Commentary

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Various Thoughts

There is no point is bashing away at old economics or old economists. They are what they are. And it isn’t as if there is a compelling alternative to orthodoxy, if there were we wouldn’t be in this never ending and unproductive cycle of throwing stones at the establishment.

I think we all ought take comfort in the fact that a few decades ago things were so much different. The generation that trashed economics was on the rise and on the outside once. There are great reputations to be made fixing and updating the entire enterprise. In a business where incentives are so lauded, I imagine the incentive of fame should bring a savior soon enough.

Meanwhile it was sobering to read:

“The modern industrial system is no longer essentially a market system. It is planned in part by large firms and in part by the modern state. It must be planned, because modern technology and organization can flourish only in a stable environment, a condition the market cannot satisfy.” – J.K. Galbraith, “The New Industrial State”

Looking back at the state-of-the-art analysis concerning business organization in the first post-war decades we find a picture so discordant with modern business theory that it is hard to connect the two. There was a distinct feeling back then that the complexity of a modern economy would overwhelm the ability of the simple structures of a market and that long and complicated production processes therefore needed to be set within a controlled environment. That environment being a bureaucratic and centrally planned “meso-economy” called a business firm.

These vast sprawling technocracies were filled with managers rather than entrepreneurs. Individual skills and qualities were subservient to the overall cooperative enterprise. Galbraith says elsewhere:

“By taking decisions away from individuals and locating them deeply within the technostructure, technology and planning remove them from the influence of outsiders.”

Central planning looms large in Galbraith’s analysis. As it does in other writers of the time. The modern illusion that large corporations are somehow nimble market-driven organizations appears nowhere. There was an acceptance of the reality that the vast array of economic transactions enclosed within the boundaries of modern firms were organized not along decentralized market principles, but were subject to a highly controlled and centrally planned management process. The skill required to manage one of these behemoths was more akin to that required in the Politburo of the Soviet Union than it was to anything taught in free market economics classes.

This is, of course, why contemporary economic theory so completely bungles industrial organization.

Our major corporations are still centrally planned. They have to be. Galbraith was onto something. Production that extends through time – as does most – is consequently exposed to uncertainty. The likelihood of error, failure, misjudgment, or other complicating factor grows with the more time required. So for the process to take place at all such sources of potential breakdown need to be eliminated or minimized. The best way to do this is to establish, in advance, the entire process, and then to enforce the sequence of steps carefully and repetitively. This establishes reliability in the finished product. It eliminates the vagaries of the market calibration by ignoring the market altogether. It ensures that the required resources are available when needed in the appropriate spot in the production sequence. It smooths out the vagaries that market volatility always imply. It would be impossible, as a practical matter, to produce complex products by reference to the market at every step in production.

We can draw a simple conclusion from observing this reality: centrally planned and controlled allocation of resources dominates de-centrally planned and market allocation of resources in any solution that extends over time and requires multiple steps. In other words practically all business. In other words much of our economy.

That is if we theorize the economy as a set of transactions rather than as a melange of agents doing “final” transactions. Once we include into our set of transactions all those that are interim in a production process, rather than focusing only on the final product, not only do we vastly expand the number of total transactions in the economy, but we alter entirely our perspective on their facilitation. Central planning becomes crucial. Even a cursory empirical look confirms this.

By focusing on final transactions exclusively and thus consigning production to a “black box” orthodox economics has avoided dealing with the coexistence in a modern economy of diverse allocative methods. Transactions are both centrally and de-centrally expedited. And they are both cooperatively and competitively mediated. With each playing a significant role at different stages of a product lifecycle.

The recent erroneous obsession with the supposed superiority of de-central allocation has deprived economics of an ability to connect itself with the reality of business and thus with a major component of the economic landscape that the discipline purports to describe. It has led to a disconnect that hinders understanding. For instance, large corporations set prices they are not price takers, and their prices are not set by applying marginal analysis the way economics is forced to imagine. Orthodoxy has to retrofit marginal analysis into a firm’s decision making because to do otherwise would imply having more than one allocative model. This means, in turn, making absurd assumptions about a firm’s cognitive capacity and its data collection ability. It is a classic instance of having only one solution for all problems no matter what.

Unfortunately, in recent decades orthodox economics has invaded business theory and upended the more pragmatic views of people like Galbraith. Nowhere is this more evident than in financial theory and in particular in the rise of modern attitudes towards shareholder value. The discordance between such theories and the reality of central planned business could not be more acute. Business schools fill students heads with the pseudo science of modern microeconomics, and those students promptly go into a world dominated by central planning. Not only this but they spend their work lives creating market failures and other devices to allow for exactly the kind of profits that microeconomics tells us are not possible.

