Sunday, April 27, 2014

Chris Dillow — The Problem Of Distribution

In a comment here, Nuno Ornelas Martins says: "the central problem of economics is the distribution of the surplus rather than the allocation of scarce resources."

This, of course, flatly contradicts the standard view that scarcity is the problem of economics. However, in one context at least, he is right. J.W. Mason points outthat, in the US, companies have (net) long ceased to raise money from financial markets. A similar thing is true in the UK; for years, companies' retained profits have exceeded capital spending - something which the OBR expects to continue....

I am not saying here that the central problem of economics is always distribution rather than scarcity. I'm just saying that, in this context and now, it is. Most interesting facts in the social sciences are local and particular.
While the post make good points, I don't think this is quite right in its scope. This issue, like most, is much more complex that most narratives make it out to be. There is no such thing as an economy that is the subject of study of the discipline of economics. "The economy" is a conceptual construct that is built on assumptions that characterize one methodological approach among many other existing approaches and many more possible approaches.

The conventional approach that starts with the problem of scarcity rather than the distribution of a surplus defines the problem and therefore constructs the subject of study based on a set of assumptions that assume certain things as relevant and assume away other things as irrelevant. Conventional economics assumes a cycle of production, distribution, and consumption in which distribution is handled by the invisible hand of the market, which is presumed to be optimally efficient to the degree that it cannot be improved upon.

Only those institutional arrangements are appropriate that advance market efficiency or economic efficiency more broadly considered. For example, intellectual property like patents, copyright and trademarks, are considered to advance economic efficiency through creating incentive — even though they also create asymmetric market power. The corporation as a legal person capable of owing property in perpetuity is another. There are many more. The proof of their efficiency and effectiveness is in the innovation that they bring and growth they produce.

Opponents object that this disregards negative externalities that are socialized, ecological, environmental, social and political, in addition to economic. The so-called free market as a mechanism of price discovery and efficient distribution is a myth. Actual practice, such as administered pricing that now predominates, and legal and institutional arrangements that dictate winners and losers reveal that markets are not as represented.

They cannot be made free either, any more than friction can be eliminated from physical systems owing to the construction of modern society and its institutions. "Liberalization" simply increases the market power of factions in that social, political and economic asymmetry cannot be eliminated from individual relationships any more than friction can from the physical world. The idea of a market in which all participants are symmetrical in information, power, and influence is a fantasy.

Once this is recognized and acknowledged then that problem of allocating scarce resource comes to be seen in a different light, where the surplus a society creates is social rather than an aggregate of the contributions of individuals competing equally on a level playing field. Just it was a social and political issue initially about what institutional arrangements to create to produce results that are effective and efficient according to defined criteria; so too, is it a social and political issue to distribute those results in a way that takes into account that certain participants were favored in order to produce the optimal results.

The notion of redistribution is a matter of responsibility where there is a right to use private property for economic gain in addition to subsistence. Since individuals characteristically do not rise to the responsibility, it becomes necessary to undertake it institutionally.

Economically, the issue may be seen as addressing scarcity in the optimal way to achieve efficiency and effectiveness in accordance with defined criteria (norms). However, in the larger context of a society social, political, legal, institutional factors must be considered along with the economic factors.

In addition, open national economies must be considered relative to a closed world economy. Given that modern economies are interdependent, e.g. with respect to resources, and humans inhabit the same global ecology in which externalities play a fundamental role socio-economically, addressing scarcity and abundance becomes a human issue, involving human rights, and a global issue with respect to context.

Stumbling and Mumbling
The Problem Of Distribution
Chris Dillow | Investors Chronicle


Dan Kervick said...

They are clearly both important and interconnected problems. You don't have a surplus to distribute unless you have a system of production generating that surplus through decisions about the allocation of finite and costly amounts of natural resources, existing capital resources and labor. And you can't sustain a system of production, which includes a viable and sustainably just social order, unless the output of the production is distributed in a way that maintains the pattern of allocation and the labor contributions that are needed to keep it going.

Tom Hickey said...

Right, mechanistic thinking versus organic thinking. Atomistic thinking versus systematic thinking. Structuralism based on analysis into elements versus functionalism based on synthesis involving relationships of elements.

Synergy: The whole is greater than the sum of its parts.

A society as a complex adaptive system is naturally synergistic unless it inhibited by cultural and institutional factors that supervene such as are introduced by interest groups, in which case it becomes dysfunctional.

Roger Erickson said...

If economists don't know these things, then they're just admitting that their whole field is a charade that ought to return to teaching the basic rules of accounting.

"Economics" is purely an exercise of self-apology for aristocrats to better manage their maladaptive approach to social parasitism?

Tom Hickey said...

""Economics" is purely an exercise of self-apology for aristocrats to better manage their maladaptive approach to social parasitism?"

Neoclassical economics was established as a classical liberal response in reaction to socialism and social liberalism and has been funded by those that stand to gain from it so much so that the professional association refused to institute a code of ethics that would include conflict of interest.