free markets

/ / , , , /

Leftists are not “anti-market”

I have been reminded by Tyler Cowen of Bryan Caplan’s simplistic theory of left and right.  It’s short and to the point.  Leftists are, he says, “anti-market”.

He is wrong.

Leftists are anti-market obsession.  They are anti-market fanaticism.  They are anti-market worship.  Specifically, they are opposed to the form of idealization used to articulate “the market” in economics.

There’s a difference.  And I assume Bryan Caplan knows as much.

There has been a recent attempt amongst mainstream economists of various nuanced differences to soften their discipline’s unhealthy attachment to markets.  This seems to be a recognition of the absurdly monotonous application of market-this or market-that to whatever problem falls within the purview of economics.  The discipline has become trivialized by its inability to think a bit more broadly about economic problems.  We all understand the urgency of the need felt by the mainstream to denigrate any form of intervention onto the hallowed ground by the sullied hands and minds of government technocrats.  That ideological urgency is well known to all.  Having erected its intellectual defenses around the logic of the idealized market and all the munificence derived therefrom, economics has a great difficulty in going beyond.  

A problem flowing naturally, and frequently, from this homogeneity of focus, is that economists have become casual in their language.  They toss around phrases including the word “market” without feeling the need to provide context, specification, notes of relevance, or any other marker suitable to situate their comment with reference to the real-world phenomenon being discussed.

This we hear frequently that “markets aggregate information”.  In fact, we are told markets do this very well.  So well, in fact, that there is no need to specify what any of those three words means.  This brilliance at aggregation is just presented as a given.  Of course, economists all know the backstory to this statement.  They know the necessary proofs and so on that establish, beyond doubt, that markets are unsurpassed at aggregation.  As long as the conditions that make their models produce such aggregation exist.  

Which they don’t, but that’s the risk with idealization.  We all know the conditions expressed in the model do not exist.  That’s not the point.  The point is to explore the properties of the idealization and extract bits and pieces that look useful in interpreting the real world.  Where “look useful” becomes a question of judgement driven by a prior existing worldview. 

Markets actually do not aggregate information.  They disaggregate it in order to strip away anything that might not be associated with a price.  What they are left with is a single dimension.  With all that information eliminated the market, in its newfound and particular ignorance, is said to be uniquely capable of allocating scarce resources.  None of that discarded information is assumed to have relevance to allocation.  Not that we would ever know.  It’s been discarded.  

The problem with the process of idealization is that it requires exactly this elimination of what is considered to be extraneous.  This, obviously, involves a great deal of value judgement.  The reduction for purposes of simplicity and model specification becomes a vital component of the economist’s art.

This art is a precursor to the subsequent scientific skill.  But art it still is.

It is in this conjoining of art with science that economists sometimes get especially sloppy.

For instance, in his short note on his simplistic theory of left and right, Caplan says that leftists are anti-market, and then, later on, he says that “free markets get on their nerves”.  This is lazy.  Are we discussing markets, or free markets?  Are they different?  Are the underlying models, assumptions etc different?  Are the two available for different prescriptive and analytical purposes?

That’s unfair, perhaps, but it demonstrates the way in which economists mix and match phenomena with an unhealthy ease.

And even if we accept that “markets aggregate information” with each of those words fully specified to fit within the logic of price theory, we have the small problem that the obsession with prices has led to the aforementioned elimination of swathes of potentially highly relevant information.

By obsessing over prices and the act of exchange economists have reduced economics to a narrow shadow of what is needed to comprehend a real economy.

In the words of Ronald Coase:

“What happens in between the purchase of the factors of production and the sale of the goods that are produced by those factors is largely ignored … Even more surprising, given their interest in the pricing system, is the neglect of the market, or more specifically the institutional arrangements which govern the process of exchange.”

He goes on:

“This preoccupation of economists with the logic of choice … has nonetheless had, in my view serious adverse effects on economics itself.  One result of this divorce of theory from its subject matter been that the entities whose decisions economists are engaged in analyzing have not been made the subject of study and in consequence lack any substance.  The consumer is not a human but a consistent set of preferences.  The firm to an economist … is effectively defined as a cost curve and a demand curve.  Exchange takes place without any specification of its institutional setting.  We have consumers without humanity, firms without organization, and exchange without markets.”

You can tell he was vexed.  The ironic centerpiece of his critique is that to get price theory burnished to its ultimate extent, and thus to be able to render the statement that “markets aggregate information” as a truth, economists had to get rid of the marketplace and substitute some other, and extraordinarily idealized, object.

