle does not convey the actual truth of the influencer’s lifestyle. You do not see the behind the scenes pressures of appeasing a brand’s aggressive marketing department. Nor do you see the pitfalls of fame. Fame brings a level of Scrutiny that few mild-mannered people can adequately weather. This was the same point that Adam Smith illuminated in his book Theory of Moral Sentiments. The trapping of fame often comes with profound drawbacks. The lavish life portrayed by the kings and queens of  Snapchat does not include the bad and the ugly aspects of their lives.

The Man of System- The Folly of Planning

war chess
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Planning on an intuitive level always appears to be the most logical course of action. If we could only harness the same methodical rigor of a physics experiment, we could all live in the blessed light of “reason”. Few of a scientific disposition stop to question if there are certain aspects of life we shouldn’t attempt to control. In their haughty hubris, the proponents of planning bumptiously trudge forward. In full faith that they can implement the next pivotal stage of progress in the history of man. For those who pray at the altar of pure reason, such oversights are a consequence of believing that they possess more knowledge than it is possible to know. A point clearly elaborated on by Nobel Laureate F.A. Hayek decades prior to 2019. Most notably in his seminal book The Road to Serfdom published at the tail end of World War II, an era when the debate about economic planning was raging.

 

Even when we are armed a plethora of empirically verified statistics and data planners are still merely guessing. Often guessing with information collected under idyllic experimental conditions. Conditions that are meticulously controlled and don’t account for the invariability of a natural environment. An environment that is more constrained by natural law than by experimental controls. While science has brought forth the advantages of modern medicine and technological advances, there are specific areas where its breadth of knowledge is insufficient or inappropriate. Social engineering and economic matters being sublime examples.

 

If such measures could bring about a utopian society it would have already been implemented. Attempting to subvert the effects of the law of Supply and Demand through price-fixing and subsidizes will invariably fall flat. Regardless of their intentions, the central planners will always fail. Venezuela’s financial woes spiraled out of control after a subsequent chain of ill-fated interventions initiated by artificially manipulating oil prices. However, Venezuela is merely a drop in the bucket, such measures have backfired on just about every country that has entertained similar policies. It starts to become quite salient that when immutable laws are violated the ramifications can be disastrous. This premise isn’t merely regulated to economic law, but all forms of natural law. The intellectuals, bureaucrats, technocrats, and other authority figures rank among men foolish enough to attempt to undermine static and enduring.

 

The sin of such arrogance is far from a new pathology of the human condition and has proven to be quite a pervasive vice. From the dawn of civilization to the Middle ages gout-ridden men reeking of entitlement and excess felt their privileged station was anointed by the will of God. Making them immune to the conventions and morals that bound common men. While monogamy was imperative for the butcher, baker, and the brewer; the king had his court filled with concubines. The king not only felt he was above moral convention, but that of natural law. After all, he is literally a step away from being a deity in his own right. Many medieval rulers in an attempt to keep wealth within their own national boundaries implemented highly protectionist policies. Composited policies that reflect the economic system known as Mercantilism. Which erroneously disregarded just about every basic economic law we hold in high regard.

 

At the apogee of the Scottish Enlightenment, there was one man who saw the folly in the lofty assumption of central planners. He was also an outspoken critic of Mercantilism, that man was the moral philosopher Adam Smith. He expounds upon this phenomena in his 1759 book  The Theory of Moral Sentiments in the personified construct dubbed “The Man of System”:

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamored with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder. (Page 212, para 2)

 

The king believes he can circumvent the will of his subjects and impose import tariffs that will encourage them to buy domestic goods. By virtue of natural law, purchasing cheaper imported goods does not constitute theft or assault, but rather a byproduct of free will. Due to the tariffs being legitimate in the eyes of the royal subjects an expansive smuggling ring is formulated. Illegally importing untaxed goods into the kingdom. People are not chess pieces, nor are they objects. They possess free will (or the illusion of such), an individual set of morals, and the capacity for subjective attributions. It is faulty to surmise that people can be treated as pawns when social law and their own volition will most likely hamper any attempts at planning.

 

It becomes truly horrifying when individuals believe they can legislate morality. The abject failures of alcohol and drug prohibition provide sufficient insight into the shortcomings of such endeavors. Utopia does not exist on planet Earth. The nature of man is imperfect and is incapable of mimicking the pristine deportment of cherubs. We are not saints, no amount of legislation or penalities can correct for this deficit. This not intended to provide immunity for the murder, rapist, or thief. However, they have transgressed against a higher moral code making their actions universally reviled. While the moral indiscretions of the prostitute, the drug addict, and the bookie are not universally seen as wrong.  In the sense that they are victimless crimes. More of a passive acquiescence than an endorsement.

