Sunday, November 24, 2013

The End of the Road: A Reflection on Value

There was a song I have heard a long-long time ago which had started or ended, I am not quite sure with the following words: “the king of the road”. Sitting on my desk pondering whether or not I should begin work on my next book, about the state of the Federal Budget and the unsustainable levels of debts in the US and most EU member countries, I found myself recalling this particular tune. The mind works in mysterious ways, as so many believe.

Why this tune, and at this point in time. I am sure psychologists can answer this question. For me, a trigger prompted me to recall it. I have just published a paper on the “Rate of Return to Aging: A capital Stock Approach” (International Advances in Economic Research, November 2013, vol.19, pp.355-366), where I came up with the finding that the rate of return to aging if not negative is close to zero. Another and perhaps a more subtle reminder about the implications of aging is the relationship between old age and work, especially the value of work. On reflection I knew why I associated the song with age.

I am fond of watching a program on PBS called “Window to the Wild”. There the host of the program, perhaps in his 60’s or early 70’s takes his viewers into the “wild”. A day or two ago, I saw an episode where the host of the program took his viewers into a place in Massachusetts quite deserted called “Dog Town”. What prompted me to think, I believe about the song and the title of this blog is a most interesting statement carved on one of the town boulders that stated: “When Work Stops Value Diminishes”. Whoever thought of it did well to carve it in stone.

Not every one, I am sure will realize or envisage how this small, yet a most powerful sentence pricks the mind. For an economist, value is a very important concept in the economist’s repertoire. Value has two characteristics: Value in “use”, and value in “exchange”. An inquiry into the history of economic thought leads you to the question of what determines value.

Value defines a good or service. A good such as bread or water have a value to the user but may not have a value in exchange. For example, water in a river can be obtained free of charge, and if the water is available to all, it will have no exchange value. On the other hand, if water is not available to all, and it is useful to users, then it will have a value in exchange. Whoever possesses the water can exchange it for other commodities or for money.

Determining a good's value in exchange has been at the foundation of economics from Adam Smith’s the Wealth of Nations (1776) to Leon Walras Elements of Pure Economics (1873) and Alfred Marshall (1890) to name a few. Through the history of economic thought one of the issues that have occupied the classical and neo- classical economists has been the determination of value in exchange. Although the analysis differed, one thing they have settled on was that “LABOR” determines the value in exchange (For a review of the history of economic thought on this issue see Attiat F. Ott with Sheila Vegarie: What Economists Do: A Journey Through the History of Economic Thought i Universe LLC, 2013, ch.4).
If “Labor” as our forefathers put it is the source of value in exchange, then the statement carved in stone in the Dog Town is quite remarkable.

As a professor of Economics who spent all my academic life teaching and writing about economic issues and principles, my value to my profession was determined by my labor. When dispensing labor services stops—comes to an end with retirement, value unquestionably diminishes. A person who has retired from the work force, his/her labor clearly has value in use but little in exchange in a monetary economy.

Everyone knows that, if a good has an exchange value, and if such a good has a limited life span, (an exhaustible resource) from instantaneous to a relatively longer duration, at some point in time it will cease to command a value in exchange. Labor is such a good, its services fall under the label of exhaustible resource. By labor, it is meant not only physical existence, but also the embodiment of said labor in value in exchange. When labor diminishes, or erodes through the passage of time, so does its value.

The law of Economics, since Adam Smith still holds. Labor is the source of value in exchange, and when work stops, as it happens sooner or later, “VALUE DIMINISHES” and that is the end of the road.

Wednesday, October 2, 2013

Shutting down the Federal Government: It is Time for a Nationwide Recall of Our Representatives in Congress

“Here we go again”. These four words were uttered by former president Ronald Reagan during a televised debate in New Hampshire back in the late 1970’s during the primary. Frustrated over a repetitive question raised by his fellow contestants for the White House, Reagan admonished his fellow contenders for such behavior so that they move on to address issues of national priorities. The admonishment seems to have worked—they moved on and Reagan won the presidency in 1980.

