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Index
Observation #1: Origins
Observation #2:
Geometry
Observation #3: Equity
Observation #4: Modeling
Observation #5:
Jeremy Bentham
Observation #6: Capital, Labour & Natural Resources
Observation #7: Technological Change
Observation #8: Monopoly & 'Big' in Economic Thought
Observation #9: Economic Concepts of Technological Change
Observation #10: Common Natural Resource Treaties
Observation #11: The Knowledge Commons
Observation
#12: Public Choice
Observation #1: Origins
The Standard Model of Microeconomics (or
Market Economics), specifically 'X' marks the spot, was formalized by
Alfred Marshall at Cambridge University at the end of the 19th and early
part of the 20th centuries. He provided the solution to profit
maximization under perfect competition and monopoly. In the 1930's Joan
Robinson, also at Cambridge, provided the solution for monopolistic
competition but in an interesting intellectual coincidence it was
independently resolved, at the same time, by Edward Chamberlin in the
U.S.A. As will be seen, the Standard Model was then extended into
Welfare Economics (including Externalities) by Arthur Cecil Pigou who
succeeded Alfred Marshall in 1908 as Professor of Political Economy at
the University of Cambridge holding the post until 1943. Thus the
Standard Model of Market Economics could more accurately be called 'The
Cambridge Model'.
Its roots, however, lay in the 'Marginalist
Revolution' of the 1870s. This shifted the focus of economics from the
production and distribution of wealth among social classes - owners of
capital, labour and natural resources - towards the atomized individual
consumer (2.0 Demand) and producer (3.0 Supply). Microeconomics was born
- the budget constrained maximization of consumer happiness and the cost
constrained profit maximization of producers underpins the standard
model.
This Standard Model of Market Economics
served as the foundation for development of Macroeconomics, or what I
call the Standard Model of National Economics, by John Maynard Keynes (also of Cambridge) with his 1936
The General Theory of Employment, Interest and Money. Until then
government did not play an active role in managing the economy. Rather,
it was governed by 'the iron law of wages'. As the economy boomed
labour became scarce and wages rose until the economy crashed. As the
economy declined labour was increasingly unemployed and wages fell until
low enough to jump start the economy. There was no government
intervention, no 'social safety net'.
Observation #2: Geometry
Beyond the human realm, according to the
ancient Greeks, lays the universal forms of the circle, square, triangle
and their variations, e.g., the parabola. Captured in Euclid’s
Elements, two-dimensional space was reduced to the mathematics of
such universal forms – their balance, harmony, proportion and
resonance. Archimedes moved the cognitive relationship between number
and nature into the three-dimensional world of volume. Measuring
different forms of space was resolved by the Greeks through ‘exhaustion’
whereby one considers the area measured as expanding to account for
successively more and more of the required space. In astronomy this
method was extended to the celestial motion of the stars and planets.
In effect, motion to the ancient Greeks was geometric exhaustion
applied, step by step, through time. Geometry was thus concerned with
spatial relationships finding fullest expression in Euclidian and
Archimedean geometry and the astronomy of Ptolemy.
At the beginning of the European
Enlightenment Rene Descartes introduced analytic geometry using a
calibrated, coordinated two-dimensional space defined by two axis: the
X-axis or abscissa and the Y-axis or ordinate defining the location of
every point as coordinates, e.g., (600, 2200) a point 600 units to the
right and 2200 units up [MKM C2/27, Fig. 2.2]. Analytic geometry
has since been extended to n-dimensional space.
In the 1670s, what was known as ‘the
geometry of infinitesimals’, i.e., geometric exhaustion, achieved a
breakthrough with the simultaneous invention of the calculus,
independently, by Newton (1643-1727) and Leibniz (1646-1716). Calculus
provided a true mathematics of motion – changing spatial position
through Time expressed in algebraic rather than geometric terms. This
breakthrough was then extended by Newton to his three laws of motion,
the foundation stone of modern natural science. The Standard Model of
Market Economics can be expressed in differential calculus as well as
graphically and verbally. Please note that no calculus will be used in
the course.
Observation #3: Equity
The economic concept of equity evolved out
of a distinct strand of English legal history. Together with the Common
Law, Equity began during the reign of Henry II (1133 –1189). The Norman Conquest of 1066 abrogated all
pre-existing rights and privileges of the previous regime by right of
conquest. In effect William the Conqueror had carte blanche to shape a
kingdom without accounting for pre-existing feudal rights and
privileges. Thus unlike other European monarchs, England was his
exclusive unqualified personal domain. He was absolute Sovereign.
Nonetheless what he conquered was a patchwork of Angle, Saxon, Jute,
Danish, Viking and Celtic settlements in different regions with
different laws and languages. The new King divided up his Property
accepting fealty from a new Anglo-Norman aristocracy. The new local
rulers, while subject to the King, also inherited rights and privileges
acceded to rulers under varying local traditional laws and customs.
Overtime, however, these new subjects
brought to the attention of William's successors, among other things, inequities in a
supposedly unified kingdom. At the extreme, in one locality theft of a
loaf of bread cost a hand; in another, two days in the stocks hit by
rotten vegetable and insults thrown by one’s neighbours. It was not
guilt or innocence rather they cried for fairness from the King.
Responsibility for hearing such calls were transferred to the King’s Lord Chancellor
who set up a court of his
own – the Court of Equity also known as the Court of Conscience or of
Morality. This was later complimented by the Exchequer Court
dealing with tax fairness. In fact until Sir Thomas More (a lawyer) became Chancellor in
1529, all had been men of the cloth. Three aspects of Equity played a
critical role in the Sovereign’s ability to control his vassals. These
were taxes, trusts and tenant-landlord disputes. Trusts (from which
modern charities and financial trusts evolved) usually concerned widows
and orphans left to the mercy of a local lord or baron. The most famous
is Lady Marion of the Robin Hood myth who was an orphan and ward of King
Richard I, son of Henry II. With respect to tenant-landlord disputes
about rent, Equity balanced arbitrary feudal local lords by judiciously
connecting the King to his subjects. This was called the ‘rent bargain’
by J. R. Commons in his 1921 The Legal Foundations of
Capitalism. It stabilized the social system of post-Conquest
England.
While Magna Carta (1215) and subsequent
events increasingly limited the King, Equity and Common Law continued to
develop as parallel systems of law with precedence given to Equity. It
was not until 1873 in the United Kingdom that the two systems of courts
merged. In the process Common Law courts gained access to legal
instruments previously exclusive to Courts of Equity, e.g., the
injunction. Nonetheless, these two strands of Anglosphere jurisprudence
continue in all Common Law countries with Equity retaining precedence.
The economic concept of Equity arguably
derives from legal Equity. Thus the Chancellor of the Exchequer (in
Canada called ‘the Minister of Finance’) exercised concurrent
jurisdiction in Equity with the Lord Chancellor’s Court. There are two
economic definitions of Equity, each reflecting its historical roots.
First, there is Equity as the capital of a firm which, after deducting
liabilities to outsiders, belongs to the shareholders. Hence shares in
a limited liability corporation are also known as equities. This links
back to the historical treatment of trusts under Equity.
Second, there is Equity as ‘fairness’.
While often used with reference to taxation it is a general economic
concept. With respect to taxation Equity has three dimensions:
horizontal, vertical and overall. Horizontal Equity refers to ‘like
treatment of like’. Vertical Equity refers to ‘unlike treatment of
unlike’. Overall Equity refers to the accumulated impact of all forms
of taxation. Crudely, it is the difference between earned and
disposable income, i.e., net of all taxes – income, excise, sales,
et
al. Among other things, Equity is also used to justify market
interventions by government, e.g., minimum wage and rent control.
It is important to distinguish between
equity and equality. Equity is about fairness, given the facts of
a situation. Equity is part, not just of law and economics, but
also of ethics, the science of morals. It is not biased in favour
or opposed to equal, egalitarian outcomes. Outcomes simply must be
fair. The difference between equal opportunity and equal outcomes
highlights, in a way, the difference between equity and equality. In
this regard, Kenneth Boulding entitled his
Presidential address to the 81st meeting of the American Economic
Association in Chicago, December 29, 1968:
Economics
as a Moral Science.
