Saturday, December 20, 2014

Saturday Night Music - Irie Christmas Edition

The Sharing Economy Versus the Servant Economy

Reader ‘J’ alters us to this post, which bookends the last series of posts nicely – that the modern propaganda called economics, especially Neoliberal economics, is only possible by forgetting all of economic history. From the post: “…this idea that there was once a time when this country had free and unregulated markets is a persistent one... The Statute of Labourers in 1351 is usually regarded as the first labour legislation in English Law. …Until 1875, …the imbalance of power between workers and their employers wasn’t just economic; it was legal too. That balance only began to shift towards the end of the 19th century, at first with health and safety laws and later with trade union and employment protection. For most of the period since the middle ages, though, labour law was firmly on the side of the employer....Those who complain about employment law often say that the government has no business meddling in the labour market. In fact, governments have been meddling in labour markets for almost as long as they have existed...The myth that there was a time before The Fall, when the state didn’t meddle in the affairs of free men, is persistent, especially on the libertarian right.”

The Legend of the Free Labor Market (Flip Chart Fairy Tales)

I’m reminded of this story told by Franklin Roosevelt (I cannot independently confirm whether it is true):
“Let me take you back three hundred years to old King James of England. The reign of this king is remembered for many great events—two of them in particular. He gave us a great translation of the Bible, and, through his Lord Chancellor, a great statement of public policy. It was in the days when Shakespeare was writing Hamlet and when the English were settling Jamestown, that a public outcry rose in England from travelers who sought to cross the deeper streams and rivers by means of ferry-boats. Obviously these ferries, which were needed to connect the highway on one side with the highway on the other, were limited to specific points. They were, therefore, as you and I can understand, monopolistic in their nature. The ferryboat operators, because of the privileged position which they held, had the chance to charge whatever the traffic would bear, and bad service and high rates had the effect of forcing much trade and travel into long detours or to the dangers of attempting to ford the streams.” 
“The greed and avarice of some of these ferryboat owners were made known by an outraged people to the King himself, and he invited his great judge, Lord Hale, to advise him.” 
“The old law Lord replied that the ferrymen’s business was quite different from other businesses, that the ferry business was, in fact, vested with a public character, that to charge excessive rates was to set up obstacles to public use, and that the rendering of good service was a necessary and public responsibility. “Every ferry,” said Lord Hale, “ought to be under a public regulation, to-wit: that it give attendance at due time, keep a boat in due order, and take but reasonable toll.”
Defending the Public From Greed (Resilience)

Such interference in the economy! Imagine the hue and cry if you tried to do that today in the age of Neoliberal market utopias! There was apparently more regulation for the common good in the 1600’s than there is today in age of nuclear power and biotechnology. Who is really more feudal?

Two sentences from the above article deserve special attention:

"The important thing to understand about master and servant law, though, is that workers were subject to criminal sanctions for breaches of their contracts while masters were only subject to the civil law. You don’t need to think about that for too long to see the lop sidedness of it. Workers of limited means had to pursue employers through the courts, while employers had the entire law enforcement apparatus of the state at their disposal."

This is coming back with the rise of noncompete agreements:

Ties that bind: The market for smart people is clogged up by all manner of dubious legal restrictions (The Economist)

Noncompete Clauses Increasingly Pop Up in Array of Jobs (New York Times)

Not only that, as I’ve pointed out before, the American system where you are dependent upon your employer for health care and other benefits effectively “ties” you to your employer in a semi-feudal relationship. If you are without work, you are on your own! Employers are also pushing off the costs of everything on the employees themselves. They’ve already done this with education – you need to spend tens of thousands of dollars of your own (usually borrowed) money just to make yourself amenable to the jobs that are on offer. The employers do nothing but sit back and pick the employees who can afford to bear the highest education cost burdens and profit from this educated workforce while giving nothing back in return. Without this educated workforce, profits and prosperity would not exist. This is getting easier as good jobs are getting more scarce - people are more desperate.

"Where we think of employers and employees, our forebears thought of masters and servants. Nowadays, we use the word servant to refer to household staff but, until recently, it was a general term for a worker."

Servants, eh? Back to the future! That brings us to the so-called “sharing economy.” I recently read this:
Of the many attractions offered by my hometown, a west coast peninsula famed for its deep natural harbor, perhaps the most striking is that you never have to leave the house. With nothing more technologically advanced than a phone, you can arrange to have delivered to your doorstep, often in less than an hour, takeaway food, your weekly groceries, alcohol, cigarettes, drugs (over-the-counter, prescription, proscribed), books, newspapers, a dozen eggs, half a dozen eggs, a single egg. I once had a single bottle of Coke sent to my home at the same price I would have paid had I gone to shop myself.

The same goes for services. When I lived there, a man came around every morning to collect my clothes and bring them back crisply ironed the next day; he would have washed them, too, but I had a washing machine.

These luxuries are not new. I took advantage of them long before Uber became a verb, before the world saw the first iPhone in 2007, even before the first submarine fibre-optic cable landed on our shores in 1997. In my hometown of Mumbai, we have had many of these conveniences for at least as long as we have had landlines—and some even earlier than that.

It did not take technology to spur the on-demand economy. It took masses of poor people.
The secret to the Uber economy is wealth inequality (Quartz) Of course it is! If you think about it a minute, you realize that only in a vastly unequal economy will a single person have enough income to buy the labor of so many other people. If incomes are relatively equal, you will not pay for people who make roughly the same income as you to serve you. You cannot, it makes no sense. A service economy not only requires, but engenders a world of six-figure corporate technocrats on one side, and Wal-Mart associates and baristas on the other. There can be no other model for the "service" economy.

In order for a single family to be able to afford a maid, a nanny, a personal chef, a personal assistant, a personal trainer, a chauffeur, an interior decorator, a personal shopper, a dog walker, a house sitter, a Yoga teacher, etc., they must make an order of magnitude of more money than all of those people because all those people are economically dependent by that person's income (they may have a few other clients, but these are low-productivity services not amenable to improvement, and there are only so many hours in the day). We're going back to the world of Downton Abbey.

I actually worked with someone from Mumbai once. I remember the shock and amusement from us Americans when she casually mentioned growing up with servants. Well, this will not be surprising or shocking to future Americans. Is this the America you want, because it's where the elites are taking us.

Another thing - what the sharing economy is has been badly misused. Somehow it came to mean anything done with your smartphone, or involving computers in any way.

Um, no. The idea was a) to utilize resources sitting idle, and b) to discourage the need for individual people to have to buy something that they would use only infrequently. And if they did end up buying it anyway, they could recoup some of the costs by sharing it (step a).

