About Peter Radford

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Political Economy?

“American economics harbors fierce political debates over theory, methodology, and policy.  In practice and in comparative perspective, however, the main trend over the course of the twentieth century has been the standardization of training as well as a homogenization of evaluation criteria that has marginalized nonorthodox approaches.  After institutionalism was dethroned by the rise of mathematical economics and more politically challenging forms of intellectual heresy (such as Marxism) were relegated to peripheral institutions and sometimes to other disciplines, American economists installed themselves confidently within the neoclassical paradigm.  It is within this paradigm that the major intellectual debates have taken place. … In other words, the dominant conversations within the discipline have centered around which hypotheses in the neoclassical framework may be modified or tweaked to account for observed empirical patterns.  But American economists implicitly agree to keep disturbances to a minimum; as a result the framework is almost never questioned as a whole.”

That’s a long quote from Marion Fourcade’s excellent study of the discipline of economics “Economists and Societies” published in 2009.  I think it helps us wrap our minds around why it has taken so long for any discernible change in the profession’s thinking to have seeped into the open.

The discipline of economics is a closed society with unwritten but deeply rooted rules.  It is easy to be cast out.  If you are, you cannot easily find your way back in.  And, given the excessive prominence of economics in policy making during the middle and later years of the twentieth century, the profession placed an acute premium on not breaking ranks.

That prominence was ill-founded, economists don’t really have a good grasp of actual economies — the complexity of the subject matter and its infernal intertwining with society as a whole make the supposed rigor of what became the mainstream an illusion.  But it was a convenient illusion.  It fit well with the appeal of rational construction of policy.  It was a short skip from such appeal to the imposter of rational decision-making that supports the edifice of market superiority over other forms of resource allocation and distribution.  Instead of accepting that all forms of human activity are equally flawed and/or rational, economists mistakenly imagined people to be rational within the hallowed halls of a market, but insufferably irrational everywhere else.

One of the dominant themes of the last century was this general assumption that human activities can be studied through an ever increasingly rational lens.  That may be, but economists then went too far: they projected rationality into the subject of study.  Instead of using the tools of reason to tease out regularities of interest, they made the subject matter itself entirely rational.  So the regularities they thought they saw were simply echoes, or mirrors, of their own thought processes.  People in markets suddenly became economists, which made studying them more easy.  The entire enterprise became a massive “if only” exercise.  If only people behaved like economists it would so much easier for economists to study them!  So that’s what happened.  Entire Nobel winning careers were built around what was nothing more than a gigantic bout of self-absorption.

No wonder the discipline rapidly became so sterile.

And irrelevant.

Now, however, there are feint signs of hope.

A younger generation is breaking free of the constraints of  theory dependent upon rational behavior within market spaces entirely cut off from the rest of society.  The messiness of life is slowly being recognized as a real thing worthy of attention.

I am happy about this.  I am even hopeful that we might eventually arrive at a day when beginning economics is based upon the realities of asymmetries of information, uncertainty, path dependencies, inequality, power relationships, institutional and cultural limitations, and even geography, rather than having all these sorts of things introduced as “imperfections” later on.

 

The way in which economics came to be taught was backwards.  The perfect alternative was posited and described before the imperfect reality was introduced.  The problem being that most students never got to that real part.   They left with a false image.  Which was the ideological intent of some of the founders of the modern discipline.  The homogeneity that Forucade refers to above meant that even those who were not ideologically inclined were trapped into spreading the ideas of those who were.  They became unwitting propagandists for what was, essentially, an anti-government political agenda.

But times are changing.  Here we are a decade after the enormous embarrassment of the discipline caused by its blindness to the possibility of the Great Recession, and books are appearing that suggest markets are not quite what was once thought, that governments are important if not essential, and that all sorts of things muddy the pristine waters of the neoclassical world.  Some of these books have the temerity to ponder the effects of distribution and question whether markets are very good at it.  Especially since markets can be infected with diseases such as power relations and so on.

