Commentary

Probably both.

America’s ideological nightmare continues. So extreme are the Republicans nowadays that they have just thrown out, in a primary battle, one of their long standing Senators. Lugar from Indiana lost his reelection bid and is replaced for this November’s Senate election by Tea Party nominee. The only notable things about this new candidate is that he espouses open ideological warfare and has pronounced that the Republicans are not right wing enough.

Really?

Just this week the Republican led House passed a bill blocking the $55 billion reduction in defense spending mandated by last year’s debt ceiling deal. A deal they signed off on. Instead they proposed cutting $310 billion from sundry domestic spending programs like food stamps, low income household health insurance assistance and so on. This is all out class warfare. All out. There is no pretense. No attempt to dissemble. Not soft public face to hide the real intent. The Republicans are going all in on their attacks on the poor and disadvantaged in order to protect their defense industry sponsors and – at all costs – avoid raising taxes on higher income taxpayers.

This is absurd, divisive, and flat out nasty.

It rolls back the longstanding consensus in American politics about building and maintaining a safety net, and seeks to plunge us back into pre-Great Depression era social divisions. There is no other explanation for the extremism that now dominates the Republican Party.

I have friends who argue Mitt Romney will be able to ignore this vicious extremism and shift to the center as we approach the election. I reject this idea. He has not shown any significant ability or willingness to distance himself from the extremists. Instead he panders to them. In many ways he typifies modern Republicanism with his deep rooted attachment to market magic and its supposed all purpose all conquering solutions to all society’s ills. He believes, along with his party confreres, that if a problem is not amenable to a market magic solution then it is not a problem at all. He made his living on the cutting edge of the shareholder value revolution that contorted American business and tossed aside older values replacing them with the low wage, low cost, low benefits, and insecure employment contracts that have undermined our society and contributed to the rotting foundation of the economy as a whole. He is the very epitome of modern scientific management.

Which is not scientific at all.

Modern management theory, especially the concepts undergirding shareholder value, is based wholeheartedly on the pre-existing orthodox economic theory. That theory is not at all scientific but is an ideological construct designed specifically to defend and justify free market neo-libertarian social relationships. There is not an ounce of science involved in it. Science would at least try to explain the artifacts littering the real world landscape. Orthodox economics rejects that approach and substitutes for it the study of Platonic worlds – called models – that have no bearing on reality but which conform to the ideological preferences of the modelers. It is thus no surprise that those models produce results that justify slashing government which looms large as a muddying and malign influence in them.

Business strategists who pursue shareholder value nostrums are simply part of a widespread effort by orthodox economists to twist the workings of the real world to conform with the simple workings of their models. In an act of extraordinary vanity orthodox economists see their role as intervening in the world to modify it. This, they say, will result in a more perfect world. It will be, they argue, a world in which our resources flow naturally, without government intervention, to their best use.

It is also a Hobbseian nightmare – nasty, brutish, and short.

Orthodox economics sits at the heart of the American ideological nightmare. It provides intellectual cover for the pillaging of the poor and weak by the strong. For such pillaging is simply an expression of market forces. And market forces are pure. Are they not?

Not.

Economics has been exposed as an adjunct to politics. It is simply a tool kit for imposing on society a pre-existing ideological vision of how our resources should be allocated and the wealth produced shared.

If the Republicans are to be reviled for their attacks on the poor and their defense of the wealthy, so too are those who wrote the theories that justify those attacks.

Perhaps more so.

The economy sidles along. Sideways has become the constant theme this year and none of the news contradicts the notion that our malaise will linger. In view of the lack of leadership from Washington – the never ending American election cycle militates against actually doing anything other than run for re-election – we cannot expect dramatic policy initiatives of any stripe or color.

The exception being that the House rather pointlessly passed the budget proposal put forward by Paul Ryan, current darling of serious commentators everywhere.

