Jerry Emanuelson’s Algebraic Proof of Ricardo’s Law of Association

Most likely in the summer of 1970, Jerry Emanuelson published a proof showing that if two people work at two tasks at relatively different rates, they can trade their labor for mutual gain, even if one of them does both tasks better than the other.  His work appeared in The Libertarian Connection #13.  It is known to economists as Comparative Advantage, and it was suggested by Adam Smith, but argued forcefully later (1817) by David Ricardo. However, the formal statement was not known outside of academic economics; and it was, of course, compelling to libertarians. So, Jerry worked out several pages of algebraic inequalities for our benefit. As of this posting, it remains a lost work.

It is specifically inequality that makes Comparative Advantage be true.  The governing assumption is not that A is better than B, but that A and B produce what they trade at different comparative costs within their own economies. They have different opportunity costs. In order to maintain autarky (to produce all of their own goods themselves) they each must give up the opportunity to produce more of what they do better.  Even if Nation A or Person A is better at producing both items, it is still in the interests of both A and B to specialize and exchange, rather than attempting to produce everything for themselves.

Ricardo’s Law of Comparative Advantage also became famous.  Not only do libertarians know all about it …

https://mises.org/library/ricardian-law-comparative-advantage

http://www.econlib.org/library/Enc/bios/Ricardo.html

… but even Paul Krugman accepts it: 

http://web.mit.edu/krugman/www/ricardo.htm

If all things were equal this would not work. Or so it is claimed.  In fact, I believe that the economists have not considered an important aspect of human nature that supports trade: alleviation of boredom. Eventually, the carpenter buys a bookcase, rather than making one. He can do it cheaper and better, but he has done enough of it that making another costs marginal utility and brings diminishing returns.  This is an old fact. Ancient Greek cities that produced good local wines exported them, even to other cities that produced good local wines. The wines tasted different, and the difference created value.  Ancient Greek towns named for their wine include Oinoanda in Lycia, Oinoe on the island of Ikaros, and Oiniadai in Akarnania. 

The Libertarian Connection was modeled on the science fiction fanzine. For your subscription, you were allowed to contribute two pages of content. The publishers collated the submissions, copied them, and distributed them to the subscribers.  The magazine came out every six weeks.  Originally, it was mimeographed. Contributors sent their works on stencils. The LC eventually went to photo-offset.

Issue 1 here:  http://fair-use.org/libertarian-connection/1969/02/10/from-the-publishers-of-libertarian-connection

Issue 2 here:  http://fair-use.org/libertarian-connection/issue/2

Issue 3 here: http://fair-use.org/libertarian-connection/issue/3

My comments about LC for Rebirth of Reason here: http://rebirthofreason.com/Forum/GeneralForum/1211.shtml

In those early days, libertarianism was a very small set of people. Dale Haviland, a professional printer, produced the A is A Directory in 1971, which listed just about everyone who wrote an article for a libertarian magazine. He also produced a directory of those publications. That is what made Jerry Emanuelson’s proof important: it influenced a small group of people who themselves went on to become the Libertarian Party, Reason magazine, the Cato Institute, and much else. 

You can find the original treatise On The Principles of Political Economy and Taxation (London: John Murray, Albemarle-Street), by David Ricardo, 1817 (third edition, 1821) as a text file here:

http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/ricardo/prin/index.html

You can find the algebraic statements for Comparative Advantage in Wikipedia https://en.wikipedia.org/wiki/Comparative_advantage  The bibliography of sources for that article includes these:

· MacDougall, G. D. A. (1951). “British and American exports: A study suggested by the theory of comparative costs. Part I.”. The Economic Journal. 61 (244). pp. 697–724.

· MacDougall, G. D. A. (1952). “British and American exports: A study suggested by the theory of comparative costs. Part II.”. The Economic Journal. 62 (247). pp. 487–521.

· Stern, Robert M. (1962). “British and American productivity and comparative costs in international trade”. Oxford Economic Papers. pp. 275–296.

· Balassa, Bela. (1963). “An empirical demonstration of classical comparative cost theory”. The Review of Economics and Statistics. pp. 231–238.

· Chipman, John S. (1965). “A Survey of the Theory of International Trade: Part 1, The Classical Theory”. Econometrica 33 (3): 477–519. Section 1.8, p.509.

The theory and its algebra were known, but not widely known to those with great interest in promoting free trade.

For much more see, for instance, “Ancient Greece and Wine” in Wikipedia
https://en.wikipedia.org/wiki/Ancient_Greece_and_wine

But see, also, modern Greece and wine here:

http://enroute.aircanada.com/en/articles/greece-wine-tour

Erwin S. “Filthy Pierre” Strauss bought The Libertarian Connection from Skye d'Aureous and Natalee Hall, and soon changed its masthead to The Connection.  Filthy is active in science fiction fandom. As neither Jerry nor I can find our archives, I wrote to him to see what his terms and conditions may be.

Jerry Emanuelson's homepage is called Future Science here: http://www.futurescience.com/

ALSO ON NECESSARY FACTS

Supplies and Demands

The Shroff

Tokens of Capitalism

What is Legal Tender?