The model for this is the public library. Everybody pools their money for free to build a place for everyone to use that contains the contained knowledge of society embodied in books. It benefits the whole community. It's a nice vision.
But beneath all the hype is a sensible idea: there are a lot of slack resources in the economy. Assets sit idle—the average car is driven just an hour a day—and workers have time and skills that go unused. If you can connect the people who have the assets to people who are willing to pay to rent them, you reduce waste and end up with a more efficient system. 
In the past, this was hard to pull off, because the transaction costs involved in borrowing and lending were high: there was no easy way to find someone who had what you were looking for and no easy way to know if someone was trustworthy. So if you borrowed a lawnmower it was typically from your neighbor. But digital technology has made it much easier for buyers and sellers to find each other quickly, and to evaluate the people they’re trading with. The effect has been to make sharing a much more plausible business model.
Uber Alles (The New Yorker)

This is the sharing economy that I supported. There are some companies in this model. Airbnb allows people who have a spare room sitting empty to rent it out. Zipcar allows people who don't want to bear the enormous burdens of having to pay for a car when you only need it occasionally to share it with other people. Tool libraries and time banking are cooperative ways to put idle resources to work and reduce unnecessary consumption, and hence resource use. Rideshare services allow people who have an empty seat in their car to give it to someone who needs it. That should be a good thing in a time of economic decline and resource scarcity.

Here's what it's NOT - a way for more people to be servants. Note to the media, just because you summon something with a smartphone does not automatically make it part of the "sharing economy" Yet lazy journalists everywhere treated every new business proposal coming out of Silicon Valley as something to do with "sharing" when it was really just another way of taking advantage of desperate people.

And now the usual suspects whose job it is to rationalize and justify whatever new war against labor is going on, are touting what they imagine to be the "sharing economy" as a viable replacement for jobs and employment in actual businesses! The same people who touted the "service economy," and the "knowledge economy," are now touting the "gig economy" and "Uber-for-everything" as the next wave. We will all be mini-entrepreneurs working for ourselves, they say. Total freedom! Well, see where that leads above. It's yet another con-job in the service of the rich.

This is what I oppose. Uber is in no way a part of the sharing economy. It has nothing to do with sharing. The same goes for things like Mechanical Turk and Taskrabbit.Those are ways to bid down the cost of labor and insert profit-taking middlemen. As this comment notes, "I wish people would not call renting a car ride from an independent contractor “sharing” — there is nothing being shared here, a service is being sold, plain and simple." Here's Ran Prieur's description of Uber:
Through a smartphone app, they "arrange rides between riders and drivers", but unlike Craigslist, Uber controls all the information and all the money. They also aggressively externalize costs: they profit from everything that goes right, while only passengers and drivers suffer from anything that goes wrong.
That's not "sharing." Stop using that term. That word does not mean what you think it means.
In its essence the sharing economy is similar to offshoring and outsourcing in how it works...Let us establish the basics: high income for individuals, absent government fiat, is based on a tight supply of whatever it is they are selling, and nothing else...Hotels make decent money because any Joe or Jill can’t sell their rooms.  Taxi drivers (or, more accurately, those who own the licenses) used to make decent money because any schmo with a car couldn’t compete.  And so on.

In manufacturing terms, when those jobs pretty much had to be in a first world country, and the government enforced the ability of unions to strike by forbidding replacement workers, assembly line workers made good money.So the sharing economy increases capacity.  It increases supply to areas which had constricted supply. Supply increases, and the profits and/or wages of those in the old sector go down...All of these platforms: Spotify, AirBnB, etc… take huge margins.  Spotify takes 30%.  This is in line with what App Stores take, again, 30% being standard.

That number is one we’ve become numb to, but it’s essentially oligopoly or monopoly profits, a huge distribution rate. If you add that much to the cost of a product, it will sell far fewer copies and make far less money.  That percentage comes directly out of profits. In most cases, one or two sites control most of the business.  Maybe three.  That makes them oligopolies or monopolies. You go through them, or you don’t make a living, and once they are established, they are essentially impossible to dislodge.
Why the Sharing Economy is Destroying Prosperity (Ian Welsh)
Gabriele Lopez, an LA Uber driver, also lies. “We just sit there and smile, and tell everyone that the job’s awesome, because that’s what they want to hear,” said Lopez, who’s been driving for UberX, the company’s low-end car service, since it launched last summer. In fact, if you ask Uber drivers off the clock what they think of the company, it often gets ugly fast. “Uber’s like an exploiting pimp,” said Arman, an Uber driver in LA who asked me to withhold his last name out of fear of retribution. “Uber takes 20 percent of my earnings, and they treat me like shit — they cut prices whenever they want. They can deactivate me whenever they feel like it, and if I complain, they tell me to fuck off.”

In LA, San Francisco, Seattle, and New York, tension between drivers and management has bubbled over in recent months. And even though Uber’s business model discourages collective action (each worker is technically in competition with each other), some drivers are banding together....Uber drivers in LA, the largest ride-sharing market in the country, held dozens of protests over the summer to oppose rate cuts....Drivers are going up against a burgeoning goliath valued at around $18 billion. The company just hired David Plouffe, who managed Barack Obama’s presidential campaigns; it’s active in 130 cities; and if company executives are to be believed, it doubles its revenue every six months.

Uber makes that money by relying on a network of thousands of drivers who are not technically employees of the company, but rather independent contractors — the company calls them “driver-partners” — who receive a percentage of its fares.From the very beginning, Uber attracted drivers with a bait-and-switch...
Against Sharing (Jacobin)
It isn’t just companies and regulators who will have to be flexible, though. Workers will, too, since the sharing economy requires people to function as micro-entrepreneurs. Uber is just a broker, and the drivers aren’t anyone’s employees, any more than the landlords in Airbnb’s system are. They are all independent contractors, working for themselves and giving the companies a cut of the action. This has certain attractions: no boss, the ability to set your own hours, control over working conditions. It also means no benefits, no steady paycheck, and the need to always be hustling; in that sense, it fits all too well with the free-agent nation we’re increasingly becoming. Sharing, it turns out, is often a hell of a lot of work.
Uber Alles (New Yorker)
Wired's cover story this month is about the rise of the "sharing economy" — a Silicon Valley–invented term used to describe the basket of start-ups (Uber, Lyft, Airbnb, et al.) that allow users to rent their labor and belongings to strangers. Jason Tanz attributes the success of these start-ups to the invention of a "set of digi­tal tools that enable and encourage us to trust our fellow human beings," such as bidirectional rating systems, background checks, frictionless payment systems, and platforms that encourage buyers and sellers to get to know each other face-to-face before doing business. Tanz's thesis isn't wrong — these innovations have certainly made a difference. But it leaves out an important part of the story. Namely, the sharing economy has succeeded in large part because the real economy has been struggling.