Observation #4: Modeling
Heidegger argues that the essence of the
contemporary world is objectivity resulting from the triumph of
perspective in Art during the Renaissance and in Science with
Descartes in the 17th century. (The graphic space in which this course
is conducted is 'Descartian Space' made up of the X and Y axis.) In
effect, it is our ability to model or imitate Nature, especially using
mathematics including geometry that brings relative certainty of
knowledge and perspective. Through representation everything in and of
the world is brought before us from the perspective of object. We call
them "models", "simulations", et al. The result is that we live in “The
Age of the World Picture” (Heidegger 1938). This iconic conclusion is
visible in the contemporary Natural & Engineering Sciences where
confirmation through picture or graph makes "seeing believing'.
Scientist do not watch a cascade of numbers as in the film The Matrix (Wachowski
& Wachowski 1999) but rather they "read" their graphic representation as
"lived" in a virtual reality. In Polanyi‟s terms we indwell in our
representations. They can become more real to the observer than that
which our native senses tell us. This is arguably one cause of the
'Great Recession', i.e., the so-called 'quants' on Wall Street believed
their complex math models were reality. The quality of the data (see
Keynes, Chapter 12), among other things, make this impossible.
Furthermore, in the Natural & Engineering Sciences the Laws of Nature
are assumed fixed while in the Social Sciences including economics,
human laws constantly change and evolve.
In fact Economics is an Ideology.
Ideology has many meanings today but was coined simply enough by
Condillac during the French Revolution to mean ‘the science of ideas’.
Separation of Church and State was critical to both American and French
Republican Revolutions. Creation of a secular science of ideas to
counter the awe and mystery of religious and metaphysical thought and
ritual was part of a revolutionary agenda designed to overthrow of an
Ancient Regime of subordination by birth. In this sense ideology is
‘secular theology’, i.e., an explanation of the way the world works
without god. Theology, on the other hand, is an explanation of how the
world works with God. In this regard the word 'theory' literally means
a god's eye view. And unlike the Natural & Engineering Sciences, a
contemporary definition of Ideology is: A systematic scheme of ideas,
usu. relating to politics or society… and maintained regardless of the
course of events" (OED, 4).
With the collapse of Communism there is
arguably only one Ideology still standing - Market Economics in which
everything has a price – kidneys, children, the environment,
everything. It is, however, arguably split into two antagonistic
schools of thought. One, the Austrian School of the ‘vons’ -
von Mises
&
von Hayek, believes in the supremacy of the market with limited if any
public intervention. The other, the Keynesian School, believes in a
regulated marketplace and public intervention to correct market
failure. This is called macro-economics. Both are ideologies, not
natural science.
The perceived misuse of ‘new’ knowledge
is known as ‘the problem of dirty hands’. Originally coined to describe
physicists spawning the atomic bomb, there are lots of dirty hands to go
around. Biology gave birth to eugenics and its demon child, the
Holocaust with the smiling, all-knowing biologist greeting the condemned
at the gates of Auschwitz. Economics too must accept paternity for its
own devil spawn, the Market/Marx Wars, which, for half a century,
threatened mutually assured nuclear destruction of the human race
because of an ideological dispute over private property. Even the Arts
must accept responsibility. In Nazi Germany, all modern means of
artistic expression - from literature, music, painting and sculpture to
radio, television and the motion picture - were harnessed in the service
of a cause so evil that colour film of the Nuremburg Rallies has never
been released to the public by the American Government. What in
scratchy black and white is ancient history is to the modern eye a
symbol of the power of Art to serve evil in living colour. Then there
is the ‘Agitprop’ practiced by Lenin’s Commissar of Enlightenment
consolidating the revolution before Stalin took over and displaced it
with socialist realism and the gulag. Art is no more summum bonum – all
good - than physics, biology or economics
Observation #5: Jeremy
Bentham
Contemporary Economics is rooted in the 17th century
Scientific Revolution in England. What we call the natural and
engineering sciences were then called ‘experimental philosophy’. This
new way of looking at the world gained legitimacy with Charles II’s 1662
Charter to the Royal Society of London for the Improvement of Natural
Knowledge. The Scientific Revolution then began in earnest with
Isaac Newton’s clockwork universe serving as its icon. This
materialistic meme rapidly spread across Europe.
The ascent of experimental philosophy left moral
philosophers (those today we call social scientists and humanists)
searching for the social equivalent of Newton’s clockwork universe.
Arguably it was uncovered by
Jeremy Bentham (1748-1832)
founder of the last great school of philosophy to emerge from the
Western
Enlightenment -
Utilitarianism.
His answer was the greatest good for the greatest number
measured by atomic units of pleasure/pain called utiles with
pleasure and pain serving as “sovereign rulers of the State” in
Bentham’s words. The greatest good was to be calculated using Bentham’s
felicitous calculus, the calculus of human happiness.
While we will consider Bentham’s contribution to
economics it is important to note that the impact of his thought was
much wider. Thus among his disciples were the Philosophical Radicals
who became the Liberal Party of the United Kingdom. They used Bentham’s
felicitous calculus to institutionally transform England and its Empire
from a feudal into an Administrative State. Their achievements, among
others, included: constitutional and local government reform, the end of
slavery; responsible government in Canada, universal suffrage; the
supremacy of the legislature (or ‘legislative omnicompetence’ in
Bentham’s words), compulsory public education, health and safety; penal
and criminal law reform including a modern police force; welfare reform;
and, founding, in 1826, the first English research university and the
first to accept non-Anglican, non-male and non-white students –
University College London. These achievements were based on the premise
that the happiness of a pauper is equal to that of a prince expressed in
the euphemism: An Englishman’s home is his castle. Liberal democracy in
fact took root in England through Benthamism dodging the Republicanism
of the United States and France.
Bentham’s philosophy is rooted in Epicurean
sensationalism. Epicurus
(341-271 BCE) was a contemporary of Aristotle and Plato who both
believed in the gods but Epicurus did not. Bentham acquired his view
from the
De Rerum Natura (On the Nature of Things) by the Roman
Epicurean poet Lucretius (99-55 BCE), whose work, unlike those of
Epicurus, survived the fall of the Roman Empire and the censorial fires
of the Church.
Like Epicurus, Bentham believed that physical sensation
was the foundation of all knowledge. Knowledge, including
preconceptions such as ‘body,’ ‘person,’ ‘usefulness,’ and ‘truth’, form
in the material brain as the result of repeated sense-experience of
similar objects. Ideas are formed by analogy between or compounding
such basic concepts (O’Keefe
2001).
For Bentham sense experiences involved a unit measure of
pleasure and pain called the ‘utile’ that eventually, according to
Bentham, would be subject to physical measurement. One corollary of the
utile, however, is that customs, traditions and taste cease to be
independent variables. For Bentham compulsory public education would
begin with children taken at birth from their mothers and placed in
state-operated crèches. Each child was, Bentham believed, born
tabula rasa – blank – and compulsory public education would ensure
everyone’s customs, traditions and taste would eventually become
identical and therefore irrelevant. He also innovated the
Panopticon, an architectural form that allowed the observation
of convicts in prison cells (Kingston
Penitentiary)
is an example and designs for observing the
educational life of children and civic life in general by a hidden
observer.
Bentham believed that human
existence was simply the search for pleasure and the avoidance of pain.
Thus utilitarianism is radically materialistic. Even aesthetics shrank
to analysis of pleasurable sensations evoked by a work of art. A thing
is beautiful because it pleases, it does not please because it is
beautiful (Schumpeter 1954, 126-7). This, combined with emphasis on
functionality, meant application of artistic effort was “irrational”.
In industrial design and architecture, this aesthetic reached its
conclusion in the aphorism form follows function, the
Bauhaus and the glass and steel towers of the International School
of Architecture (Hughes 1981).
In many ways, Bentham makes Karl Marx look like a weak
kneed bleeding heart liberal. Marx would have admired John Lennon’s
working class hero. Bentham, on the other hand, wanted to socialize not
just the means of production but also of consumption. For Bentham the
Mao suit or ‘GI’ issue - one size fits all - was the style of the
future. It was only the terrors of the French Revolution that drew
Bentham back from perfect communism. For Marx, on the other hand,
Revolution was the instrument of change. In a sense, Marx was the son
that Bentham never had
The formal name for Bentham’s utilitarianism is
Ethical Hedonism. The search for pleasure (hedonism) was inhibited
in Bentham’s scheme by assuming human beings carried a genetic sense of
right and wrong, good and bad - essentially the Protestant work ethic.
