Wednesday, September 21, 2016

One Man's Profit is Another's Loss

There is this fixed quantity of whatever it is and if you get more, I get less. One man's profit is another's loss.
This dogma was already advanced by some ancient authors. Among modern writers Montaigne was the first to restate it; we may fairly call it the Montaigne dogma. It was the quintessence of the doctrines of Mercantilism, old and new. -- Ludwig von Mises
Add "the Montaigne dogma" to the collection of pejorative phantoms: mercantilism and Malthusianisme, image of limited good, zero-sum fallacy, Luddite fallacy, fixed Work-fund and the theory of the lump of (labor, labour, work, jobs, output).

Except... it really ought to be the Seneca dogma since Seneca was the ancient author whose de Beneficiis Montaigne faithfully borrowed from for 'his' essay (find "Demades"). Even Seneca was elaborating on an older maxim by Publilius.

Is it ever true that one man's profit is another's loss? You bet! I just gave an example -- gambling and other contests of skill or luck are typically zero sum. Your loss is my gain. Our loss is the house's gain.

But there is a more historically-pertinent operation of the zero-sum game: bills of exchange. As I remarked in that earlier post, one of the prime motivations for early modern merchant bankers to adopt the novel and challenging technique of double-entry bookkeeping was to "prove an alibi" against suspicions of usury. The way that bills of exchange were accounted for made them one of the favorite financial instruments for avoiding an appearance of usury. Raymond de Roover explained:
As a result of the usury prohibition, bills [of exchange] were never discounted but were bought at a rate of exchange which fluctuated up and down according to the conditions prevailing in the money market. There is no doubt that interest was received by the banker who invested his money in the purchase of bills, for a hidden interest was included in the rate of exchange. Because of this subterfuge, the structure of the money market was such that exchange fluctuations were caused either by a change in the rate of interest or by a change in the terms of international trade.
Interest was thus concealed in the exchange rate charged by the banker. As a consequence, the profit on any given transaction was uncertain. A banker, however, could rely on his long-run observation of the fluctuations in the terms of international trade to achieve a high degree of predictability covering a large number of transactions.

By the middle of the 16th century, the use of bills of exchange had become common enough in trade between England and the Low Countries to raise suspicions about manipulation of exchange rates by bankers. This suspicion was articulated in the memorandum prepared for the 1564 Royal Commission on the Exchange, which noted the 'usurious' undercurrents of different exchange rates prevailing simultaneously in London and Antwerp:
…when the English pound is paid for a month before hand [in London], then the price thereof in reason ought to be the less; and when the English pound is not paid for in Flemish money until a month after hand [in Antwerp], then the price in reason ought to be the more. But here you may perceive that this necessary and fair name Exchange might be truly termed by the odious name of buying and selling of money for time, otherwise called usury.
The memorandum then went on to describe "how private gains may be made when the Exchange goeth too low" and "how the bankers do cunningly fall [or raise] the exchange at Antwerp." Among the remedies proposed for such manipulation of exchange rates was to "govern this realm by good policy" such that would "temper and forbear the superfluous delicacies" of imported goods and cause English exports "to be wrought to the best value before they are vented." The resulting trade surplus would raise and maintain the value of the English pound.

Of course not every country can run a trade surplus all the time. For the world as a whole, the balance of trade is indeed a zero-sum game.

There are, however, not one but three issues bound up together in the memorandum on exchange. The first is usury and its concealment in the exchange instrument. The second is the effect of exchange fluctuations on the profits and losses of bankers and merchants. And the third is the manipulation of exchange rates, either by bankers for the private gain or by government to counter the cunning tricks of bankers.

Nowadays, we no longer have to worry about fraud by bankers. The old superstitious prejudices against usury have been supplanted by an enlightened embrace of the unequivocal blessings of credit and debt. Comparative advantage has proven that it is economically illiterate to question the universal benefit of globalization.

Verily, we can embrace the von Mise-erly wisdom that "There are in the market economy no conflicts between the interests of the buyers and sellers." One man's gain is clearly the alleviation of another's pain.

This post is the second in a series of three posts. See also "Nine Spades are a Lump of Leets."


Anonymous said...

"There is this fixed quantity of whatever it is and if you get more, I get less. One man's profit is another's loss."

this disproof of this is the essence of Keynes work

Sandwichman said...

"this disproof of this is the essence of Keynes work"

No it's not.

Anonymous said...

