economic theory

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More on What’s Missing

I suspect economic theorists are not alone in shunting to the side issues or phenomena that might upset the applecart.  But they appear to do it with a determination that other disciplines mind find somewhat alarming.  This is why I relentlessly and repeatedly mention Cause and his 1937 question about the existence of the firm.  It isn’t because I imagine that theories of the firm began in 1937, or that they are somehow restricted to a peculiar Anglo-Saxon view — Coase would have been an ideal advocate of such a view having spent his career on both sides of the Atlantic — but because he typifies the dilemma he raised.  He cannot quite accept the enormous ramifications of his question, and so he wanders off and tries to invent a reason for firms to exist that can be kluged together with the pre-existing purist view of marketplace superiority.  Firms, in the theoretical tradition born to help Coase out of the box of his own making,  are made out to be exceptions rather than the rule.

Well, when you have theorized utopian markets, how can any other phenomenon be anything other than a sullied alternative?  You’re stuck with trying to make everything else out to be a result of some mysterious “failure”.

Economists have done a wonderful job of hiding from the demons that reality might unleash and the damage such demons might wreak on their pristine imaginings.

A much broader scale of avoidance was suggested by Sraffa in 1926:

“In the tranquil view which the modern theory of value presents us there is one dark spot which disturbs the harmony of the whole. This is represented by the supply curve, based upon the laws of increasing and diminishing returns. That its foundations are less solid than those of the other portions of the structure is generally recognised. That they are actually so weak as to be unable to support the weight imposed upon them is a doubt which slumbers beneath the consciousness of many, but which most succeed in silently suppressing. From time to time someone is unable any longer to resist the pressure of his doubts and expresses them openly; then, in order to prevent the scandal spreading, he is promptly silenced, frequently with some concessions and partial admission of his objections, which, naturally, the theory had implicitly taken into account. And so, with the lapse of time, the qualifications, the restrictions and the exceptions have piled up, and have eaten up, if not all, certainly the greater part of the theory. If their aggregate effect is not at once apparent, this is because they are scattered about in footnotes and articles and carefully segregated from one another.”

Whenever economists trip over an uncomfortable counterpoint to their core ideas they have, throughout the course of their discipline’s development, had a wonderful ability to bury inconveniences like the firm in the footnotes.  Sraffa was, of course, trying to put forward a more sweeping critique, but I get the feeling that most economists do what he is suggesting they do whenever they have to tackle production, innovation, and all the other things that firms do.  They compress it into as small a space as possible and bury it in the footnotes where it can be ignored while they press on chatting about the glories of general equilibrium, set-in-stone preferences and the other paraphernalia of orthodoxy.  And, yes, I am aware that economists are a broad church, so don’t waste your time letting me know I am missing something, but I have that annoying habit of looking at what they teach the kids instead of what they argue about behind closed doors.

Speaking of a broad church, this is from Witt in 2006:

“Evolutionary economics focuses on the processes that transform the economy from within and investigates their implications for firms and industries, production, trade, employment and growth.

These processes emerge from the activities of agents with bounded rationality who learn from their own experience and that of others and who are capable of innovating. The diversity of individual capabilities, learning efforts, and innovative activities results in growing, distributed knowledge in the economy that supports the variety of coexisting technologies, institutions, and commercial enterprises. The variety drives competition and facilitates the discovery of better ways of doing things. The question in evolutionary economics is therefore not how, under varying conditions, economic resources are optimally allocated in equilibrium given the state of individual preferences, technology and institutional conditions. The questions are instead why and how knowledge, preferences, technology, and institutions change in the historical process, and what impact these changes have on the state of the economy at any point in time.”