I expect our libertarian friends will mount a stout rearguard action and belabor the importance of individual liberties in the construction of modern highly productive economies.  I would agree with them were they then to acknowledge the reality of the inequalities that unfettered liberty always produces.  We need a balance which implies something more than just markets to be involved in the economy.

In this regard one of the most important books written in recent years about inequality talks about exactly this.  Walter Scheidel’s “The Great Leveler” is a glittering tour through history with one simple message: inequality is the norm, not the exception.  More to the point history tells us that elites will always capture economies and create what economists call rents.  To rely on markets to provide equitable distributions is foolhardy.

The problem is well known to economists, so they say, but in their effort to eliminate the taint of politics from economics they had to pretend otherwise.  So we ended up with a ridiculously lopsided and unreal version of economics purged of politics unable to explain reality where politics is everyday.

Economics with politics is a real thing.  Economics swithout politics is not.

A resurgence of political economy?

An emphasis on policy rather than sterile internecine spats over theory?

Progress is possible after all these years.

Congratulations to all these who kept the fires of plurality burning through the dark ages of neoclassical dominance.  Now is the time to switch gears to writing the new political economy.

Well, I can hope can’t I?

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A Quick Note: Utopian or Real?

Just a brief follow-on to my recent comments on the role of economics and its relationship with power and/or politics.

I pulled out my old copy of Polanyi’s “The Great Transformation” to refresh my memory of his position on the topic.  Recall that he talked about the way in which economic activity is embedded within the larger social and political fabric.  Mainstream economists must shudder at such a thought.  Isn’t economics superior and more “scientific” than politics?

In any case, in his introduction to the edition I have, Joe Stiglitz made a very useful comment that is worth repeating.  His words are:

“… the very utopianism of market liberalism is a source of its extraordinary intellectual resilience … its theorists can always claim that any failures were not the result of the design but of a lack of political will in its implementation.”

That is clearly true of all utopian or faith based arguments or theories.  The purity necessary for such arguments or theories to represent reality is unattainable.  Reality is riven through with all sorts of contradictions, uncertainties, and other vagaries such that any utopian vision cannot be fully realized.  Thus a utopian theory is rendered immune to contradiction.  How sneaky! The defenders of such theories can hide behind a convenience of their own making.  The radical rationality of market liberalism is such a theory.  Its proponents can point to any number of so-called failures that prevent its pristine wonders from occurring on earth.  Inevitably those failures are described as being a problem of governance or, rather, government interference.

The obvious retort to such talk is simply to ask why it is that the theory describes a utopian world and not the one we all observe.  To that the utopian theorists have no answer.

Why?

Because to provide a theory that accounts for the contradictions, uncertainties, and vagaries contradicts their ideological intent.  They set out to prove the superiority of markets over other forms of resource allocation, and the only way of achieving that goal is to abstract away reality with all its inconvenient facts.  However, markets, as Polanyi pointed out, are tainted by their continual co-existence and co-mingling with other forms of allocation and social activity.  Telling the consequences of one set of causes from another is difficult to say the least.  Economics can describe monopolies or rent seeking, but treats them as anomalies that sully the purity of a market.  In reality they are the norm.  Elites make them that way.

It is trivial to argue that perfect markets deliver perfect results.  It is a great deal more difficult to make a real economy tractable to analysis.  And the argument that we ought compare the pure version with reality to see where we could improve the real world is truly bizarre and pointless.  Unless, of course, your agenda is not study but dictation.

In the context of my recent comments on power, the utopian nature of economics and its need to be other-worldly in order to arrive at its core conclusions, often renders it secondary or worse  as a description of economic reality.  The ebb and flow of inequality throughout history is a good example. Even though things like supply and demand may exist as forces in the allocation of resources and hence the level of inequality, they quite often are overwhelmed by other forces.  Like elitist control of power for instance.  Utopians will, as Stiglitz suggests, cry foul and argue that, “if only” such asymmetries as concentrations of power did not exist, the world would comply with their theory.  But such asymmetries do exist.