Numismatics: the standard of proof in economics

What is “Legal Tender”?

Once again, this time on the Galt’s Gulch Online message board, my conservative comrades displayed a disappointing though predictable ignorance about money. For people who claim to honor the bourgeois virtues of trade and commerce, they collectively guard a treasury of incomplete, incorrect, erroneous, and falsified assertions.  In truth, objective investigation demonstrates that the government has the right, the need, and the obligation to define and create legal tender.

 

Gold. Coin-shaped. Issued by Congress.
Not Money. Not Legal Tender.

Last week (about January 8, 2017), this discussion was launched:

Which is worse, government“printing” money or government “borrowing” money”

Posted by $CBJ 1 week ago to Economics

Several writers declaimed against “legal tender laws.”  So, I asked (rhetorically) for definition of “legal tender.” dbhalling, an attorney-at-law who specializes in intellectual property rights wrote this:

(cut and paste) Posted by  dbhalling 5 days, 20 hours ago [January 9, 2017 --mem]

Here is the exact statute. "Today the legal tender law in the US is 35 USC § 5103 which states: United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts. Why legal tender laws do not require government monopolies on money absolutely, they are almost always used for that eventually. You just wrong that any Legal Tender law is consistent with Objectivism..  (/cut and paste)

Of course, that is not actually a definition. As a lawyer, dbhalling only cares about what the law says. He does not need to investigate further. Moreover, he was not alone in claiming that an “Objectivist government” would not have the power to create legal tender. But if there were such a thing as an “Objectivist government” it would need to define legal tender, as does any government. 

Deed for Sale of Federal Land.
A valuable paper promise of the Government.
Perhaps negotiable. Not money. Not Legal Tender.

According to Ayn Rand’s Objectivism, and in line with much else on the libertarian right wing of American politics, the proper functions of government include operating courts of law. It is for the courts that the legislature defines “legal tender.” If the legislature did not define legal tender, there would be no way to know when a debt has been discharged, or when payment has been made.

 

One Dollar in Lawful Money.

Like much else in our traditional laws, the idea of debt is still mired in the agrarian feudal Middle Ages, and not yet enjoying the free air of commercial city life, i.e., civilization. In fact, very little trade is “cash on the barrel head.” It never has been. Since at least 2000 BCE, merchants have dealt at distances in both space and time, making and keeping promises to buy now and pay later. (See, for instance, The Kingdom of the Hittites by Trevor Bryce, Oxford University Press, 2005.) We now enjoy a vast global city. Cash is accepted – even preferred – on the street, but retailers buy from wholesalers who buy from manufacturers, all on credit and via debt.

 

One of the most valuable
coin-like objects issued by
the Federal government.
Not money. Not Legal tender.

Contrary to common myths, money did not evolve out of barter; and barter did not originate in the desire for economic gain. (See David Graeber’s “Debt: The First 5,000 Years” here.) Ritual gift exchange is the taproot of commerce.  For tens of thousands of years, including two ice ages from about 35,000 YA to about 10,000 YA, strangers became friends by exchanging gifts.  Finally, after writing was invented to keep track of commodity promises, we abstracted “money” as a safety to mitigate risk.  If you promise a sheep, but all of your sheep have died, what can you give instead? 

Wheat was first. Then after about 2000 BCE, silver was accepted. The astonishing attribute of silver is that it is useless.  It is pretty when polished, but it cannot hold an edge without being alloyed.  (The same is true of copper, which is why the Bronze Age is a demarcation along our common advance. And we have archaeological evidence of large “oxhides” of bronze offered in trade.) Silver served as “legal tender” i.e., money recognized by the “courts” (king or temple).  Gold is likewise useless, but has the added value of not tarnishing, and being far less commonly found. 

Code of Ur-Nammu
(fragment)

 18. If a man knocks out the eye of another man, he shall weigh out one-half a mina of silver. 

19. If a man has cut off another man’s foot, he is to pay ten shekels. 

22. If a man knocks out a tooth of another man, he shall pay two shekels of silver.

24. [...] If he does not have a slave, he is to pay 10 shekels of silver. If he does not have silver, he is to give another thing that belongs to him.
The Law Code of Ur-Nammu, about 2050 BCE at Real World History here.

In modern times, the governments of the British American colonies created paper money. Whether and to what extent the new Federal government would be allowed to do that was debated. The Constitution did not forbid Federal paper money, and the necessities of commerce almost demanded it. The Federal government had the power to borrow money. That created the power to create promissory notes under the Necessary and Proper clause.  

Coinage Law of June 28, 1834 recognized several foreign coins
as legal tender. Laws before and after this also 
defined the legal tender status of foreign coins.

Moreover, in the USA until 1857, several types of foreign coins were commonly recognized by law as being “legal tender.”  The Spanish Dollar was the foundation of commerce, both for international and local trade. Bank notes from the early 19^th century promise to pay fractions of a dollar, but display images of Spanish or Mexican coins.  (See “Spanish Coins on American Notes” here.)

