All’s well that ends well

” ‘A merry Christmas, Bob!’ said Scrooge, with an earnestness that could not be mistaken, as he clapped him on the back. ‘A merrier Christmas, Bob, my good fellow, than I have given you for many a year! I’ll raise your salary, and endeavour to assist your struggling family, and we will discuss your affairs this very afternoon, over a Christmas bowl of smoking bishop, Bob!  Make up the fires and buy another coal-scuttle before you dot another i, Bob Cratchit!’

Scrooge was better than his word. He did it all, and infinitely more; and to Tiny tim, who did not die, he was a second father.  He became as good a friend, as good a master, and as good a man, as the good old city knew, or any other good old city, town or borough, in the good old world…And so, as Tiny tim observed, God bless Us, Every One!’ “

Charles Dickens, A Christmas Carol, December 1843

Celebrating Christmas in the valley of the shadow of death

“At last the dinner was all done, the cloth was cleared, the hearth swept, and the fire made up. The compound in the jug being tasted, was considered perfect, apples and oranges were put upon the table, and a shovel-full of chestnuts on the fire.  Then all the Cratchit family drew round the hearth, in what Bob Cratchit called a circle, meaning half a one; and at Bob Cratchit’s elbow stood the family display of glass. Two tumblers, and a custard-cup without a handle. 

These held the hot stuff from the jug, however, as well as golden goblets would have done; and Bob served it out with beaming looks, while the chestnuts on the fire sputtered and cracked noisily. Then Bob proposed:

‘A Merry Christmas to us all, my dears. God bless us!’  Which all the family re-echoed.

‘God bless us every one! said Tiny Tim, the last of all. He sat very close to his father’s side upon his little stool. Bob held his withered little hand in his, as if he loved the child and wished to keep him by his side, and dreaded that he might be taken from him.

‘Spirit,’ said Scrooge, with an interest he had never felt before, ‘tell me if  Tiny Tim will live.’

‘I see a vacant seat,’ replied the Ghost, ‘in the poor chimney-corner, and a crutch without an owner, carefully preserved.  If these shadows remain unaltered by the Future, the child will die.’

‘No, no,’ said Scrooge. ‘Oh, no kind Spirit! say he will be spared.’

‘If these shadows remain unaltered by the Future, none other of my race, ‘ returned the Ghost, ‘will find him here. What then?  If he be like to die, he had better do it, and decrease the surplus population.’

Scrooge hung his head to hear his own words quoted by the Spirit, and was overcome with penitence and grief.’

Charles Dickens, A Christmas Carol, December 1843.

God bless us, everyone!

Ebenezer Scrooge and the dark side of the force

In yesterday’s column, I distinguished between two aspects of self-interest: the bright side that enhances wealth and well-being through trade, and the dark side that augments immiseration through conflict. I suggested that a small window exists for trade and wealth-enhancement even when individuals are driven by the dark side of the force.

Today, Christmas Day, I shall illustrate my point by reference to the behavior of Ebenezer Scrooge in Charles Dicken’s famous Christmas story, A Christmas Carol.

Ebenezer Scrooge, when the story begins, is driven inexorably by the dark side of the force:

Oh!  But he was a tight-fisted hand at the grindstone, Scrooge! a squeezing, wrenching, grasping, scraping, clutching, covetous old sinner! Hard and sharp as flint, from which no steel had ever struck out generous fire; secret, and self-contained, and solitary as an oyster.  The cold within him froze his old features, nipped his pointed nose, shrivelled his cheek, stiffened his gait; made his eyes red, his thin lips blue; and spoke out shrewdly in his grating voice. A frosty rime was on his head, and on his eyebrows, and his wiry chin.  he carried his own low temperature always about with him; he iced his office in the dog-days; and didn’t thaw it one degree at Christmas!

External heat and cold had little influence on Scrooge. No warmth could warm, no wintry weather shill him. No wind that blew was bitterer than he, no falling snow was more intent upon its purpose, no pelting rain less open to entreaty. Foul weather didn’t know where to have him. The heaviest rain, and snow, and hail, and sleet, could boast of the advantage over him in only one respect. they often ‘came down’ handsomely, and Scrooge never did”. Charles Dickens, A Christmas Carol  December 1843

There, in consummate prose, dear readers, Charles Dickens defines the dark side of the force.