And it is this contradiction, or should I say sleight of hand, that leftists object to.  It isn’t markets, free or otherwise, that we object to.  They are real things in the real world.  We cannot object to reality.  That would be absurd.  No.  What we object to is the construct that economists call “the market” which , in all its abstract magnificence, floats midair, unmoored from reality, stylized and yet worshipped as an entity so valuable that the real world needs to be rebuilt in its image.  

Bryan Caplan’s simple theory is, simply, like a lot of economic argument, a way of avoiding reality.  

So, let me summarize: leftists are not anti-market.  They recognize that what is called a market by economists is a rigorously simplified idealization.  And that like all idealizations a lot is left out in order to render the idealization coherent.  It’s what’s left out, not what’s left in, that leftists object to.  And that is not trivial. Coase says so too.

/ / , , , , /

Economics as Storytelling: McCloskey Again

This is not new to most of you of course. You are already steeped in McCloskey’s Rhetoric. Or you ought to be. After all economists are simply telling stories about the economy. Sometimes we are taken in. Sometimes we are not.

Unfortunately McCloskey herself gets a little too caught up in her stories. As in her explanation as to how she can be both a feminist and a free market economist:

“The market is the great liberator of women; it has not been the state, which is after all an instrument of patriarchy … The market is the way out of enslavement from your dad, your husband, or your sons. … The enrichment that has come through allowing markets to operate has been a tremendous part of the learned freedom of the modern women.” — Quoted in “The Changing Face of Economics – Conversations With Cutting Edge Economists” by Colander, Holt, and Rosser

Notice the binary nature of the world in this story. There are only the market (yea!) and the state (boo!). There are no other institutions. Whole swathes of society vanish or are flattened into insignificance. The state is viewed as a villain that the market heroically battles against to advance us all.

It is a ripping tale.

It is shallow and utterly misleading.

The problem McCloskey has is that she constantly battles her own Chicago roots and those roots sometimes – not often – surface in this same way. Markets good. State bad. Nothing else matters.

This binary and overly simple view of the world is common throughout economics. We are constantly being asked to set the market alongside the state and leave other things aside. The word ‘society’ is such an anathema to economists that they seem to have forgotten its existence. And thinking of institutions as playing a role in our everyday affairs is definitely déclassé. Except, of course that both the state and the market are institutions, but let’s not dwell on that.

Somewhere in the tale told by McCloskey the market rode in on her white horse, struck down the nasty masculine dragon we know as the state, and women were happy ever after. Why were they happy? Because they could become independently prosperous and could, therefore, flourish away from their prior enslavement.

Presumably markets didn’t exist throughout those aeons of prior enslavement. Presumably only states did.

Which implies that McCloskey’s vision of what a market is must be extremely historically contingent. At some point they must have morphed into the dragon slaying kind. At some point they too must have been set free to accomplish their magic. Quite how we have to ponder another time. After all with a binary vision of the world and with the state perpetually the villain markets had to self-liberate. Which, I suppose, implies that the entire history of modernization, liberation, advance, enlightenment, and such can be reduced to market forces.

So markets are epicenters of learning, philosophy, the arts, politics, and all other good stuff.

Except they are impersonal.

At least according to Brian Arthur’s summary of the structural foundations of general equilibrium analysis. I take this quote from the introduction he wrote with Durlauf and Lane to their edited volume “The Economy as an Evolving Complex System II”:

“In general equilibrium analysis, agents do not interact with one another directly, but only through impersonal markets. By contrast, in game theory all players interact with all other players with outcomes specified by the game’s payoff matrix.”

I choose this text not for its unique insight but for its brevity and ease of use.

Neither of these alternative forms of analysis seem, to me, to be very plausible. Game theory has its specified payoff matrices and has all agents interacting with all other agents. How anything ever gets done given all this interacting I shudder to think. But that’s beside the point for now. What I want to give more attention to is the nice summary of how most mainstream economists view a market. The key word being impersonal.

What does impersonal mean?

Meaning number one is ‘the lack of personal feeling’. Synonyms being objective, neutral, unbiased, dispassionate, unattached and so on.

Meaning number two is ‘not existing as a person’ or ‘having no personality’.

So the market, according to economists, is a place devoid of feeling. Bereft of emotion. It is a cold landscape where calculation and self-advancement dominate over other less worthy sentiments like cooperation and altruism. And where enslavement over aeons is likely to have been established only because it fulfilled some utterly rational and  utilitarian role. Markets, in this narrative, don’t care. They are places of cold rationality, not places of heated debate.

