The construction of a rational society, first attempted in France after 1789, produced contrasting images: the heroic, neo-classical images of the painter David - propagandist for the Republic - and the nightmare scenarios of the Peninsula war as depicted by Goya. [MC]

Rationalism turns out to be just another faith - a belief that the dark side of human nature can be eliminated. [JG]

But the primitive beast is still present. Call it the unconscious [Unc] [id], or the amygdala [AA], it has a habit of calling the shots.

Before 1789, there was Newtonian-based reason, which embued the works of Adam Smith.

A 'free' - unregulated - market, so the theory goes, achieves optimal outcomes as though being directed by an invisible hand, [IH].

The 'invisible hand', the theory has it, is guided by rational choices - [RCT] - which should lead to 'Pareto improvements' [PE]:

Given a set of alternative allocations of, say, goods or income for a set of individuals, a movement from one allocation to another that can make at least one individual better off without making any other individual worse off is called a Pareto improvement ... [PE]

Mark Buchanan - "Money messes with your mind" - suggests that rationality is not a sufficient explanation of our attitudes to money, and that there is a conflict between social and market norms to which economists should pay more attention. [MB]

Market failure, as theory explains it, takes place when four sets of factors interfere with the workings of the 'invisible hand':

• Monopolies;   GM   [MC]   [PJ]
• Externalities;  [BPL]
• Public goods;  [CWE]   [DS]
• Information asymmetry;    [FI]    [FII]   [JS]
• Joseph Stiglitz has significant things to say on " ... finding the right balance between the market and government ... " [JS]

It's vital to compare market theory with market practice:

[The invisible hand] also works as a balancing mechanism. For example, the inhabitants of a poor country will be willing to work very cheaply. Entrepreneurs can make great profits by building factories in poor countries. But since they increase the demand for labor, they will increase its price.

And since the new producers will also become consumers, local businesses will have to hire more people in order to provide for them the things that they want to consume.

As this process continues, the labor prices will eventually rise to the point at which there is no advantage for the foreign countries doing business in the formerly poor country. Overall, this mechanism will cause the local economy to function on its own. [IH]

Ross Clark supported this theory when he attacked this statement made by Ms Harriet Harman during New Labour's Deputy Leadership campaign in 2007:

‘You can’t have proper equality of opportunity with a huge gap between rich and poor.... Do we want a society where some struggle and others spend £10,000 on a handbag?’ [HR]

The evidence, however, points to the fact that workers no longer share the rewards of success, and are therefore in no position to make 'rational choices':

You might think that rational employers would have several reasons for sharing the rewards of success with the people who have helped them gain their wealth.

You would be wrong:

That the gap between rich and poor is widening in the UK is also confirmed by the Institute for Fiscal Studies, whose report "Poverty and inequality in the UK: 2007" includes a remarkable statistic:

Median equivalised disposable income in Great Britain in 2005–06 was £363 per week: half the population have higher incomes than this and half lower. This amount is considerably lower than the average (mean) income of £445 per week.

Devaluing Labor

From 1947 through 1973, American productivity rose by a whopping 104 percent, and median family income rose by the very same 104 percent. More Americans bought homes and new cars and sent their kids to college than ever before. In ways more difficult to quantify, the mass prosperity fostered a generosity of spirit: The civil rights revolution and the Marshall Plan both emanated from an America in which most people were imbued with a sense of economic security.

That America is as dead as the dodo. Ours is the age of the Great Upward Redistribution. The median hourly wage for Americans has declined by 2 percent since 2003, though productivity has been rising handsomely. Last year, according to figures released just yesterday by the Census Bureau, wages for men declined by 1.8 percent and for women by 1.3 percent. ...

Harold Meyerson

On the other side of the inequality equation we meet people like Gordon Brown's "smoothy" - Sir Robert Cohen, who runs a charity called The Portland Trust - and retail entrepreneur Sir Philip Green:

“In the spring, the BBC’s Money Programme calculated that Green and his family had ’saved themselves’ £300m from their £1.2bn salary by living for a part of the year in Monaco, whose residents don’t pay income tax. Standing up for such paupers used to be the point of a Labour government. Even if it could not force the likes of Green to pay their fair share, it retained the power to shun them and make it clear that those who don’t contribute towards their country can’t expect their country to be grateful. Even that modest defiance of the plutocrats is beyond Labour now. Yesterday, the Queen announced her birthday honours and high on her list was Green, who received a knighthood for ’services to the retail industry’. If I were in the Inland Revenue, I would fret about the moment when the little people who stupidly still pay taxes realise that the state is treating them like fools. It insists that they must hand over their earnings on pain of punishment by the courts, while inviting Philip Green to Buckingham Palace to be honoured by the Queen.”