Yet by story’s end, a radically different Ebenezer Scrooge emerges from those dark shadows into the sunshine of a Christmas Day:

“He became as good a friend, as good a master and as good a man, as the good old city knew, or any other good old city, town, or borough, in the good old world.  Some people laughed to see the alteration in him, but he let them laugh, and little heeded them; for he was wise enough to know that nothing ever happened on this globe, for good, at which some people did not have their fill of laughter at the outset; and knowing that such as these would be blind anyway, he thought it quite as well that they should wrinkle up their eyes in grins, as have the malady in less attractive forms.  His own heart laughed: and that was quite enough for him…and it was always said of him, that he knew how to keep Christmas well, if any man alive possessed the knowledge. May that be truly said of us, and all of us! And so, as Tiny Tim observed, God bless Us, Every One!”  ibid.

Now, how that transformation came about is explained in the story – which you are strongly encouraged to read. Two interpretations are possible. First, Ebenezer Scrooge may have undergone a fundamental  transformation from the dark to the bright side of the force, like Saul to Paul on the Road to Damascus.

Alternatively, Ebenezer Scrooge may have peered into the future in his third dream, and viewed the likely dreaded  consequences of continuing to behave as his instincts signaled that he should. Scrooge may have squeezed through the narrow window of trade that remained open to him on the dark side of the force,  in order  to protect himself from the horrendous future depicted for him by the Ghost of Christmas Yet To Come!

A Merry Christmas to all you, readers of these columns. May you all and always  enjoy  Christmas Day on the bright side of the force.

And do not ever forget that the force – bright or dark – is always with you.

US politics in 2011: Niccolo Machiavelli defeats Ronald Coase (1)

In modern democracies, politicians exert enormous influence – for good or for bad –  over the economic well-being of  those who elect them into office.  Public choice hypothesizes that such politicians are driven largely by narrow self-interest. Campaign funding, personal wealth accumulation, and the vote motive appear center-stage in their individual utility functions. Water, as they say, tends to run downhill for all of us, whatever our station in life.

A key question, in such a political environment, is which side of the self-interest force – the bright or the dark – drives  interactions in the market-place of politics.  Two important economic theorems offer powerful insights into the nature and potential economic consequences of those two competing impulses.

The bright side of the force, advanced by Adam Smith (1776) with respect to private markets, focuses attention on value-adding interactions between self-seeking individuals. In Smith’s judgment, the wealth of a nation depends largely on allowing such value-adding trades to proceed unhindered. 

In 1960, Ronald Coase (University of Virginia) advanced a proposition based on the insight of Adam Smith  that would eventually win for him a Nobel Prize, and that is now referred to as the Coase Theorem:

“It is always possible to modify by transactions on the market the initial legal delimitation of rights.  And, of course, if such market transactions are costless, such a rearrangement of rights will always take place if it would lead to an increase in the value of production.”

Readers should be aware that Ronald Coase did not believe that transaction costs are always zero. A rider to his theorem took the following form:

“These operations (markets) are extremely costly, sufficiently costly at any rate to prevent many transactions that would be carried out in a world in which the pricing system worked without cost.”

In this manner, Ronald Coase left open a role for limited government.  If collective action can lower transaction costs to facilitate wealth-enhancing trades that otherwise would be blocked by high transaction costs, a prima facie  case exists for it so to act.  Note however that Coase here relies on the assumption that the bright side of the force will serve as the driver in political markets much as it typically does in the private market-place.

In 2001, Jack Hirshleifer (University of California at Los Angeles) advanced a counter-theorem also based on the notion that self-interest drives human behavior.  Hirshleifer recognized that there is also a dark side to that same force, in which the self-interest impulse leads individuals into ultimately wealth-destructive interactions, conflictual rather than consentaneous in nature: murder, rape, pillage, violence etc.

Hirshleifer distinguished between the Coase theorem – which in its first form implies that individuals will never pass up an opportunity to cooperate through mutually advantageous trade – and the Machiavelli theorem – which says that no one will ever pass up an opportunity to gain a one-sided advantage to exploit another party.  According to Hirshleifer, neither theorem stands alone. Institutions, nature and culture will determine the actual balance that exists between the bright and the dark side of the force.

At first sight, it may appear that when the dark side of the force dominates, wealth-enhancing trades will not occur. It turns out that such is not always the case.  The window for wealth-enhancing trades surely narrows dramatically, but it does not always completely close.

In my Christmas Day column,  shall explain why the window does not always close completely, why even Ebenezer Scrooge ultimately behaved seemingly more  in accord with the   Coase  than the Machiavelli theorem. 

In subsequent columns I shall demonstrate the extent to which the dark side of the force dominated US politics throughout 2011, and why some albeit fragmentary wealth-enhancing trades nevertheless occurred.