Economics

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Firms: Who Knew?

One of the controversies buried by contemporary economists in their great cause of advocating market freedoms, is that of the role of central panning. There was a time when economics accomodated controversy. Nowadays it’s arguments are securely contained within the narrow bounds of saltwater versus freshwater type spats that are little more than professional name calling inspired over minor differences of detail.

Recall the capital controversy? No?

How about the socialist calculating controversy? No?

They were real differences. Time has allowed modern economics to ignore its larger conflicts in the name of ideological purity.

Yet central planning lives on.

Bigly, as our new president might say.

One of the greatest deficiencies of modern economics is its total blindspot to the middle layer of economic activity. Few, if any mainstream economists, refer to a “meso-economics”on a par with their hallowed micro and macro versions. Indeed the most ideologically pure insist that macroeconomics is simply a summation of their micro version. So they try to pummel everything into one flat layer.

And yet that meso level exists. We call it business, and if you want to understand what’s going on in most modern economies you have top grasp what’s going on in business.

Businesses are massively influential in setting the trends that we see manifest in the aggregate numbers.

Take, for example, current trends in employment. For a few decades now business has been dominated by an offshoot of ideologically right wing economics, called shareholder value. This is an idea that is based on the sand of what the purists insist is the “free” action of individuals. That was transformed into a body of thought applicable to business and can be summed up as: the only goal of a business is the to further the interests of its shareholders. Nothing else matters.

Since in that ideologically pure microeconomics there is no space for social action — it is entirely premised on individuals after all — there is no tolerance for a focus on anything else. Naturally when such a theory was translated into the business world this lack of social awareness was elevated into a basic management principle. That shareholders are a group or a collective, is ignored. That they might accumulate power by virtue of being a group was sidelined. Their collective interest were said to dominate. Referring to it as a singular interest made it easier to overlook the power relationship inherent in it.

Within the context of business, shareholder value then was elaborately embellished and changed into a technology that the bureaucratic processes and central planning of executive management could apply. With gusto.

The consequences of the avid activity of the central planning in business are everywhere around us. The application of the shareholder value technology affects us all. Outsourcing and globalization are its most obvious outcomes. In the incessant pursuit of profit and its so-called maximization, business realized that they ought shed any activity not deemed “core” to its “value proposition”. This is an administrative response to the pressure for profit even in slow growth economies. So out went any employee not employed in those core activities. Some work was sent overseas to lower its cost. Some was eliminated entirely. Some was sub-contarcted, with former employees being brought back to perform the exact same activity as before, only now at a lower cost and within highly circumscribed timeframes.

The entire purpose was to reduce cost. Since wages are the highest cost borne by business it is nor surprise that, after a few years, wage trends were flattened out. Nor is it a surprise that employment is less secure. Or that the number of people covered by strong retirement or health care benefit packages has plummeted. Inequality skyrocketed, and the share of our national wealth going to wages shrank dramatically. Meanwhile profits boomed.

You could describe these trends as macroeconomic, but that would be misleading. They are only explained by looking at the middle layer of the economy. By getting inside the “black box”, as economists prefer to see business, we can start to explain the bigger shifts in the economy. These aren’t consequences of individual consumer choices. Nor are they outcomes explained in those impossible models of decentralized economies that economist love to think about.

No. The big trends in the economy are best theorized about in the context of what we call the business firm.

And the business firm is a local example of central planning.

Ronald Coase knew this in 1937, quite why modern economics turns a blind eye to business eighty years later is perplexing. Maybe it has something to do with its fixation on decentralized market forces? Surely not?

In any case: anyone seeking to understand the economy needs to begin with a theory of the firm. Everything else can be built from there.

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Impossibilities and The Market Turn

One of the least credible aspects of economics, an enterprise that suffers from a credibility problem at the best of times, is that of general equilibrium. Chasing after this mirage comes at a great cost. For one thing it makes economists look more like priests than scientists or even artists. It is an article of faith, not anything remotely plausible in a real economy. Any reference to general equilibrium in an article, book, or paper, automatically disqualifies its author as being about to pronounce on the economy as we experience it. It is, rather, a necessary badge to be sworn within the temples so as to allow the author to assert membership of the highest faith.

