The invisible hand and central planning

I have not read Adam Smith and it may be that his metaphor has been extended beyond the original intention; yet the invisible hand is frequently used in the context of free trade, with the suggestion that government leave alone.

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

Freedom of trade in general leads to greater economic prosperity than that of a centralised economy: the invisible hand guides better than the economic planner.

I agree with this is general. It seems, however, that the metaphor implies that a less informative process is more productive than a more informative one; that a planner is less productive than no planner.

The thing is that there is planning, it is just that it is extended to all the buyers and sellers in a marketplace. All those minds making decisions about their economic options contain a vast wealth of information; more information than any group of planners could have. It is not an invisible hand that guides, it is an invisible collective knowledge that decides.

Patents and price setting

A conversation with my pastor got me thinking about how we treat patents. He is more socialist minded than I. In defence of his position he used a patented medical product as an example of what he considered excessive markup within the market. The problem as he saw it was that people would mortgage their homes to purchase medications if it would potentially cure them, or stave off death for some time.

Now one could argue for the market based on the fact that the company has invented a cure that was not previously available; without the company the cure would not exist. So perhaps they should be allowed to charge what they will. And people are willing to pay large sums of money for medical promises that are known to provide no benefit. Health is a difficult area. One could argue for some federal involvement or oversight because health is an area that people are forced into (sickness is not usually a choice), and they often make decisions in a vulnerable state. Perhaps an issue for another time.

Nevertheless, the discussion got me thinking. Arguing for the free market using patented products has one on the back foot. Competition and productivity allow for low prices for consumers and wealth creation. Patents interfere with this mechanism.

Patents apply to intellectual property, which is not property at all. A better argument for patents (and copyright) is that the government allows a temporary monopoly to sell in acknowledgement that the person created the concept. Such reasoning for patents has some merit. If we accept this however, we are appealing to the government to enforce our monopoly. This raises the question as to whether the government can also have a say on the conditions of monopoly.

I think an argument can be made that allows the government to set minimum sales figures and maximum prices. The first is to prevent artificial scarcity, driving demand by intentionally limiting supply, a supply that cannot be made up by competitors. The second to limit profiteering, especially of a product that is excessively desirable such as a cure for cancer.

Now one could argue (as above) that these products would not exist if it were not for their inventors, and people are no worse off if such an item does not come to the market than they were prior to the invention. This is not necessarily the case however. People are creative. It is likely that several people would occasionally invent similar things to solve a problem. Here are a couple of situations.

The first is software. There seem endless patents in software for ideas that many programmers would solve given a problem. It seems that many patents are little more than a race to state (code) the obvious. There is true innovation, but not all of it is. If several programmers come up with a solution independent of each other and are hit with patent infringement, perhaps it wasn't that innovative.

The second is biomimetics. Many ideas arise from imitating an idea derived from the living world. Think velcro, though there are many others. Copying design from the living world has led to a plethora of new creations. Of course such activity still requires much research and subsequent experimentation. But again this is a race to copy more than be innovative. If several researchers copy the same part of an organism to create a similar machine or product, the first there gets all the benefit.

Some ideas arise from a single person and may be unlikely to arise in the near future otherwise. Our situation is not really different after such a product becomes available but prohibitive to acquire than what it was before that person invented it. However consider when similar ideas arise frequently. Our situation may improve as useful products become available and competition lowers price. But if the right to production limited to the first person to register it then the consumer fails to gain these benefits because other creators who are prepared to make and sell the product are prohibited from doing so. The monopolist may price the product significantly above production cost and outside the price range of many people, yet others who arrived at the idea independently and who are prepared to sell marginally above cost are prevented from doing so by law.

If we are to have a state enforced private monopoly for creativity via patent and copyright law then perhaps the state can dictate the conditions of the monopoly. Such a position would mean that creators could either patent or not patent a concept. If they choose not to patent they can sell the quantity they wish and charge what they will with the benefit of being the first to the market and the ability to maintain secrecy. Competitors would need to reverse engineer a product then copy it as best they can. If the creators choose instead to patent their concept then they gain a temporary monopoly enforced by the state but must sell a minimum number of products at a fixed price (or markup), both set by the state.