A huge precondition for the sharing economy has been a depressed labor market, in which lots of people are trying to fill holes in their income by monetizing their stuff and their labor in creative ways. In many cases, people join the sharing economy because they've recently lost a full-time job and are piecing together income from several part-time gigs to replace it. In a few cases, it's because the pricing structure of the sharing economy made their old jobs less profitable. (Like full-time taxi drivers who have switched to Lyft or Uber.) In almost every case, what compels people to open up their homes and cars to complete strangers is money, not trust...
The Sharing Economy Isn’t About Trust, It’s About Desperation (NYMag)
As an Uber/Lyft driver, I’ve received dozens of emails and texts encouraging me to resist government meddling. I may drive for these companies, but I’m not stupid. Just broke and desperate. Which is why I use my own car as an unlicensed taxicab, despite the risks associated with transporting drunk and impatient people through crowded urban streets. I know I’m not protected from misfortune. When something goes wrong, whether it be car-maintenance or worse, I’m on the hook. My personal insurance policy is completely invalid when driving for-hire. If I get in an accident, I’ll be at the mercy of the offshore insurance company Uber uses to cover their drivers. From everything I’ve read about the experiences of other drivers, Uber won’t be clamoring to come to my aid. There isn’t even a number to call in case of an emergency. I could have bodies splattered all over the asphalt and still only be able to submit a support ticket through Uber’s website. And hope for the best. Even though drivers make these companies billions of dollars, we are entirely alone out on the streets.
Being Uber Ain’t Easy: Why Drivers Should Support Regulation (Disinfo)
The median income of the self-employed has been falling for some years now. This is because, as we know, the increase has come not from those running new businesses but from odd-jobbers scratching around for work. These figures are not adjusted for inflation, so the real-terms shrinkage in self-employment incomes will be even higher. Is it any surprise that the OECD blames the rise in self-employment for half of the UK’s increase in inequality?
Why the rise in self-employment is a Bad Thing (Flip Chart Fairy Tales)

Many of the above articles make the same mistake - lumping these predatory services in with "sharing" thanks to the media debasement of the term.  The true sharing economy provides are ways to use idle resources - not provide replacements for genuine employment. It would be a real shame if the actual "sharing economy" went away thanks to this misunderstanding.

P.S. The Economics profession priesthood always circles the wagons in the face of any attack. Here's one response the BBC show critical of economics teaching: Thoughts on “Teaching Economics After the Crash” (Medium)

Tuesday, December 16, 2014

Economics Is A Fraud - The Reality of Labor

What's below is probably not discsussed. Source.
Of all the omissions in the conventional Neoclassical/heterodox economics, surely none is more egregious that that of the role of labor. Economics like to talk about voluntary exchanges and liberty and other such nonsense, but everybody knows that freedom in this economy is a relative term. Any acknowledgement of the obvious elephant in the room is termed "Marxist." Here are some good explanations in plain English:
The institutions and habits that contemporary industrial civilization uses to structure its economic life comprise that tangled realm of supposedly voluntary exchanges we call “the market.” Back when the United States was still contending with the Soviet Union for global hegemony, that almost always got rephrased as “the free market;” the adjective still gets some use among ideologues, but by and large it’s dropped out of use elsewhere. This is a good thing, at least from the perspective of honest speaking, because the “free” market is of course nothing of the kind. It’s unfree in at least two crucial senses: first, in that it’s compulsory; second, in that it’s expensive.

“The law in its majestic equality,” Anatole France once noted drolly, “forbids rich and poor alike to urinate in public, sleep under bridges, or beg for bread.” In much the same sense, no one is actually forced to participate in the market economy in the modern industrial world. Those who want to abstain are perfectly free to go looking for some other way to keep themselves fed, clothed, housed, and supplied with the other necessities of life, and the fact that every option outside of the market has been hedged around with impenetrable legal prohibitions if it hasn’t simply been annihilated by legal fiat or brute force is just one of those minor details that make life so interesting.

Historically speaking, there are a vast number of ways to handle exchanges of goods and services between people. In modern industrial societies, on the other hand, outside of the occasional vestige of an older tradition here and there, there’s only one. Exchanging some form of labor for money, on whatever terms an employer chooses to offer, and then exchanging money for goods and services, on whatever terms the seller chooses to offer, is the only game in town. There’s nothing free about either exchange, other than the aforesaid freedom to starve in the gutter. The further up you go in the social hierarchy, to be sure, the less burdensome the conditions on the exchanges generally turn out to be—here as elsewhere, privilege has its advantages—but unless you happen to have inherited wealth or can find some other way to parasitize the market economy without having to sell your own labor, you’re going to participate if you like to eat.

Your participation in the market, furthermore, doesn’t come cheap. Every exchange you make, whether it’s selling your labor or buying goods and services with the proceeds, takes place within a system that has been subjected to the process of intermediation discussed in last week’s post. Thus, in most cases, you can’t simply sell your labor directly to individuals who want to buy it or its products; instead, you are expected to sell your labor to an employer, who then sells it or its product to others, gives you part of the proceeds, and pockets the rest. Plenty of other people are lined up for their share of the value of your labor: bankers, landlords, government officials, and the list goes on. When you go to exchange money for goods and services, the same principle applies; how much of the value of your labor you get to keep for your own purposes varies from case to case, but it’s always less than the whole sum, and sometimes a great deal less.

Karl Marx performed a valuable service to political economy by pointing out these facts and giving them the stress they deserve, in the teeth of savage opposition from the cheerleaders of the status quo who, then as now, dominated economic thought.
Dark Age America: The End of the Market Economy (The Archdruid Report)
So, what do I mean by capitalism? Capitalism is a system in which all major economic actors are dependent on the market for their basic requirements of life. Other societies have had markets, often on a large scale; but only in capitalism is market dependence the fundamental condition of life for everyone. And that is equally true of capitalists and workers.

The relation between capital and labor is itself mediated by the market. Wage laborers have to sell their labor power to a capitalist simply in order to gain access to the means of their own life and even the means of their own labor; and the capitalist depends on the market for access to labor and to realize the profits the workers produce. Of course there’s a huge imbalance of class power between capital and labor, but capitalists are no less dependent on the market to maintain themselves and their capital.

In non-capitalist societies, direct producers such as peasants typically possessed their means of subsistence and production (land, tools, etc.), so they were not dependent upon the market. The dominant class had therefore to be able to deploy superior power in order to appropriate the surplus labor of others by what Marx called “extra-economic” means — that is, coercive force of one kind or another: juridical, political, or military — as, for instance, when a feudal lord extracted labor services or rent from peasants.

Capitalist profits, by contrast, are not extracted directly from workers.

Capitalists pay workers in advance and must realize their gains by selling what workers produce. Profit depends on the difference between what the capitalist pays workers and what s/he derives from the sale of the products and services supplied by the workers. The fact that capitalists can make a profit only if they succeed in selling their goods and services on the market, and selling them for more than the costs of producing them, means that their making a profit is uncertain.

Capitalists must also compete successfully with other capitalists in the same market in order to secure a profit. Competition is, in fact, the driving force of capitalism — even if capitalists often do their best to avoid it, by means, for example, of monopolies.

But the social average of productivity that, in any given market, determines success in price competition is beyond the control of individual capitalists. They can’t command the prices at which their products will successfully sell and don’t even know in advance what conditions are necessary to guarantee a sale at all, let alone a profitable one.

