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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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Certain Decisions

One of the books I keep close by on the shelf is Paul Glimcher’s “Decisions, Uncertainty, and the Brain: The Science of Neuroeconomics”.  It dates back to 2004 and is one of those books that provides a glimpse of what a dialog between economic theory and psychology might produce.  More to the point it explores the issues surrounding economic decision making at a deep biological level.  It thus adds substantially to the behavioral explanation of economic activity.

Apart from making me think about the practical problems of decision making, one of the additional benefits I had from reading the book was that it introduced me to David Marr whose work was instrumental in the development of neuroscience. a few decades back.

Here’s a very long quote taken from Marr’s book “Vision” and I hope you can see its relevance to the plight of contemporary economics:

” Almost never can a complex system of any kind be understood as a simple extrapolation from the properties of its elementary components.  Consider, for example, some gas in a bottle.  A description of thermodynamic effects — temperature, pressure, density, and the relationship among these factors — is not formulated by using a large set of equations, one for each of the particles involved.  Such effects are described at their own level, that of an enormous collection of particles; the effort is to show that in principle the microscopic and the macroscopic descriptions are consistent with one another.  If one hopes to achieve a full understanding of a system as complicated as a nervous system, a developing embryo, a set of metabolic pathways, a bottle of gas, or even a large computer program, then one must be prepared to contemplate different kinds of explanation at different levels of description that are linked, at least in principle, into a cohesive whole even if linking the levels in complete detail is impractical.  For the specific case of a system that solves an information-processing problem there are in addition the twin strands of process and representation, and both these ideas need some discussion.”

One of the great failings in mainstream economics is its futile insistence that all theory must stand on the shoulders of what are called “micro foundations”.  Such an insistence is a clear denial of the complexity of a modern economy and that within such complexity phenomena worthy of study can emerge at different levels of detail.  Of course there is the additional issue that economists of this ilk also deny that the faux-psychology upon which they construct those micro-foundations is naively simple and hopelessly inadequate.  Yes, behavioral economics is beginning to change that, but the damage being done every day by the adherence to rational expectations based micro is too awful to contemplate.  Marr is clear that the macro and micro descriptions ought to be consistent, but that one follows necessarily from the other is not the same thing.  Need the micro must be consistent with the macro.  So descriptions developed at a more aggregate level ought inform our thinking lower down.

Not everything can be reduced to the decisions of individuals as if the interactions between individuals doesn’t produce phenomena of interest also.  Glimcher, of course, is writing his book at the level of the individual, and looking at the brain as a complex system, but Marr reminds us that emergence is something we need to deal with as we scale upwards through larger and larger aggregations of activity.

Mainstream economics has, by and large, obstinately refused to embrace such an approach.  By so doing it has denied itself the ability  to interpret or explain some aspects of the macro economy,  and has isolated itself from the kind of fresh thinking that might have helped it avoid the calamity of its failure prior to the 2008 crisis.

Until the entire concept of rationality is re-worked to adhere to real world experience and behavior, and until the consequences of complexity are fully brought on board, modern economics will continue to flail and will continue to decline in relevance.  So it will leave open the opportunity for other disciplines to offer more relevant and coherent explanations of economic activity — if they haven’t done so already.

 

Addendum:

For fans of the intersection between neuroscience and economics here is another quote I dug up from another Glimcher book.  On one of its early pages, as he describes the arc of progress in recent years, he remarks on a special conference issue of the journal of the Society for Neuroscience.  The editors, he says, write in their introduction:

” Within neuroscience, for example, we are awash with data that in many cases lack a coherent understanding … Conversely, in economics, it has become abundantly evident the pristine assumptions of the standard economic model — that individuals operate as optimal decision makers in maximizing utility — are in direct violation of even the most basic facts about human behavior.”

The gig’s up.

It is time to reinvent economics.

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Krueger

I want to note, with sadness, the death of Alan Krueger who was one of those economists undaunted by the existence of the real world and all its complexity, and had the courage to present conclusions based on empirical work rather than on pure theory.

