Economics

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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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Pre-existence

One of the mysteries of economics is its contemporary willingness to ignore everything around it. Economists act as if the economy they study is easily isolated from its surroundings and thus immune to the trends, problems, and changes that go on in those surroundings. Indeed this isolationism is a key component of economics because it allows the profession to preserve and bolster its pretense to being scientific.  It allows economists to chat away blithely without concern for the web of entanglement within which actual economies reside. Instead they can pretend to have discovered timeless regularities that allow the ‘system’ to glide smoothly and effortlessly towards a singularity, unsullied by the nastiness of the self-same system’s attachment to other social realities.

It is thus that economists indulge in their fantasies of social physics, and consign anything that interrupts the aforementioned smooth glide to the horrible non-economic netherworld known as ‘exogenous’ forces.

A netherworld which you and I refer to as ‘life’.

It is as if the economy was plopped pristine into a pre-existing reality, with the shape of that pre-existence fitted perfectly to conform with the analytical demands of economics.

Then, given this happy circumstance, economists sally forth armed with what they regard as superior social knowledge and freely advise those who are daft enough to listen, or, worse, to impose their designs on society in order to maintain and improve the fit between their fantasy and that pre-existence.

This ignorance of pre-existence results in some of the more infuriating abilities we note in economists. Such as the sublime ability to ignore the contradictions in their theories.

On the one hand we are told that the world is just too complicated for central planning ever to produce an efficient solution; yet on the other we are taught that just such a solution is possible through decentralized planning. Efficiency, it seems, can be wrung from complexity despite itself. This miracle is the result, not of some amazing force of society, but of careful theorizing. Whereas central planners are inept at computation and have cognitive overload in the face of torrents of information, decentralized markets suffer no such failure. They digest information easily and precisely. They compute at prodigious speed. They never err. They always excel.

How come?

By assumption.

That is to say the pre-existing messiness of society is neatly swept away and replaced by an imaginary order tailor-made to fit the needs of a system that must portray its allocative superiority in order to be taken seriously.

Central planners, it seems, are always mired in their pre-existing muck and murk. Decentralized markets are pristine, crystal clear, and shorn of attachment to anything that might muddy things up.

By assumption.

This is not an advantage based upon observation of real economies. It is an artifact of need. Economists needed to eke out a win for decentralization back in the dark days when capitalist economies looked a little shaky, and central planners looked a tad more successful. Since that would not do – it didn’t conform with the ideological roots of modern economics – something had to give. And in the case of economic theory it was reality that gave way.

All those pre-existing institutional constraints, all that culture, all those power relationships, all that path dependent behavior, all that ugly uncertainty, all that geographical and social diversity, all those socially constructed relationships and personal networks, all that patchy opportunity, all those various biases and prejudices, all that discrimination, all those technological convulsions, and all that accumulated knowledge had to be swept aside. It had to be assumed away and made to be of no importance. Heck with it all.

No, economics need not delve into such ugly matters. Economists could leave that stuff to lesser social theorists. They could abstract the economy up, up, and away, from anything that might taint the relentless pursuit of rational choices, optimization, and, most of all, the happy arc towards the stasis of equilibrium.

It has never worried economists that the denizens of their model economies, the ‘units’ or the ‘agents’ who do the exchanging in their test tube markets, are the self-same idiots who vote for redistributive government policies, who blithely ignore incentives and undertake all sorts of irrational activities, who constantly change their minds, muddle up their priorities, mismanage their budgets, and generally screw up their financial lives. Yet those dunderheads then are able to become paragons of rationality and automatons of decision making when they pop up in a market.

This extraordinary leap from one extreme to another on the part of the actors at the center of their so-called science seems not to concern economists. It’s a psychological gyration of epic interest to anyone interested in humanity, but of no interest at all to economists. When you unmoor yourself from reality such make-believe behavior can become normal.

I suppose its one of those pre-existing conditions we hear so much about when we discuss health insurance. And just like the health insurance industry, in order to arrive at the result they want, economists ignore such conditions.

After all, that ugliness pre-exists economics. So it’s not part of the subject matter.

How convenient.