Promises 25 cents. Offers 2 Reales.
(Hence, "2 bits" means a quarter dollar.)

Finally, all governments create a plethora of medals, medallions, certificates, promises, and warrants that may be valuable, negotiable, even fungible, but are not recognized in courts of law as legal tender. That is why a government must define the term in order for objective law to be possible.

  

PREVIOUSLY ON NECESSARY FACTS

Money as Speech and Peacemaking 

Debt: the Seed of Civilization  

Industrial Medals: A Currency of Fame  

Tokens of Capitalism  

The Remarkable Story of Risk

Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein explains that the modern world was created by the mathematics of chance.  Earlier times had traders, bankers and merchants.  Our capitalist culture is special because of the mathematics of risk invented by Fermat and Pascal.  Those tools within the Renaissance cultural context allowed the idea that we could - and should - discover and control the future. 

 “The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature.” (pg 1 ppb)

I first reviewed this book for the Objectivist Living discussion board here. Over the years I alluded to it occasionally there and on the Rebirth of Reason website. My copy has dozens of Post-its.  Looking through the book again, I made still more notes. Perhaps it is my own ignorance, but hardly a page lacks something important worth marking for future reference. 

These facts, insights, observations, and assertions reflect more than shopping at a supermarket.  After all, von Mises called his work Human Action, not People at the Grocer’s.  “Fear of harm ought to be proportional not merely to the gravity of the harm, but also to the probability of the event.“ (Attributed to the Port Royale Logic.) In criminology, we say that punishment must be “swift, certain, and severe.”  Statistical evidence shows that only certainty seems to prevent crime.

The development of risk theory has deep roots.  Astragalus “knuckle bone” dice are known from Egyptian tombs of 3500 BCE – and pharaoh’s dice were loaded.  But the ancient world had many of the artifacts we assume are modern from accurate astronomy to steam-powered mechanisms.  True enough, the arithmetic was cumbersome, but something else far more consequential was lacking.

“Up until the Renaissance, people perceived the future as little more than a matter of luck or the result of random variations and most of their decisions were driven by instinct.  When the conditions of life are so closely linked to nature, not much is left to human control. As long as the demands of survival limit people to the basic functions of bearing children, growing crops, hunting, fishing, and providing shelter, they are simply unable to conceive of circumstances in which they might be able to influence the outcomes of their decisions.  A penny saved is not a penny earned unless the future is something more than a black hole.” (pg. 18)

From there, Bernstein covers the expected territory of probability theory and statistics: Pascal, Fermat, Graunt, Galton...  Allusions and examples from the American stock markets abound.  While an impassioned capitalist, he is not perfectly consistent in an Objectivist sense, admitting to the need for some government regulation of the financial markets.  However, lowercase-o objectivism runs throughout this work, as it must in any exploration that supports facts with theories and that validates hypotheses with evidence.  Bernstein quotes Chicago economist (and Nobel laureate) Harry Markowitz on diversification: “Diversification is both observed and sensible; a rule of behavior which does not imply the superiority of diversification must be rejected both as a hypothesis and as a maxim.” (pg. 252).

Also my Randian comrades will find it curious that John Maynard Keynes could be quoted as an objectivist: “When once the facts are given which determine our knowledge, what is probable or improbable in these circumstances has been fixed objectively and is independent of our opinion.” (A Treatise on Probability, 1921; cited pg 226.)

Peter Lewyn Bernstein (January 22, 1919 – June 5, 2009) shared his passion for markets with Robert Heilbroner (The Worldly Philosophers) with whom he attended both primary and secondary school, as well as Harvard College. (Biography on Wikipedia here.) Bernstein is also associated with the efficient market hypothesis which says that current prices reflect all the information that is generally available and out-performing the market is impossible without taking on more risk. (See Investopedia here and also Wikipedia here.) [edited 11 Feb 2021.]

Bernstein was the first editor of The Journal of Portfolio Management. He authored several books including Capital Ideas: The Improbable Origin of Modern Wall Street.  Bernstein published five of his ten books after he was 75 years of age.

Business Week’s reviewer, Peter Coy, call the theme of risk management “The Closest Thing to a Crystal Ball” (here)  “Bernstein brings Against the Gods up to the present with an account of how some skeptical researchers--beginning with the Israeli-born psychologists Amos Tversky and Daniel Kahneman in the 1950s--trashed the classical model of rationality by exploring how people actually behave in risky situations. The bottom line: People behave irrationally, even when they know they are doing so. Bernstein relates an anecdote about a distinguished Soviet professor of statistics who showed up at an air-raid shelter during a German bombardment. Until then, he had scoffed at the prospect of being hit. What changed his mind?  “Look,'” he explained. “There are 7 million people in Moscow and one elephant. Last night, they got the elephant.”

Also on Necessary Facts:

Mere Gold is Not Enough: Hayek's "Denationalisation"

Numismatics Informs Economics

Debt: the Seed of Civilization

Electronic Money: Coins without Realms