Where to Next?
A veritable blizzard hit me this morning. A blizzard, that is, of articles and various snippets that seem to tangle together somehow. They speak to deep transformations. And yet none of their authors offered that depth. Such is our moment. I wonder when, and indeed if, this will all make sense. Perhaps we will have to leave it to future historians to report on that.
Meanwhile this is what I came across. In no particular order:
First: In Project Syndicate, Ricardo Hausmann bemoans the slide in economics towards what he characterizes as a more “auditing” mindset, which he contrasts with his preferred “architect” mindset. Economists, he suggests, have become too detailed, too timid, and too lacking in imagination. He wants to inject a greater level of energy and commitment to larger-scale thinking in order to get economics back to its former glory as a source of big ideas.
This, I think, is a worthy goal. As I have said repeatedly through my twenty-five years of writing these sorts of things: I regard economics as a vital discipline. Its contribution ought to be rather more than designing auctions or discussing the merits of surge pricing. But it cannot. And it does not. Why?
Hausmann offers an interesting starting point for the retreat from what he calls “design thinking”. He points to Arrow-Debreu and their first fundamental theorem of welfare economics. This piece of elegance sets a trap from within which economics cannot escape. It posits that, in the absence of various aspects of reality called “market failures”, free markets inevitably move the economy towards what are called efficient outcomes. You can see the problem instantly. Once you are within the imagined world of perfection you are dealing with inevitabilities. There are no options, choices, alternatives, differences, asymmetries, bumps, hillocks, mountains, rivers, or any other novelty. Everything just is. And undisturbed history unwinds towards a utopia. Like clockwork. Very Newtonian.
This is, of course, an absurdity. Arrow knew full well what rubbish it is. But his purpose was not to be useful to the real world. His purpose was to burnish the make-believe of what was then the emerging alternative universe called neoclassical economics. When Arrow re-entered reality he recognized that it was chock full of those market failures he carefully had to eliminate in order to “prove” the efficacy of free markets. So, in effect, he had proved nothing. I doubt he foresaw that economics would subsequently go all in on his utopia rather than explore reality.
But it did. And so we are left where Haussmann picks up: with a discipline that has deliberately severed itself from reality in terms of being a “big picture” discipline, and has, instead emphasized its deployment of techniques appropriate to solving smaller puzzles. It has, as I pointed out recently, voided itself of subject matter [i.e. the real economy in its entirety] and retreated into being a sort of social statistics. All method and model, devoid of the ability to tackle major moments and movements.
So I sympathize up to a point with Haussmann. Economics needs a re-boot. There are tons of good economist out there talking about big issues. It’s just that when they do so they are forced to leave the rigor of things like Arrow-Debreu behind and ignore it. They then begin to engage reality. They sometime have great ideas and insights too. They become the architects that Hausmann wants more of. The problem being that, when they do, they sound less like economists and more like general social scientists. They de-emphasize economics in order to be useful.
Second: which gets me to my next article.
Or, rather, pages in a book.
I have been reading Jonathan Levy’s “The Real Economy” lately. Here, perhaps is someone doing the work that Hausmann wants economists to do. Levy, though is s historian and thus free of the Arrow-Debreu like traps economists are caught within.
Somewhere towards the latter part of Levy’s book we find him discussing stocks and flows and the movement of capital around the world. That leads him to quote Robert Lucas. Which is always good for a laugh. It is a perfect illustration of the problem Hausmann has raised. Levy’s conversation — it’s on page 192 of his book — wanders into Lucas’s famous discussion of why capital does not flow easily from wealthy economies to poorer ones. Or from developed to those less developed. Trapped as he is within neoclassical economics, and thus cut off from reality, Lucas hits a conundrum: in that unreal world capital ought to flow. But it doesn’t seem to want to move. Why not?
Levy gives us a relevant quote from Lucas:
“If it is profitable to move a textile mill from New England to South Carolina, why is it not more profitable still to move it to Mexico? That fact that we do see some capital movement toward low-income countries is not an adequate answer to this question, for the theory predicts that all new investment should be so located until such a time as return and real wage differentials are erased … I do not have a satisfactory answer to the question, but it seems to be a major — perhaps the major — discrepancy between the predictions of neoclassical theory and the patterns of trade we observe.” [Italics in original]
And here we have a response to Hausmann. Stuck as he is within neoclassical theory Lucas can offer us nothing. The ability to be an architect in the way Hausmann encourages economists to be is foreclosed by a theoretical sinkhole. All Lucas can do is admit he has no “satisfactory answer”. Which is because, obviously, the theory does not match reality. Undaunted Lucas carries on. Elsewhere, again discussing movements of capital, he makes this remarkable statement:
“I will also be abstracting from all monetary matters, treating all exchange as though it involved goods-for-goods. In general, I believe that the importance of financial matters is very badly over-stressed in popular and even much professional discussions and so am not inclined to be apologetic going to the other extreme.”
The honesty is refreshing.
He might well have simply said that he knows and is proud that economics is plainly dumb. Why, after all, bring matters of money into discussions of an economy? How absurd.
But the journey from places like Arrow-Debreu to the deliberate and obstinate denial of reality inherent in Lucas is an easy and predictable one. The decline in relevance seems to be in direct and inverse proportion to the increase in rigor and commitment to the theory. Whereas Arrow knew he was ignoring reality only to produce a proof of something that could never actually exist as a representation of reality, Lucas is doing the opposite. He is lamenting that reality refuses to conform to his ridiculous theory and so he just lest out a primal scream of defiance and blathers onwards.