His budget will certainly be defeated in the Senate. Rightly so too since it is an abomination, and, despite the plaudits it draws form the commentariat, is basically an ideologically driven attack on the poor, the middle class, and all else except big business and the super rich. What I love most particularly about the Ryan plan is just how little close scrutiny it gets from the serious folk posing as experts in the media. It is continually being presented as a “bold” attempt to rein in the Federal deficit, yet it is actually a string of traditional Republican policies tied together: it reduces social spending dramatically, it gets rid of Medicare and replaces it with a voucher system that caps payments, it leaves defense spending largely alone, it reduces tax rates, especially for the top tier, and thus creates an enormous hole in the budget. This hole is then closed miraculously by way of a vaguely worded re-vamping of the tax code which is supposed to offset the giveaways with a series of loophole closing and base broadening initiatives none of which is spelled out. The serious folk don’t get into details, so they don’t get vexed about that lack of said detail. They simply take it on faith that Ryan will produce a rabbit from his hat when asked.

This is rubbish of course. The Republicans have never been worried about the deficit. In fact they rather like it. It gives them a hammer with which to attack social spending. It is no coincidence that every single Republican plan produced during their prolonged and painful primary election process would have made the deficit much worse. None was serious. All were ideological in content and aimed at the poor and underprivileged.

This charade in the House is being lauded in serious corners as being a genuine attempt to deal with an iconic issue. Then again serious corners are not serious, so all this fawning is to be expected.

As for the economic news: there really is not much to comment on. The trade gap widened. New claims for unemployment assistance stayed put. The Fed continues to prattle on about a need to hold the line on inflation – even in the total absence of inflationary pressure. GDP potters along at sub-par rates. People continue to leave the workforce which makes the unemployment rate improve for all the wrong reasons. Housing is still stuck in a rut, although not as depressed as it once was. And every other indicator meanders about aimlessly.

Yes, the general direction is correct. No, the pace is nowhere near fast enough.

But.

Yea!! Ring the bells. In April the US government posted a budget surplus. It was in the black to the tune of $59 billion, the first surplus since just before the implosion of Lehmann. This means nothing. The surplus was created by better than expected tax revenues – a sign of a healthier economy – but also cuts in education spending, which don’t augur well if they last. Some quirks in defense spending also helped along the way. Needless to say the White House is pointing to the surplus as evidence of improvement. Which I suppose it is. But it won’t last. Besides, the last thing an economy stuck in sideways motion needs is a bout of austerity. Sucking demand out of the economy is hardly the way to get things rocketing along.

Except if you are a serious person.

Then the only way forward is austerity.

I happen to think that austerians – as opposed to Austrians which sometimes amount to the same thing – are simply frustrated by the evident failure of their three decade long project to re-cast the economy in the image of free market theory.

Which gets me to structural problems.

Our sideways moving economy is so lame that the unemployment rate persists at higher than acceptable levels. People like me argue that this is evidence for more stimulus. We see the issue as a cyclical one. Demand is weak in the private sector as households fix their balance sheets and deal with disgorging the debt they accumulated during the succession of bubbles and other years of Reagan/Bush policy making. I should add that Clinton perpetuated rather than reversed those policies. The blame spreads to both sides of the political divide although it clearly began on one.

The self proclaimed serious people who inhabit the upper echelons of our elite laugh at the obvious, in their eyes, naivety of this cyclical diagnosis. They argue, without a shred of empirical support, that the malaise reflects deep and sinister issues. The structure of our economy is out of whack. We have a bout of structural problems.

Others have debunked the structural problem thesis far better than I. Suffice to say that the structuralist argument is full of wind. It is insubstantial. It is vacuous. It is, like the Ryan budget these same folk adore, a non-starter. But it has legs. It keeps getting trotted out. Usually it is accompanied by a snide and paternalistic reference to us cyclicalists. We are just silly to think that throwing more government money at the problem will save the day. Grown-ups all realize that our problems are deeper than that. They are really deep. Down in its foundations our economy has suddenly been exposed as rotten. Our workers are dumb. They lack the skills needed to compete in this “hyper-connected” globally bounded economy. Our “hyper-efficient” firms can get by with fewer workers, whether dumb or not. So we are faced with a need to provide extra incentives to those hyper-efficient firms to expand their operations and invest even more than they already do. Our education system sucks. It doesn’t produce engineers. Our government regulates way too much and lays a heavy hand on our entrepreneurs. And our banks are being stigmatized such that they will not, or cannot, lend to flood our great economy with the benefits of their financial genius.

In short we are stuck up a river without a paddle.