This makes sense.  Notice the introduction of time.  Notice the emphasis on change occurring within the system rather than being some magical “exogenous” phenomenon.  And notice the implied feedback between the creation of knowledge and the state of the economy. I have mentioned too many times that I am at a loss as how to explain the absence of knowledge from the standard production function that serves to suffice as a description of what a firm is in most economic theory.  The increase in our collective inventory of useful knowledge is one of the most obvious features of our relatively modern acceleration towards universal prosperity.  This accumulation of knowledge is far more important to our current state of wellbeing than, for instance, any accumulation of capital.  After all, what is “capital”?  As an aside: those of you foreseeing the imminent demise of “capitalism” need first to stipulate what you mean by capital.  Personally I think it foolish to predict the end of something that remains ill-defined.  Capital, as in the bricks and mortar, or even of the financial assets, of an economy will surely continue to exist.   So if it’s simply the transference of ownership you are predicting, we have examples from history.  Not very helpful ones if you are imagining a great improvement in outcomes.

Anyway, back to the firm as a problem for economics.  This is from Teece and Pisano in 1994:

“What is it, then, about firms which undergirds competitive advantage?

To answer this, one must first make some fundamental distinctions between markets and internal organization (firms). The essence of the firm, as Coase (1937) pointed out, is that it displaces market organization. It does so in the main because inside the firms one can organize certain types of economic activity in ways one cannot using markets. This is not only because of transaction costs, as Williamson (1975, 1985) has emphasized, but also because there are many types of arrangements where injecting high powered (market-like) incentives might well be quite destructive of the cooperative activity and learning. Indeed, the essence of internal organization is that it is a domain of unleveraged or low-powered incentives. By unleveraged we mean that rewards are determined at the group or organization level, not primarily at the individual level, in an effort to encourage team behavior, not individual behavior, in order to accomplish certain tasks well. Inside an organization, exchange cannot take place in the same manner that it can outside an organization, not just because it might be destructive to provide high powered individual incentives, but because it is difficult if not impossible to tightly calibrate individual contributions to a joint effort. Hence, contrary to Arrow’s (1969) view of firms as quasi markets, and the task of management to inject markets into firms, we recognize the inherent limits and possible counterproductive results of attempting to fashion firms into clusters of internal markets. In particular, learning and internal technology transfer may well be jeopardized.”

I include this in my random set of quotes because it both mentions Coase [yeah!], and get to another aspect of economics that seems to be missing: notably that we live in a collective world where some element of solidarity is essential to the understanding of how value is created.  Orthodox economics builds itself up from a purely individual perspective.  This is because it started out as an exploration of demand more than of production.  It attempted to put consumers in the center of the arena, which was forgivable in an era when industry was primitive and production was of simpler goods and services.  But we have moved way beyond that era.  Production nowadays is complex spatially, informationally, and with respect to the time it consumes.  If it depends on the mobilization of “teams” how, exactly, does the concept of a wage being fixed by a person’s marginal production fit in?  The elegance of the marginal approach is its main attraction — economists swoon over elegance — suit its realism in a modern context is somewhat suspect.

And to double down on my view that knowledge is central to any understanding of economic growth, this is from Soo, Devinney, and Midgley in 2002:

“The notion that knowledge is a source of competitive advantage has been advocated extensively in the management literature over the past decade (i.e., Winter, 1987; Quinn, 1992; Nonaka and Takeuchi, 1995). The value of intangible assets increases as goods and services become more sophisticated in content and production and the foundation of competition becomes intensively knowledge-based. As hypothesized by Teece (1998: 76), “the key sources of wealth creation at the dawn of the new millennium will lie with new enterprise formation; the renewal of incumbents; the exploitation of technological know-how, intellectual property, and brands; and the successful development and commercialization of new products and services”.

I think that stands for itself.  Innovation and knowledge accumulation, as expressed through the vehicle we call a “firm” is a central phenomenon of interest to economics.  The missing middle looms large.  But there are a ton of people looking at it.  I wonder when it will be moved from the footnotes and into the main text.

Lastly, just to rub it in.  This is from Simon in 1979:

“In the views of Mason and Friedman, fundamental inquiry into rational human behavior in the context of business organizations is simply not (by definition) economics – that is to say, political economy – unless it contributes in a major way to that purpose. This is sometimes even interpreted to mean that economic theories of decision making are not falsified in any interesting or relevant sense when their empirical predictions of micro-phenomena are found to be grossly incompatible with the observed data. Such theories, we are told, are still realistic “enough” provided that they do not contradict aggregate observations of concern to political economy. Thus economists who are zealous in insisting that economic actors maximize turn around and become satisficers when the evaluation of their own theories is concerned. They believe that businessmen maximize, but they know that economic theorists satisfice.”