The one thing capitalists can control to a significant extent is their costs. So, since their profits depend on a favorable price/cost ratio, they will do everything possible to cut their costs to ensure profit. This means, above all, cutting the costs of labor; and this requires constant improvements in labor productivity, to find the organizational and technical means of extracting as much surplus as possible from workers within a fixed period of time, at the lowest possible cost.

To keep this process going requires regular investment, the reinvestment of surpluses, and constant capital accumulation. This requirement is imposed on capitalists regardless of their own personal needs and wants, whether they are altruistic or greedy. Even the most modest and socially responsible capitalist is subject to these pressures and is compelled to accumulate by maximizing profit, just to stay in business. The need of capitalists to adopt “maximizing” strategies is a basic feature of the system.

So the whole capitalist system is operated by market imperatives, the compulsions of competition, profit-maximization, capital accumulation, and a relentless imperative to improve the productivity of labor so as to reduce costs in order to reduce prices.
Capitalism's Gravediggers (Jacobin)
Imagine that we have two workers, worker K and worker O, each with two young children.

Worker K is laid off when the company “downsizes.” K is nervous, but has some savings, is eligible for Unemployment Insurance benefits, Medicaid, food stamps (SNAP), and TANF, has access to free local day care, and lives in a Section 8 apartment, with their monthly rent tied to their income.

While K is not living as well as when working, if K were eligible for all of these programs, which would be highly unusual, K will be able to get by.  K can pay the rent and buy food and remain insured and with some belt-tightening, will be okay for a while.

Worker O, by contrast, is fired, even though O didn’t do anything wrong. O is therefore ineligible for UI. O has no savings, cannot afford insurance, even with a subsidy through the Affordable Care Act, is not eligible for Medicaid or food stamps or TANF, has no reliable, affordable day care, and has no access to a housing subsidy. As a result, O is in trouble, and is desperate and perched on the edge of homelessness.

Now, let’s turn our attention to an employer with a job to fill, Z. This job is terrible. It’s minimum wage, has no health benefits, no paid days off or vacation time, has irregular hours -- some weeks you’ll need to work days, some weeks nights (and you won’t know in advance so you can plan), and you'll get 20 or maybe 30 hours each week, if you're lucky. There’s no opportunity for upward mobility, it’s a two-hour drive each way, with no reliable public transportation to get you there, and the working conditions are unsafe -- there have been lots of injuries there. As I said, it’s a terrible job.

Employer Z offers unemployed worker K the job. What’s K’s answer? It’s no, of course. Maybe even hell no. Does K say no because K is lazy? No. K says no because this is not a job that will help K raise a family and move up the ladder, and taking it would mean being unable to look for something better, among other things. It is rational under these circumstances, smart even, to turn down this job. If you can. And K can.

Now, Z offers O the job. What does O say? O says yes. Maybe even yes please. Why? Because O does not have any choice. O is desperate. O is in no position to bargain, or to wait for something better.

It may be even worse than this, because there might be a worker called V who is even more desperate than O. So, V says:  “I know you can’t legally pay me less than minimum wage, but if you hire me instead of O, I’ll come in early and work for an hour before punching in, and then after I punch out at night I’ll stay for an extra hour then too.” When workers are desperate, they bid down their own wages.

If you are a worker, would you rather live in a country where most people were in K’s situation, or in O’s? K’s, of course, right? Because in that world, with very generous social welfare benefits, you would have some security, and some bargaining power.

If you are employer Z, would you prefer to live in a country where most people were in K’s situation, or in O’s? O’s of course, right? Because in that world, with very limited social welfare benefits, workers would have no choice but to accept whatever job you offered under whatever conditions; in a world with very generous social welfare programs, by contrast, everyone would have the ability to decline work, and if you want to hire someone, the burden would be on you, the employer, to make the job more attractive -- you might have to offer higher wages, paid vacation or sick days, a regular schedule, health insurance, and opportunities for promotion. Many of those would mean lower profits.

This is why business and their elected allies fight efforts to expand food stamps or unemployment insurance or TANF. A desperate worker is a cheap and compliant worker.
Why Big Business Loves Desperate Workers (Common Dreams)
While a science must be rooted in material reality, mainstream economics ignores or distorts the most fundamental aspect of this reality: that the vast majority of people must, out of necessity, labor on behalf of others, transformed into nothing but a means to the end of maximum profits for their employers. The nature of the work we do and the conditions under which we do it profoundly shape our lives. And yet, both of these factors are peripheral to mainstream economics.

By sweeping labor under the rug, mainstream economists hide the nature of capitalism, making it appear to be a system based upon equal exchange rather than exploitation inside every workplace. Perelman describes this illusion as the “invisible handcuffs” of capitalism and traces its roots back to Adam Smith and his contemporaries and their disdain for working people. He argues that far from being a basically fair system of exchanges regulated by the “invisible hand” of the market, capitalism handcuffs working men and women (and children too) through the very labor process itself. Neoclassical economics attempts to rationalize these handcuffs and tells workers that they are responsible for their own conditions. What we need to do instead, Perelman suggests, is eliminate the handcuffs through collective actions and build a society that we direct ourselves.

“Workers, working conditions, and work itself rarely draw the attention, let alone concern, of employers or economists. Michael Perelman fills the void with this sweeping review of Procrusteanism—the economic institutions and practices that force people to accept the discipline of the market. His account of the degradation of labor gives us a sequel to Harry Braverman’s Labor and Monopoly Capital.”

—Richard B. Du Boff, professor emeritus of economics, Bryn Mawr College

“When so much punditry around us is devoted to finding market-based solutions to our current woes, this book is a blast of fresh air, reminding us that the market is an increasingly destructive institution. Perelman shows how the market, instead of serving humanity, is now a Procrustean monster, demanding imperiously that humanity fit to its own constraints. The market gives power to the destructive practices of business and finance while stifling the creative potential of labor to address urgent social needs. Perelman subjects to withering criticism both the market and the economists who pray to this false god—a tonic read in these times of economic disarray!”

—Paul Adler, Chair in Business Policy, Department of Management & Organization, Marshall School of Business, USC
The Invisible Handcuffs of Capitalism (Monthly Review) The metaphor of a Procrustean Bed is a theme of the book and extremely apt: "In Greek mythology, Procrustes or "the stretcher [who hammers out the metal]", also known as Prokoptas or Damastes "subduer", was a rogue smith and bandit from Attica who physically attacked people by stretching them or cutting off their legs, so as to force them to fit the size of an iron bed. In general, when something is Procrustean, different lengths or sizes or properties are fitted to an arbitrary standard." Perelman's point is that in conventional economics, all aspects of life are contorted to fit the idea of markets, rather than economics changes to deal with actual human beings. Here's a terrific interview with him (mp3 audio).

This interview is especially good because the host, even though he agrees with the guest in the main, challenges him and argues the other side. By defending his position, we actually learn more. If only we had more of this.

