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Free to Trade Efficiency?

Fascinating.

The war in Europe is messing with some major preconceptions and exposing some as illusions that, perhaps, we would be better off without.

Take, for instance, The Economist magazine’s leader article entitled “Trading with the enemy.”  Here’s the key question the article poses:

“Is it prudent for open societies to conduct normal economic relations with autocratic ones, such as Russia and China, that abuse human rights, endanger security and grow more threatening the richer they get?”

You and I might answer in the negative with a certain ease, but for the Economist and its ilk the question is more nuanced.  After all aren’t freedom and free trade one and the same?  If you stop trading freely aren’t you surrendering your freedom?

The Economist goes on to present its case, which inevitably decries any diminution of free trade, and ends thus:

“Liberal governments need to find a new path that combines openness and security, and prevents the dream of globalization turning sour.”

All well and good.  And predictable.  We must not get in the way of free trade.  Must we?

Something niggles me though.  When the Economist talks blithely about trade between nations it overlooks the rather more complicated issue that trade is not actually between nations.  It is, more often, between private parties situated in different nations.  So the so-called American trade with China is not America doing the trading but private entities like Apple, or Google, or Microsoft etc.  Certainly the benefit of such trade, in the form of cheaper goods for American consumers to buy, can be thought of as a national advantage, but the truth is that there is a second and more potent incentive for the trade.  That is the profit going to the private enterprise shareholders.  The disadvantage to the far fewer workers who might have been displaced by the trade — with “trade” being extended to include the relocation of production offshore — also has to be included in the equation, but since this has been externalized away from the business doing the trade, it doesn’t show up on any private ledger.  It shows up in the social and economic costs borne by the areas whence the production was moved. 

We can go a bit further.  The entire trade relationship between, say, America and China, is predicated on and initialized by, private decisions and not democratically decided, public ones.  And yet national diplomacy follows the trade.  So subsequent diplomacy takes the form of protecting and extending where possible, private interests.  Trade wars begin with private incentives being exploited. 

In other words, the simpler conversation the Economist wants to pursue is more complex and involves questions that ought not be squashed into narrow concepts like “freedom” and “free trade”.  Whose freedom?  Whose fee trade?  Who benefits?

Now I am not anti-free trade,  far from it.  Lower prices provide a great advantage for consumers.  But the social cost, by being externalized tends to get lost.  It is why there has never been a proper accounting of and compensation for it.  The flow of profits that Apple, say, gets from “free trade” ought surely subsidize the social costs of offshoring production.  Does it?  Or does Apple play games with its profits so as to minimize the tax it pays and this renege on its responsibilities?

No one can be shocked at the answer to that query.  

And then the Economist rolls out another questionable concept.  Locked as it is within the walls of classical economics, the Economics bemoans the possible losses associated with less “efficient” production.  It says:

“The retreat by the West to cold-war spheres of influence or self-reliance would be a mistake.  The costs would be vast.  Roughly $3trn of investment would be written off for les efficient production that fuels inflation and hurts living standards.”

Efficiency is such a strange concept.  It always distills down to lower cost.  Here we are at the tail end of a pandemic that exposed the supposed efficiency of elongated supply chains as being a stark trade-off between lower cost and resiliency, and the Economist still hasn’t absorbed the lesson.  Efficiency is an illusion in a world of radical uncertainty.  Lower cost is demonstrably beneficial to shareholders in the short term.  But a cursory survey of the natural world will tell us that some form of adaptability, which is a costly luxury in the world of extreme efficiency, protects the profit over the longer term.  You just don’t know when the next pandemic or geopolitical crisis will pop up.  Just how efficient is the inability to adapt to a new circumstance?  What does efficient even mean in the context of constant change?  The lack of understanding of the costs associated with uncertainty continues to baffle me.  Lower costs in general are a good thing.  I get that.  But at the end of an attenuated and vulnerable series of links across the globe, the loss of any one of which destroys the integrity of the whole, such efficiency is a liability not an advantage.

Context is everything.  Efficiency is not.

So some retreat from the sort of free-trade that the Economist argues we need to protect is in the interests of the very private organizations that profit from such trade.  This is a lesson that both the pandemic and the crisis in Ukraine is teaching us.

And this, of course, ignores the perennial question of just how far national and private interests are entangled in free-trade.  If the national interest — in the name of efficiency — is to encourage and protect private free-trade, then the private interests thus protected have an obligation to help pay for the consequences of their pursuit of profit abroad.

