Milton Friedman

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Trump, Denial and The End of Normal

Shocking is an understatement. Donald Trump is unfit for public office, be it town clerk or president of the US. He’s an unbalanced egomaniac. He’s a racist. He’s an immature misogynist. He’s many other awful things. Presidential, he is not.

How did we get here?

Failure. But a particular kind of failure. Failure dressed as success. A success so sweeping and deep that we hardly recognize the extent of the change that it wrought. Naturally I am speaking of the victory of neoliberal thought. Perhaps you were thinking of something else.

For a brief moment after World War II, for a generation and a bit, the western world basked in a quiescence of steady growth, political solidarity, industrial calm, and rising living standards. That much of this was an illusion, or rather a reflection of the prior chaos of the spasmodic ending of the elongated nineteenth century, we ignored. Instead we imagined that a new normal had emerged. Economic depressions had been defeated. Western Europe had settled its ancient scores. And America had emerged as a beacon of democratic freedom, albeit one willing to exert quasi-imperial tendencies in its foreign dealings. Compared with the authoritarian alternative of the Marxist east, America’s heavy hand was tolerable for a generation able to recall the terrors of 1914 through 1945.

This period, though, was bound to end. Within its fabric was an unrest bound to tear at the fragility of the apparent unity.

That unrest was the desire of many to return to the chaos of a more unfettered way of life. They disliked the growing tendency of post-war governments to intrude into spheres of life and activities that previously had been private domains. They especially regarded such intrusions as obstacles to personal enrichment.

They questioned social democracy as if it were Marxist authoritarianism. They asked: Where was the private incentive? Where was the opportunity? What was the intellectual footing upon which those intrusions stood? And: were those footings not insecure against the tide of uncertainty best dealt with by private initiative?

The rebellion, when it finally burst into open life, swept away the temporary stability of that generation and a bit. And like all movements recapturing some imagined version of a glorious past it was even more radical than the original. It preached ideas producing an ever growing insecurity, constantly accelerating change, wrenching social re-aligments, and loss of opportunity for anyone incapable of being the kind of calculating insensitive and morally ambiguous trooper in its corporate divisions.

At its core the rebellion has one theme: liberty. A return to an idealized version of liberty such as that taught by the likes of Hayek and his most potent student Milton Friedman. Others, like von Mises, Peter Drucker, as well as Hayek were members of what the essayist Tony Judt so eloquently called the Austrian cabal. They all grew up within the fetid declining years of the old Hapsburg Empire. They all misunderstood the causes of that decline. They all witnessed the horror of demagoguery of Hitler. They all feared the repression of Marxism, Lenin and Stalin. So they all overcompensated.

Their error, as they built the intellectual features of neoliberalism, was to mistake democracy as a form of socialism. In this they echoed the fears of their intellectual ancestors. The founders of the American republic were just as fearful of the people. The phrase “we the people” refers to a select few: those entitled to participate. It does not refer to the vast mass who were thought unfit to participate.

By making this error Hayek and his ilk debauched liberalism. No: they tore it in two. They ripped away any references to equality or the dignity of community, leaving only the much rawer individuality to stand alone as a beacon of freedom. This primitive liberalism was then packaged as economic and political theory to stand against any attempts to leaven it with those lost, yet appropriate, features of mature liberalism.

So that’s how we arrived here.

The consequences of the neoliberal rebellion are all around us. Trump. Brett. La Pen. Haider. Berlusconi. The people’s reaction to insecurity, austerity, globalization, deregulation, and the decay of social cohesion wrought by the single minded pursuit of the individual ideal.

With respect to Brexit, let me quote at length from Jonathan Freedland’s essay in the New York review of Books:

“There is an overlap here with those white working-class voters in the US who are backing Donald Trump. In both cases, they are often people who once enjoyed secure, relatively well-paid work and who have seen their jobs, and their factories, shipped eastward. Working low-status jobs on zero-hours contracts, they live in places that have been hollowed out and left behind … While London and other major cities gleam and sparkle with investment and regeneration, many of these English towns — post-mining, post-industrial, post-their-best — are still reeling from the Thatcher-era policy of privatization, which saw the state shut down industries it had once propped up. They have grown derelict. In each wave of change — Thatcherism, globalization, automatization [sic] — they have lost out.