The cumulative damage is there for us all to see. Our businesses may be better off, but our economy is not.

There is a paradox in shareholder value. The more businesses pursue it, the worse the economy becomes, causing a diminution in shareholder value, which causes another turn of the screw. Each round of pursuit of value has its own collateral damage – more wages are cut, more workers fired, and more technology deployed. Managers reward themselves unconstrained by the social damage they are inflicting. Inequality rises and eventually dampens demand sufficiently to make shareholder values return to their original position.

Supply, apparently, begets its own demise.

Or, perhaps greed does.

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What Does LSE Mean?

I just received an email from the London School of Economics asking me to donate, as a loyal alumni, so that they can devote funds to “innovation”. The university of the future seems to be the objective of this innovation.

What on earth is this?

What about higher education needs innovating?

Why the imperative?

I understand that higher education productivity measured in business terms is, to be blunt, weak. And I understand that more modern techniques as enabled by digital technologies will, no doubt, disintermediate education and make the classic class/lecture room setting look antiquated. But what are the consequences?

For universities.

For students.

For teachers.

Is this just another step along the relentless path of commercialization, whereby everything, no matter what its content, is measured by business metrics and made amenable to business school solutions?

The history of modern growth has been the history of a search for efficiency. This is not the same thing as innovation. It is not invention. It is not learning or discovery of new knowledge. It is the translation of existing things – processes – into new terms to reduce the cost of that process.

I call this reduction a compression of “operating space”.

To me all processes consume both physical and logical spaces. They consist of a series of steps logically contrived, and often physically delineated, to accumulate towards a final product or service. Each step consumes resources. It therefore has a cost. Part of that cost is the energy and physical resource used along the way. Another part is the intellectual effort in designing the steps. A third is the management cost of overseeing and conceiving the process. Obviously there are other costs. Compressing this operating space reduces the cost, often through the elimination of steps made redundant or duplicative, or by substituting one method for another.

In any case the goal of reducing operating space is to release resources either to end users – consumers – or to resource owners so that they can re-deploy their resources to alternative processes.

Why?

Because all processes represent an intermediate step between consumers and their direct access to resources.

In an industrial or post-industrial economy, with it complex division of labor and even more complex division of knowledge, some form of intermediation is essential. Market purists deny this existence of process. They still talk in antiquated terms of macro and micro economic activity, whereas much, if not most, activity now exists within the operating space of mediation that some people refer to as a “meso” layer.

A university is a form of operating space. It is a series of steps that make education available to large numbers of students simultaneously. It is a method of standard enforcement. It is a locus of a variety of activities that loosely relate to the actual supply and demand: students coming into contact with knowledgeable teachers. Every aspect of that operating space and those steps could be subject to elimination or change in method.

Let’s make this real. I read yesterday a story about a Duke student in which the following paragraph contains costs within Duke’s operating space. Set aside the fact that the student in question performs in porn movies to pay her way through school, and simply focus on the costs:

“Officials at my school responded that $60,000 [student cost for attendance] is a bargain — they actually spend $90,000 a year on each student. Let’s break that $90,000 down. Building and maintaining physical infrastructure on campus gets $8,000. Another $14,000 goes to pay a share of administrative and academic support salaries, which in Duke’s case includes more than $1 million in total compensation to the university president, Richard Brodhead, and more than $500,000 to the provost, Peter Lange, according to 2011 tax filings. Also, $14,000 goes to dorms, food, and health services; $7,000 goes to staff salaries for deans and faculty; and miscellaneous costs take up another $5,000.”

So only $7,000 of the total $90,000 cost claimed by Duke is actual teaching expense – salaries and so on to faculty. The rest is consumed by the delivery method. Big physical spaces, extensive logical spaces, and a slew of management costs. Not all this could be eliminated. But it ought to be a target. Reduction in operating space ought to free up resources that flow to students in the form of lower costs.

Do student’s really need a $500,00 a year provost? Really? Or a $1 million a year president?

With a $240,000 investment [i.e. four years at $60,000 a year] a student is entitled to know what return she is getting. This is the consequence of commercialization. It is not acceptable to use pre-commercial language in a response. If universities want, as they apparently do, to become commercial to attract investment – donations is the old word for such inflow of funds – then they need to be clear about what product they are producing.

Some of that reduction in operating space could end hop as a reallocation of resources to teachers. But I imagine there will be an offset. Fewer teachers each earning more because their individual productivity will have risen.

Such is the march of commercialization.

It is the story of our modern era.

Ever greater productivity due to the compression of old operating spaces, coupled with a redirection of resources towards the construction of new processes to deliver new services or products each housed in a new operating space.

