The Dark Genius of Price Theory — A Rant
Prologue
I need to cough this one out. So many apologies in advance.
Yes, it’s a rant. Yes, it’s repetitive. And yes, it’s absurdly long. But if we are to progress we need to puncture the armor of the cult — or is it simply a guild? The Financial Times seems to think it’s a guild within a guild. The FT ought to know: its pages are full of, even redolent of, current economic opinion. Or is it economic science?
Buckle up.
The point being that there is an enormous concentration of intelligence called economics. It is a giant cluster of highly educated opinion. What else is it? Politics by another name? Ideology? What, at the end of the day, do economists actually know? What do they agree on? Anything? Or are we destined to watch them argue and pick at one another interminably, absorbing resources, and getting nowhere. And, what the heck is this thing called ‘The Market’? What is it? Where is it? More to the point who is it? If we are ruled over by market forces, as economists suggest, then we ought know who the market is. For they are our rulers.
Economics began life as a study of society before it became a study of logic. This logic builds itself around this thing called ‘The Market’. Is it a real thing? Or is it simply an abstract device? And has the road into abstraction unmoored economists completely from their roots? Sometimes, judging by what they say, it has. They make fools of themselves. Yet they pretend to have in their possession a great treasure: the secrets of how we interact when we transact and the consequences of those interactions. They claim insight into the inevitability and the optimality of ‘The Market’.
Is it inevitable? Is it optimal? After two hundred or more years of intense, brilliant, and fervent intellectual effort what do we know? Where are we? Sometimes it appears that the more we know, the less we know.
It’s time to change all that. Economics has become less and less relevant even as it becomes more and more formal. Its window dressing is fabulously skillful. Its product is jaded and outdated. And its epicenter — its precious logic of choice — has little to do with what we all experience when we go shopping. Yet it is that core of which it is most proud and most sure.
It’s time to change all that …
Arnold Kling just said:
“Economic outcomes are determined by general forces, like supply and demand, as opposed to intentions — good or bad — of individuals.”
Say what? You read that right. Individual intentions don’t matter. Not one bit. It’s the certainty of opinion that catches the eye.
So what happened to those super-smart individuals who optimize, maximize, and generally populate planet economics? Quite a conundrum isn’t it? Somewhere along the way all that individual behavior gets neutralized and intentions become futile. What Kling seems to be saying, and I don’t think he’s an oddball, is that in order for the system to work the way economists claim it does, the individual behavior they build their theories on has to disappear. It mustn’t be too … well, individual.
They want to tell us that consumer behavior is built around maximization and all that rational stuff that they think of as psychology, and, at the same time, they want us to think of the collective system as one giant maximizing machine. It’s a sleight of hand. You are told to look away and ignore the problems they create for themselves. For the system to slide uninterruptedly and elegantly towards nirvana and the beautiful quiet and stillness of equilibrium there must be no pesky or aberrant expressions of individuality at the lower level. Conveniently for economists rational behavior appears to lack any such individuality. For what they mean by rational is actually a clockwork adherence to a set of rules established by economists to achieve the goal they have set.
That’s quite some psychology.
Oh dear.
Well now. We all know the saying: when all you have is a hammer …
When you are so convinced by the efficacy of that hammer you are liable to say odd things. You might even, in today’s febrile atmosphere, be called a bit weird. Economists, especially those of the so-called mainstream approach, are such folk. They say the oddest things and then wonder why outsiders ignore them. In their heads they are so utterly correct and so perfectly logical. To the rest of us they’re just plain weird.
Hah! They say. We’ll show you! No one, anywhere, and at any time can defy the great economic forces in the sky. You silly outsiders just don’t understand: the economy is a machine that moves inexorably towards its inevitable optimal end point.
But how can we mere mortals possibly understand? We are just pawns in the hands of the economic gods.
Part One: How it Began
It all began thus:
“The economist studies the disposal of scarce means”
That comes a little before the much more famous:
“Economics is the science which studies human behavior as a relationship between ends and scares means which have alternative uses.”
I imagine that quote from Robbins’ “An Essay of the Nature and Significance of Economic Science” must be hanging above the threshold into every major university department of economics.
It is a fierce and bold statement.
Written in 1932, it is an explicit rejection of economics as it was. Robbins wrote during an era of great disruption and heated debate. The economy was a mess. Capitalism was in disrepute. Economists were in disarray looking for answers. Some were even suggesting heretically that the government might play a positive role. Such suggestions sent shivers down the spines of those steeped in the liberal tradition. Was this socialism creeping in?
Robbins led the counter attack. He never wrote much, but played a central role in mustering the discipline’s right flank. Hence his statement. He wanted to re-define economics safely away from the encroachment of the soft-hearted. It had to be, it must be, it absolutely needed to be … a science. After all, sciences are immune to moral second guessing. Aren’t they?
Thus inspired economics transformed itself from what was previously known as political economy towards its current very narrow and technical form. The move was explicit in its ideological intent as well as in its scientific aspiration. The advocacy of something economists call ‘the market’ became central. With that market defined as a series of logical processes protected from the sullying effects of anything beyond it — like society at large or naughty democratically inclined politicians. It was a turn towards logic and away from narrative.