It meant that the Remain campaign’s central argument — that Brexit risked Britain’s prosperity — cut no ice with these voters, because they had no prosperity to risk.”

A little later Freedland quotes a Conservative minister, Michael Gove, as saying:

“I think people in this country have had enough of experts.”

And that’s also why we are where we are.

The experts blew it.

The elite. The center. The experts.

They are the people who brought us rising inequality, globalization, shareholder value, austerity, infrastructure neglect, rotting schools, dilapidated cities, insecurity in retirement, health, and personal finances, stagnant wages, and all the other ailments of an economy and society run solely in the name of private profit.

Worse still: those experts are scarcely attached to democracy because they, like Hayek and his confreres, believe that popular will is akin to a chaos imposed by an unwashed undereducated mob. Those experts believe that they alone understand the so-called “national interest”.

But why is it in the national interest for almost half the population to live perilously close to poverty?

As it turns out, that fleeting glimpse of normal back in the immediate post-war years was no illusion. It was simply a threat to the old establishment and to big business. It was a democratic moment that had to be ended not extended. It had to be ended so profits could be made as they had back in the Golden Era. So ended it was.

Which is why we are where we are.

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Market Reflex

There are a few thoughts or words in a normal economics discourse that trigger what I call my ‘market reflex’.  Asad Zaman just triggered it. Of course he didn’t mean to, and the sentence in question is in an article I agree with. Further, the sentence, on the surface, looks and sounds so innocuous. Here it is:

“Free market economists believe that markets work best when left alone, and any type of government intervention to help the economy can only have harmful effects”

See what I mean? Innocuous. Asad is totally correct, they do think that. Worse: they mean it. And even more worse: they teach it.

Which gets me truly bothered.

The entire enterprise of contemporary economics, aside from its fringes, is built on this shady and unsubstantiated premiss.  It’s shady because it is laden with ideological bias, and it’s unsubstantiated because, well, its unsubstantiated.

Which gets me even more annoyed.

The supremacy of markets sitting at the heart of contemporary economics is a faith based notion not an empirically based fact. It is the result of economists of a certain ilk having vivid imaginations and strong biases. When you push a little on the idea you find that it relies on a set of thought experiments rather than on research of the real world. It requires superhuman and distinctly otherworldly computational skills, flows of information, and ironclad willpower, not to mention a total lack of real choice on the part of the denizens of this imaginary market, for it to work smoothly and to find its way to the happy land called a utility maximizing equilibrium. Only within such ridiculous constraints is the so-called superiority ever exhibited.

The rest of the time stuff happens and who knows what’s best?

It is the obsession with sanitizing the economy and thus rendering it unreal that has led economics astray over the years. And this article of faith about free markets working best when left alone, is sheer tosh.

Just to press my point further: for the dream land of economists to display such a characteristic it would have to be inhabited by two sets of parallel and never interesting people. One would be the superb calculating machines of the erstwhile free market. The other would be the foolish idiots of the political system.

You see, and this bugs me most of all, the ‘agents’ of the economy that economists model and who, in those models, produce such startling efficiency – so startling that it cannot be improved upon – are the same ‘voters’ who support government intervention to soften the edges of the economic machine. Apparently economists are oblivious to this rather salient fact. I suspect they are oblivious on purpose. For to acknowledge the reality of democracy and voter involvement in government treads heavily on the pristine ground economists have carved out for themselves. By separating the economy, or, rather, the ‘market system’ from society as a whole they can pretend that it is a self-enclosed entity bereft of outside influences that might muddy their simple models. And it means that they can indulge in anti-democratic theorizing without actually being anti-democratic: democracy is a dirty government thing, it isn’t part of the market system.

I remember reading Hayek’s famous paper on knowledge in the economy in which he lays out the argument about central planning being a hopeless adventure and asking myself how, if the world is that complex, anyone can know whether any system is better than any other. You can’t. If the information is so difficult to gather and compete for a centrally planned system, on what basis do we have to conclude that a decent rally planned system cannot be improved upon?