They always have.

 

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Inequality Conundrums

What am I supposed to make of the Scheidel book?

Having waded through it I emerge with a grim pessimism — certainly more than when I started.

The basic thesis, as I mentioned a couple of weeks ago, is that periods of relatively greater equality are rare in history and that they ebb away soon after the re-establishment of elite control over the distribution of national resources.  Worse, the relative equality that is then undone was only the result of some disastrous episode such as a war, plague, state failure, or revolution.

Scheidel is relentless in his delivery of historical facts and examples.  He allows us no escape.  We are left with a feeling of hopelessness and a fear that all we can do is to mitigate, but never stall, an inevitable tide.  Humanity, it appears, is doomed to spend most of its existence in societies riven through with various inequalities, and attempts at remedy are futile.

Even the few counterfactual references and the exhaustive list of recent suggestions at the end of the book are swept to one side as folly.

So: what am I supposed to make of the book?

First: it reinforces the thought that the recent past is an extraordinary exception to the norm of history.  We ought no extrapolate from the immediate post-war era and somehow expect it to be lasting.  It was the result of the awesome destruction and disruption of the Great Depression bookended by two catastrophic world wars.  The loss of capital during that period inevitably reduced both wealth and incomes at the top of the scale.  And the pressure of shared emergency and danger induced an unusual and unsustainable social cohesion that allowed redistribution of resources via the political process at unprecedented levels.  The social democracy that still endures in parts of the world is an echo of that cohesion, but is, everywhere, under stress from the steady re-assertion of power by elites determined to establish rents lost during the crisis.

Second: it suggests that the political process is far more significant than the economic process in distribution.  This is of no surprise to many of us, but it does, or ought to, dissolve the hubris of economists who continue to insist that distribution is driven by rational processes and can be explained wholly by notions such as marginal productivity.  People like myself who contest the meaning and relevance of both “marginal” and “productivity” cannot be shocked by what Scheidel says, but we may be disturbed by the sheer nakedness of the role of power in shaping the institutional and network relations necessary to subvert whatever purity may exist in the mythical market.  Being a bully really matters.  Owning the reins of power matter even more.  This cannot be news to any of us.  It’s just disappointing to realize that contemporary understanding isn’t a sufficient antidote to what I suppose can be loosely defines as human nature.  In any case, anyone seeking to study an actual economy, and especially features of it that relate to the distribution of resources, is better advised to begin by studying politics than economics.  Apparently economic forces are all too easily overridden by force and are not “inevitable” the way that we are taught in the textbooks.

Let me give two examples drawn from the book to illustrate this.

During the darkest hours of World War II, the Times newspaper in London, hardly a bastion of leftish thought published an editorial containing these words:

“If we speak of democracy we do not mean a democracy which maintains the right to vote but forgets the right to work and the right to live.  If we speak of freedom we do not mean a rugged individualism which excludes social organization and economic planning.  If we speak of equality we do not mean a political equality nullified by social and economic privilege.  If we speak of economic reconstruction we think less of maximum (though this job too will be required) than of an equitable distribution”

Just a few decades later that same editorial page would bash at anyone uttering those words.  It is simple and convenient for the powerful to slide from a message of unity and equality in the midst of a dire situation in which they need to co-opt the masses for the fight, only to return to the defense of privilege once the crisis has abated.

To reinforce this tendency, and right at the end of his book, Scheidel reminds us that the last time the United States mustered enough political unity and willpower to pay for a war via a rise in taxation was 1950.  Since then the resistance of the elite to being taxed has forced subsequent wars to be financed by debt.  Perhaps the iconic example of this resistance being the Reagan arms build-up at the end of the Cold War.  Not only was that build-up debt financed, but it came at the same time as a major tax cut on higher incomes accelerated the American surge of inequality that so disturbs some of us today.

It is the post-1970s decades and the re-appearance of higher levels of inequality that are the norm.  It is the rampant rent-seeking of our elite that we ought consider usual.  And its is the resistance of that elite to redistribution that is consistent with history.