He gets us back to Sraffa’s critique.  Economists dither endlessly.  They postulate great certain edifices and then waffle weakly about their foundations.  I have always loved the Friedman dodge on the need for realism in assumptions or on the approximation that theories have to reality.  Economists theorize one way and then live their own lives another.  Just how many of them “optimize” or “maximize” their own economic activity?  How would they know if they did?  And how many of them actually believe that the farce they call a production function is how stuff gets produced and distributed in a modern economy?

I think we can all agree not many do.

They just bury their own experiences in the footnotes so as not to muddle the utopia they teach.

 

Addendum:

I realize that I used the phrase “universal prosperity” in the above text.  I mean it.  As Philippon recently remakes, economics has two major questions to answer: how is that prosperity grows; and how is it that prosperity is distributed.  The first is about the timeless and universal battle against scarcity.  The second is about the equally timeless and universal apportionment of the spoils of that battle. The great leap forward in our useful knowledge during the past two to three centuries has solved the first.  We know how to overcome scarcity — perhaps a little too well given the abundance of consumerism in some places.  We are yet to solve the second question to everyone’s liking.

So, yes, we are living in an era of universal prosperity.  Whether that prosperity is well distributed is an entirely different matter.

 

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Carter on Keynes

The biography of Keynes by Zachary Carter ends on a decidedly wimpy note.  The concluding chapter is devoted to the financial crisis of 2008 and the subsequent half-hearted sort-0f-Keynesian policy response.  Whilst Carter seems fine with his condemnation of neoliberal policies and is clear about the abject failure of the notion that financial markets act in either a self-correcting or a rational manner, he then goes on to ask why Keynesianism has proven to be so politically weak:

“But pointing the finger at neoliberalism raises uncomfortable questions for Keynes and his defenders.  Why has Keynesianism proven to be so politically weak, even among ostensibly liberal political parties and nations?  The Keynesian bargain of peace, equality, and prosperity ought to be irresistible in a democracy.  It has instead been fleeting and fragile.  Keynes believed that democracies slipped into tyranny when they were denied economic sustenance.  Why, then, have so many democracies elected to deny themselves economic sustenance?”

Surely the answer is obvious.  Indeed, the answer is littered throughout the previous pages of Carter’s book.

Neoliberalism as it cohered in the second half of the twentieth century was essentially a reactionary effort to undermine democracy.  Carter himself aptly describes what emerged as a pseudo aristocratic mindset bent on protecting major asset owners, large corporations, and a singular version of personal liberty that allowed space for the co-option of government by those forces in the name of “liberty”, but which disallowed space for government action to protect the collective against those same forces.  In other words “liberty” was available to the powerful who owned the back channels into government and less so to those who relied on government to ameliorate the consequences of the activities of the powerful.

Democracy became a name that papered over a plutocratic reality rather than a fact.  The aristocratic counter-attack that gathered momentum in the 1970s and flourished in the decades since was designed precisely to deny the very sustenance that Carter wonders about.  The Keynesian vision, at least the version Carter describes, was firmly in the aristocratic cross hairs because it implied a focus on equality and a more generously shared prosperity.  It was also a grand philosophical vision, however naive, of a post-scarcity world rather than a technocratic focus on efficiency.  As such it ran counter to the essence of twentieth century corporate ideology with its relentless desire to assert the power of capital over that of labor.  Keynesian thought had to go.

Perhaps a more nuanced response to Carter is that Keynes tried to carve out a middle ground in a century where extremes were the norm.   Caught between the siren songs of fascism and Marxism and with early versions of capitalism apparently crumbling around him, Keynes was impelled to salvage a less extreme world.  This effort forced him to accept the real world around him which is why his economics is riven through with pragmatic acceptance of reality and eschews the fantasy worlds that others have preferred to theorize about.  It’s what makes him a more human and not a glittering prophet.