[Marx and Engels] took the best thinkers, and they demonstrated how they were incomplete. They were not able to see what was driving, you know, inequality in the world. You know, Charles Dickens saw that there was inequality in the world, but what he didn't necessarily see was why this was so, why this reproduced itself. And that was Marx's project.

And that's really the reason why I find Marx even today to be a earth-shattering approach. You know, his approach is earth-shattering to understand the world, because it suggests that if you go through liberalism, you can understand its incompleteness. And then if you try to understand how the system is operating, you can have a much more complete, much more robust picture. You can understand, for instance, how the fact that small numbers of people arrogate to themselves the right to hold property, you know, and because they hold property, they're able to disenfranchise people and make people make judgments based on the fact that they have no property, so then I, having no property, have to come to you who have property and say, give me a job, and then you set the terms in which I'm employed.

You know, that is the root problem of how inequality is, you know, you know, constantly reproduced in our society, that those with property get to set the terms by which the rest of society live. And, you know, if you don't come to that, if you don't grasp that, which is the essence of Marxism, then you've not understood how we can constantly have discussions, every generation can have a discussion about what to do with poverty, you know, how to solve poverty. Can we raise enough money to solve poverty? Well, you can raise a lot of money, you can eradicate malaria, you can give to people, you know, a laptop computer, but they're still not able to set the terms themselves of how they should live. And that is the core lesson of Marxism. Unless people are able to set the terms in which they can live, they're not going to be free.
Questioning the Underlying Structures of Property and Power is “Off the Table” (Naked Capitalism) - good comments here as always.

And a few odds-and-ends that didn't fit anywhere else. On the disingenuousness of "small state" people and their arguments:
    My first major problem with small state people is that they are not prepared to look at these items on their merits. Instead they have a blanket ideological distaste for all things to do with government. ... My second major difficulty with many small state people, like George Osborne, is that they are using fear of a debt crisis (a possibility which for the UK and US is non-existent) to achieve their ends. This is political deceit on a grand scale. My third major problem follows from the second: reducing government spending during a liquidity trap recession does real harm. It wastes resources on a huge scale. ...

    Which brings me to a final problem I have with small state people, which is their disregard for the evidence. It is true that most people are bad at acknowledging counter evidence, but those with an ideological conviction are worse than most. ...
The imaginary world of small state people (Mainly Macro)

And in the subject of "free" trade - Bill Greider on Why Paul Krugman Was So Wrong (Naked Capitalism) A good point in the first paragraph - "Greider, who has long stressed that our system is not open trade but managed trade, and that other countries manage it with much more attention to protecting their workers than we do..."

Monday, December 15, 2014

Economics is a Fraud - Part 3

A recent paper called "On the Superiority of Economists" has engendered a bit of discussion: The study says:
    In this essay, we investigate the dominant position of economics within the network of the social sciences in the United States.  We begin by documenting the relative insularity of economics, using bibliometric data.  Next we analyze the tight management of the field from the top down, which gives economics its characteristic hierarchical structure.  Economists also distinguish themselves from other social scientists through their much better material situation (many teach in business schools, have external consulting activities), their more individualist worldviews, and in the confidence they have in their discipline’s ability to fix the world’s problems.  Taken together, these traits constitute what we call the superiority of economists, where economists’ objective supremacy is intimately linked with their subjective sense of authority and entitlement.  While this superiority has certainly fueled economists’ practical involvement and their considerable influence over the economy, it has also exposed them to more conflicts of interest, political critique, even derision.
The Superiority of Economists (Marginal Revolution) Wow. Furthermore:
The authors point out that economists demonstrate their self-belief in subtler ways too. Articles in the American Economic Review cite the top 25 political-science journals one-fifth as often as the articles in the American Political Science Review cite the top 25 economics journals. Another study found that American economics professors were less likely than their peers in other subjects to agree with the notion that “interdisciplinary knowledge is better than knowledge obtained by a single discipline.”

The odd thing, the authors argue, is that we believe in economists almost as much as they believe in themselves. Journalists and politicians seek strong arguments and clear answers. Most academics are reticent types: historians, for instance, question whether you can learn anything from history. “For a moderate fee,” jokes Deirdre McCloskey, an economic historian, “an economist will tell you with all the confidence of a witch doctor that interest rates will rise 56 basis points next month or that dropping agricultural subsidies will increase Swiss national income by 14.8%.”
The power of self-belief (The Economist) Combine the arrogance, insularity and self-belief with the many, many flaws we saw in economics in the previous two posts and you've got a recipe for disaster. Yet politicians constantly use the work of economists as a smoke screen for their policies, whether it is "free trade," eliminating the minimum wage (a favorite of conservative economists), the dangers of a social safety net (conservative econmists say people refuse to work if we have one), allowing unlimited mass immigration, to the dangers of debt.

On that last point, a real-world case was the Reinhart-Rogoff affair where two Harvard economists published a paper which claimed that growth went negative when a country's debt equaled 90 percent of its GDP. This economics paper was cited ad nauseum by every conservative politician intent on slashing spending (on the social safety net, not defense of course). This is a concrete example of economics affecting actual policy for actual human beings, and giving cover to an ideological position. Yet it turned out that the paper being waved in the face of everyone by conservatives contained a spreadsheet error which completely invalidated the results:

Also, a recent study on economists found that:
"We first found that an economist’s research area is correlated with his or her political leanings. For example, macroeconomists and financial economists are more right-leaning on average while labor economists tend to be left-leaning. Economists at business schools, no matter their specialty, lean conservative. Apparently, there is “political sorting” in the academic labor market."
Economists Aren't As Nonpartisan As We Think (FiveThirtyEight)

So conservative economists study what they want to study and liberal economists study what they want to. And no doubt their conclusions uphold their ideologies. But note that even "liberal" economists have bought into the underlying assumptions of the field. I always found it interesting that the economists at "think tanks" always come up with conclusions that validate the world-views of the people funding the think-tank. Yet  these results are used by politicans to justify their actions all the time. Of course if one think-tank's conclusions contradict another, you can always pick which one you want to use. After all, that's how science works, right?

From my experience, left-wing economists tend to focus on whether or not the economy is delivering beneficial social outcomes and why. Right-wing economists, by contrast, tend to advocate policies that increase money flows and maximize returns to capital, the idea being that maximizing money flows and wealth of the richest Americans will produce maximal beneficial outcomes to all levels of society via the trickle-down effect, and that decreasing such flows by any means will have negative effects for everyone. These are ideologies, and the conclusions flow from that. Both claim that the economy is somehow free of political decisions or considerations.

And finally, debate and disagreement amoung economists has slowly declined as "heterodox" economists have been purged from the profession:
The rise and fall of debate in the leading economics journals (Marginal Revolution)

In the age of "Freaknomics," economists are expected to experts on all topics - from how to increase food supply to how to decrease crime rates, to how to decrease teen pregnancy, despite the fact that all their training is in money flows and transactions. The government hires scores of economists to advise it on every policy from agriculture to health to transportation to energy to immigration. Economists even rule countries directly, as the technocrats in Europe. After all, whatever is good for "the economy" must be good for society, right?