The odd thing, we can say in retrospect, is that as economics struggled to become more scientific in the way Robbins intended, it began a regression into the 1800s. To flourish on a rebuilt scientific basis it needed a recognizable foundation. It had a choice: join the emerging trends in the physical sciences replete as they were with new questions and exciting ideas built around relativity, genetics, evolution, and so on. Or go backwards to an era before all that had gained prominence.
It went backwards to Walras and general equilibrium rather than forward. It chose methods of closure rather than of openness. It developed its current limited vision. Consequently, it sees complex problems everywhere yet cannot engage them without a farcical over-simplification that often just assumes the problem away. Its inability to predict is legendary, and has even, amongst some, become a badge of honor. Economists do not need to predict they say, they just know, after all don’t you all realize that economics is just a framework for looking at the world?
Well, no, we don’t know that. A mere framework? That sounds a bit limited. Surely economics is something more than an odd mix of accounting and some really weird version of behavioral studies? We thought it was scientific. Didn’t Robbins say so?
Yes, Robbins put a stake in the ground, everything that has happened since has been tethered to that stake.
Nowadays, everything under the scrutiny of the discipline is seen through a lens so finely tuned that it cannot see whole swathes of economic activity. It has become blind in order to see the effects of prices everywhere.
What began as an effort to establish economics as a more scientific discipline able to reveal and engage with the deep social arrangements and re-arrangements subsequent to industrialization, has become the proverbial hammer. Everything it seeks to discuss has become a nail. The relevancy of economics has shrunk accordingly — just ask Steve Levitt who has retired disillusioned about its relevance.
Despite the best efforts of many who continue to opine on the great issues ever present in any modern economy, the heart of the discipline is shrunken. It is logic. It is applied mathematics. It is costs and benefits. It is statistics. It is accounting of sorts. It is not able any longer to tell stories about how and why our economies are what they are. It cannot adequately tackle two central problems that vex anyone interested in the arc of modern economic history: growth and distribution — some of its recent luminaries even argue that questions of distribution are trivialities best left to lesser disciplines. What was known as macroeconomics is a shell of itself. It has made scant progress in decades despite consuming massive amounts of intellectual firepower. Trapped as it is within its method, it lacks the tools and the imagination to modernize. It has, indeed, condemned itself to irrelevancy.
Economists have to hope that outsiders are unaware of this malaise. They have to hope that no one outside realizes the bankruptcy of representative households, or the transition of total factor productivity from being measure of ignorance into a measure of … well, ignorance. In this latter case it is fascinating to see how the discipline has re-cast a measure of its ignorance into a quantity of something or other tossed about in conversation as if they knew what it is.
There is a problem though. Within the citadels of business and finance, both riven through with mindless repetition of extracts from mainstream economic theory, the natives are restless. Just this morning Martin Wolf in a Financial Times article discussing the need for growth admitted, in the context of a list of possible policies, that “unfortunately, the effectiveness of such policies is uncertain. Economists do no know which key to turn to deliver growth.” Ouch. Decades of intense study and a plethora of Nobel Prizes and there’s confusion over which key to turn?
Is it because one of the biggest consequences of the great narrowing effect post-Robbins is that economics has become just one social tool amongst many. Useful at times. Inadequate at others. Its relevancy diminished by its central core’s inability to predict — despite its glittering claims to scientific knowledge.
The effort to make economics scientific began long before Robbins. We all know that. We also know that the adventure was inspired by the great successes of the so-called hard sciences back in the late 1800s. So it is trite to say that economics wanted to establish itself as the social equivalent of physics. We all know that also. The imprint of that intent is all over the discipline. It has produced knowledge that appears deep — the great force of the interplay of costs and prices underlies the long haul of economic activity. Prices exert a gravitational like pull over absolutely everything.
So we are told.
But physics sits within a collective of sciences. Each with a different purpose and domain. No one would deny the action we know as gravity. But as an explanation for why the forest grows where it does behind my back garden, and why the leaves are beginning to turn color, or why there is a mountain dominating my view, gravity fades into the background. It lurks as a foundational force. It is not, however, where I go to learn about gardening. The more immediate, the more urgent, the more relevant knowledge sits, not within fundamental physics, but within biology, botany, and even geology. And every one of those is touched wholly or in part by evolution and its related complexities.
So it is with a modern economy. Perhaps prices lurk as an inevitable force. But they are underneath layers of other activities. And it those other activities that produce the richness, variety, and change that we observe most keenly when we study or experience real economies. To imagine that absolutely every economic action is dictated by the gravity of prices is to ignore all those other more immediate influences.
Economics alone cannot explain such richness, variety, or change. Not, at least, in its most developed so-called scientific guise. For that we need to refer to other social studies, and economics has to cede center stage. We need collective or collaborative explanations. Economics can longer aspire to be fully explanatory even within its own domain. To study real modern economies we need to be more than economists.
Part Two: Who Needs Agency?
The problem begins because regular people want to feel some agency in the world around them, but economists, in order to develop price theory, want to reduce them to automatons. You do realize, an economist might say, that you are entirely dominated by ‘the market’. You are a slave to the price mechanism. Market forces determine everything and foreclose escape. You are powerless to fight against those forces.
Powerless.
