Joseph Heath

Joseph Heath (born 1967) is a Canadian philosopher.

Filthy Lucre: Economics for People Who Hate Capitalism (2009)

 * In a sense, we are all Fabians now.
 * Chap. 1 : Capitalism is Natural: Why the Market Actually Depends On Government


 * From John Locke in the seventeenth century to Robert Nozick in the twentieth, libertarians have appealed to individual enforcement as the frontline mechanism for the defense of individual rights. They have failed to realize that presupposing punishment is as good as presupposing universal brotherly love. While positing either one can solve a lot of social-engineering problems, neither can be the result of self-interest alone. As a result, there is no such thing as “spontaneous order” in human society. The invisible hand of the market cannot do all the work; some type of conscious guidance is also required, to get the invisible hand going in the first place.
 * Chap. 1 : Capitalism is Natural: Why the Market Actually Depends On Government


 * So we need to have a state; the market cannot do everything. In particular, the market cannot arise spontaneously: it must be created, and its fundamental rules must be enforced, by the state. People have tried to square this circle in hundreds of different ways, but no matter how you run the numbers, the results always come back the same: You can’t get a market economy out of self-interest alone. What is required—and what self-interest cannot provide—is an honest enforcement agency to impose Hume’s three “fundamental laws”: to protect private property, to ensure the voluntariness of exchange, and to enforce contracts. This enforcement agency must remain neutral among the rival parties; its services cannot simply be available to the highest bidder. In order for its threats to be credible, the enforcement agency must be motivated by some principled commitment to ensuring respect for the law.
 * Chap. 1 : Capitalism is Natural: Why the Market Actually Depends On Government


 * Capitalism is not a spontaneous order. The compositional fallacy, however, makes it tempting to believe that it is. Since it is in everyone’s interest to have a system of property rights, or to have the orderly exchange of goods, won’t people just naturally tend to organize their affairs in that way? Who needs government to step in? Yet as it turns out, we do need government to step in, even to secure the most basic conditions for a functioning market economy. Two boys trading marbles in the schoolyard may constitute a spontaneous order, but the capitalist economic system is a highly artificial construct, based upon an elaborate set of social programs that have been refined and tweaked over the course of centuries.
 * Chap. 1 : Capitalism is Natural: Why the Market Actually Depends On Government


 * Perhaps the most revealing experimental “anomaly” came from a study at Stanford University, where one group of subjects was instructed to play a public goods game called “the community game,” and another asked to play one called “the Wall Street game.” The two problems were in fact identical, but the rates of cooperation in “the community game” were twice as high as in “the Wall Street game.” (Cooperation in the former was around the “normal” rate of two-thirds; in the latter it was abnormally low, at about one-third.) Another version of this study, carried out among Israeli air force trainers, showed approximately the same effect. In that study, however, instructors were asked to predict how their trainees (whom they knew quite well) would behave. Interestingly, not only were the instructors wrong (they did no better than chance at predicting the behavior of their trainees), but they also made the mistake of ignoring the effect that the name of the game might have upon rates of cooperation and defection. In this respect, the trainers fell victim to the same fallacy that has plagued generations of economists. It is, in fact, a general flaw in our everyday social reasoning, which social psychologists refer to as an extrinsic incentive bias. Simply put, people have a tendency to overestimate the importance of external incentives in motivating human conduct. In particular, we have a natural tendency to overestimate the influence of power, money, and status in motivating other people’s decisions.
 * Chap. 2 : Incentives Matter: … except when they don’t


 * What are we to conclude from all this? The most obvious lesson is simply that human psychology is infernally complicated. The standard assumptions that economists have been known to make about human rationality and the way that people respond to incentives represent a gross oversimplification. Sometimes this simplified model produces incredibly powerful, highly generalizable results. But sometimes it generates predictions that are totally off base. Increasingly, economists are becoming aware of this—there has been a significant move toward so-called behavioral economics within the profession. This approach, as the name suggests, pays a lot more attention to how people actually behave. Unfortunately, behavioral economists have yet to generate anything with the explanatory and predictive power of “the model” that is taught in Economics 101, and so the latter continues to exercise its intoxicating (and sometimes toxic) influence on the minds of the young.
 * Chap. 2 : Incentives Matter: … except when they don’t


 * The perfectly competitive market is more like the Atkins diet than a frictionless plane. The Atkins diet, one may recall, is the one that recommends eating only fat and protein—scrambled eggs, steak, bacon—but cutting out all carbohydrates. It works by tricking the body into thinking that it’s starving, thereby prompting it to start breaking down and consuming its fat reserves. But in order for this to work, you have to really trick your body, and that means absolutely no carbohydrates. People who follow a 100% Atkins diet can in fact lose a lot of weight. But one cannot infer from this that following a 99% Atkins diet—eating a lot of fat and protein and just a tiny bit of carbohydrates—will lead to almost as much weight loss. On contrary, it’s a recipe for putting on massive amounts of weight. In fact, “almost” following the Atkins diet is far worse than not dieting at all.
 * Chap. 3 : The Frictionless Plane Fallacy: Why more competition is not always better


 * Markets are, in general, an invaluable tool for promoting human well-being. It’s very easy to forget that whenever two people enter into an economic exchange, it’s because they both expect to be better off as a result of this exchange than they would have been without it. But it is false to claim, on this basis, that the more our society relies upon competitive markets to organize the production and distribution of goods and services, the better off we will be. Sometimes moving closer to the ideal of perfect competition will make us better off, but sometimes it won’t.
 * Chap. 3 : The Frictionless Plane Fallacy: Why more competition is not always better