Unequal Austerity and Its Economics

Inequality is much discussed nowadays. Pundits of all political stripes are weighing in on its causes and on its effects. As usual there is no agreement. So, also as usual, I suspect there will be no action.

This is not a new problem, nor is it trivial. The steadily increasing privilege afforded capital – higher profits, dividends, and rents, and the consequent steady erosion of the rewards to work – wages and salaries, have been accumulating beneath the surface for decades. I believe that in the years ahead the emergence of our highly unequal society will be the hallmark of the entire Reaganite era.

I don’t think this problem is as complicated as some people make it out to be. It is a direct consequence of the shift in the dominant economic theory that infuses our decision making across all relevant domains of activity in our economy. It was an intentional consequence. It was not, as Bill Gross tries to make sound, a happy accident of being alive at the right moment. If you’re  capitalist that is. If you’re a regular worker, then tough.

What happened?

Well, back before the shift took place the dominant economic theory guiding decision making was the post-war version of Keynesianism. It seemed to explain things well, and seemed to produce excellent results: the western world bounced back from its wartime trauma and produced a golden age of growth that propelled living standards, wages, and profits all together.

Then it hit a snag. The stagflation of the late 1970’s didn’t fit well within its theoretical structures. Change was due. And, as usual, economists can always be relied upon to have alternative theories ready to roll out. A new theory was available on the shelf, one that offered a different path and one that fitted well with the right wing reaction to that stagnation.

This is the key to unlocking the door to a solution our own problem: it was a change in the political landscape that allowed the switch in economic theories to have an impact. Economics by itself doesn’t much matter. Its theories are simply armament for politicians. Those theories chug along happily with a team of economists ready to proselytize at any opportunity. No one particularity cares about those theories outside of academic economics until one is needed to give intellectual heft to a new political position.

In the case of the great switch back in the late 1970’s the change in politics was the re-emergence of a more activist right wing political temperament and the rise of activist corporate influence in the form of newly established think tanks and the establishment of lobbying in Washington.

This is why Gross is so wrong. The switch was entirely deliberate and manufactured. It wasn’t a happy accident. Big business wanted to break the post-war social contract. Right wingers did too. The alliance they created still forms the basis of what we nowadays call mainstream Republicanism. Back then it wasn’t so mainstream: it had to overthrow the Eisenhower version of Republicanism that to our contemporary eye would look slightly left of center. Eisenhower and Nixon – yes event Nixon – governed along similar lines. They preserved the post-war social contract and were, if anything, biased towards expanding rather than reducing social programs. It was the emergence of Reagan as heir to the right wing, and his ability to sell that right wing tilt as acceptable, that altered the political and cultural landscape, and which then was the channel through which right wing economics was able to do its pernicious work.

Right wing economics being what is commonly called neoclassical and the many variants of Austrian economics, with the neoclassical version in the vanguard. The ideological content of these kinds of economics is manifest: they are designed from the ground up to justify market based solutions to every problem and to reject both the need for, and the efficacy of, government interference in the economy. The key point being that these theories are indifferent to the plight of workers, embolden right wing political attempts to limit government, emphasis supply side considerations, and are easily bent to protect capital.

Hence what became known as “trickle down” economics, where a focus on allowing market based freedom to the few and big business was supposed to have beneficial knock-on effects for everyone else. Remember all the talk about “a rising tide lifting all boats”? Apparently most boats were fixed in the mud.

In the very long run there is no doubt, or ought not to be, that a decentralized economy produces better results than a centralized one. It can adapt better. It can innovate better. And it can thus grow better. What it cannot do, necessarily, is to allocate better. Yet, and this is the truly pernicious nature of modern orthodox economics, it is precisely it allocative power that modern theory lauds.

Why is this?

If you are trying to build an ideological defense of a particular worldview – in this case that markets ought to be left alone to get on with it – it is prudent to defend its weakest points mostly actively. This is the brilliance of neoclassical economics. Its entire edifice is built around ideas that make it appear as if markets will always outperform alternatives in the allocation of society’s resources. It does this by inventing and deploying specialized uses for common concepts like “efficiency”, and then restricting the set of assumptions used in the theory to ensure that it achieves its goals. Outside of academia most people don’t realize the extraordinary effort needed to distort the real world into conformance with neoclassical theory, they simply accept that, somehow, economists have “proved” the superiority of markets. They accept economics as being a sort of science, and that it has intellectual sincerity or objectivity.

It may be sincere, but it isn’t objective. It is the handmaiden of capital. Which is odd when you reflect on its emphasis on market magic. So severe are the lengths it has to go to retain its internal consistency, logic, and so on that it is a strange bedfellow for big business.  Modern corporations are the living epitome of centralized economies with their top down decision making processes, tightly constrained internal resource allocations, and defiance of outsider or shareholder influence.  Yet the executives of these cop rations prattle on in public about the huge benefits of markets, apparently unaware of the irony that markets – in the sense economists talk of them – are supposed to make their corporations unnecessary or at least minimally profitable.

Not that they care about the economics. What they care most deeply about is the politics. Which is a politics that looks at every problem through a lens that privileges capital at the expense of labor. To pile on further irony: that most large corporations have short lives – measured ind evades rather than centuries – is precisely because they are centralized and suffer from all the issues that centralization brings. Notably a poor record in adaptation.

So hegemonic, though, has right wing economics become, and so successful was the rightward shift in our political landscape, that all discussions about our current problems are conducted through that self-same lens. Take the deficit and the national debt. They are treated almost axiomatically as being problems to be solved only in one direction: made smaller. That this will hurt millions of people and diminish their futures drastically is never mentioned. Or, if it is, any comment about their plight is accompanied by a severe statement about the need for sacrifice. So the people who have been clobbered the most by the failure of right wing economics are being asked to sacrifice in order to shore up its protection for those who were not clobbered at all.

Which returns me to the beginning.

If our current policies, based on right wing economics  as they are, are asking the neediest to make the largest sacrifices, then they will make inequality worse not better. Indeed practically all austerity policies have the largest impact on those who rely on the government as a defense against the predation of the market. This is despite the fact that our crisis began as a failure of the market not a failure of the government. We are correcting the wrong thing.

But before we can fix inequality we mist fix our politics, and only then choose a new economic theory.  There’s plenty of economics waiting to be deployed to help. There always is.