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Market Reflex

There are a few thoughts or words in a normal economics discourse that trigger what I call my ‘market reflex’.  Asad Zaman just triggered it. Of course he didn’t mean to, and the sentence in question is in an article I agree with. Further, the sentence, on the surface, looks and sounds so innocuous. Here it is:

“Free market economists believe that markets work best when left alone, and any type of government intervention to help the economy can only have harmful effects”

See what I mean? Innocuous. Asad is totally correct, they do think that. Worse: they mean it. And even more worse: they teach it.

Which gets me truly bothered.

The entire enterprise of contemporary economics, aside from its fringes, is built on this shady and unsubstantiated premiss.  It’s shady because it is laden with ideological bias, and it’s unsubstantiated because, well, its unsubstantiated.

Which gets me even more annoyed.

The supremacy of markets sitting at the heart of contemporary economics is a faith based notion not an empirically based fact. It is the result of economists of a certain ilk having vivid imaginations and strong biases. When you push a little on the idea you find that it relies on a set of thought experiments rather than on research of the real world. It requires superhuman and distinctly otherworldly computational skills, flows of information, and ironclad willpower, not to mention a total lack of real choice on the part of the denizens of this imaginary market, for it to work smoothly and to find its way to the happy land called a utility maximizing equilibrium. Only within such ridiculous constraints is the so-called superiority ever exhibited.

The rest of the time stuff happens and who knows what’s best?

It is the obsession with sanitizing the economy and thus rendering it unreal that has led economics astray over the years. And this article of faith about free markets working best when left alone, is sheer tosh.

Just to press my point further: for the dream land of economists to display such a characteristic it would have to be inhabited by two sets of parallel and never interesting people. One would be the superb calculating machines of the erstwhile free market. The other would be the foolish idiots of the political system.

You see, and this bugs me most of all, the ‘agents’ of the economy that economists model and who, in those models, produce such startling efficiency – so startling that it cannot be improved upon – are the same ‘voters’ who support government intervention to soften the edges of the economic machine. Apparently economists are oblivious to this rather salient fact. I suspect they are oblivious on purpose. For to acknowledge the reality of democracy and voter involvement in government treads heavily on the pristine ground economists have carved out for themselves. By separating the economy, or, rather, the ‘market system’ from society as a whole they can pretend that it is a self-enclosed entity bereft of outside influences that might muddy their simple models. And it means that they can indulge in anti-democratic theorizing without actually being anti-democratic: democracy is a dirty government thing, it isn’t part of the market system.

I remember reading Hayek’s famous paper on knowledge in the economy in which he lays out the argument about central planning being a hopeless adventure and asking myself how, if the world is that complex, anyone can know whether any system is better than any other. You can’t. If the information is so difficult to gather and compete for a centrally planned system, on what basis do we have to conclude that a decent rally planned system cannot be improved upon?

Well, it turns out, we can make that determination if we rig the model and the calculations upon which we rest our argument.

Which is what Friedman and the other followers of Hayek have done.

They have no ‘proof’ other than an artificial test tube model that they created especially to produce their proof. Garbage in, garbage out.

Or, as Friedman so famously argued, it really doesn’t matter how insane your assumptions are as long as they produce the ‘right’ results. Friedman, of course, knew what result he wanted:

Free market economists believe that markets work best when left alone, and any type of government intervention to help the economy can only have harmful effects.

So there.

Scientists at work.

Not.

 

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American Amnesia?

That’s the title of a book I am looking forward to reading over the summer. It’s by Jacob Hacker and Paul Pierson, and I just read a summary essay they published called: “Making America Great Again – The Case for the Mixed Economy”. Let’s overlook the loaded content of the first part of the essay title, and focus, instead, on the subtitle: The case for the mixed economy.

Now there’s a good subject for economics.

The essay is a long paean to the role of government in a healthy growing economy. There are all the usual references to market ‘failures’ of various sorts, all of which the authors tell us only a strong government can resolve or offset.

It’s the kind of argument that you and I are very familiar with. We are, after all, steeped in the dogma of market ‘failures’. Markets, we know, ‘fail’ all the time. The sources of ‘failure’ are many and common. Indeed they are so many and so common that we ought, were we empirically inclined, to expect markets to ‘fail’ more often than not.

But economics is not empirically inclined.

It is theoretically inclined.

And in its core theories markets are pristine and devoid of ‘failure’. They are so pure, perfect, and fully functional, that many economists seem to forget that those theoretical markets actually do not exist. Nor will they ever exist. They are simply an ideal form against which we compare real markets. We use the pure imaginary form as a sort of stereotype or caricature so we can locate the ailments of the real markets we find around us.