In a recent interview in the Financial Times, Eugene Fama wants us to believe that all economics is behavioral. That is, I suspect, because the more modern behavioralists have trampled on his pristine rational world. So he says that the point of departure between the two sorts of behavioral economics is whether you believe behavior is rational or not. Sure. His sort of behavior is so rational that it has become almost quaintly deterministic — given the conditions economists like Fama say you face, you always and thus predictably do certain things. You don’t waver. You don’t balk. You don’t err. You don’t blink, but move instantly towards the goal Fama and his ilk have set. Their goal. Not yours. Fama is not studying behavior, he is studying logic.
Price theorists thus have a paradoxical view of life. In order to claim they have insight into the deepest behavior of consumers — in their world everything is just demand of one sort or another — they have to give those consumers an ability to act based on the choices before them. They have to set their agents free. Their consumers are thus agents acting independently. The problem is that real consumers are prone to be idiosyncratic, and there’s a lot of them, so the mix of emotions, preferences, and potential contradictions is massive. So, in order that the logic of ‘the market’ produces the ideologically predetermined answer to the questions presented to it, those same consumers must only make decisions of a certain kind and in a certain way. They must have no choice. Their ‘freedom’ is immediately constrained. It is taken away from them. Otherwise the math gets too cumbersome and stops working.
Hayek, in one of his more lucid moments, called this ‘choice without choice’.
You, the consumer, are monarch and slave all at once. Economists elevate you to exalted heights by giving you ultimate control over the economy, and then they trap you in a web of logic from which there is no escape.
The paradox is complete.
The paradox is also inevitable. Economists want to construct an idealized world of equilibrium, efficiency, and optimization, and if you free the multitude of slaves, each with an individual goal, that ideal comes crashing down so that nothing is as smoothly predictable and amazingly logical as the economists wish it to be. So any messy individual behavior has to be cleaned up.
Hence the automatons. Hence ‘choice with no choice.’
Don’t forget the objective: which is to elicit the laws of socio-economic gravity. It is not to describe the complex and often contradictory activity nearer the surface. Economists sweep such activity to one side as being of no interest. I would suggest, though, that it is exactly such more superficial activity that we experience as an economy. My garden is undoubtedly affected by gravity, but I study horticulture not physics to explain it and to grow the plants I enjoy seeing. In contrast, economists are forced to keep reminding us of their version of gravity as if it nothing else matters.
Perhaps those newer behavioralists outflanking Fama might have a point to make here. Fama does look a bit out of date. He calls his world a ‘hypothesis’ in order to inoculate it from criticism that it is simply weird. It is, apparently, only a stylized world that we can study to draw inferences that may, but mostly may not, have value in the real world. What is does not do is explain what actually goes on. Which is something emergent from a host of forces, some deep, some shallow, and all interconnected in ways difficult to parse cleanly.
It gets worse: from within their idealization economists seem to bask in the utter powerlessness of their fellow citizens. They revel in the pointlessness of a struggle against the forces of ‘the market’ whose logic crushes any aspiration for difference and which moves relentlessly towards the stillness and calm of equilibrium.
John Holland once said that something in equilibrium must be dead. If so, economists desperately want to kill the economy in order to extract their insights. So they pretend to hold still something that is in constant flux. They destroy the essence of the economy in order to study it. In an act of social vivisection they pretend that what they reveal is the beating heart of an economy, whereas what they see has no pulse. So they remain ignorant of its life. It is this pretense that makes economics increasingly irrelevant.
And it is why economists frequently resort to what Daniel Dennett referred to as ‘sky-hooks’ for a way of escaping from the trap they set themselves. The most common being something called a ‘shock’. Pretty much everything, from the weather to a disease can deliver such a shock. Anything that disturbs the inevitability of equilibrium is swept into the rubric of shock. More importantly, such shocks are set outside the economic system — they are made ‘exogenous’ — which is assumed to remain logically pristine. These shocks hang out in intellectual mid-air and are carefully severed from the inner workings of ‘the market’. This way they can both act as disturbances and explanations for the constant failure of economics to conform with lived experience.
So common are shocks that they are no longer shocking. We might even go as far as to say that such shocks are the norm. They are reality unfolding. What is truly shocking is the persistence of economists in pretending that their logical constructs represent anything vaguely normal.
Meanwhile …
Relentless. Logic. Force. These are the words of standard economics.
The entire corpus of such mainstream economic doctrine is cluttered with the symbols of power. But that power is not of that of regular humans. It is the power of ‘the market’ — impersonal and imperious — which shatters all before it. And, because it is said to be a force of nature, power is eliminated from economic discussion. There are no human sources of power within economics. Just the big power in the sky — prices. Which act …
Relentlessly. Logically. Forcefully.
Part Three: Apolitical Politics
Economics is a modern guild. It is a restriction on the trade of ideas. The irony and explicit hypocrisy is stunning. More on that later.
From within the confines of the guild it is comfortable and sensible to make the kind of statement that Kling just did — there is no imprint of individual intent in the shape of the economy. By this telling an economy is the ultimate commune. No individuality. No personality. No expression of intent. Just the great grey pall of forces beyond human touch. The market is the puppeteer. You are the puppet.
There is no garden. No forest. No mountain. Just the socio-economic gravity of prices.
