Politics

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Greece

So we reach the end. Good. Let democracy and popular government prevail. The entire Euro project was conceived by a small group of elitist technocrats, then foisted on national peoples often without any ability on the part of the people to veto it.

The crisis in Europe is an echo of the crisis here in the US. America’s banks went on an unsustainable binge of greedy excess. They generated, accumulated, mixed, and then sold mortgages in an ever increasing frenzy driven by the knowledge that as long as they moved the pile fast enough they could reward themselves handsomely and not suffer the consequences of their descent into the depths of outright fraud.

And it was a fraud.

Maybe not in the narrow and legally provable sense, but in the broader and more applicable ethical sense. The banks sought to rip us off to enrich themselves. They knew how compliant our governments all were. They knew that, in the end, they would be bailed out. So there was never a brake on their acceleration over the edge.

This we all know. All except, apparently, for those few who cling to the delusion that it was the US government’s fault for “forcing” the banks to lend to marginally creditworthy borrowers in the name of some equality program. This trope still pops up now and again. It is utter rubbish, but serves to fog up the post-crisis debate just enough that we have never sought proper compensation from the banks. They still exist, absent one or two of the real fringe players, and are bigger and more dangerous than ever.

So the sudden realization that all that highly rated paper spewing from the Wall Street spigot, was just toxic junk, overturned the world’s finances. The Euro zone immediately fell into disarray. Its banks had gathered debts with reckless abandon and needed help. That help took the form, by and large, of moving the debts from private balance sheets onto public balance sheets. Meaning the taxpayers and not shareholders were now responsible for piles of useless assets that they had no responsibility for creating.

Add in the burden of providing support to those thrown into unemployment by the inevitable recession the bank crisis gave life to and government budgets everywhere were thrown into disarray. Debt piled up.

So governments suddenly faced their own debt management crises. And true to the immutable laws of capitalism, the bankers began to decry the increasing piles of debt accumulated from their own vice. Those bankers and their friends in orthodox economics began to talk ominously of impending confidence crises wherein nations would be unable to access the credit markets and so continue to fund the recovery from the bank induced horror.

The ratio of debt to GDP, we were told, had risen to crisis levels and needed to be reduced. Instead of increasing GDP the advocated approach was to reduce debt.

Now any fool with even a modest education could have understood that reducing debt ratios by cutting spending would also cut GDP meaning that the risk was high that the ratio might never fall even with substantial cuts. Worse: the risk was higher that cuts would actually reduce GDP faster than it would allow debt to be reduced, thus the ratio would deteriorate.

But that doesn’t happen in orthodox textbooks. And it doesn’t fit the banker’s narrative.

So austerity was invented and doomed to fail from the beginning.

You and I told them so, but you and I don’t count. The voice of democracy has been stifled. Popular government has been subverted and re-tooled as government for the benefit of a few.

And they want to be repaid. Despite having started the crisis. Despite having made bad decision after bad decision. Despite being so-called “experts” at risk assessment. Despite the 25% unemployment. Despite the 25% decline in GDP. And despite the humanitarian catastrophe that their greed unleashed on perfectly innocent people.

That a whole slew of north European politicians have cast their lot with the bankers is testimony to the grip that plutocracy and economic orthodoxy have combined to exert. It is an insanity. It is a delirium from which Europe, or rather the Euro project, probably will not recover.

Deservedly so.

When you ask an orthodox economist what a market is comprised of they rarely mention people. When you ask a banker what constitutes a debtor nation they will not talk about human beings. They do not care about real lives. Or real consequences. Reality in all its manifest aspects is expunged from their respective analyses. Instead they speak in a language specifically constructed to dehumanize their thoughts. This is to protect them from the ethical responsibility for their ideas and actions.

Well no more. Maybe.

Democracy has spoken up.

Let us not rejoice just yet though. There is work to do.

The Greeks have resisted more plunder. But can they rebuild?

I hope so.

 

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Hayek v Keynes

I am giving a talk soon about the famous, and widely discussed, ‘debate’ between Hayek and Keynes back in the 1930’s. It is much travelled ground so novelty is not my aim. Just some clarity. These are [incomplete] notes to myself to help along the way.

