economic theory

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Class Based Economics

Buried somewhere in the pile of stuff I have accumulated as I think about inequality are these statistics:

  1. Of all the income generated between 2009 and 2011 in the US 121% went to the top 1% of income earners
  2. The top 1% owns just over half of all investment assets including 64.4% of all bonds
  3. And, the bottom 90% incurs 72.5% of all debt

Think through the consequences of these numbers.

Basically we have an economy where the top 1% reaps all the rewards; where less well off people constantly fall further behind; and where the top folk lend to the bottom folk so that the less well off can keep on consuming and thus boosting the profits of the businesses the top folk own. This is a nice game for the rich as long as it lasts. Here in the US that would be the past forty years or so.

This is really simple.

It explains why our economic policies focus on preserving creditors, bailing out lenders, and keeping the inflation alarms ringing even when there is no inflation. Those policies benefit the top 1%. Those policies are advocated for and set by the people who will benefit from them. That a healthy does of inflation would alleviate the debt burden on those down the income ladder is scoffed at by those in power. Inflation, not unemployment, is the true bogey man of central banks everywhere because it is the bogey man of the wealthy.

This is simple class economics.

It also helps explain why the economic theories that undergird such policies endure remarkably despite being thoroughly debunked both intellectually and empirically. That Robert Lucas can argue that the distribution of income is both inconsequential and harmful to study is more a statement about his total lack of scientific standing than it is about the economy. Inequality matters. It matters hugely. To those in the economy if not to economists. And, contrary to the mystical ravings and incantations of those who defend “free” markets, said free markets have no internal equilibrating mechanism to combat or offset the workings of capitalism.

Capitalism naturally begets inequality and thus needs to be repressed whenever inequality reaches an unacceptable level. The repressive force is known to us all as democracy, within which the much feared mob asserts itself and forces the redistribution of the gains made by capitalists. In the US this is known as “we the people” refusing to play along with the rigged games played by businesses everywhere and at every time.

Except, of course, we have been duped into just that. Playing along. Thus assuring the destruction of the once much admired American middle class.

It turns out that the aforementioned middle class was the creation, not of American “exceptionalism”, superior management, access to resources, basic freedoms, superior opportunity, or any other thing, but of a freaky coincidence: the raw power of the super-rich was undermined for a while by the epic struggles and costs associated with fighting lots of global wars. Once the wartime social improvements introduced to mollify returning veterans and to produce sufficient war material were eliminated by the resurgent wealthy, they could revert to the long term onward accumulation of wealth and power by the few. Those golden post-war decades were an aberration needing to be swept away so that the top folk could entrench themselves once more.

Or so to seems.

Is a modern day CEO really worth 354 times that of the average worker, whereas a 1980’s CEO was only worth 42 times? Of course not. Modern CEO’s are just much better at cheating and rigging the game. The economy hasn’t benefitted one bit from the spike in CEO incomes. So much for marginal productivity theory. It never was based much on reality, but it sure looked elegant, and sounded good. Especially if you wanted to defend inequality.

The more I think about it the more I come to realize that the entire corpus of post-war American economics was based on a misreading of history. The Kuznets curve was acceptable because it told the “right” narrative. It “proved” that capitalism could – no that it was – benign. And benign, moreover, within itself. It didn’t need lots of heavy handed government action to rein in its excesses. The Lucas Critique was nothing more than an attempt to prevent analysis that might endanger belief on the magic of markets. It was an ideological intrusion into the marketplace of ideas designed to stifle diversity and impose a single version of the truth. The awesome ignorance of the sweep of history and the equally stunning preference for isolation from power realities within much of modern economics is a disaster for all those who suffer the consequences of policy advice given out by professors of that economics.