Others will write more cogently than I can about his impact on the profession, so I will simply note that his work, with David Card, on debunking the notion that a rise in the minimum wage will always cause higher unemployment ended the anti-social grip of textbook economics on a very key issue for tens of millions of his fellow citizens.  And ended that grip on a positive note.

So much did that research roil the ideologically pristine waters of mainstream economics that no less a character than Nobel prize winner James Buchanan wrote in the Wall Street Journal (where else?), that Krueger and Card were undermining the very credibility of economics as a discipline and that they and their allies were nothing but “a bevy of camp-following whores.”

Such is the sensitivity of the mainstream to criticism.  Such is its devotion to data driven thought.  Such is its commitment to scientific discovery.

It is the likes of Buchanan that drag the reputation and standing of economics into the mud.  The willful ignorance that such erstwhile experts propagate in the name of intellectual rigor and in defense of economics “as a discipline” is in sharp contrast to the refreshing and humane work of those, like Krueger, who dare to think and respond to real world data.

Economics is a social science.  It is not an empty pursuit of an ideologically determined logic, despite whatever Buchanan and his confreres might assert.  The mainstream has forgotten, or more likely abandoned, the “social” in the social science in order to pretend the science.

And a pretense it is in the absence of real world data.

I am more familiar with Krueger’s work on inequality.  His efforts at calling attention to what he called the “Great Gatsby Curve” is another instance of his daring to throw dirt into the wheels of the mainstream.  That higher inequality is associated with lower inter-generational socio-economic mobility radically undermines the idea that inequality does not matter.  Recall the infamous and insensitive comment by arch-villain Robert Lucas, who’s said in 2004:

“Of the tendencies which are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on the question of distribution.”

There are few more succinct statements of the utterly anti-social stance of mainstream economics than that.  Damn the evidence. The preservation of something called  “sound economics” simply does not allow certain topics into the discussion.   Why not?  Because the intrusion of facts might undermine central assumptions needed to prop up the logic.  And logic matters above all else, especially reality.  Lucas has always been, in my mind, the archetype of what Keynes was describing when he said: “how, starting with a mistake, a remorseless logician can end in bedlam.”

Krueger will be remembered very differently.  He tried to begin in facts.  He then applied his logic.  He rarely, if ever, arrived in bedlam.

He will be missed.

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Uncertain

I am not quite sure what to make of the phrase “radical uncertainty”.  It pops up in most discussions of Keynes as being a critical, if not the critical, point of departure of his thinking from the silliness we know as classical economics.

Is radical uncertainty a redundant statement?  If something is uncertain, what is it that can make it radically so?  Surely the whole point of uncertainty is that we have no idea just how radical that lack of knowledge may be.  Worse, how do we identify uncertainty?  Isn’t it simply a concept that describes our inherent lack of knowledge?

In any case, it is precisely because of uncertainty that I find Keynes so appealing.  Whether or not he dealt with it correctly is another matter, but at least he was sensible enough to eschew the nonsense embraced by others that economics can be theorized about as if humanity had all the knowledge it will ever have right now.

Imagine the lunacy attaching to the notions underpinning mainstream economics.  The implication is that humanity has access to the future with sufficient acuity not only to reduce it to manageable proportions in the present, but to place knowable limits on it.  And then, to make things even more absurd, to be able to calculate and make “rational” decisions based upon this other-worldly capacity.

When you try to explain the mainstream core tenets to someone not infected by its disease you often get told not only about its transparent lack of reality, but also of its extraordinarily radical nature.

Keynesian thought not only embraces uncertainty as the central feature of reality, but it, more importantly, rejects “radical certainty”.