Tax Research UK, from The Observer 18 June 2006

MPs and small shareholders launched an attack yesterday on Adam Applegarth, chief executive of Northern Rock, for selling over £2.6m of shares at peak prices while still urging thousands of employees and investors to buy shares when the company was facing trouble.

Chris Huhne, the Liberal Democrat leadership candidate, called on the Treasury to demand that Applegarth and the rest of the directors resign before loaning the stricken bank any more cash. ...

Kevan Jones, Labour MP for Durham North, many of whose constituents work for the bank, said that he was astounded at the "short-termism" of Applegarth and his fellow directors in selling millions of pounds of shares "while encouraging employees and small investors to still put their money into the company".

Applegarth made two large share sales last year and this year, raising just over £2.6m. He was also paid £1.3m last year: half as a basic salary and half in bonuses.

Robin Ashby, a spokesman for some 100,000 small shareholders, who include the former police chief Lord Stevens and Sir Neville Trotter, the former Tory MP for Tynemouth, said:

"While the directors were cashing in shares worth millions of pounds before the company got into trouble, they left small shareholders and employees who have remained loyal to Northern Rock for more than a decade facing financial ruin. They obviously had no long-term faith in the company."

MPs have also criticised Applegarth's lifestyle after alleging he used some of the cash to purchase luxury cars - an Aston Martin for himself and a Ferrari for his wife - as well as a Northumberland estate. ...

The Guardian 15 November 2007

Could it get any worse? Sadly, it could. The Guardian reported that Northern Rock was using a little-known Jersey-based charity for nefarious purposes:

Northern Rock is facing a Charity Commission investigation after it emerged that the bank exploited the name of a charity for disabled children while creating an elaborate financial arrangement for maximising profits from home loans.

The inquiries will centre on the bank's unusual structure. For while Northern Rock appeared to be a uncomplicated mortgage lender employing thousands of people in the north of England, three-quarters of its key assets are owned by a Jersey-based offshore trust called Granite.

And at the heart of Granite's operations is a rather peculiar fact: on paper, at least, it had been set up to benefit charities, and in particular a small organisation for children with Down's Syndrome, and their families, which was being run from a semi-detached house on the outskirts of Newcastle.

Even more peculiar, perhaps, is the fact that nobody at Northern Rock bothered to tell the children's charity that it was a beneficiary, and the charity never received a penny from Granite.

For seven years, Down's Syndrome North East (DSNE) raised small sums of money as best it could. There was £125 from a man who cycled across the United States, children at a primary school in Middlesbrough chipped in £100, and the North East Ladies' Luncheon raised £750. And the whole time, the volunteers who kept the charity running were unaware that it was supposed to be the beneficiary of a trust which had raised £71bn on the international financial markets and which enjoyed a turnover of £1.8bn last year. ...

The Guardian 28 November 2007

Portland Trust

Sadly, Adam Smith is no longer around to tell us what he would have thought if he could have seen what is now being done in his name.

Thanks to the systemic greed of the financial services 'industry' a crisis entirely of its own devising is now hurting millions of people who are, by and large, helpless spectators.

When the crunch comes - pun intended! - banks like Northern Rock know that governments, led by the likes of corporate-friendly Gordon Brown, will bail them out.

The Social Darwinist 'rules' of the 'free market' - which are applied ruthlessly to the likes of car-make Rover - cannot possibly apply to them, since it would also damage the other financial institutions who were also delighted to join the party when the going was good.

Before the crash they were motivated by greed; after the crash they are motivated by fear.