Well, it turns out, we can make that determination if we rig the model and the calculations upon which we rest our argument.

Which is what Friedman and the other followers of Hayek have done.

They have no ‘proof’ other than an artificial test tube model that they created especially to produce their proof. Garbage in, garbage out.

Or, as Friedman so famously argued, it really doesn’t matter how insane your assumptions are as long as they produce the ‘right’ results. Friedman, of course, knew what result he wanted:

Free market economists believe that markets work best when left alone, and any type of government intervention to help the economy can only have harmful effects.

So there.

Scientists at work.

Not.

 

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New York Stops The Revolution in Economics Too?

Yesterday’s election result in New York State effectively ended Bernie Sander’s tilt at the Democratic windmill. Here’s what I wrote to a friend who was intent on parsing the numbers:

And, the point is?

We can analyze all we want. It doesn’t alter the result. It provides nice fodder for coffee shop talk, but doesn’t help anyone.

It’s time to move on. Bernie will keep going. Clinton will become even more annoyingly patronizing. Her surrogates [like Krugman] will gloat. She will likely win in November. And America will struggle on regardless.

Clearly 2016 is not the year of change. It is a year of upheaval on the right, complacency in the center, and only the beginnings of rebirth on the left.

I never imagined that the Democrats would be the party of centrist corporate establishment thought. Or that it would be the Democrats enforcing the wishes of big business over and above those of the working people. But that’s where we are.

I suppose none of this is a surprise. The total dominance of social/cultural issues as a defining line in politics has obscured the equally powerful dominance of right wing economics across the board. Neoliberalism is the monotone ideology of both parties.

The revolution will have to wait.

Buried in there is my attitude towards economics. By enabling neoliberal ideology, and following the lead of Hayek and Friedman, economics debases the role of liberal democracy and representative government. This casts a long dark shadow across the subject.

Never has it been more clear to me that, notwithstanding the professed personal positions of individual economists, contemporary economics has become a profoundly anti-democratic project.

This is ironic only with respect to longer history.

The 1930’s were critical in the demise of the democratic tradition within economics. The setting into concrete of its severe limitation as a subject dealing primarily with the mathematics of choice and allocation was masked only temporarily by the superficial victory of Keynesian macroeconomics. The intellectual catastrophe of the 1970’s and 1980’s, which saw the emergence to superiority of the formalized ideologically anti-democratic version of economics that now dominates, was merely a logical extension of the 1930’s limitation.

The subject finally emerged as a tool for performative reconstruction of society. Its methods were exported to ensure the elimination of alternative viewpoints. Its dogma was translated and accepted into the prevailing faith for business strategy, economic policy, and many other aspects of socio-economic life.

Even the supposed schism between various flavors of macroeconomics which gives great life to the academic elite and provides large numbers of hand-wringing articles about the state of the discipline is trivial when set beside the socio-political stranglehold neoliberalism has on our society.

When the major debate about ‘what went wrong’ is being conducted by the same people who led us into error; when that debate is conducted entirely in the same theoretical framework as that of the error itself; when the policy outcomes are only relatively modified; and when the entire discussion seems so unrelated to the day-to-day actors who populate – or are supposed to populate – the markets and economies that economics is meant to understand we know that nothing will change.

Don’t we?

Until economics rids itself of the fantasies of equilibrium, maximization, and the pursuit of an efficiency that cannot be located in an uncertain world, it cannot be much more than an narrow academic pursuit. Right now, by convincing itself of the efficacy of its method, and by the unethical exportation of that method into subject matter where the simplicity of economics has no relevance, economics has managed to make itself into nothing more than a technology for the exact opposite of its original intent: it is no longer trying to understand economies. It trying to invent them.

It is social engineering.

And like a lot of twentieth century social engineering it has become a very sinister undertaking.

Let’s take it back.