Once that ethic fades, however, we are left with ‘Me-ism’ socially
expressed as ‘Consumerism’.
In 1881
Francis Ysidro Edgeworth (1845-1926) married Bentham’s felicitous
calculus of human happiness to Newtonian calculus of motion and reduced
it to geometric expression subject to mathematical proof in his
Mathematical Psychics. At root this marriage succeeded by using
Bentham’s reification (making concrete that which is abstract) of
happiness as money – the presence of money brings pleasure, its absence
brings pain. One’s willingness to pay $10 for a DVD is a measure of the
utility or happiness one hopes to derive from it.
Edgeworth’s geometry and its related calculus
permitted erection of what became, in the hands of
Alfred Marshall, the Standard Model of Market Economics. It shifted
the focus of economics from analysis of the distribution of national
wealth among different classes in society to the constrained
maximization of utility by consumers generating the Demand Curve and the
constrained maximization of producer’s profits generating the Supply
Curve with ‘X’ marking the spot where the willingness to buy (Demand)
exactly equals the willingness to sell (Supply). The market clears.
This is where
the greatest good for the greatest number is achieved in the
Standard Model of Market Economics.
It is important to note that use of calculus defines the
Standard Model as mechanical rather than biological in nature, i.e.,
the calculus of motion, in this case, of human happiness. It is also
important to note that the demand-side of the economic equation came
first and flowing from it the supply-side was subsequently erected. Put
another way, consumer's wants, needs and desires in the Standard Model
precede production of goods & services to satisfy them. This is
sometimes called ‘consumer sovereignty’ or ‘dollar democracy’. In this
sense the consumer/producer-centred Standard Model of the late 19th
century allowed economics to catch up with the citizen/voter-centred
Republican Revolution of the 18th century.
It is ironic that Bentham-inspired economics should
achieve what Plato most feared about the Arts as expressed in Book X of
The Republic:
We must remain firm in our conviction that hymns to the
gods and praise of famous men are the only poetry which ought to be
admitted into our State. For if you go beyond this and allow honeyed
muse to enter, either in epic or lyric verse, not law and the reason of
mankind, which by common consent have been ever deemed best, but
pleasure and pain will be the rulers in our State.
It is not, however, just the Ancients who have (or would
have) concerns about Bentham’s felicitous calculus and the Standard
Model.
Joseph Schumpeter called it “the shallowest of all conceivable
philosophies of life that stands indeed in a position of irreconcilable
antagonism to the rest of them” (Schumpeter 1954, 133).
John Maynard Keynes went further identifying its dangerous
ideological flaws:
I do now regard that as the worm which has been gnawing
at the insides of modern civilization and is responsible for its present
moral decay. We used to regard the Christians as the enemy, because
they appeared as the representatives of tradition, convention and
hocus-pocus. In truth, it was the Benthamite calculus, based on an
over-valuation of the economic criterion, which was destroying the
quality of the popular Ideal. Moreover, it was this escape from
Bentham... which has served to protect the whole lot of us from the
final reductio ad absurdum of Benthamism known as Marxism (Keynes
1949, 96-7).
In fact, before the Republican Revolutions of the 18th
century the economy was embedded in society through guilds and a class
structure of subordination by birth. Today, many fear that human
society is being embedded into a global economy in which everything is
for sale – children, hearts, kidneys, lungs as well as the entire
natural and human built environment – as Karl Polanyi suggested in
The Great Transformation (2001). Such lingering concerns may be
genetic fragments of a not quite dead Marxism or remembrances of
forgotten roots - in the United States, “Life, Liberty and the pursuit
of Happiness” and in France, “Equality, Fraternity and Liberty”.
In a way, the Republican Revolution overthrew an ancient
regime of subordination by birth gaining political freedom for the
individual and in the process spawning the free self-regulating market
as its economic corollary. The Communist Revolutions of the 20th
century, on the other hand,
sought economic freedom for the individual (each according to one’s
need) through a centrally planned and controlled command economy and
spawned the one-party Leninist State as its political corollary.
Arguably, both freedoms – political and economic - are necessary, if not
sufficient, to fully realize human potential.
Non-linked References
Hughes, R., The shock of the new, Knops, NY, 1981.
Keynes, M., Essays on John Maynard Keynes [1949],
Cambridge University Press, Cambridge, 1975.
Schumpeter, J. A., History of Economic Analysis
(1954), Oxford University Press, New York, 1968.
For more on Bentham, the 'Marx & Lenin' of Capitalism, please see my MIDAS
Lectures:
Secularization of the West & The Rest: The Legacy of
Jeremy Bentham
Part I Establishment
November 2012
Part II Disestablishment
April 2014
Observation #6: Capital, Labour & Natural Resources
Capital (K)
The
definition of capital is an unresolved problem in economics. To Marxists, it is
theft. To the mainstream, its definition remains problematic as noted by T.K.
Rymes of Carleton University in conversation with the author in the early 1970s:
“If there is no theory of capital, there is no economics. And there is no
theory of capital!”
The concept of capital has
mutated and expanded through history. To the Mercantilists of the 17th century,
capital was gold, silver, land and slaves. To the Physiocrats of
pre-Revolutionary France, it was the surplus generated by agriculture. To the
Classical School of the late 18th and early 19th centuries, it was the surplus
resulting from the division and specialization of labour. To the Neo-Classical
School of the late 19th and 20th centuries, it was financial capital as well as
physical plant and equipment. To Bohm-Baverk and
the Austrian School, capital was historically embodied labour produced through
‘round-about’ means of production (Blaug 1968, 510-11). How to measure such
embodied labour has never, however, been satisfactorily answered (Dooley
2002).
Today, when
economists speak of capital, they may refer to cultural, financial, human,
legal, physical, social or other forms expressed as a stock, e.g.,
physical plant and equipment existing at a given moment in time.
For my purposes, capital is codified and tooled
knowledge, i.e., knowledge fixed in an extra-somatic matrix.
Alternatively, capital is “knowledge imposed on the material world” (Boulding
1966, 5), or, “frozen knowledge” (Boulding
1966, 6). It includes:
codified knowledge in the form of human-readable
information management systems and databases, operating manuals and libraries as
well as associated intellectual property rights such as copyrights, patents,
registered industrial designs and trademarks; and,
‘hard-tooled’ knowledge in the form of physical
plant and equipment, i.e., sensors and tools, plus related ‘soft-tooled’
knowledge including machine-readable computer & genomic programs, standards and
techniques.
Codified and tooled knowledge are fixed in material
form; both have vintage; both are extra-somatic, i.e., they exist outside
the natural person. I will now briefly examine softer forms of capital -
cultural, financial, human, legal and social - expressed as codified and tooled
knowledge.
Cultural
Cultural capital, as artworks, books, photographs,
plays, recordings, etc., is codified knowledge. As broadcast & recording
studios, conservatories, libraries, museums, parks, printing presses, sets,
props & costumes, theatres and other venues, it is tooled knowledge. In this
sense, cultural capital (codified and tooled) contrasts with cultural practice
or performance which is personal in nature.
Financial
Financial capital as currency, equities, bonds,
mortgages and other financial instruments is codified knowledge, i.e.,
fixed on paper or in human readable electronic format. Anti-counterfeiting
measures such as encryption, electronic strips and chips are forms of tooled
knowledge. Debit and ‘smart’ cards are contemporary examples of financial
capital as tooled knowledge. In this view, financial capital (codified and
tooled) contrasts with financial practice which, again, is personal in nature.
It is as personal & tacit knowledge, however, that
financial capital plays its primary role. As a generally accepted medium of
exchange, store of value or unit of account, financial capital as money involves
tacit knowledge routinely recognized and accepted by a natural person. In this
sense, financial capital, including the price system (Hayek
1989), is an institution, i.e., a routinized pattern of
collective human behaviour. Like a physical reflex, e.g., riding a
bicycle, a human being learns to recognize, accept and exchange financial
capital. In different cultures and periods of history what constitutes money
and financial capital differs (Humphreys 1969). In other words,
financial capital is a cultural artifact, a form of organizational technology
that is tacit, i.e., ‘generally accepted’ in a society.
Human
Human capital generally refers to the stock of skills
and education possessed by a worker. Given human capital is embodied in a
living human being, there is no extra-somatic component, i.e., there is
no capital as frozen knowledge. The term ‘human capital’ is thus a misnomer.
Human capital is personal & tacit knowledge and somatic to the individual.