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Flat Earth Rules

Economists, especially mainstream economists, often like to ignore the real world consequences of their theories. Instead they prefer to hide away pretending that their conversations and ideas leave no imprint on society, and that their simple little models are just representations designed to cut through the tangle of reality to get at some core truth. Only in the grand world of macroeconomics is this not true. There, economists love to strut about as if they hold the keys to universal insights untroubled by the somewhat ambiguous results their ideas appear to inflict on the rest of us.

The fact that there are economists on all three sides of any two sided argument ought be sufficient to let us know that their insights are a little vague, and highly dependent on each individual economists worldview. Economics, it seems sometimes, is little more that highly formalized opinion.

This is not meant to demean economics, I think it is a subject worthy of high regard, I mean only to alert us all to its manifest weaknesses and deeply ingrained biases. Only economists could possibly imagine into being something as absurd as dynamic stochastic general equilibrium, or representative households, or the non-accelerating inflation rates of unemployment, or growth models where the unexplained residual accounts for there-quarters of growth. All these could be dismissed as arcane academic nonsense were they not essential to the policy making that affects everyday lives of hundreds of millions of people.

It is because of this policy impact that economics ought have a well developed ethical standard for its researchers – something like “first do no harm” would be a good place to start – but economics being the home of a group of people who look askance at organized or social anything steadfastly refuses to look inward at its ethical responsibility. After all, they argue, the mar ket will take care of weeding out the rotten apples.

Sure.

But here I am not concerned with macro which is, despite my deep skepticism, the part of economics that has some, albeit it cartoonish, relationship with reality. No, the part of economics that is truly messed up is micro. And by messed up I mean really messed up. Rational choice? Really? Microeconomics makes no pretension whatsoever about connecting with the real world. It just exists in its make-believe world of agents – not people – running around in a kind of utopian information rich hyper-individualistic flat earth like place where the vistas are the same in every direction, where choice is a singularity driven by machine like logic, and where anything resembling humanity is scrunched aside in order to make life easy for economists. All those individuals defy the meaning of individual because true autonomy would surely introduce variety, and variety dirties the purity of economics. So out variety must go.

This would be all well and good were it contained within economics. Who would care? No one. The rest of us could look on and laugh at the silliness of it all.

But we ought not laugh: economics is really dangerous stuff. Sometimes I think it should be banned – it’s that dangerous.

You see, economics has infected other disciplines. Its ideas have migrated and brought their lax ethics into places where they can do enormous damage.

Like into business schools.

Take a look at this chart:

EPI_productivity_compensation

Familiar?

It ought to be. It has been making the rounds in one form or another for a while now. A friend of mine just sent it to me and asked for an explanation. How come wages have not kept up with productivity.

Now economists of all stripes and opinions have their own views. Globalization. Class structures. Technological change. The demise of unions. And many more.

I tried to think of something different to tie those things together.

My thought is that the cause of the great divergence between wages is due to the notion of shareholder value.

Huh?

Look at the date of the onset of the divergence. It is coincident with the rise of modern management theories being peddled at business schools. Central to the panoply of ideas of modern management is shareholder value.

What is this?

It is the pernicious idea that the single and only valid focus of corporate management is to maximize the value of the corporation in the hands of its shareholders. Nothing else matters. Nothing. The thought of ‘stakeholders’ is anathema to shareholder value theorists. Milton Friedman – yes he was an ardent advocate of the new idea – was apoplectic at the thought that management had any other goal.

Why?

Because in the flat earth of Friedman’s microeconomics every agent is doing the same ting: looking out for number one. Further, they are all capable of doing so. Because standard microeconomics has embarrassingly little to say about business as it actually exists, Friedman’s extraordinarily naive perspective is consistent with his equally naive theories of human behavior. In such a flat earth businesses are little more than single person entrepreneurs who struggle perpetually to eke out a living in fierce competition, and they see to maximize their incomes – just like everyone else – in a world flooded with information.

So workers, customers, society, the environment, trade unions, and other sundry so-called ‘stakeholders’ had no place in Friedman’s rubric other than they are could be manipulated to maximize shareholder return. Let me repeat: nothing else mattered. Because microeconomics is so restricted and divorced from reality people like Friedman could argue for shareholder value with straight, if disingenuous, face.