Price theory is a glittering jewel in the crown of economics. It was conceived to eliminate precisely what Kling suggests above: variety or personality. Conveniently it also acts as an antidote to more leftist notions of the source of prices: it was designed to stamp down any idea that the people inhabiting an economy can influence it in any important way. Not individually at least. Communally, though, their various activities magically sum up to an oppressive and unavoidably impersonal dictatorship. The impersonal system of this dictatorship, though, has no element of social intent within it. All the qualities of the system simply emerge, and they are wondrous by definition for so doing, but they are in no way the outcome of the sort socially determined cooperation that might be associated with, for instance, democratically elected governments.
After all, impersonality is crucial to keeping the workforce quiescent — who can argue with ‘laws’? Only those ignorant of price theory. And ignorance is forbidden. It is prohibited within the logic so as to allow it to run its course smoothly towards the desired goal: the proof that ‘the market’ is the superior provider of all that is good in the world.
Relentlessly. Logically. Forcefully. Whether people know it or not, they are reduced to impersonal tokens to be moved about the economic board by powers that overwhelm individuality and move us inevitably to that death of stasis. Beyond which only the folly of inefficiency exists.
So Kling can say without embarrassment later in the same article quoted above that “the grocery store owner does not control the price of eggs. That price is determined by supply and demand”. And he can say “Corporate executives do not ‘move jobs overseas’. Economic activity shifts between domestic and foreign production because of complex, impersonal forces, one of which is capital movements.”
Yes he can say that, and it makes perfect sense within the logic of economics. He is applauded for his rigor and understanding of the utter powerlessness of humankind. He revels in it. His implicit message, though, is ideological: human resistance organized through collectives such as the state are futile. Only the collective of ‘the market’ is tolerated in economics. All other collectives are a weight on the freedom of the system to settle on an optimal solution. Liberty and ‘the market’ are thus conflated. We are free when we act within the constraints of ‘the market’. We are not free elsewhere. But it is, it has to be, a narrow freedom.
This paradox of having consumers as both rulers and pawns within an economy is an inevitable consequence of the necessity to ‘prove’ the ideological point about the efficacy of liberty expressed through a market.
After all, the roots of the discipline lie deep in the arguments centuries ago over claims of the merchant class who wanted to be free to trade — free, that is, from the arbitrary impress of authoritarian religious and monarchical interference. They wanted a seat amongst society’s elite. They wanted power. What better way to give them power than to theorize that it stems from nature and cannot be resisted? Then the consequences, both the good and the ugly, are simply to be endured. It is a power without responsibility or accountability. It is the best sort of power — it is abstract in its source even if it is intensely concrete in its experience.
The invention of the abstraction known as ‘the market’, extracted and elevated from the realities of the physical markets of that era, was a device essential to this ideological battle. And the purported inevitability of its superiority was a device to foreclose on discussions of the power deriving from commerce. The results of ‘the market’ were forces of nature, not of humankind. The message was clear from the outset: no one cannot resist ‘the market’.
In those early struggles to establish the freedom of trade, other possible freedoms were ignored. The idea of liberty was co-opted to defend rights of property ownership without also being extended much beyond. The idea of equality has struggled ever since to catch up with liberty. Not just equality of opportunity or equality of outcome as economists often suggest, but equality of liberty. That is something very different.
Economics is a central battleground in the war to re-attach equality with liberty and re-assert what Balibar calls ‘equaliberty’. The logic of price theory is a key example of the ongoing dichotomy — its logic sits atop a liberty to trade in ‘the market’ which is never required to deliver equality or any other freedom. Questions of power are disallowed and it is excluded summarily from the logic of ‘the market’ as being an impurity. Consequently, distribution is not worthy of discussion by serious economists, just by charlatans and amateurs.
Economists, as they narrowed their focus onto the logic of ‘the market’ simultaneously and willingly narrowed the definition of liberty. They co-opted it in defiance of history and the swelling of alternative definitions to include rather than exclude. The precision needed to preserve ‘the market’ cannot include alternative forms of liberty. Just as there can be no real individuality, there can be no variety of liberties. Only one. The one that fits the logic of choice.
So what some economists call ‘liberalism’ is thus the consequence of a truncated journey. Once enough liberty had been carved out for commerce, and once that seat amongst the elite had been secured, the journey was summarily ended. Other additions to the suite of liberties were to be forbidden.
After all, such things might intrude upon ‘efficiency’ which is, we are all told, the ultimate objective of an economy. Efficiency. A concept borrowed from physics. The delivery of efficiency requires the construction of logic that bends behavior along pre-determined paths. Hence the need to foreclose on alternatives. You may be given choice in their theories, but economists thereafter limit that choice to the one that serves their goal.
Thus the paradox of Hayek’s ‘choice without choice’.
Economists set this trap because they were searching for an explanation of a greater mystery that vexed them: the locus of the ‘invisible hand’ driven by the background ideology of free trade. What began as a metaphorical device mentioned once or twice by Adam Smith was elevated into a construct of grand and central status after its scientific re-invention as Walrasian inspired general equilibrium.
This intellectual device sanitizes the trap. It is intended to prove both the inevitability and efficacy of economic activity flowing through ‘the market’.
Within which you are both monarch and slave. You have choice without choice. Your freedom is a freedom only to execute the laws. Those laws are specifically designed to move the system towards its static end point. Nothing else.