What comes across as a more vexatious problem is why it was that the economics profession was so eager to abandon this realism and infuse what became the commonly accepted, and thoroughly Americanized,  version of Keynesianism with odd bits of classical thought and misleading policy certainty kluged onto a sanitized Keynesian core.  There appear to be two main explanations:  one was the paranoia of Cold War America where even a faint whiff of collectivism was enough to destroy careers and gain the opprobrium of the elite and the media.  This alone forced many a good Keynes follower into the shadows.  Second was the ambition of people like Samuelson and Solow to re-build economics on a mathematical foundation.  This required re-configuring Keynes in ways that his ideas could not easily be confined.  The resultant version of Keynes, as we all know, is hardly Keynes at all.  Samuelson and his followers expunged the key elements of Keynes and slowly, through each new edition of their works, watered it down to accommodate the aristocratic counter attack.   So, ultimately when the aristocrats won the ideological war for the heart and direction of economics is was largely because the Keynesian side had shriveled into a technocratic shell more akin to a combination of maximizing mathematics and accounting rather than being a clear vision of society.

This is truly unfortunate because the loss of ideas concerning the role of radical uncertainty, complexity, and skepticism concerning equilibrium could all have helped move economics along a realistic path.  This is especially so given the enormous advances subsequently made outside of economics on all those fronts.

Naturally economics had to be battered into submission by the plutocratic elite in order to provide intellectual heft to its need for low wages, shareholder supremacy, unemployment, globalization, deregulation, and so on.  Getting it away from its Keynesian focus on all the attributes Carter lists, and turning it into a modest mathematical justification for all that the elite wished turned out to be less of a struggle than it ought to have been.

So, whereas Carter tries to be profound in asking why Keynesianism crumpled so easily, he is simply re-telling a well worn history.  Economics went wrong because it had to go wrong in order to eliminate a source of opposition to the plutocrats.  Keynesianism was allowed to continue to exist in academia only as long as it was tamed and de-fanged.  The irony is that as economics proclaimed itself as more scientific it was in fact becoming more political.

Re-inventing economics requires, by implication, being ready to recognize its political content.

But that’s not new either.

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Some Critical Responses

It is always interesting to read what people say in response to what you write.  It is also always educational.  I enjoy the learning.

I recently wrote a short piece meant to be a little on the light side pondering the odd comparison of the use of the word essential in our vernacular understanding of it, and the way in which standard economic theory suggests we compute our various levels of worth.  I quoted J.B. Clark with respect to this latter point.  I made the point that Clark’s method is still the most well-worn within economic theory.

And then I was criticized for not reading enough economics to understand that there is no such thing as “economic theory”; there are, I was admonished, a large number of such theories, and that we are all entitled to pick and choose between them.  There was then mention of a number of economists who all sit outside the framework of standard economics and have been critics to one degree or another of it.  The implication was that I am unaware of these good folk otherwise I wouldn’t look at economics through the prism of having a central set of ideas that I , presumably erroneously, refer to as “standard economics”.

Well, allow me respectfully to re-assert my belief that there is, indeed, such a thing as standard economics.  It’s the kind of thing you will read in any well-selling textbook.  I have never asserted, however, that standard economics is an impenetrable monolith.  There are shades of grey within it sufficient to accommodate a great percentage of practicing economists.  It was to help encourage the creation and spread of an even greater plurality of ideas that I re-engaged with economics a couple of decades ago.

I don’t think that the existence of a standard set of ideas is controversial.  Why else would the literature be full of the arguments in the mid-twentieth century?  Why else would there be bookshelves groaning under the weight of critiques of the “Chicago School” etc? That there was a decisive shift in the profession of economics away from one set of standard ideas and towards another is indisputable.  So I take it, to borrow a vexed word from the subject itself, as axiomatic that there is such a thing as the standard set.  That this set is the only one in existence is not the issue.  No one would argue that.  But it is the dominant set.  It is the sharp end of economics as manifested in our cultural, social, and political discussions with respect to the economy, business, markets, regulation, and government policy.  It has infested more distant terrain like the law.  It has exported many of its methods and principles into common practice by ordinary people who have never studied economics, but accept its findings as “laws” or “scientific”.  The everyday lingua franca of business is positively brimming over with references back to standard theory.

