Keynesian Coffee

What is the difference between a neoclassical cup of coffee and a Keynesian cup of coffee? Answer: you can drink the latter and the former exists only in your mind.

This thought came to me this morning when I decided to test the vaunted market mechanism that my neoclassical friends so adore. They always distinguish between it and the version of a market I have in mind: it being pristine and akin to a Platonic pure form; mine being intensely mucky and debased due to its earthly uncertainty polluted existence. So my test was this: I expressed my preference very clearly for a cup of coffee. Then I waited for it to turn up. At my desk, which was something I also clearly included in my preference. And I waited.

Well, as you can imagine nothing turned up and I was forced to replay the experiment. This time I helped the market mechanism by setting out the coffee, water, milk, sugar cup, and spoon. I realize this is interference and may cause suboptimal outcomes, but sometimes you just have to nudge. And I waited.

Still nothing.

In the end I made the coffee myself. While the water was boiling I gave more thought to Adam Smith’s awe at how all this material stuff moves around and how it all magically seems to end up in the right places. The coffee gets to my cup eventually. Even if I have to intervene and give the market a helping hand.

This is, of course, all nonsense. But no more so that the absurd claim that there can be a market mechanism abstracted away from human activity. There is no mechanism. Just a lot of people doing things. Some good, some bad, some clever, some not so clever. And stuff seems to turn up in just about the right place. A market is no more and no less than a specific group of people. There is no mechanism, just a web of relationships. Study those and you study economics.

The great folly of orthodox economics is that it has systematically eliminated people from its theorizing in order to focus on the pure “forces” and “mechanisms” that appear to provide the impulse to exchange in market spaces. Some of these forces exert such pull that they bring, according to these economists, the economy into equilibrium, which is a state where everything adds up neatly and everyone is happy. Or rather it is a state where were anyone to make another exchange, someone somewhere would be worse off. The magic of the mechanism is that it inevitably arrives at this extraordinary state. And the only reason we don’t arrive there is, get this, human error.

Sometimes, it turns out, humans are just too dumb and they muck up markets. If only we could learn to leave markets well alone we would all be so much better off.

The more astute amongst the orthodox theorists realize this is all just a mind game. They understand full well that they are making stuff up just for fun, and in order to see what could happen were there no people in an economy. They make up fabulous models knee deep in intricate and very clever math that produce perfect outcomes. They then compare these models with the real world and despair of the latter. They also make suggestions about how we can alter the real world to bring it closer to their dream worlds. But, since we are human and thus very limited and error prone, we never arrive at their desired dream world end state. We keep missing the mark. We cannot compute fast enough, we seem not to have enough information, we cheat, we hoard, we rig the game, and we just generally act like children when compared with the robotic supercomputers who inhabit their models.

Our humanity lets us down.

Which is why I played my little foolish game. I reversed the process. I took out all the human activity from the coffee making to see what would happen. And I conclude, not very scientifically, that we need humans in an economy in order to get anything done. In other words the word market refers not some abstract mechanism. Nor does it refer to a set of forces that inevitably produce predictable and replicable results. It simply is a word that refers to a group of people interacting for the purpose of exchanging stuff. This is something that has been going on for millennia, and will no doubt continue to go on.

Most of the silliness of orthodox economics stems from the misuse of the word market. And from the subsequent attempt to eliminate humans from what is a human activity. Orthodox economists mean mechanism when they say market. Which is to say, in my view, they mean nothing in the real world.

So ranting on about the superiority of markets over governments is a waste of time. We are simply discussing different forms of human association. Both limited. Both flawed. Both riven through with uncertainty. Both incomplete. And both prone to exploitation, personal vanities, cheating and all the other venality humans bring to the table. In other words we are talking about politics.

Which is why economics is so inextricably intertwined with politics, and can never be split apart and retain human contact. It is also why economics is not scientific in the way we understand physics to be. It is scientific in the original and now largely disused use of that word: it is an organized, coherent, and challenging investigation of a specific set of phenomena. It explores and seeks to explain certain regularities in the real world.

One of which is what caught Adam Smith’s attention: the observed regularity with which all the necessities of life, and a great number of luxuries, tend to be available in convenient forms and places for each of us to access them. All this in what appears to be a very complex and spatially extensive environment.

I just wish he had chosen a better metaphor. That reference to a “hidden hand” set us all off on a wild goose chase searching for magical forces and mechanisms that just don’t exist. At least in reality.

Please remember this next time you hear a politician or pundit argue we should leave decisions to the market. Ask yourself which set of people constitutes the market in question. Then ask whether you trust those folks to get the job done well? Where are they? What is their belief system? Are they likely to cheat? How do they know each other? Are they biased or privileged in some way that might tilt the outcome? What technologies do they have access to? Do they share your knowledge base? Do they observe the same rules, norms, and other institutional limits that you do? Are they culturally bound to ignore or include your wishes? Do they have the information or power to enforce an outcome you don’t like? And why do they get to do the job and not you?

Economics in the real world, human economics rather than robotic economics, asks all these questions and many more.

If you ask these questions thoroughly and consistently you will be a better economist than many Nobel prize winners I could name.

And you probably give an assist to those market mechanisms to make your own coffee.

You interventionists! Keynesian coffee anyone?