Can We Change Group Think?

People keep asking me: what would you do? That’s a good question. It’s all very well to comment on all the follies of current economic policy – as I see them – but, really, what would I do? Each of us has a personal list of things that irk them and need fixing. Most of us can articulate a few policies we favor. But to string that all together into a broad program is much more difficult. Especially in today’s environment. Which is why I have avoided the subject so far. But the more I listen in on what passes for debate in Washington the more I realize that one of us, either those folks or me, are on another planet. We are all looking at the same economy. We are seeing totally different problems. How can this be?

Groupthink. Lots and lots of groupthink.

You cannot solve a problem that you fail to recognize. Nor can you solve a problem that you deny exists, even once you have identified its possible presence. Then there are those problems you cannot solve simply because your ideological perspective eliminates them as being problematic. Finally there things that are not problems at all, but which your ideology insists on your solving, problem or not.

As you can see this is a mess.

In my view economic policy is all ideologically derived. That is to say economic policy-making can only exist within the sphere of politics. In part this is because economics itself is simply a large – possibly too large – array of lesser tools each of which can be used to resolve a particular issue, but none of which resolve everything. There is no over-arching theory. Yes, there are a few big theories, but they are all contested, and all incomplete. And they are all old. None have been produced in recent decades. So economics is a toolkit, and politicians or other policy makers reach into that toolkit and pull out only those tools they feel comfortable with.

Right of center politicians tend to pull out free market tools. Left of center politicians pull out interventionist tools. Both sides have the comfort of an army of economic theorists to back up their choice.

One more thing: right of center politicians and economists like to pretend that their choices are designed to allow “natural laws” to come to the fore and drive outcomes. We on the left dismiss this as an example of the right’s ideological bias. We argue that there are no natural laws in an economy, since everything there is a man made artifact. This rebuke is most often fired back against the claim that markets are subject to deep “forces” that, if allowed to act unchecked, produce socially beneficial results. But it has long been known that markets fail. Indeed one of the driving forces behind the advance of classical economics during the early years of the Industrial Revolution was the need to accommodate the increasing evidence that an untrammeled free market produced all sorts of anti-social effects. And, more to the point, there was no market based mechanism to eliminate those unfortunate effects. Markets fail. Frequently. Worse: the more complex the economy, the more likely it is that markets will fail.

Why?

The rise of complexity in both the production and distribution of goods or services strains the limited ability of a market to absorb and propagate information sufficiently for producers and consumers to behave in a sensible – sort of rational – manner. Economic theorists go to all sorts of absurd lengths to elide this point. They are apparently in denial that the economy has changed much since Ricardo and Malthus were arguing over population growth, marginal limits on farming, and all the other hot topics of the early 1800’s. So at least a large portion of our contemporary theory rests on a 1800’s view of what production and consumption look like. Land, labor, and capital are the factors from which economic stuff flows. Useful knowledge, to employ Mokyr’s phrase, is found nowhere. Yet to me land, labor and capital count for nought without us knowing what to do with them. So know-how is the most essential economic driver. Though finding it in theory is hard to do.

Not only this, but much of that theory was written specifically to investigate one side of an issue or to inform a specific political debate. In order to bolster their credentials these early economists sought to sanitize their theories and make them look apolitical or “scientific”, but the reality is that the contestable ground was defined by the great shifts in political power during early industrialization. Landowners wanted theories to defend themselves. The new industrial and commercial class wanted to make the economy more to their liking.

Thus free trade and free market theory arose from a need to rebalance power. The prior system was denigrated even though it had served the old elite well. There was a new elite. There was, thus, a need for a new theory.

Marxism arose in this same milieu. One of the most obvious phenomena of industrialization was the shift in the nature of work. People were working for wages instead of within the home. Wage labor implied a massive social shift. It seemed to produce the terrible conditions of the new cities where the factories were crowded. The entire edifice of Marxism is a reaction to shifts like these.

Marx was a classical economist, and along with his peers failed to take into account the institutional changes that would shape society and thus the economy. But the Marxist challenge was thorough, it needed a response. Right wing economists needed to justify all those factories and the awful conditions in the big cities. What they came up with was a retreat into systemic thinking and “natural laws”. They rebuilt economics as the study of naturally occurring “market forces” that looked a lot like those of their classical antecedents, but which were radically different. Now the economy was thought to be a huge machine churning relentlessly towards a single and supremely efficient solution. But a solution to what? After a few decades of argument it was decided that the entire purpose of the machine was to allocate the stuff of an economy as efficiently as it could within the limits of its starting conditions. It was nothing but a massive amalgam of individuals, each producing and each consuming, and each trying to maximize wealth, or better yet, something a little more vague – utility. Thus the entire classical focus on groups of people and the respective interests of those groups – landowners, capitalists, workers etc – was tossed overboard. Economics was saved from the Marxist threat. If classes were no longer a “proper” element for study, and if “natural forces” now ruled the roost, the plight of workers, as a group, was beyond the pale of economic theory. It was swept aside, as if by magic.