Let’s begin with what I call the ‘Robbins Paradox’:

“That [democracy] carries with it liberty to destroy other liberty is undeniable; and we may agree with … Professor Hayek that, for this reason, popular government carries with it very grave dangers. But this is just one of those paradoxes of life.”

This is simply a recognition of the tension between concepts of liberty that undergird capitalism and concepts of popular government that undergird democracy. Robbins seems to be acknowledging that there is therefore a similar tension between the reach for economic efficiency, which he believes is the long run guarantor of increasing wealth, and the equally important search for social justice and inclusion, which is the long run guarantor of social stability and health within which business can operate most effectively.

Elsewhere Robbins backs away from the rigidity of what we would now recognize as orthodox economics. He suggests that there is a structure in an economy that can be elucidated by ‘economic reasoning’, but that this reasoning is distinct from the ‘economic formalism’ that has swept all before it. This is to argue that whilst formalism may look as if it subsumes reasoning, its obsession with its own rigor and completeness leaves aside a more realistic vision of what people actually do when they transact in an economy. People may decide ‘in the right direction’ when faced with changes in economic facts, but they may also err from conclusions suggested by the kind of logic formalist models build in. So all we can say is that there are tendencies or generalities in the direction in which economies move in response to changes, we cannot be certain of what those changes will produce.

In other words, in this interpretation of Robbins, the economy remains foggy or inscrutable, and economics is far less precise than its more ardent practitioners argue it is. This is in accord with Hayek’s later ideas about knowledge in the economy, and bear a distant relationship with Keynes’ idea that uncertainty is a critical driver of economic activity.

So fog abounds and errors are the norm. How activity is coordinated we have to get to later.

Next we have Hayek:

“We can either have a free Parliament, or a free people”

“There is all the difference in the world between treating people equally and attempting to make them equal.”

It seems to me that Hayek resolves the Robbins paradox by erring in the side of ‘liberty’. He never argues extensively of persuasively on behalf of popular government. Indeed he is notorious for having supported authoritarian regimes that had no compunction in removing the popular will from government as long as those regimes then advocated free market and pro-capitalist policies. Clearly Hayek was no friend of democracy.

Why?

Because he saw it as an inevitable stepping stone towards collectivism. Hayek is typically “Austrian” in his adamant objection to anything that smells, even slightly, of populism. The rule of the mob sends shudders of fear down the spine of every Austrian theorist. They are so vigorously and viscerally opposed to any form of liberty reducing government that they are unable to tell the difference between social democracy and authoritarian regimes of either left or right.

But notice that the reduction in liberty they abhor pertains only to the economic sphere. It has no traction in pure politics. Hence Hayek’s ability to square dictatorship in the political realm with freedom in the economic realm. Indeed on a closer examination it looks as if Hayek dislikes democracy precisely because it is a sort of middle ground that allows the blending of economics and politics and thus encourages the mob to seek the institution of redistributive policies that would be perfect representations of the mess the Robbins Paradox invokes in our minds.

Lastly we have Keynes:

“The political problem of mankind is to combine three things: economic efficiency, social justice, and individual liberty”

Keynes recognizes the Robbins Paradox as being real and immanent within modern societies. In order to protect economic efficiency, at least somewhat, he ends up articulating short run intervention in the economy to keep the wheels from falling off and disrupting the social order. If economies can only be relied upon to produce a satisfactory  ‘equilibrium’ in the long run, and if they can be shown to be unreliable even then – he argues that sub-optimal equilibria are far from unusual – then we ought not wait for the long run, but we ought act to offset the economy’s miscalculation and prevent the slide into unrest that so scarred Europe in the 1930’s. Hence his famous dictum: “In the long run we are all dead”.

So the debate between the two, at least in the late 1930’s, is about two very different reactions to the Robbins Paradox. On Hayek’s side we have a defense of liberty and thus free markets that is both idealistic and pessimistic. It is idealistic because it posits the operation of the market as being an ideal that no end of central planning can emulate. Indeed government interference, however well intentioned, is most likely to make matters worse. So Hayek advises we ride out the storm and allow ‘market forces’ to play themselves out. Note that Hayek does not argue that these market forces are necessarily ‘natural’. He acknowledges their human origins. He simply argues that so complex is the economic system that we interfere at our risk, and that the effort of classical economists to reach even a minimal understanding of that complexity suggests we are better off being steadfastly passive in the face of business cycle downturns.

