Thinking Romney

The current furor over Romney’s activities whilst at Bain shows just how difficult it will be to get the economy back to solid growth. When all is said and done there are two very basic problems economic policy seeks to solve: making the economic pie larger so we are all better off, and then deciding how that pie ought to be divided among us.

Unfortunately modern economic theory largely – some would say totally – disregards the second of those two problems. A cursory read of any basic textbook will confirm that modern economics, in its mainstream or orthodox guise, is concerned only with making the pie larger. Hence the obsession with measures like GDP and so on. Who gets to share in that larger pie is left to politicians to haggle over. This division of duties is not historical, but is, rather, the outcome of the re-orientation of mainstream economics over the last seventy years or so.

As orthodox economics was being formed from the prior existing theories a key decision was to focus on what were thought to be objective issues and to leave the so-called subjective issues aside as being intractable to ‘scientific’ study. This led to economics becoming more and more simple, even though its techniques became more and more complex. The steady adoption of mathematical explication as the preferred form of expression in economic theory making, as opposed to, say, narrative, hid this simplification. The primary economic problem was reduced systematically to exclude any trace of subjectivity. This is hard to do in an inherently human subject, so intense effort was required to sanitize theory and remove anything remotely human. People became ‘agents’. They were stripped of whimsy, inconsistency, paradox, and any of their other more engaging and essentially human characteristics and were turned into automatons who followed strict and simple decision rules. By so doing they could be modeled and scrunched into the calculations that orthodox economists wanted to carry out.

The end result of this odd and inhuman project was that economics emerged re-cast as the study of allocation under constraint. It became a kind of applied math. Economic objects and artifacts that did not conform to the newly ‘scientific’ project’s rules were cast aside as being of no interest.

Now, applied math armed with the right assumptions can tell us that there exists out there, somewhere, an ideal world in which no person agent can make a fresh exchange without lowering the welfare of society as a whole. Such an ideal state is viewed as being ‘efficient’. Indeed its seen as being optimal. How could we not want to be optimal? The paraphernalia of economics hinges on this ideal state. More to the point it argues that policy needs to clear the decks and ensure we get as close to this ideal state as we can. Since the assumptions that underpin this allocative method have been carefully chosen, it will come as no surprise to you to learn that the theory tells us that market magic is the only way to arrive at the optimal. All other routes are doomed. They founder on the greed, ignorance, incompetence and other evils of government or other forms of central planning.

This is all very convenient.

Having set out to prove the efficacy of market magic, economists, by selecting only certain problems to solve and by being highly selective in their assumptions about human behavior, have managed to prove exactly that. Markets will, as long as there are no humans involved and as long as we hold our noses about those absurd and biased assumptions, beat all other allocative machinery in producing this magical optimum.

Whether that turns out to be a nice place to be is of no consequence to economics.

The obsession with the efficiency problem and the neglect of the distribution problem has major ramifications for society. Economics has a lot to explain.

One ramification is Romney.

He is typical of a whole generation – or two now – of highly educated and skilled purveyors of efficiency. Distribution is not a concern of his because the application of the efficiency techniques that are rooted in mainstream economics happens to have paid great dividends for him. Viewed from his vantage point the pursuit of efficiency has been great. He has, in his mind and as validated by mainstream economic theory, helped make the US economy more efficient. And by so doing he has earned a large fortune for himself. He sees that fortune as a just reward for all that efficiency building.

Another ramification is the single minded obsession on inflation by central banks everywhere. This is despite the fact that inflation has not been much of an issue for decades. The elimination or containment of inflation has come a huge cost. It has squashed the middle class. It has benefited creditors and rentiers. It has helped the financiers and hurt the manufacturers. It has hurt workers because wages have stagnated even though productivity has improved greatly.

It may sound odd to you, but there are a number of academic studies that suggest inflation – not hyperinflation – is not a problem at all. A few percentage points a year oils the wheels of the economy by making debt easier to repay, which is why manufacturers, who are typically borrowers, benefit at the cost of bankers during a period of inflation. It is no accident that the decades since the anti-inflation obsession took deep root have seen the burgeoning of bank profits and bank excesses. There is no evidence that the total absence of inflation is good for us, yet central bankers everywhere solemnly and doggedly pursue policies that harm workers and average families in order to prevent it rearing its ugly head.

I wonder why?

Well, that has to do with third ramification.

The taboo surrounding discussion of distribution. Or redistribution.

Market magic, as defined in the very restricted and applied math world of orthodox economics, is supposed to lift all boats. That it lifts some more – think Romney – more than others is not the concern of economists. And since the onset of the Reagan Illusion and its stranglehold on our elite’s attention span we have hewn close to the orthodox economist creed. We have pursued efficiency. We have produced and enabled lots of Romneys. Government is bad. Romneys are good. Since more efficiency gets us closer to that optimum, and since it sounds like a jolly good thing – who in their right mind wouldn’t want to be efficient? – discussions of distribution have become socially unacceptable. Worrying about who gets what muddies the efficiency waters. What matters is that there’s more. Groups like trade unions who argue about distribution are looked down upon. Groups who advocate growth, like bankers, are revered. Or they were. Okay, if not revered, at least looked upon as being doyens of capitalistic efficiency pursuit and allocative genius. Financiers helped move capital about our economy. They made the pie bigger. So what if they scarfed up all the goodies too? Think Romney.

There is a big problem with the pursuit of efficiency. I have hammered away at it before. It’s an idealist hiding to nothing. An optimal outcome cannot be defined in the face of endemic uncertainty. It just isn’t possible. So pursuing one is a fool’s game. Unless, of course, you can persuade the unsuspecting public otherwise. In which case you can present your arbitrary goal as being an optimum. You can argue that market magic will take care of everything. Meanwhile you can get on with making yourself and your buddies rich. Think Romney.

Oh. And those discussions about who gets what? They are class warfare. People who worry about the distribution of the goodies are inevitably just griping because they aren’t smart enough, or strong enough, to muscle in and get their own share. They worry about silly things. Like the sick, the elderly, the children, and other sources of social weakness.

We should ignore them. We should focus on efficiency. Sometimes that means we need to make tough decisions. Like fighting non-existent inflation demons and raising unemployment. Or like taking money away from the sick, the elderly, and the children in order to give it to the rich. Yes, these are tough things to do, which is why only serious people get to decide on policy. And, yes, it turns out that certain people will get rich while a lot of others suffer. But that suffering is a sure sign that our efficiency quotient is rising. No pain no gain. Let the rich gain by making us all more efficient. They deserve to be rich.

Don’t they?

Think Romney.