It is because of its adoption of the unreal and radical idea of certainty that mainstream economics — call it whatever you will — became so anti-social.  Basing itself on certainty was a necessary maneuver to eradicate a role for government or any other institution that society has developed to deal with uncertainty.  Once we know everything, absolutely everything, we can abandon all our defenses against the vicissitudes of life precisely because there are no vicissitudes of life.  The great weight of not knowing is lifted from our shoulders and we can reduce our lives to the calculus of maximizing efficiency, allocation, and so on.

This extraordinary fantasy is what is sold as economics.

That it is arrant nonsense ought to be self-evident, but because of the closure off of its intellectual milieu from the disinfecting current of reality, mainstream economists can pretend to have discovered something of value.

That they might deny its virulent anti-social nature is simply an admission that they don’t believe what they teach.  So too are all the kluges that adopt in an attempt to bend it to the evidence around them.  The problem they face is the more kluges they add the more cumbersome and contradictory the entire edifice becomes.

For instance, it is laughable to speak of a representative household.  Show me one.  I hope it isn’t mine.  And exactly which of Apple, Amazon, Google, General Motors, IBM et al is the representative firm?

The idea that such novelties are just devices to assist in the discovery of great truths about the economy is well, let me repeat myself, just laughable.  No they are not.  They are devices designed to mask the failure of an intellectual tradition.  More to the point they are designed to make the machinery of analysis tractable.  Which itself is an admission of a failure to recognize the texture of the subject it purports to discuss.

And that, I think, is the core dishonesty of the entire project.

Economics takes as its subject the most complex possible set of arrangements: human interaction on its quest for material self sufficiency and survival.  Those interactions are incalculable given the size of the population and the variety of personal opinions and abilities involved.  Any sensible enquiry into those arrangements has to account for its history,  its emergence, its social setting, and the oddities of human psychology.  And it has to be humble in its admission of the difficulty of its task.

Economics, as it developed, steadily shaped itself into a caricature of denial of all that complexity.  Instead it lauds its ability to use simple representations such as representative households, to make sweeping judgements about human psychology such as rational expectations, and to reduce all the rest to irrelevance by ridding itself of uncertainty.  The consequent analysis is a tautology based upon the assumptions put in place to enable its existence.

It is a tautology designed to prove the superiority of something called “markets” over all other allocative devices.

So, as I said before, mainstream economics is simply anti-social.  It is designed to be.  It is meant to be.  And it is.

Job well done if you’re of that mindset.

Now, if you want to talk about the economy as it actually exists.  Well, that’s another story.

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Anti-Social Economics

Some jumbled thoughts prompted by my recent reading of Robert Skidelsky’s book, “Money and Government”

Just how anti-social is economics?

I don’t think the question is difficult to answer: economics in its modern mainstream form is, at its heart, designed to undermine democratic government.  It is, therefore, profoundly anti-social.

The genesis of this antipathy towards democracy is all the way back in the beginning moments of economics as an intellectual discipline when its earliest proponents had a very specific objective, which was to build an argument for the elimination of politics from the social space we now refer to as the “market”.  This effort to de-politicize commerce was driven by the perceived need to rid it of the constant interference of whimsical and debt ridden monarchs.  So the discipline’s founders built their new framework to denigrate or demean government, where government could be equated with an authoritarian despot.

The problem with this is that the same sentiment grips modern economics even though the presence of authoritarian despots is minimal, and many more governments are comprised of democratically elected officials who represent the very same people who are lionized as ‘rational agents’ in the economic domain.  To undermine the legitimacy of democracy economists had to construct a theory to eliminate any socially inspired action on the part of those officials and relegate them, instead, to just another group off self-serving agents incapable of acting on behalf of others.

The central premiss of economics became that social issues were best resolved within the market and that government was, at best, inevitably an imposition on the pursuit of liberty, and, at worst, deleterious to, or destructive of, that same liberty.  Oddly in order to prove that politics ought be eliminated from commerce and that markets ought simply be set free, economics had to become politically committed to an ideology.  Economics had to engulf politics in order to make sure it was the ‘correct’ politics of the rugged individual rather than anything tainted by social activity.