Economists have been fixated on the apparent order exhibited in the economy ever since the discipline began to form in its modern guise. Adam Smith’s unfortunate and passing reference to an invisible hand with its supernatural ability to turn individual greed into aggregate happy circumstance was the beginning of a chase down one of economic’s deepest rabbit holes. Turning lead into gold is a time honored endeavor and has always made its aspirants look foolish.

There is no global order. There is no general equilibrium. All that apparent calm on the surface is simply a gloss over the constant seething and deep undercurrents beneath. You cannot suddenly jump from individual activity with all its idiosyncrasy to smooth seas above with no intermediate explanation at all. Unless, as economists do, you suppress the individual and impose absurd constraints.

It is one of the great scandals of economics that its proponents of what they call rational choice act so irrationally and disingenuously. In order to force their predetermined preferred outcome on their own theories they utterly undermine any semblance of reality: they disallow any and all activity that we would otherwise recognize as human, so as to make their analysis tractable. The effect is to subvert human agency in the name of choice and to turn consumers into nothing more than a caricature where all efforts on the part of those consumers to assert individuality is blocked. In an even more bizarre turn this authoritarian attack on the individual is then given an Orwellian twist. The total elimination of whim, changing preference, subjective experience, qualitative expression, and so on, is done in the name of “proving” the superiority of “freedom” over anything remotely hinting of central planning.

To prove the efficacy and existence of the forces of the freedoms economists want to advocate, they, in effect, destroy those very freedoms. They burn the village in order to save it.

Worse, they are forced, by their own ideological imperatives, to go further. Not only are the individuals in their models grotesque contortions, they are given attributes that no one attached to reality would recognize. In particular, economists assume people are cognitively superhuman. They can perceive events far into the future with perfect clarity. They can gather near infinite amounts of information. They can process that information. They all arrive at precise conclusions. And they all act robotically according to those calculations. There is no error. No smidgeon. No nudge. No near misses. No nuance. Just supreme perfection.

This microeconomic sand then is used to underpin macroeconomic theorizing.

All in the great cause in the sky called general equilibrium.

Economists are then reduced to laughable explanations to defend their lunacy.

Milton Friedman argued that consumers behave “as if” they had those superhuman cognitive powers. After all, he said, billiard players aren’t all wizard mathematicians when they play billiards. So why can’t we theorize that consumers act “as if” they possess the calculating power of economists? Well, because economists don’t have that calculating power either. No one does. No one ever has. It doesn’t exist.

Friedman’s dodge was superseded by another trick. Later generations of economists simply got rid of people all together. They collapsed all those individuals into one “representative” individual. This, naturally, makes things easy for economists, which was their goal. They tossed reality even further away — if that was possible. In the big models economists subsequently constructed these “representative” entities, one for consumption and one for production, then went about their business and allowed economists to ignore the messiness of actual economies.

The mirage of general equilibrium and of basing macro level analysis on the presumed security of its micro foundations is one of the shoddiest parts of contemporary economics. The most sympathetic conclusion we can derive from looking at the effort is that it was earnest and doomed. All the proofs of general equilibrium are actually perfect disproofs. No one should mention general equilibrium again.

The least sympathetic conclusion is that, given economists still include general equilibrium in their arsenal, they are attempting to undermine democracy.

When we mention this anti-democratic effort to most economists they are aghast. How could we impugn their democratic credentials? We simply respond: let the evidence speak for itself. How else are we to interpret it? And if they don’t then realize this reality we have every justification for ignoring their advice.

The so-called market turn in economics was simultaneously an anti-democratic turn.

It’s time to turn back.

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How’s That?