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Flat Earth Rules

Economists, especially mainstream economists, often like to ignore the real world consequences of their theories. Instead they prefer to hide away pretending that their conversations and ideas leave no imprint on society, and that their simple little models are just representations designed to cut through the tangle of reality to get at some core truth. Only in the grand world of macroeconomics is this not true. There, economists love to strut about as if they hold the keys to universal insights untroubled by the somewhat ambiguous results their ideas appear to inflict on the rest of us.

The fact that there are economists on all three sides of any two sided argument ought be sufficient to let us know that their insights are a little vague, and highly dependent on each individual economists worldview. Economics, it seems sometimes, is little more that highly formalized opinion.

This is not meant to demean economics, I think it is a subject worthy of high regard, I mean only to alert us all to its manifest weaknesses and deeply ingrained biases. Only economists could possibly imagine into being something as absurd as dynamic stochastic general equilibrium, or representative households, or the non-accelerating inflation rates of unemployment, or growth models where the unexplained residual accounts for there-quarters of growth. All these could be dismissed as arcane academic nonsense were they not essential to the policy making that affects everyday lives of hundreds of millions of people.

It is because of this policy impact that economics ought have a well developed ethical standard for its researchers – something like “first do no harm” would be a good place to start – but economics being the home of a group of people who look askance at organized or social anything steadfastly refuses to look inward at its ethical responsibility. After all, they argue, the mar ket will take care of weeding out the rotten apples.

Sure.

But here I am not concerned with macro which is, despite my deep skepticism, the part of economics that has some, albeit it cartoonish, relationship with reality. No, the part of economics that is truly messed up is micro. And by messed up I mean really messed up. Rational choice? Really? Microeconomics makes no pretension whatsoever about connecting with the real world. It just exists in its make-believe world of agents – not people – running around in a kind of utopian information rich hyper-individualistic flat earth like place where the vistas are the same in every direction, where choice is a singularity driven by machine like logic, and where anything resembling humanity is scrunched aside in order to make life easy for economists. All those individuals defy the meaning of individual because true autonomy would surely introduce variety, and variety dirties the purity of economics. So out variety must go.

This would be all well and good were it contained within economics. Who would care? No one. The rest of us could look on and laugh at the silliness of it all.

But we ought not laugh: economics is really dangerous stuff. Sometimes I think it should be banned – it’s that dangerous.

You see, economics has infected other disciplines. Its ideas have migrated and brought their lax ethics into places where they can do enormous damage.

Like into business schools.

Take a look at this chart:

EPI_productivity_compensation

Familiar?

It ought to be. It has been making the rounds in one form or another for a while now. A friend of mine just sent it to me and asked for an explanation. How come wages have not kept up with productivity.

Now economists of all stripes and opinions have their own views. Globalization. Class structures. Technological change. The demise of unions. And many more.

I tried to think of something different to tie those things together.

My thought is that the cause of the great divergence between wages is due to the notion of shareholder value.

Huh?

Look at the date of the onset of the divergence. It is coincident with the rise of modern management theories being peddled at business schools. Central to the panoply of ideas of modern management is shareholder value.

What is this?

It is the pernicious idea that the single and only valid focus of corporate management is to maximize the value of the corporation in the hands of its shareholders. Nothing else matters. Nothing. The thought of ‘stakeholders’ is anathema to shareholder value theorists. Milton Friedman – yes he was an ardent advocate of the new idea – was apoplectic at the thought that management had any other goal.

Why?

Because in the flat earth of Friedman’s microeconomics every agent is doing the same ting: looking out for number one. Further, they are all capable of doing so. Because standard microeconomics has embarrassingly little to say about business as it actually exists, Friedman’s extraordinarily naive perspective is consistent with his equally naive theories of human behavior. In such a flat earth businesses are little more than single person entrepreneurs who struggle perpetually to eke out a living in fierce competition, and they see to maximize their incomes – just like everyone else – in a world flooded with information.

So workers, customers, society, the environment, trade unions, and other sundry so-called ‘stakeholders’ had no place in Friedman’s rubric other than they are could be manipulated to maximize shareholder return. Let me repeat: nothing else mattered. Because microeconomics is so restricted and divorced from reality people like Friedman could argue for shareholder value with straight, if disingenuous, face.

