Is Mainstream Economics the Servant of the Wealthy?
JK Galbraith, writing circa the election of Reagan, made this observation (from “The Conservative Onslaught”):
That a large share of all economic comment comes from people of comfortable means will not be in doubt. High social, business, and academic position gives access to television, radio, and the press. And professional access to the media also gives a relatively high income. It follows that the voice of economic advantage, being louder, regularly gets mistaken for the voice of the masses. On the need for tax relief, investment incentives, or a curb on welfare costs, the views of one articulate and affluent banker, businessman, or acolyte economist are the equal of those of several thousand welfare mothers.
I want to use this observation to raise an issue different from the one Galbraith was addressing.
I have long suspected that mainstream economics is an ideology – a set of justifications and rationalizations of the status quo, dressed up to look scientific, engineered by the status quo’s beneficiaries in order to safeguard the wealth which it bestows on them.
I have suspected that mainstream economists want “free markets” – in both developed and undeveloped countries – because “free markets” make them and their (mostly corporate) cohorts very comfortable, indeed. These economists are warriors in a class struggle, and their primary weapons are the graphs, equations, and “laws” that every attentive freshman knows so well.
What raised this suspicion initially, and keeps it alive today, is the regularity with which attempts to aid the less fortunate and redistribute wealth are swarmed by self-assured economic analysts prepared to demonstrate that the attempt will blow up in the face of those who make it via interference with a “free market”. Also peaking my suspicion is the regularity with which attempts to reign in corporate malfeasance and market interference are swarmed by (usually the same) self-assured economic analysts prepared to demonstrate that corporations ferment wealth in all sorts of ways and ought not be constrained by distorting regulations.
These orthodox – and yes, conservative – arguments are easy to recognize, especially after Hirschmann classified them in his book “The Rhetoric of Reaction”. Time after time, conservative economists argue that redistribution or welfare program x will have the opposite of its intended effect, will interfere with established liberties, or will have no effect at all.
Another cause of suspicion, which you will notice if you observe carefully, is that many, if not most, of these arguments are made by people associated with obscure organizations, usually LLCs, with vague, innocuous names that often include the word “liberty”. These organizations are think-tank corporations, essentially paid by big business to contrive arguments against tax-and-transfer programs and other attempts at increased social welfare.
I do not want to engage in conspiracy theory here. However, ideology has choked collective welfare in the past, and there is no reason to believe that it has disappeared. Ideology uses the binding principles of the day, accepted by almost everyone, to argue in favor of social, political, and economic arrangements that benefit a very few. An example of this is the famous “divine right” theory of monarchy in the 16th and 17th centuries. This theory was used to justify and rationalize oppression by kings and queens. Perhaps the most important thing about the “theory” is that it would not have worked if most people did not believe in God.
Just as ancient monarchs furthered their political agendas using popular theology, I suspect that modern economists and business interests further their own agendas using a healthy mixture of popular political sentiment, centered on “liberty”, and somewhat intimidating economic “analysis”.
Name Change!
Ok, so I’ve been strong-armed into changing the name of the blog. By Andy Cassel, the Editor-in-Chief of Moody’s and author of Moody’s blog, Dismal Scientist.
Actually, Mr Cassel was very genteel about it. He asked me to change the name of the blog, and I did.
For now, the name of the blog is “Bootstraps”. I am deeply, deeply unsatisfied with this. I don’t even know what it means, except that I’ve been thinking about poverty and development lately, and the subject calls bootstraps to mind.
It is extremely difficult to come up with a meaningful, memorable name for an econ blog. However, I can do it, and I will do it.
von Mises also said…
that “[i]t is customary to say that acting man has a scale of wants or values in his mind when he arranges his actions. On the basis of such a scale he satisfies what is of higher value, i.e., his more urgent wants, and leaves unsatisfied what is of lower value, i.e., what is a less urgent want. There is no objection to such a presentation of the state of affairs. However, one must not forget that the scale of values or wants manifests itself only in the reality of action. These scales have no independent existence apart from the actual behavior of individuals. The only source from which our knowledge concerning these scales is derived is the observation of a man’s actions. Every action is always in perfect agreement with the scale of values or wants because these scales are nothing but an instrument for the interpretation of a man’s acting.” (Human Action V1)
A number of things to say in response to this perspective.
First, I’ve been hearing a lot in the news lately about how the arts are suffering so terribly from the current recession. Though this is unfortunate for practitioners and patrons of the arts, it makes perfect sense. On the “scale of value”, art is a luxury that will be indulged only when affordable. When the well runs dry, it will be one of the first things to go. This is because, of all the realms of culture, art is probably farthest removed from the bare necessities of life, to which people will cling in times of dearth in lieu of superfluities.
Second, Mises is taking a position that is very important, I think, for ethics, and it doesn’t receive as much attention as I think it should. He is saying that there is no real difference between doing and choosing: to do is to choose, and to choose is to do. This is important because prevailing habits of thought give a great deal of weight to “mental life”, to such things as intentions, desires, beliefs, and other volitions confined between the ears and never realized in the actual world.
An interesting example is agnosticism. I have long argued that agnosticism is a form of atheism because, regardless of what’s “going on inside your head” when you think about the prospect of a deity, you cannot live like you don’t know. In religion especially, we often place too much emphasis on what a person believes as opposed to how a person behaves. I have argued that if you want to know whether or not a person believes in God, do not ask him what he thinks, because you’ll get nothing but a muddle. Instead, watch how he behaves. This will give you the real answer to your question.