We have structural problems.

This is a bit like discovering you have some dreaded disease. Serious people all intone in calm and authoritative ways that the medicine will be bitter. It will also take years to show its effects. Along the way we all must try to hang in there, not get despondent, and look to the long term, when the economy will surely blossom. That far off spring will be nourished by an army of clever, hyper-productive, adaptable, and, presumably, low cost workers all of whom will be willing to accept flexible wages, lower benefits, and insecure employment. This re-structured workforce will be the envy of the world. It will allow the platonic vision of permanently low taxes to be coupled with permanently high profits, personal rugged self-reliance will displace flabby reliance on government hand outs, and our economy will soar. Just like it did in the Reagan years. [Insert wistful yearning noises here]

Meanwhile the unemployed should endure. Yes this is a sad and rotten thing. But, hey, re-structuring takes time. And we have no alternative. None at all. No gain without pain is both a cliche and serious economic advice.

The attraction of this ridiculous proposition is that its results are a long way off and it allows structuralists to avoid doing anything in the near term. They can be content that they have tried. They have thought things through. And they have found that nothing can be done – seriously anyway – about our high unemployment rates. Yes it is indeed a rotten and sad thing. But that’s the way of the world.

Hogwash.

The odd thing about structuralists is that they are the very same crowd who got us into this mess. If we have structural problems it is because of their policies. Think about that. They were the advocates for massive deregulation. We were assured that the market magic they so fervently adore would act to eliminate problems. The market will take care of it. With “it” being whatever problem your cared to highlight.

The relentless pursuit of shareholder value would ensure, inevitably ensure, the correct and efficient allocation of our nationals resources. After all shareholders are private folk, and we all know for certain that private folk know exactly what to do with resources. Better than the horribly inefficient government anyway.

Workers will respond to their growing insecurity by throwing themselves into a frenzy of re-education and skill acquisition. The market will ensure, inevitably ensure, our workforce has competitive skills. Its about the incentives. We don’t need government subsidized training. We need to make people responsible for themselves. They’ll get on with it just as soon as the dead hand of government is lifted.

The list goes on.

The structuralists won the debate back in the early 1980’s and went on a binge of structural correction. They recast the economy in image of their free market theory. They deregulated, attacked institutional rigidities [aka unions], stomped over wages, slashed at training programs, and happily structured away through two bubbles and a near historic economic collapse.

In the aftermath of which they announce that our problems are all structural.

A simple, refutation goes this way: an economy out of whack would have hot spots of high activity associated with weak spots where the structural problems were most corrosive. Some industries would be desperate to hire, would be paying high wages to attract labor, and would be booming along. Others would be shrinking, shedding labor, and be rife with bankrupt firms.

None of this do we see.

The weakness is across the board. No industries are hot spots. Employment is rotten throughout. And, curiously, corporate bankruptcies are relatively quiescent. There are no signs of the kind of lopsidedness typical of an economy laden by structural problems.

And the recent record of our deregulated banking system is hardly great testimony to the asset allocating prowess of market magic.

What’s are structuralists to do? With the project wallowing in its own mess, they double down. They cast aspersions at the cyclical argument to divert attention from their own failure and to prevent the public getting a proper and balanced view. They pose as being serious. They disparage alternatives. They discourage debate. They puff themselves up and engage in a self sustaining closed loop of a discussion.

From which no effective policy will emerge because structure is not our major problem. Sure our education system needs buffing up – it has been neglected and underfunded for way too long. Sure we need better training for our workers – it was big business who slashed training programs first in the name of cost cutting. Sure we need to cut the burden of health care costs. Sure …

But the fact remains. We have a demand problem. A cyclical demand problem. Our economy is stuck in a low gear because people are unwilling or unable to spend. Simple. Easy.

But not fixable while the serious people dominate policy making.

Sad. No?

Not only have I had little time to make a comment on the state of the economy, but there seems to be little point either. Things are steadily slipping backwards from the mild improvement we saw a few months ago. We remain becalmed, leaderless, and clueless. It has become depressing talking about the systemic failure we are living through. So mute and weak are our leaders that we are even bereft of policies to criticize. America’s perpetual election cycle has now sucked out what vestige of energy there was from the policy making elite. And there was precious little energy to begin with.