This startlingly narrow view of the world would be fine had it not then become the intellectual basis for the notion of shareholder value business schools began to teach. What was sensible in the world of economic fiction then became the basis for real world drama.

Since business schools operate in that real world – their graduates are destined to to actual jobs and not just manipulate equations – what they teach has a great impact on business. Real business, not the unreal business of economics. The intellectual roots of modern management are back deep in Friedman-like make believe.

Just as modern economics was invaded and corrupted by the purity of rational choice and its associated fictions, so too was management theory.

The problem is, of course, that unlike the caricatures of economics, actual businesses are not governed by the so-called laws of economics. And, more to the point, they are sufficiently large to impress their values union society.

Strategy negates and plunders the pristine world of microeconomic nirvana. Business schools only teach microeconomics so as to identify ‘market failures’ or ‘niches’ where a good profit can be made. The real world is about creating opportunities for rents not profits.

Gradually the notion of shareholder value was pressed into service to justify the relegation of labor to an expense to be minimized rather than as resource to be valued; to justify the remuneration of managers who delivered cost reduction by offshoring manufacturing; to justify the adoption of financial structures that privileged debt in corporate balance sheets; to justify the steady shift of national income towards capital away fro labor; to justify the explosion of so-called global logistics; to justify the resistance to alarm over the environmental damage of some production; to justify resistance to the adoption of sustainable business practice; and to justify the explosion in CEO pay.

All of which, cumulatively, re-created the business environment and produced the divergence between pay and productivity in the chart above.

In retrospect I think it fair to say that modern management theory, and shareholder value in particular, can be seen as a technology developed from the intellectual parent we know as neoclassical economics. Shareholder value, by taking the claims of its utopian forbears seriously, ends up perverting them. It is, in my view, weaponized neoclassical economics. It became the sharp end of the performative effort of  modern economists to transform the economy in the image of their flat earth nonsensical ideas. After all if the world can be flattened, a flat earth theory starts to look more sensible, and flat earth believers start to look more astute.

Meanwhile, as that chart shows, the consequences of ideas can be devastating. The collateral damage of the attack on reality by our flat earth economists is very real.

But, as I said at the beginning, economists, especially mainstream economists, often like to ignore the real world consequences of their theories. After all they can always claim to know nothing about business, business schools, or any other practical thing. Who could possibly know that rational choice and all that marginal talk might get, well, taken seriously?

 

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Shareholders and Public Trust?

I remember sitting at business school what seems a lifetime ago and absorbing with enthusiasm the latest financial trickery. It seemed so much more rigorous than all the other stuff. I felt as if I was being taught something incisive, something with intellectual heft, something that was not subject to the whim of subjective belief, but was, rather, grounded in solid theory.

Boy, was I wrong.

Somewhere in the middle of all that mumbo jumbo was the notion of shareholder value. Here we were being taught that the only purpose of a corporation was to return the most it could to its shareholders. That most big businesses were called a ‘public’ corporation seems an irrelevancy because the word ‘public’ was simply a device to distinguish it from the alternative: a ‘private’ corporation, which was a different animal altogether.

But that word public actually has a deep meaning. Especially when we consider the near total lack of ownership that the presumed owners actually possess.

I was prompted to think about this by a recent John Kay article in the Financial Times. Set aside the source. Think about the thoughts. Here is a good sample:

“Ownership, like friendship, has many characteristics and if a relationship has enough of them we can describe it as ownership.

If I own an object I can use it, or not use it, sell it, rent it, give it to others, throw it away and appeal to the police if a thief misappropriates it. And I must accept responsibility for its misuse and admit the right of my creditors to take
a lien on it.

But shares give their holders no right of possession and no right of use. If shareholders go to the company premises, they will more likely than not be turned away.

They have no more right than other customers to the services of the business they “own”. The company’s actions are not their responsibility, and corporate assets cannot be used to satisfy their debts.