Pay those taxes.

Fascinating.    

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A Note on Furet

Intellectual vanities abound in a technocratic society.  It seems inevitable that as we push the boundaries of knowledge further and further into the space of potential beyond our current state that the division of labor presses down on us.  We become, each of us, more distant from any sense of self-sufficiency.  Such a state is an absurdity in our technologically infused and dependent world.  We have become enmeshed in the very supplementary support system we developed to drive ourselves out of the Malthusian trap we lived in for millennia.  As the complexity of our society rose, as the interdependence implied by the ever increasing network of specialities grew, and as we left behind the visceral ways of life we were prepared for by our evolutionary trajectory, we became attached to, and eventually, inseparable from, our technology.

The implications abound.

Our social organization has had to adapt to the complex realities.  We have had to create softer social technologies to foster and manage the harder technologies of production.  We had to organize.  We had to specialize.  We had to delegate.  We had to invent various forms of political arrangement to rein in the very freedoms that we unleashed in order to set ourselves beyond the deprivations of yore.  

This contradiction between the freedom necessary to defeat perpetual poverty and that needed to restrain the concentration of wealth that threatens to disintegrate the cohesion needed to maintain prosperity once achieved, is an ongoing and insoluble aspect of modernity.  

There has been, within the attempt to resolve this contradiction, a variety of illusions.  They are the vanities of intellectuals who identify supposed permanent, historic, or universal regularities within the tumult of what we have put in place over the past two hundred years.  

The contradictions, the paradox of modernity, has spawned its own intellectual contradictions that vie for attention and allegiance.  Neither offering any space for the other.  Neither actually solving the central question of how to achieve the delicate balance between the two opposed freedoms we need to maintain to preserve our progress.  Instead the intellectuals take radical sides and are willing to pretend that only one side is necessary to sustain us.

This conflict has played out in political and social reality.  In a tragic confirmation of the Keynesian notion that politics reflects the ideas of some long deceased thinker we have become embroiled in pointless debate.  Various illusions have entranced, enthralled, and deceived us for the better part of two hundred years.  Lives have been blighted by the failure to recognize that the answer is neither extreme.  

One of those intellectual vanities, the compilation of ideas loosely called neoclassical economics came crashing to the ground just over a decade ago.  The entire discipline of economics was diminished as a consequence.  It matters not whether other forms of economics persisted in the wings, what matters is that the discipline had rallied around what turned out to be a rotten core.  The degrees of difference from that core do not excuse the fringes from failure to influence society more strongly.  The discipline is in a cul-de-sac and is now reduced to being little more than a series of techniques or applications of techniques to social problems.  That is a very long fall from the lofty and practical heights achieved by the thinkers of the 1930s, which is the period that, on reflection, produced the most recent vibrant thought.  

Even now, after the embarrassment of 2008, there are far too many economists advocating so-called market solutions to complex problems that confound the simplicity of such markets.  The teaching of failures, or desecrations of the purity of the ideal, still comes after the advocacy of the ideal.  Even though the ideal is one of those intellectual vanities that misdirect our energies.  It has never existed.  It can never exist.  It is a complete illusion.  To teach it is to lie.  Yet it is erected in order to contrast with reality.  Worse, it is advocated as the long sought order that we might attain if only we eliminate the messiness of human relations.  Or, at least, restrain that messiness by imposing a technocratic regime to reduce the ardor and ignorance of the common folk.

The other great illusion of the past two hundred years was, of course, the great project of communism.  There remain advocates of that illusion also despite all the evidence that the past century has to offer.  The collapse of any practical application of communism has left us bereft of a bulwark against the rampant consequences of the unfettered freedoms we have come to call capitalism.  By imagining that human nature can be bent towards a consolidated consensus and thereby cleansed of its millennia of history, the left has deluded itself into thinking that nirvana is just around the corner if only something called capitalism were to go away.  And, because communism has manifestly failed, that departure is now dependent upon the supposed contradictions within capitalism.  But those contradictions are not potential weaknesses or sources of failure.  They are strengths.  

Anyone who dares to imagine an end of, or a trajectory to, history, is doomed to be known as a fool.  It is unimaginable.  It has no purpose.  It just is.  

It is the mightiest of all intellectual vanities to imagine otherwise.

