Filthy Lucre: Economics for People Who Hate Capitalism

by Joseph Heath

Book Description "Economics is haunted by more fallacies than any other study known to man." -- Henry Hazlitt, Economics in One Lesson (1946) Every day economic claims are used by the media or in conversation to support social and political positions. Those on the left tend to distrust economists, seeing them as friends of the right. There is something to this, since professional economists are almost all keen supporters of the free market. Yet while factions on the right naturally embrace economists, they also tend to overestimate the effect of their support on free-market policies. The result is widespread confusion. In fact, virtually all commonly held beliefs about economics--whether espoused by political activists, politicians, journalists or taxpayers--are just plain wrong. Professor Joseph Heath wants to raise our economic literacy and empower us with new ideas. In Economics Without Illusions, he draws on everyday examples to skewer the six favourite economic fallacies of the ri

Genres: Economics, Nonfiction, Politics, Philosophy, Business, Social Science, Science

338 pages, Paperback

First published January 1, 2009

About the author

Joseph Heath (born 1967) is a professor of philosophy at the University of Toronto. He also teaches at the School of Public Policy and Governance. He received his bachelor of arts from McGill University, where his teachers included Charles Taylor, and his master of arts and doctor of philosophy degrees are from Northwestern University, where he studied under Thomas A. McCarthy and Jürgen Habermas. He has published both academic and popular writings, including the bestselling The Rebel Sell. His philosophical work includes papers and books in political philosophy, business ethics, rational choice theory, action theory, and critical theory.

Reviews

[Trevor · Rating 3 out of 5]

It was the subtitle of this book that got me in – ‘Economics for those who hate capitalism’. I’ve been reading a few books lately that have been economics for those who love capitalism and I was hoping that this would take to task some of the fundamental assumptions of free market economics and present some way forward for people who are sick of seeing obscene amounts of social product go into increasingly fewer hands while large numbers of the world’s population have nothing or, if they are particularly lucky, next to nothing.

That wasn’t quite how this book turned out. I don’t want to say that the title and sub-title are false advertising, the problems with the book being a bit more subtle than that, but the book wasn’t what I was hoping for.

There are effectively twelve chapters and an epilogue to this book. The first six are responses to rightwing fallacies – such as: it is all about incentives or it’s all about personal responsibility or that the government’s role in the free market is always negative. He then has six chapters on leftwing fallacies – such as, calls for equal pay miss the point, just prices aren’t possible and that perennial favourite of all egalitarian types, his countering of the idea that profits are always bad.

I don’t want to give you the wrong idea here; there were parts of this book I really liked. He starts off by talking about Blade Runner and how shocking that film seemed when it first appeared (another film I have always meant to watch). This was perhaps my favourite part of the book and the bit I’m most likely to remember from it. His point was that the film was set in the future and yet there are still advertisements. This is the opposite of what most science fiction up until then had taught us to expect the future to be like – fiction had assumed that in the future we would no longer need money; the future would not have profits, the future would be a kind of vision splendid of a communist utopia where people would be beyond the nonsense of competition, wages and other such things. Blade Runner presented a ‘dystopia’ where the future looked frighteningly like the present day, only more so. In fact, the shortest glimpse at the horror that is commercial television is perhaps enough to prove that the future vision of Blade Runner has proven to be much more accurate a depiction of our future than say Star Trek.

One of the core notions behind this book is that free markets are the most efficient way to organise production – naturally with some provisos (most notably around ‘externalities’, which we really need to come back to if I can remember). The problem with planned economies (say in the former Soviet Union and Eastern Block countries) from an economic view point (so, therefore leaving aside the other problems with freedom, democracy and such these societies had) was that economies are insanely complicated things. The problems with planning, as free market types never stop getting their kicks from pointing out, is that there are simply too many things to take into consideration for any centralised plan to accommodate. You can virtually be assured that the thing that you forgot or overlooked will suddenly be the essential detail that sinks your plan. That none of the books I’ve read then goes on to explain how businesses (multinational corporations, for example) with economies larger than most countries are then able work around and overcome these ‘planning problems’ (surely they have a centralised plan too…) is just one of the little mysteries of Capitalism I’ve never quite grasped.

Is there a solution to the dead hand of the socialist planned economy? Well, the solution isn’t actually to have no plan, but to completely decentralise economic planning by giving control over to the market itself. The problem with socialist planned economies wasn’t so much with the idea of planning per se, but with centralised planning. It is at about this point that people start to go on about bureaucrats in ivory castles (though the people in charge of say IBM are never referred to as either bureaucrats or living in ivory castles for some very strange reason). Capitalism’s advantage here is taken to be the free market, where, because of self-interest, all of the agents in the economy act locally and this means globally we end up living in the best of all possible worlds.

Given this glorious vision of the free market we then get the string of rightwing myths such as, all government interference in the market is invariably bad and counter-productive (ending up hurting those who it was supposed to assist). Rent control laws are a favourite whipping boy here. The point being that the market is supposed to automatically respond to a shortage of housing by putting rents up – this then attracts investment and thereby increases the amount and quality of housing stock available and then makes everyone happy – smiling faces all around. The essential piece in this puzzle is the initial increase in the cost of rent – but then governments (read: evil do-gooders) come along and think they are helping the poor by controlling the increase in rents (read, stopping rents going up the economically appropriate level). This creates disincentives for people to invest in the supply of rental accommodation and therefore makes the problem the policy was seeking to address all the worse.

Where I found this book most interesting was where it sought to explain how to combat the ‘red in tooth and claw’ aspects of capitalism without undermining the efficiency of market capitalism. He does not, for example, accept that there is a huge pair of scales with efficiency written on one side and equality on the other and that more of one invariably leads to less of the other. He doesn’t accept that markets can be left entirely to their own devices. As it seems with most things today, it is all about reframing the debate.

He makes the point that Capitalism would have been impossible without insurance, for example. Without government guarantees over bank deposits and the ability to militate against runs on banks and the subsequent losses these runs would create, the consequences to investment would be catastrophic. So, he argues, the rightwing arguments against other forms of insurance, like say health care insurance and unemployment insurance, ring hollow given that they are more than happy to accept these forms of insurance that are organised by governments and benefit them in ways it would be difficult for capitalism to exist without.

Insurance becomes, then, a very important concept in this book and the main weapon to be used by those who hate some of the consequences of free markets. In a sense, this same logic works for finding market ways to add externalities to the economy. Externalities are an interesting example of market failure; the environment being a classic example. When you drive your car you pay for the petrol you use, but that doesn’t cover all of the negative effects of your driving. You don’t pay for the noise pollution or air pollution you help to create, nor the cancers you cause and so on. Externalities are examples of market failures and finding ways to fix them is an important role for government. Given our conservative party here in Australia has spent the last few weeks tearing itself apart on exactly this question (how to create an emissions trading scheme to work into the market some of the costs of our current high carbon diet) getting rightwing people to accept that the market isn’t always and invariably perfect is a real problem and one that is likely to cost us dearly into the future.

All the same, other negative aspects of free markets mentioned in this book are just accepted as being inevitable and people are advised just to get used to them. Profits are good. Inequity in pay is good. Globalisation is good. Or, if not actually good, then the best that can be expected. As a case in point, let’s look at the Economics 101 view of foreign trade and discover why all trade is always good.

The first point is that leftwing types often see trade as being something that is forced on poor countries by rich countries and is always in the best interests of the rich countries with the poor countries invariably being ripped off. The argument against this grossly negative view is that a country will only agree to trade if they can see they will derive some benefit from the transaction. Therefore, the fundamental assumption ought to be that trade is mutually beneficial, otherwise, why would the two sides enter into it?

Trade makes sense on the basis of relative efficiency. If the US can make 100 televisions and 200 washing machines in an hour and Australia can make 5 televisions but 100 washing machines in an hour it might be best for Australia to stop making televisions altogether – but it might also make sense for the US to stop making washing machines and direct all of its investment toward making televisions and just buy washing machines from Australians – even if we are less efficient at making both products. This is because the US is so much more efficient at making televisions and only somewhat more efficient than Australia at making washing machines. Getting both sides to make what they are most efficient at making means that both sides will be better off.

The ‘myth’ of trade is that it kills local industries, whereas, in reality, it kills off only those that can’t compete with foreign companies and redirects investment towards economic activity where the country has better skills and is therefore better able to compete. In fact, the whole competition idea with foreign markets is shown in the book to be a bit of a myth in itself, as when you trade people will only trade with you if you have something they want to trade for. I thought this reading of global economics was interesting (as I’ve found it interesting in other books I’ve read recently too) even if a little Pollyannaish.

That trade is seen as an unequivocal good seems to overstate the benefits while ignoring complications – something the left seem to be constantly accused of and ridiculed for doing in these books. With so many countries in debt up to their eyeballs, the US and Australia just two such countries, and with creditor nations like China prepared to lend well beyond our ability to repay (in the expectation we will keep buying their products), the simple balance of international trade discussed in most such books on economics seems optimistic at best.

The fact that about the only thing the US is able to trade on the international market is weapons also makes the appraisal of trade as unequivocal good also ring hollow. Our encouraging (via subsidies and other benefits) of third world countries to plant cash crops such as coffee, bananas, cocoa beans and the like and then our forcing them to sell these to us at low prices (often due to a glut on the market caused due to our initial investment which was done precisely to bring down the price of these commodities) all so we can sell the leaders of these countries guns to keep their local populations under control just doesn’t seem like something we should be very proud of.

