Compiler Press'

Elemental Economics

Not Accounting, Not Business, Not Commerce, Not Mathematics  - Economics  

                                                       

SITE INDEX

Microeconomics

Introductory

Intermediary

Shared Resources

Macroeconomics

Introductory

Intermediary

 

SISTER SITES

Compiler Press

Compleat World Copyright Website

Competitiveness of Nations

Cultural Econometrics

Cultural Economics

Elemental Economics

World Cultural Intelligence Network

 

Dr. Harry Hillman Chartrand, PhD

Cultural Economist & Publisher

Compiler Press

©

h.h.chartrand@compilerpress.ca

215 Lake Crescent

Saskatoon, Saskatchewan

Canada, S7H 3A1
 

Curriculum Vitae

 

Launched  1998

 

 

Microeconomics

Observations

 

 

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 the Standard Model of Macroeconomics 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 in during the reign of Henry II (1133 –1189.  Those interested in the legal origins of equity, please see Observation # 3: Equity.

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 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 they cried for but fairness from the King.  This is the root of Equity – a separate and distinct strand of jurisprudence parallel to the Common Law of precedent used to judge right and wrong, guilt or innocence.  Both, arguably, began to formalize during the reign of Henry II (1133 –1189).

Responsibility for hearing such calls for fairness transferred to the King’s Lord Chancellor with a court of his own – the Court of Equity also known as the Court of Conscience or of Morality.  In fact until Sir Thomas More (a lawyer) became Chancellor in 1529, all were 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.  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.

Equity is also used to justify market interventions by government, e.g., minimum wage and rent control. 

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 Galbraiths 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?

 

next page