Additions to this stock reflect learning, education, experience and training on
the memory and reflexes of the individual.
Legal
Legal capital as law books, statutes, judicial and
quasi-judicial decisions is codified knowledge. Legal capital as court houses,
handcuffs, prisons and police cars is tooled knowledge. In this view, legal
capital (codified and tooled) contrasts with legal practice which is personal knowledge.
Social
Social capital can be codified and fixed on paper or
another human-readable format stating customs and conventions of behaviour,
educational curricula, public rules and regulations as well as public safety
standards, e.g., drinking water standards. Social capital as schools,
hospitals, roads, sewage & water systems and telecommunication systems is tooled
knowledge. In this view, social capital (codified and tooled) contrasts with
social practice including market sentiment which are persona knowledge.
Social capital, according to some
scholars, can be extended to include “values and beliefs”. Such values and
beliefs can be codified, e.g., the Analects, Bible, Koran & Vedas.
Alternatively, they can be tooled into monuments and other works of aesthetic
intelligence reflecting an ideology, e.g., socialist realism. Values and
beliefs, however, take on meaning only when practiced or perceived by a living
human being. In this sense, there is no extra-somatic component, i.e.,
there is no capital or asset that can be exchanged for money. Put another way,
“Money can’t buy you love”.
With respect to economics, such values and beliefs
include market sentiments. In The Theory of Moral Sentiments and The
Wealth of Nations, Adam Smith stresses the role of Sentiment in market
exchange, e.g., trust. As Samuels
put it, “the order produced by markets can only arise if the legal and moral
framework is operating well” (Samuels
1977, 197). Together with division and specialization of labour, it
is market sentiments, according to Smith, that assures the wealth of nations.
In effect, Sentiment influences Reason and Reason influences Sentiment including
economic expectations. Put another way: no matter the price, would you buy a
used car from that person?
To the degree that various forms of capital –
cultural, financial, legal, physical and social – can be expressed as codified
and tooled knowledge, one may speak of ‘a knowledge theory of capital’. Such a theory is a corollary to a more general ‘labour
theory of knowledge’.
Labour (L)
In fact there are three forms
of Labour - Productive, Managerial & Entrepreneurial. All three forms embody personal knowledge.
Productive
Productive workers are those on the shop floor actually
producing goods & services. They are concerned with output. Their
knowledge is technical and specialized to a given industry or firm. In
effect they combine codified and tooled with personal & tacit knowledge
(memory and reflex) generally learned on the job in the Anglosphere.
Their knowledge involves making something or making something work. In
this sense the competitiveness of a firm or nation “depends not only on
sensible decisions about what to do, but on the availability of the
skills that are required to do it” (Loasby 1998, 143).
Managerial
Management, among other things, means “a governing body
of an organization or business, regarded collectively; the group of
employees which administers and controls a business or industry, as
opposed to the labour force”. It also means “the group of people who run
a theatre, concert hall, club, etc” (OED, management, n, 6). The role of
management is to make available the means (inputs) so that production
workers can perform their tasks and then to market and distribute the
output. In many ways management is like a choreographer, music or
theatre director. This sense of modern management is caught by Aldrich:
Thus the total operation is a performing art with
blueprints for score or choreography, the difference being that in this
technological case neither the co-ordinated performances (ballet) of the
skilled workers nor the finished product is put on exhibit simply to be
looked at, contemplated. It is a useful performing art. Its value is
instrumental.” (Aldrich 1969, 381-382)
Similarly, according to Schlicht, it is:
the fit of the organizational elements, rather than the
elements themselves, that characterizes a firm. Just as the quality of
an orchestra performance cannot be adequately measured by the average
quality of the performances achieved by the individual instruments, but
depends crucially on the way the instruments are played together, so the
productive value of a firm - as opposed to a set of individual
contracting relationships - emerges from the quality that has been
achieved through mutually adjusting the various activities that are
carried on. (Schlicht 1998, 208)
One crucial characteristic of the firm is custom
including tacit understandings of entitlements and obligations between
productive, managerial and entrepreneurial workers. This constitutes
part of what is commonly called ‘the corporate culture’ for which, on a
day-to-day.
Entrepreneurial
With the notable exception of
firms like Microsoft (Bill Gates) and Walmart (Sam Walton), most modern
corporations do not follow an original founder/owner but rather a ‘hired
gun’, or business entrepreneur. The word ‘entrepreneur’ comes from the
French entre meaning ‘between’ and prendre meaning ‘to
take’. The English ‘middleman’ retains this original sense.
During the Middle Ages and Renaissance, European traders (especially
from Venice and Genoa) ‘middled’, at high risk, between foreign
suppliers, e.g. of silk and spices from the Turks, and final consumers
in northern Europe. Today the term usually refers to someone who
sees and seizes an economic opportunity or a market opening or gap.
This may take the form of a new product or of servicing an existing
market in a new way. In both cases a high degree of creativity and
risk-taking is implicit. In this regard, the first English usage
of ‘entrepreneur’ was in 1828 meaning “the director or manager of a
public musical institution.” Today we would call this ‘an
impresario’. In fact, it was not until 1852 that entrepreneur took
its modern meaning of “one who undertakes an enterprise; one who owns
and manages a business; a person who takes the risk of profit or loss
(OED, entrepreneur, a, b).
Entrepreneurial knowledge is
intuitive in seeing and taking advantage of invariants and affordances
in a market that others do not see. It involves seeing and
realizing a vision of future markets, products and opportunities.
Ignorance is the opposite of knowledge, i.e., want of knowledge.
The non-rational way of entrepreneurial vision was called ‘animal
spirits’ by Keynes (Keynes 1936, 161). Like some ancient
priest-king, the entrepreneur ‘knows’ the future and leads his people
(investors, managers, workers and consumers) into it – right or wrong -
to success or failure. In a manner of speaking, prophets today
seek profits, not souls. Ideally, this highly valued form of
pattern recognition works best as “informed intuition” (Jantsch 1975).
All available information, knowledge and opinion is explicated but then
an intuitive, inductive judgmental vision is conjured up. In a sense,
the business entrepreneur or CEO has assumed the mantle of the Western
Cult of the Genius joining the artist, inventor and scientist.
Natural Resources (N)
Similarly, the definition of what
constitutes a natural resources is constantly evolving.
At first
glance, natural resources have no relationship to knowledge. By
definition, they exist as John Locke said in “the State that
Nature hath provided” (quoted in
Dooley 2002,
4). They are just part of the environment until the knowing mind
recognizes them as useful. Thus oil lay in the ground virtually
untapped until invention of the internal combustion engine. Just
as we recognize a tool by its purpose (M. Polanyi 1962, 56), we
similarly identify natural resources by the human ends we
attribute to them. At a given point in time a naturally
occurring substance is seen as nothing but an environmental
feature. Take a pathway through the jungle one day and you see a
large rock outcrop. The next day, with new knowledge, the same
path leads not to an environmental feature but to a bauxite
deposit that can be converted into aluminum. It has become a
toolable natural resource. Yet it itself has not changed, one
day to the next, rather new knowledge allows us to see it in a
different light. This ‘changed way of
seeing’ is captured by Loasby when he writes:
Menger begins
by arguing that an object becomes a good only when someone
discovers how to use it to satisfy some human need. Goods are
endogenous, created by new connections between human need and
physical or human resources; and their value is derived from the
need which each of them serves and - crucially for this paper -
from the knowledge that it can serve this need and also the
knowledge of how it can be made to do so… The creation of goods,
and of technology, rests on the creation of knowledge, and
therefore on previous uncertainty - or indeed sheer ignorance.”
(Loasby
2002, 6)
Today the most striking example of how new knowledge
transforms environmental features into toolable natural
resources is biotechnology. While advances in analysis
and sequencing now allow researchers (and hence firms) to
experiment with known genetic command codes to build new
drugs, enzymes, pathways, proteins et al, the reality
is that the raw material for biotechnology is life itself –
everywhere and every when. Nature is much older and more
experienced in designing command codes under a wide range of
environmental conditions than emergent biotechnology.
Accordingly Nature has become the object of search by the
biotech industry for
novel code.
This search is called ‘bioprospecting’ and takes two forms:
ethnobiology and ‘original research’ which is
self-explanatory.
Ethnobiology is the interdisciplinary study of how human
societies use or have used flora and fauna to serve human
purpose, e.g., for medical or nutritional purposes.