It isn’t natural law that decrees the need for punitive measures for such conduct, but government fiat. This is where we cross the line into legal positivism. An action is either moral or immoral purely on the basis of legislative command. A Pentagon directed bombing campaign that kills innocent civilians was justifiable. A convenience store owner shooting a burglar that is attempting to rob his establishment at gunpoint is a civil infraction. Considering the gross insensitivity to property rights and higher moral values can we truly trust  ” The Man of System” (bureaucrat, legislator, etc.) to codify morality in a self-serving legal system? The prison unions have a storied history of lobbying against the legalization of Marijuana. Who is to say that many of our petty laws exist purely for justifying the existence of a task force or bureaucratic department?

 

It isn’t merely just the conservative Christian or the “law-and-order” types that can assume the proverbial role as “The Man of System”.  The progressive left-wingers have also utilized the government apparatus to legally impose their own brand of  “morality”. Any form of government funded safety-net or subsistence program is a legal attempt at evening the odds for the economically disadvantaged. While it is fair to disagree or agree with such policies, the real line of demarcation is when initiatives to criminalize intolerance are suggested. Most of these policy suggestions amount to compelled speech laws. If certain speech is deemed as hateful it must not be tolerated. To such an extent that there are legal repercussions for using “hate speech”.  As outlandish as it may sound you need to look no further than Bill C-16 passed in Canada to see the ultimate outcome of such ill-advised policies. Implement such sanctions against our speech is purely an assault on the principle of free speech. Even criminalizing the right to be a member of a hate group tramples upon the relished right to free association. If either right is nullified by legislative constraints you are an inch away from living in a dictatorship.

 

These legislative crusaders may be well-intentioned they are willfully ignorant of human nature. Much how you cannot legislate Judeo-Christain values into the psyche of an individual the same holds true for the virtues of social justice. Despite what you do, intolerance will never be completely relinquished as long as humans walk the Earth. The human mind is glutted with biases that push many to favor individuals that are similar to themselves. Similar to themselves in a shared language, values, religion, political identity, ethnic identity, national identity, sexual identity, etc. Considering these proclivities for tribal behavior it becomes quite conspicuous that tolerance is merely another incurably ill of mankind. Sure you may be able to enlighten individuals of the errors in their thinking, but not on any kind of grand level.  Intolerance dies on the same day that man longer yearns for a pint of beer, a dose of opium, and no longer lusts for a voluptuous misteress. Anyone convinced otherwise is profoundly mistaken.

 

I am still perplexed by people who unquestionably trust the judgment and authority of those who insist upon controlling the lives of others. Politicians, bureaucrats, intellectuals, judges among others. All of these individuals are human and none are infallible. All are cable of sin, all are subject to psychological biases, and other influences that would make them biased.Why is the law contrived and fabricated by these purported experts superior to the “golden rule”? Holding the authority of mortal men in such a high degree operates as a perverse form of deification.  Their credentials and education are what separate them from ordinary people. That is it. There aren’t any further qualifying factors that make these individuals morally superior to common folks. In most cases, laws don’t even make us any safer or product our property rights. Most laws if anything is hostile to our property rights. Leaving it reasonable to question, why are lawmakers incentivized to legislate such grotesque sanctions against some of our most basic rights?

 

 

Praise Needs To Be Earned (Wisdom From Adam Smith)

three people standing on stage holding trophies
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A few months ago, I was sitting among my co-workers in a meeting reviewing the previous quarter’s sales numbers. My manager just recently completed our quarterly performance reviews. Unbeknownst to me, my well-meaning superior would give me an unwarranted shout out. I had completed an optional industry-related training course and happen to mention this fact to my boss during my quarterly review. My motives being demonstrating my willingness to be a self-directed learner. Surprise, surprise!  My boss decides to articulate my achievement publicly to my team during our team meeting. All 30 of my co-workers, a nice composite of salespeople and pre-sales staff.

 

The natural consequence being applause, most likely a byproduct of social convention. Right, in-synch with all of the social cues that it is almost a semi-automatic response. However,  I did not feel good about this moment of unsolicited praise. As I looked around the room I see slow clapping that mirrored all the signs of a conditioned response. There was something insincere about as gazed at the blase demeanor of my coworkers.  A fitting demeanor coupled with irritated looks skepticism. For some, clear unspoken opprobrium was being expressed by their frustrated glares.  A silent censure. Unarticulated disapproval, not the kind of response I  was intending to invoke. Especially considering I am a very reserved person at work who avoids the spotlight at all costs.