It is this expansive impression of the modern discipline of economics upon our society that I am most interested in.

I am well aware that, within the safety of their profession economists, are generally willing to discuss the variety of ideas that comprise standard theory.  They are also usually careful to let everyone know that many — unfortunately too many — of the critical intellectual components of their overall edifice are somewhat frail when exposed to the rigors of reality.  I happen to believe that marginal productivity is one of those frailties.

I don’t think it ideologically extreme to write about this.

So, allow me to press on with my enquiry of economics.  The articulation of the web of ideas centered on marginal analysis, of which marginal productivity is a part, is very much alive and well in standard economics.  It is rolled out, often in subliminal form, to justify the distribution of incomes in our modern economies.  And it does appear to be an inversion of what most of the rest of society thinks as essential.  Jeff Bezos earns far more than the average worker in an Amazon warehouse.  Standard theory seeks to explain why.  Yet it is the latter, not the former, deemed essential.  The paradox exists.

None of this implies that someone like Simon hasn’t tried to describe the pay of CEOs.  The literature relating the various theories of the firm, which is my particular interest ever since I read Coase decades ago, is full but mostly marginal.  It is marginal because, as Coase pointed out, the very existence of something called the “firm” is a denial of the perfection of the markets that the more committed members of the standard theory favor.  Since this contradiction is hard, if not impossible to resolve without re-inventing a century’s worth of theoretical structures, it has been ignored.  This is despite the best efforts of Williamson, Winter et al.  And, yes, we all know about the so-called “capital controversy”, and that the Robinson argument was victorious in the battle but defeated in the war.

Just for the record: I like the idea that an economy is dominated by rule-based decision making rather than by a more extreme form of rationality.  Satisficing is a very comfortable concept.  I happen to think that the ignorance revealed by total factor productivity could be reduced by the abandonment of both “capital” and “labor” from a production function and replaced by more accurate inputs such as energy, raw materials, skill, and information or knowledge.  Heck, I would even find room for management in there.  I don’t think it possible to “maximize” anything in an economy because of the irreducible uncertainty facing decision makers.  Equilibrium is more an illusion than a fact because the system is bothy open and dynamic.  It may be useful as an investigative tool, but as a description of reality?  Oh, and I tend to see the world through the prism of evolution and complexity.  Yes, I am aware those things exist.

Finally: I see economic activities as as inextricably intertwined with other social and political activities.  They are not separable.  So I would expect there to be as many forms of economics as there are of politics.  I am encouraged that a number of economists are now being more empirically driven.  It’s about time.  Hopefully the days of grand and elaborate theories with intricate machinery that all has to fit neatly together are gone.  Economics needs a more modest moment. Perhaps the pluralism that I and others have been encouraging for a while will help in both making economics more humble and more useful.  Even so the residual effect on our culture of the ideas within standard theory, most notably the power of unfettered markets, will create a great deal of inertia that a modest economics might find difficult to overcome.  But it’s worth trying.

Meanwhile I will continue to poke a little fun at the more odd aspects of standard theory.  Even if it reveals a little of my own ignorance.

Odd things like marginal productivity.  And don’t get me started on revealed preference.

Doh!

Did I just say that again?

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Two Definitions

Two definitions, one for ‘essential’ and the other for the way in which, according to economics, people are rewarded for their work.

In recent weeks we have become accustomed to calling someone an ‘essential worker’.  These are our most important people.  They are, if the dictionary doesn’t lie, indispensable.  They are extremely important.  They are key, crucial, vital, and needed.  They sound pretty darned special to me.  They must be doing things that, were they not doing them, would bring the economy to a screeching halt.

My goodness, they must be paid a lot.  Surely anyone who is a vital cog in the machinery is paid commensurately with that importance.