On Keynes’ side we have a pragmatic response. He defends capitalism by supporting it more tightly within a combined economic and political structure. He too recognizes the reality of market forces, but he tells us we can mitigate the storms and seek shelter in the government’s ability to augment investment and demand. This smoothes out the economy’s trajectory and minimizes the damage it does to any citizen’s personal wellbeing or association with society.

Hayek, at least earlier on, was clear he thought all economic theory ought to begin by being based on equilibrating micro foundations. Later on he realized that a fuller picture of how an economy actually works required that economists extend their theorizing to encompass non-economic social structures and institutions since those things are in constant feedback with the economics system. Keynes was more content with attacking the existing micro foundations and by taking a more holistic perspective that we nowadays call macroeconomics. Hayek objected to this ‘aggregated’ view because he thought it obscured essential details about how economics decisions are made, and the impact this decisions may have.

At a deeper level the two, who appear so divided, are much more closely aligned. They both recognize the role played by uncertainty – Hayek through his ideas about the dispersal of knowledge and the fact that this asymmetry causes calculation errors on the part of individual entrepreneurs; Keynes through his notions of “animal spirits” and the consequent miscalculations of business. They both, therefore, depart from the perfect knowledge and rational decision making of orthodoxy.

Eventually, I think, we can bring ideas such as evolutionary epistemology, as articulated, for instance by Karl Popper, Hayek’s close friend and interlocutor, to play in order to bridge the divide between the two camps.

If we look at the economy as a learning process firmly situated in time/space, with decisions being partly rational  but error prone and limited by pervasive uncertainty, with money active rather than neutral [an unlikely concession by the Hayekians!], and with its path being in a constant state of becoming rather than arriving at an equilibrium – thus recognizing the reality of the system’s openness and constant turmoil – we can accommodate parts of both Keynes and Hayek.

Whether this is valuable or possible is for another time.

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Go Texas!!

No. I really mean it: go Texas! As in please leave. Or, if not, please stop the nonsense. It just reminds the world why the US is so unreliable at times.

Paranoia runs rampant in Texas. Not content with monitoring a recent US Army training exercise in case it was really an undercover attempt at invading Texas and imposing Obamacare under martial law. And not content with passing a new gun law to allow those tough Texans to swagger about in public with guns strapped to their waists, just in case a terrorist or US army officer attacked them, we now have this:

The Texas Gold Depository

Yes. It’s true. Texas wants it gold back from New York. Those ‘Yankee Dollars’ which are about to be debased beyond recognition – well any day now – are foreign to those tough guys down there. So they want their gold back from the Feds. So when the hyperinflation hits they can presumably issue hard currency backed Texas Dollars. All you need to know is that the von Mises Institute loves the idea. That tells you where in the fringe firmament this all fits.

Read the article. It will give you so much insight into the insanity that pervades America. And it ought to caution you all: the US is never far from being deranged.

These are interesting times.

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Jeb? Not Jeb!

Oh no!

With the big boys and girl now officially in the presidential race we are all going to suffer from political pablum for the next year or so. So far the signs are not good.

I find the Jeb Bush effort the most depressing so far. And that’s after only a day or so. His primary claim to fame rests on his days as governor of Florida. His campaign is gushing with all sorts of supply side promises. Jeb [his last name has discreetly disappeared] stands, we are told, for free enterprise. Free at last from the stranglehold of Obama’s quasi-socialist grip. At least that’s what I surmise.

Just this week I ran into someone here in Vermont who was positively apoplectic about our government’s policies since the crisis. Those policies had, I was told, stifled growth, cost us millions of jobs, and generally loused up the business environment.

Now, I happen to agree.

Our government has done a very bad job of getting the economy rolling. But I doubt that my interlocutor and I would agree where to place the blame. He would, I assure you, blame Obama. After all it is ‘well known’ by those who take themselves really seriously on these matters that he has poisoned the business environment. And American business is, presumably, easily frightened. So much so that even though profits have reached all time heights, and wages have been crushed by the onslaught of manic cost cutting in order to preserve those profits, CEO’s fall over themselves to criticize the administration.

What for?