Scheidel leaves us with little hope.  Every effort to fight against the tide of the powerful seizing more than their share of society’s aggregate resources is futile.  Sooner of later inequality will rise back to levels seen before.

But then there is the libertarian argument that none of this matters.  What does matter to libertarians is the general level of living standards and that consistent economic development delivers a steady increase in such standards.  So what if the elite pilfer a disproportionate share?  As long as the general populace is better off we ought not be distracted by arguments about fairness.  Lucas is famous for taking this position.  Understandably so given the irrelevance of his economics in the face of elitist force.

Is this all we have?

What happens if growth tapers off as it appears to be doing?  What if the pilfering is egregious and leaves the majority worse off?  Will that unleash a storm of unrest and erase enough capital to restore fairness?

Is violence the only way?

Read the Scheidel book.  See what you think of it.

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Power: Take Two

I have been reading Walter Scheidel’s wonderful book “The Great Leveler”, which gives us a very long period perspective on inequality.  Were I to be limited to only two books on inequality, this would be one.  It covers the ebb and flow of inequality over an extremely long time, with extensive discussions on civilizations as diverse as ancient China and ancient Rome.  Anyone who wants to make a serious contribution to the understanding of inequality has to be familiar with Scheidel and his mountain of data.

At the risk of being too brutal to Scheidel’s argument, here is my very brief version of it:

  • Inequality is the norm, not the exception, throughout history
  • Its ebb and flow is dictated more by the impact of warfare and mayhem on society than by social reform or redistributive governance
  • Our current high level of inequality is simply a return to the norm because the devastation of capital during the first half of the twentieth century has now worn off, and the urgency for social reform caused by the two world wars has dissipated

And that’s about it!

What I like about the simplicity of this general idea is that it undermines the logic — at least in my mind — of economic forces being the key determinant of resource allocation.  Politics trumps economics at every turn.  Each time a society suffered a wave of mayhem it appears to have created opportunity for a reshuffling of the social order during which time resources were temporarily more evenly distributed.

Sometimes this more equal distribution was a result of deliberate action by an elite trying to stave off social unrest whilst it [re]established itself securely.  Sometimes it was a result of the wholesale destruction of capital and the consequent “clearing the decks” before a new elite rose to power to co-opt resources for itself.  Sometimes the mayhem was purely warfare related, other times it was a result of a natural disaster like the Black Death.

In any case the episodic rise and fall of real wages  was firmly in the hands of political forces as societies shaped and then re-shaped their power structures and as new elites found themselves able to obtain rents and other sources of disproportionate wealth acquisition not available to the average citizen.

The logic of history, to the extent that such a thing exists, is best described as a pulse fluctuating around a norm of inequality, with purely economic forces playing a secondary role in terms of distribution, and with political power playing the dominant role.

So much for “marginalism”!

Oddly this reality helps justify Robert Lucas’ ridiculous assertion that attempts to explain inequality are a dangerous sideshow for economists.  As it turns out he is correct.  Economics is too limited in its scope to be able to offer an explanation.  It has made itself so small a part of the overall explanation of social wealth allocation that its contribution can also only be minor.  By carving itself away from politics in order to study only markets, and idealized markets at that, economics has nothing to say about inequality.  Those economists who have stepped into the arena have inevitably had to expand their reach beyond the standard or mainstream toolkit of economics and incorporate social and political elements into their explanations.

This doesn’t invalidate things such as the interplay between supply and demand, what it does invalidate is the attempt to create a “scientific” economics based on the notions of marginal productivity and the inevitability of the relationships that such marginal analysis purport to describe.

The only inevitability in society is that elites will always distort resource allocation in a parochial or self-serving manner, reducing the so-called natural forces of economics to irrelevancy.  Unless, of course, those elites are eliminated by warfare or similar mayhem. In which case economics temporarily emerges as significant whilst a new elite rises to power.

