Inequality, Rationality, and Other Annoying Things

Forgive me. My ‘grandmother quotient’ is running at danger levels.

Frequent readers will know the special place my grandmother has in my development. In just a few sharp phrases she influenced me far more than anyone else. One of those phrases grates on me: “Remember, Peter” she said one day “They can always take it away from you.”

Quite why a young boy needed to know this, and who the “they” or the “them” was I never have figured out. But somehow her words resonated and I have been on the side of equal opportunity and other progressive causes ever since. She meant something. She had lived through the fight to level, at least somewhat, the gross inequalities that mar nineteenth century British development, and she emerged a hardened warrior for the underprivileged everywhere. In her own way of course. Always in her own way.

I mention this because I find myself reflecting on her words more frequently nowadays. That’s what I mean by my grandmother quotient. There is a direct relationship between my such reflection and my perception of the state of the economy. I don’t really care how well the economy is doing, so much as I am concerned by how well people are doing.

And therein lies the tale.

Economists are notorious for trying to eliminate people from their theories. That way they can pretend to be scientific in the grand manner of physics and mathematics, rather than in the manner of biology, history, and other subjects rooted firmly in evolution, and, especially, time. Economists use jarring words like ‘agents’ and ‘units’ to strip away humanity and to avoid having to face the consequences of their allocative mechanisms. They make things impersonal so they don’t have to look unemployed people in the eye and explain to them that unemployment is always voluntary – in theory. I imagine they fear they might be punched by the voluntarily unemployed. Sometimes I want to punch them myself. Especially those who are tenured whilst explaining the evils of tampering with free labor markets.

Inequality seems to fall into this same category.

Hey, the economists say, that’s just tough. Stuff happens. But our theories tell us exactly what the right answer is if we all want the most efficient allocation of resources. Right? Those hifalutin equations give us such exact answers. Just look at the decimal points. Such precision is hard won. And worthy of many, many, Nobel prizes. That some folk win, while some folk lose, is just not important. Not at all. What’s important is the efficient of the outcome, and the elegance of the reasoning. Elegance is particularly important in the rarified world of economic theorizing. The fine tuning is nicely balanced. Elegance makes it ever more so.

Perhaps it’s the astonishing capacity of orthodox economists to conduct a conversation with themselves as if they were engaging something else that mystifies me most. They really don’t get out much. Anyone intruding is laughed at as being an amateur. And we all know how simple and naive amateurs can be. After all they never paid their dues to join the club. Within the professional cloisters jargon hangs heavy and the total irrelevance of the conversation to the real economy is itself irrelevant. Economists, as I have shouted out many times, don’t talk about the real economy. They discuss their own imaginary one.

In there, agents patrol endlessly, tirelessly digesting infinite streams of data, calculating at universally unattainable speeds, knowing all, and arriving instantaneously at perfect answers. All in the name of efficiency and allocative maximization. This parallel universe actually parallels nothing. It vectored off a long time ago. There is probably a non-Euclidean geometry to describe the warp into which economics has ventured, but I am unaware of which it is.

Consider this: you are one of those agents.

Think about that. You and your fellow 6.8 billion humans are the stuff of economic theorizing. Or at least the outcomes of what we do every day are. How many economic transactions do we all make a day? Fifty? One hundred? More? Apparently there is a giant hidden hand ensuring that all those transactions – 6.8 billion to the nth power – mesh seamlessly into one gigantic computation that ends up establishing the correct order we know as an equilibrium. Amazing. Death defying. Indifferent to time. Indifferent to uncertainty. Indifferent to any gritty nonsense at all. The miracle of the price mechanism ensures, with unnerving accuracy, that those equations so elegant bring us to the nirvana so longed for by us all. That is the happy place where none of us, not one of those 6.8 billion souls, can change a single thing without setting someone else back.

Wow. That’s quite some trick. I need to meet this price mechanism one day.

Because the one I come across on my daily walks around New York City seems to produce something a little different. Like homelessness. Like inequality. Like a whole lot of things that someone – one of our fellow agents – would like to change, and which probably wouldn’t wreck anything at all for anyone else anywhere.

Meanwhile I have a favor to ask: I am trying to do my best by this rational expectations thing. It’s very difficult. I am worrying endlessly nowadays about the enormous increases in taxes that are inevitable to pay off the needless and thoroughly useless stimulus. Since the stimulus was financed with debt, I am aware of the trajectory of future taxes and need to plan accordingly. I need, in order to maintain my status as a true denizen of orthodox theory’s world, to adjust my current spending. But I have run into some embarrassing issues. Like I have no idea of what those future tax rates might be. And like that fact that my spending bumps along the boundaries of sufficiency, so to reduce it seems likely to inflict quite a bit of near term pain. Then there’s the problem faced by my grandson. He, taking the long view, needs to know crop prices – he lives on a farm – in 2053. After all he is rational. His expectations need to be brought into line. I realize he’s a bit young, but he doesn’t want to tamper with elegance.

Anyway any help you can all provide will be most welcome. We would hate that it were our family to ruin the machinery of equilibrium.

My grandmother would probably look at orthodox economists as being part of the reviled “them”. In their zeal to defend markets from the presumed tampering of the central authorities they managed to provide ideological cover for those who are strong enough to tip the balance in their own favor. Orthodox theory is not neutral. It is biased. Even its axiomatic base is carefully established to ensure the proper outcome. I call it a GIPO system of thought in honor of Milton Friedman who notoriously fended off criticism of orthodoxy’s bizarre assumptions by arguing that those assumptions can be as crazy as all heck as long as the outcome of the theory that rests on them is “correct”. Where correct means that markets are good and governments are bad. Friedman was a libertarian and it was merely coincidence that his scientific enquiries ended up this way. It could have been the other way round. Honestly. By the way: GIPO stands for Garbage In, Perfection Out.

Orthodox economics is GIPO economics.

My grandmother would probably have a few choice words for Thomas Sargent too. He won the Nobel prize recently for his work on rational expectations. Which is why it’s a little odd that he would co-author, with William Silber, an op-ed piece in the Financial Times talking about the problems with the Federal Reserve Board’s attempt to be transparent in its rate setting policies. What’s to discuss? It doesn’t matter what the Fed does. In a rational world we all know, and have taken those policies into account. Indeed we all know exactly what’s going on inside Bernanke’s head. So why discuss? Why comment? Is he disavowing his own Nobel worthy work? Or is he just talking out of both … no surely not.

Oh. Wait. The entire comment was about monetary policy and the evils of quantitative easing, the hyperinflation it will inevitably unleash, and all the other detritus of orthodox theory. It’s that whole “democracy tampers with efficient capitalistic outcomes” thing.

That naughty government. It always manages to muck up sensible, scientific, economies.

I wonder whether my grandmother included the government as part of “them”.

No. Of course not. She quite liked democracy. More than capitalism any day.