Anybody born after about 1910 and reaching influence back in those golden decades had no real grasp of history relevant to the creation of economic theory. The entire neoclassical era was an intellectual misreading of the fundamental nature of markets. At the very least it was an attempt to justify a panglossian interpretation of the inner workings of real economies. Those rose-tinted explanations of markets turned economics into a mere belief system far from its more scientific origins. It was a belief system that could be deployed to support class based politics and a business driven policy agenda. It was a lie used to create the massively unequal society we now live in. It was culpable, as was anyone teaching it.

Capitalism is a nasty brute force that has useful side effects: it produces masses of stuff and thus the raw material to better society. But it doesn’t do the bettering. That’s the domain of the social, cultural, and political forces that are need to harass and suppress it. Any economics that ignores historical or political reality is thus entirely irrelevant. It ought to be ignored. It ought to be ridiculed. It is damn near unethical to continue to propagate it whilst arguing that you are theorizing about actual economies.

We must undermine anyone who does so theorize. They are purveyors of class based economics. They should be called such.

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Quote of the Day #6: Reformist Economics

“… the act of judgement that leads scientists to reject a previously accepted theory is always based upon more than a comparison of that theory with the world. The decision to reject one paradigm is always the decision to accept another, and the judgement leading to that decision involves the comparison of both paradigms with nature and with each other.” – Thomas Kuhn, The Structure of Scientific Revolutions

I will break my recent silence – I am still burrowing down into the issue of inequality – to make a comment on the skepticism I see concerning the Institute for New Economic Thinking.

It is justified.

Let’s think about this a moment.

If we are to set up an institute to support change, provoke discussion, and otherwise meddle about with the established way of thinking, and thus to earn the moniker of “newness”, we ought not to pack our agendas with a steady stream of establishment figures. That is not the way to revolution. It might, however, be the way to raise esteem and thus get the institution media attention.

Newness in economics is devilishly hard to locate. This is due, possibly, to the continued warring amongst longstanding points of view that have neither been reconciled nor defeated. Indeed, from my perspective, it is practically impossible to kill off an economic idea once it has attached itself to an ideological flag. If the flag persists so does the idea. No manner of empirical refutation is sufficient to get rid of old economics. There is always someone ready to argue its case or to critique the efficacy of the data. The entire economics enterprise is riddled through with such ideas lingering on in the shadows until they can jump back onto the stage suitably re-burnished. People call these ideas zombies for good reason. Society deserves more from its economists, but, unfortunately, has to settle for this constant recycling.

This doesn’t mean that no progress has been made over the last two to three hundred years. Not at all. We have a ton of valuable insights to arm ourselves with. Smith’s passing comment on the wonders of the invisible coordination of an economy gives us an opportunity to ponder on the powers of decentralized, one might say disorganized, organization. Then there’s Ricardo’s look at marginal production in land and its subsequent generalization into a whole edifice of like minded thinking on all sorts of economic matters. There’s the Marxist critique of capitalism and its socially destructive tendencies that are being borne out once more in our contemporary rise of inequality. And there are many more.

But Kuhn is right. Theorists are highly conservative people. They cling on to their theories despite a tide of empirical contradiction. Especially if they feel that no convincing alternative is available. After all it would be an odd economist who was willing to admit that all the currently available theories are wrong and that the profession has no much to say about the economy after all. Except for those insights of course, none of which are capable of carrying the burden that subsequent acolytes have attempted to pile on them.

An example: free market economists have taken decentralized organization and made it into something it cannot possibly be as long as people are involved. In the headlong pursuit of supposed scientific credibility they have erected an enormous intellectual superstructure on the flimsiest of bases. The whole thing totters and falls when poked at, which is why they don’t poke. Or, rather, they only poke behind closed doors where outsiders can’t see how frail the enterprises is. Meanwhile their ideas do enormous damage to everyday folk who suffer the consequences of policies the depend on the purity of theories that are partial at best.

The same is true for all stripes of economic theorizing. They are all incomplete, incoherent together, and can only be described as works in progress. None are “right”, but most are useful in one way or another. As long as you don’t take any of them too seriously, and as long as you admit their severe limitations, you can get a pretty good feel for the economy. Just don’t accept any of them as being “true”.