As François Furet asked in the epilogue of his majestic “The Passing of an Illusion” :

“If capitalism has become the future of socialism, if the bourgeois world is what comes after ‘proletarian revolution’, whatever happened to temporal certainty?”

Furet is sympathetic to socialist thought and so its failure raised, in his mind, the confusing specter of uncertainty.  This reveals a misunderstanding.  It is the strength of capitalism that it adapts to onrushing uncertainty.  Indeed it revels in uncertainty.  It is an illusion ever to have imagined the possibility of something called “temporal certainty”.  It is an attempt to impose a structure where no structure can be sustained.  It is an attempt to freeze society in place and admit no change.  It is a failure to recognize the fluidity resultant from the destruction of the age old monarchic and religious orders that held back progress for millennia.  It’s worth reporting Furet’s contemplation of this conundrum in full:

“To add to this threat of uncertainty, there is the shock of a closed future.  Westerners have become accustomed to investing society with unlimited hope, since that promises freedom and equality for everyone.  In order for these qualities to assume their full meaning, it might one day be necessary to go beyond the horizon of capitalism, to go beyond the universe of rich and poor.  But the end of Communism has brought the individual back into the antinomy essential to bourgeois democracy.  It has revealed, as if something quite new, the complementary and contradictory terms of the liberal equation — individual rights, and the market — thus compromising the very foundation of what has constituted revolutionary messianism for two hundred years.  The idea of another society has become almost impossible to conceive of, and no one in the world today is offering any advice on the subject or even trying to formulate a new concept.  Here we are, condemned to live in the world as it is.”

This gloomy conclusion is based on an error.  Which is that binary intellectual vanities are all we have, and that there can be certainties.  That theories of society need not bend or adapt as society does.  Or that perpetual conflict between those antinomies is necessarily a bad thing.  It isn’t.  It is how the excesses of those intellectual vanities are shaved off.  It is how we modify the extremes to bring them into the dull and more modest center.  

In the midst of modern complexity it is deluded to imagine simple solutions.  We left that world behind a long time ago.  Unfortunately we have carried forward with us too many ideas built back in those simpler days.  As Balibar tells us, the original concept of “liberty” was fractured into rival notions that have been in conflict or contradiction ever since.  The search by idealists ever since to reverse that fracture and to re-create the “equaliberty” Balibar spoke of has only produced unnecessary intellectual confusion. The ideal unity of individual and social liberties can never exist.  Instead they vie for supremacy.  They seek a balance in order to survive. It is the constant opposition of democracy that moderates capitalism.  And it is the existence of capitalism in opposition to democracy that prevents stasis.  Our two modern freedoms co-exist uneasily.  But their tension permits progress.  The presence of that tension, the existence of uncertainty in Furet’s words, is exactly what we want.  

It’s what draws us inexorably into the future.  It is what excites our imagination.  It is what gives us hope.

Meanwhile, the idealists are best left to their respective vanities.  The rest of us need to be pragmatic.  However boring and confusing that might be.

Our problem is not surfeit of capitalism. It is that we have allowed, through conceit and adherence to the false doctrines of modern economics, a deficiency of the democracy needed to rein in the capitalists.  Markets are not the be-all and end-all of social organization.  They fail too frequently if not all the time.  So our objective is to rebuild or re-invigorate democracy, not to eliminate capitalism. 

Or, returning to my Heraclitus of yesterday:

“The cosmos works

by harmony of tensions

like the lyre and bow”

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All Wet like a River

Heraclitus exists only in fragments.  That’s unfortunate because aphorisms are not the best way to tackle the hubris of the technocrat.  He was on to something though.  We all know his well-worn saying about stepping into rivers.  He tells us that they’re never the same twice.  And yet they stay the same.  Beware, then, the analyst that thinks she sees a regularity in our economy.  It may look the same as before, but it isn’t.  Not in detail.

Yes, I am still stuck wondering about Diane Coyle’s defense of economics.  It has, she says, changed a great deal since it was exposed as somewhat vapid back during the Great Financial Crisis.  I am trying to be gentle.  In truth it was exposed as being a lot worse than vapid. 