So, what have we learned in recent days?

That the economy is growing at a rate too slow to build sustainable improvements in the labor market. The 2.2% growth reported for the first quarter is simply inadequate and speaks to endemic weakness rather than any kind of strength. As foundations for future wealth generation go this is flimsy indeed.

We have learned that factory orders are softening.

That consumer spending is flat.

That construction spending is hovering just above disaster levels.

That motor vehicle sales are flat.

And that the employment outlook is worse than we thought.

In short we have learned that the economic recovery is as anemic as it can be without causing alarm bells to be ringing. This is exactly what we should expect from an economy lacking leadership, clear policy direction, and where debate is still has an eery reminiscence of that of seven decades ago.

I grieve for those families suffering, and those that will suffer, as our elite indulges itself in a repeat of the 1930’s. It ought to have been different. That is was not is testimony to the weakness of our leaders and to our collective ability to forget the efficacy of decisive action in the face of the kind of storm encountered when markets get things horribly wrong.

Our unwillingness to deploy the full weight of the government as a bulwark against the failure of the market is a sign of ignorance. An ignorance rooted in blind adherence to ideological purity despite the stack of evidence against it.

Make no mistake about it: we, collectively, have chosen mediocrity. We aspire to it. We indulge in shallow debates about tepid alternatives and eschew any thought of bold policy as being the domain of a naive few. We parse endlessly the fine points of thickly worded speeches whose cumulative heft is negligible. We substitute discussion of phraseology for the search for sharp meaning. We indulge in ever more acute observation of furniture alignments while not noticing the rottenness of the furniture itself.

We seem to to care.

Or we are to afraid of the effort needed to set a healthy course.

The debate we need is difficult. It its fraught with great distinctions. It requires commitment. It needs our attention, involvement, and education. It is one we need to have. Or else this drift will continue unabated and the decline will become more difficult to reverse.

But we will not have such a debate.

Instead we will suffer through a year long election cycle stuffed with grandstanding, pandering, and puffery.

I am convinced that the upcoming election will solve nothing.

Obama has proven to be an indecisive flop. He is a gifted bureaucrat whose greatest skill is tinkering with the details of legislative gobbledygook. He is a wonk’s wonk. His favorite book was “Nudge”. Nudging is his predilection. Unfortunately we need a good wallop. Nudging is good in a healthy economy, where only a little fine tuning is needed. In an economy as deranged and unbalanced as ours became during the years of Reagan/Bush delusion something a tad more heavy handed was required. Obama was the wrong person to deliver the requisite bang to the side of the head.

Romney I think would be just as bad. His skill is in delivering the dry, chilling, and austere management of organization theory. He is adept at squeezing and manipulating in order to rejuvenate a subsystem like a business firm. Those skills are inappropriate when faced with the entire system of a national economy. There is nowhere to offload the supposed dross. There is no one else to absorb your excess. You can no longer fire and slash away safe in the knowledge that the fired and slashed are not your problem. They are. And being a corporate manager is training for authoritarian not democratic government. Besides, Romney now leads a party long ago captured by an anti-social libertarian sect hell bent on deconstructing modernity and whose philosophy is shaped to defeat autocrats not democratically elected governments. Libertarians live in daily fear of George III, apparently unaware of his demise and the subsequent rise of democracy. The tyrant whose taxes they so decry is not some distant autocrat pillaging the realm, but us. The rest of us – we the people trying to band together to solve, collectively, our mutual problems.

One example: The period of fastest economic growth this nation has ever had came at a time of its highest marginal tax rates. This flatly contradicts the libertarian call to cut taxes further and the supply side argument that high taxes impede growth. Either we have to admit that high taxes are compatible with high growth, or we have to acknowledge that the two are not connected at all. The one thing we can say with certainty is that high marginal tax rates rates are not a cause of malaise. History says so. Clearly. Yet here we are entering an election is which that case will be made.

This is what Romney promises to bring to that table. Nothing new.

We are destined to go backwards to retrieve ideas already shown to be wrongheaded in order to conduct our discussion of our future. But we have no Hayek and no Keynes to conduct the debate. We have no one remotely of that stature. So history is repeating its plot without its key actors. And like the remake of any old movie it will fail to rise to the level of the original.