Speaking of economists who hold forth on everything, consider the case of Noah Smith, a Paul Krugman wannabe who holds forth at Bloomberg news on everything from the safety of GMO foods (despite not being a natural scientist) to matters of energy and infinite growth (ditto) to whether people are becoming less violent over time (ditto). He recently wrote an article reflecting on the above article on the superiority of economists. He asks the question, "Why Economists Are Paid So Much"
As for economists’ “influence over the economy,” I am going to take a wild guess and say that it isn't because of their arrogance or hierarchical insularity or “sense of authority and entitlement.” It’s probably because…drumroll…economics is the discipline that studies the economy. If politicians want to know how to reduce cancer rates, they should go to a biologist. If they want to know how to shoot missiles at Vladimir Putin, they should go to a physicist. If they want to know how to boost productivity at U.S. companies, or increase employment, or auction off broadcast spectrum rights, whom should they ask for advice? A sociologist?

But there is one way in which economists clearly do dominate the other social sciences, and that is in the amount of money they make...
He concludes that economists are paid so much because they are the most facile with statistics and data-crunching.
The technical skill I am talking about is statistics. Economists learn a lot of statistics -- much more than anyone else except for applied mathematicians and statisticians. There is a whole branch of economics, known as econometrics, dedicated to statistics. Most of the empirical work that economists do is applied statistics. Statistics is hugely valuable in the real world. Simply knowing how to run, and interpret, a regression is invaluable to management consultants. Statistics is now permeating the IT world, as a component of data science -- and to do statistics, economists have to learn how to manage data. And statistics forces economists to learn to code, usually in Matlab.
However, if all that was needed was statistical analysis, wouldn't it make more sense just to hire someone who knew the relevant mathematical techniques? Why spend all the time learning all the other stuff? After all, there were hardly any economics majors before World War 2 - it was an obscure discipline. Business management was much more important, and that was either done by the owner of the business or self-taught.

I contend that economists are paid so much because they are the lackeys of the banking/political overclass who reward them handsomely for coming up with justifications that can be waved in the collective face of the masses about why the rich are gaining ever more from the economy while the rest of us are getting poorer, and avoiding uncomfortable discussions of negative social outcomes or exploitation or unfairness. We've already seen what happens to economists (presumably with the same econometrics training as their brethren) who depart from the "orthodox" party line. Again, "it is difficult to get a man to understand something when his salary depends on him not understanding it." If that isn't the best summary of the economics "profession" I don't know what is.

At every turn along the road to hell, from deindustrialization and "free trade" policies, to letting millions of immigrants into the U.S., to eliminating guaranteed pensions in favor of 401Ks, to soaring college and health care costs, to CEOs making over 300 times the average worker, to "maximizing shareholder value," to monopolies in every industry, to deregulating Wall Street and financializing the economy - the economists were out front-and-center with justifications for every single one of these things!

They said we would be okay because of the "service economy" (fast-food and retail jobs instead of manufacturing jobs). They said saving for your own retirement was okay because salaries, the stock market and housing prices would go up forever (Americans are now 40 percent poorer than before the recession). They said unlimited immigration was just for jobs "Americans don't want to do" (which jobs are those?), then said we needed more H1-B visas because there weren't enough Americans for high-paying tech jobs. They said CEOs deserved their obscene salaries and bonuses because of their genius and awesome marginal productivity (despite often running companies into the ground and leaving with golden parachutes in the midst of mass layoffs). They said raising the minimum wage would cause unemployment. They said Americans were unemployed because they needed 'more education' (despite increasing college attendance rates and people overqualified for many jobs). They said monopolies are okay because they delivered value to the consumer (Americans pay more for slower telecom than anywhere else in the world). They said the "private sector" was always more efficient that the public sector, despite Americans paying twice as much as the rest of the world for health care and education. They said privatization would save us money (private prisons are guaranteed certain rates of incarceration by state governments). They said deregulating markets would cause economic growth (remember Enron?). They said bank mergers weren't a problem (1 trillion in bailouts later) Every single one of these policies was justified by the economics profession, and (most) people believed it!

Now they are saying that automation won't cause job losses, we need even more immigration, lower birth rates are a crisis, we need to cut the deficit even more, we can't afford Social Security, raising taxes on the rich will harm growth, resource limitations are not a problem, etc., etc.

Institutional economics is superior in my opinion because it actually looks at the interaction between various forces and institutions in society and how they evolve over time. These relations are not static, as with a mathematical theory, but constantly changing with different forms of technology and social norms. The economics that worked in 1776 or 1880 or 1932 will not work in 2014, or in 2100. This is the problem with so many economics theories which view the economy as something that can be “solved” once and for all like an engineering problem. The economy is not a neat, clean, clockwork mechanism. It is messy and factious and constantly evolving, just like society. It is an ad-hoc amalgamation of competing interests, parties, groups, and coalitions, each with their own agenda.

This is a major problem with Communism and it’s mirror image Libertarianism, which see an ideal economy working according to abstract theories that do not take human nature into account. Both appeal to a certain type of person who is intelligent and rational, and wants the world to behave according to predictable rules, but it inevitably leads them astray. In reality, the economy, like society, is formed by a series of compromises. It is never reaches perfection or an end state. The problem in our society today is that all interests – save one—have no representation. The only interest that can get its way is the oligarchy of money and power – the one percent—and the rest of us have no say. It is that which is tearing society apart all across the world. Rather than a series of compromises, it is designed for one purpose - to maximize profits and returns to capital - all other needs be damned. And economics provides the justification for this with its utilitarian, productivist and materialist philosophies.

And this has consequences, from hospitals running out of drugs in Greece, to protesters in the streets of Spain, Mexico and Thailand, to the increasing rate of suicide in America, to the destruction of entire nations like Iraq. Make no mistake, economics as practiced today has blood on its hands.

Economics is a fraud and a pseudoscience. When it comes to social policy, it's high time we stopped listening.

Sunday, December 14, 2014

Economics is a Fraud - Part 2

In my last post I contrasted the human-based approach of institutional economics which attempts to explain economics in the real world with what economic "science" has become - mathematical rationalizations in favor of the status quo, which are then disseminated through schools, the media, etc. Now "economics," a completely unproductive activity, is one of the most popular and remunerative majors in college, indoctrinating thousands of young minds per year and sending them forth to spread the gospel much like the theological seminaries of the Middle Ages.

But what really engendered this was this excellent program from the BBC; Teaching Economics after the crash. It's just over half an hour, and well worth listening to in full. As much as I hate transcribing stuff, I just has to jot down some of the more salient parts of the broadcast. Particularly revealing are those with "heterodox" economists Ha-Joon Chang and Steve Keen, who I mentioned in my last post:
Aditya Chakrabortty (program host): Then there's the divide between mainstream economics, and all the other perspectives. What does that mean? Well, listen to this. Two economists go down to the pub. No, it isn't a setup for an unpromising  joke, but a conversation between Danny Clark, LSE professor and self proclaimed Neoclassical--he's on the ginger ale. And, sipping fizzy water, Dr. Ha-Joon Chang, Cambridge economist, and decidedly heterodox in his views. Their different approaches mean they see the world completely differently, even on the simple matter of getting a drink:

Danny Clark: "As a neoclassical based economist, we construct a collection of alternatives, and then we look at those options and we say, 'what is it that I can do given the time, given my budget?' and of those that are feasible, I choose the best option. But Ha-Joon, you like us to think about things differently."