I happen to think markets are never impersonal. They involve people: always and everywhere. So the notion of an impersonal market is nonsense from the very beginning. As a rhetorical device or as a starting point for analytical purposes I can tolerate them for a nanosecond or less. But as a permanent feature of a theory about human behavior they are – how do I put this? – rubbish.

Now it is quite possible that in her departure from Chicago McCloskey also rid herself of the impersonal market notion. But I am not so sure. From my point of view a market full of human beings is also a market situated in a lush and diverse social setting. This is by definition since humans are surrounded by all sorts of institutional manifestations of their creativity and search for structure.

Which gets us back to the binary problem we started with.

It is only in a society rich with alternative networks and channels of development, of outlets for expression and argument, and of institutional ways for accepting or enforcing progress, that the riddance of enslavement can take place. A binary split between an evil state and a virtuous market will not do. Such a split is a device created by economists to make their lives easy and merely suffices as an ideological crutch in their libertarian adventure.

As part of a narrative about the steady rise of freedom in our modern world it just doesn’t work.

Markets don’t care. But McCloskey does. Yet she persists in calling herself a free market economist.

Why?

/ / , , , , /

Unicorns and Free Markets

One of the more depressing features of the discourse on the parlous state of our economy is the constant refrain from some about the need to allow ‘free markets’ to do their magic and fix our ills.

That’s nice.

Or it would be were free markets not like unicorns.

Both are beautiful and captivating. Their features send us into paroxysms of joy and wonder. Their exploits and virtues are the stuff of great poetry or writing. They beguile us with the extent of their magical powers. They haunt us with endless dreams of what might have been.

Were they real.

Which neither are.

It is one thing for poets to wax lyrical about imaginary animals like unicorns in order to inflame our minds at the mythical. It is another for supposedly hard headed analysts to invoke free markets as an elixir of endless youth and vigor for our economy. Free markets are artifacts of our imaginations. They were invented in order that we could study the many differences between their imagined perfection and the grubby mess that is the real world. They allow us to identify all sorts of anomalies and quirks that clutter up real life and prevent it from ever being as pristine as the dream like wonderland we call a free market.

But there never has been, nor will there ever be, a truly free market. Like the unicorn they cannot nor do they exist. They remain a vivid and unfortunate reminder that human imagination and human reality inhabit two very different spheres. Call it a Platonic curse. I cannot abide Plato and his authoritarian views, nor can I stomach his obsession with the unreal. The notion that ‘pure’ forms exist, and that we are fatally compromised and thus shall never experience such purity is utter nonsense. It never existed in the first place, so it is hardly a failure not to experience such nirvana. Nonetheless Plato and his errors have infected our lives for more than two thousand years. Most notably in Christianity which is almost exactly built upon his faulty foundation – not that most Christians seem to notice or care. This is not an idle comparison: the exertions urged upon sinners bear a remarkable likeness to the exertions urged upon the unemployed. Both are deemed failures who should repent and improve themselves in order to be saved. Both are urged to hew more closely to a dogma remote from the front lines of modern living. No wonder Weber got lost in the Puritan work ethic.

And free markets?

They are a version of a Platonic ideal. They are unrealizable in the world of humanity. They turn to vapor and vanish the moment any contact with temporal considerations are introduced. They are a mist that distorts our dialog.

The reason is, of course, that markets in our real world and compromised daily by all sorts of stuff the free market dreamers call flaws. But they are not flaws at all: they are essential constructs and components of non-mythical markets.

The dream like free market is something that is suspended in mid air. It has no contact with geography, with man made institutions, nor with our incomplete cognitive ability – neither our instrumental nor our cognitive constraints limit its computational powers – and its denizens are unrecognizable as human. They are what Miroswski calls cyborgs in his book “Machine Dreams”. Only when real people and all their many imperfections are totally expunged from a free market can it become free. Only when it is released from the constraints of the law, custom, culture, religion, class, gender, and family can it rise above the mess of humanity and become free. And only when it is universal and not locked into a specific earthly location can it be free.

In other words it cannot be.

The analytical mythology that is the free market came into being because economists wanted to set up a laboratory model against which to compare the real world. I am being generous here. In my more cynical moments I would argue that they wanted to justify a certain way of life – they wanted to ‘prove’ that the interference of government was deleterious to the creation of wealth. So the cynic within me would say that the entire edifice of classical economics has been an effort to prove the superiority of decentralized markets over centralized or planned economies. This is not science it is politics. And the upshot has been the creation of an artifact we know as the free market, which, when stripped of all humanity, is indisputably superior in exactly the long sought for manner.