The good example of this paradox of choice embedded in the logic of economics is, perhaps, that of the corporate executives mentioned by Kling. He says that the movement of jobs to China and from the US is an inevitable consequence of differential savings rates. There is no agency involved in the decision to outsource jobs. It’s those savings rates. The great forces in the sky that determine everything.
Executives may differ.
In reality, they do not wake up one morning and observe differential savings rates. Executives are not simply transactors. They are strategic, but strategy does not exist in economics because its very core suggests deviation from the established logic. It suggests the possibility of variety on the road to the future. It even suggests the potential of multiple equilibria. No, jobs do not suddenly appear in China and disappear in Ohio. Executives aren’t passive ciphers for the power of the market. They determine movements. They execute. That’s why we call them executives. They have agency. They could have made a different decision, but they did not. The jobs were moved abroad. By people making executive decisions.
But from an economist’s perspective, there was no ‘decision’. Those executives were simply caving in to the relentless, logical force of supply and demand. They were simple automatons like the rest of us. Yes, the executives appear to have made an executive decision, but in the truth of ‘the market’ their action both contributed to and was driven by the ineffable laws of economics. The executives may have felt agency. They may have felt they had a choice, but they were simply detritus in the tide of logic: they had no choice. They had no option. No opinion. No agency. No nothing.
I wonder, then why we pay them so much?
There is a congruence however that is worth noting: executives making politically difficult or potentially anti-social decisions are only too happy to be seen as simply bending to the press of ‘reality’ — economic reality. It relieves them of responsibility for social disruption. ‘The market’ is a handy demon to blame. After all economists — who ought to know — claim we cannot defy ‘the market’. And this, despite all the executive’s daily efforts to undermine ‘the market’ by constructing various advantages and anticompetitive ‘moats’ — to borrow Warren Buffett’s happy phrasing.
As the physicist David Bohm articulated it: reality is in a constant state of becoming. Those deep forces guiding it remain hidden beneath the turmoil of surface change. So it is with the economy: executives and all the others that comprise the collective activity of an economy are actively fighting against the deep forces to create niches, however temporary, that are havens of individuality and gain. History, as the saying goes, is just one damned thing after another. Looking for its logic is an illusion that has absorbed the attention of utopian thinkers for a while now. Our Marxist and libertarian economist friends both suffer from such an illusion. Maybe they know something. Meanwhile life goes on. Agency matters.
And that returns us to politics. In its desire to appear apolitical economics has been forced to adopt a certain sort of politics. It hides this, though, behind a veil of science, and behind a veil of attempted neutrality. It presents its logic as inevitable and as overpowering. Which, within it own secure walls it is.
Part Four: Price-Gouging Pantomime
The paradox, though, often leads economics into occasional pantomime. Such as in its recent applause for price gouging, or rather ‘dynamic pricing’ which is the idea that it is just fine to ratchet up a price in the face of a sudden spike in demand — like during lunch hour. That’s not predictable is it? Lunch hour? Who knew there were lunch hours? Wendy’s was lambasted for the nerve in its suggestion that it might adopt dynamic pricing to match supply and demand during lunch hour. I wonder whether it was proposing adding supply? Was it proposing paying its staff more? Can you imagine the advertising challenge? Which price would it plaster all over its adverts? Nonetheless price gouging is a great idea. Apparently. The reality, far from the academic chalkboard, is that Wendy’s had seen a possibility to earn extra profit. It was transparent. Everyone saw it for what it is. Except economists.
The pantomime is likewise in the guild’s applause for the ever more refinement of the employment contract with the recent adoption of zero-hours contracts. How better to match labor supply and the demand for work than to reduce everything to hour-by-hour decision-making? Minute-by-minute? Eking out efficiency is, after all, our ultimate objective. Reducing everyone and everything to an object to be moved towards ‘efficient allocation’ is perfectly ethical within the rubric of the guild. Who cares what disruption the search for efficiency might render to our lifestyles? It is efficiency that matters.
So economists praise price gouging — it eliminates their version of scarcity, any consequent unpredictable lifestyles are merely a minor hindrance. Any hint of unfairness is set aside as folly — the search for efficiency is too great a cause to muddle it up with soft-hearted notions of fairness. After all, who can qualify fairness? How would fairness sit alongside all those rigorously defined and hyper-sharp quantities such as labor or capital? And we all know the fairness is never revealed the way preferences always are. We will all have to adapt to the motions of ‘the market’ machinery. Life will imitate science: we all become automatons so that economic logic can rule over us.
And yet despite the pantomime economists want their guild to be taken seriously. Even though they strenuously avoid the ramifications of the market in their own lifestyles. Do I really need to mention the counter-market existence of tenure?
They live in a closed shop recently berated in a Financial Times editorial. They are a guild jealous of its status and power. Contemptuous of competition. Self-defined. Self aggrandizing. Self-policing. Self-perpetuating. And certainly not self-aware. From within its innermost bastions it can declare that executives cannot execute. Or that traders cannot set prices. Or that consumers rule despite being slaves to ‘the market’.
It all makes so much sense. Logically.
Reduction. Impersonal. Efficient. Optimal.
Beyond which is the great void of equilibrium. Where nothing moves. Where nothing changes. Where nothing dare undo the perfection so desired of economists. Where nothing lives.
Because when you’ve arrived in price theory nirvana why would you ever move? That would be irrational. And economists tell us we are all rational.
Of course we are.