The problem for economics is that politics did not disappear.  Nor was the need for it obviated by the wonders of the market.  On the contrary, as individual liberty became more and more synonymous with what we now loosely call capitalism, economic theory was driven into ever increasing efforts to express that liberty in quasi-scientific terms.  The early critiques of capitalism produced a counter-movement expressed as ‘marginalism’ and eventually as general equilibrium.  In each case the ideological intent was to prove that defiance of markets was futile.  Markets, inevitably so the story went, provide the most social welfare, whereas governments can only muck things up.

Great efforts went into erecting proofs to support these conclusions.  Maximization and optimization were seen as inevitable outcomes of individual agents interacting freely, with their interaction producing no sullying or inconvenient result dependent upon their cooperation.  Indeed, cooperation disappeared altogether from theory.

Still politics refused to cooperate with economics.  The steady rise of industrialized populations with their attendant problems and demands forced the extension of democratic politics into all corners of society.  Despite the best efforts of economists social organization outside of the market continued to gather strength.  Society actually existed beyond the borders of the market.

In the middle of the 1900s this gathering strength triggered a crisis in economics.  The evident failures of markets around the world  during the 1930s produced economic theories that incorporated or tolerated a social view.  But in the eyes of ideologically committed economists even the most benign of these new theories were seen as simply the beginning of a slippery slope into oblivion.

Thus there was a renewed attack on social activity in commerce.

Planning of the kind undertaken in Soviet era governments was attacked as irretrievably flawed by dint of the cognitive incapacity of planners to absorb all the information available in an economy.  Any effort at planning was bound to produce sub-optimal results because of this cognitive incapacity.  The defense of markets and the attack on democracy then became one of a least worst kind.  Economists argued that we knew for certain that planners could not digest and act on all the information available and were thus condemned to fail lamentably.  So we ought let the market do the digesting and acting: it could do no worse, and was surely more able since all that locally held, and centrally indigestible, information was represented in the actions of individuals in the marketplace.  Magically individuals in markets have super cognitive powers not available to government employees.

This cognitive argument was ultimately successful.  Theorizing at a social or macro level was regarded as ineffective or counter productive.  Instead all theory had to start from the perspective of an individual.  Theory went back to its anti-democratic roots in order to preserve the sanctity of individual liberty.  The anti-social ideology of economics managed to squeeze out any vestiges of social action from mainstream theory.  Everything became an expression of individual choice.  At its most appalling yet logical extreme came the pronouncement that all unemployment is voluntary and that variations in the business cycle are simply representations of the latest rationally expressed information.  Thus was content sacrificed in the defense of ideology and logical consistency.

The cost was that economics rapidly lost relevance, with its last claims to such evaporating after the 2008 crisis: a crisis which according to theory could not occur.

A modern economy is riven through with interconnected processes that need extensive oversight and organization.  Such oversight and organization lies beyond the reach of even the most committed rational individual.  Hence the rise of modern corporate bureaucracy and its wholesale adoption of planning as a technology for governing production, distribution, and most other elements of commerce.  The original model of individual action upon which the anti-social attitudes of economics was based is obsolete.  Explanations of modern economies inevitably require accommodation with social activity since most commerce is entirely social.  Society manifestly exists even in the private sector where organization dominates activity and belies the notion that everything can be resolved back down to acts of individuals.

Yet economics doggedly plods on denying the political landscape and the social advances of the past two hundred years.  It still privileges individuals over the social.  It still cannot comment usefully on organization other than that of markets.  And it steadfastly looks aghast at democratic governance because it cannot tell the difference between a democracy and an authoritarian despot.  All government is simply lumped together in one malign bucket whether it expresses the will of the people or not.  And great efforts go into moving important economic decisions beyond the reach of elected officials.  This is even if the technocrats that economists entrust with those decisions are manifestly wrong.  Apparently, it is better to deny society than to re-invent economics.

No matter what gloss economists put on their efforts, at its core economics remains anti-democratic:  by design.

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