On a parochial level economics is mired in similar miserable doldrums. It has nothing new to add to what it said seventy years ago. It is substantively unchanged decades after the titanic struggles of the 1930’s. Sure it is more formal. Absolutely it looks more rigorous. But its subject matter and what it has to say is the same.

We are back too the future.

Unfortunately our elites – business, academic, and political – are incapable of generating novel responses to our problems. We are stuck with the mediocre when we need – so, so clearly need – the exceptional.

2.2% GDP growth looks about right for the rest of the year. Get used to it.

That got your attention.

One of the great things about moving house is that you are forced to confront the pile of accumulated stuff on your desk: it has to go one way or another. At least that’s my challenge. Wading through notes, papers, reminders, and scribbles that now mean nothing can be tedious, but the alternative of ditching the lot and starting over isn’t an option. In my case there’s years of clutter to be dealt with which is a refreshing opportunity to start anew.

It also allows me to rediscover one or two threads that contributed to my current thinking. That pile of stuff may look like rubbish to others, but to me it is a memory. Or a jolt to remind me of distant thoughts.

One such is my early attraction to economic sociology.

As I re-started thinking about the economy years ago I read avidly. The economics books I picked up didn’t say much of interest. So I roamed around looking for people who had a point of view that resonated with my experience. Don’t forget I come at this from within business and my primary interest has been the theory of the firm, which gives me an institutional bias from the get go.

The group with the most interesting things to say, at least for me back then, were people like Granovetter, Dobbin, Bourdieu, and Fligstein. So I was happy to re-read some of my early notes on Fligstein’s “Architecture of Markets”, a book that has a great deal of useful stuff to say about actual, as opposed to hypothetical, markets, when I discovered them as I rummaged through that pile of papers.

I mention all this because, at precisely the same time, I came across an interview with Fligstein in Salon where he talks briefly about economic sociology and takes a couple of well deserved swipes at the sterility of mainstream economics.

What the sociologists get right, and what mainstream economists get horribly wrong, is that an economy is woven into a social fabric. Much as it appears attractive trying to extract the economy for study in isolation robs it of its very reason for being. So the results of such study are devoid of meaning when they are applied to an actual economy. The separation of economic things from the rest of life is something we all do periodically as we think about work, money and other practical things, but none of us then pretends that we can linger perpetually in a pure economic world. Reality is far more complex than that.

The problem – one of them – with economics is that it avoids reconnection with reality as if it has something useful to say based upon its abstraction. It doesn’t. Or, at least, it has far less to say than it thinks it does.

When I try to describe this problem to outsiders I use physics as an example. It is as if physicists tried to explain the world solely relying on gravity. Other forces like nuclear reactions and electromagnetism would be excluded as irrelevant. So while the gravity only models would work beautifully and be full of wondrous math they would fail utterly to explain what goes on around us. Gravity is just one part of the whole, it explains a lot, but at times it fades into the background.

Economists fall into this trap. By looking at everything through a lens of supply and demand, scarcity, competition, and incentives, they ignore other forces that deeply affect economic outcomes. They explain only part of the whole. They miss, with regularity, essential elements of reality that overwhelm and render irrelevant the nice neat analysis they perform with their limited vision and even more limited bag of tricks.

By trying to be scientific, in a narrow rather than broader sense, mainstream economists have descended into a hole of their own making and made themselves ever less useful. By denying the embedded nature of an economy they have built an extraordinarily naive edifice of great beauty but of little practical application. It is naive because of its simplistic assumptions about human behavior. It’s beauty is its intrinsic self serving logic. It looks great until you blow gently on it, whereupon it scatters like dust and has no material substance at all. It keeps economists busy. That’s the best we can say.

As a body of knowledge, hard won from two or three hundred years of trying, it’s not very good at all. In fact most of it is worthless to anyone working, living, and operating within an actual economy and looking for some theoretical guidance about how to proceed.

That was my problem when I was working in banking twenty years ago and the recent internet spat between Krugman and Keen suggests to me that economists as a whole still don’t understand banking that well at all.