The problem I have is that the resurrection of economics, in the eyes of Coyle, is in its contribution as a technocratic bulwark against the visceral or uneducated emotions of democracy.  As a center of empirical wisdom economics can, apparently, regain its luster and provide a counterweight to the fogginess of ideas that emerge, not from dogged adherence to statistical analysis, but from the vague good intentions of the people’s representatives.  The economist-as-technocrat thus replaces the economist-as-theorist at the epicenter of modern policy and decision making.  Technocrats can do what mere politicians might not.  They can stand aloof and make the hard choices.  They can point out the opportunity cost of a choice.  They can hammer out the alternative values within an array of choices.  They can sort the costs from the benefits and weigh them objectively so as to ensure that society reaches the peak of its potential.  They can, in short, make us all efficient.

Whatever that means.

Who knows?

But then the technocrats have a definition of efficiency so we can rely on them.

The issue with this turn towards technocracy is the inherent uncertainty pressed upon us by the rivers of Heraclitus.  Can we really draw solid conclusions from the flow of history such that we can predict what to do next?  Is not uncertainty an irreducible problem blocking our view forward?

Certainly the technocrats have amassed a set of tools that dazzle us all.  But the information they rely upon is history.  It is in the past.  Yet it is the future they pretend to discuss.

This is the dilemma we now find ourselves in after centuries of technological advance.  So alienated are we from the simpler world we have been ejected from we now are forced to rely on specialists who decide for us how to interact with our own circumstances.  We have, and the irony is startling, surrendered our agency in order to find our independence.  We, unlike our ancestors, no longer control the provisioning of the necessities or luxuries that we require.  We simply provide our effort in the production of one tiny element of the whole.  We rely, for the rest, on the enormous coordination and administration of the complex we call an economy.  This reality implies we are surrounded not just by the technology that has enabled this complexity, but by the minders of the machines and the technocrats that delve into the deeper workings and meanings of that complexity.  It is only in moments of crisis that we realize just how fallible the technocrats can be.  For all their pomp and hubris, for all their self-evaluation and peer reviewing, and for all their self-referential self-regard they are not that much better at seeing into the future than any of the rest of us.  And their track record, the longer it produces evidence for us to evaluate, ought puncture what remains of the hubris surrounding their status.  They are valuable.  They are just one component of any democratic decision making process.  They ought not dominate how we go about navigating the waters of technological advance.

Prominent economists have, of course, called our attention to the fallibility of decision making.  It is always strange to hear economists like Coyle refer to Hayek’s attack on centralized management, based as it is on the massively fragmented nature of information spread throughout society, as if it is a defense of market based allocation of resources.  As I have said many times: that fragmentation destroys entirely our ability to determine whether any system of management is “better” than any other.  We simply have no idea.  We have no idea whether way over in some corner of the decision space there isn’t a better one lurking and waiting to be discovered.  Likewise we cannot assert that an equilibrium ever exists.  We don’t have the information or the computational power to determine what an equilibrium might look like in the real economy, let alone whether it exists.

This inscrutability within the data was also mentioned by Jean Fourastié who hit upon another feature of the problem.  Amongst his many insights into the difficulties of understanding the complexity of a modern economy one that comes to mind in the context of Coyle’s defense is that time is not homogenous.  Things change.  Compositions change.  Heraclitus was correct.  The river never stays the same.  Worse, the time-lag in gathering data for analysis, and then the time consumed in analysis itself, means that the object of study is obsolete by the time we learn anything from that study.  In Fourastié’s words:

“Factors Become Modified During the Time Required to Verify Them. … One fact is sufficient to prove this; and I ask the reader to reflect upon it, since it is, to my mind, the heart of the problem: the time required to gather information exceeds the duration of the action being studied.”

I call this dead-time.  Our ability to use data as a gateway to understanding the future, and to the development of strategies to determine our path forward, is circumscribed by time.  If the pace of change is faster than our ability to forecast based on analysis, then we are reduced to reaction alone.  And lessons from the past are redundant before we even have a chance to deploy plans based on them.

Thus the speed of our evolution beyond our more primitive, simpler, past, which gave rise to the very need for the study of economics undermines the efficacy of much of what we learn.  As Fourastié points out, the original founders of economics, those who laid out its path, were less affected by the phenomenon of dead-time.  The pace was slower back then. But the technological whirlwind unleashed by industrialization has subverted much of what they took to be solid and invariable lessons.

Which implies a much reduced space for technocratic certainty even as the need for that very technocratic certainty has risen.  Coyle’s hope for economics needs to be modified to accommodate this paradox.  Her technocrats need to be modest.  The increasing complexity of modern economies calls for a greater understanding of what makes them what they are, and yet, simultaneously, makes that understanding less likely.