Which brings us back to the INET and to the reform of economics in general.

The crisis in economics – and there is one – was caused by the loss of pragmatism and a great forgetting of crucial lessons. The hubris of mid-20th century economics was that it forgot its many flaws. It pressed its claims way beyond any sensible limit. It forgot the essential contingency of its greatest insights – Smith, Ricardo, Marx et al were explaining what they saw before them. These were not eternal claims, but were historically rooted observations that may or may not be relevant in other times or circumstances. This hubris was part of a great up-swelling in confidence based upon a very small data set. Theory after theory was accepted because it passed muster when applied to a short time span. Few economists, apparently, thought to look back into deep history or to test theories against longer spans of time. So we ended up with a slew of ideas that stood up well in the short run and which were then accepted as being applicable more generally.

We ended up with theories to explain the exceptions and none to explain the rule.

So, when the latest exception blew up in our faces – the so-called great moderation – the economic orthodoxy which seemed to explain it so well, was suddenly revealed to be just another side bar. We can, apparently, explain yet another special case. We cannot yet explain anything more.

If Kuhn is correct and changes in theoretical paradigms depend on the availability of credible alternatives at the moment of crisis, then any institute of new economics ought to be searching the landscape for those new ideas and not rolling out proponents, no matter how notable, of the old. Plus it ought to fend off  the descent into blandness that seems inevitably associated with institutions everywhere – INET, to my eye at least, seems a little too eager to appear credible to those whose very ideas it purports to debunk, it lacks edge, and its efforts look highly sanitized to avoid overt conflict with the old establishment. The subject matter it deals with doesn’t look very controversial and already it seems destined to be just another island in the economic archipelago rather than an agent for change.

All in all the INET has little new about it, but is certainly more. Plenty more because of its ample financial support. Its bulk runs the risk of squelching smaller and less well funded alternatives and it could do its credibility a load of good were it it to provide wider support for the search for newness.

I won’t carp any more. George Soros is entitled to his vanity and his efforts. But as a person who made his fortune playing with financial hedges of various sorts he ought to recognize the value of variety and of competition. He could, for instance, back many horses in the race for the new. He could fund the grassroots of economics rather than its alternative establishment. He could fund dissident academic departments. He could do all manner of things that would be “new”.

What he is doing isn’t.

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History Lessons

History repeats itself. Cliche. Truth. Or, perhaps, we repeat history. That seems to be the lesson I am learning as I continue to delve into the darker corners of inequality, which is, undoubtedly, the issue of our age.

Before I go any further I have to note – it is relevant – Paul Ryan’s extraordinary speech last week, here’s a key paragraph:

“We have got this tailspin of culture, in our inner cities in particular, of men not working and just generations of men not even thinking about working or learning the value and the culture of work, and so there is a real culture problem here that has to be dealt with.”

This is a direct racial reference to the plight of inner city minorities. Only it isn’t a plight to Ryan, it is a self-inflicted wound. Naturally it is all the government’s fault for trying to help. A little dose of self-help and individual responsibility along with a few visits to church will no doubt cure it all.

Ryan has been criticized heavily for what he said. Rightly so. We ought to be, but are not, beyond such venal racial politics. Indeed, as Paul Krugman has pointed out, race is the central thread running through what can often appear as contradictory thoughts in contemporary American right wing politics. According to the right we have, apparently, a big problem with “them”. They are the ones who loiter and live off of those government programs like food stamps, Medicaid, and various other social bailouts. They mooch off of the hard working white middle and working class.

This nasty undertone of race has a long history in the American right, but really came to the fore with Reagan’s election. He, after all, spent a goodly amount of time attacking handouts whilst on the stump in the deep south. He was well aware of the implications, in that setting, of his words. He was issuing a coded rallying cry to southern whites, the echoes of which are heard in recent efforts to make voting more difficult throughout those states.