Well, there we are. It took less than three weeks for us all to realize that neither the Republican party nor Trump are ready to govern. Their health care fiasco was the talk of the weekend, and fingers are being pointed every which way as culprits are sought and blame assigned. Naturally, Trump doesn’t take any of the blame onto himself. That’s just not his way: he hasn’t nurtured that TV persona of perpetual winning and ace deal making for nothing. Even though it is, apparently, patently absurd. Trump’s image as dealmaker in chief now lies in that dust alongside Ryan’s reputation as a wizard policy wonk and Congressional consensus builder.

Reality is a very difficult thing, especially so if, as the Republicans have done for years now, you can ignore it and succeed only in a world of pretense.

Perhaps most baffling is that the Republicans had no thought through policy in their arsenal as they went into the health care battle. A battle that they chose and that they began. They were remarkably unprepared to confront the realities of both legislation and of the details of health care policy making. Instead they trumpeted their alternative to Obamacare as being a lean and mean example of unbureaucratic planning. It weighed in at only sixty-six pages, of which about ten percent were devoted to the precise ways in which lottery winners were to be denied public assistance in their health care. Compared with the six to seven hundred pages of Obamacare the Republican plan was supposed to be a triumph of direct business like language and no nonsense decision making. Instead it was revealed to be a botched together ensemble of unrelated ideas that anyone could have cobbled together over a drink with friends at the local pub. It wasn’t a plan at all, it was a wish list that had no real central purpose, no coherence, and no constituency. It was doomed to fail from the outset as an orphan with no advocate. Amidst its rubble the Republicans are now revealed as a party under-prepared and poorly led. And, more the point deeply divided.

This point will loom large in the next few weeks as the Republicans seek to recover from this self-inflicted defeat. There is an extreme wing in the GOP party caucus that values ideological purity above action. It abhors compromise and believes that it was sent to Congress to lead the nation away from the corrosive effects of the “nanny” state back to some pristine and efficient market-driven world where each citizen genuinely gets the rewards he or she deserves. In such a world poverty is something you bring upon yourself through idleness, indolence, and the like. It is not a consequence of a systemic failure. Nor is it an outcome of upbringing, luck of birth, or lack of opportunity.

This hard line small government rump of politicians burnished its reputation in those opposition years by constantly haranguing Obama and by forcing votes along hard right lines. It never mattered whether those votes led to legislation, what mattered was only that the purity of ideological temperament was demonstrated and preened before radical voters. This is a great way to oppose. It is a shambolic way to govern. As we now know.

Worse for the Republicans, though, is that the ideological schism between that hard right group and a softer right  — I won’t call it centrist — group now casts a long shadow over the governing party. As they move on from last week’s debacle and seek to undertake tax reform that sharp divide looms larger. How can Ryan, himself a member of the hard right at heart, produce a tax plan that caters to the two sides?

Already we have been given a glimpse of a possible rapprochement. One of the hard right leaders, Mike Meadows, has already signaled that he is not as opposed to “budget busting” tax reform as he might have been before. His hard line has hitherto been to enforce budget “neutrality” meaning that any new spending has to be offset by cuts elsewhere to ensure that the Federal deficit is not increased.  Apparently he is now willing to back away from that requirement in the interests of party solidarity. He is thus channeling Dick Cheney from the Reagan years who famously argued that deficits don’t matter. Well, not at least when they are created by Republican tax giveaways to big business and the wealthy.

There are some elements of Ryan’s tax proposal that are already being heavily opposed by loyal Republican outside interest groups. The so-called border adjustment tax is especially reviled by a large and well-funded coalition of businesses all of whom fear a major tax increase because they are so import dependent. This group, plus any wavering deficit hawks, are likely to cause as much of a problem for Ryan as he tries to get his tax bill through Congress, as the hard right did during the health care disaster. So the odds are that whatever tax reform gets passed into law, if it gets that far, will be a hollow shell of an effort. It will most probably simply be a large tax cut for business and well off taxpayers. It will have little to no effect on the economy, despite the probable cheerleading from the White House, and will almost certainly contain nothing for Trump’s loyal voters.

But they ought to be getting used to being ignored by now.

How’s that for leadership and dealmaking?