Not really.  Not at all for most of them — the exception here in the U.S. being doctors.  No, most of our ‘essential workers’ are amongst our least well paid.  They cannot afford to live in the cities or towns where they do their essential work, so they commute and thus expose themselves to the risk of contracting the virus that is our current scourge.  They certainly aren’t paid for that risk, no matter what the finance textbooks tell us about risk and reward.  Apparently only the ‘risk’ managed by hedge fund mangers and their ilk matters, even though it turns out they aren’t essential at all.  Instead they sit safely ensconced in their second or third homes, or on their yachts, moving paperwork from one side of the desk to the other, and getting paid very nicely for all that incredible effort.

Economists tells us that people are paid for what they produce ‘on the margin’.  Indeed, marginal productivity, as this particular piece of economic fiction is called, is fairly uncontroversial even among the so-called progressive economists. John Bates Clark describes for us the effect of this oddball idea:

“the distribution of the income of society is controlled by a natural law, and that this law, if it worked without friction, would give to every agent of production the amount of wealth which that agent creates”

It’s a natural law!  It sounds pretty sensible too: you get out what you put in.  Sort of.

And it seems to imply that economic theory is comfortable with our most essential workers not adding much to our collective wealth.  Whereas hedge fund managers on their yachts moving paperwork around do.

Which is upside down.  But that’s not unusual for economics, whose most ardent practitioners take a particular delight in being counter-intuitive.  So, whereas those of us poor souls who think words have regular meanings would think that essential workers are those who are adding the most value, economists and their more irregular meanings don’t think that at all.  Isn’t this counter-counter intuitive?  Are economists so befuddled by the elegance of their machinery that words have lost all meaning?

Marginal productivity only exists in order to establish a ‘natural law’ to frighten workers into believing that they have to settle for poor wages — who can overturn a natural law?  The fact that society sees some workers as essential doesn’t matter to economists.  What matters is preserving a variety of interlocking intellectual marvels so that their Ptolemaic apparatus doesn’t implode.  That this produces circumstances where essential seems to mean trivial rather than vital is not an issue.  The goal is to preserve the machinery, it is not to make sense.

So one of the bedrocks of economic theory says that our most important workers are doing something that adds little to no value.  They are essential but, well, not essential.  They are hugely important to the workings of the economy, but ought be poorly paid because of their insignificance.

Am I the only one to find this odd?  I must have missed something really counter-intuitive.

Maybe it’s the pandemic playing with by mind.

And, don’t get me started on ‘revealed preference’!  We can laugh at that another day.

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Pandemic Musings

I have been digging around a fair bit lately trying to understand the role of economics in the extent of the inequality being laid bare by the pandemic — more on that later.  A few interesting nuggets worthy of a quick note popped out along the way.

Thomas Phillipon opens chapter one of his recent book this way:

“The big debates in economics are about growth and inequality.  As economists, we seek to understand how and why countries grow and how they divide income among their citizens.  In other words, we are concerned with two fundamental issues.  The first is how to make the pie as large as possible.  The second is how to divide the pie.”

Presumably his approach ignores the ugly dismissal of inequality by the likes of Lucas who said it was of no enduring interest.  Or words to that effect.  Distribution is one thing.  Inequality is another.  Sliding back and forth between the two words elides the moral centerpiece of the discussion: what level of inequality is acceptable?  Economics, once it adopted the marginal method, has avoided such a discussion and has, instead, hidden behind the “it’s the way the world works” argument.  In other words it took an ideological stance under the guise of scientific discovery.  Even today we can easily find economists blithely arguing that people get paid equivalent to their contribution.  As if calculating said contribution is that simple.  As if that’s the only factor in determining pay.  As if  … well you get the picture.

Economists are fond of playing neat tricks like this.

They stumble on something pretty useful, marginalism being one example, they elevate it to become a universal truth impervious to attack, and then they assume they know something about the world that others just don’t “get”.