Shareholders do not have the right to manage the company in which they hold an interest, and even their right to appoint the people who do is largely theoretical. They are entitled only to such part of the income as the directors declare as dividends, and have no right to the proceeds of the sale of corporate assets — except in the event of the liquidation of the entire company, in which case they will get what is left; not much, as a rule.”

This is all true. My own work experience confirms it to me. Shareholders exist on the periphery. They do not exert control in any true meaning. They simply expect a return. And that return is manipulated by management to match whatever the current market fad wants it to be. Shareholder returns are administered cash flows  managed to conform with socially acceptable levels. The social pressure setting those ‘required’ returns exists within a narrow and self-contained financial circle that includes Wall Street and its various adjunct professional and media tributaries.

There is no solid ground under the notion of shareholder value at all. The entire concept exists in mid-air.

Yet business has been beholden to it for the best part of four decades. Innumerable workers have been fired in order to ‘release’ shareholder value from underneath the pedestrian boot of ‘inadequate’ management. Entire sub-cultures  and business groups have sprung up around the idea of shareholder value. More damage has been done to the lives of American workers by the notion than by pretty much any other idea.

Modern finance, within which shareholder value plays a central role, has much to answer for. It sits atop an entirely false premiss: that shareholders own the corporation. No they don’t. Not in any practical way. And certainly not in any way that distinguishes them from any other group wanting to exert ownership rights. Like the workers who comprise the workforce. Or the managers who dictate what the business does. Or the customers who buy the products and thus provide the demand to keep the business alive. Or the boards of directors who sign off on that cashflow the shareholder so crave.

How did this total misrepresentation come about?

Well you probably know.

Like many other errors in modern economic life Milton Friedman and his Chicago progeny plays a large role. He was blunt in arguing that the only reason corporations exist is to maximize shareholder returns.

How economists love that word ‘maximize’. As if maximization in the real world was possible. Having sat within the confines of a large business, and having tried to apply modern finance in a practical way, I can assure you that the idea of maximization is laughable. Quite where the necessary information is coming from to allow for it, I have no idea. Presumably from some set of infantile assumptions. Like the ones in mainstream economics.

The fixation of mainstream economics with maximization and other engineering concepts is easy to understand. It allows for a precision of thought and, more to the point, an accuracy of calculation, which, in turn, can then be twined together into elaborate and elegant explanations of how the economy works. The only cost for all this wonder is that the world around us has to be ignored. Because in that world none of that accuracy, precision, elegance, or elaboration survives its first contact with uncertainty and the limits of information.

Economics has been undaunted and unaltered by its lack of reality. Unfortunately when some of its pioneers started to create modern finance they blithely imported the lack of reality along with their zeal for mathematical elaboration. What appeared to me as a business school student to be nifty rigor and a theory of great practical import, was in fact a sham, built as it was upon the same sand as mainstream economics. No, not sand, that is too substantial: modern finance floats free like its economics counterpart and makes sense only at some altitude well above the somewhat more cloying earth we prowl about day to day.

So we ought chalk up some more real world damage to hold economics accountable for. Not only did it screw up the economy by trying to re-work the real world in its own image, but it exported its silliness into finance which then abetted in that re-working.

Between the two economics and finance have managed to mangle the lives of a multitude of people. I am not sure we can reform economics easily: it is too self-absorbed and self-congratulatory. So we need to start with its application in the offshoot of finance.

There has been a lot written about the vagaries of what we teach and learn at business school: the relentless ideological content gives students a very blinkered view of the alternatives. And, yes, there are alternatives. Robert Locke, who is a familiar name when it comes to a critique of ‘western’ business school teaching recently sent me a paper he gave on the topic. Read it to get the flavor of what our students are missing. Whether we agree or not, we have to realize that management is not the single minded pursuit of shareholder value. Nor can it be if the shareholders do not actually own much at all.

So: get rid of economics at business school, after all nothing could be more amusing than watching students embrace modern micro-economics in one class and then learn how to defeat the market in the next. As for finance: ditch shareholder value and go back to the previous theory that a modern corporation is a public trust. With that last word having all its many meanings.

Oh. And that might even get big business out of politics.

Trust. Really?

Well I can dream can’t I?

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