This startlingly narrow view of the world would be fine had it not then become the intellectual basis for the notion of shareholder value business schools began to teach. What was sensible in the world of economic fiction then became the basis for real world drama.

Since business schools operate in that real world – their graduates are destined to to actual jobs and not just manipulate equations – what they teach has a great impact on business. Real business, not the unreal business of economics. The intellectual roots of modern management are back deep in Friedman-like make believe.

Just as modern economics was invaded and corrupted by the purity of rational choice and its associated fictions, so too was management theory.

The problem is, of course, that unlike the caricatures of economics, actual businesses are not governed by the so-called laws of economics. And, more to the point, they are sufficiently large to impress their values union society.

Strategy negates and plunders the pristine world of microeconomic nirvana. Business schools only teach microeconomics so as to identify ‘market failures’ or ‘niches’ where a good profit can be made. The real world is about creating opportunities for rents not profits.

Gradually the notion of shareholder value was pressed into service to justify the relegation of labor to an expense to be minimized rather than as resource to be valued; to justify the remuneration of managers who delivered cost reduction by offshoring manufacturing; to justify the adoption of financial structures that privileged debt in corporate balance sheets; to justify the steady shift of national income towards capital away fro labor; to justify the explosion of so-called global logistics; to justify the resistance to alarm over the environmental damage of some production; to justify resistance to the adoption of sustainable business practice; and to justify the explosion in CEO pay.

All of which, cumulatively, re-created the business environment and produced the divergence between pay and productivity in the chart above.

In retrospect I think it fair to say that modern management theory, and shareholder value in particular, can be seen as a technology developed from the intellectual parent we know as neoclassical economics. Shareholder value, by taking the claims of its utopian forbears seriously, ends up perverting them. It is, in my view, weaponized neoclassical economics. It became the sharp end of the performative effort of  modern economists to transform the economy in the image of their flat earth nonsensical ideas. After all if the world can be flattened, a flat earth theory starts to look more sensible, and flat earth believers start to look more astute.

Meanwhile, as that chart shows, the consequences of ideas can be devastating. The collateral damage of the attack on reality by our flat earth economists is very real.

But, as I said at the beginning, economists, especially mainstream economists, often like to ignore the real world consequences of their theories. After all they can always claim to know nothing about business, business schools, or any other practical thing. Who could possibly know that rational choice and all that marginal talk might get, well, taken seriously?

 

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Back From a Break

And what do I find?

Precisely what I left.

It is a remarkable fact that the current election here in America is likely to produce as its protagonists the two least liked candidates. It is far less remarkable how they would have been selected: both Trump and Clinton started the race – if you can recall that far back – with the greatest name recognition. America apparently takes a while to see through the acts of well known players.

Yet their routes to dominance have been equally remarkable in their difference. Trump has mounted an insurgency that has toppled the Republican establishment. By the time November rolls around I think we will be in the midst of a complete and very open break-up of the Republicans. This is simply the end point, or the logical conclusion, of the steady re-apraisal of what it means to be a Republican. The origins of which are coterminous with the rise of the hard right Californian faction with Reagan as its figurehead.

Reagan was an ideologue, his personal views on things like Social Security – which he argued was a communist method for undermining good old American self-reliance – set him out of step with the American middle class, and were it not for the 1970’s and its economic turmoil, stagflation, and oil crises, his extremism – nor his racism –  would never have been acceptable. His skin deep Hollywood style demeanor and solutions were simply an overlay beneath which sat the manifestly anti-democratic machinations of a rising corporately funded and manned effort to subvert government and place it in the hands of big business.

I wish I could say that the Democrats fought back and called out that big business attack on democracy, but I cannot. Instead, scared by the immense popularity of Reagan’s charisma, which people still seem to conflate with the popularity of his policies, the Democrats cut their long time allies adrift, abandoned economic progressivism, and, under Clinton, became a milder version of Republicanism.

Neoliberal political economy has since run as a common thread between the two parties. Free trade, pro-business deregulation, anti-unionism, anti-government austerity policies, and the like became in various ways the platform of both parties, with the ugly stand-off in Congress we now witness entirely due to differences on social issues.