There is also a section criticising Marx’s theory of surplus value, and this is the second time recently I have read something that implies that Marx said that the problem with capitalism is that workers are not given enough to ‘buy back the product’ of their labour. Both authors have then gone on to show how stupid Marx was for coming up with such ideas. The problem is Marx didn’t say anything like that at all. It is true that Marx saw that the cost of labour was less than the value that could be gained from deploying labour (and in many ways that is self-evident – otherwise why would a capitalist buy the labour in the first place?), but Marx’s solution wasn’t to give the surplus back to the worker – his problem with capitalism was that virtually all of the surplus went to the capitalist.

This is an interesting book, and yet another in a line of books I’ve been reading lately to give myself an education in economics – but I think I do need to read a book now that actually gives a leftwing view of these matters, at least, more than in just the title.

[Ian "Marvin" Graye · Rating 3 out of 5]

A Contribution to the Critique of Political Economy

What we now call Economics was once, at the time of Marx, called Political Economy.

One of the major achievements of this book is to reveal just how much political philosophy sits behind Economics, and vice versa.

The book is written from the perspective of the Left. Well, a Left.

It reflects a reasonable level of economic literacy. It acknowledges past errors on the part of both the author and the Left, and seeks to remedy them. In the words of one of the titles of the book, it seeks to remove illusions and debunk myths.

I approached the book with several motives and biases. Would it be consistent with my existing values? If not, would it help me to understand, reconsider or change them? If it was consistent, would it help other people to understand and/or embrace such values? Would it persuade or enhance the thinking of people on the Left? Would it persuade or enhance the thinking of people on the Right?

Some Critical Criteria

The book isn’t so much concerned with the comparative assessment of two or more economic systems (e.g., Capitalism and Democratic Socialism).

It’s more concerned with the basis upon which today’s version of Capitalism can be justified or criticised and, if it needs to be finessed to accommodate various political objectives, what are the economic consequences of such attempts to finesse it.

It made me ask, by what standards should we measure and assess the success or efficiency of any particular type of Economy?

I’d start off by suggesting two socio-economic goals:

• 100% employment (for those who want it); and

• a minimum subsistence wage.

Six Things I Like about this Book

#1 The basic concept of the book is the debunking of six Right Wing myths and six Left Wing myths about Capitalism.

#2 The book recognises that Capitalism in some form or other is here to stay, that it isn’t about to collapse because of internal contradictions, and that the prospects of a permanent revolution (whether Communist or Anarchist) are infinitesimal.

#3 The express goal of the book is to improve the arguments of the Left.

#4 The book recognises the importance of Economics to Politics.

#5 It seeks to find a common ground between the Left and the Right based on solid Economics.

#6 It wants to make Left-oriented socio-economic programs more economically effective and efficient (and therefore acceptable to traditional supporters of the Right).

Six Things I Don’t Like about this Book

#1 It’s been published under two separate titles: “Economics Without Illusions” and “Filthy Lucre”. The latter signals a skepticism about Capitalism and reduces the potential audience for the ideas in the book.

#2 It’s been published under two separate sub-titles: “Debunking the Myths of Modern Capitalism” and “Economics for Those Who Hate Capitalism”.

#3 There’s a fair amount of subjectivity in the essays. Statements or theories with which Heath disagrees are described as obviously erroneous, mistaken or fallacious.

#4 Each essay is quite diverse and could have been broken into several separate essays. The six plus six format started to dictate the method of exposition, to its detriment.

#5 The lack of sub-headings detracted from the clarity and direction of a fairly difficult, technical and abstract subject matter.

#6 I question the book’s ability to persuade a dyed in the wool Capitalist. To some extent, the book preaches to the converted, if indeed it can change the mindset of modern Left-wing, Anarchist or Green supporters.

12 Observations about Capitalism

Below are some personal thoughts on Capitalism prompted by a reading of the book.

#1 Selfishness or "Greed is Good"

Capitalism opposes State intervention in the market. One way or another, it believes that the market can operate effectively for the common good without regulation by the State.

The market consists of individual people or entities acting, working, consuming, producing, trading or exchanging in their own interests. All of the participants act selfishly, arguably greedily, although they don’t have to act solely this way.

Capitalism as a political philosophy isn’t concerned about the selfishness or greed of the individual participant. It believes that across the economy as a whole the net result of individual selfishness or greed benefits society in the most effective and efficient way.

There is an averaging process at work. As long as on average it works, Capitalism is good for society. The net effect of all of this selfishness is the common good.

It doesn’t matter that 20%, 40% or 50% suffer for the benefit of the rest. Any individual suffering is collateral damage that is justified by the common good. The suffering of the minority is justified by the benefit of the mean (i.e., the average). The mean, alright. It’s but a short journey to a destination where 80% suffer for the benefit of 20%.

Thus, the battle between Capitalism and Socialism is a battle between averaging and equalisation.

Capitalism describes the achievement of the common good by the market as the work of an invisible, almost divine, hand. The outcome is good and wise, even though it wasn’t deliberately planned. In fact, planning is viewed as counter-productive and futile. The divine hand can achieve a better outcome than an office full of public servants and computer simulations.

Heath actually concedes that:

"Historically…the way that Capitalism simulates socialist planning has been far more successful than any actual socialist system. The primary reason is that ‘socialist planners’ cannot be trusted to make the hard decisions that socialist planners are supposed to make."

Any attempt to plan a different outcome is regarded as more deleterious to society as a whole.

#2 Human Nature

Capitalism believes that selfishness is natural and legitimate.

Adam Smith wrote that, when a man acts in his own interest, “he frequently promotes [the interest] of society more effectually than when he really intends to promote it.”

At this level, there is a trust in human nature, a desire not to interfere in its natural processes.

On the other hand, when attempts are made to change how the market or Capitalism operate, the Capitalist argument is that human nature becomes a negative. There is a moral hazard that human beings will attempt to exploit the State-imposed system for their own advantage. They will be lazy, unmotivated and deceitful. It doesn’t matter that the same humans, the same human nature, the same character traits occur under laissez-faire Capitalism, as long as the average is for the common good. There is no recognition that the human nature of the few might make no material negative difference to the common good. If 10% abuse the welfare system, does it undermine the effectiveness of the 90%?

We are asked to accept human nature in producers, but not in consumers.

#3 The Market

The blind faith in the market and the invisible hand falls down when it comes to competitive behavior.

Selfishness means that no business wants to lose market share to a competitor, none wants to make a loss, none wants to be wound up.

As a result, the natural tendency of a business or of human nature is to be defensive. People lie, cheat, defraud, exploit, undercut, overcharge, misrepresent, overpromise and underdeliver. They abuse positions of power, they abuse monopolies, they form cartels, they collude, they conspire against the public.

These consequences of human nature under Capitalism, which are denied by its advocates, have to be countered by legislative initiatives of the State. The market has to be forced to be honest.

The human nature of Capitalists cannot be trusted to run the market honestly or effectively. The market cannot operate legitimately or perfectly in the absence of the State.

The market, left to its own devices, will not only prejudice consumers, but other competitors.

The very failure of the market invites and legitimates the intervention of the State. If Capitalists were as virtuous as their apologists proclaim, there would be no need for the State.

The market has nobody to blame but the human nature of participants in the market.

One problem with State intervention is getting it right. The nature and extent of the intervention should be no more than is necessary to honour the promise of a perfect market.

#4 The Goal of Full Employment

The primary goal of Capitalism is not necessarily to employ people. That is a by-product of what Capitalism does. If it could better achieve its primary goal (making more capital) without employing people, then it would and does do so (e.g., by the use of machines).

Thus, if we assess Capitalism by whether it achieves full employment (one of my socio-economic criteria), then we are judging it by an outcome rather than a goal. It shouldn’t really surprise us that it will never get a mark of 100% in this test.

#5 The Effect of Competition on Prices

In the same way, I don’t think that it is necessarily a goal of Capitalism to reduce prices payable by consumers. This is an outcome of one aspect of competition.

The natural tendency of Capitalism (built into the human nature of a capitalist) is to charge whatever price you can get away with, whatever people are prepared to pay.

Thus, an unrestricted monopoly will inflate its prices, unless some restraint is imposed by the market or the State or people simply refuse to buy their product.

The more there is effective competition, the greater the commercial pressure to reduce prices (or differentiate in terms of quality).

The more we save money on some products (through lower prices), the more we have to spend on additional products.

We still spend the same amount of money, only we spend it on a greater diversity of products and capitalists. As a result, a greater diversity of people are employed in the process. However, because the amount of money being spent remains the same, the wages of each employee across the diversity of employers might be reduced.

#6 The Effect of Competition on Wages

One aspect of pricing is the relative abundance or scarcity of the input. The more scarce it is, the higher the price.

People who want work are theoretically abundant. Because full employment is not a goal, people and employees are treated like any other input. The abundance of potential employees reduces wages.

Unemployment is Capitalism’s way of reminding us that we are abundant. It can maintain that it can’t employ us all. If we all want a job, then we will all have to drop our wages. In a sense, the same amount of money has been allocated to the same total wages bill. We can either have unemployment and higher wages, or full employment and lower wages.