So what do we mean by ‘failure’ in this context? What is an ‘ailment’ that would need correcting?

 

That’s where economics goes off track. Its obsession with markets and the technology of allocation within a perfect market leads it wildly astray. So far astray that economists are forced to use the word ‘failure’ when they actually mean entirely normal. Markets do not fail in the way economists use the word failure, so much as function normally albeit it in wonky and inefficient ways. The word failure loses all useful meaning if it is applied as a label to put on something we ought expect to see as the usual state of affairs.

In medicine we look at the common cold or a bout of the flu as aberrations and expect our bodies to return to normal once the illnesses have run their course. In this regard the illness is a ‘failure’ of sorts, and the cure signals a return to health. We are sensible to look at health in this way because both conditions: the healthy version and the sick version both exist in reality. The contrast is thus valid.

In economics we don’t do this. Our comparison skips across a very significant boundary: one one side is the wonky version suited in reality; and on the other is the perfect version situated in our imaginations. The real instance is a not a ‘failed’ version of the perfect because they cannot and do not co-exist in reality. They occupy parallel worlds. They have no intersection. They certainly differ: their mechanics and outcomes can be contrasted; and their efficiency – whatever we mean by that word – may be different, but in one case the mechanics, outcomes, and efficiency is real, whereas in the other it is entirely made up. So while we can imagine what a perfect market might be like, we can never experience it. And while real markets may be messy and contrast rather poorly against the imagined ones they are not failures because of that contrast, they are simply real.

I will grant that theorizing about perfection makes for a great deal of fun, and that examining it in our imaginations is a useful, if limited, exercise – after all that way we can imagine how to create replicas of perfection here in reality, but we can only do that if the conditions of our imaginations are available here in reality. Which they are not. Which is why we have to resort to our imaginations to explore perfection. Whenever we want to export from the imagined world into the real world we immediately lose perfection. Hey, that’s life, it isn’t failure.

Anyway I now I am running on about this. Why?

Because it annoys me that economists have so limited their interest in economies to the tight and restricted world of imaginary markets that they are no longer the source of interesting discussions about the role of government – or any other institutions – in an actual economy. Within the suffocating ambit of economics purified markets rein supreme. Elsewhere a more realistic, vibrant, and healthy vision of reality exists where discussions about the role of government can go on unhindered by preconceived, and frankly absurdly fake, imaginary comparisons with unattainable purity.

I should note that both Hacker and Pierson of “American Amnesia” are poli-sci professors. Which is why, I suppose, they can talk about the real economy with such interest and authority.

It’s just a shame that most economics professors can’t.

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Hope 101?

A nice way to end the week:

I overheard a conversation between two high school students this morning.

The first person was asking about which classes the second was going to take next. One of those mentioned was microeconomics.

“Oh, that’s easy” said the first, “You just have to remember that its all rubbish – they want you to believe that people are rational, and that there’s all this perfection in the world.”

“Really?” responded the second, “That’s really dumb. I wonder why they do that?”

“It doesn’t matter, it’s economics”

“Well maybe I’ll take history instead, at least I might learn something useful.”

And, yes, this was the conversation.

A small ray of hope?

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101 or Not 101- Uber Knows?

Paul Krugman has this in his blog today:

The name is a takeoff on Noah Smith’s clever writing about “101ism”, in which economics writers present Econ 101 stuff about supply, demand, and how great markets are as gospel, ignoring the many ways in which economists have learned to qualify those conclusions in the face of market imperfections. His point is that while Econ 101 can be a very useful guide, it is sometimes (often) misleading when applied to the real world.

My point is somewhat different: even when Econ 101 is right, that doesn’t always mean that it’s important – certainly not that it’s the most important thing about a situation. In particular, economists may delight in talking about issues where 101 refutes naïve intuition, but that doesn’t at all mean that these are the crucial policy issues we face.

So why is 101 what it is?

A significant number of students are exposed to economics only through Econ 101. They never intend to become economists, they simply want to learn something about the economy. Yet, as Krugman admits, 101 is full of hypothetical purity about markets. It isn’t a representation of actual economies. It is a distorted and ideologically driven account of what markets might be under conditions so remote from reality that we can dismiss the whole thing as absurd. No one can learn about the actual economy from sitting through Econ 101.

Why do economists insist on creating this stalking horse called a ‘perfect market’ only to bash it as ridiculous later on? Why not begin with something more attached to the real markets students are likely to encounter? And why do they bash it in classes that only future economists attend? Is this some secret plot to ensure intellectual superiority over the naive souls who fell for the misleading nonsense in 101?