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Republican Dilemma

We are down to the wire in Congress: will the Republican party be able to live up to its six year old promise to eliminate the Affordable Care Act [aka Obamacare]? As I write this, a few hours before the vote in the House of Representatives, the answer appears to be no.

The reasons for this potential abandonment of what had become a critical element of true Republicanism is that old fashioned Republican ideology has come up against modern social reality. It is impossible to square the two. Either you are a hard old guard Republican who abhors the prospect of any government involvement in the economy, in society, and in particular, in health care. Or you are a realist who accepts that Obamacare changed the rules and infiltrated the government ever more deeply into the social fabric, from which it is now impossible to retreat.

This clash its tearing the Republicans apart.

There may be some of you who cling to the notion that the Republicans have a theory of public or social policy. Allow me to disabuse you: they don’t. In their world there is no “public” or “social”. Those of us old enough to recall Margaret Thatcher will also recall her ludicrous claim that there is no “society” only a whole bunch of individuals. That is the perspective through which to analyze the Republican health care plan.

It isn’t a health care plan. It is an effort to re-assert the notion that individuals are entirely and exclusively responsible for their own health care, including making a choice as too whether to have insurance. In order to achieve this deconstruction of society the Republicans need to avoid any policy that might perpetuate government involvement in that realm of individual choice.

Hence their desire to eliminate the so-called mandate that forced younger healthy people to buy insurance, which in turn allowed the overall pool of insured people to be less risky and less expensive. Through time the mandate was reining in premium price increases by achieving its goal: lower risk means lower premiums. Health care cost inflation in the Obamacare era was lower than in the previous decade in part due to this improvement in the insurance pool.

Another feature of the Republican effort is to eliminate the so-called ten plan requirements. This was a list of ten elements that Obamacare forced all health plans to include. They are all everyday types of things including maternity and emergency room coverage. The Republicans have always opposed this as a restriction on choice. They argue, absurdly and ingenuously, that people ought not be forced to pay for something like maternity coverage. That gets them into the position of arguing that a young man who, obviously, is unlikely to get pregnant, ought not to be forced to buy a plan that is designed to cover the costs of pregnancy. This is the kind of argument that sounds foolish and is actually more foolish than it sounds. The entire premiss of insurance — of any kind — is that some people buying the coverage will never use it. This allows there to be enough funding in the plan to pay for those who will use it. Interestingly, Republicans never use the example of a woman being forced to buy coverage for prostate cancer screening. The Republicans routinely reek of sexism when they try to give examples of their advocacy of choice.

In any case, if we expand the Republican argument beyond their targeted Obamacare list we could, in a sort of reductio ad absurdum arrive at health care plans that covered only one ailment. And the insurance market would collapse because of the rampant adverse selection that such a situation would unleash.

Adverse selection is that circumstance where people only buy insurance when they know they will use it. This means that there is no pool of low risk people to provide the funds to cover the cost of those of higher risk. The Republican effort to increase the choice of plans available in the market is doomed because it runs afoul of adverse selection. Premiums will rise rapidly for those in higher risk categories, for example the elderly, and many insurers will decide that rising risks and payouts make the market so unprofitable that they will exit. The market will then collapse.

These are just examples of the knots the Republicans are tying themselves in as they try to confront social policy. Paul Ryan, their leader in the House, has been explicit: he sees repeal of Obamacare as a step towards undoing the “nanny” state. That phrase belongs in the 1980s and ignores the massive upheaval in our social fabric wrought since Reagan and his attack on the middle class — also in the name of individual responsibility. Health care costs have risen dramatically since then. The average household’s income has stagnated and the workplace is massively less secure. Ryan’s approach is not to improve health care policy, but to re-design it so there is no room for community or social action. The superior logic of social democracy that would drive us towards a single payer health care system is an anathema to Ryan, so he forced to hobble us with an even worse version of our already poor health care system.