Suddenly the argument for more and better regulation returns. [SR]

But not everyone is 'on side':

Measured response from Darling

Alistair Darling may have got much wrong over Northern Rock, but one thing he is getting right is his refusal to be bamboozled into an extreme regulatory over-reaction to the current crisis. The response so far to the obvious weaknesses in the system exposed by Northern Rock and the wider problems of credit markets has been relatively measured, and he's resisted wilder calls for the markets to be brought to heel through a regulatory crackdown. It is essential he maintains this stance, and indeed gets this message out to the wider international community.

The Northern Rock debacle has done the City's reputation abroad much harm. The last thing it needs now is a Sarbanes-Oxley-type response. Thankfully, there was no hint of it in yesterday's Bill to nationalise Northern Rock. The powers it gives the Government to intervene in similar circumstances are only a backstop until more satisfactory resolution arrangements are brought in later on.

Jeremy Warner

Larry Elliot sums up the current reality:

... we now have Keynes lite - a system whereby policy makers act like free-marketeers for 95% of the time, giving the City and Wall Street licence to do what they want, and like Keynesians for 5% of the time, spraying money at the crisis once it has broken.

The Guardian 20 March 2008

"Greed really has become a part of America’s value system.

"Get as much as you can, while you can, and don’t worry about the other guy.

"Corporate greed often exploits the poor for greater profits.

"Political greed makes promises never meant to be kept in order to achieve position.

"Personal greed sets us free from a sense of responsibility to the community, and establishes love of self as the greatest commandment."

Joe Thorn.net

For economists, it is nothing more than a tool of exchange that makes economic life more efficient. Just as an axe allows us to chop down trees, money allows us to have markets that, traditional economists tell us, dispassionately set the price of anything from a loaf of bread to a painting by Picasso. Yet money stirs up more passion, stress and envy than any axe or hammer ever could. We just can't seem to deal with it rationally... but why? ...

As we come to understand more about money's effect on us, it is emerging that some people's brains can react to it as they would to a drug, while to others it is like a friend. Some studies even suggest that the desire for money gets cross-wired with our appetite for food. And, of course, because having a pile of money means that you can buy more things, it is virtually synonymous with status - so much so that losing it can lead to depression and even suicide ...

In reality we are not that rational. Instead of treating cash simply as a tool to be wielded with objective precision, we allow money to reach inside our heads and tap into the ancient emotional parts of our brain, often with unpredictable results. To understand how this affects our behaviour, some economists are starting to think more like evolutionary anthropologists.

Daniel Ariely of the Massachusetts Institute of Technology ... suggests that modern society presents us with two distinct sets of behavioural rules. There are the social norms, which are "warm and fuzzy" and designed to foster long-term relationships, trust and cooperation. Then there is a set of market norms, which revolve around money and competition, and encourage individuals to put their own interests first ...

News Scientist 18 March 2009

Larry Elliot

The basic idea of rational choice theory is that patterns of behavior in societies reflect the choices made by individuals as they try to maximize their benefits and minimize their costs. In other words, people make decisions about how they should act by comparing the costs and benefits of different courses of action. As a result, patterns of behavior will develop within the society that results from those choices.

The idea of rational choice, where people compare the costs and benefits of certain actions, is easy to see in economic theory. Since people want to get the most useful products at the lowest price, they will judge the benefits of a certain object (for example, how useful is it or how attractive is it) compared to similar objects. Then they will compare prices (or costs). In general, people will choose the object provides the most benefits at the lowest price.

Rational choice theory

In microeconomics, the term "market failure" does not mean that a given market has ceased functioning. Instead, a market failure is a situation in which a given market does not efficiently organize production or allocate goods and services to consumers. Economists normally apply the term to situations where the inefficiency is particularly dramatic, or when it is suggested that non-market institutions would provide a more desirable result. On the other hand, in a political context, stakeholders may use the term market failure to refer to situations where market forces do not serve the public interest.

The four main types or causes of market failure are:

Monopolies or other cases of abuse of market power where a "single buyer or seller can exert significant influence over prices or output"). Abuse of market power can be reduced by using antitrust regulations.

Externalities, which occur in cases where the "market does not take into account the impact of an economic activity on outsiders." There are positive externalities and negative externalities. Positive externalities occur in cases such as when a television program on family health improves the public's health. Negative externalities occur in cases such as when a company’s processes pollutes air or waterways. Negative externalities can be reduced by using government regulations, taxes, or subsidies, or by using property rights to force companies and individuals to take the impacts of their economic activity into account.