The question we have to ask is whether this constant cycle of innovation followed by a search for efficiency in order to free resources for alternative uses is one appropriate for higher education. Or should education be somehow immune to it? And if we think it ought to be immune how do we insulate education from the desire to be more productive? Can we?

So what does LSE mean?

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Equality

All the justified fuss over inequality in recent months begs a rather significant question doesn’t it? If we are all so vexed over inequality we must have some yardstick or some more ideal state we could call equality. What is it?

The problem I have is that equality almost immediately disappears into a fog.

There are very few of us who would argue for the blandness of total equality. That seems to be as inhuman as extreme inequality. After all we are all very different and thus there is an inherent tendency towards lumpiness in society. Some people will always outperform others whilst some will underperform. Some will be richer and others poorer. This much is so simple we can move on quickly. After all we don’t want to fall into the trap that has ensnared orthodox economists: they cannot do their work without expunging humanity from their equations. Else all that lumpiness gets in the way of the smooth operation of maximization, efficiency, and rationality. So they sweep it away peremptorily by making absurd assumptions and then pretend to have discovered something of extreme value about humanity. Ridiculous, I know, but they plod on stupidly despite it.

So what is equality in the context of our discussion of inequality?

Let’s go back to the beginning.

Sometime after the Enlightenment set us free from the dead hand of religious certainty, we suddenly had the license to roam about the real world and enquire about the human condition. Somewhere along the way that led to questions about the state of the political and social structures within which we conducted our daily lives. From there is was quick work to get to an understanding of alternatives to the authoritarian institutions imposed by kings and bishops. The concept of freedom was dusted off from its ancient roots.

And, at least in those early stages freedom was inextricably linked with equality.

Equality as in we are all equals.

Equality as in we are all independent.

Equality as in we are all citizens.

Alike, free, and responsible.

This is the “equaliberty” of Etienne Balibar, as expanded upon by Pierre Rosanvallon in his recent book “The Society of Equals”.

If we sit back and ponder that triad of concepts, from our modern vantage point, we see immediately that they are riven through with potential contradiction. How can we all be free and alike? Doesn’t the impulse to protect our freedom conflict with our desire to express citizenry through collective action? And so on.

In the first flush of liberal expression, especially back in those heady decades at the end of the 1700’s, no one gave too much thought to these issues. Equality was a catchall word that wrapped up all sorts of longed for freedoms. Of course we were all equal and citizens and free. All at once. It was the contrast with the prior oppressive regime of monarchy and church that captivated everyone. Liberty mattered more than the details of what that actually meant and how we would have to balance freedom and citizenry. Or how our being alike was to be balanced with the freedom to vector off on our own unhindered by worrying about being held back by our fellow citizens.

So equality was born under a cloud of paradox.

And we ought remember that many of the modern concepts we associate with freedom and equality we scoffed at by even the most liberal of thinkers back in that era. Gender equality? Racial equality? Democracy? None were seriously discussed. If they were it was to be dismissed as dangerous or unjustified. To be equal was a moral question not a political question, so it was quite possible to advocate equality and yet tolerate what we now would see as gross inequality.

It was in the long subsequent struggle to define and reach for those additional freedoms that the original view of equality began to splinter into its contradictory components. Great fissures opened up between what we view as freedom – especially the freedom to own and dispose of property, and what we view as citizenry – especially in its modern democratic and redistributive form.

The latter implies a legitimacy in the seizure of private property – taxation – in order to redistribute.

This is the root of the conflict between capitalism and democracy that now plays out as the rise in income and wealth inequality. Both sides have rich and long intellectual histories. Both sides are rooted in those heady days when equality was allowed to be a fuzzy, breezy, and imprecise morally laden slogan rather than a concept well thought through and politically implemented.

If anything the modern libertarian view – which festers on in orthodox economics – is the longer tradition. After all the early pioneers of liberalism were landowners and aristocrats seeking to throw off a monarchical authority. Their idea of equality was not very deep. It certainly didn’t include women or minorities. It didn’t even include the majority of men. Libertarian freedom, then, is not at all about equality. Indeed it has inherited and thoroughly absorbed those early liberal’s scorn of community. A cursory read of modern economics or of biographies of people steeped in the libertarian tradition explains why it is so difficult to deal with inequality. Libertarians exult in it. They regard inequality, no matter how extreme, as a badge of honor. It is a ‘natural’ outcome. It is to be applauded because it means the ‘natural system’ is working. Attempts to redistribute are doomed to fail because they are going against that natural system. And it is that system we rely upon to drive our social welfare to the heights we now expect and experience. So mucking about with it is to make it less ‘efficient’. And in the world of libertarian thought, efficiency is all. Because freedom, that is unhindered individualism conditioned only by the most minimal of laws, will always, in the libertarian view, produce the most efficient result.