Its principal sub-disciplines include ethnobotany,
ethnomycology, ethnolichenology, ethnozoology, ethnoecology,
paleoethnobotany, and zooarchaeology. The
Society of Ethnobiology
publishes a journal documenting activities in these fields.
Non-linked references
Blaug, M.,Economic theory in retrospect, Cambridge
University Press, 5th Edition, 1996
Jantsch, E. Design for Evolution, Braziller, NY,
1975.
Observation #7:
Technological Change
What do we mean by technology?
The word ‘technology’ entered the English language only in
1859 according to the Merriam Webster Dictionary
deriving from the Greek techne meaning Art and
logos meaning Reason, i.e., reasoned art. The
Oxford English Dictionary (OED, technology, 1 b) reports
it was re-coined at that time by Sir Richard Francis Burton,
Victorian explorer and translator of the Kama Sutra
(1883), the Arabian Nights (1885) and the Perfumed
Garden (1886).
It was Karl Marx, however,
(1818-1883) who produced the first true philosophy of
technology combining ‘the means of production’ with a
humanist critique rather than simple glorification of
Victorian progress. It is important to realize that the
technological imperative drives Marxian analysis. Class
warfare is collateral damage. This Marxian connection
tainted reception of all subsequent philosophies of
technology in the English-speaking world or Anglosphere.
Arguably, it was the work of Martin Heidegger (a purported
Nazi sympathizer) specifically his 1954 essay ‘The
Question Concerning Technology’ that finally led,
in 1983, to founding the American Society for Philosophy and
Technology (Idhe
1991, 4). Please see the journal,
Techne. Physical technology, to paraphrase
Heidegger, is the enframing and enabling of Nature to serve
human purpose.
In Economics, measurable
technological change only entered the mainstream in 1957
when economist Robert Solow published "Technical
Change and the Aggregate Production Function". In it he presented what is known as
the Solow Residual. It begins with a symbolic
equation for the production function: Y = f (K, L, T)
which reads: national income (Y) is some function (f)
of capital (K), labour (L) and technological change (T).
Subsequently, in 1962, Solow
introduced the concept of 'embodied technological change' in “Technical Progress,
Capital Formation and Economic Growth”. Embodied
technological change refers to
new technology fitted into
actual products
like the transistor in the
transistor radio. By contrast disembodied
technological change tends to spread evenly across an
economy such as improvements in communications and
transportation or what the Victorians would have
called 'Progress'. In addition there is endogenous and
exogenous technological change, i.e., change
resulting from economic imperatives (endogenous to the
economic system) and changes resulting from the work of
independent scientists, inventors and other creators
(exogenous
to the economic system).
Technological change in the
Standard Model of Market Economics refers to the impact of
new knowledge on the production function of a firm or
nation. The content and source of that knowledge is
not a theoretical concern; what matters is its mathematical
impact on the production function. Over the last
hundred years, depending on the study, something like 25% of
growth in national income is measurably attributable to
changes in the quantity and quality of Capital and Labour
while 75% is the residual Solow attributed to technological
change. Yet we have no idea of why some things are invented
and others not; and, why some things are successfully
innovated and brought to market and others are not.
The Solow Residual is known in the profession as the
measure of our economic ignorance. The economic
effects of this residual was called 'creative destruction'
by economist Joseph Schumpeter. The
'residual' is why I became an economist distinguishing,
during my career, between Physical Technology (P) emerging from the
Natural & Engineering Sciences; Organizational Technology
(O)
emerging from the Humanities & Social Sciences; and, Design
Technology (D) emerging from the Arts or what I call the POD
Model of Technological Change.
For more information please see
my:
Creative Destruction: The Economic Meaning of Technological
Change, especially
Exhibit 1: Evolution of the Production Function.
All cost considerations involved in internalizing a process can be
overturned due to changes in technology, e.g., information technology in the 1980s reduced the need for middle management
and resulted in significant 'downsizing' of large firms.
As has been demonstrated, however, new
knowledge has many sources and varying effects. It may be productive,
increasing output on the shop floor; it may be managerial reducing costs or
increasing sales; or, it may be entrepreneurial realizing a vision of future
markets, products and/or other opportunities. It may flow from the natural and
engineering sciences (physical technology), the humanities and social sciences
(organizational technology) or the Arts (design technology). In economic
theory, however, it does not matter what form new knowledge takes; it does not
matter from whence it comes; the only thing that matters, in terms of calculatory rationalism, is its mathematical impact on the production function.
In response to technological change, the production function for
output may shift upwards or downwards, i.e., technology can be lost as
happened with the fall of Rome. The quantity and/or cost per unit output may
increase or decrease. Alternatively, an entirely new production function may
emerge with innovation of new and/or elimination of old products, processes and
techniques. Technological knowledge does not only accumulate; it also withers
away if not transmitted to subsequent generations. The later is most apparent
with respect to traditional craft methods (White & Hart 1990). The process has
been compared by Kaufmann to speciation and extinction in biology (Kauffman
2000 216).
In the 20th century, technological change became recognized as
the most important source of economic growth, i.e., increase in output –
absolutely, or, per capita. Our understanding of such change, however,
remains limited. We do not understand why some things are invented and others
are not; why some are successfully innovated and brought to market, and others
are not. The contribution of technological change has, in theory, traditionally
been treated as a ‘residual’, i.e., after measuring total growth of
output, the contribution of an increased quantity and quality of capital, labour
and natural resources are factored out and the residual is called technological
change. Again, technological change, in this sense, is a residual amounting to an
error term, or, a measure of our economic ignorance. In this regard,
Kaufmann criticizes the Standard Model and suggests such
‘ignorance’ can be resolved using the concept of coevolution and coconstruction
(Kauffman
2000, 222).
Non-linked references
White, B. & Hart A-M, (eds), Living Traditions
in Art: First International Symposium, Dept. of Education in the
Arts, Faculty of Education, McGill University, Montreal, 1990.
Observation #8: Monopoly & 'Big' in Economic Thought
During the
Age of the Robber Barons from the mid-19th to early 20th centuries,
the dangers of
monopoly were a concern to
Marx whose solution was public ownership of the
means of production. The
extremity of this solution, among other things, fuelled
Alfred Marshall's effort to set out
a model of perfect competition to demonstrate the comparative costs of
monopoly.
According to Marshall, the monopolist was like a tree in the
forest; it would grow but eventually fall.
Reasons included that heirs to the monopolist’s power
would be less able than the founder until eventually the firm died – Eatons?
Following a series of Harvard
Law Review articles written by Adolf A. Berle, Jr. and E. Merrick
Dodd, Jr., in 1932 Berle and Gardiner Means’ published their influential
book,
The Modern Corporation and
Private Property.
This text established the concept of separation of ownership and
control of the ‘modern’ corporation and laid the foundation for
John Kenneth
Galbraith’s concept of the ‘technostructure’,
i.e., large
firms can become self-perpetuating or ‘immortal’ through the self-genesis
of management.
This a key difference between Legal vs. Natural Persons.
Before exploring the implications of the Legal vs.
Natural Person it is important to note that
Berle and
Means exposed the problem of agency in the widely held public
corporations that have come to dominate the economy. The
Standard Model of Market Economics assumes a one product, profit
maximizing firm with the owner in the store. When ownership is
spread out by share equity the owners are not in the store but
rather hire employees - entrepreneurial and managerial - to run the
firm. This raise the question of whether the objective
function of the owners, i.e., profit maximization, is the
same as that of their agent?
In 1956
Herbert Simons
introduced the concept of satisficing vs. maximizing
behaviour. Thus managers of a widely held public corporation
have to satisfy not only the owners but also workers, customers
and the government. To do so they do not pursue profit
maximization but rather satisfying all these various
stakeholders. If successful management is then able to satisfy
its own needs for things like corporate jets, oak-lined board
rooms and other perks of office.
