Tag Archives: economics

genuine progress indicator

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Vermont is going to have a go at the Genuine Progress Indicator, a GDP alternative:

Estimating the GPI begins with household consumption, the major component of Gross Domestic (or State) Product (GDP), followed by twenty-four separate adjustments including:

  • Additions for benefits not included in GDP, for example the values of volunteer and household work, and non-market benefits from the services of forests (e.g. water purification) and wetlands (e.g. buffer storm events);
  • Deductions for depletion of our environmental assets, harm to human health, costs of underemployment, and loss of leisure time; and
  • Adjustment for the distribution of income received by citizens, more accurately measuring the ability of the economy to provide for all.

The website explains in detail how the calculations are done.

more on corporate social responsibility

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Just thinking some more about yesterday’s post on the profit motive and shareholder value as the only responsibilities of business. I remembered a recent interview with Noam Chomsky where I thought he explained very well why profit maximizing entities do not automatically serve the greater good:

In market systems, you don’t take account of what economists call externalities. So say you sell me a car. In a market system, we’re supposed to look after our own interests, so I make the best deal I can for me; you make the best deal you can for you. We do not take into account the effect on him. That’s not part of a market transaction. Well, there is an effect on him: there’s another car on the road; there’s a greater possibility of accidents; there’s more pollution; there’s more traffic jams. For him individually, it might be a slight increase, but this is extended over the whole population. Now, when you get to other kinds of transactions, the externalities get much larger… Destruction of the environment is an externality: in market interactions, you don’t pay attention to it. So take tar sands. If you’re a major energy corporation and you can make profit out of exploiting tar sands, you simply do not take into account the fact that your grandchildren may not have a possibility of survival — that’s an externality. And in the moral calculus of capitalism, greater profits in the next quarter outweigh the fate of your grandchildren — and of course it’s not your grandchildren, but everyone’s.

What makes the gospel of shareholder value so insidious is that it gives the human beings inside corporations a shield to hide behind – an excuse to not ask any questions about right and wrong in their daily actions. I think Milton Friedman has it right that a business corporation on paper is a completely amoral entity. Now it appears that business corporations are evolving and molding a whole new species of human beings in their image! As children we are taught to think about right and wrong every day, but then as adults we don’t have to any more. This is not human at all, and we can reject it – the managers and employees at the car companies and energy companies have a responsibility to think about right and wrong every day and to make choices that are consistent with what they think is right. If the only thing that is right is not working for that company, then so be it. Consumers can do the same. The political system can provide somewhat of an ethical framework for society from the top down, but we individual humans need to take responsibility for our daily actions and meet it halfway.

the gospel of shareholder value

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This article from the Boston Globe talks about the idea that maximizing profits and shareholder value (which hypothetically is the present value of all future profits) is the sole function of a corporation.

Experts on the history of business say the Market Basket saga is a window onto something deeper than a power struggle among the Demoulas clan that owns it. They see it as emblematic of a war over the future of the American corporation—what its purpose is, how it should be run, and whom it should be engineered to benefit. They argue that maximizing profit and shareholder value—an approach to running companies that drives investment on Wall Street and serves as the closest thing to modern management gospel—is only one way of defining corporate success, and a fairly new one at that…

Post and others argue that a well-run company can—and should—be managed in a way that benefits not just the investors who own its stock, but a wide range of constituents. As opposed to “shareholders,” they call these people “stakeholders”: a group that includes employees, customers, suppliers, and creditors, as well as the broader community in which the company operates, and even the country that it calls home. According to that view, Market Basket’s employees and customers are essential to the firm’s success and, thus, rightful beneficiaries of its prosperity.

It also links back to a 1970 Milton Friedman article in which he argued that it is unethical for a person employed by a corporation to try to be ethical on the company dime:

In a free-enterprise, private-property sys­tem, a corporate executive is an employee of the owners of the business. He has direct re­sponsibility to his employers. That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.

The main problem I have with this is that the ownership of corporations is so diffuse these days that it is almost impossible for shareholders to exercise any sort of ethical control. Many shareholders are large institutions that collectively have no motives beyond the profit motive, even if individuals among them are ethical. No, the only way for society as a whole to behave ethically is for the vast majority of individuals to consciously act ethically every day – be they shareholders, employees, or customers. I don’t see that happening today.

R and NetLogo

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I had never heard of Netlogo, which is a programming language for simulating and teaching agent based models. Agent-based modeling is important because it might be the key to real quantitative simulation in economics and the social sciences. You can keep drilling down into the links in this post from R-bloggers until you either run out of time or find out everything you want to know about it.

Lords of Finance

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Lords of Finance: The Bankers Who Broke the World

This book was kind of a hard read, but I’m glad I read it. My favorite part of the book was the last five pages, particularly these quotes explaining just how bad the Depression really was.

Anyone who writes or thinks about the Great Depression cannot avoid the question: Could it happen again? First it is important to remember the scale of the economic meltdown that occurred in 1929 to 1933. During a three-year period, real GDP in the major economies fell by over 25 percent, a quarter of the adult male population was thrown out of work, commodity prices fell in half, consumer prices declined by 30 percent, wages were cut by a third. Bank credit in the United States shrank by 40 percent and in many countries the whole banking system collapsed. Almost every major sovereign debtor among developing countries and in Central and Eastern Europe defaulted, including Germany, the third largest economy in the world. The economic turmoil created hardships in every corner of the globe, from the prairies of Canada to the teeming cities of Asia, from the industrial heartland of America to the smallest village in India. No other period of peace time economic turmoil since has even come close to approaching the depth and breadth of that cataclysm…

[The Great Depression was] a crisis equivalent in scope to the combined effects and more of the 1994 Mexican peso crises, the 1997-98 Asian and Russian crises, the 2000 collapse in the stock market bubble, and the 2007/8 world financial crisis, all cascading upon one and other in a single concentrated two-year period. The world has been saved in part from anything approaching the Great Depression because the crises that have buffeted the world economy over the past decade [writing in 2009] have conveniently struck one by one, with decent intervals in between.

21st Century Cosmopolis

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This guy, Steven Colatrella, has drafted a new constitution for the world that abolishes nation-states in favor of city-states. It also abolishes debt, credit, wages, and big business. In short, it sounds like a return to the original concepts of idealized socialism or communism. I don’t know about all that, but there might be a few ideas worth pulling out. I do like the idea of treating metropolitan areas as our society’s core economic and social units – clearly that is what they already are, and our political system is not consistent with that. Another idea that is somewhat interesting is that each city has its local currency, with a universal currency available but used only in transactions between cities.