If the goal of Capitalism was full employment, it would go about things in a different way.

Heath tells an apocryphal story about an engineer who witnessed Chinese workers building a dam with picks and shovels. He asked why they didn’t use equipment. The response was that this would destroy many jobs. The engineer said:

"I thought you were interested in building a dam. If it’s more jobs you want, why don’t you have your men use spoons instead of shovels?"

#7 The Price of Goods and Services

Prices are determined by an attempt to recover the cost of inputs and a projected profit.

Let’s say that a corporation wishes to sell its entire inventory for $100M.

The composition of this total price might be:

• $25M rent, infrastructure and capital costs;

• $25M material input;

• $25M labour; and

• $25M projected profit.

Thus, the aim is to make a 25% profit.

The problem is that the strategy will always come under pressure when the corporation encounters competition. If it doesn’t drop its prices, it incurs the risk that it won’t meet its sales projections. If this happens, it mightn’t meet its profit projections.

The question is what happens if the shareholders and management don’t want the shareholders’ dividends (their profit share) to drop? If it is to remain constant, then one of the other three inputs in our determination of the price has to be reduced.

Of the three inputs, two are supplied by other Capitalists, one is supplied by the workforce. There is often less bargaining power with the other Capitalists. They want to maintain their pricing, and might even have entered into medium-to-long term supply contracts (property leases, loan agreements, supply agreements that guarantee the price of their goods or services).

Thus, Capitalists insulate themselves from the risks, and the burden of cost-cutting falls to workers. You either have to reduce your individual wages or some of you will lose your jobs.

#8 Minimum Wages

Capitalists can deal with this challenge far more easily by dropping wages or sacking staff, because employees negotiate their wages and working conditions on an individual basis. They have little bargaining power with the corporation. They certainly don’t have the same bargaining power that other Capitalists have.

One way they try to increase their bargaining power is to leverage their collective power through membership of a trade union. However, Capitalism despises this challenge to their bargaining power.

The other way to get a fair wage is for the State to legislate a minimum wage. This works against the logic of Capitalism’s desire to let market competition determine relative wages. However, in a way, it achieves the same level of insulation as the input of other Capitalists into the price mechanism have achieved.

Naturally, Capitalists argue that, if there is a minimum wage, they won’t be able to employ as many people. Therefore, a minimum wage will result in greater unemployment.

Remember that the goal of Capitalism is not necessarily to achieve full employment. The problem of unemployment is somebody else’s problem.

Of course, one other response to a minimum wage would be to reduce the proportion of one of the other inputs into price to compensate. A one percent increase in wages could be offset by a one percent reduction in profit. However, this is out of the question. It interferes with the primary goal of Capitalism, which is to generate more capital from the capital we already have.

#9 Unemployment

Whose problem, exactly, is unemployment? Whose fault is it? Is it the fault of the employee that there aren’t enough jobs to go around? Are you a useless piece of shit because Ayn Rand’s Objectivist acolytes want to throw you on the scrap heap?

The Social Welfare State deals with the issue by providing unemployment benefits. Perhaps this involves an element of empathy, altruism and charity that is bad for Capitalism or society as a whole.

However, the benefits all get spent on rent, groceries and other essentials, which are provided by Capitalism. Thus, the benefit is effectively a safety net for business. It just keeps the money flowing in the system.

Of course, the benefits are funded out of the taxes we all (including corporations) pay. Thus, collectively, we bear the financial burden of Capitalism’s failure to provide full employment.

Once again, the State remedies a failure of Capitalism (even though Capitalism declines responsibility for full employment).

#10 Production as a Joint Venture

Of the three inputs into price, two are external (often on contract), and only one (employees) is internal, even though they might be engaged on employment contracts.

Because they are internal to the corporation, most management still views the relationship as a master/servant relationship. There is rarely a sense in which the relationship is a joint venture aimed at jointly succeeding in the market.

Marx justified much of his theory of the internal contradictions of Capitalism and the inevitability of Revolution and Communism on the exploitation and alienation of workers that occurred/occurs under Capitalism.

I think this could be ameliorated, if the relationship was seen more as a joint venture, and the input of an employee given the same respect as the input of another Capitalist.

#11 Profit

Many people on the Left regard profit with suspicion. They think it is a form of theft. Before property can be theft, there must be profit, which Marx regarded as the surplus value created by labour.

There has been much recent criticism of Marx’s theory of surplus value. However, it wasn’t unique to Marx at the time he espoused it, and all of its advocates have had to make room for greater understanding of pricing.

I think that profit is the product of all of the inputs mentioned in the price mix, even if the root cause of much Capital might have been somebody’s personal effort or labour. The thing is that, once capital exists, it wants to multiply. Capital wants to make more capital. It takes money to make money.

I don’t dispute the legitimacy of profit. I do, however, advocate different ways of sharing it around. It's perfectly acceptable for capital to earn an appropriate return of investment. Let’s say that is 20%. That 20% then becomes available for expenditure on goods and services, the suppliers of which employ people and pay taxes. So the profit goes around in the system.

However, if we set a target of 20% and achieve a superprofit of 25%, I think capitalists should be prepared to share some of the surplus with the people responsible for creating it. Arguably, this should be not just the management team, but the whole staff.

Thus, I think profit is necessary not just to compensate capital, but to incentivize and motivate the joint venturers (including staff).

#12 Taxation

Just as the Left has had to give up on the idea of a revolution, the Right has to give up on the abolition of the State. In fact, this is a reality that Capitalists, Socialists, Communists and Anarchists all have to recognise. It ain’t going to happen.

That doesn’t mean that the existence of the State is an excuse to squander taxpayers’ funds. There has to be clarity about what the State has to do, how it will do it most efficiently, how much it will cost and how it will be funded by taxation. A budget needs to be set, just as if we had established a corporation to carry out the task.

One of the many insights I got from Heath’s book is the view that the State is a consumer, but that it is effectively a mandatory collective consumer on our behalf. It buys things that Capitalism and we as individuals mightn’t have been able or prepared to produce or buy (e.g., roads, hospitals, police, health care). Hopefully, by buying collectively, it is able to leverage its bargaining power and buy so more cost-effectively. Heath writes far more eloquently and persuasively on this topic than I could in the space that I have allowed myself. His book deserves to be read for that reason alone.

Taxation is also a vehicle for achieving some redistribution of wealth. Heath argues convincingly that the State should not manipulate prices. Equally, it shouldn’t be too punitive in its taxation of Capitalism or those who make more money because, perhaps, they have displayed more initiative.

Personally, I don’t believe in achieving financial equality, especially by pulling the top income earners down to the level of everybody else (i.e., “leveling down”). However, I do advocate a progressive tax system, so that those who earn more money pay more taxes.

I also advocate a minimum wage, that would be at least enough for a subsistence standard of living for a couple with two children. The goal is to pull people up, rather than pull people down.

[Szplug · Rating 4 out of 5]

Joseph Heath debunks the myths of modern capitalism, hoping that, by doing so, this book's readers will gain an understanding of economics without the illusions that arise from tendentiousness and/or wrongful intuition: a bit of filthy lucre wherein we better grasp the lucre itself, as well as why the grime accumulates, how we occasionally mistake the lucre as being grimy, and that washing off the grime doesn't always cleanse the lucre.

Heath is a lefty himself from way back, and one who, as he notes in his thoughtful introduction, held many of the Left fallacies he explicates in detail, ere exposure to center and right-thinkers in the course of his university profession revealed how ignorant of the economic bases he actually was. Thus, despite its split into six fallacies held by and addressed towards either side, it seemed clear to me that it's the Gauche ones into which he pours the better strength of his spirit: basically, he desires left-oriented ends, but despairs of the means and arguments that are typically pursued and presented by his fellow progressives; and which, in his estimation, tend to arise from a lack of understanding of how modern capitalist economies work, and that certain ameliorations or extinguishments are simply not possible—or, at any rate, not without debilitating effects and consequences. That's not to say it isn't a useful primer for the reader of any particular political stance—rather, that the unveiling of the right fallacies strike me as being less-aimed towards achievable goals, whereas Heath believes in progressive reform and hopes that the exposure of fallacious thinking will channel those efforts into better achievable results. I once heard Heath state, in a Bloggingheads conversation with Will Wilkinson, that over the years he had gradually come to the conclusion that John Stuart Mill was right about everything—a tongue-in-cheek admission that nonetheless illustrates how utilitarianism seems prone to filling the abscesses left by deflated enthusiasms, tempered optimisms, and diminished radicalization.

I took 1 1/2 pages of notes of the right ones, and nearly 3 full ones of the Left (JN-M, with the best of intentions, created a monster) and which—in a move that will shock absolutely no-one—I am including below. This probably reflects that the latter six are both more interesting in their timber, and that they are ones I used to be more strongly aligned to, and, hence, would stand to learn more from in having their erroneous natures clearly revealed. And clarity is both what Heath strives mightily for and impressively achieves: his analogies are superb, his foundation-laying thorough, and the impartiality he musters for his logical presentation appreciable and appreciated. Those with a mid or high level understanding of economics might find all of what he covers to be nothing new, but for those others, like myself, whose grasp is never better than middling and tenuous, ofttimes emotionally driven, the entirety of its contents went a long way towards clearing the miasmatic air of the dismal science.