That economists still advocate this artifact as an exemplar of reality is shameful. They know full well that it is an imagined object.

Having opened Pandora’s box they have armed an ideologically motivated group to march off with the concept and impose, or try to impose it, on society. These ideological storm troopers engage in all sorts of social engineering in order to force reality more closely to align itself with the dreamscape. And by so doing they both undermine humanity and they introduce conflicts and distortions into the everyday workings of a real economy.

One outcome of this social engineering is the enormous change in the distribution of wealth we see today. As long as we acknowledge the conflict between democracy, which is a device for ensuring a more equable distribution of power and wealth, and capitalism, which necessarily results in exploitation and concentrations of power and wealth, we can maintain a balance. The conflict between the two enforces compromise. And all compromise leaves purists dissatisfied. The great era of the US economy – the 1950’s and 1960’s – was built upon this messy compromise. Once we allowed ourselves to be beguiled by the free market myth we sacrificed that balance. We unwittingly undermined democracy and favored capitalism.

We started to believe that unicorns were real.

And so, having arrived at the nearest we can to executing the dream here in the real world, after having deregulated and tossed aside as much constraint as we can, we are faced with the ugly moment of truth. Our pursuit of unicorns has been in vain. We are awake from the delusion. Reality requires limits to the market. Because only within limits do real markets exist.

That is the great lesson to be learned from the decades of Reagan illusion: once we strip away humanity in order to explore the magic of the free market, we should not then fall into the trap of thinking we are looking at something real. A market without the trappings of humanity is not a market. It is a unicorn like myth. It simply cannot be. However beautiful. However mysterious. However perfect.

So it saddens me to hear advocates of free markets get any air time in our current discourse on the economy. They are selling ideology not economic advice.

Snake oil has no place in our debate when the livelihoods of over nine million of our fellow citizens are at risk.

The unemployed deserve more than stories about unicorns. They deserve policies to restore growth. Policies based upon real world economics.

/ / , , , , , , , /

What Difference?

There have been a number of good books written about the crisis we are embroiled in. Depending on what you want to learn and what perspective you want to take the shelves are groaning with tomes each presenting a credible view. From what I can tell they all triangulate on one simple fact: that our elites, the media, the politicians, business leaders, and academics, failed us horribly. They failed to realize the consequences of their social engineering – the extraordinary emphasis on home ownership as opposed to home renting – and their unabashed commitment to free market ideology. They genuinely thought that markets resolve problems. They never considered that markets may also cause problems.

Group think permeated the US from the late 1970’s through until 2008. Every aspect of our lives was exposed to the rawness of unfettered market power. Regulations were stripped away because “government was the problem”. That meant protections were also stripped away, a fact that voters less committed to the ideology failed to grasp.

So when Katrina roared through we watched as our government was helpless – rendered that way by the deliberate reduction in its capacity. It was government, so it was bad. Likewise when tainted products arrived from China we were exposed to their dangers because the “bad government” had been reduced and could not cover the vast territory of inspection we still expected it to. And finally we all were forced to watch as our government caved in meekly to the banking industry as it imploded and asked peremptorily for our help. This after having been deregulated and allowed to pile up the disaster from which it sought relief.

Our elites failed us.

So the question we should ask, naturally, is: will that failure continue?

Sadly yes.

Getting back to those books.

What most stands out for me is the extraordinary analysis in “This Time Is Different” by Reinhart and Rogoff.

The one message that they hammer home is that it is never different. Crises have time worn similarities. Symptoms do exist. It is possible to tell whether an asset bubble is brewing. We are quite capable of seeing the problems arise and before they reach catastrophic levels of urgency.

Our one problem is that we keep convincing ourselves that ‘this time is different’.

We heard that endlessly about the rise of the internet and that somehow the internet had changed, irrevocably, the basics of economics. We heard it about the rise of the insanity in the financial markets, where ‘risk management’ techniques had eliminated, forever, the chance that risk would destroy a bank.

The point is that while the innovation of the internet may alter the way in which business is done – and that is something I am completely convinced of – those changes do not alter the more basic relationships of profit and loss. Profits my be sourced in different ways, and losses may crop up in different guises, but the economy, in aggregate, is still subject to the same forces that have always buffeted it.