At the same time, though, it seems to me that Mises is missing something crucial. A person’s actions can indeed be an imperfect reflection of the person herself. The reason for this is precisely the bedrock economic truth that people always act under constraints that fall outside their control. A person’s domain of choice – her available options – may be limited in such a way that she must act in a way that does not at all reflect her values or goals, because to act in that way is the best of her available options.
Is this important? Is it important that a person would choose differently (perhaps better?) if given a wider domain of choice? Or is her actual choice among her actual alternatives the only relevant objects of study?
For Mises’s purpose – purely positive economics or “praxeology” – it seems to be irrelevant. Obviously, it was so to Mises himself. However, if he had thought the issue all the way through, he might have thought differently. For Mises never tires of insisting (correctly) that the fundamental category of human existence and the fundamental subject of economics is “human action”. And he never tires of defining action as teleological or goal-oriented and goal-driven. Finally, he never tires of insisting that people act only in order to eliminate “uneasiness”. (In fact, he practically uses this definition to argue against the existence of an active deity.)
But isn’t the fact that a person would choose x if x were available, regardless of whether or not x actually is available, important to teleology and therefore to human action? Don’t people act, more often than not, in order to expand their domains of choice, so that the “better” option is actualizable for them? In other words, don’t people’s “ideals” matter tremendously, apart from their actual choices and actions? In fact, can people’s actual choices and actions even be understood apart from an understanding of what they would choose if things were different?
Krugman Keeps His Chin Down
Krugman is dismal:
The crisis is over! Or so some are saying.
OK, a couple of things.
One is that even in the Great Depression, things didn’t head down all the time. The chart above (not included, sorry), from Eichengreen and O’Rourke, shows world industrial production in months from the previous peak, in the Depression and in the current crisis. Notice that there were several upturns along the way; each of those could have been — and was! — heralded as the beginning of recovery.
Meanwhile, about those great numbers from Wells Fargo: remember, reported profits aren’t a hard number; they involve a lot of assumptions. And at least some analysts are saying that the Wells assumptions about loan losses look, um, odd. Maybe, maybe not; but you do have to say that it would be awfully convenient for banks to sound the all clear right now, just when the question of how tough the Obama administration will really get is hanging in the balance.
All that said, I would not be surprised if GDP growth is positive in the second half of this year, if only because of the inventory bounce. But I will be surprised if the unemployment rate actually turns down.
Bernanke Keeps His Chin Up at Morehouse College
Bernanke says that “the Fed’s toolkit remains potent”, passably defends the AIG bailout, calls for more and better regulation of the financial sector, and insists that the fundamentals of the economy are strong. (Aren’t they usually wrong when they say that? Oh, well…)
von Mises said…
that “[i]t is impossible to understand the history of economic thought if one does not pay attention to the fact that economics as such is a challenge to the conceit of those in power”. (Human Action V1)
Is this true? If so, does it not come dangerously close to an admission that economics is less disinterested science than political ideology?
It could be argued that just because economist’s motives have often been less than pure, that does not mean that the results of economic investigation are sullied. How many advances in the physical sciences arose not from a purely theoretical desire for truth but from a personal vendetta? (Not a rhetorical question, by the way. I would really like to know.)
But this is far from obvious. Perhaps a better line of argument would point out that economics, politics, and ethics all deal with behavior under constraints and so their subject-matter often intersects, which often leaves economists with unavoidably partisan perspectives.
David Altig on Innovative Monetary Policy
David Altig of the Atlanta Fed on innovative monetary policy:
I have a simple way of thinking about how monetary policy works. Imagine a long rope. At one of end of the rope are short-term, relatively riskless interest rates. Farther along the rope are yields on longer-term but still relatively safe assets. Off at the other end of the rope are multiple tethers representing mortgage rates, corporate bond rates, and auto loan rates—the sorts of interest rates that drive decisions by businesses and consumers.
In the textbook version of central banking, the monetary authority grabs the short end of this allegorical rope, where the federal funds rate resides, and gives it a snap. The motion ripples down and hopefully reaches longer-term U.S. Treasury rates, which then relay the action to other market interest rates, where the changes reverberate throughout the economy at large.
[...]
One way to view the effects of [...] credit market dysfunctions is to imagine that someone had placed a series of bricks at strategic points along the segment of rope connecting short-term interest rates to broader market rates. With these bricks in place, it is simply not enough for a central bank to keep snapping short-term interest rates: The bricks—dysfunctions in the markets—will keep the impulse from being transmitted to the interest rates that are directly connected to market outcomes. Thus, a new set of policy instruments is needed, instruments that allow the monetary authority to circumvent blockages in the monetary transmission mechanism.
[...]
2 Quotes About Money
“Money, thou bane of bliss, and source of woe,
Whence comest thou, that thou art so fresh and fine?
I know thy parentage is base and low:
Man found thee poor and dirty in a mine.
“Surely thou didst so little contribute
To this great kingdom, which thou now hast got,
That he was fain, when thou wert destitute,
To dig thee out of thy cave and grot.
“Then forcing thee, by fire he made thee bright:
Nay, thou hast got the face of man; for we
Have with our own stamp and seal transferred our right;
Thou art man, and man but dross to thee.
“Man calleth thee his wealth, who made thee rich;
And while he digs out thee, falls in the ditch.”
George Herbert, “Avarice”
“Money can never be a safe and dependable device in a society made up of people ignorant of its nature.” Norman Angell