Now that’s a little opaque. It seems to be a general malady rather than anything specific. Obama sometimes says nasty things about business and that makes CEO’s feel sad and unwanted. These are the self-same tough minded folk who take all those tough decisions to cut jobs even though it pains them to. They’re tough. They got to the top by being tough. Did I mention they’re tough? Yet they melt like butter when Obama says something critical. Poor dears.

I have a somewhat different perspective. I happen to think the administration was weak when we most needed strength. That was back in 2009, when we needed a whole lot more deficit spending to boost demand and to crank the economy out of its near depression. The administration misunderstood – that’s the most benign excuse I can come up with – what the crisis really was. Its efforts were too little. And when the penny finally dropped the Republicans had won the 2010  elections and were firmly in control of the discussion.

So we slipped into terrible economic management. Our focus shifted towards deficit reduction and the so-called terrible consequences of expansionary monetary and fiscal policies. By falling foul to this false message we hobbled ourselves.

And therein lies the cause of our malaise: Republican advocated austerity at a time when we needed expansion. Fortunately it didn’t sink us, but it certainly slowed us.

Back to Jeb: his record in Florida was based entirely on his oversight of a massive real estate bubble. It was utter fiction. We know that because once the bubble burst Florida shed jobs at an alarming rate. Jeb managed to leave office just before the bottom fell out, so his record belies his impact. That seems to be a family trait.

In any case I have a suggestion for the Bush campaign: his logo is currently Jeb! With the exclamation mark both substituting for his infamous last name and indicating a presumed excitement. I think this is inappropriate. It ought not be Jeb! but Jeb?

As in ‘really?’

Supply side? Again?

How many times does this debunked idea have to float to the top of our political debate before we finally sink it for good?

Jeb?

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Natural Liberty or Democracy?

There seems to be a lot of angst as to why standard macroeconomics ignores the government in its analysis. Or, rather, that when the government slips into the picture it is almost invariably in the form of an evil presence mucking up the sweet operation of market magic and thus stalling us all on our way to the happy place economists love to call equilibrium.

This is quite simple to answer: economists of the standard ilk are opposed to democracy.

Why?

Because, since its very inception, modern economics in most its forms has been the study of the private economy. Listen to Quesnay:

“All trade ought to be free … It is enough for the government to watch over the way the expansion the revenue of the kingdom’s property; not to put any obstacles in the way of industry; and to give the people the opportunity to spend as they choose”

Listen to Adam Smith:

“According to the system of natural liberty, the sovereign has only three duties to attend to … the provision of national defense, the provision of civil justice, and the duty of erecting and maintaining certain public works and certain public institutions”

Further, according to Smith, the economy was so complicated and worked in such an obscure yet magical way that it was here folly for anyone to imagine they could constructively interfere with its working:

“The statesman, who should attempt direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but would assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”

In other words: government ought get out and let laissez-faire do its work.

Of course we should doff our hats to those who argued for a modicum of modesty on the part of market magic. McCulloch, for instance in 1848, gives us this more pragmatic view:

“The principles of laissez-faire may be safely trusted to do in some things, but in many more it is wholly inapplicable; and to appeal to it on all occasions savors more of the policy of a parrot than of a statesman or a philosopher.”

We could go on, but what’s the point? What we all need to remember is that economic theorizing, and thus the theories we find cluttering our discourse, are all historical artifacts. They were created in various times and places to respond to what were perceived to be great issues of the day.

All those quotes above share a common theme: that of an attempt to break society apart so that the economic aspects of our lives can be considered a separate domain subject to its own rules and theories of operation. This was important because as modernity took hold and as older more traditional structures, especially those of autocratic monarchist governance, were challenged people needed new tools and insights to justify the change.

Thus all the prattle about something called “natural liberty”. It was essential to present such liberty, which was a dire threat to the old order, as being somehow “natural” since that made it more difficult to object to. If it’s natural we just have to live with it. Don’t we?

This original perspective became deeply entwined with economic theorizing and has remained ever since, albeit carefully hidden in the attic of such theorizing. It lingers on in every economics text book where the economy is presented as a domain somehow apart from the other, and supposedly less rigorously theorized, aspects of social life such as politics and sociology.