Public goods such as national defense and public health initiatives such as draining mosquito-breeding marshes. For example, if draining mosquito-breeding marshes was left to the private market, far fewer marshes would probably be drained. To provide a good supply of public goods, nations typically use taxes that compel all residents to pay for these public goods (due to scarce knowledge of the positive externalities to third parties/social welfare); and

Cases where there is asymmetric information or uncertainty (information inefficiency). Information asymmetry occurs when one party to a transaction has more or better information than the other party. Typically it is the seller that knows more about the product than the buyer, but this is not always the case. Buyers in some markets have better information than the Sellers. For example, used-car salespeople may know whether a used car has been used as a delivery vehicle or taxi, information that may not be available to buyers. An example of a situation where the buyer may have better information than the seller would be an estate sale of a house, as required by a last will and testament. A real estate broker purchasing this house may have more information about the house than the family members of the deceased.

This situation was first described by Kenneth J. Arrow in a seminal article on health care in 1963 entitled "Uncertainty and the Welfare Economics of Medical Care," in the American Economic Review. George Akerlof later used the term asymmetric information in his 1970 work The Market for Lemons. Akerlof noticed that, in such a market, the average value of the commodity tends to go down, even for those of perfectly good quality, because the buyer has no way of knowing whether the product they are buying will turn out to be a "lemon" (a defective product).

Wikipedia

Pareto efficiency, or Pareto optimality, is an important concept in economics with broad applications in game theory, engineering and the social sciences. The term is named after Vilfredo Pareto, an Italian economist who used the concept in his studies of economic efficiency and income distribution.

Given a set of alternative allocations of, say, goods or income for a set of individuals, a movement from one allocation to another that can make at least one individual better off without making any other individual worse off is called a Pareto improvement. An allocation is Pareto efficient or Pareto optimal when no further Pareto improvements can be made. This is often called a strong Pareto optimum (SPO).

A weak Pareto optimum (WPO) satisfies a less stringent requirement, in which a new allocation is only considered to be a Pareto improvement if it is strictly preferred by all individuals (i.e., all must gain with the new allocation). The set of SPO solutions is a subset of the set of WPO solutions, because an SPO satisfies the stronger requirement that there is no allocation that is strictly preferred by one individual and weakly preferred by the rest (i.e., no individual loses out, and at least one individual gains).

Wikipedia

An economic system that is Pareto efficient implies that no individual can be made better off without another being made worse off. Here 'better off' is often interpreted "put in a more preferred position." It is commonly accepted that outcomes that are not Pareto efficient are to be avoided, and therefore Pareto efficiency is an important criterion for evaluating economic systems and public policies.

If economic allocation in any system (in the real world or in a model) is not Pareto efficient, there is theoretical potential for a Pareto improvement - an increase in Pareto efficiency: through reallocation, improvements to at least one participant's well-being can be made without reducing any other participant's well-being.

In the real world ensuring that nobody is disadvantaged by a change aimed at improving economic efficiency may require compensation of one or more parties. For instance, if a change in economic policy dictates that a legally protected monopoly ceases to exist and that market subsequently becomes competitive and more efficient, the monopolist will be made worse off. However, the loss to the monopolist will be more than offset by the gain in efficiency. This means the monopolist can be compensated for its loss while still leaving an efficiency gain to be realised by others in the economy. Thus, the requirement of nobody being made worse off for a gain to others is met. ...

Wikipedia

The theory of the Invisible Hand states that if each consumer is allowed to choose freely what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle on a product distribution and prices that are beneficial to the all individual members of a community, and hence to the community as a whole.

The reason for this is that greed will drive actors to beneficial behavior. Efficient methods of production will be adopted in order to maximize profits. Low prices will be charged in order to undercut competitors. Investors will invest in those industries that are most urgently needed to maximize returns, and withdraw capital from those that are less efficient in creating value.

Students will be guided to prepare for the most needed (and therefore most remunerative) careers. And all these effects will take place dynamically and automatically.

It also works as a balancing mechanism. For example, the inhabitants of a poor country will be willing to work very cheaply. Entrepreneurs can make great profits by building factories in poor countries. But since they increase the demand for labor, they will increase its price.