Returning to the question of the Legal vs. Natural
Person, under Anglosphere Common Law & Equity, Legal Persons (bodies
corporate) and Natural Persons (flesh and blood human beings)
essentially enjoy the same rights. In the constitutional monarchies of
the British Commonwealth this legal fiction flows from the concept of
the Crown. The State is thus fictionally represented as the monarch, a
human personality. In the USA similar treatment of Legal and Natural
Persons began with the 1886 decision in
Santa Clara County vs. the Southern Pacific Railway. Until then
corporations were limited to the functions and States for which and in
which they were chartered. In this case the railway successfully
invoked the 14th Amendment of the USA Constitution intended to protect
former slaves from discrimination. Subsequent court cases followed
including Citizens United in which the Supreme Court in 2010
extended freedom of expression guaranteed by the 1st Amendment to
corporations as ‘persons’. This decision effectively squashed federal
political fund raising limitations on corporations. In 2013, in
Hobby Lobby, a privately owned corporation using the Citizens
United decision successfully argued before the Court of Appeals that
freedom of religious expression is similarly protected under the 1st
Amendment. The intent was to block the Affordable Care Act from
requiring the firm to pay insurance premiums for certain types of
contraception. The
Supreme Court decided a corporation enjoyed religious rights just
like a Natural Person.
Under the European Civil Code, however, Legal and Natural
Persons do not enjoy the same rights. As we will see this is
particularly important with respect to intellectual property rights. A
created work is considered an extension of the human personality. As
such it is subject to imprescriptible moral rights, not
recognized by Common Law & Equity. In effect they are human rights in
the Natural Rights tradition.
On the other hand,
Joseph Schumpeter argues that the forces
of 'creative destruction' or technological change was the dominant force
in economic growth and such change required the surplus expropriated by
monopoly and oligopolies to fuel the necessary research & development.
For a more detailed description of creative destruction please see:
http://www.compilerpress.ca/ElementalEconomics/CREATIVE%20DESTRUCTION.pdf
Observation #9: Economic Concepts of Technological Change
In 1962, economist Robert Solow published “Technical Progress,
Capital Formation and Economic Growth” in the American
Economic Review. In it he presented what is known as the
Solow Residual. It begins with a symbolic equation for the
production function: Y = f (K, L, T) which reads:
national income (Y) is some function (f) of capital (K),
labour (L) and technological change (T).
Technological change in the standard model of Market Economics
refers to the impact of new knowledge on the production function
of a firm or nation. The content and source of that knowledge
is not a theoretical concern; what matters is its mathematical
impact on the production function.
Over the last hundred years, depending on the study, something
like 25% of growth in national income is measurably attributable
to changes in the quantity and quality of capital and labour
while 75% is the residual Solow attributed to technological
change. Yet we have no idea of why some things are invented and
others not; and, why some things are successfully innovated and
brought to market and other are not. The Solow Residual is
known in the profession as ‘the measure of our economic
ignorance’. It is why I became an economist.
The effects of technological change in the orthodox model can be
broken out into two dichotomous but complimentary categories:
disembodied & embodied and endogenous & exogenous technological
change.
Implicitly disembodied technological change dominated economic
thought since the beginning of the discipline. It refers to
generalized improvements in methods and processes as well as
enhancement of systemic or facilitating factors such as
communications, energy, information and transportation
networks. Such change is disembodied in that it is assumed to
spread out evenly across all existing plant and equipment in all
industries and all sectors of the economy. It is what
Victorians would have called ‘Progress’.
Also implicitly, the concept of embodied technological change
traces back to Adam Smith’s treatment of invention as the result
of the division and specialization of labour (1776). It refers
to new knowledge as a primary ingredient in new or improved
capital goods. The concept was refined and extended by Marx and
Engels (1848) in the 19th and by Joseph Schumpeter in the 20th
century with his concept of creative destruction (1942). No
attempt was made, however, to measure it until the 1950s (Kaldor
1957; Johansen 1959). And it was not until 1962 that Solow
introduced the term ‘embodied technological change’ into the
economic lexicon, and by default, disembodied change was
recognized (Solow May1962).
Formalization of embodied technological change arguably emerged
out of ‘scientific’ research and development (R&D) during the
Second World War followed by the post-war spread of organized
industrial R&D. This demonstrated that new scientific knowledge
could be embodied in specific products and processes, e.g.,
the transistor in the transistor radio. Conceptual development
of embodied technological change has, however, “lost its
momentum” (Romer 1996, 204). Many theorists, according to Romer,
have returned to disembodied technological change as the
force locomotif of the economy meaning: “Technological
change causes economic growth” (Romer 1996, 204).
While embodied/disembodied refers to form, endogenous and
exogenous refers to the source of technological change. The
source of exogenous technological change is outside the economic
process. New knowledge emerges, for example, in response to the
curiosity of inventors and pursuit of
‘knowledge-for-knowledge-sake’. Exogenous change, with respect
to a firm or nation, falls from heaven like manna (Scherer 1971,
347).
By contrast, endogenous technological change emerges from the
economic process itself - in response to profit and loss. For
Marx and Engel, all technological change, including that
emanating from the natural sciences, is endogenous. Purity of
purpose such as ‘knowledge-for-knowledge-sake’, like religion,
was so much opium for the masses cloaking the inexorable
teleological forces of capitalist economic development. The
term itself, however, was not introduced until 1966 (Lucas 1966)
as was the related term ‘endogenous technical change’ (Shell
1966).
Endogenous change is evidenced by formal industrial research and
development or R&D programs. It therefore includes what are
usually minor modifications and improvements – tinkering - to
existing capital plant and products called ‘development’
(Rosenberg & Steinmueller 1988, 230). In this way industry
continues the late medieval craft tradition of experimentation.
R&D varies significantly between firms and industries. At one
extreme, a change may be significant for an individual firm but
trivial to the economy as a whole. On the other hand, ‘enabling
technologies’ such as computers or biotechnology may radically
transform both the growth path and the potential of an entire
economy. How to sum up the impact on the economy of the
endogenous activities of individual firms remains, however,
problematic.
With respect to the Nation-State, endogenous and exogenous
technological change has a different meaning. They refer to
whether the source is internal, i.e., produced by
domestic private or public enterprise, or external to the
nation, i.e., originating with foreign sources.
Furthermore, in the 1980s
a ‘New
Economic Geography’ arose inspired by the work of Nobel Prize
winning economist Paul Krugman (Martin & Sunley 1996). A
central feature is the ‘industrial cluster’ such as ‘Silicon
Valley’. While economies of scale and scope are available
within a single firm, external economies are available only
outside. High tech firms operating in the same sector benefit
from physical proximity. Such clusters, in turn, crystallize
around the University as a nucleating agent or prime attractor.
The success of Government sponsored ‘clusters’, however, remains
problematic.
A key industrial example of the role
of the University as an exogenous source of technological change
is biotechnology. With the decoding of DNA a new enabling or
transformative technology was unleashed. Its leaders are
generally University-based (Zucker et al 1998, 293). It
is they who take new knowledge and commercialize it. It is they
who attract the best students. Often they establish new firms
within an existing cluster or start a new cluster with the
assistance of the University which shares in patent royalties.
Many new biotech firms are in fact founded with the intent of
selling them to large established firms (Arora & Gambardella
1990, 362).
Non-Linked References
Gibson, W., Neuromancer, Ace, 1984;
Count Zero, Arbor House, 1986, Mona Lisa
Overdrive, Bantam, 1988; Virtual Light, Bantam,
1993. Pattern Recognition, Berkley, 2003.
Holbrook, M. B., E. C. Hirschman, “The Experiential
Aspects of Consumption: Consumer Fantasies, Feeling, and Fun”, Journal
of Consumer Research, September 1982.
Holbrook, M. B., “Progress and Problems in Research on
Consumer Esthetics”, in Artists and Cultural Consumers, D. Shaw,
W. Hendon and C. Richard Waits (eds), Association for Cultural
Economics, University of Akron, 1987.
Johansen L., “Substitution Versus Fixed Proportion
Coefficients in the Theory of Economic Growth”, Econometrica 27
(2), 1959, 157-76.
Kaldor, N., “A Model of Economic Growth”, Economic
Journal, 67 (268), Dec. 1957, 591-624.
Lucas, R. E. Jr., “Tests of a Capital-Theoretic Model of
Technological Change”, Review of Economic Studies, 34 (2) April
1967, 175-189.
Romer, P.M., “Why, Indeed, in America? Theory, History,
and the Origins of Modern Economic Growth”, American Economic Review,
86 (2), May 1996, 202-206.
Rosenberg N. & Steinmueller W. E., “Why are Americans
Such Poor Imitators?”, American Economic Review, 78 (2), May
1988, 229-234.
Scherer, F. M., Industrial Market Structure and
Economic Performance, Rand McNally, Chicago, 1971.