The insanity of the ‘dot com’ era was that profit was not as important as revenue growth. So money poured into speculative projects that had no reason for being. Most of that money was lost. Yes, many great companies emerged from the debris, but only after they embraced the fundamentals of finance and economics. Old fashioned fundamentals allowed them to survive and flourish. As for the rest: they disappeared and took a ton of very valuable capital with them. Capital that could have been employed rebuilding our infrastructure, or our manufacturing industries.

The insanity of the financial boom and bust was that people came to believe in magic. They believed risk could be neutralized – eliminated rather than simply managed – by deploying endless layers of increasingly opaque rigamarole and legal hocus-pocus. It was a profitable illusion for a while and the main players all made personal fortunes. But they robbed the economy at large of its vibrancy and debilitated one of our great assets: our healthy banking system.

In retrospect, which is the perspective of all the books now flooding us with their 20/20 hindsight, the staggering fact is the we did this to ourselves. We allowed ourselves to suspend our better judgement because the dreamy ‘city on a hill’ was sufficiently gaudy that we took our focus off reality.

We fell for saccharin, old wives tales, and ‘this time is different’.

Why am I repeating this?

Because, already, the next bubble is growing. The financial media, for which my contempt is unbounded, is already touting our recovery and is breathlessly talking of new highs in the Dow just a few months from now.

And the energy, determination, and simple brute fortitude needed to fix the structural mess that underlay the crisis is fading from our legislators daily.

The case in point is bank reform.

We will witness the passage of bank reform. My guess sooner rather than later. The new law will have a glossy edge to it and will be filled with well meaning and tough sounding jargon. But it will not fix the big problems.

Our biggest banks will remain too-big-to-fail. They will thrive off our subsidy. They will pay egregious bonuses. They will continue to ‘innovate’. They will syphon capital into their paychecks rather than channel into our businesses. And they will assuredly fail again.

We all have a tendency to avoid the big decisions. Politicians more so than the rest of us because they are so exposed to our vanities. Now is not a time to fail by such avoidance. The pall cast across the world by the Euro crisis should warn us not to postpone action. The failure of the Euro was predictable. It was a matter of time. It was a classic case of ‘this time is different’. The failure is now obvious: without a full integration at the political level, and the fiscal integration that would have implied, each Euro member has only limited choices in policy. Europe’s problem can be boiled down to this: wages are too high in some parts when compared to the wages of the other parts. This means that Greek and Spanish workers need to deflate their incomes – by about 30% – in order to compete with Germany. Other ways to accomplish a re-balancing of purchasing power – local inflation or local currency devaluation – do not exist. So the original weakness to seek the bold solution, political integration, has left a legacy for which today’s workers will pay a terrible price.

This time is never different.

Boldness, clarity, and direct action will always be preferable to limp explanations that, somehow, we have discovered the magic that enables us to ignore reality.

So beware the financial media’s triumphal headlines about the next big thing.

Ask: what difference?

/ / , , , , /

Martin Feldstein: And That Rationing Lie

Humph.

Some people just won’t stop. Now it’s OK for an average peson to get into an argument about health care reform and make claims that a government plan will introduce rationing. But it absolutely not OK for a Harvard professor of economics and former advisor to Presidents to do so.

“Repeat after me: all economic systems ration. The only possible debate we can have about rationing is, therefore, what kind of rationing we would prefer.”

So I get really annoyed when Martin Felstein writes this absurd article for the Wall Street Journal. I give the WSJ itself a pass on the basis that its editorial staff don’t know any better, and they simply shill for the Republicans.

But Feldstein?

He should know better. It makes me wonder what he actually teaches.

I have had my say on this many times, most recently here. For those of you who want to dig deeper go to Professor Mark Thoma’s blog and get a proper education.

For those who may be sending their children to Harvard: make sure you avoid Martin Feldstein’s classes.

No wonder few people have a clue what to think.

Poor people and, in this economy, unemployed people, do not ‘prefer’ not to buy insurance or health care services: they cannot afford them. Choice and affordability are not the same thing. Only a dyed in the wool right wing neo-classical economist would confuse affordability with choice. Even then they wouldn’t shouldn’t mislead readers into thinking that a free market does not ration when rationing is its exact reason for being. And contrary to Felstein’s apparent belief reducing the number of high cost/low effectiveness procedures makes very sound economic sense. Then again sense doesn’t seem to motivate Feldstein much in this case.

This really is embarrassing for the Harvard economics faculty. It’s also ridiculous that the rationing canard keeps finding its way into print in serious, or ostensibly serious, media outlets.

Repeat after me: all economic systems ration. The only possible debate we can have about rationing is, therefore, what kind of rationing we would prefer.

Duh!