They also, conveniently, sanitize their subject from the rather nasty need to ponder or take into account factors like power relations.  Not that they ignore such things entirely.  Look hard enough and you can find dark references to horrible things like monopoly and monopsony tucked safely away in marginal notes.  We are assured in those notes that these murky issues ought not divert us from applauding the truths of “free” markets.  That the real world is more characterized by the exceptions economists shove into those margin notes than by the pristine centerpiece of their thought is left for the assiduous reader to divine.

Which is why most people come away from a study of elementary economics with a thoroughly distorted view of economic “truths”.  When the average student takes a single economics class, the odds are that they emerge thinking that free markets are wonderful and that government intervention stinks.  After all, that’s the ideological thrust inherent in most economics and the way it’s most often taught.

If Philippon is correct and growth and inequality are the two big issues, why don’t the elementary books focus on them more?  Why do we waste precious time in setting up the perfect and decidedly unreal model of market workings first?  Why not relegate that silliness to the appendix where it belongs?   Wouldn’t it be more productive for the average student to engage in discussion of the real world rather than in the fantasy of perfect markets etc?

Anyway, Phillipon has written a good book.  He helps the interested reader learn precisely why economics has contributed to the growth of inequality.  He doesn’t say it quite that way, of course, but by describing the drift away from “free” markets — the subtitle of his book is “How America Gave Up on Free Markets” — he implies that there were, or are such, things and that much of the present awfulness is due to the aforementioned drift.  Economic theory gave vital intellectual heft to the drift away from freedom.  All in the name of freedom, of course.

Another book I have been tackling is “Unequal Gains” by Lindert and Williamson.  This is also an excellent read.  Some of you might be surprised to find this as one of their findings:

“There is no fundamental law driving the history of income inequality.  Inequality movements are driven not by any fundamental law of capitalist development but instead by episodic shifts in six basic forces: politics, demography, education policy, trade competition, finance, and labor-saving technological change.  These forces appear to be exogenous with respect to inequality.  If they are indeed exogenous and hard to predict, then four centuries of American inequality can hardly be driven by some capitalist law of motion.”

It has, of course, become axiomatic on the left that capitalism, whatever that is, is to blame for pretty much everything we find horrible.  And inequality certainly sits high up that list.  The problem is, from my point of view, is that leaves too much unanswered.  It leaves very difficult questions on the table.  My right wing friends all chatter on about liberty and how the modern existence of that concept set the stage for the fantastic growth in prosperity most nations have experienced at different ages over the past two hundred years or so.  “Ideas matter”  or “bourgeois values” are rallying cries for the right as they seek to defend capitalism from the onslaught of criticism it well earns.

And I agree to an extent.

Which is why I see the co-evolution of modern democracy as essential to the mitigation of all the manifest errors that excessive liberty [aka capitalism] generates.

I am always drawn back to the work of Balibar in this respect.  His notion of “equaliberty” still fascinates me.  It is a strikingly simple idea.  At the dawn of the modern era, when the word liberty was being tossed about within the elite sector of society that craved more space for itself, it had many meanings.  It became refined and narrowed as the elite sought and secured more power and eventually excluded some of its original content.  It did not, for instance, extend to equality for minorities or women.  And it certainly did not include any notion of self-government for the masses.  Battles had to be fought to re-generate the other meanings of liberty that had been cut away as the modern elite entrenched itself.

But they have been fought.  What we sometimes forget, and this I think is where economists go wrong, is that those battles must be fought continuously.  The context for the emergence of that we now call economics is the social battleground on top of which relatively free people can execute exchanges without arbitrary occlusion by the state.  Ignoring the socio-political implications of growth and distribution undermine the efficacy of the results of study.

Which brings me to my next snippet.

Hayek has always been a source of interest to me.  His ideas on knowledge are intriguing.  Yet he is a great example of the myopia modern economics developed when it took its ideological turn in the mid twentieth century.  Hayek inspired people like Thatcher and Reagan to adopt a severe anti-social political stance because he was unable to distinguish between the “state” as arbitrary autocratic power, and the “state” as modern democratic government.  Economists still struggle along those lines.