We are, to put it bluntly, stuck.

“The river where you set your foot just now is gone — those waters giving way to this, now this …”

Exactly.

Heraclitus knew a thing or two.

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Symbiotic Machines and Our Ignorance

Well, what are we to make of all this?

Here’s something I came across in Diane Coyle’s recent book, “Cogs and Monsters”:

“A large range of factual subjects, evidently part of science and duly explainable (in principle) by empirical methods operating under natural laws, treats different kinds of inordinately complex and historically contingent systems — the history of continents and landforms, or the patterns of life’s phylogeny, for example — as not deducible, or predictable at all, from natural laws tested and applied in laboratory experiments, but crucially dependent on the unique character of antecedent historical states in a narrative sequence fully subject to explanation after the fact, but unpredictable beforehand.”

That’s Steven Jay Gould writing in 2003.

He gets it.

Does the economy fit into Gould’s set of “inordinately complex and historically contingent systems”?  Of course it does.  Indeed it’s one of the better examples.  We can always look back and untangle parts of the story as to how or why some economic phenomenon emerged or disappeared.  There are a wide array of perfectly valid economic points of view to cast backwards and articulate such stories.  Our arsenal is full of them.  But that doesn’t mean that any of them have future validity or that a trick played once will work out the same way twice.  Those natural laws so beloved of economists are simply observations that help explain the tracks in the sand we have left behind as we navigate the tides of technological, cultural, and cognitive change.  They are nothing more than a guide into the future and the impenetrable unknown.  

Of course it’s not quite as simple as that.

The enormous stability created by the path dependence of history dictates that deviance is unlikely to be too radical in the immediate future.  Further off is another matter.  

Who, for instance, could have imagined back in the early days of industrialization that our lives would be so totally intermingled with that of the machines we rely upon to deliver out current standard of living?

You are all, naturally, aware of Lynn Margulis’s contribution to evolutionary biology.  She argued that a major step along the way towards life as we know its was the symbiosis between various primitive life forms that ended up producing cells with nuclei.  The primitive forms still exist, but within a mutually beneficial greater whole.  They are no longer separable in the way they once were.

Do we need a theory of economic symbiosis?  Do we need to develop a narrative that organizes our steady journey into a machine mediated existence?  Alternatively, do we need to start discussing how our machines are becoming more and more to resemble us?  Our mutual dependence is quite clear.  Only our hubris stops us from recognizing the inevitability of a total merging in the future.  Where will the line between human and machine be drawn?  

Economists like to talk about “general purpose technologies” (GPTs).  The concept is one of those generalities that gets tossed around frequently in discussions of the history of economic growth and the contributions to that growth of various inventions.  GPTs are the holy grail of advancement.  Their effects permeate socio-economic activity to such a degree that each elevation in growth seems impossible with them.  The steam engine, electricity, the computer and now artificial intelligence are often mentioned as iconic GPTs.  But, perhaps, from the perspective of a less anthropocentric and very long term viewpoint the original and longest lasting GPT is the human.  That is to say that we deployed ourselves, our skills, our know-how, and our capacity to do work for millennia to solve the problem of survival.  It is only recently that we added other GPTs to augment that set of attributes.  We found an ability to multiply the effect of our own basic capacities and break free of the Malthusian trap.  In order to do so we entered into a bargain with our machines.  We designed them to serve us.  We own them.  We decide their fates.  We use them.  They would not exist without us.  And yet each of those statements has a negative.  As our dependence increased we began to serve them.  They came to own our ability to prosper.  They came to decide our fates.  They use us.  And we could not exist, at least as we now are, without them.  Where, nowadays, does the pragmatic line exist between the two species?  Especially as we are now designing machines that can think.  What next?  Machines that feel?

So, what are we to make of all this?

Perhaps that we need to re-invent economics in the manner Gould suggests.  As we march towards a true machine/human symbiosis a future economy is not predictable from the so-called laws of economics.  Those laws look backwards not forwards.  Ineluctable complexity is just that.  It cannot be avoided.  Let’s not pretend.  There are no laws sufficient for the purpose of prediction.  None.  So all economic arrangements are simply accommodative to our current circumstances.  Contingency is all.  