Even when 101 is right – according to Krugman – it needs to be set aside as often irrelevant.

His own area of trade is a good example. The notion competitive advantage gets lot of air time. Economists love talking about it because it is not self-evident and thus it makes them look smart for having it in their arsenal, but it only makes sense in the context of a few other ideas. Like the one where displaced workers will find new jobs instantly and so the benefits of trade are unhampered by the cost of lost jobs. Sure. Tell me another one. One simple model can look very clever, but those darned interconnections make things murky very quickly. Which is why most economics ought to be taught in the context of reality.

Which, more often than not, Econ 101 is not. How could it be? It’s mostly a plan attempt to indoctrinate students into believing a particular perspective: that governments are bad and that markets must be ‘free’.

I read that the CEO of Uber repeats a favorite line when asked how his business model is so financial successful: “It’s just Econ 101” he keeps saying. Which is tantamount to saying it’s a fairy tale. Investors beware! Especially when, as someone has now pointed out, that if Uber drivers are all independent contractors, and not employees, ought they not then compete on price and not collude by using Uber’s pricing platform? Uber, it turns out, is one of those exceptions to Econ 101 that one learns about later on after the indoctrination. Uber is actually a massive price-rigging scheme by a whole bunch of independent drivers, and the Uber CEO is acting to encourage the collusion.

Such are the lessons of Econ 101?

 

 

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New York Stops The Revolution in Economics Too?

Yesterday’s election result in New York State effectively ended Bernie Sander’s tilt at the Democratic windmill. Here’s what I wrote to a friend who was intent on parsing the numbers:

And, the point is?

We can analyze all we want. It doesn’t alter the result. It provides nice fodder for coffee shop talk, but doesn’t help anyone.

It’s time to move on. Bernie will keep going. Clinton will become even more annoyingly patronizing. Her surrogates [like Krugman] will gloat. She will likely win in November. And America will struggle on regardless.

Clearly 2016 is not the year of change. It is a year of upheaval on the right, complacency in the center, and only the beginnings of rebirth on the left.

I never imagined that the Democrats would be the party of centrist corporate establishment thought. Or that it would be the Democrats enforcing the wishes of big business over and above those of the working people. But that’s where we are.

I suppose none of this is a surprise. The total dominance of social/cultural issues as a defining line in politics has obscured the equally powerful dominance of right wing economics across the board. Neoliberalism is the monotone ideology of both parties.

The revolution will have to wait.

Buried in there is my attitude towards economics. By enabling neoliberal ideology, and following the lead of Hayek and Friedman, economics debases the role of liberal democracy and representative government. This casts a long dark shadow across the subject.

Never has it been more clear to me that, notwithstanding the professed personal positions of individual economists, contemporary economics has become a profoundly anti-democratic project.

This is ironic only with respect to longer history.

The 1930’s were critical in the demise of the democratic tradition within economics. The setting into concrete of its severe limitation as a subject dealing primarily with the mathematics of choice and allocation was masked only temporarily by the superficial victory of Keynesian macroeconomics. The intellectual catastrophe of the 1970’s and 1980’s, which saw the emergence to superiority of the formalized ideologically anti-democratic version of economics that now dominates, was merely a logical extension of the 1930’s limitation.

The subject finally emerged as a tool for performative reconstruction of society. Its methods were exported to ensure the elimination of alternative viewpoints. Its dogma was translated and accepted into the prevailing faith for business strategy, economic policy, and many other aspects of socio-economic life.

Even the supposed schism between various flavors of macroeconomics which gives great life to the academic elite and provides large numbers of hand-wringing articles about the state of the discipline is trivial when set beside the socio-political stranglehold neoliberalism has on our society.

When the major debate about ‘what went wrong’ is being conducted by the same people who led us into error; when that debate is conducted entirely in the same theoretical framework as that of the error itself; when the policy outcomes are only relatively modified; and when the entire discussion seems so unrelated to the day-to-day actors who populate – or are supposed to populate – the markets and economies that economics is meant to understand we know that nothing will change.

Don’t we?

Until economics rids itself of the fantasies of equilibrium, maximization, and the pursuit of an efficiency that cannot be located in an uncertain world, it cannot be much more than an narrow academic pursuit. Right now, by convincing itself of the efficacy of its method, and by the unethical exportation of that method into subject matter where the simplicity of economics has no relevance, economics has managed to make itself into nothing more than a technology for the exact opposite of its original intent: it is no longer trying to understand economies. It trying to invent them.

It is social engineering.

And like a lot of twentieth century social engineering it has become a very sinister undertaking.

Let’s take it back.

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