Oh yes it is! Neither Keynes nor his many predecessors (such as Hamilton) or successors (say, Michael Pettis) subscribed to the intellectual food for the infant that in some quarters still passes for respectable economics.

Magpie said...

"Malthus's Essay [on the Principle of Population, 1798] is a work of youthful genius. The author was fully conscious of the significance of the ideas he was expressing. He believed that he had found the clue to human misery. The importance of the Essay consisted not in the novelty of his facts but in the smashing emphasis he placed on a simple generalisation arising out of them. Indeed his leading idea had been largely anticipated in a clumsier way by other eighteenth-century writers without attracting attention.

"The book can claim a place amongst those which have had great influence on the progress of thought. It is profoundly in the English tradition of humane science in that tradition of Scotch and English thought, in which there has been, I think, an extraordinary continuity of'feeling, if I may so express it, from the eighteenth century to the present time the tradition which is suggested by the names of Locke, Hume, Adam Smith, Paley, Bentham, Darwin, and Mill, a tradition marked by a love of truth and a most noble lucidity, by a prosaic sanity free from sentiment or metaphysic, and by an immense disinterestedness and public spirit." (pages 100-101)

A little later, the author (let's call him Mr. X) writes:

"I cannot forbear to follow on with that famous passage from the second edition (p. 571), in which a partly similar idea is introduced, more magnificently clothed, in a different context (in criticism of Paine's Rights of Man):

"A man who is born into a world already possessed, if he cannot get subsistence from his parents on whom he has a just demand, and if the society do not want his labour, has no claim of right to the smallest portion of food, and, in fact, has no business to be where he is. At nature's mighty feast there is no vacant cover for him. She tells him to be gone, and will quickly execute her own orders, if he do not work upon the compassion of some of her guests. If these guests get up and make room for him, other intruders immediately appear demanding the same favour. The report of a provision for all that come, fills the hall with numerous claimants. The order and harmony of the feast is disturbed, the plenty that before reigned is changed into scarcity; and the happiness of the guests is destroyed by the spectacle of misery and dependence in every part of the hall, and by the clamorous importunity of those, who are justly enraged at not finding the provision which they had been taught to expect. The guests learn too late their error, in counteracting those strict orders to all intruders, issued by the great mistress of the feast, who, wishing that all her guests should have plenty, and knowing that she could not provide for unlimited numbers, humanely refused to admit fresh comers when her table was already full." (also p. 106)

The passage in italics comes from Malthus (more precisely, from the second version of his Essay). Malthus is precisely speaking about the limited quantity of food: "At nature's mighty feast there is no vacant cover for him. She tells him to be gone, and will quickly execute her own orders, if he do not work upon the compassion of some of her guests."

The author quoting Malthus -- Mr. X -- agrees with the "magnificently clothed idea" contained in the passage above.

Mr. X calls the first version of Malthus' Essay "a work of youthful genius", "profoundly in the English tradition of humane science", "a tradition marked by a love of truth and a most noble lucidity, by a prosaic sanity free from sentiment or metaphysics, and by an immense disinterestedness and public spirit".

Who is Mr. X, Malthus' appreciative fan?

Go ahead, guess.

Mr. X was J.M. Keynes, 1st Baron Keynes.

The quotes come from "Robert Malthus (1766-1835): the first of the Cambridge economists", included in "Essays in Biography".

Sandwichman said...

"It was precisely from the concept of equilibrium that Keynes was struggling to escape." -- Joan Robinson

I'll take Joan's word for it over anonymous's. A couple of weeks ago, I posted this observation from the Maynard:

"For some two hundred years both economic theorists and practical men did not doubt that there is a peculiar advantage to a country in a favourable balance of trade, and grave danger in an unfavourable balance, particularly if it results in an efflux of the precious metals. But for the past one hundred years there has been a remarkable divergence of opinion. The majority of statesmen and practical men in most countries, and nearly half of them even in great Britain, the home of the opposite view, have remained faithful to the ancient doctrine; whereas almost all economic theorists have held that anxiety concerning such matters is absolutely groundless except on a very short view, since the mechanism of foreign trade is self-adjusting and attempts to interfere with it are not only futile, but greatly impoverish those who practice them because they forfeit the advantages of the international division of labour. […] Nevertheless, as a contribution to statecraft, which is concerned with the economic system as a whole and with securing the optimum employment of the system’s entire resources, the methods of the early pioneers of economic thinking in the sixteenth and seventeenth centuries may have attained to fragments of practical wisdom which the unrealistic abstractions of Ricardo first forgot and then obliterated." -- John Maynard Keynes