Shell, K., “Toward A Theory of Inventive Activity and
Capital Accumulation”, American Economic Review, 56 (1/2), Mar.
1966, 62-68.
Solow, R. M., “Technical Progress, Capital Formation and
Economic Growth”, American Economic Review, May 1962, 52 (2),
76-86.
Zucker, L. G. et al, “Intellectual Capital and the Birth
of U.S. Biotechnology Enterprises”, American Economic Review,
March 1998, 88 (1), 290-306.
Observation #10: Common Natural Resource Treaties
The first multilateral agreement is the
UN Convention on the Law of the Sea open for
signature in 1982. Before this convention Freedom of the
Seas historically limited national
sovereignty to 3 miles from the coastline of a Nation-State. This
was the distance a cannonball could fly in the 17th & 18th centuries.
Beyond that limit was the open seas belonging to everyone but no one.
With the Convention and its subsequent amendments the legal limit is
now, in simple terms, 12 miles from the coast and/or to the edge of the
continental shelf plus a 200 mile exclusive economic zone. This
allows coastal states to manage resources within the zone including
marketable fishing quotas ideally based on the best available scientific
evidence concerning sustainablity of the fish stock and historical
practices in different fishing communities. Once established such
marketable quotas can be bought and sold. If a fisher finds
business unprofitable, for whatever reason, he or she can sell the quota
to a more willing and efficient fisher. The overall quota remains
the same, the number of firms declines but average cost per unit goes
down, ideally to a socially optimal price/quantity. The convention
also set up the International Seabed Authority (ISA) to regulate deep
sea mining ventures outside each nations’ Exclusive Economic Zone. One aspect of the extension is that landlocked
Nation-States are to receive a royalty from the mining of such CNRs.
The second agreement is the
UN Convention on
Biodiversity
opened for signature at the Earth Summit
in Rio de Janeiro in 1992.
The Convention has three main goals: (i) conservation of biodiversity;
(ii)
its sustainable use; and,
(iii) equitable sharing of benefits. The Convention recognizes
that each Nation-State has property rights over all genetic resources
within its territorial limits.
In
response countries have increasing sought to protect their biological
resources. India, for example, is putting together a 30-million-page
electronic encyclopedia of its traditional medical knowledge (as well as
yoga positions). Ancient texts in Arabic, Bengalis and Sanskrit are
being translated into five global languages - English, French, German,
Japanese and Spanish - in an effort to establish ‘previous art’ and
prevent others from claiming intellectual property rights (Biswas
2005). Brazil, on the other hand, is tightening enforcement of its
CBD rights and has, for example, sentenced Marc van Roosmalen, a
world-renowned primatologist, to 16 years in prison for ‘biopiracy’ (Rohter
2007).
His crime: illegal export of monkey poop!
The third, and best known, multilateral
agreement, is the
1997
Kyoto Protocol to the 1992
United Nations
Framework Convention on Climate Change opened at the Rio or Earth
Summit.
Its objective was to stabilize greenhouse gases,
especially carbon dioxide, to maintain current 'normal' temperature distribution around the world.
The Protocol established quotas for Member States of the
First World, reduction targets, emissions trading and other quasi-market
mechanisms. As with land locked countries with respect to deep-sea
mining under the Law of the Sea Convention, Third World countries
benefit by First World investment in Third World `green` energy projects
thereby offsetting quota obligations. From 1997 India (Third
World) and China (Second World) were exempt from obligations to reduce
their own emissions. At the Paris climate conference (COP21),
December 2015, 195 countries adopted the first-ever universal, legally
binding global climate deal. Tradable quotas remain part.
If a participating country comes in over its quota it
must buy part of the quota of another Nation-State that has come in
under its quota, or as noted above, invest in Third World projects.
Thus CNR property rights now exist by legal alchemy that can be bought
and sold in markets. Some countries, especially members of the
European Union, in turn, divide up their national quota into marketable
permits auctioned off to industries generating green house gases.
Companies compete among themselves. If a firm exceeds its
permitted output it must buy quota not used by another firm. A
financial incentive is created to reduce green house gas emissions.
In all three cases, Law of the Sea, Biodiversity and Climate,
Nation-States have created legal property rights allowing a market
driven by financial incentives to conserve CNR and, ideally, achieve a
socially optimum price/quantity outcome. How successful such
markets have been is the subject of much debate. It is important
to note that the United States has not ratified any of the three above
mentioned treaties.
The fourth is the 2003
UNESCO Convention on Intangible Cultural Property.
Intangible cultural property refers to the
cultural patrimony of Fourth World tribal, aboriginal peoples or what in
Canada we call the First Nations. Such patrimony tends to be oral, hence
intangible, and is not subject to fixation and other IPR requirements as
noted below iii. Knowledge Commons.
This includes their TEK – traditional ecological
knowledge. Furthermore protection of such 'property' varies dramatically
between Fourth World Peoples.
It also has no individual creator or Person,
natural or legal, traditionally required under Anglosphere Common Law &
Equity and the European Civil Code tradition. Accordingly they
have had no 'legal standing' in court because they are not Persons.
An apocryphal example of appropriation is the alleged mid-1980s case of
the thunderbird motif used by the Kwakiutl people of west coast Canada.
Kwakiutl women knitted woolen sweaters using this design for almost a
hundred years. A pair of Japanese businessmen saw the sweaters on a tour
and promptly mass produced them for sale in Asia. Apparently over $100
million in sales were made. Not a penny was returned to the Kwakiutl
people. And because such images are considered to be in the public
domain the Kwakiutl had no standing in court to seek damages and
compensation for the appropriation of their cultural property for the
profit of others. The UNESCO Convention recognizes that Fourth World Aboriginal Peoples
own their Cultural Patrimony. It leaves it to individual Nation-States,
however, as to how such property is protected. It is important to note
that Canada, Russia and the USA did not sign nor ratify the 2003
convention.
Observation
#11: The Knowledge Commons
As noted in my "Ten
Ways to Know the Knowledge-Based Economy", it is appropriate to consider the different forms knowledge may
take. Form, according to Francis Bacon, is “the real or objective
conditions on which a sensible quality or body depends for its
existence” (OED, form, n, 4 c). There are three material forms or
matrixes into which knowledge is fixed. These include:
Codified with meaning fixed in
a matter/energy matric;
Tooled with function fixed in
a matter/energy matrix; and,
Personal with thought, memory and reflexes fixed in neurons, nerves and
muscles
of the flesh and blood Natural Person.
Codified
knowledge is fixed in an extra-somatic (Sagan 1977), i.e., out-of-body,
matrix as meaning. Sagan considers such knowledge, figuratively, the
third strand of human DNA. Sender and receiver must share the code if the
message is to convey meaning from one human mind to another. Furthermore, the
physical communications media into which codified knowledge is
fixed (in the case of copyright but not registered industrial design and
trademarks) has no function other than to communicate meaning, i.e.,
the matrix is non-utilitarian. For example, a book may be a good read
but makes a poor door jam, or similarly, a CD may yield beautiful music
but serves as a second-rate coaster for a coffee cup.
Tooled
knowledge, on the other hand, is also fixed in an extra-somatic matrix
but as function. Unlike a work of art that is appreciated for what it
is, a device or process is valued for what it can do, i.e., the matrix
into which knowledge is fixed has utilitarian function. Tooled
knowledge takes two forms – hard and soft. Hard tooled knowledge is the
physical instrument or process that manipulates matter/energy.
Thus a
scientific instrument's tooled knowledge extends the human reach and grasp
far beyond the mesoscopic level of daily life to the micro- and
macroscopic worlds of electrons, quarks, galaxies, the genomic blueprint
of life, et al. To see and manipulate matter/energy in such unseen,
unreachable spaces and places our tools must go where no human can. They
generally report back in numbers (digital) converted into graphics
(analogue) to be read by the human eye. Modern scientific observation
thus involves an almost cyborg-like relationship between a Natural Person and an
instrument. This constitutes ‘Instrumental Realism’ (Idhe 1991). It
provides what Galileo called ‘artificial revelation’ (Price 1984).
Soft tooled
knowledge, on the other hand, refers to standards, e.g., 110 vs. 220
volt, as well as programming software, operating instructions and
manual techniques to optimize performance. In effect, tooled knowledge
is the physical technology by which humanity enframes and enables Nature
to serve its purpose (Heidegger
1954). That tooled knowledge exists is demonstrated
by the common industrial practice of reverse engineering.