This fracturing of the social sciences is perpetuated for a number of reasons. It provides great job security for academics who specialize in one or other part. They don’t have to rise to any meta level and discuss the messiness of society in toto. Instead they can opine as experts on some arcane locality, whilst occasionally being asked to comment on the map as a whole. Naturally, when they do so opine, they are careful to ensure that we acknowledge their expertise is insufficient for their global comments to be taken too seriously.

Economists are the exception to this modesty. They brazenly ramble all over the social field commenting on things that their expertise in no way equips them for. This is what I call the “Becker Effect”. For some bizarre reason economists, having carefully limited the economic domain as being unique enough for special theorizing, then presume that the theories developed for that unique domain can be generalized far afield. This is an arrogance that we would all laugh at were they not so determined. And the reason that they are so determined is that they have duped themselves into believing that they have insight into human behavior through the entry way of their microeconomics. This, as we all know, is the place where economists pretend humans are automatons. And not just any automatons: they are automatons that think like economists. This leads us to the not too pretty situation where those automatons are prone to cheating and conniving, because, again as we all know, those who study economics also tend to display those less than socially sound behaviors.

But, perhaps the more important legacy that natural liberty, whatever that is, has left us is, the notion that government is a separate domain from the economy. Don’t forget that back in the days of Smith, and nowadays in the age of the Chicago School, government was the state, and the state was some meddlesome individual intent on extracting wealth from his [or, rarely, her] much put upon citizens. In other words the state was a source of hostile oppressive intrusion. Including it in a comprehensive analytical framework for society as whole made no sense: if you did that you had to concede that naked power relations played a significant part in trade, commerce, and so on, thus denuding the notion of natural liberty of much of its force. Natural liberty had to be presented as a counterweight to the oppression of the state. And if it was successfully thus presented the more enlightened monarchs might just be persuaded that their own wealth would rise more if they let the economy secede from the state.

Once this hostility to the state found its way into the bedrock of economics it stayed there. Moreover this anti-government perspective, that colored all subsequent economic theorizing, attracted to it analysts who were like minded. We thus find a positive feedback between the anti-state foundations of economics and those who then carry the theory forward.

In contemporary terms this has profound consequences. One of which, as I mentioned at the beginning, is that standard economists are openly and brazenly opposed to democracy.

Why?

Because, apparently unbeknownst to economists, the social and political milieu within which the economy sits, has undergone radical change since the 1700’s. We nowadays have far fewer autocratic monarchs prone to meddling in popular affairs, and significantly more democracies where the people who are the erstwhile agents of the economy are also the agents  of self-government. Regular people, unlike economists, admit of more than one social domain. They operate in many all at once. The notion that we the people actually govern ourselves has been born and adopted around the world. But it hasn’t seeped into economic theory, where the government is resolutely presented as a hostile and incompetent force just as it was two hundred or more years ago.

So when we the people want to raise taxes to pay for our retirement and to establish a collective to help administer that retirement, this act of communal spirit is seen within the walls of economics as an infringement on natural liberty. Standard economics has no other way of viewing it. It is a monotone discipline in a multicolored world.

And in such a monotone world, where the people act only in their self-interested economic way, there is no space for government. Were we to bring the government into standard economic theory as a fully fledged partner we would have to modify that theory to such a degree that it would be easier to toss it out and start again. For one thing we would have to theorize afresh about human motivations and the distressing, to economists, habit people have of being able to hold contradictory thoughts and not burst into flames as a consequence.

In the end, I suppose, the fact that standard economics is caught up in its 1700’s roots is both quaint and annoying. It is quaint because it gives us an insight into the big issues of those long ago years. It is an artifact of history akin to the battle of Waterloo and allows astute historians to look at what intelligent people thought back then. It is annoying because all our social progress during the interim is apparently of no interest to standard economists. They want to live in the past and thus impose the past on the present whenever they offer us all advice.

Which is a pity because I think the ongoing fight for equality and democracy is just as important, if not more so, that the preceding fight to establish the notion of natural liberty. Whatever that is.

 

Acknowledgement:

I found all those quotes above in Steve Medema’s essay “The Economic Role of Government in the History of Economic Thought” which is a chapter in Samuels, Biddle, and Davis “A companion to The History of Economic Thought”. If I mis-typed them, that’s my fault!

 

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