Which is why Kling can press on. He is a price theory guy for a reason. So he says:
If you can appreciate the impersonal forces that affect international trade, your are an economic expert. Otherwise, if you fall back on ‘American executives who send jobs overseas’, then you are a dangerous demagogue. This is true if — especially if — you are lauded in the press as a thought leader with new ideas.
A very large component of America’s savings weakness is the deficit spending of our Federal government. We pay for some of our Federal spending by sending securities overseas. The foreign buyers of these securities value the dollar, increasing our trade deficit. The next time you hear a Congressman blaming individuals for sending jobs overseas, tell that Congressman to look in the mirror.”
There you go. You are ‘an economic expert’ if you can handle the paradox of being both monarch and slave at the same time. If you accept that you have no agency, No individuality. No responsibility. No nothing, and that there are just great forces in the sky moving us all about despite what we might prefer.
That’s why we all love the guild so much. Impeccable logic.
Relentless. Logical. Powerful. Nonsense.
At times.
Part Five: The Path Not Taken
The more astute economists, those who have been objecting most mightily to what I have written so far, are aware of their dilemma. They are aware of the contradictions they have to try overcome in order to maintain coherence. They are aware of the paradox.
Brian Albrecht is one such — he is the author of an article declaring ‘the is only demand and no supply’. His logic is impeccable. I applaud it whilst I lampoon it.
He begins a recent article thus:
“Picture a city’s skyline. Did any single person decide its shape? Of course not. It emerged from countless individual decisions, constrained by geography, economics, and regulation. Yet, when we look at economic outcomes, we often fall into the trap of assuming there must be a master plan or some sinister (or benevolent) motives behind what happens.”
This he says is an animistic fallacy or the idea that something that appears as order must have been organized that way. Any evolutionary biologist’s eyes must be lighting up at this point. Is economics about to catch up?
Not really.
Because economists cannot free themselves from the need to ‘prove’ the efficacy of ‘the market’. Albrecht is typical. He goes on with a straight face. Having declared that it is a fallacy to argue that the appearance of order is a consequence of a single mastermind, he gives us the usual alternative explanation: that order is the consequence of the logic of ‘the market’. So the human mastermind is replaced by the abstract mastermind. And order is preserved. He hints at the existence of emergence which is the defining quality of a complex system, and then retreats. He avoids questioning whether there is, in fact, anything orderly about that city skyline. He simply asserts that it is orderly, and argues from there.
But is it?
On the surface this is reminiscent of the road taken by biology. The replacement of deliberate design in nature with the process of evolution over time is a compelling comparison. The inevitability of evolution and the inevitability of ‘the market’ appear, on the surface, to be similar or equivalent explanations for observed phenomena. Except evolution does not produce anything we call an optimum. It just is. No one can make serious claims about the superiority of evolution over some alternative ‘centrally planned’ form of design. It just is. There is no order in what we observe in nature. There is complexity. There is a mass of interconnection and interdependence. But there is no order. It just is. It is constantly becoming something else.
There is no optimum. No maximum. No efficiency. No closed system. And no way of arguing that one order is better than another. It is stripped of ideology. .
In contrast, economists do make claims about the systemic processes of ‘the market’. They do give it qualitative superiority. The market that they theorize about is, in their telling, exactly what evolution is not: it is a single path to an optimal outcome.
Moreover, in order to prove his point Albrecht gets into the weeds of all those logical necessities we mentioned before. He has to reduce his fellow citizens to a robotically monotonous rule-driven behavior that defies any description as human.
He even gives us the standard reference to Hayek, who in one of his other lucid moments described the emergence of prices from dispersed knowledge. This insight earned Hayek his presence as a one of the founders of complexity science. Economists, however, failed to follow up.
Why?
Because … ideology.
Hayek, as we all well know, was an adamant opponent of democracy. He also spent a great deal of time articulating ideas designed to denigrate and disprove the efficacy of central planning. His various essays of the use of knowledge in society are a case in point. They are persuasive. But they are not final.
Having established the computational impossibility of acquiring and using all the knowledge laying around in the various corners of an economy. And having argued that the prices that emerge from those corners represent best available set of prices, Hayek walks away. He leaves the field. Prices are, he implies, an emergent property of the complexity of society. Hayek, with his realization of the complexity facing him, started to criticize equilibrium theory as having little power. He began to look towards a more integrated investigation of social phenomena including political theory and forays into the philosophy of mind. His views on economics, in other words, expanded whilst those of many of those following him narrowed.
What Hayek implicitly recognized, and what economists subsequently have failed to emphasize, is that those very same computational and aggregation problems that bedevil central planning foreclose us from making any definitive statement about the optimality of prices. They are simply they are what we have. There may be other sets of prices that are better. We just don’t know. So we have no idea whether there is single equilibrium. Or optimum. Or any maximum. Or whether anything is efficient. And we have no credible defense of the efficacy of ‘the market’ from within economics.
It just is what it is.
Put another way: the set of prices that emerges appear to be consistent with an apparent order within the economy, but is there another, better, order? Is there another set of prices consistent with that same order? And is the order real or a mirage? Do we imagine it? These and a host of other questions remain.
But … ideology.
It was sufficient, in the context of the time and the contemporary necessity of defending capitalism from criticisms from its arch-enemy, that Hayek’s point about decentralization versus centralization be left as the end of discussion. The point was made: central planning was less efficient — if not impossible.
