Part 3 of a Discussion of Peter Foster’s Why We Bite the Invisible Hand Chapter 8 “Do-It-Yourself Economics”
Last blog, I covered how Foster delved into many of the cognitive biases that interfere with our ability to understand modern economics.
Now, I want to focus on one cognitive bias I have discussed before: Malthusian thinking.
At its core is zero sum thinking — that there is a “fixed pie” of resources — ignores the possibility that we can make the pie grow.
And if the pie is growing, so is our share: 5% of a bigger pie is more than 5% of a smaller pie. In some cases, 5% of a bigger pie is more than 7% of a smaller pie.
Today, of all our primitive anti-economic institutions, that of zero-sum mentality may be among the most pervasive, and the most potentially damaging to wealth and freedom. (p. 173)
Why do we suffer from this thinking? Foster suggests it comes from primitive times when it was time to divide up the carcass.
Throughout most of human history, and for all non-human social carnivores, the division of a collectively hunted carcass was a fundamental form of collective activity. This led to the evolution of hierarchies — authority ranking…to prevent intra-pack or intra-tribal conflict. (p. 173)
The carcass was a limited resource that could not be stored. It made sense to share it with others to build relationships because those who “earned it” could not use it all for themselves anyway.
The Bias Against Profits
Today though, income derived in a modern economy has moved beyond physical limits. Industrialization is the application of technology and innovation to our resources to massively grow our output. (p. 173)
We do have a growing pie, but many have their minds stuck in the fixed pie mentality.
And a fixed pie mentality is suspicious of profits because someone earning profits must be taking that from someone else. Instead what that shows is a lack of understanding of the value added from innovation and organization that make the pie grow. (p. 173)
A key to understanding our modern economy is the idea of mutual benefit. I have something you want more than the money you have, and I want the money you have more than the thing I am selling. We both benefit from the transaction; I did not rip you off.
The terrible scourge of stakeholder capitalism that is afflicting us today is based on this fixed pie idea. Surely the profits the corporation earned must be at the expense of workers, vendors, customers, and the environment. (p. 173) Thus, we must force some profit extraction from the businesses to pay for it.
Businesses are in the business of making money so they will not willingly do things that will hurt their reputation. They will look to minimize costs as a part of maximizing profits, but if they make decisions that cause accidents that hurt the community and environment, they face the cost of clean up and reputation damage.
In any sensibly managed company, the long term interests of shareholders, customers, suppliers, employees, and communities have to be carefully managed; but they are not ultimately conflicting, they are coexistent. (p. 174)
The Scourge of Depletionist Thinking
In addition to suspicions surrounding profits, the fixed pie thinking drives other erroneous thinking like resource depletion, overpopulation, and over-consumption that lie at the heart of the sustainable development movement. (p. 174)
Some wonder why the depletionist mentality is not eradicated by the sight of the mounting cornucopia of capitalist production and resource creation. In fact, the greater the use of resources, the more convinced depletionists become that the day of reckoning has merely been postponed, and that it will be all the more terrible when it arrives. (p. 175)
And that is what we see with this primitive thinking — evidence it is wrong does not make it go away.
Foster notes it is difficult for us to comprehend the size of the world, and thus the amount of resources, because hunter-gatherers lived in small, localized worlds. (p. 174)
He says that the reaction to the first pictures of the earth from space reveals this thinking.
They were seen as confirming how small and finite the earth was, rather than how immense and full of limitless potential when combined with market innovation. (p. 174)
There was no “limitless potential” or “market innovation” in the days of hunter-gatherers so we do not seem to have that in our minds as an option naturally.
The economist Paul Romer writes, “Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered.” (p. 179)
Those pushing a depletionist mindset reveal their lack of understanding of market innovation and a lack of faith in the outcome of a decentralized market process, what we call the Invisible Hand. (These are two of the do-it-yourself-economics mistakes we make discussed in the blog linked at the top.)
Instead, they too often have an authoritarian plan in mind.
They present themselves as being more moral as demonstrated by their concern and yet, “typically, there was an unreflecting authoritarian centralist standing behind the moralist.” (p. 176)
The Fear of New Technology
Today’s concern about AI is another example revealing our failure to grasp the potential of the new ideas and jobs that it will generate, and instead the focus is on the fixed pie of how many jobs will be lost. (p. 179) Every time a new technology is adopted, the people fear an inevitable rise in unemployment.
The term, luddites, is used today for someone who is resistant to adopting new technology. It comes from a rebellion by British textiles workers in the late 1700s who destroyed mechanized looms that threatened their jobs.
Fear of technology killing jobs is nothing new. Yet every time we have seen more jobs created than destroyed. Yes, some jobs are lost, but new products and services are born, and the standard of living for all rises.
New industrial technologies are almost invariably labor saving, but the experience of the past 200 years is that the labor so released is always absorbed by the work emanating from new technologies, products, and services. The supply of employment-creating ideas seems endless. (p. 179)
The Focus on Income Inequality
Finally, Foster discusses the focus on income inequality as coming from a combination of the immense wealth capitalism generates with the “zero-sum carcass assumptions.” (p. 179)
If you think that people can only get wealth by taking it from someone else, then it seems unfair when someone has a huge share.
If wealth was fixed like a carcass, then envy about someone having more than their “fair share” makes sense.
However, wealth is more like a growing carcass so that everyone has more than they would have had if not for the innovation that made some people very wealthy.
In fact, what the wealthy in a capitalist society are “guilty” of is not taking too much, but creating too much. Did Beethoven take more than his fair share of musical fame? Are bestselling authors accused of greed for taking “too much” of the book market?…How can somebody take too much of something they have created themselves, albeit in the case of entrepreneurs and capitalists with the help of voluntary labor, and by standing on the shoulders of their myriad innovative predecessors? (p. 182)
Foster notes that 70% of the Forbes 400 list in 2012 had built their wealth themselves. The rest did inherit it from previous generations that had built corporate wealth earlier. (p. 182)
They couldn’t have built those fortunes without creating for their shareholders and communities, so how could their wealth be a source of concern? (p. 182)
I think a lot of the focus on income inequality is envy. I have never envied the wealth of those who have built their fortunes because I know how hard they work. They choose to put in more hours at work than I am willing to because I have other priorities. To then begrudge them their money I was not willing to sacrifice for makes no sense to me.
True, those who inherited the wealth are in a different category. But you can always find someone who was born with advantages you don’t have. There is always someone smarter, taller, thinner, richer, but bathing yourself in envy is no way to live.
“A heart at peace gives life to the body, but envy rots the bones.” Proverbs 14:30
Foster concludes this chapter,
In the vast majority of prehistory and history, relative wealth was indeed usually a reflection of political oppression and theft. But today, just as the Western rich are no longer “expropriators” (except when bailed out by governments, or when they get rich through government favors), so the relatively poor can arguably make no moral claim on a share of what they have not earned. (p. 183)
Next chapter Foster delves deeper into the idea of the Invisible Hand which extols the power of the free market and its many critics that prefer the intervention of government.
Reference: Foster, Peter, 2014. “Do-It-Yourself Economics” Chapter 8 of Why We Bite the Invisible Hand, Pleasaunce Press.