Personal
knowledge is fixed in a Natural Person as neuronal bundles of memory and
reflexes of nerve and muscle, e.g., of the athlete, brain surgeon,
carpenter, dancer, sculptor or technician. In this case, the matrix is a
Natural Person. Some personal knowledge can be codified; some tooled;
but some inevitably remains ‘tacit’, i.e. inexpressible yet sometimes
visible in performance (Polanyi Oct 1962). Ultimately, however, all
knowledge is personal (Polanyi 1962). Without a Natural Person to decode
a work or push the right button codified and tooled knowledge remain
sterile artifacts without meaning or function. And, of course, books,
computers and corporations can’t ‘know’ - only the Natural Person.
Observation #12:
Public Choice
State intervention in the economy has been a
controversial question in the Anglosphere (English-speaking, Common Law
& Equity
countries) for centuries. The 1624
Statute of
Monopolies was, metaphorically, the economic equivalent of the 1215 Magna Carta
freeing the English economy from the royal prerogative. It
declared all domestic industrial monopolies to be illegal. Until
then the monarch of the day could, arbitrary, grant in the form of
letters patent, a domestic monopoly in, for example, playing cards or
salt to whomever the monarch might favour. There were
three exceptions.
The first was the monarch's continuing right
to grant what today we call a patent
covering
“any manner of new manufactures within
this Realm to the true and first inventor” but such patents of invention
could not be “contrary to the law nor mischievous to the State by
raising prices of commodities at home or hurt of trade”. In Law
the monarch retained the prerogative to grant industrial patents until
the Patent Law Amendment Act of 1852
when parliamentary statute and Common Law
displaced the royal prerogative. Until then patents were handled by law
officers of the monarch exercising the royal prerogative.
In the United States the first Patent Act was
passed in 1793.
The second exception was
the Stationers’ Company of London’s
perpetual copyright as well as royal printing and performing patents. Parliament displaced the royal copyright
prerogative with the first so-called modern copyright act - the
Statute of Queen Anne in 1710. With respect to licensing theatres and plays the
Lord Chamberlain, the highest official in the royal
household acted as stage censor exercising the royal prerogative until displaced by Parliament's
Theatres Act of 1968.
The third exception was overseas or trading monopolies such as Charles II's
1670 charter
grant to the Company of
Adventurers of the Hudson Bay, a.k.a., the Hudson Bay Company.
It also included the 1600
Charter of the East India Company whose efforts to monopolize retail
trade in tea along the Atlantic coast of what is now the United States led
to the Boston Tea Party and hence to the 1776 American Revolution (Nace
2005).
It was continuing royal grants of industrial
privilege, a.k.a., monopolies, of which
Adam Smith complained in his 1776 On the Wealth of Nations.
Thus, unlike now, in Smith's time there were two centres of political
power - the elected Parliament and the Monarch who retained selected
economic prerogatives. Particularly the later led to political
power being converted into economic power that in turn was converted back
into political power in a vicious circle.
In effect Smith called for separation
of political and economic power. While Smith was also well aware
of the collusive tendencies of business (see
Oligopoly, ii - Collusion) he nonetheless
believed in the overall efficacy of the free market as well as the need
for public works to support it.
The question of market
driven monopolies first arose during the
1870s at the height of the Industrial Revolution. In the guise of
cartels, combines, trusts, etc. American Robber
Barons such as Andrew Carnegie (steel), J. P. Morgan (banking), John D.
Rockefeller Sr. (oil), Cornelius Vanderbilt (railways & shipping), et
al monopolized entire sectors of the economy. The cost
to the public was very high and finally in 1890 the U.S. Congress passed
the
Sherman Antitrust Act. It prohibits anti-competitive
activities including all combination of firms fostering monopoly.
The power of these Robber Barons can be seen in the
banking and finance industries. Thus a series of financial crises racked the
United States in the mid- to late 1800s climaxing with the 1907 Panic
known as the
Banker’s Panic. It led to runs on all banks and the entire
financial system appeared near collapse. A white knight appeared,
however, in the guise of financier J. P. Morgan, one of the richest men
in America. Organizing other New York bankers and industrialists like
John D. Rockefeller – the richest man in America - Morgan pledged
enormous sums of his own money to stabilize the financial system.
While many in industry and government
praised Morgan for his initiative many were gravely concerned that the
fate of the nation’s finances rested on self-interested private charity.
Accordingly in 1908 Senator Nelson W. Aldrich established and chaired a
commission to investigate and propose solutions. This led to creation of
the Federal Reserve System in 1913. This was also the period during
which the perfect competition and monopoly models were developed
by
Alfred Marshall.
Since that time most Nation-States have adopted Competition
Policy to thwart monopoly whether the stand alone firm or oligopolistic
cartels. In effect public policy tries to direct oligopolistic
markets as well as pure monopoly towards a
perfectly competitive price/quantity outcome. Globalization, however, has shifted the
focus of Competition Policy from the domestic market of individual
Nation-States to the global marketplace. Many Nation-States in
fact now encourage domestic monopolies in order to reach minimum optimum
scale and compete on behalf of the Nation-State in global markets. Brazil
(Embraer) and Canada
(Bombardier) are two such countries with respect to airplane
manufacturing.
In 1995 the
World Trade Organization (WTO) began
operations and a new global economy was born. Today, virtually all
member states of the United Nations (UN) belong. Put another way, global
regulation of political and military competition by the UN beginning in
1945 was extended to global regulation of economic competition by the
WTO fifty years later. This was possible only because of the triumph of
the Market over Marx.
For the first time virtually all Nation-States agreed to
abide by common rules of trade recognizing the WTO as final arbitrator
of disputes and authorizing it to sanction countervailing measures
against offenders of its rules. Given the historical role of trade
disputes fueling international conflict, the WTO compliments the UN as a
bulwark of international peace, law and order. It is underpinned,
ideologically, by the Standard Model of Market Economics.
As a multilateral instrument, the WTO is a ‘single
undertaking’, i.e., it is a set of instruments constituting a single
package permitting only a single signature without reservation. One of
these instruments is the
Trade-Related Intellectual Properties and
Services Agreement (TRIPS) that constitutes, in effect, a global treaty
on trade in knowledge, or more precisely, in intellectual property
rights (IPRs) such as copyrights, patents, registered industrial designs
and trademarks. TRIPS, however, is only one part of a complex WTO
package that includes the General Agreement on Tariffs and Trade (GATT)
and twenty-six other agreements.
The benchmark in all cases is the Standard Model of
Market Economics. Put another way, it is the last ideology
standing. Nonetheless, there is ongoing dispute within Economics
about its public policy implications. In the case of monopoly and
the collusive practices of oligopoly there is, arguably, a general consensus that
public intervention is appropriate. With respect to Equity, Externalities and Public Goods,
however, there is dispute.
The dispute is most evident at the macroeconomic
level dealing with the role of government in the economy as a whole.
In very simplistic terms there are at least three schools of thought.
First, there are the Keynesians (followers of
John Maynard Keynes). They believe that the State should play
an active role correcting market failure plus increasing
spending during recessions and depressions. Essentially they
believe the State should compensate for the failure of the market system
to generate full employment as well as take other actions justified by Equity,
Externalities or Public Goods. Second, there are followers
of
von Hayek and
von Mises
the so-called Austrians or Austerians
who argue: Let the market do it! In the case of
recessions and depressions they believe the State should not intervene
but rather let the market clean out inefficiencies through firms exiting
industries and consumers tightening their belts. Equity should not concern
government and except for extreme cases of Externalities the State
should similarly not be concerned. With respect to Public Goods,
other than national defense, they believe that if
consumers are willing to pay then providers will be
willing to supply. If a sufficient number are not willing to pay,
for example, because of the 'free rider' problem, it is not profitable
for suppliers then there will be no provision, no market and people will
get what they paid for - nothing.
Third, there is the school of
Rational Expectations that argues any State intervention will be
'gamed' by firms and consumers resulting in high costs to government
with limited if any impact on the economy. Therefore the State
should take no action.
Whether to intervene, however, is not just an economic but also a political
decision and "[a]s
the economist Albert Hirschman
emphasized, the policymaking process is by its nature messy...
"
(Mazzucato, 2015).
In what follows the
economics of democracy are overviewed based on extending constrained
maximization of the Standard Model to political actors, i.e.,
What is the objective function of each actor and
under what constraints do they operate?
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