That the discovery was about computation rather than efficiency was left alone.
The argument needed being made more concrete however. Especially during the Cold War. So economists picked up where Hayek left off and erected an entire logical system to prove not simply the computational difficulties of central planning, but its failure to deliver efficiency also. Our individuals are rational optimizers. Add them up and our system must be too. Simplicity itself. Macro from micro with nothing in between. The system that emerged was precisely that Hayek criticizes as having ‘choice with no choice’. Notice how quickly the rationalization and optimization of the individual becomes likewise for the system. There is no wiggle room here. It has an authoritarian tone to it. But it’s an acceptable authority. It is ‘the market’ not the hated state.
Albrecht is clear in his defense of the systemic viewpoint.
Having dismissed the animistic ‘mastermind’ notion as an error he gives us a spirited and clear explanation of what he calls the system view.
It is possible to envisage a system comprised of various bits and pieces, especially hand-picked institutions, that result in exactly the optimality we are searching for. We can claim that the idea that allowing humans to be human and express themselves in any way they want, does not conflict with the emergence of a systemic order replete with the attributes that rebut those pesky central planners.
In Albrecht’s words:
“There’s a tension in this, between the economic focus on individual decision-making and our understanding of systemic outcomes. On one hand, much of modern economics is built on the foundation of methodological individualism – the idea that economic phenomena should be explained by the actions and motivations of individual agents. We construct models where consumers maximize utility, firms maximize profits, and we derive market outcomes from these individual choices. The push for micro-foundations in macroeconomics stems from this desire to ground our understanding of aggregate phenomena in individual choices.”
That’s our paradox.
Notice two things however: first, the agents inhabiting our micro space are given specific objectives. They maximize. Their choices are pre-ordained. They have ‘choice without choice’. Second, apparently economists desire to understand aggregate phenomena as a consequence of individual choices. As if simple aggregation will do just that.
How did this happen?
The clue lies in Robert Lucas’ Nobel address. Discussing the long history of thinkers such as Hayek and Keynes theorizing about the way in which economies adjust — he actually also even refers to David Hume — he says:
“Yet all of these theorists want to think in general equilibrium terms, … They resort to disequilibrium dynamics only because the analytical equipment available to them offers no alternative … The intelligence of these attempts to deal theoretically with the real effects of changes in money is still impressive to the modern reader but only serves to underscore the futility of attempting to talk through hard dynamic problems without any of the equipment of modern mathematical economics.”
What Lucas is saying is that our paradox is an illusion created by the lack of proper math. Once that math is put in place, the intractable complexity that Hayek saw and which drove him towards being dismissive of the value of equilibrium, disappears. We can, indeed, aggregate individual outcomes and produce something of value to say. Ideological purity is persevered.
Lucas, though, fails to understand an economy as a complex system. It’s as if people like Herbert Simon and Hayek never existed. He prefers, instead, to see it as a mechanism in the tradition of Walras. It was ultimately Lucas and his ilk who took the discipline backwards and limited its field. ‘Choice without choice’ became more than acceptable, it became necessary.
And so, our fleeting flirtation with complexity begun by Hayek and his essays on knowledge in society ends abruptly with the abandonment of emergence as the basic reality of economic systems. However complex these systems are they are going to be reduced and sampled in order to maintain the virtues of ‘the market’. What became known as ‘micro-foundations’ is an explicit rejection of the possibility of the presence of phenomena appearing above the individual level. It is an ideological and intellectual choice that forecloses on acknowledging complexity.
Ideology trumped science.
Albrecht, to give him his due, is clearly aware of the disconnect. He prefers to call it a tension. The problem is that it is more than mere tension. Emergence is not the same thing as aggregation. There is no easily defined logical trail through a complex system that ties the individual and the aggregate. There are too many interactions. Too many moving parts. Too many combinations along that way. It is Hayek’s computational problem writ large.
Conclusion
And, so we end where we began.
If you only have a hammer …
Driven by the ideological need to defend the commercial class’ desire to acquire status amongst the elite in society, economics began its journey as a general social enquiry. This occurred at a moment when liberty was being redefined for a modern era. For economists the concept of liberty was foreshortened and frozen in place sometime in the late 1800s. It was heavily dependent on the ability to truck and barter property. The later great social upheavals of industrialization led to a re-appraisal of freedom that was never fully brought onboard in economics. Especially after economics was co-opted to the defense of the commercial class in the 1930s. To buttress its defense against alternative narratives it was re-invented by the likes of Robbins as a narrow field shorn of the broad ramifications of those upheavals. The idea being that something indisputably scientific is beyond attack by lesser, unscientific, alternatives. Indeed, Robbins poured scorn on economists who persisted with the ‘unscientific’ endeavor of maintaining a connection with the political and/or social outcomes of market forces.
Robbins was insistent that economics become a truly scientific discipline. To achieve that it had to step away from moral questions. He wanted to go deep and unearth the social equivalent of gravity.
Along the way Cold War politics intruded and ideology added an urgency to the science.
The end result, perhaps, is an understanding of that social gravity.
But.
None of us will deny that physics possesses great knowledge. It can give us grand explanations for fundamental phenomena.