Trump’s ascendancy is simply a recognition that the post-Reagan GOP has never really been committed to its own propaganda. It advocated that its policies would provide a prosperous future with opportunity for all. In actuality those policies were designed to benefit the wealthy few and big business alone. This contradiction has been laid bare by the stagnation of wages and the prospect of a further decline in fortunes for the very people who provided its most loyal voter base. Those voters, not unsurprisingly, are rejecting the establishment as a consequence. Hence the turmoil and the likelihood of a re-alignment on the right in our politics.

In contrast Clinton is the candidate of the establishment. She is steeped in neoliberal ideology. An ideology that produced welfare reform and threw millions into the working poor, which deregulated the banks leading to the recent crisis, which passed NAFTA, a device to ship manufacturing jobs abroad, which was the origin of our bloated prison population because of its attitudes towards crime, and which was committed to a fiscal conservatism that failed to undo the rising tide of inequality unleashed by Reagan.

Clinton is a more reliable friend of business that Trump could ever be. Her pro-business credentials are worthy of a candidate of the right in most any other western nation. She is an avid supporter of the current round of pro-business trade agreements, and her affiliation with Wall Street is a legendary example of the interbreeding between big finance and Washington policy makers. As a leader of the left she is a fraud. As a conduit for corporate control she is perfect.

I find all this ironic.

The party associated with conservatism is in chaos and likely to reinvent itself in some updated way. The party associated with the progressive agenda is stolidly in the grip of an establishment which owes its soul to its corporate money backers.

The one offers us chaos and a neo-fascist policy suite. The other offers us a bland attachment to all that is worst in our recent past. The conservatives are radical and the radicals conservative.

It’s all very confusing and not a little disconcerting. The one thing I can say is that big business will manage to retain its grip on power. After all, the extent of lobbying means that our elections no longer matter: the minute the politicians return to Washington after November they will be reminded who owns them.

Hint: it’s not you or me.

 

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Am I An Economist?

Who knows?

If measured by the standards of the current elite of the subject, then clearly not. I am apostate. I am an outsider.

Let me explain: I had the good fortune to attend The London School of Economics – I only mention this because it is important later in the story. It was too long ago for me to recall all that I studied there, but my concentration was what was then called Diplomatic History. What they call it now I have no idea. The only course in economics that I took was the common first year class for those who were not going on to become economists. I can, at this distance, only assume that the class was designed to be less specialized. Somehow I dimly recall the name Alchian. I do remember, however, getting stuck in the elevator with Lord Robbins as we both were on our way to his history of economics class. The book based on that class – although produced much later – still has pride of place on my book shelf.

Now this does not mean that I wasn’t interested in economics. My decisions back then were much more driven by my greater affinity for history rather than a distaste for what economics was, or was about to become.

Upon graduation rather than pursue history further, which is what my academic advisor suggested, I took the advice of my father and became an accountant. His attitude towards an academic lifestyle was both stern and unrepeatable, and I was too callow to resist. So accounting it was. By default. To this day I have no idea why I thought I would make a good accountant. For one thing my problems with dyslexia present an obvious hurdle, especially in those days of pre-calculator and computer. I struggled along doing moderately well, but it was clear I wasn’t destined for anything other than mediocrity. Besides, I really didn’t like it.

So I decided to switch. On a whim I applied to business school, this being the time when the allure of an MBA was untainted by what has befallen the business world subsequently. To the astonishment of all who knew me I managed to finagle my way into a prestigious American school and so embarked on another path through the real economy. And I mean finagle: the partner at my accounting firm who I had write a recommendation for me laughed when I told him I had been accepted. His reaction was clear: my success in gaining entry clearly had nothing to do with what he wrote.

So off to business school I went, only to be deeply disappointed at what I found. Nowhere were we told anything fundamental. Everywhere were we told the latest fad. This is when I was re-exposed to some economics, and I thought the juxtaposition of standard micro-economics with all its wonderful certainties and lovely ignorance of reality alongside classes that taught us how to develop strategies in order to baffle and confound the marketplace was perfect. Although, apparently, not many of us appreciated the irony. It was clear to me that I was being taught something clever in the finance classes, but that the cleverness depended entirely on the efficacy of the underlying theories – which we weren’t taught. And it was equally clear that whilst it was heretical to question the greatness of markets in general, it was perfectly fine to undermine markets with strategy and the other devices of marketing and so on, just so long as we provided something called ‘shareholder value’.