How can someone so committed to such a deep deviance from reality ever offer the sort of helpful design thinking Haussmann wants to encourage?
So what Haussmann is looking for is not a minor movement within economics. He is asking for a wholesale shift. A great deal of stuff needs to be forgotten in order to move forward. I wish him well.
Third, and last blast in that blizzard I mentioned at the outset is something entirely different. It concerns politics and democracy.
It comes in the form of an Op-Ed in the morning’s Financial Times. Janan Ganesh, who always tries to entertain us with sweeping and colorful commentary, want us all to calm down. I paraphrase: Trump is not that much of an oddity. American politics always re-centers itself. Indeed it is all rather dull: Americans seem predisposed to reversion to some sort of political mean. They regularly vote out incumbents. So this mayhem will pass. No need to get too upset. Trump’s power is at its height. Decline and rejection are inevitable. The only two elections in the last century to mark true “change” were 1932 with the arrival of FDR, and 1980 with the election of Ronald Reagan. The implication being that neither 2024 nor 2028 will be such change elections.
Really?
Yes, things changed in 1932. America took a major step towards social democracy and cut back the power of its traditional elite — the wealthy and business community, whom as Schlesinger pointed out in his 1945 defense of the New deal, usually rule the roost in America. Obviously, the 1980 election was the counter attack orchestrated by that elite. It succeeded spectacularly. So well, indeed, that the erstwhile left of center Democratic Party has emerged as the bastion of an establishment committed to defense of a market based economy, technocratic rule, and the de-emphasis of class conflict. The combination of market obsession, technocracy, and deregulation is called neoliberalism. There are quite a few of our analysts who still refuse to recognize it as a coherent program or philosophy. They have been blinded by the mythology created since 1980 to hide the re-emergence of the old elite. They have bought into the stuff of Lucasian economics where reality needs to be bent to look like theory rather than the other way round. They seek efficiency where it cannot be found. They speak the language of markets even though they are comfortable with never having to define what a market actually is. They too prefer myth to reality.
In any case the shift in 1932 towards social democracy and then the 1980 shift towards neoliberalism are the only two elections that have truly mattered in the last hundred years. So far I agree with Ganesh. But I am not so sure 2024 doesn’t represent another significant shift.
Both of those major elections signaled a shift in power within the body politic. In 1932 the masses moved center stage. In 1980 business reestablished itself as dominant. In 2024 another shift seems to have occurred.
It’s the arc of democracy I am concerned with.
1932 saw the emergence of what I call really-existing democracy. Policy started to respond to the wishes and aspirations of the majority rather than to the much more narrow interests of the wealthy, the business community and/or their hangers-on. That election summoned into being a period of actual democracy in America.
1980 saw its reversal. The burden of being socially responsive not only cost the former elite its status and some of its power, but not imposed costs on its ability to accumulate and retain wealth and income. That intrusion had to be undone. And so it was. The alignment of Cold War geopolitics, oil dependency, inflation, and 1960s political unrest provided fertile ground for the old elite to reassert itself. Modern economics played its part by going all in on the absurdities I mentioned above and as perfectly represented by the likes of Lucas. It became steadfastly anti-democratic.
The subsequent undoing of democracy is marked in the record by the rise in inequality since 1980.
The 2024 election marks another major change to the extent that it is the final rejection by a substantial portion of America’s ruling class of any semblance of residual democracy. It represents the victory of that part of our elite that was never committed to democracy. The battle was not within the body politic so much as within the elite. One part wanted to continue with the appearance of democracy — elections, freedom of speech, and the other structural elements that allow the masses into the political conversation. The other part wanted to finish the job and get rid of such things altogether. After all why continue the pretense and run the risk of a resurgence of a democratic inclination from below?
Between 1980 and 2024 both political parties advocated similar market oriented policies. They bought into the sort of economics that rejected the social in favor of relentless commodification of the individual. That’s where modern economics seeps into and pollutes reality. As the legislative agenda increasingly favored the creation of rent extraction by the business community and our technocratic so-called “knowledge workers”, it encouraged the growth of a more concentrated oligarch class even less committed to democracy. Our oligarchs regard democracy with contempt. They are open in expressing the view that democracy is both a cost and an impediment to their construction of our future. They are the group that wants final separation from democracy.
Which is why they so openly encouraged and supported Trump. 2024 was their moment.
And which is why the infamous Project 2025 contains so much overt anti-social content.
It is this context that I differ from Ganesh. I see 2024 as further transformation. It confirms and entrenches the elimination of really existing democracy. It starts the work of getting rid of the last vestiges of democratic institutions. If thoroughly carried out it makes the work of relocating a democratic future difficult if not impossible. 2024 completes the journey begun in 1980. The two elections bookend an era during which America turned its back on any substantial effort to realize democracy as its foundational political purpose. It returned, instead, to its prior 1800s quasi-aristocratic norm.
Just how economics plays a role in the next few years is hard to see. If Hausmann is correct in his analysis of it being severely reduced as a contributor to “big thinking” and it stays as a technocratic and detail oriented methodology I doubt it has much to tell us. Instead it will remain a tool for use by those abetting the oligarchs: advocating extreme individualism rather than anything collective. It will continue, as Lucas admitted, to have no answers, and will, instead retreat even more within itself and to the safety of method.
What a shame. We need to break through limitations not hide behind them. We need imagination.