Two extra chapters that Heath wrote for the book but decided against including:

Spare the Rod, Spoil the Child.
More Democracy.

*******************************************************

Heath opens the book by disparaging Naomi Klein for intellectual laziness and illiteracy in favor of the aura of activism once again. Old reliable!

FALLACIES EXISTING ON THE RIGHT:

Evolution does not optimize. Individuals cannot be counted upon to do what is necessary to promote their own interests as a group. What is good for the individual is not necessarily good for the group/species.

There is an element of irrationality in our moral and legal reasoning. The consequentionalist position, wherein outcomes are evaluated only in regard to one's actions is a minority position.

Capitalism does not derive from Spontaneous Order—it requires a state to secure even the most basic conditions of private property, free exchange, contracts—and inevitably comes to require more of the state to solve Collective Action Problems via various social programs. Which of these latter to pursue is not a function of ideology and preference, but of reasoned, evidentiary consideration—it is not Natural but rather of empirical questions regarding the occurrence and severity of collective action problems, that is, Prisoner Dilemmas.

Extreme Incentive Bias: People have a tendency to overestimate the importance of external incentives in motivating human conduct. In particular, we are prone to overestimating them in regard to power, money and status. External incentives do matter; but such as morality and social norms also act as a constraint upon human conduct.

Welfare states are incentivized to streamline and tighten their tax systems to maximize revenue and minimize evasion and growth-inhibitors (taxes on corporations and investment). These last two combined are also why governments prefer to tax dividends and make debt interest payments tax deductible.

Humans are incredibly complex psychologically. Behavioral Economics must be taken into account to explain why Standard Rational Actor models sometimes get things wrong. Behavioral Economics has not proven itself to generate results with the same explanatory and predictive power of the Standard Economic Model, but it is a real influence on incentives—external incentives aren't everything and incentives can be very complex business.

Economists use efficiency to describe outcomes—not means—where one person's satisfaction cannot be increased without worsening someone else's. For example: kid's exchanging candy at a party; shoppers picking cashier queues at supermarkets. The Invisible Hand Theorem states that a perfectly competitive market—ie, all market exchanges as per above—will generate a perfectly efficient outcome. The Second Best Theorem of Lancaster and Lipsey, which Heath describes as one of the most powerful arguments against laissez-faire capitalism ever invented, stands potently against the IHT mentioned directly above: with respect to perfect competition, the more conditions you satisfy—short of satisfying them all, which is an impossibility—the farther you get from the ideal of perfect efficiency. The argument for market solutions must be made on a case-by-case basis—it cannot be derived from an abstract model of how an ideal economy would function.

Neither the state nor the market produce or consume anything—they are rather the institutions through which people coordinate their production and consumption.

Taxes are, in essence, club fees: as with condo or health club fees, what you pay is spent collectively to pay for all that is offered for free; and they are mandatory because their benefits are relatively non-excludable. One of the goods that can be purchased most efficiently in this way is insurance—the larger the pot, the larger the gain for the the individual. Taxes are simply the financing of your own consumption, and your money will be spent on club goods instead of private goods. With taxes, what we should ask is if the benefits that come from the formation of an optimal sharing group outweigh the costs that we associate with it. Tax deadbeats are just like market frauds—an expense of market exchange and consumption.

Heath conducts a great discussion of club goods like state pensions as pooled annuity purchases, an instance of insurance—whereas what those who wish to privatize pensions are asking for is individuals to invest money in the market to fund their own retirement. This in an attempt to change apples into oranges, with much different risk levels and optimization points, and this should be the first thing factored in any discussion about doing so.

Final note on taxes: the state does provide limited choice and limited right of exit (to opt out) because they are mandatory—but choice can often be tripped-up privately and there is also a limited right of exclusion to balance this. This is a reality that tends toward bringing peace of mind, an effect that most people unjustly discount.

Heath is solid on how to conceive of free trade: countries exchange with one another, they do not compete—only companies do so. Free trade basically is an exchange of vouchers—currency—that can only be used to buy goods or services from the other country. Even if these vouchers are exchanged for other currency, at some point down the line someone, somewhere, will want them to buy goods and services from the issuing country. The sole exception to this is the US Dollar—but currency muddies the picture, and ignorant people believe, erroneously, that countries are structured like and compete with each other like corporations.

Free trade is all about comparative advantages: our productivity, a nebulous measure of all the factors of growth that cannot be accounted for, has a bearing only within a country: Detroit auto-workers compete with Iowa farmers for car production, not with Japanese auto-workers.

There are two ways for Americans to produce automobiles: they can build them in Detroit, or they can grow them in Iowa. Growing them in Iowa makes use of a special technology that turns wheat into Toyotas: simply put wheat onto ships and send them out on the Pacific Ocean. The ships come back a short while later with Toyotas on them.

Productivity helps give comparative advantages to certain sectors. Countries do compete for foreign investment, and the factors involved vary, depending upon the industry in question. English speakers, high-skilled/quality native craft, mandatory risk-pooling, patent laws and copyright protections for intellectual property, local and national culture, etc, may all or in part contribute to making one country more attractive than another. What is important is that comparative advantage comes about through differences between countries—in fallacy, the Left misunderstands this to seek trade restrictions; the Right misunderstands it to seek the pauperization of labour.

Insurance comes from pooling risk, so that the bell curve of outcomes has a decreased variance. This pooling is intended to increase win-win efficiency gains. Examples can be found in two Canadian provinces: Saskatchewan is mostly farming country with stringent weather and a single-crop season, so pooling risk is a popular solution. On the other hand, Alberta, with an industry mostly comprised of ranching and oil, faces a larger threat from theft—so property rights become paramount therein. Moral hazard comes from the disincentives created by risk pooling, the tendency for free riders to avail of the efforts of others from the spreading of risk—this tends to shift the bell curve so that the hazardous left-right extremes, of previous low incidence, become more likely. Reason says that moral hazard, though real, should be managed, because the benefits of risk-pooling mostly outweigh the costs of moral hazard (a rather relevant exception? Exotic Investment Vehicles and their insuring prior to the crash of 2008).

Heath offers good stuff on the Left and Right perceptions of moral hazard among the lower-classes, or rule-breaking based on ideology and views on responsibility. While perverse incentives and moral hazard are serious, the question asked should be do the benefits of pooling poverty risk outweigh the costs? If you allow private property, then you have to accept some theft along with it; if you want insurance, you have to accept some moral hazard as well. Insurance and actuarial sciences have accompanied the stable rise of Capitalism. Most right-wing decrying of the welfare state is actually aimed against insurance. Moral hazard is an inescapable part of insurance and risk-pooling schemes; and insurance lubricates our economic systems. What's more, the government welfare programs tend to all be of the insurer of last resort type, where private insurance would face asymmetries and information problems and inevitably fail. That the latter proves the case is shown by Heath in a well-delineated walk-through of all of the interconnectedness and complexity of the finance industry during the housing bubble, and how the burgeoning asymmetries made the gauging of actual risk difficult, and the payouts demanded during the collapse impossible. In similar manner can the case be made for government-operated insurance pooling for such expensive, complex, disincentivized and information-intensive industries as healthcare.

FALLACIES EXISTING ON THE LEFT

To come when I summon the energy to enter once more into the chicken coop.

[Marco · Rating 5 out of 5]

Economics without Illusions is a rare case of "myth-busting" book that actually does its intended job, rather than simply exposing a contrarian position as if it were divine revelation.

Writing from a Leftist position, the author starts by showing how some positions traditionally associated with Conservative politics (even if the author is a bit too prone to lump everybody outside of the Left tent, blurring some relevant policy distinctions with a convenient label) are not a natural consequence of economical science; indeed, some common pro-market arguments go against the findings of contemporary economical science, especially as they disregard the importance of insurance in a risk society, favouring instead approaches based on individual responsibility alone.

The Left, however, is not spared from Heath's criticism. Quite the contrary: the second part of the book addresses some common banners of anti-capitalist activism and show how the traditional Leftist approaches and intuitions can end up actually harming the people they intend to assist. In his analysis of topics such as "just prices", Heath argues that knowledge of modern Economics is essential for the design of policies that solve critical issues such as inequality without causing nasty side effects (like the scarcity traditionally associated with "real-world Socialism").

While the book simplifies many positions -- the hand-waving of Libertarianism in Chapter 1 is a particularly low point, lacking the nuance seen elsewhere on the book --, it does so not as strawman-building, but as an attempt to engage what is seen in popular discourse. The policies proposed by the author are not above criticism, either, both from Leftist and Rightist perspectives.

Economics without Illusions is still a very thought-provoking and nuanced book on the "dismal science" and the consequences of Economics on political and social activity. The discussion of the role played by risk and insurance in modern society alone would be worth the read, but the book successfully shows that each of its discussed topics is way more complicated than the received wisdom -- both on the Left and the Right -- would lead one to think.