In a way this fits perfectly with the Hayekian view that Coyle references in her defense of so-called market forces.  She gives us the usual criticism, referencing Hayek, of centralized organization of an economy.  Since knowledge is dispersed and cannot be collated for central computation, we are told, decentralization is the best and only way to go.  She leaves it there.  At least Hayek left open the door to the rather obvious criticism: if we cannot compute centralized solutions due the dispersion of knowledge and the vastness of the volume of information, how can we then argue that any solution is any better than any other?  We cannot.  We have lost control of the situation.  We cannot identify any solution as being better, being in equilibrium, more efficient, or meeting any other qualitative criterion at all.  We simply do not know.  Everything is a guess.  Maybe based upon some fancy theorizing, but a guess nonetheless.  So markets cannot be called any more or less efficient.  We have, by using the Hayekian logic, acknowledged our ignorance.  To go beyond that ignorance is to venture into ideology.  

But you know all this.

Of course you do.

I ventured into this ramble because of a sequence of articles in the Financial Times.  The existence or absence of hubris is essential for understanding how we can deal with current issues.  In one article, Geoffrey Owen, a former FT editor, says the following:

“Shareholder-based capitalism, with competition between profit-making firms as its driving force, is the means by which society’s resources are used most productively for everyone.” 

That is a highly contestable statement.  Given our lack of true insight into the workings of the economy, and given the lack of integration of corporate theory into economics, by and large,  we simply cannot, and ought not, make statements like that.  We don’t know.  Indeed there is a steady accumulation of evidence that suggest shareholder value, when carried to the extreme, as it has been in recent decades, is greatly harmful to swathes of society.  So to sweep past that evidence and to make assertions that drop straight from the naive and idyllic self-serving assumptions of economists as if they were truths is misleading, and at a deep level purely ideological.

Contrast that with an article today by Martin Wolf who joins the lists as an advocate of monetary tightening in the face of today’s burst of inflation.  His entire article can be resolved into a single perspective: economies are too complex for any idea to be thought of as having enduring value.  The fashion in monetary theory ebbs and flows to reflect the current context.  What was good once is now bad.  And vice versa.  Wolf even trots out the old observation that technocrats have a foolish tendency to prefer being precisely wrong rather than roughly right.  He argues for humility and prudence on the part of central banks because of how little we know about the economy.  Apparently the humble and prudent approach is to squeeze the labor force to stop wages spiraling out of control.  I suppose neither humility nor prudence applies to profit margins which appear to be as wide as ever despite so-called cost pressures.   Economists seem to forget that despite arguing that inflation is “always and everywhere a monetary phenomenon” Milton Friedman gave himself an enormous caveat.  According to Wolf, he also said that money affected the economy with “a lag that is both long and variable”.  In other words he said he had no clue, but prefers to think it’s all about money.  In any case, contra the fashion in contemporary technocracy, prices are established by bureaucratic administration.  They are set to cover costs and achieve a target profit.  It is, as Kalecki explained a long time ago, the volume sold at this administered price, and the target profit, that will trigger a price change.

And yet there is Diane Coyle defending the advances in economics since the Great Financial Crisis, or GFC as she calls it, and the rise of economists as technocrats capable of taking a tough stand.  High on their elevated intellectual perch they can, according to Coyle, make those tough choices because they are not influenced by the vagaries of democratic influence.  In true technocratic style they can calculate and decide in society’s best interests.  Such Platonic perfection would be wonderful, would it not, were it possible?  

Personally I would prefer that they stop pretending to know something that they do not.  Frankly they should all take a leaf out of the critics of “total factor productivity” (TFP).  It is a measure of our ignorance.  Economics just doesn’t understand the drivers of growth in any coherent manner.  Why would it?  They are inscrutable. So TFP is just the odds and ends of ignorance.

Or, perhaps, it’s a measure of our symbiosis with machines?

Just a thought.

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Democracy? Surely Not!

Let’s stir things up for the New Year by continuing with one of my recent themes.

A quote from an opinion piece in the NYT this morning [January 3rd]:

“James Madison boasted that the Constitution achieved “the total exclusion of the people, in their collective capacity.” Its elaborate political mechanics reflect the elite dislike and mistrust of majority rule that Madison voiced when he wrote, “Had every Athenian citizen been a Socrates, every Athenian assembly would still have been a mob.” Madison’s condescension has never gone away. Walter Lippmann, perhaps the most prominent intellectual of the short American Century, reckoned that citizens were ignorant, confused and emotional. Democracy brought “an intensification of feeling and a degradation of significance” to whatever it touched.” 