Much of the toxicity in our political discourse issues directly from such tactics. Our inability to deal with, or even recognize, inequality as a pervasive and crucial issue is partly, if not mainly, rooted in the moocher mindset acting as cover for the racial antagonism the polite society is supposed to have eradicated. After all if we set out to deal with inequality we have, by extension, to help “them” because they are disproportionately represented in the lower levels of our income strata. And dealing with inequality implies raising taxes on the upper levels in order to redistribute incomes and re-set the balance lost in the wake of Reagan’s anti-social programs.

The failure of the left to maintain a connection with the white working class sits squarely in this same space. Reagan and his heirs were able to convince that group to abandon their own self-interest because of the imagined unfair redistribution and thus higher taxes it became associated with. That the white working class suffered nearly as much, or that its tax burden was comparatively light, was overlooked Or it became overlooked in the context of the quasi racist tones of modern right wing politics.

So here we have Paul Ryan situating himself plum inside that recent and sordid tradition. He is trying to rally white voters ahead of this November’s elections. So a few alleged indiscretions or unfortunate wordings that still a mange to get the message across are fair game.

America really hasn’t progressed as far as many of us had hoped.

Another history lesson, again associated with inequality, is that of the ‘Kuznets Curve’. I re-read the original paper, “Economic Growth and Income Inequality”, which was actually a speech Kuznets gave to the American Economic Association in late 1954. His basic idea, which took form in other work also, was that the inequalities engendered by capitalism fade away naturally as an economy matures. Early on as a nation moves out of an economy dominated by agriculture and into one dominated by industry, capital is relatively scarce, regulation lax, labor abundant, and opportunities for ‘rent-seeking’ widespread. So inequality rises rapidly. A new wealthy class emerges and social divisions open up. Discontent and competition, however, start to close the income gap. Capital becomes less scarce. Labor markets tighten. Governments act to regulate business and limit rent-seeking opportunities. The game shifts and slowly, but surely, the early income gap is reduced.

This was an easy reading of history back in the early 1950’s. The data seemed to confirm it. And economists were eager to produce a narrative that was both in line with the data and had capitalism triumphant. It was, after all, in the context of the Cold War, urgent that the American version of capitalism be portrayed in a humane and socially beneficial light. Thus, I suspect, the economics profession was willing to delve only so far as to confirm wheat it wanted to say for ideological purposes.

The next few decades, through to the late 1970’s, seemed to conform to this Panglossian perspective. America boomed. The middle class in particular became the model of American economic power, and its constant accretion of income and material well-being stood as testimony to the benefits bestowed on us all of mature capitalism as explained by Kuznets and his ilk.

But this was radical misreading of history. We now know it. A happy confluence of events created an illusion of perpetually rising living standards for the great middle class. A rapidly growing population, diminished foreign competition, abundant cheap oil, and a massive indigenous market all conspired to make it look as if mature capitalism was benign. Business was good. Wages rose. The future was assured.

Then stagflation hit, foreign entanglements and setbacks undermined confidence and the newly empowered middle class needed to be told its gains were not temporary. Something and someone had to be blamed. Changes needed to be made.

Enter Ronald Reagan and the right wing counter revolution.

The package Reagan sold and the revised political trajectory he set us upon, and which successive presidents of both parties have hewn closely to, lead directly to today’s extraordinary levels of inequality. The line connecting the two is direct and clear. Reagan’s genius was to convince the white middle class to destroy itself all whilst being convinced it was helping itself. The hypocrisy and ethical indifference of the course he set out on have epic lessons we need urgently to learn. And to teach once learned.

Reagan, Clinton, and Bush each contributed to the inversion of the Kuznets curve. They drove us backwards to a society where deregulation, anti-labor activity, and rent-seeking became the norm once more. Only this time the discontent was managed carefully and government neutered. The triumph of neoliberal politics and its incessant attachment to pseudo-free market economic theory, led us to reverse the Golden years and to undo the middle class. It produced an economy dependent upon bubbles to create the illusion of growth. It papered over a great shift in income distribution. It argued that the return to a more basic capitalism would ‘lift all boats’ even though most boats were palpably taking on water. Only now that they’ve sunk is the message tainted sufficiently that a few, a precious few, on the left are organizing resistance.