So Fligstein’s scathing comments about economics – he neatly avoids falling into the trap of subdividing economics the way that economists do and just tars the entire discipline with the same brush – strike me as highly appropriate. When he ends his comments with this: “And as for the dismal science of economics, I think reality undermines it every day without the assistance of sociologists” I get what he means.

Reality does undermine economics. Actual economies don’t look like, behave like, grow or shrink like, or resemble much at all, the rarefied models economists study so carefully.

Which gets me to another paper lost in my pile of stuff.

I re-read a paper by Geoff Schneider given at last year’s ICAPE conference. In it he talks about the parlous state of the teaching of economics. What caught my eye most is the conversation about teaching students how to think like an economist. By now you can imagine that I don’t think that’s a very good idea. If by economist you mean mainstream economist. There was a time when economics had an allure as being a worthwhile discipline to study. Supposedly it taught you some handy ways of analyzing problems and looking at the world. Students studied it to get a leg up in and prepare for careers in business.

Except that economics has nothing to say about business. And it’s view of an economy is desiccated, ideologically driven, and riven through with outmoded techniques. As Schneider points out most students don’t even learn modern economics because the textbooks lag so far behind the cutting edge.

And, let me tip my hat to economics, the cutting edge is now just beginning to incorporate a few – scant but a few – more real concepts.

It is because theoretical economics is so distant from actual problems and has failed so miserably of late that the teaching of it needs to be thoroughly rethought. There is a suggested core curriculum, or rather set of standards, for teaching the subject: the Council for Economic Education publishes a set of voluntary guidelines replete with what it calls standards. These are a set of core principals that undergird mainstream thinking but don’t reflect the wider perspective non-mainstream economists have. So the recommended core of teaching is the narrow and ideologically based libertarian viewpoint that Milton Friedman would have well recognized. It isn’t economics as a whole. And it isn’t particularly useful.

Back to Fligstein: he mentions another of my favorite books on the economy, Donald MacKenzie’s “An Engine, Not a Camera”. The book is about how mainstream economics, having failed to describe an actual economy, has tried to pervert reality and twist it to conform with theory. The title itself is a joust at Friedman’s ideological driving force. Friedman was famous for denying the need for reality in economic modeling. To him the purity of outcome was paramount. So much so that he argued that not amount of garbage input could alter the glory of the output. As long as the output was correct. And by correct Friedman clearly meant that it accorded with his libertarian worldview. More to the point, Friedman saw economics as helping to construct the world as it “should be” in order to attain the heights of efficiency achieved by the models of theoreticians such as himself. So economists can build engines for the economy to drive it ever higher. They do not, in Friedman’s view, merely record camera -like what the economy is.

From this twisted perspective flows naturally an entire web of construction and social engineering. Indeed most of modern finance, including those now notorious risk models that imploded so ingloriously, are based upon the Friedmanite view that economists, knowing so much as they do, can interfere and tinker in order to mold the economy to mimic their models. They have a license to meddle based upon their supreme knowledge.

Not so much. But tinker they do.

Sociologists call this tinkering being “performative”. It is the height of arrogance that economists presume they know enough that they can ignore reality, or rather, bend it to conform to their ideas. It is Platonic nonsense of the first order. It can only exist inside the hermetically sealed ignorance of a discipline devoid of ethical values.

It is the hubris of libertarians generally to presume that they have divined a great truth, when they have spotted a minor human trait. Friedman is the epitome of this horror.

Let me end, then, with Fligstein once more.

He takes a swipe at the core of libertarian economics. He, rightly, denies that economics has much to say about entrepreneurship. Which is odd given the near godlike status entrepreneurs occupy in libertarian economics. Once again these economists trip over their own coattails as they try to ascribe great values to a person, who, bereft of humanity as they must be in order to inhabit an economic model, nonetheless is a flesh and blood person without whom we would all still be living in the Dark Ages. No one exists, nor can they, who can rise to the challenge of exploiting opportunities in an economy where there are no opportunities by definition. For in a world of perfect information there is no opportunity. So there can be no entrepreneurs.

No wonder business schools have turned recently to sociology as a source of ideas to teach about business.

Business is out there in the real economy.

That means economists don’t have much to say about business. But sociologists like Fligstein and MacKenzie do.

Which is why I like social economics. At least it’s a start.