Trumpcare, which I suppose is what we ought call the Republican plan even though Trump is sublimely disconnected from it and ignorant of its consequences, is a disaster for American families. But it delivers on two key planks of Republican ideology: it attacks the “nanny” state, and it includes a huge tax cut for the rich.

That’s all we need to know in order to understand the urgency that the Republican leadership is displaying as it tries to corral its troops for a vote.

Except, it appears, that quite a few Republicans in Congress fear for their re-election chances and have suddenly embraced the nanny state because their voters like government help in getting them health care.

Such is the conundrum when an outmoded ideology runs smack into modern social reality. Not to mention modern democracy.

And, somewhere, Trump is playing golf.

 

Addendum:

I alluded to the new social reality that the Republicans are facing with their outmoded ideology. It might be better to refer to it as a new socio-political reality. It has been well documented that profoundly anti-social politicians such as Reagan and Thatcher were unable to undo well-established social programs even though they reviled those programs as debasing their neoliberal core values. Go to this 1996 paper by Paul Pierson to see his explanation of the argument that social progress occludes political reaction in such circumstances. His argument explains the Republican dilemma well.

 

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Budget Topline

We all ought calm down about the Trump budget. Presidential budgets never, ever, get put into practice. They are simply exercises in politics. They simply give us insight into presidential goals.

In Trump’s case there is nothing that we didn’t already know. He wants to slash domestic programs, especially those niggling ones that offend his far right fans, and pile on the offensive weaponry for the Pentagon.

As I said: no big surprise.

Here’s a very short synopsis of the bigger items:

  1. The Environmental Protection Agency takes a really big hit — a 31% cut in spending. Many of its key programs would simply be axed. They range from any and all research into climate change to the very popular Energy Star program that rates energy using products and so gives consumers insight into their probable energy bills. Ironically one program that might survive is the greenhouse emissions monitoring program which is a mandate by Congress so getting rid of it would imply legislation unlikely to pass. So the EPA might still monitor greenhouse gases. It just would n’t be able to do anything about them.
  2. The Energy Department gets hammered too with an almost 18% cut. The biggest target at DOE is its research programs designed to help accelerate the country’s move from a carbon based energy supply to alternative sources. Right wingers have constantly complained about the DOE dabbling in applied rather than pure early stage research. Evidently Trump agrees.
  3. The State Department also gets a beating, especially anything to do with climate change. The cuts don’t indicate that the US is quitting the Paris climate agreement of 2015, but it sure looks as if that is in the cards. The cuts also include anything to do with UN based climate initiatives. Indeed the UN is a heavy target with the US contribution to peace keeping in the cross hairs. State is having its “soft power” capacity severely trimmed. These are the kinds of programs both the hard right and Russia particularly dislike. They are programs that allow the US to project a softer, gentler image to the world and are meant to take the edge off the militaristic image all those wars project. Apparently Trump doesn’t care about the US image. His generals do: they love soft power because it makes their lives easier out in the war zones.
  4. NASA gets its climate watching programs axed or drastically cut.
  5. The National Oceanic and Atmospheric Administration is likewise gutted.

Yes, there’s a pattern here. It’s not for nothing the the Trump cabinet is packed with energy and like minded plutocrats who have a long held contempt for climate science. What better way to get a nuisance out of the way for the energy companies than to gut funding?

The goal of the budget is to shift financing from all these sorts of activities — the list above leaves aside departments like Agriculture which also gets a big hit — and shovel it down the treat of the military-industrial complex in type name of security.

Quite why America needs to ramp up what is already the world’s biggest defense/offense budget — US military spending is more than of the next seven countries added up [including Russia and China] — is not clear. Except, of course, that military spending is an easy sell to a fear riddled country that jumps at the sight of its own shadow.

Oh: and the budget excludes all the severe cuts aimed at Medicaid and Medicare that are part of the great Republican repeal and reform of Obamacare.

If both the budget and the health care plan pass and are signed into law [a very low probability fortunately] America would be a vastly diminished place. Although both big business and the wealthy would be very happy.

And that is all you need to know.

This is a plutocrat’s budget, pure and simple.

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