 

Where my coworkers being unreasonable? That is a debatable question, however, their frustration was understandable. At the time I hadn’t even been with my current employer for a year and my workload was lighter than that of my coworkers. The new guy getting praise when everyone else is working circles around him is a recipe for contempt. While I  have many disagreements with my coworkers this was one point we all had some common ground, I didn’t deserve praise. Hence why my stomach sank when it was announced that I had completed the previous referenced training course. I only mentioned it to my boss for any potential exculpatory benefit for my lighter workload. In the end, this ploy only ended up backfiring.

 

My grief and the annoyance of my teammates is far from a new behavior phenomenon.  Rather is an enduring fixture of the human condition and how guilt weighs on our psyche. No other than the great moral philosopher Adam Smith expounded this in his initial book The Theory of Moral Sentiments. Yes, Smith did write a book prior to his classic 1776 The Wealth of  Nations. While The Wealth of Nations focused on behavior patterns on more of a macro level,  The Theory of Moral Sentiments concentrated on human interrelations on the individual level. Smith through the book analyzes the dichotomy between self-interest and the common good. The “impartial spectator” often clashing with the “that passion arises in our breast”.

 

Smith in his first treatise does address the human need for praise and admiration. However, praise is the only gratifying and comforting if it is justifiable. In other words, praise must be obtained under conditions in which we do something that is praiseworthy.

 

As ignorant and groundless praise can give no solid joy, no satisfaction that will bear any serious examination, so, on the contrary, it often gives real comfort to reflect, that though no praise should actually be bestowed upon us, our conduct, however, has been such as to deserve it, and has been in every respect suitable to those measures and rules by which praise and approbation are naturally and commonly bestowed. We are pleased, not only with praise, but with having done what is praise-worthy. We are pleased to think that we have rendered ourselves the natural objects of approbation, though no approbation should ever actually be bestowed upon us: and we are mortified to reflect that we have justly merited the blame of those we live with, though that sentiment should never actually be exerted against us. The man who is conscious to himself that he has exactly observed those measures of conduct which experience informs him are generally agreeable, reflects with satisfaction on the propriety of his own behaviour. When he views it in the light in which the impartial spectator would view it, he thoroughly enters into all the motives which influenced it. He looks back upon every part of it with pleasure and approbation, and though mankind should never be acquainted with what he has done, he regards himself, not so much according to the light in which they actually regard him, as according to that in which they would regard him if they were better informed. He anticipates the applause and admiration which in this case would be bestowed upon him, and he applauds and admires himself by sympathy with sentiments, which do not indeed actually take place, but which the ignorance of the public alone hinders from taking place, which he knows are the natural and ordinary effects of such conduct, which his imagination strongly connects with it, and which he has acquired a habit of conceiving as something that naturally and in propriety ought to follow from it. Men have voluntarily thrown away life to acquire after death a renown which they could no longer enjoy. Their imagination, in the mean time, anticipated that fame which was in future times to be bestowed upon them. Those applauses which they were never to hear rung in their ears; the thoughts of that admiration, whose effects they were never to feel, played about their hearts, banished from their breasts the strongest of all natural fears, and transported them to perform actions which seem almost beyond the reach of human nature. But in point of reality there is surely no great difference between that approbation which is not to be bestowed till we can no longer enjoy it, and that which, indeed, is never to be bestowed, but which would be bestowed, if the world was ever made to understand properly the real circumstances of our behaviour. If the one often produces such violent effects, we cannot wonder that the other should always be highly regarded. (Page 104, Para 2, The Theory of Moral Sentiments )

 

As it is clearly demonstrated from the excerpt above, by the convention of our conscience we know when we have earned praise. Our peers can ascertain when our actions align with proper virtue are in-turn worthy of admiration. Undeserved praise for most people is an empty gesture devoid of any true satisfaction. By virtue of our norms,  our unwritten but universally understood societal rules, displeasure is experienced by both parties. The individual who receives undue praise is overwhelmed with guilt.  In contrast, the observing peers are frustrated by this minor but notable injustice. There are two principles at play eliciting both responses. The party who receives unearned accolades feels guilty as they know they didn’t rightfully earn them. It mirrors the concept that you appreciate more what you work for than what is given to you. Deep down in your subconscious, you know you are cheating someone who is deserving out of their time in the spotlight. Your disgruntled peers know that they got cheated out of justifiable recognition for their hard work. Unjust violation of norms constitutes cheating. Even if the  “cheating” wasn’t intentionally perpetrated. Cross-culturally humans in general adversion to cheating.