Ha-Joon Chang: "I think that humans are more complex. We are creatures of habit. And also peoples' preferences are shaped by the environment. For example when I first came to this country in the 1980s it was very rare for working class people in this country to drink wine because it was almost an act of class treachery to drink it. Today they are drinking wine. One reason might be that they are more willing to break out of this class consumption pattern which you didn't see in the 1980s and this is an interesting insight that you can learn from studying Marxist economics."

Rational choice theory, as sketched out by Danny, begins by treating humans as walking calculators who know what they want and how to get it. Following Marx, Keynes and others, Ha-Joon on the other hand assumes that we are much more social and easily influenced.

Outside the saloon bar, Danny's way of analyzing the world is the one that dominates economics faculties. Ha Joon? Well, listen to how being outside the mainstream has affected his Cambridge career:

HJC: "A life of persecution and struggle, if I may put it that way. They don't promote you, telling the students that you are a crank. They shut down your course which happened to me. So, yeah, I mean it's a very unpleasant life, and of course they'll have a good excuse. They'll say, 'Oh, he hasn't published in this top journal.' And then people like me go out in the real world and write books for the popular market and sell 1.5 million copies. They say it is still not good enough because you cannot trust the ignorant masses. But then success in the market is the best indicator, but when it comes to their turf they don't admit it."

The way modern academics get ahead is by publishing articles in the most prestigious journals in their field. Except in economics there's a problem. Professor Steve Keen is another non-mainstream economist:

Steve Keen: "Neoclassical economists edit all the major journals - the Economic Journal, the American Economic Review, the Quarterly Journal of Economics. All of these journals which are top-ranked are in fact filtered by neoclassical economists as editor. That means that people like myself don't get published in those so-called leading journals. And it's really as if you had just a [core?] religion where it just happened that the Vatican edited all the top journals, and therefore anybody who wrote as a Muslim or a Buddhist would be ranked as a low-quality religious person."

Aditya Chakrabortty: "If that were to be the case, then we wouldn't have the teachings of the Buddha, and we wouldn't have the Koran."

SK: Yeah exactly. Well we would have them, but they wouldn't be read. They'd be minority, truly minority elements, and they'd be forever battling against a totally dominant Catholic church. In economics, just one particilar majority sect has the monopoly on teaching economics across the whole globe.

The result is to make the subject narrower than its ever been.

Aditya Chakrabortty: "I'm going to name you some famous economists of yesteryear, and you tell me whether you think they'd get published in top journals. Let's start with John Maynard Keynes. Would he get published in the American Economic Review?"

SK: "No. Where he talks about the monetary system and instability and the role of uncertainty, that goes against what the modern mob call 'rational expectations,' and they think if you dont have rational expectations in your model, that's really bad."

AC: "Hayek."

SK: "So his vision about uncertainty, lack of information, and instability, would also be rejected from any mainstream journal."

AC: "I'm not having much luck. Let me try Schumpeter."

SK: "Schumpeter would get rejected because he had a cyclical vision of capitalism."

AC: "Hyman Minsky."

SK: "Oh, absolutely not!"

These legendary names may not have much of a future in academia, but they were the precisely the ones who proved most useful to understanding the crash and its aftermath. Yet over the past three decades, the economists who follow their teachings and other traditions outside of the mainstream have been weeded out of their departments.


The picture painted by both students and nonmainstream economists is of a social science that's [more] keen on being a science than having an accurate grasp of society. Yet over the past thirty years it shaped our society and our politics more than any other discipline.

Audio footage of former President Ronald Reagan: "Ive always felt the nine most terrifying words in the English language are, 'I'm from the government, and I'm here to help.'"

Dr. Victoria Bateman teaches economic history at Cambridge:

Victoria Bateman: "At the fundamental root cause of the crisis is the belief of economists in the free market capitalist system. And the result of this growing faith that really began in the 1980s with the rise of Margaret Thatcher and with Reagan in the U.S. The result of that belief was a liberalization of markets, privatization, the rolling back of the state, deregulation of the financial sector, and so we began to experience full-blown capitalism.  That it could be set forth, free reign, and the result would be low unemployment; inflation that was under control; respectable, even high, economic growth rates. The result was that on the eve of the global financial crisis, economists were looking ahead and envisioning a rather rosy future, you know, we were basically on the Titanic with all the great glory that this free market capitalist model promised. And economists were entirely unaware of some of the problems that this was creating behind the scenes."

Take mainstream economics out of the textbooks and into the real world, and what do you get?

HJC: "The world economy has grown much more slowly..."

Ha-Joon Chang, author of "Economics: The Users Guide:"

HJC: "...has become much more unequal, and has become much more unstable. So growth being slowed down means that living standards [don't] rise as fast as it could have. [?] financial crisis creates unemployment; increasing inequality harms social cohesion and the society becomes more unpleasant to live in. So the human cost of having [the] wrong kind of economics has been enormous."

But the really big blow to the standing of mainstream economics came from the meltdown in 2008. It was a crash that hardly any economist saw coming. And the ones who did were almost all from outside the mainstream. Among them was Steve Keen, author of "Debunking Economics:"

Steve Keen: "Everything that they did about setting up an armchair view gave them a view effectively of a village from 5,000 years ago before credit and money had been invented. And that's how they try to model modern capitalism."

AC: "You said economics doesn't really take much account of money and banks and debt. But a lot of people listening will think, hang on, that's exactly what economics is about, isn't it?"

SK: "Exactly. And the people who are listening are right and the economists are wrong. The mainstream mantra basically says that money is just a veil over barter, what's actually going on behind all those money transactions is in fact just people exchanging one commodity for another, and money is basically irrelevant. All money gives you is the rate of inflation; it doesn't tell you anything real about the economy. And they then drill that into people's heads in first year, and if they survive all the way to a Ph.D they actually believe it."

AC: "So you're saying, effectively, that mainstream economics misses out on how banks actually function, and in doing so they basically miss out on the creation of debt, right?  And therefore that when we have a huge crisis caused by too much debt, mainstream economics is no help to us whatsoever."

SK: "No, half of [??] don't even bother looking at that information. So rather than saying we have to monitor bank lending and look at how big it is compared to  the GDP and whether it is growing or shrinking at the time, they basically say 'ignore it.' There are many, many steps at which that model falls over, but they continue to teaching it because it's this nice, coherent, neat, plausible, and wrong model of the world, and then that gets in peoples' minds and it becomes the religion of economics..."