The premier role this analysis gives to politics and social studies generally is a price economics pays for being the study of market allocation alone.  Apparently Lucas is content with economics being a bit player in the study of economies as long as it preserves its market biased ideological purity.

One last thing: if we consider a list of major economic phenomena of interest and importance in real economic life as we experience it, economics actually has weak or no explanations for many.  It is poor on growth.  It is almost blind on industrial organization.  It doesn’t even care, per Lucas, about inequality,  and so on.  But it is wonderfully logical and gives awesome insight into the fantasy world of perfect markets.  Wherever economist think they have a strong explanation it is almost always only in reference to a phenomenon they have arbitrarily constructed and not in reference to something beyond the laboratory.

Power matters:  Economics no so much.

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Notes on: Power Matters

Let’s start with a different approach:

Reality suggests there are many ways in which resources are allocated within an economy, not just one.  Economics, as it now exists in its mainstream or standard form, has withered to study just one: that which takes place in markets — where markets are strictly defined in such a way as to guarantee outcomes compatible with a certain ideological perspective.  As we have discussed before this trajectory for the discipline was deemed essential for the mainstream to construct a logical defense against the mid-1800s criticism of early industrial capitalism.  It continues to act as a defense against more contemporary critiques as well.  In so doing it adopted a hostile and denigrating stance to alternatives.  “Markets good, all else bad” subsequently became a standard mantra, which is why mainstream economics is inherently anti-democratic.  It has no tolerance for anything other than its preferred market mechanisms, and, by obliterating non-market forces from its purview, has steadily retreated from being a “social science” into becoming more of a “pseudo science”.

As a result, there is a clash between an economy as it exists in practice, which is riven through with non-market forces, and an economy as it exists in theoretical principle, in which such difficult things are absent.  This brings to mind a quote I came across whilst reading the philosopher Daniel Dennett, unfortunately he doesn’t give us an attribution, but to paraphrase for our purposes:

“An economist is the one who’s says: We know what exists in practice, we are trying to find out if it exists in principle.”

This obsession with principle rather than reality bedevils economics, and often renders it irrelevant as an explanatory system for what we see around us, but it does give convenient cover for economists who want to avoid the non-market methods of allocation available to society.  It also allows them to criticize such methods where they dominate market forces.  They scoff at efforts to alter the result of market-based allocation through redistribution as a well-meant, but foolish, attempts to muck with fundamental forces.  Economists like to think in terms of “the laws of economics” rather than the “social constructs of economics”.  The discovery of laws dignifies economics as a science.  That there are social constructs would relegate it and put it on a par, at best, with sociology and political theory, which would offend the feeling of superiority rife amongst most economists.

Uncomfortably for economics those social constructs do exist.  After all a market, no matter how purified it becomes in theory, is simply a group of people behaving in certain ways and towards certain ends.  A group of people is sometimes called a society or a collective.  And societies and collectives are breeding grounds for politics.

The introduction of the social and political implies the introduction of power.  It brings into sharp focus the struggle over the distribution of wealth and incomes; and it ought to make us think about the historical development of modern politics.  Unfortunately, though, history is another taboo in mainstream economics.

History teaches us that the predation of capital owners, when left unfettered, is  antithetical to any vision of even the lumpiest of equal citizenship.  Money will concentrate and, thus, so will power.  The pretense that market processes will magically prevent inequality is proven absurd.  On the contrary, inequality entrenches power, and power entrenches inequality.  Markets are used as engines by the powerful to empower themselves.  That represents such a challenge to mainstream theorists that they have abandoned any discussion of inequality.  Indeed they demean efforts to suggest that inequality is a topic worthy of serious discussion.

Despite that, the challenge of inequality exists.

Here’s a quote to make the challenge stark:

” There can be no permanence in a situation in which we abandon production to capitalism, and yet give the workers the political power to enforce demands on the national income which capitalism has neither the ability nor the incentive to supply.”

That quote is taken from a book, “The Decay of Capitalist Civilization”, written in 1923 by Beatrice and Sydney Webb, the British socialists.