I love that phrase: “the total exclusion of the people, in their collective capacity”.  What other capacity can the people have, other than collective?  Madison was hedging.  He wanted to be aristocratic with a popular twist.  And there was that awful reference to “we the people” in the background that needed proper definition.  So the people were invited in.  Just not collectively.  They were let in selectively instead.

To this day the threat of democracy is a real and present danger in America.  The bedrock of the constitution remains firmly anti-democratic.  Various bolt-ons have attempted to bring it into the democratic era, but they have failed.  America is not a democracy.  So there is no existential threat to it.  You can’t lose something you don’t have.  Our project for the New Year ought not to be dedicated to fixing the governance system.  It ought to be dedicated to reforming it.  Making it democratic would be a good start.  Just think: had America been a democracy Trump would not have been elected.  He lost the 2016 election by three million votes.  He lost in 2020 by seven million.  Due to the undemocratic nature of the constitution, switching a mere 46,000 of those seven million — in the right states — would have secured a win for Trump and his attempted coup would have been unnecessary.  No wonder he’s upset.

Still, it’s an uphill fight against a hero like Madison.

Another quote, this time in the context of economic policy:

“The past 20 years, the very rise of independent central banks, is all about getting priorities right, getting rid of democratic money which is always short-sighted, bad money”

That’s Rudiger Dornbusch of MIT talking in 2000.  I get the quote from Adam Tooze’s recent book “Shutdown: How COVID Shook the World’s Economy”.  Dornbusch was praising the Reagan/Thatcher adoption of neoliberal political economy in an effort to rebalance the public and private sectors firmly in the latter’s favor.  Key was the insulation of monetary policy from democratic politics, which in true Madisonian style, was assumed to be rotten to the core.

Since the 1980s it has been commonplace in the Anglo-Saxon world to treat democratic urges as leading, inevitably, to the degradation of the economy and the debasement of the currency.  So policy has been constructed consistently to act as bulwark to protect “the system”.   Preserving the economic status-quo has been of paramount importance.  So we expended vast energy to preserve the banks in 2008, but ignored the people.  We shifted too rapidly to austerity and slowed the haul back to normality in order to avoid inflation.  But that didn’t matter because the labor force needed to be disciplined.  Neoliberalism, at its core, has always been about privatizing gains and socializing losses.  It is, as Hayek et al would argue, stubbornly opposed to the people who simply cannot be trusted to run their own lives.

Which is odd, as I have observed before, since orthodox economics treats customers as supremely rational when they act as economic agents.  This rationality is critical to the preservation of market supremacy as a vehicle of resource allocation.  Yet those same consumers are hopelessly reckless when they vote, which is why Madisonians everywhere treat the people with such disdain.  No wonder the world is such a mess.  The people either suffer from excessive rationality or excessive self-interest.  Oh wait.  Maybe they’re the same thing?  Maybe they vote in their self interest?  Perhaps they’re rational after all in politics?  Perhaps it’s just that our Madisonian leaders don’t like the result?

And yet …

In the past two years we have seen a complete reversal.  Neoliberalism has been tossed overboard by the institutions most dedicated to its propagation.  The IMF, for instance, has berated the left-of-center Mexican government for not running a large enough budget deficit.  Yes, you read that correctly.  The IMF was urging what was previously thought of as reckless policy.  What happened?

Reality happened.

Neoliberal orthodoxy ran headlong into a crisis that no market could self-fix.  The markets themselves needed fixing.  So we had a burst of democracy.  We monetized the debt in an astonishing reversal of orthodoxy.  We succumbed to the realities of the mob.  We could collapse or we could democratize policy.

The question now, and for 2022 as a whole, is: do we go back?  Do we revert to preserving the system alone?  Or do we continue with our democratic experiment?  Should policy makers take workers into account, or right them off once more as an expensive input prone to destabilizing equilibrium and, gasp, asset prices?

Democratic [small “d”] economic policy has been an astounding success only because the interests of the people were aligned temporarily with those of the financial markets.  When the dust settles who will we care about more?

My money is on reversion.  The specter of inflation will be used to suppress the democratic uprising.  The shadow of Madison is a long one.  We must avoid the mob disrupting the genteel and profitable life of the system.  We must make democracy safe for capitalism.

By stifling it.

I think I can hear our “independent” central banks working on that project already.

What a shame.

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