It is a concept of fairness rooted deeply in a rugged acceptance of the inequalities inherent in human nature and in they wider world at large. It is a concept of fairness that to many of us seems deeply unfair.

It is also frail.

It falls apart when it comes into contact with those exact human qualities we call human nature. In particular it flounders when exposed to our desire to protect any advantage we have and to prolong our dominance artificially. Libertarians, especially economists, love to admire competition, but few willingly enjoy its consequences. The number of tenured economists attests to their rejection of competition even as they protest its value as the force behind the inexorable march towards efficiency. Competition amongst workers to lower wages is good. Competition amongst economists for work is bad.

Libertarians overlook the full gamut of human activities. Our proclivity to cheat. Our desire to cooperate. Our willingness to set aside our own goals for some greater good. The list goes on.

In the subsequent exploration of equality, and in view of the later consequences of industrial freedoms accorded capital and land owners, democracy emerged in its modern form to mitigate and shape those consequences to the advantage of a wider audience. The masses forced their way into the discussion.

The horror and recoil expressed by libertarians at this turn of events, as equality was extended and re-shaped to include more than just those with privileges, lingers on within orthodox economics. Alan Greenspan sums it all up nicely in this quote from his recent book “The Map and The Territory”:

“Most commentators take it as self-evident that taxing the wealthy at a higher rate than lower income groups is ‘fairer’. But that implies that somehow upper income taxpayers have not ‘earned’ their income, a view that rests on the belief that in a division of labor society, all income is produced jointly. The alternative view is that even though output is produced collectively in a free, competing market, each individual’s income reflects that person’s marginal contribution to total output.”

This is the libertarian view writ large. It rests on all sorts of specious assumptions and technical dodges. Things like marginal productivity theory, for instance, which happily ignores any institutional or cultural constraints and simply assumes that merit is the only ingredient in an individual’s ability to contribute. How convenient. How extraordinarily simple minded. It makes mathematics easy – the models can work. It overlooks practically everything we experience as we grow and then join the workforce.

Greenspan goes on:

“We can choose to buffer the competition’s ‘losers’ from the extremes of suffering and want … but there is always a trade-off between productivity and such buffering.”

And:

“Capitalism’s inequality of wealth, of course, reflects the variations of economic talent among our populations.”

Of course.

Not at all of course.

Who benefits from all that productivity that buffering against the extremes of competition somehow diminishes? Certainly not those who are suffering. Certainly not those who, through no act of their own, lack the necessary basis from which to compete.

The disadvantaged are not self-disadvantaged. They are not lacking in energy or incentive. They simply, most often, start from further back. They are not lacking in merit, it’s just that their merit is insufficient to offset their place lower down the starting list.

Conversely, and quite contrary to Greenspan’s assertion, many of our society’s winners only win because they began the race at the front.

How then can the marginal productivity model stand up? How does it measure the inequality that hampers and prevents so many from excelling?

Arguments based upon a bedrock of merit need to acknowledge that there are a multitude of factors that inhibit its flourishing. Pompous assertions such as Greenspan’s demonstrate just how far removed we are from being a society based on merit. For if it were we would not being having this discussion. The self-evidence that Greenspan and his fellow libertarians so glibly presume must be challenged.

All that other stuff that gets in the way of markets being efficient affects the equality of opportunity.

Which is why we need to understand equality in order to tackle inequality. The libertarians and orthodox economists don’t care. They love inequality. Poverty is justified by the lack of contribution by the poor. The poor deserve to be poor.

How horrid.

But we do care. And poverty is often undeserved.

Somewhere in the word ‘equality’ there resides hope for the poor. It is our responsibility to bring it to the fore. Despite orthodox economics and its libertarian fans.

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Think Like An Economist?

Perhaps we are all asking too much. The burden is just too heavy a load. One point of entry too limited. A single, albeit determined, band of thinkers too narrow, too isolated, or too specialized to give us all that we want.

I am talking about economics of course.

We, that is society at large, want economists to deliver us from the great cycles and risks that seem to bedevil what we call the economy. This last crisis, the Great Recession, has plunged economics into a frenzy of introspection, self-analysis, and denial all at once. It has frozen the discipline into large well entrenched camps each holding ideas that appear to be economics, but which are often so contradictory that some of us are left believing the discipline no longer exists as a coherent body of thought. If ever it did so exist.

So do we ask too much?

Can one body of thought handle all the big questions that economies generate?