First, at the time it was written economics was in turmoil and economies were heading towards disaster.  Capitalism as we now know it was young — a hundred years old or so — and thus there was no long term perspective.  The social upheaval of the first stage of industrial capitalism had not yet been met with a suitable, or effective, counter.  The Marxist critique, with all its grim and apocalyptic language, had accurately described the consequences of that original upheaval, and it was still possible to couch economic discussion within its ambit.  So defining society as a stark confrontation between capitalists and workers, without a middling sort, was perfectly acceptable.

Second, the Webbs clearly did not expect that giving workers the power to enforce political demands on the national income would ameliorate or reduce the starkness of their depiction.  They fully understood that workers want to co-opt the wealth capitalism produces.  What they didn’t see is that this can be accomplished by forcing politics to become more democratic.  The Webbs were stuck in a misunderstanding of the way in which power can be shared.  They still saw things in the stark terms of the Marxist critique.  They can be forgiven for this, of course, since they were writing when capitalism appeared about to collapse and at a time when the Marxist experiment in the Soviet Union had not revealed itself as being an exercise in tyranny rather than in liberty.  We now know better.

Thirdly, and more abstractly, it accepts that mainstream theory’s factors of production are correct.  John Bates Clark had stated the case for the mainstream most clearly back in 1899 when he argued that in a competitive market equilibrium the two factors of production, capital and labor, would be paid their marginal product.  This “marginalist” explanation of the results of allocation remains the foundation for purist economists seeking to avoid having to deal with non-market forces; but power relations do indeed exist as an economic factor: it is how the pie actually gets carved up.  Marginalism is a failed attempt to expunge power and to create a mathematically fine way of getting around power relations.  Clark thinks we get what we deserve.  The Webb’s think we get what we seize.  It is a clash of extreme moral views, with each side expressing itself in its chosen methodology.

Neither is correct.  The actual factors of production are: energy, natural resources, and knowledge/information.  Capital and labor are terms defining a socially determined  power relationship that sits above the factors of production in order to allocate the wealth created below.  The use of the capital-labor duality as fundamental inputs into economic theory harks back to the days of political economy, before marginalism attempted to expunge power.  It is odd that economics carried this duality forward without attempting to get at the deeper reality — especially given its obsession with discovering “laws”.

And the historical process set in motion by the upheaval Marx described so well has also not ended.  It is still in motion, just as capitalism itself still evolves.  Modern social democracy has been the solution most industrial societies adopted to solve the Webbs’ conundrum.  Workers have the vote and hence the power to enforce their demands on the capital owning class.  The balance is between democracy and capitalism.  It is that balance we need to get right.  We do not need to cast the conversation or argument in apocalyptic terms.

To deal with inequality, we do not need to rid ourselves of capitalism, we need to restore our democracy.  Our current difficulties, both political and economic derive from the imbalance created by neoliberalism, which, in turn, is given its intellectual credibility by the neoclassical version of mainstream economics.  Thus the irony of mainstream economics is revealed: by denying the impact of power relationships in the allocative process, it has allowed capital to take too dominant a position.  It has played a role in politics.  It has facilitated a power grab.  Or, perhaps, this is not an ironic and unintended consequence.  Perhaps it was intended.  The libertarian founders of both neoliberalism and mainstream economics detested democracy as something far too close to socialism.  To them democracy was a step on the road to serfdom and the so-called laws of economics stood as an insurmountable barrier defeating any wishy-washy well meaning efforts by democrats to soften the edges of red-blooded market forces.

Yet, to repeat, power exists.  The arbitration of the outcomes of allocation is a tussle taking within place both the economic and socio-political domains. As family members, citizens, and consumers we can affect both.  We express power through what we buy and through how we vote.  In other words, how we exercise our power is what drives and defines the basic relationships within a modern political economy.  No analysis of an economy can be complete without recognizing that allocation or distribution has many sources, not just one.

Power matters.

 

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