President Obama should do no less. He should remind the Republicans of the futility of hanging on the one issue that is holding the government and the people hostage to “ideology. President Obama articulated such behavior best in stating (October 1) that “”holding the function of government hostage to ideology is “‘unseemly”.

The American public should be indignant about the shutdown of the Federal government. True, the Republican minority that are holding the functioning of the Federal government over the Affordable Care Act—Known best as the Obama’s care plan are acting on behalf of their constituents who share their ideology. This is how democracy functions. They were sent there to represent their constituents, their votes offered or withheld should reflect those of their constituents. But in this instance, they are not acting the way they should in a representative democracy where a vote up or down is governed by a simple majority. The issue on which government shutdown rests is irrelevant. The Affordable Care Act or the so called Obama’s care plan is the law of the land. It has been challenged, and the challenge was defeated as the US Supreme Court affirmed its legality. The ideology was put to test and in the case of the Obama’s care plan was defeated. In a representative democracy, this how a democracy functions. Our representatives have to either accept the outcome of a single majority vote, or insist in cases that divide their constituents according to ideology, that the issue should be determined by a 2/3 majority.

The American public should not let the government shut down go by the wayside. Our representatives are sent to Washington (their accountants only know how much they spend to get there) to serve the public and not the private interest. That may be an old fashion concept but that what democratic institutions are about. The segment of the Republican Party in the House of Representative that are holding the government functioning hostage to their unsuccessful effort to defeat the Obama care law, when they had the opportunity to do so, should reserve their fight for another day. Win or lose they must honor a system that allowed them to be there. A democratic system of government built on simple majority rule. Failure to achieve simple majority on any issue should be hammered out to insure the survival of democracy. The blame game should be beneath men and women in both houses of Congress. It is unworthy of representatives who pride themselves in living and serving in a democracy.

This is not the time or place to argue for against the Obama care law. Those who failed to stop it from becoming the law of the land, if they adamantly believe it to be injurious to their constituents should, in a democracy, garner the support of a majority to repeal it. That is how a democracy survives and avoids the pitfalls of autocracy.

The current ideological battle is not one that it ought to be fought by shutting down the government. Just look at what the battle is about: not to repeal the law, that battle was fought and lost, but to delay the funding for one year. You should ask: then what? Will the government be threatened with a shutdown next year, or the year that follows? Will the delay impede the implementation of the law? Just listen to what president Obama said in his televised speech: “The government is shutdown but the health care act is alive and well--the uninsured are ready to get insurance; to bail themselves out of a burden for long has been on their shoulders”.

Yesterday an American citizen reacting to the President speech put it to the Network carrying the speech: “do you know a country in either the Eastern or the Western Hemisphere where they shutdown the government because of differences in ideology?” The question was left hanging there.

The last shut down of the Federal government that took place 17 years ago lasted 21 days. How many days will it last this time around? Placing the responsibility of the shutdown on the shoulders’ of either Senator Reid or Representative Boehner does not help matters much. The American people should hold members of Congress; Democrats and Republicans hostage for their votes.
It is time for a “Nationwide recall of our representatives in Congress”. If they cannot discharge their obligations to govern, they should be sent home. The country will not be worse off than it is today.

Friday, January 11, 2013

A Time to Remember: a Memorial to a Nobel Laureate, James M. Buchanan (1919-2013)

Nobel laureate James M. Buchanan passed away January 2013. His death, to his family, colleagues, friends and students, was heart retching. For me, personally, it was devastating as I was looking forwards to see professor Buchanan at least one more time at the Public Choice Society meeting in March celebrating the 50th anniversary of the publication of his seminal work (with Gordon Tullock): “The Calculus of Consent”. One knows that death is always waiting at the doorstep, but never realizes it until it comes.

Today, I find myself in remembrance of Jim Buchanan looking back at the history of public Economics. In remembrance one accepts death as a continuation of life. Today, like so many others of Jim’s colleagues and friends, I face his passing through remembrance of what his life’s accomplishments have meant to us, colleges, friends, students, but most of all to our discipline—the discipline of public economics.