[Harry · Rating 3 out of 5]

This book raised what I think is an interesting question, and worth some consideration by any thoughtful reader: what exactly is a good book? Does the "goodness" of a book reside in its achievement of what it set out to do—supporting a point, demonstrating a theory, illuminating a collection of facts—or does goodness instead rest in the impact of the book? Is a book good merely on the basis of laying out how a policy could be implemented, or does its goodness depend upon its ability to further conversation and progress discourse? What responsibility rests upon the author to consider the implications of the ideas that they are supporting or deriding?

Depending on your answers, this effort from Joseph Heath ranges from a Good Book to one that is merely middle of the road. In the task that he explicitly takes on—demonstrating the fallacious reasoning behind various critiques of capitalism-as-implemented, Heath is eminently successful. Of the twelve fallacies he identifies, seven are quite adequately dealt with. The flaws of argumentation that attend the other five are, with the exception of his chapter on "why making money is not so bad after all", not fatal. I have no doubt that where Heath's arguments fall down they have been admirably picked apart by reviewers and commentators around the world, so I won't waste words there. In terms of the task that it explicitly took on, Economics without Illusions is a successful book.

Its weakness emerges not with the fallacies and failures of economic theory that Heath does see, but with those that he doesn't—or that he simply chooses not to engage with.

Very near the beginning of the book, Mr. Heath outlines why the (apparently) right-wing preoccupation with incentives as the central driving force of economics is senseless: either it is false, because people act on all kinds of motivations of which material incentive is only one; or it is true, because incentive-centric economics defines "incentives" so broadly as to encompass everything. Whether it is simply false or trivially true, Heath has established that incentive-centric economics is functionally useless.

Demonstrating the vacuousness of entire theoretical approaches to a given field of knowledge, especially a field held in such religious awe as economics, is important work. It's a crucially important contribution to the discourse of economics, and—given the reverence for economics in our modern civilisation—therefore to the discourse of our world. But it does not appear to interest Heath at all. Having established that gasping failure of economic "science", he simply breezes on to concern himself with fallacies of reasoning within the field, rather than the fallacies underlying the field. The revelation of economics' weaknesses into narrow focus on a related flaw in reasoning is something of a theme: Heath notes that thousands of empirical studies have found the predictions made by economic theory to be reliably inaccurate and that it is impossible to make useful policy recommendations based on the "general equilibrium model" widely used as a foundation for mainstream economics. Then, having exposed serious, important problems with the discipline, he wanders off to lecture us about how we're getting this or that particular aspect of thinking about economics wrong. After several chapters one could be forgiven for wondering at the utility of a book explaining how we are getting economics wrong, when the author is clearly conscious that economics is getting economics wrong.

The book is further hampered by Heath's unwillingness to engage with or question ideas that economics takes as axiomatic, but which underlie many criticisms of the field. Heath provides us with chapters about incentives being important; prices naturally trending to equilibrium; the permanence of "the system"; and the need for capitalism to focus wealth in a small number of capitalists, but bases all of his rationalisations in the economist's truism that "when two people enter into an exchange it's because they both expect to be better off". The possibility for information asymmetries, the value of equality, or emergent goods do not factor into his analysis. Whether those factors are important is beside the point; in a book nominally aimed at convincing people that capitalism is the way to go, sidestepping their main concerns and criticisms seriously undermines the value of the work.

Heath continues the trend by blithely accepting further nonsensical economic diktats: in various lengthy explanations of pricing and comparative advantage he repeats the platitudinous, senseless notion that money has no intrinsic value or bearing on the economy and is "simply a stand-in for the goods that can be purchased". Elsewhere he accepts the economist's myopic view of "goods", suggesting that the positive value of "group shopping" via tax-funded goods is limited by its compulsoriness; people with no children, Heath suggests, get a bad deal out of government spending on public schools. Presumably people with no children derive no benefit from living in a dynamic, well-educated, politically engaged, equitable society.

The overarching theme of this book is missed opportunity. Certainly, Heath succeeds in his stated goal: responding to twelve leading criticisms of modern free market capitalism. That goal, however, was inadequate to contribute much to the ongoing discussion on capitalism. On the one hand, Heath fails to properly engage with and even attempt to allay the concerns and criticisms levelled by the left. On the other, he relies upon axioms of mainstream economics that lack any reflection in reality and in fact have come under heavy criticism from within the field of economics itself, emphasising rather than ameliorating the weaknesses and failings of economic inquiry.

As a handbook of responses to common talking points, Economics without Illusions is mostly acceptable, and readers who want that and nothing more—readers who are, I suspect, already convinced by the position that Heath wants to persuade his readers to accept—will consider this a Good Book. As a contribution to the wider discourse on capitalism, quantification and mainstream economics, however; that is, as a contribution to the discourse that Heath wants to contribute to, this book shies away from saying anything of much value.

[Westcoastsusan · Rating 5 out of 5]

So it turns out that 'hyperbolic discounting' is not actually an annoying debate technique but rather a description of the universal human tendency to over-weight near term costs and to over-discount long term ones.

We already know this about ourselves. We don't stick to our own virtuous long term plans; Yeah, we're better at it as older adults than we were as teenagers, but we 'sign up to show up' and lock ourselves in to accountability because we know; We know the power of appetite; We know that the horizon can seem infinitely far away.

Heath writes:
"A proper understanding of hyperbolic discounting [..] serves to dissolve much of [the] old-fashioned antagonism between liberty and paternalism. Many social policies that force people to act in their own best interests can be understood not as the high-handed intervention of the "nanny state", but rather as a self-binding strategy that individuals themselves may be perfectly happy to support."

[Suhrob · Rating 5 out of 5]

There is a chance that one could rate a book like this high just because one agrees with it. I do agree with vast majority that is said here, but even if I try to account for this bias I still think it is an incredibly worthwhile read and arguably there is genuine attempt to be balanced (there are 6 fallacies both for left and right). Don't get turned off by the sensationalist title, this is a well thought through, reasonable discussion. Heath might suffer a bit of hindsight smugness, some points might be discutable, but I think it is even worth a second read (something I almost never do!).

Also a big plus for me is that the essentially the whole book is argued from the neo-classical standpoint i.e. not using the currently popular behaviourist approach (with a small exception of a discussing hyperbolic discounting and dynamical preference inconsistency). Heath even explicitly states his reservation to behavioral economics in the appendix (via the charity principle). I am much more open to the behavioral approach (if done carefully), but I think the first line of attack on most of these fallacies can (and should) be done from the more classical standpoint.

This concludes the review. Now the part where I unsolicitedly vent my frustration by using snippets from the book (aka Give me rampant intellectualism as a coping mechanism!)

Meanwhile, other departments (like philosophy) find themselves turning away job applicants literally by the hundreds. The wage rate, which should be sending a signal to the effect that “the world does not need more philosophers,” is sending the opposite message. As a result, society must rely upon unemployment, rather than low wages, to deter entry into the field. Because of this, something of a “lottery economy” develops, where some people win big and most wind up with nothing.

Oh yes, that does make me feel better! Fret no more, there are solutions too:

With other sorts of employment, on the other hand—anything that is advertised as “pampering”—the waste of someone else’s time constitutes a significant element of that which is being consumed. This is why there are fewer maids than there once were but more massage therapists. The more expensive the other person’s time is, the greater the sense of luxury produced through the act of wasting it.

May I interest you in our Feng Shui interiror designers with PhDs? They study Dark Energy... you don't want that nasty stuff to flow through your appartement, clogging up your chakras, do you?

[Nick · Rating 5 out of 5]

This is a "landmark" book which anyone on the political "Right" and, especially anyone on the political "Left" should read. The author challenged, and in many cases destroyed my economic assumptions. Heath is a very witty, intelligent and, when need be, blunt writer, who isn't afraid to tell it like he sees it and back up his points logically. His being a philosopher first, instead of an economist or activist enabled a relatively balanced book, and produced a paradigm of constructive critical thought. The book is not flawless, but it is very, very good, and very powerful.

[Lee · Rating 3 out of 5]

This book is written for a wide audience, pitched particularly to progressives who aren't sure what to say to rightwing economics types. The aim is debunking economic fallacies on both the right and left. If that sounds like something you want to read, it delivers and I can recommend. For me it covered too much familiar material, but I gleaned some new insights and anyway enjoy Heath's way of thinking. My main criticism of this book is actually that it is what (and only what) it purports to be: a collection of fallacies debunked, rather than a positive leftwing economic program. Some radical ideas are alluded to, and you can find them in the footnotes, but that's not really what this book is about.