It was convenient, of course, that this magical cleansing of economics coincided with the interests of the new elite. The problem, as I have alluded to already, was that the real economy exhibited all sorts of malfunctioning. The magical market worked only up to a limited point. And that point was limited indeed.

A further limitation, and for me the final nail in the magical coffin, was the irritating observation that economies are beset with uncertainty. It was not easy to eliminate the mucky workings of the classical economists. The new economics had to be forced to hum along smoothly. To do that it had to be built on an absurd foundation. True to the era during which it was conceived economics was quite willing to adopt such absurdity. After all the outcomes of the theories matched those the elite deploying the theory desired. So the absurdity was overlooked or even applauded when need be. One such absurdity was the need for complete information, or at least the costless acquisition of whatever information was necessary to make the vast machine hum and spit out that epitome of efficiency. Since this is not a property of the real world it stands out as a shining example of theory being bent to accommodate a desired outcome. Keynes, of course, decried the inclusion of certainty in economic theorizing and has been lambasted ever since.

So the combination of complexity and uncertainty destroyed the illusion that markets are efficient at all times or that market solutions are always preferable to alternative solutions.

The problem is that the constant motion within the economy has produced a radically different problem set than that addressed by either the classical or the new classical theorists. Their solutions are still predicated on an 1800’s style economy. Their machinery works well in the limited case of very simple small economies with no complicated production, little interaction, and very small social networks. They are talking about preindustrial villages. Useful in its time and place. But that’s not here or now.

This is a very long preamble. It is idiosyncratic. But is is my starting point.

Why?

Because our current elite is fully invested in that village theory. They view things through the lens of market based solutions and are willing to ignore or disregard the unfortunate outcomes of their position. Their belief system is predicated on an out of date theory that has been unable to be updated to take into account the world around us. The irony is that the very forces they applaud: especially the innovation of business driven by the profit motive, are responsible for the obsolescence of their theory. Nonetheless they stick grimly to the village theory because it matches well with their ideological preference for private property rights as perpetually more important than collective, or social, rights. They like individualistic economic theories because they preclude social action or the taking of a position that prefers a social solution to a private one. Thus, to them, Keynes and his occasional advocacy of government intervention is an anathema. Like Margaret Thatcher they claim that society is an artifice of our imagination and thus not a credible actor in economics. The irony of their reliance of “the market” which is also an artifice of our imagination is so massive they apparently don’t notice it.

In any case, we have an elite running the economy in its own self-interest. That means the topics that are chosen for discussion are only those that matter to them.

This is why unemployment has slipped down the agenda and has been replaced by the non-issues of debt levels and inflation. While it seems to me that we ought to be talking about the extent of the redistribution of wealth we feel comfortable with – and thus the tax structure and social policies that go along with it – we are stick debating the opposite: how much more does the ordinary household have to give up in order to preserve the status quo? Policies that redraw the balance between the upper echelon of income earners and the rest will have more long term impact than those designed to fend off the imaginary beasts of the credit market. Bolstering support for education rather than attacking public sector workers; reducing rather than preserving the power of the banks; shifting resources towards green technologies rather than subsidizing oil companies; and finding ways to employ the full set of our resources rather than allowing the magic of the market to generate the jobs we need. All of these are urgent. Far more urgent than reducing the deficit, which to me is simply a residual of our past choices. Those past choices have turned out to be wrong. They should not, through the deficit they created, be allowed to dictate our future choices.

Though, as I have tried to spell out, our elite has benefitted from those past choices and is trying to protect the privileged lifestyle it built on that foundation.

In this sense our era is no different from any other. There is an elite protecting its turf. To the extent the rest of us want to muscle in on the wealth of the nation we have to shift the discussion to topics that permit that. We have a right to do that. We have the power to do that. Above all else we should recognize that we have the right to pull from the tool kit of economics whatever tool is appropriate to move the machine to our advantage. There is not “natural law” of economics. Only what we want to make happen. We need to expose the groupthink as just that. Until we do we are destined to discuss topics that most of us should not care about. After all we are not part of that group.