How to give away $500 million

Forbes has an article on David Green, a billionaire who has bankrolled the popular youversion app.

Much of his philanthropy is directed at distributing biblical literature,

Through foundations he supports, he has already distributed nearly 1.4 billion copies of Gospel literature in more than 100 countries, mostly in Africa and Asia. The OneHope Foundation targets children age 4 to 14 with Scripture tailored to them, while Every Home for Christ sends evangelists with Bible booklets door-to-door in some of the poorest countries on Earth.

The temptations of wealth are significant, and one should not seek the world in exchange for his soul (Matthew 16:26). But what if you seek the kingdom and in the process God blesses you with wealth. There are several biblical examples such as Abraham, Job and Solomon. There are moderns such as George Muller. A well known New Zealand example was Robert Laidlaw.

Interesting read and Green gives some useful advice.

Myths of privatisation

I am a fan of privatisation for several reasons, not the least being that I think that private companies tend to be less wasteful, more productive, and if they fail the taxpayer isn't called to bail them out, let alone continue to fund them indefinitely. I also do not think it is the government's mandate to run most companies.

Roger Kerr has a good article discussing what he considers are false beliefs held by many opposed to privatisation of public companies. These are the 8 myths he discusses:

1. Privately owned businesses consistently outperform publicly owned businesses.
2. Privatisation is ideological.
3. Privatisation is needed to reduce debt.
4. The government should own SOEs [State Owned Enterprises] because it has a lower cost of (debt) capital.
5. SOEs were sold too cheaply.
6. Privatisation leads to more foreign control over New Zealand.
7. The government loses financially from privatisation because it forgoes dividends.
8. Air New Zealand is a good model for the government’s partial privatisation approach.

Myth 2 is interesting as even proponents of privatisation may think this. Kerr argues it is in fact pragmatic.

Myth #2 Privatisation is ideological. To the contrary, it is pragmatic: it (generally) works. When the Thatcher government embarked on privatisation in the 1980s, some regarded it as a leap of faith. It was not a popular policy to advance but was supported when the benefits became clear.

As a British minister said, “facts overtook the debate.”

The genuinely ideological argument is the reverse: the Marxist attachment to “public ownership of the means of production, distribution and exchange.”

Of course it could be both. An ideal system can be the best system if the underlying ideology is basically correct.

Public or private environmental conservation?

I mentioned that government involvement (or oversight) in conservation can potentially be a hindrance. Roger Beattie re-established weka in an area they had previously disappeared from, but he was struggling to farm them for food because of their endangered status.

Beattie has brought back weka from the Chatham Islands since 1994, with Department of Conservation (DOC) consent, and has settled the birds in a predator-proof enclosure.

He now plans to tackle the rules that protect buff weka on the mainland. "It's a process and could take five years, but I am going to enjoy the challenge of speeding that up," he said.

DOC believes Beattie's proposal raises questions, and the department may need legal advice.

Buff weka disappeared from the South Island in the 1930s. However, a population was established on the Chatham Islands.

...Beattie is the country's biggest individual wild paua-quota holder and a paua-pearl industry advocate. He also harvests sea kelp from Akaroa Harbour and wants to commercialise the pest seaweed undaria.

Beattie believes conservation and business go hand-in-hand. He said if there was money to be made from an endangered species, it would never die out.

Beattie said DOC's control of bird species created a protracted permit process that strangled entrepreneurial enthusiasm.

I think Beattie's comments about conservation and business are on the mark. The qualifier being that commercial interests need to produce their product, not find it, sell it, and move on. Breeding endangered plants for ornaments or construction; or endangered animals for pets, pelts, or palate, is probably the quickest way to remove them from endangered status.