Some interesting topics covered:
* Anarcho-capitalism cannot overcome the collective action problem of rule-enforcement needed to enable market exchange. Libertarianism justifies a minimal state on the grounds that it is required to overcome that collective action problem. But once we have a state, there's no principled reason it cannot solve other collective action problems. The market is just one social program among others.
* Many social programs can be justified on the same grounds as market-enabling ones: public pensions overcome adverse selection, eg.
* Objections to welfare policies frequently take the form of citing the mere possibility of moral hazard. But wherever risk is pooled, privately or publicly, there is a potential cost of the indemnity ("handouts") encouraging moral hazard ("irresponsibility"), so that's just one cost to be weighed against sometimes considerable benefits. Anyway, it is an objection to insurance generally, not just public insurance.
* Economic popularizers often say "people respond to incentives," but that is either vacuous (incentives are definitionally that to which people respond) and tells us nothing, or it is a substantive empirical claim about the character of incentives (ie, that people will maximize their interests, narrowly conceived) that is doubtful.
* Many recommendations that we adopt policies for the sake of international competitiveness are simply confusing comparative advantage for absolute advantage. Ricardo's point was that only comparative advantage is necessary to gain from trade.
* When scarcity pricing represents true social cost, it really is best not to muck with it. If the problem is that someone cannot afford something, it's usually better to give them money so they can afford it rather than lower the price.
* Related to the previous point: the socialist Oskar Lange wrote that the central attraction of capitalism, when properly institutionalized, is that "competition forces entrepreneurs to act exactly as they would have to act were they managers of production in a socialist system." No competent socialist planner would allocate commodities on any basis but their scarcity.
* What goes for prices (mostly) goes for pay, which is just the price of labor. Mucking with it tends to be wealth-destroying. Even if our concerns are solely distributional, that is seriously a problem when you consider the foregone economic growth even just over the lifetime of an individual. What you get paid is mostly a reflection of the opportunity cost of employing you in a role, which in turn is mostly dependent on your context (1500 France? 2022 America? 2022 Haiti?) and not any inherent value you possess.
* There's also an interesting long passage on Lancaster and Lipsey's "General Theory of the Second Best," which I cannot do justice to. The idea is something like the following. Under a certain set of conditions, you can show that a competitive market delivers Pareto optimal results, but it is widely acknowledge that those conditions don't obtain in reality. Here's the issue: implicitly many economists talk as if the closer we are to meeting those ideal conditions, the closer to Pareto optimality we will be. But that doesn't actually follow, and there is (apparently) a mathematical theorem to the effect that better approximations can be had by mucking with other conditions so that they deviate from the ideal. So at the very least this shows that in a fallen world of non-ideal market conditions the efficiency-minded economist has to wrangle with policies on a case by case basis.
* Lastly, being economically-minded and focused on solving environmental problems in a sensible way, Heath cannot help but share a few original contrarian takes clearly intended to rankle. I admit that I find these delightful. (1) Using incandescent light bulbs in the winter generates heat, which in a thermostat-controlled home is no worse than LED bulbs, since the extra heat is perfectly offset by reduction in electric power that would otherwise be needed to raise the temperature (it's a closed system!). And (2) because paper comes from pulping cash crop trees, throwing paper in the trash (instead of recycling it) is a straightforward instance of carbon sequestration.

[Jens · Rating 4 out of 5]

Erg goed boek dat verschillende economische misconcepties behandelt met een kritische noot op het kapitalisme. Sommige redeneringen zijn echter contra-intuïtief en af en toe net iets te liberaal. Maar zeker een aanrader als je meer wil weten over economie zonder een boek te lezen dat de vrije markt de hemel in prijst

[Tim · Rating 3 out of 5]

Real rating should be 3.5. This book had some very interesting viewpoints it also was very confusing and in my opinion sometimes also wrong viewpoints.................. but the amount of new ideas that it gave me outweighed the not so good material.

[Kevin Reinholdt · Rating 5 out of 5]

The book is written by a Canadian philosopher. It scrutinizes economic arguments in the political debate. It does so without any technical difficulties, and by very well formulated and intuitive argumentation.

Interesting that paper recycling can reduce amount of trees, as vegetarians reduce cow population, and that car safety increases cancer due prolonged life expectancy. Ch. 1 explains the fallacies of libertarianism in extreme form, that is why we need a government. Ch. 2 claims that economists overestimate the importance of incentives, exemplified by controlled experiments where people act unexpectedly. Extensive welfare state may be inefficient due to high taxation, but regains efficiency by social programs such as maternity leave, which cause higher labor force participation and lower population growth. Ch. 3 exaggerates the second best theorem. Ch. 4 suggests an educational effect by replacing government with all of us. It equates public and private markets, arguing no effect of tax cuts, without accounting for differences in efficiencies. Ch. 5 states obviousness about international trade. Ch. 6 suggests that socialist institutions might reflect risk pooling, which is counterweighted by moral hazard (relate it to Peter Singer and donations). Ch. 7 argues not to fiddle with prices, and thus that politicians tend to fuck up the economy. Ch. 8 explains features of companies/cooperatives, and argues that it is easier to have public control over private firms than over state controlled firms. Ch. 9 presents business cycles, to which he prefers a Keynesian solution. He eloquently refutes the idea of technologically induced unemployment. Ch. 10 justifies wages based on replaceability. This must mean that a constant immigration of unskilled labor cause extreme wage inequality. That occupations don't get squeezed out by increased cost. Ch. 11 argues that impatience (in consuming) cause poverty in industrial nations, explained by a discount function. He suggests restructuring incentives, to make future costs and benefits be accounted for presently. Ch. 12 is a discussion of equality and taxation. He blames status competition for the upper bound of happiness that we seem to have reached. Though status completion can be beneficial insofar as spending is for altruistic purposes.

Very good book that improves ones understanding of economics.

[Rachel · Rating 4 out of 5]

I finally finished! And it only took almost three months! I learned a lot from this book, although I've probably already forgotten a significant proportion of it. The book mostly puts forth good explanations of broad economic theories and truths/falsehoods, but he also explains some specific things, too. For example, I now have a much better handle on the current economic/housing crisis.

[Craig · Rating 4 out of 5]

A very simplified overview of the field of economics. With critiques of both left and right wing economic policies and theories. A fascinating and humorous introduction for a chap like myself who knows virtually nothing about economics. I'll probably read it agin some day to remind myself.

[Yudhister · Rating 4 out of 5]

Good exposition of useful frames. Albeit mildly simplistic at times.
Libertarians and Social Darwinists

His defense of libertarianism the ideology is useful and draws on the prevailing intuitions that Darwinianism created, namely that order emerges from chaos and that there are self-organizing principles in simply-ordered systems. See:

In order to see the attractions of libertarianism, it is important to consider two very powerful images that emerged from the nineteenth century. The first regards nature as an optimizing system, with Darwinian natural selection ruthlessly weeding out the sick and unfit. The second regards capitalism as an optimizing system, with the discipline of the market driving out the lazy, irresponsible, and inefficient. The confluence of these two ideas is summed up perfectly in Herbert Spencer’s expression “survival of the fittest,” initially used to describe social relations in the market economy but subsequently extended to describe evolutionary dynamics in the natural world.6

Indeed, Spencer was not the only one to be struck by the similarities between Adam Smith’s “invisible hand” and Charles Darwin’s mechanism of natural selection. Both represented systems of “spontaneous order”—situations in which an outcome that looked like the product of meticulous planning and design turned out in fact to be the result of a “blind” mechanism. If one looks at bird beaks among different species, for instance, it seems that each was designed for a particular task: cracking seeds, catching fish, tearing meat, and so on. Darwin was the first to propose a mechanism that could achieve this result without positing any sort of conscious design.

The market exhibits a very similar structure. When left to its own devices, the movement of prices ensures that labor and resources migrate to their best employment. If there is a shortage of coal, tin, wheat, or whatever, prices will be bid up until only people who are able to make best use of these inputs are able to afford them. An alien observing from on high might think that some conscious intellect was rationing these goods, but in fact the outcome is nothing more than a consequence of each individual’s pursuing his or her own interest under the appropriate circumstances. Tin cans are no longer made out of tin, and nickels are no longer made out of nickel, not because anyone sat down and decided that these metals would be of greater use in other applications, but simply because the price of these metals was bid up to the point where it became economical to change the way tin cans and nickels were made.

The medieval Christian worldview assumed that all the order in the universe was a product of some underlying divine purpose. Everything from rocks, plants, and animals to humans needed to be understood in terms of the good that was sought, since this good represented the place of each of these creatures in the providential order. Striving for the good was seen to be the “final cause” of all natural and vital motion. In the case of humans, this good was sought self-consciously, taking the form of “natural law.” The highest manifestation of this pursuit of the good was the state, which was taken to be the agency through which humans sought to give concrete expression to the dictates of this natural law.

The central success of the Scientific Revolution was its demonstration of how “orderliness” could be explained without divine intention. Newtonian mechanics allowed one to show how heavenly order (the regularity of planetary orbits, their alignment in a single plane) could be explained without God. In the case of living things, Darwin showed how a perfectly “blind” mechanism, such as natural selection, could achieve adaptation and “design.” There was no need to assume that living creatures sought some good or pursued some higher divine purpose; a narrow drive for self-preservation was all that was required for natural selection to occur.

In the case of society, Adam Smith showed that a perfectly “blind” mechanism was able to achieve order. There was no need for conscious guidance by the state, since the market mechanism was able to produce optimal allocations on its own. Furthermore, there was no need to assume any pursuit of the good, or any higher divine purpose, on the part of individuals. When seen in this light, “natural law” becomes irrelevant; the narrow pursuit of self-interest is all that is required to achieve what Spencer described as “a constant progress toward a higher degree of skill, intelligence, and self-regulation—a better co-ordination of actions—a more complete life.”

Thus twentieth-century libertarianism developed, essentially as an application to society of the principles of the Darwinian revolution. Aristotle thought that “the good” was required in order to have order in either nature or society; as it turned out, it wasn’t required for either. What libertarians posited, in the place of the state and of natural law, was simply a system of natural rights, most famously the rights to life, liberty, and property.