We are indeed repeating history. We ignored or mis-learned the key lessons of those post-war decades. Capitalism may produce great wealth, but that wealth has to be distributed democratically in order for a middle class to prosper. And it is democracy that we have undone.

Meanwhile it is arrant nonsense to argue that all we ned to do is open up a few doors of opportunity and all will be well. No it won’t. Income inequality limits opportunity. It prevents it being real. It has ramifications on health and longevity. It has anti-social effects that prevent a united political response to the greed of the 1%.

Which, naturally, is the goal of our elite.

This isn’t an argument over economic theory so much as bare knuckled politics. Those of us who care are going to have to get angry to get attention because the cognitive capture of the elite is near complete. Let’s hope we can make a difference soon.

What’s the American analog to the Bastille anyway? What do we storm?

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Inequality

I am preparing a talk on inequality here in America, and so have been re-reading the Piketty and Saez work. Amongst the more eye-opening facts I have come across is the assertion, by Saez, that the surge in the top 1% incomes is so large that the growth of the bottom 99% amounts to only half the average [mean].

Think about that for a moment.

It would be like walking into a room full of people two feet tall with one thirty footer in the corner. The mean average is meaningless in such circumstances. We are all taught that in statistics class, but to come across such an egregious example in a dataset as large as all US tax returns is astonishing.

Not only is this an alarming fact, but to portray it adequately on a chart is difficult to do. The line representing that 1% doesn’t fit well with the 99%  because any scale you use cannot easily accommodate such extremes.

When I chat with people about the topic I realize that most have no clue as to how skewed and screwed up the economy now is. Even when they start to comprehend they retreat into a kind of ‘it doesn’t affect me’ denial.  The fact seems to be that most people want to cling onto the mythological image of America they carry with them, perhaps because confronting the reality we have made for ourselves means accepting unpleasant and disturbing facts.

Yet they’ve all been hurt by what happened.

They key, I think, is to be as apolitical as possible when you portray the facts. People can absorb those facts given time and lack of controversy. The bigger challenge is getting them to understand that they have suffered and need to do something to help re-assert a more acceptable balance.

There are still plenty who argue that inequality does no harm and that those who accumulate great wealth and/or incomes somehow deserve it. Ironically mainstream economics can help win the argument. Once you get people to commit to allegiance to free markets you can more easily get them angry over massive inequality when they realize it represents a perversion of market magic.

But then you get trapped into arcane discussions about how mainstream economics has nothing to do either with capitalism or reality or much of anything at all. People’s eyes glaze over, and economics is once again shown to be a waste of time.

Why do we bother?

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Is Medicine a Model For Ethics In Economics?

A recent correspondent asks whether medicine could act as a template for the importation of ethical standards into economics. On balance I don’t think it can. Here’s why:

Medicine consists of a practical part that faces outward towards its customers. We call those customers patients. From the earliest times medicine has adopted the credo ‘first do no harm’ which forms the ethical bedrock for all subsequent standards. This is relatively easy to do since ‘doing harm’ is quite quickly identified. Even then such an ethical background failed to stop the development and implementation of some outrageous and harmful medical techniques. In the modern era the ‘doing no harm’ ethic has allowed the creation of a number of rules that govern doctor activity and provide a measure of protection to patients. Those rules are enforced by various governing bodies that not only establish and monitor the rules, but also govern the very process that allows someone to call themselves a doctor in the first place. This governance structure gives practical medicine a coherence and shape that are identifiable by the public, and ensures that the profession recognizes it relationship with society at large.