Professor James Buchanan together with professor Gordon Tullock have revolutionized our thinking about the role of the individual in a free society, and how he/she interacts (or should) interact with the sovereign. Their Philosophy embodied in the Calculus of Consent will forever light our way as we seek to forge a relation tempered with good will with the representatives of the public sector—the sovereign.

The Calculus of Consent: Logical Foundations of Constitutional Democracy (1962) was published by the University of Michigan Press. At the time of publication I was a PhD student in Economics at the University of Michigan. One of my fields of specialization was Public Economics, known then as Public Finance. I studied with Professor Richard Musgrave, known then as well as today as the father of public economics. I felt so fortunate to be one of his students and since my graduation; I have remained faithful to the discipline of public Economics.

As a student of Richard Musgrave, I have espoused a positive role for the public sector. The individual, to be sure had a role to play in setting budget allocation and distribution, but the framework of analyses left no room to think about an alternative arrangement—arrangement where the individual in a democratic setting sets the rules by which the “sovereign” is to interact with the individual in a “public choice” setting.

Not until I met Professors James Buchanan and Gordon Tullock at VPI in 1975 at the campus of the University (where I was invited to join the Public Choice group housed in the so called “white House” of the university) that I have realized that an alternative view of the public economy should complement the traditional study of the public economy. Although at that time I could not accept the invitation to join, it has given me an entrĂ©e to the field of public choice. Listening to Professors Buchanan and Tullock discussing the shortcomings of our knowledge about the role of the individual in the sphere of public economics I appreciated the force of the arguments presented in the Calculus of Consent. Reading it over and again I realized the enormous task and the burden the Calculus of Consent has placed on students of public economics. It was a path breaking for all of us students of public economics to understand what public choice is about and how individuals’ choice has to be effected in a democratic setting. The rest is history.

The Nobel Prize Committee in awarding the Nobel Prize to James Buchanan in 1986 has cited his contribution for: “the Development of the Contractual and Constitutional Bases for the Theory of Economic and Political Decision Making”. Not quite adequate a description of the colossal impacts of the contribution of Buchanan to the study of the public economy. Students of the public Economy have found in the Calculus of Consent a blue print, a guide to the complex and intricate relationship that has existed and remain so between the rights and aspirations of the individual in a democratic setting against the power of a sovereign motivated by self interest or the so-called the public interest.

For those of us whose task was, perhaps still is, the search for those institutions that would meet the Buchanan ideal of the Contractual and Constitutional bases for a theory of the public economy, need look no further than a second reading of the Calculus of Consent.

The public choice school, the brainchild of Buchanan and Tullock enriched the economist’s knowledge of the process of decision making when the collectivity replaces the individual as the decision maker. The contribution of the public choice school, when put in the frame of reference of our forefathers; the political economists dating back to the 17th century, clearly changed the landscape for the study of the public economy.

But, there is a softer side to Professor Buchanan. When I first met the great Economist, Professor Buchanan, I did not think that I could talk with him about other life undertakings. I found out how easy and wonderful it was to listen to Jim talking about his home in Blacksburg, Virginia, the pecan trees he had where he spent a relaxing time shelling those pecans, and to my delight found out that we shared the love of one author; Nevil Shute. One particular novel we both felt it to be a great novel was: “In The Wet”. I told Jim that I have gone to Torquay, England to see the place where Nevil Shute wrote his novels. At that time I was given the task to put together a conference sponsored by the Liberty Fund, and we thought perhaps it would be nice to have the conference there. Unfortunately, that was not done; I guess the expenses would have exceeded the grant.

Many of Jim colleagues, students and friends, I am sure, would have a great deal of soft memories of the Jim Buchanan, the great economist and the wonderful thoughtful human being. In his presence, you felt his greatness flow over and engulf you with warmth and appreciation of being there. Those of us who knew him, personally or through his writings, will always carry with us the soft glow imparted on us in knowing him and been rewarded with a glimpse of his inner thought. The economic profession has lost one of its pillars, but he lives on through his contributions to the economics discipline and the many students who followed in his footsteps.

Professor Buchanan: We shall miss you, but your thoughts will forever live on.