But when I want to explain why my garden is what it is. Or why that mountain is where it is. Or why the ten varieties of butterfly in my garden have the lifestyles they have. I do not refer to physics. I refer to more relevant sciences. I refer to sciences with more approximate explanations of what I see and experience around me. I prefer those that incorporate and accept the complexity of reality. All life is, after all, complex, not simple.
So it is with economics.
By becoming, in its own eyes, the physics of social studies, it has made itself less relevant. Its explanations are at odds with lived reality. It fails to acknowledge human agency even while acclaiming the existence of individual choice. It is at odds with the richness of every day life. Its claims to counter-intuitive insights are simply a recognition of its own nearsighted inability to face reality. It is clever. It is brilliant. It is deep. And in its current form is best used for statistical analysis, manipulations of large scale data sets, and various other quasi mathematical activities. It is logic drawn out to an extreme. It is a caricature of itself.
It is economics. It is not about actual economies — that would be a different topic entirely.
And those jobs were moved abroad by executives working in actual firms. Executives. Firms. What are they? Don’t ask an economist.
If you only have a hammer … you need help. Or, at least, some new tools.
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Addendum:
By ignoring distribution economists have waded into politics. By endorsing the unimpeded outcome of market activity as ‘optimal’ [by definition] they are taking a dramatically anti-democratic stance. And so, concerning distribution and the blindness to it of economics …
Alexis de Tocqueville wrote:
“Among the novel objects that attracted my attention during my stay in the United States, nothing struck me more forcibly than the general equality of conditions. I readily discovered the prodigious influence which this primary fact exercises on the whole course of society, by giving certain direction to public opinion, and certain tenor to the laws: by imparting new maxims to the governing powers, and peculiar habits to the governed.
I speedily perceived that influence of this fact extends far beyond the political character and the laws of the country, and that it has no less empire over civil society than over Government …
The more I advanced in the study of American society, the more I perceived that the equality of conditions is the fundamental fact from which all others seem to be derived, and the central point at which all my observations constantly terminated”
Later on, Madison [hardly a fool] wrote five proposals to combat excessive political factionalism:
- Establishing political equality among all
- Withholding unnecessary opportunities from a few, to increase the inequality of property by an immoderate, and especially unmerited, accumulation of riches
- The silent operation of the laws, which, without violating the rights of property, reduce extreme wealth towards a state of mediocrity, and raise extreme indigence toward a state of comfort.
- Abstaining from measures which operate differently on different interests, and particularly favor one interest, at the expense of another.
- Making one party a check on the other, so far as the existence of parties cannot be prevented, nor their views accommodated.”
Gary Stevenson wrote [in his recent book; “The Trading Game: A Confession”]:
“As ordinary families and governments got poorer, and the rich got richer, that would increase flows interest, rent, and profit from the middle class to the rich, compounding the problem. The problem would not solve itself. In fact, it would accelerate, it would get worse. The reason economists didn’t realize this is because almost no economists look into their models at how wealth is distributed. They spend ten years memorizing ‘representative agent’ models — models that view the whole economy as one single ‘average’ or ‘representative’ person. As a result, for them, the economy is only ever about averages, about aggregates. They ignore the distribution. For them, it’s nothing but an afterthought. Moralist-window dressing.”
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The glaring, and frankly insulting, deliberate ignoring of distribution by mainstream economists can only be made sense of within a context of ideology. They, as I have said repeatedly, need to prove the efficacy of ‘the market’. They need to do this for purely political reasons: to bolster post-war American (and Western generally) ideology. They need to build the case against the state being a positive influence on economic outcomes to inoculate against the encroachment of ‘socialism’ of any form. The edifice they created is somewhat cheekily called ‘Cold War Economics’ by Brando Milanovic. It reeks of politics whilst claiming to be completely free of it.
Secondarily, but no less important, Lucas and his ilk are descendants of the intellectual tree planted by, sponsored by, and wholly owned by the wealthy donors, both individual and corporate, who wanted to initiate an attack on the New Deal distributive policies. This purpose was explicit in the hiring of many of the most ideological and most famous postwar economists whose remit was to bolster the rights and thus the fortunes, of those sponsors. Claims that it is simply happenstance, or a natural outcome, that the American economy has fallen into a radically lopsided distribution of wealth and/or incomes are utter nonsense. It was done on purpose. Done moreover using the ‘laws’ of economics as a politically useful crutch — if not guide. Mainstream economic theory, echoing its classical origins as an effort to legitimize the fortunes and rights of the rising merchant class in the 1700s, was bent to abet the successful recapture of status and wealth by an elite who resented the intrusion of the post war middle class into its prosperous domain. It has succeeded in this task. It has surrendered its relevance to other tasks along the way.
And, as if we need more confirmation of all this, look at the current chatter about inflation. How do we deal with inflation? By creating unemployment as a hoped-for consequence making the economy more risky. We call this ‘dampening demand’ or ‘slowing the job market’ which is simply weasel wording for launching an attack on workers. Meanwhile suggestions that prices and profits might also have to be constrained are dismissed as amateurish nonsense, and as an interference in the natural workings of that magical place called ‘The Market’ — the sort of drivel only and uneducated person could possibly say out loud.
When you only have a hammer, you run the risk of being overtly political.
As I said: you need new tools. New ways of thinking. Novelty. Innovation.
Now there’s a thing.