Medicine also has an academic part that focus not on patients but on research, the development of future cures, and on public policy issues. This part also adheres to the ‘do no harm’ ethic, but in a more loose and less immediate fashion. The background of ‘do no harm’ provides a setting for academic debates about the efficacy of various treatments, drugs, and policies, but does not diminish that debate. It channels it. All participants would agree that at the end, when new treatments, drugs, or policies move from the academic arm of medicine into the practical arm they must rise to meet the standards the profession sets for itself. Prior to that research is governed more by the ethics of scientific discovery which may have a less rigid set of standards, but which are recognizable to the research community and which, ultimately, help ensure the overall profession can maintain its ethical standing once the product or that research is made public.

Economics too has two parts, but they are often conflated into one. A professor may both research and teach. Often that same person may offer policy advice. This conflation leads to an easy muddle. Academic freedom to pursue debate over the efficacy of various theories leaks into a similar freedom to advocate policies based up in those various theories. Consequently there is little or no separation between the research and the practical arms of economics. Academics want to defend their right to argue and debate, but they also want to advocate policies without the profession first reaching closure on what is acceptable theory. This is a sharp distinction with medicine where what is acceptable treatment is quickly propagated throughout the practical side of the profession.

Medicine has a coherence that economics does not.

Worse still is the fact that some economists have assumed theoretic closure and have thus excluded from both their teaching and their policy advocacy theories that do not fit within their closed system of thought. They evade debate and thus represent themselves, falsely, as being complete.

Arguments over the efficacy of Keynesian style remedies to the recent crisis are a good example of the difference between medicine and economics. The lack of closure, inclusion, and agreement within economics leaves two or more sometimes contradictory ‘treatments’ available to the public. The so-called experts within the profession are exposed as having arrived at no conclusion and, instead, offer up a torrent of alternatives that leaves the onus of solution selection to the non-experts. Naturally, this leads to a selection process based not on efficacy but on some other criteria such as political preference. The upshot is that economics with a degraded as social value, but continues as a nice academic pursuit as debate rattles on.

The ultimate point being that you cannot enforce an ethical standard on the profession when there is no coherent set of ‘treatments’ both recognizable and doing no harm. The lack of settled theory prevents the emergence of governance within the profession and thus limits the social value of all the thinking going on within academia.

The only way out of this bind, as far as I can tell, is for the profession to acknowledge that economics does not exist as a coherent program or set of ‘treatments’. It is a melange of competing ideas each of which may contribute at different times and in different settings. It is also a deeply contingent set of ideas, with the context of time and place being of the utmost importance. An ethical stance based on this shifting foundation requires a humble and plural approach. Economists don’t know much of lasting substance. They have identified few, if any, fundamental laws. And they have failed, after two hundred years or more, even to agree on the diseases they should treat. This is a pedagogical nightmare that ought to enforce a plural syllabus, and is representative of a field so divided that it ought only issue a caution-laden set of policy advice.

For instance someone whose theory precludes involuntary unemployment is deeply ethically challenged when they offer advice on the issue of unemployment. How can they? They are, in effect, saying there is no disease to treat. Yet, manifestly, there is a symptom. So they identify something else to cure. The symptom persists. Their cure continues to fail. And no one pays a price for doing harm.

This, of course, assumes that we can agree on what ‘harm’ is in the context of the economy. Whereas in medicine we can.

So: is medicine a model for ethics in economics? No. At least not yet. Medicine exists as a coherent body of thought with agreed upon treatments and an agreed upon relationship with society. Economics does not exist in that way and refuses to acknowledge its social relationship. Medicine is a profession. Economics is not. So medicine can have standards and governance. Economics cannot.

Perhaps it is easier to see this if we accept that economics is simply a subtext to politics. Then we can accept the futility of an expectation of either standards or governance. Ideology and personal world views clutter up our thinking too much. The best we can do is to accept certain rules of civility, let economists go about their irascible arguments, and accept that economics can never achieve the social contribution that modern medicine has attained.

You cannot apply standards to something that doesn’t exist. Economists seem to like it that way. They call it academic freedom.

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