Upon graduation, and having discovered an interest in the aforementioned finance, I found myself in banking. And its was there that my life as an economist began.

It was an accidental reintroduction.

The Chairman of our bank wanted to increase our outreach into the press and the business community. For some reason this led him to search for someone who could communicate and give talks about the economy. He mentioned this to my boss, the Chief Financial Officer, who recalled my attendance at LSE – see I told you it was important. The CFO came to me one morning and said: “You’ve been to LSE, we need you to give a talk about the economy to a group of our customers”. So there I was, a week later, giving a talk to two hundred local business people about the national economy, its outlook and so on. The speech was the easy part. The questions were a tad more difficult. I clearly need to learn a bit about economics.

So I set out to educate myself. Those of you who know me will realize what comes next: I was disappointed, to say the least, in what I read. The subject was in tumult and had taken a radical turn since my previous tenuous exposure to it. The explanations were obscure. The relevance not clear. My audience[s] wanted more information than the subject wanted to provide. The trajectory of the discipline was tangential to the business world. It touched briefly, but then disappeared into what seemed to be a fog of convenient assumption designed to allow its practitioners subsequently to pluck precision from midair, magic like, and declare all sorts of attributes for markets that were simply not visible around me.

But it was fun, this economics. It was really fun. So I started getting my hands on all sorts of articles. Since I had no idea of curriculum I wandered all over the place. I recall reading a type written version of Allyn Young’s 1929 paper and thinking it sounded appropriate long before I ever came across the Santa Fe Institute. And Ronald Coase on the firm grabbed my attention: he has never been answered well, especially by the New Institutional guys who claim to be his heirs.

When I was ignominiously kicked out of banking I decided to dedicate myself to economics. My particular interest was how changes in technology would affect business. This seemed to be a fine intersection of business with economics. Back then we were all talking about ‘digitization’ and the impact of the internet. Since then we have been engulfed by endless business school fads like ‘innovation’ and ‘disruption’. And where are they in economics? Where in growth theory do we find them? In a residual. Well, it’s improved some since its beginning, but growth theory is still a tough issue for most economists. They’re too busy running the math of transactions in perfect markets.

That’s it. For the past thirty years or so I have read and listened. I have tried to understand. I have tried to explain what I have learned to those who ask. And I have written this blog for the past ten years.

So I am I an economist?

Not if by economist you mean someone who is blind to uncertainty: after all the entire structure of business is to seek profit from the uncertainties of the marketplace. Strategy is simply a method to create an alternative reality – one not so beset by uncertainty that investment can never be justified. Not if by economist you mean someone who believes in the mysteries of equilibrium: the world I worked in is for ever changing, if there is an equilibrium it is so remote that its presence is of little practical relevance. It might be out there somewhere, but who cares? Not if by economist you mean someone who believes in the rational choice described in economics books. That is a phenomenon I never have met. Yes people are rational, but in an idiosyncratic and personal way that defies the simplicity of economic theory. Not if by economist you mean someone who thinks that values are somehow set on the margin. I recall  pricing decisions being an administrative process loosely based on an understanding of scarcely reliable management accounting, profit targets, and pricing feedback from the marketplace that entered the discussion only in extremis. Marginal theory is a convenience for economists it is not a fact of reality. Not if by economist you mean someone who is blind to the subject’s political association. One advantage of being self-taught is that I realize the quirks and contexts within which current theories developed. And I know of the conveniently forgotten potholes that people like Joan Robinson or Oscar Lange thought ought ensnare modern theory.

Oh, this list could go on and on: what about the relationship with our environment? Or the evident sexism in the entire history of economics? Or, for that matter, in the way we measure an economy?

Economics has an allure for me, not because of what it purports to know, but because of what it quite obviously doesn’t know. Most of which it has chosen to forget or not explore at all.

So am I an an economist?

Yes, I suppose I am. Although I am still learning and quite prepared to acknowledge the gaps in my understanding.  Why? Because there’s so much yet to learn, and in the possibility of that learning, in that potential, we are all equal. Aren’t we?

 

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