He said in 1979, and I paraphrase, that the word “social” is a weasel world because nobody knows what it means.  Perhaps this is true.  But by that standard no one knows what a market is either.  Come to think of it, what does the word “free” as in “free markets” mean?  Can everyone join in?  Are we all free to participate?  Or are some people more “free” than others?

Economics has been encumbered by this muddy sort of definition of its terms as long as it has existed.  Even the most rigorous axiomatic constructions seem to leave the barn door open to question. Or, rather, they are designed to remove all the awkward bits from the subsequent analysis in order to render an elegant result rather than one that might be a tad opaque, but which might also reflect the complexity of life.

Hayek had a habit of tossing around what appeared to be wonderful insights: his notion that an economy contains too much information to be processed by a central body remains a classic assault on centrally panned economies.  But if there is too much information for that, how can we possibly “know” anything about the economy?  We cannot, for example, ever “know” whether a market has aggregated all the relevant information.   To know that it has, we would need to know the full extent of the information, in which case we would be in a good position to execute a central plan.

But we will let that slide.

Let me end with Paul Romer.

I recently read  one of his blog entries in which he expressed surprise that economists could be blamed for much of what is wrong in our contemporary economy.

Earth to Paul!

Perhaps nothing more summarizes the state of the discipline than this.  The relentless anti-social message inherent in most modern economics is stark.  Silly results such as the fact that there is no such thing as involuntary unemployment ought to be sufficient for any reasonable person to conclude that economics is manifestly detached from reality.  The reliance on marginal productivity as the sole determinant of wages is another.  Or the entire edifice of modern business school thought around shareholder value, which is a simple derivative of right wing economics, and along with its pernicious add-ons like agency theory and “core competency” became the driver of outsourcing, globalization, and the suppression of wages.  Romer might shunt that error onto the laps of business school professors, but the intellectual lineage is clear: economics claimed certain truths and consequently spread the contagion into related subjects.

Economists might shun the blame for shareholder value, but the rest of us ought not allow them to.  Pull on the thread and you quickly follow the idea back to its ancestral home alongside non-existent involuntary unemployment.

Now I agree whole heartedly with Romer that economics has produced some really socially useful ideas.  He references counter-cyclical fiscal and monetary policies as a good example.  I agree.  But those ideas date back a way.  It’s the clutter and anti-social ideology that post-dates them that caused the modern antipathy towards economics.

Ultimately economics is a very difficult discipline to imagine ever being wholly socially responsible.  It is an ongoing conversation that attracts people who prefer to exclude complexity in order to distill truths about reality.  They love the counterintuitive nature of some of its main results.  It is excessively mathematical, and so it allows those people to express themselves and elide the full murkiness of reality.  It applauds elegance and thinks it encourages efficiency.  But it has gone too far away from its origins.  It is  no longer trying to explain the world.  It is trying to explain itself.

It rewards the wrong things.  Instead of seeing Arrow/Debreu as an amazing disproof of the existence of general equilibrium, it is awed at the technical achievement of cobbling together such a fantastic assemblage of make-believe.  General equilibrium was not a discovery.  It was an invention.  It began as a search for the infamous invisible hand and ended with the creation of a ghost that haunts us still.

Arrow, I think, would agree.  Economies are a bit like nature.  They create themselves.  The illusion of design is what draws us in.  But there is no design.  An economy just is.  It self-organizes within socially and politically established boundaries.  Which means that any distribution of resources is as legitimate as any other because politics and social relations pre-exist the economic transacting.  These relations give legitimacy to the economics.  Indeed, they define it.

So Phillipon is correct: there are two big issues.  How to grow the pie so we all prosper and how to divide it so we all prosper.  The solutions are not, however, the unique domain of economics.  They are social questions which involve all the elements that Lindert and Williamson list, and more.  They defy Hayek’s anti-social agenda, and they require a lot more sensitivity to the real world than many economists are willing to show.  Which is what Paul Romer has discovered.

But enough!

My pandemic induced seclusion has allowed me to meander too far.

Stay safe everyone, and remember that economists don’t know a much as they appear to claim.  Which means they’re just like the rest of us.

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