Is the system too complex? Too embedded in other social systems? Too inter-connected? Too laden with information? Too vibrant? Too historically contingent, yet so unhinged from that history that uncertainty swamps the past so frequently?

Is it just all too much for one group of people, using one general point of view, one perspective, and one method to investigate and deliver us the solutions we need?

Is an economy inscrutable to one such method?

Yes. Yes it is.

Which is why we need variety. But it must be a coherent variety and not perpetually mutually exclusive in its component analysis. And there ought, by now, to be one or two settled ideas. There ought to be a foundation broad enough to support different approaches. Collaborative, supportive, and independent approaches that can be deployed variously without fear of being declared apostate by true believers in some other approach.

This is not what economics is.

Thinking like an economist is, nowadays, understood by and large to be thinking like an automaton. It is to be cold. Calculating. Rational to a fault. Inhuman in any other discipline, but essential and lauded in economics.

I am reminded of this by the latest volume in the absurd “Freakonomics” family. It is a book designed to teach people to think like an economist. But the core ideas it promulgates are not exclusive to economics. Which is the problem. Calculation is not the exclusive province of economists. Nor is data collection. Nor is a reverence for fact. Nor is that skepticism we all need to avoid falling to much in love with our own ideas. Nor is pretty much anything else in the book. The technique is common. Indeed it is often more sophisticated and modern outside of economics.

I think those kinds of things can be generally called ‘scientific’. Doing those things is to do science. Science, that is, in a very catholic definition. Much of the study of history would qualify under such a rubric. I can imagine the authors of “Freakonomics” choking at the thought.

Somewhere along the way economists stopped pursuing big ideas. Indeed the authors of “freakonomics” warn us to avoid thinking expansively. They suggest taking small steps, thinking about little things, or studying the crumbs left after the big ideas have been chewed on by others. We are cautioned against tackling big problems because they tend to be too complicated. They are intractable to economist-style analysis. So we are advised to break things down and deal with the little bits that we can take a look at.

This is thinking like an economist.

Apparently.

What I glean from this advice is that economics has given up. That some part of it, at least, has decided that all the big questions are dealt with and that to be an economist is now, simply, to think clearly. Something that a vast number of other people do already.

Thinking like an economist within economics is too ignore the economy for all the reasons I gave earlier. It is just too much. The economist toolkit – as told to us by the authors of “Freakonomics” – can tackle a few small things. It can’t tackle the big stuff. Not without massively scrunching the big stuff up by locking it down inside such restrictive assumptions that is no longer recognizable as an economy.

And therein lies at least part of the problem with modern economics. Its orthodox wing has settled on a method it calls ‘thinking like an economist’. That method is insufficient to deal with the enormous complexity of real economies. So, along the way, the subject of study has been whittled down successively to make it tractable to the method. What is now defined as economics – by the orthodox – is whatever can be studied when one thinks like an economist. Which is to say little things, an endless stream of special cases, and an avoidance of the general case.

So we produce economists who are supremely gifted at being inhuman, and yet who purport to divine the workings of that most human of creations – an economy.

Yes. I think we are all asking too much. They are not up to the task. They have been trained downwards. They have been limited deliberately. They need help.

Lots of help.

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Science or Politics?

Paul Krugman, with whom I do not always agree, asks two very pertinent questions:

“Were the freshwater guys always just pretending to do something like science, when it was always politics? Is there simply too much money and too much vested interest behind their point of view?”

Let’s set aside our differences for a moment and unite behind those questions.

Yes. It was always politics.

Yes. There is simply too much money and too much vested interest behind their point of view.

Orthodox economics is a sham as a science. It is an ideology masquerading as science. How else can we describe a body of thought that appears totally inflexible and immune to contradictory evidence? It does not adjust. It’s believers do not learn. They preach. They proselytize. Their theory lies exposed for all to see as a mere prop for a particular point of view. A point of view that justifies inequality of outcomes and mean spirited indifference to the plight of vast swathes of our fellow citizens in the name of pseudo-efficiencies in the allocation of our collective resources. These supposed efficiencies are neither observable nor measurable in the real world, but only within the enclosed, cramped spaces of models specially created to produce a very limited and desired outcome. Desired, that is, by those who value extreme individualism over community, excessive competition over cooperation, and an almost pathological belief in rational behavior over human cognitive frailty.

There is nothing in orthodox economics that resembles the world in which we live. Yet it is deployed relentlessly, and heartlessly, by policy makers as if it were some scientific truth. Worse: it is deployed as a template for social change. It is thus a toxic and supremely unethical attempt to bend society to the advantage of a particular vested interest.

Yes. It was always politics.

Of course it was.

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