And since the new producers will also become consumers, local businesses will have to hire more people in order to provide for them the things that they want to consume.

As this process continues, the labor prices will eventually rise to the point at which there is no advantage for the foreign countries doing business in the formerly poor country. Overall, this mechanism will cause the local economy to function on its own.

Wikipedia

More recent research clearly indicates that the amygdala plays a crucial role in responding to information about the external world as obtained through our senses.

The amygdala attaches emotional significance to incoming information and prepares the body to act, well before conscious appraisal is possible.

The amygdala responds to both conscious and nonconscious information input and this is taken that it may be the centre for the integration of emotional learning.

The second pathway through the brain is relatively slow. Additionally, the portion of the brain dealing with this 'slow motion' imput is also influenced by output from the emotional centre receipt centre in the Amygdala.

Sensory input from the eye travel first to the thalamus and then to the amygdala before a second signal travels to the neocortex, the seat of thinking.

The implications of such a process is that we begin to respond emotionally before we can think about an issue.

It may even mean that much of what we think of as decision making is simply rationalisation of unconscious processes.

However, we need not take such an extreme view where responses to imagery is concerned. Here it is sufficient to acknowledge that emotional response precedes cognitive appreciation.

When not 'over-run' by emotions it is probably more accurate to state that although we are cognitive beings, reason and emotions both have crucial roles to play.

Initial emotional reactions to visual input 'point us in the right direction' by tapping into knowledge of earlier experiences. However this emotional input may, on occasions, bias rational decision making. ...

The id is the source of instinctual impulses such as sex and aggression as well as primitive needs that exist at birth.

It is entirely nonrational and functions according to the pleasure-pain principle, seeking immediate fulfillment of its impulses whenever possible.

Its working processes are completely unconscious in the adult, but it supplies the energy for conscious mental life, and it plays an especially important role in modes of expression that have a nonrational element, such as the making of art.

Answers.com

Perhaps the most significant contribution Freud made to Western thought was his argument for the existence of an unconscious mind.

During the 19th century, the dominant trend in Western thought was positivism, which subscribed to the belief that people could ascertain real knowledge concerning themselves and their environment and judiciously exercise control over both.

Freud, however, suggested that such declarations of free will are in fact delusions; that we are not entirely aware of what we think and often act for reasons that have little to do with our conscious thoughts. ...

Wikipedia

Post-Apocalypse

... rationalists ... lament the renewed strength of religion in politics.

They seem to have forgotten the political religions of the twentieth century and cannot have reflected on the fact that in the United States, a model secular regime, religion and politics are intertwined more closely than in any other advanced country.

The unreality of this secularist stance does not come only from an ignorance of history.

Those who demand that religion be exorcised from politics think this can be achieved by excluding traditional faiths from public institutions; but secular creeds are formed from religious concepts, and suppressing religion does not mean it ceases to control thinking and behaviour.

Like repressed sexual desire, faith returns, often in grotesque forms, to govern the lives of those who deny it ...

John Gray Black Mass HdBk edition, Allen Lane 2007 - page 190 Rationalism

We want art to be about our human emotions, to express the full range of what it feels like to be human. We take this for granted now, but the idea of putting man, rather than God, at the centre of art was originally a revolutionary break from the predominantly religious art of the past – "one of those times when civilisation says, Crikey - a momentous change in human consciousness!".

In this episode, Matthew Collings goes in search of the origins of that change. It’s a journey which takes him from the glories of Renaissance Italy to the turbulent, violent Paris of the French Revolution.

The programme focuses on two great 18th century artists who, in diametrically opposed ways, expressed this new sense of human potential in their art – the French painter Jacques-Louis David, and the Spanish painter Francisco Goya.

David was a revolutionary, who became the official propagandist of the French Revolution and whose name is on the death warrant for the French King. Goya experienced the bloody aftermath of the Revolution in Spain. David's art is all about the nobility of man, our higher aspirations. Goya explores our baser side, our darker fears, our murderous drives. Together they're what Collings calls 'the yin and yang of feeling'. Freed to express itself, humanity can be great – but it can also be monstrous. It's a revelation whose consequences we're still living with today.

C4