From this basic point of departure, two flavors of libertarianism developed. The first claims that self-interest alone is enough to motivate individuals not only to assert their own rights, but to respect the rights of others.8 No government whatsoever is required; a market economy is perfectly capable of arising in the so-called state of nature. The second claims that a state is required in order to prevent individuals from interfering with one another’s rights but that this constitutes the only legitimate role for government. Libertarians of this tendency endorse a minimal, or what Robert Nozick called a “nightwatchman,” state—one that has no mandate to take any positive action: it is merely there to ensure that the rights of individuals are respected.

Over the years, libertarians tried various strategies to show that all this could be accomplished entirely through decentralized, self-interested action. Unfortunately, they never quite succeeded in doing so.

The libertarians failed, Heath argues, because of a few reasons (the Law of the Second Best features quite prominently), but mainly that “competition is nonproductive from the standpoint of [the general population]” in a Darwinian sense. Natural selection can’t be optimizing, because otherwise the Earth would be covered in a smooth, uniform layer of bacteria! Members of the same species end up competing against each other for resources, and as a result the pressure for better ‘fitness’ on the individual level doesn’t correspond to better ‘fitness’ on the population or the species level!

For the purposes of his argument, that pure libertarianism is doomed because an authority is needed to enforce Hume’s three “fundamental laws” (private property, voluntary exchange, contract enforcement), it works. But the general argument that ‘evolution doesn’t optimize’ or that ‘optimization occurs on the organismal level not the species level’ is clearly flawed, because it occurs on the genomic level. Trait prevalence waxing and waning in a population is the measure of the fitness, not the survival of an individual species (genes are initialized and fixed at birth).

If I understand correctly, this is why it makes sense to consider ‘memetic evolution’ or the ‘marketplace of ideas’ as analogous to traditional evolution, as the ideas themselves act on carriers and get transmitted via similar means as DNA. But considering competition in and of itself as the driver of fitness and then deciding that it doesn’t make ‘organisms’ or ‘species’ more fit is begging the question? These systems exist and are replicators of themselves, and in fact the thing getting replicated is the source code, and if it does not benefit the source code then it likely won’t be replicated.

This is why “reproductive success of the individual” is a slightly incorrect metric to consider. Yes, natural selection may not be optimizing directly for the “reproductive success of the individual”. But if the individual is reproductively successful this is evidence that its genome was good, and its genes get propagated slightly more in the population. And this is slightly different than optimizing for individual welfare, slightly different than optimizing for societal welfare, but can still be described by an optimization process nonetheless.

Here is where the analogy to the market starts to break down. Qualitatively, genes don’t have agency, while humans do. Humans have their own preferences and desires (dare I say ‘utility functions’), and behave in some correspondence with those (insert discussions on human rationality here). Markets mediate interactions between humans, and as such we get such phenomena as ‘free rider problems’ and ‘prisoner’s dilemmas’ when self-interest clashes with societal interest. Of course drawing from Darwinian logic won’t help us much here. But there are other studies of incentive & mechanism design, human psychology, and game theory that can maybe help us get a handle on which sorts of societal structures can be designed to have naturally occurring good outcomes from self-organization.

Yes, these fields are flawed. It’s just illustrative. I may consider it a fool’s errand to try and make these on the nationwide level at the moment, but superrationality-esque things do exist and it is not the death-knell to the pure libertarian hope of a purely self-organizing society that we do not behave according to the dictates of evolution. Maybe we just have to be smarter. But Heath’s practical point, that pure libertarianism as envisioned now would fail now, is broadly correct.

International Competition Doesn’t Exist??

We do not compete with China, India, or Mexico when we trade with them, nor do we compete with firms in those countries.

This is a weird definition of competition.

There are consumers in the world. These consumers have the ability to buy from American producers, Chinese producers, European producers, and Indian producers. These consumers will likely attempt to minimize costs, and via the virtues of modern currency exchange will be able to buy secondhand Lego sets on Alibaba rather than Amazon. As a result, the secondhand Lego set sellers on Amazon have less revenue, and perhaps no longer can maintain a sustainable profit margin.

Wait! But the foreign currency transaction hides something!

Currency is thus an incredibly important mechanism when it comes to regulating international trade. Yet all of these complexities should not be allowed to obscure the fundamental fact that in international trade, all imports are ultimately paid for with exports. This is an immediate consequence of the fact that trade is a system of exchange. China doesn’t just give us stuff; they also expect something in return. Of course, they may not demand repayment immediately (and by “repayment,” I mean payment in real goods, not paper money). They may choose to park their money in the country for a while, by buying government bonds or some other form of investment. This is what makes it possible for a country to show a trade deficit. When imports exceed exports, it means only that this year imports exceeded exports, because foreigners are now holding more of our currency (or debts denominated in our currency) than they were in the past. Eventually, by hook or by crook, they will have to be repaid with exports. After all, they’re not stupid. They don’t want our money: They want our goods.

Money is just a voucher, you see. It’s redeemable for a specific nation’s goods and services. Ultimately, domestic production will have to respond to trade deficits because otherwise how would we pay other countries??

There’s a hidden assumption here that the buck eventually stops. I think this is a pretty heavy assumption to make, and that perhaps maybe society has converged on the US dollar as a coordination mechanism more than anything else. Also crypto. And bitcoin.

Prices

Aristotle argued that a “just price” should be determined by equalizing the benefit going to either party to the exchange. Augustine thought that the desire “to buy cheap and sell dear” was a vice, and that the price should be determined by the intrinsic value of the object. John Duns Scotus argued that prices should be determined on a “cost plus” basis (and thus that supply-side considerations should predominate). The Renaissance “Salamanca School,” on the other hand, focused more on the demand side, arguing that goods should be priced in accordance with the extent to which they are “esteemed”.

The view that came to predominate, however, is that prices should be determined by the relative scarcity of the goods. (The scarcity in question is relative because the adequacy of any given quantity of good is a function of how much people want it: Scarcity is determined by the relation between supply and demand.) It is this concept of scarcity pricing that Layton was tacitly rejecting, by demanding that gas prices remain low during a time of shortage. Now it happens to be a feature of the market economy that competition generates scarcity pricing. However, the appeal of the basic principle extends far beyond whatever affection one may have for the market. One of the great insights of the “socialist calculation” debate of the early twentieth century was the realization that any economic system, capitalist or socialist, would want to use scarcity pricing if it hoped to avoid wasting vast quantities of resources and labor.

It would be great if the world worked in a manner such that everyone could “pay-as-they-want” for goods, in a way that maximized consumer surplus. Sadly, we have not yet figured out a way to allocate goods and services with this method in a way that is actually in accordance with how much individuals value given items. Relative scarcity pricing is the best we’ve got—but with the slight pitfall that individuals have massively different levels of financial resources, and as a result the same price for two separate individuals means two completely separate valuations of the same product.

One way to try to fix this is with price controls. This is quite a bad solution, as you’re eliminating a really good source of information (the untethered prices) as well as benefiting the rich differentially more than the poor, because the rich can still buy more than the poor. Perhaps you’d try to fix this with quotas, but even then, you’re benefiting the rich at least as much as the poor.

Another way to try to fix this is with income interventions. Make the poor richer, and hopefully the gap between rich and poor narrows. This is good! Some thought must be placed into the specifics (cash transfers, food vouchers, tax breaks), but this doesn’t eliminate the only known efficient mechanism for allocating goods under scarcity.

A surprisingly-not-apocryphal example can be found in the case of Oxfam’s attempt to alleviate the coffee fair trade problem at the beginning of the century.

…Oxfam calculated that in 2001 the total world supply of coffee was 115 million (132-pound) bags per year, whereas total demand was in the neighborhood of 105 million bags. The glut was caused not only by an increase in production, but also by a precipitous decline in coffee consumption in the developed world. [annual coffee consumption in America declined from 36 gal/person in 1970 to 17 gal/person in 2000] …The low price of coffee was thus caused not by market failure, but by the scarcity pricing mechanism functioning exactly as it was supposed to.

…

In a classic case of treating the symptoms rather than the disease, Oxfam and other fair trade enthusiasts suggested that Western consumers should respond to the glut by paying producers higher prices for their coffee. Not only is it the wrong thing to do (in the sense that it won’t solve the problem), but it’s the opposite of the right thing to do (in the sense that it will exacerbate exactly the problem that it is intendend to resolve).

…

It is to Oxfam’s credit, however, that it was forthright in acknowledging the consequences of the policies it was recommending (unlike many purveyors of fair trade coffee beans). Oxfam recognized that fair trade pricing would do nothign to address the underlying problem, which was the excess supply of coffee. And so the flip side of Oxfam’s eleemosynary pricing policy was a committment to destroying existing stocks of coffee beans. They recommended that “governments and companies” purchase about 5 million bags of coffee (at an estimated cost of $100 million) and destroy them.

Ah yes, we will buy hundreds of millions of dollars worth of a good that no one needs and then destroy it because this is somehow better than those same producers correcting earlier to produce different things given that the paying-for-beans-to-be-destroyed policy cannot be sustainable. Wonderful.

Interesting point about rich countries: we don’t have as much domestic labor here vs. in developing countries because services get more valuable as a country gets richer, so a person’s time becomes more valuable, and therefore paying them to do menial tasks for you in America is much more expensive than in India. Whereas in India, their counterfactual is much less valuable than the American counterfactual, so domestic labor is cheap.

[Amie · Rating 4 out of 5]

3.5 rounded up to 4.

Filthy Lucre by Joseph Heath is a critique of common misconceptions about capitalism, aimed at readers skeptical of economics. The author explains fundamental economic concepts like supply and demand, externalities, and market efficiency, arguing that many critics misunderstand how markets function. He suggests that while capitalism has flaws, such as market failures and external costs, it can be effective at resource allocation when regulated properly.

The book critiques some ideologies, both libertarianism's rejection of regulation and anti-capitalism’s dismissal of market benefits like innovation. He emphasises a pragmatic approach, advocating for a balance between market mechanisms and government intervention to address capitalism's shortcomings without rejecting it outright.

I liked the clear explanations of complex economic theories and the 'debunking' and thought provoking commentary on widely held misconceptions about economics and capitalism. The way it is written does a good job of connecting theoretical concepts to practical scenarios. The author's writing is accessible and engaging and offers useful insights and critiques relevant to real-world economic policy and debates. The book really encourages you to think critically about economic ideologies and policies.

A couple of specific negatives about the book:

It is a little repetitive (and dense) at times, repeating arguments and concepts. I would treat each myth buster chapter as an essay on its own rather than necessarily reading from cover to cover like I did.

I also found the book's publication under two different titles and subtitles (e.g., Filthy Lucre and Economics Without Illusions) annoying and confusing. This bothered me probably more than it should!

[C. Varn · Rating 4 out of 5]

This is a book I often disagree with--as it actually naturalizes the assumptions of a kind of center-left liberal Keynesianism that also incorporated a lot of the monetarist theory popular in Canada and amongst "New Democrats"--but I deeply appreciate it because Heath is a philosopher and spells out a logical argument even if one rejects some of his premises. The ‘Economics for those who hate capitalism’ is misleading as Heath thinks a kind of capitalism is the only game in town but he is good at debunking left moralism (although he often misrepresents Marxist responses and seems to ignore that MMT was developing when he was writing this book) and a lot of neo-classical market "fundamentalism." The book tries to be balanced--six right-wing and six left-wing fallacies--but the right-wing fallacies come pretty much from either Chicago or Neo-classical assumptions as left-wing fallacies are all over the place (and discrete schools of either thought aren't really presented in totality with their own premises spelled out.) There are some interesting and true observations here: market equilibrium requires such a level of knowledge symmetry, it would require the abolition of time and there is literally no reason to assume it develops linearly, capitalism requires both private and public insurance to stabilize the possibility of investment, a lot of left-wing local reforms don't really deal with the incentive changes in the broader market that have perverse externalities. That said, Heath naturalizes his own assumptions, but he does argue for it well.

[Gavin Esdale · Rating 5 out of 5]

It's not easy when a book makes me feel incredibly underinformed, and it's equally frustrating when a few cherished convictions get the critical treatment from someone who did his homework.

So the book comes as advertised: an assessment of the herd and then a gleeful romp through the field tipping over a bunch of sacred cows, only the herd is economics and the sacred cows are a set of misguided ideas from both the left and right sides of the conventional economic spectrum.

I liked it because Heath comes to the field as a (verbose yet practiced) mostly neutral observer and doesn't pull punches when it comes to tackling long-held convictions. It is refreshing to read a piece on economics that doesn't automatically assume capitalism is the de facto best option, but still operates within the fact that it is the system we have, and for a long list of solid reasons (which are helpfully provided by Heath).

As a book, I like it because I feel better informed for having read it, and it hasn't made me wearied by economics, which is quite notable considering how difficult some of the book's material is (heaven help me, I still don't fully understand the general theory of second best). It isn't an easy read by any stretch, but this is because this subject is conceptually difficult in more ways than I expected it to be, and has a far-reaching list of implications for how I'll be thinking about economics and public policy from here on.

You should probably read it.

[Jack Greenrose · Rating 4 out of 5]

Economics without illusions, why not. Considering that Joseph Heath is neither an economist nor political scientist, I didn't expect much from a book about political biases from an economic standpoint. But this is actually a decent package of information. This is not a perfect book on economics by any means. Heath cuts corners here and there and is occasionally quite repetitive. Whether minimum wage causes unemployment or not is an unsettled issue, for example, but Heath tries to paint a picture as if it were and that economics 101 (and the political right) has been proven to be wrong. Yet he is sophisticated enough to approach most of the issues from multiple angles and balance contradictory evidence and views in a meaningful way. This is a feat rarely achieved even by those who pride themselves on their imagined objectivity.

In short, the world is getting better (read Steven Pinker's Better Angels of Our Nature and Enlightenment Now if you want an overwhelming amount of evidence to support this claim) and, in many ways, capitalism deserves our gratitude for it—but it comes with some systemic errors, which is why markets cannot be 100% unregulated or exist without strong institutions. And this books tells you why this is a fact (while helping you break out of your political echo chamber).

[Joel Wentz · Rating 4 out of 5]

This is a very enjoyable, and from what I can tell, reasonable and balanced take on common ways of thinking through economic issues today. The fact that it's from a philosopher (and someone who is clearly more interested in the social sciences, as opposed to a strict economist) will either be a plus or minus, given your proclivities (for me, it's a big plus). Even though he doesn't officially have economic training, he clearly understands data, and he leverages it to great effect. Some chapters are stronger than others (particularly the ones on 'individual responsibility' or 'minimum wage'), and generally I found the first half of the book (on right-wing fallacies) a bit stronger than the second (on left-wing fallacies), but it's a thoroughly insightful and enjoyable-to-read book. Definitely an easy recommendation for those who are interested in more popular works on economics, especially those who are drawn to more partisan lines of thinking, as Heath challenges both sides equally.

[Irene · Rating 4 out of 5]

I vacillated between 3 stars and 5 stars the entire time I was reading this book. I think I need to read more about economics to resolve my questions. The author was reasonably objective about both camps (free market vs state intervention) and I learned a lot, yet something keeps niggling at my brain. Economics seems to be based on assumptions that are never spelled out, such as "eliminating poverty is a good thing" or "accepting personal responsibility is better." Even if society is able to eliminate poverty (I have my doubts), the assumption is that this would benefit the poor and improve society as a whole, while not harming anyone else. I'm not so sure it's that simple.

Anyway, I couldn't decide on 3 stars or 5, so I split the difference.

[Alex · Rating 5 out of 5]

I was surprised at how much I learned from reading this book. The author's explanations are clear and easy to understand, while at the same time not sounding like one of the neo-liberals who seem to dominate the economic literature. The book also takes lessons from behavioral economics, as well as from other fields often ignored by the dismal science. It might also be important to some people that this author is Canadian and uses Canadian examples. While there are parts that ought to be taken with a grain, such as his view on paper recycling(which isn't as helpful as you'd think but still has a small positive impact) overall it is one of the best books I read this year.

[Emma · Rating 5 out of 5]

I have tried and failed for a really long time to wrap my head around basic economic concepts, and this book really helped me. Heath makes some arguments here that I definitely need to read more about in order to assess the value of, but his logical and clear style makes it really easy to understand the basic premises in a way I’ve rarely been able to do. Really enjoyed this read and learned a lot!

[Shoshannah Cohen · Rating 3 out of 5]

I read a paperback version, not an ebook. I read this both because I had liked something else by this author, and because I was hoping to learn more than I know, which is almost nothing, about economics. It was okay for that, but there were many points at which I wasn't sure how much was the author's theory and how much was based on seeing how people actually behave.

[Leer es Pensar · Rating 5 out of 5]

Libro excepcional, que trata de 12 falacias de la economía, (aparentes verdades pero que al final son mentiras o errores)
Genial en la forma de ver fallos de concepto y de entender la economía, se lee lento por la forma descubre, choca, rompe, contrasta, argumenta nuevas ideas y aveces contrarias como se entiende la economía.
Explicada en varias ocasiones en ejemplos censillos y comunes.

[E.A. Amant · Rating 5 out of 5]

For a step by step refutation of modern economic liberalism as presented in such works as Filthy Lucre, see The Welfare State Laid Naked, at eastamant.com; in the above book for instance, not a single mention of Sowell, Popper or Mises, one mention of Hayek; so disappointing as to be wilfully ignorant.

[Kota Abe · Rating 5 out of 5]

An essential read for anyone who wants to have a better understanding of how the economy works, especially these days when economic issues are front page news. I realized that many of the things that I believed about the economy, and that I have heard repeated by many politicians and online commentators, were fallacies.

[Jack Oughton · Rating 4 out of 5]

This made me rethink quite a few things I'd taken for granted in economics. I'm not sure how true a lot of the statements he makes are, but the fact it makes you re-examine your commonly held micro/macro-economic beliefs makes it worth a read. Quite interesting

[Brian Moynihan · Rating 5 out of 5]

Wonderful. I frequently reference this book and wish people would read it. Joseph Heath is an original, clear, and challenging figure who is a breath of fresh air in political and economic discussions.

[Mesha · Rating 5 out of 5]

Must read - Very accessible & fairly reviewed account of both the "right" and "left" hand takes on Capitalism.