But then how will mainstream economics, and by extension the society it interprets and shapes change? Max Planck once observed that science progresses one funeral at a time. Not a bad joke for a German theoretical physicist. But it's also a serious point--that only by replacing the champions of an old idea will you get rid of the idea itself. Which is why Victoria Bateman looks to her students to save her subject:

VB: "Really what we need is fresh thinking, young minds. And I say this to my students, that when they're reading the textbooks, this is not the end state of understanding, that we still need to find a path forward, and actually it's their experiences coming in from the real world out there could potentially be the savior of the subject."

Maybe. But most undergraduates only hang around for three years. Their opponents on the faculty will be there for life. And, says economic historian Lord Robert Skidelsky, the graybeards have vested interests on their side:

Robert Skidelsky: "You have an establishment. And that establishment is very durable. And very few people break the mold of it. The ideas in office, the ideas that succeed, are ideas that are usually acceptable to the power-holders in society. They're the ones that are called 'scientific,' and all the others are called 'nonsense.'"

If, as critics say, mainstream economics is deluded, then it pays to be deluded. The rich and powerful reward those academics who come up with scientific-sounding reasons for why they should have wealth and power, says billionaire George Soros.

George Soros: "Well, lets take this fundamental misconception in General Equilibrium Theory which is that in General Equilibrium produces the optimal allocation of resources. And markets, being perfect, allocate resources the most efficient way. Now this happens to be false, because markets are not perfect. But its a very convenient belief for those who are benefiting from financial markets - the rich and powerful."


Paul Samuelson once said, 'I don't care who writes a nation's laws, or crafts its advanced treaties, if I can write its economics textbooks.' He should know, he wrote perhaps the biggest selling economics textbook of all time. The people who write the replacement set texts will be producing the instruction manual for our society...
Teaching economics after the crash (BBC Radio 4)

And related: Sack the economists (Real World Economics Review):
After reading yet another cri de coeur from yet another frustrated economist, I thought perhaps we need to spell out the message in all bluntness: we need to sack the economists (the mainstreamers). We also need to derail their baleful ideology. That means we need to disband the departments of neoclassical economics, so the poison is not passed on to any more hapless generations.

When I say “we”, I really mean “we, the people”.  The job can’t be done by a small band of isolated reformers.  That means people need to be informed and persuaded.  They need to be spoken to in terms they understand;  not everyone, but opinion leaders and interested laypeople, of whom there are many.

Thus was I moved to write the short ebook: Sack the Economists and Disband Their Departments.

The title may seem to be a bit confronting at first, but the book is a concisely argued case, not a rant.  The bluntness is justified by  the fundamental flaws in mainstream economic ideas.  There are not just one or two flaws, there are many.  Neither are they just obscure theoretical flaws.

For example, private debt is ignored in mainstream macroeconomic models and thinking.  It is ignored because, supposedly, “one person’s debt is another person’s asset”.  But that would only be true if loans comprise 100% savings.  They don’t of course, somewhere between 90% and 100% of a new bank loan is new money created out of nothing.  That means loans affect the money supply, the purchasing power available to the economy.  As debt rises and falls, so the economy booms and busts.  Steve Keen has been leading the way explaining and demonstrating this, for example in Debunking Economics.  This seems to be the most immediate reason why the mainstream utterly failed to foresee the 2007-8 Global Financial Crisis.

At an even more mundane level, the near-universal use of Gross Domestic Product as a measure of economic success, and by implication of quality of life, does not even qualify as basic accounting.  This is because the GDP measures “activity” involving money, but makes no distinction between useful, useless and harmful activity: the cost of cleaning up pollution is added to the GDP.  This would be like a shop keeper entering all his transactions (income and costs alike) in the credit column of his ledger, adding them up, and claiming his business is booming.

What is needed of course is a balance sheet.  It would also be helpful to separate economic, social and environmental factors.  All of these things are available, but they languish because politicians love the GDP and mainstream economists fail, collectively, to point out the falsity of using GDP as a measure of welfare.

The so-called efficient markets hypothesis is a joke.  If all financial market players made independent assessments of relevant information and their mean assessments were accurate, then there could be no market crashes.  It is well known that many market players follow trends, not fundamentals, so their assessments will not be independent.  If players assessments become correlated, in other words if they behave as a stampeding herd, then their mean assessment can be seriously in error, and subject to sudden correction.  That of course is what happens in a market crash, and every crash invalidates the hypothesis.  (Can I have my pseudo-Nobel Prize now, please?)

The central absurdity of mainstream economics is of course the neoclassical theory, and its prediction that free markets will bring about the General Equilibrium.  It is hard for a scientist like myself to conceive that this theoretical abstraction could have survived for a century or more, let alone become the dominant paradigm.  It is based on absurd assumptions, and there are many manifestations of disequilibrium in real economies that contradict its main conclusion.

Financial market crashes are obvious manifestations of disequilibrium, but so, for example, are extreme and increasing inequalities in wealth (an instability in the distribution of wealth), and the exponential growth to dominance by a few firms in many market segments (commonly due to economies of scale and the coloniser effect, both of which are excluded from the theory).

The neoclassical assumptions should disqualify it from serious consideration anyway.  We are all assumed to have complete knowledge, to be able to predict the future, to be immune to fashion, to social and psychological pressures, and so on and on.  If you drop these assumptions you predict a very different kind of system:  a far-from-equilibrium, self-organising system that probably qualifies as a complex system.  The neoclassical theory can never be even a rough first approximation to such a system.  Rather, it is completely misleading.

As well as silly assumptions, there are also important things missing from mainstream thinking.  For example, why is the pivotal role of ownership not highlighted as a dominant determinant of the flow of wealth, and responsibility?  There are many possible kinds of ownership, but our system is dominated by only a few, and they tend to favour the wealthy.  Why is social credit almost universally ignored.  This is the term often used Henry George’s followers – a modern systems term might be emergent community wealth, the wealth that accrues from the proximity of businesses, people, infrastructure, above and beyond the individual investments.  It is this wealth, that belongs to no individual entity, that is allowed to be captured by land speculators, thus facilitating one of many economic injustices.  Then there is the monetary system, perhaps the most important and most neglected economic factor of all.

Sack the Economists lists seven readily identifiable mechanisms that transfer wealth to the rich, from the rest of us.  Neoliberals rail against “wealth transfers” that attempt to re-balance the distribution of wealth, but are oblivious to copious transfers in the other direction.  This is an example of rhetoric that can be turned back on neoliberals.  Other examples given in the book are social engineering, political correctness and class warfare.

Mainstream economics is incomplete, grossly misleading and destructive.  It reflects the gross ignorance and long-term intellectual isolation of its practitioners.  It uses a lot of fancy mathematics, but this does not mean it is science.  The mathematics can’t disguise the fact that mainstream economics is not science – it is pseudo-science.

Saturday, December 13, 2014

Economics is a Fraud – Part One

If you want proof that the "science" of economics is simply an exercise of mass propaganda, read on.

Once upon a time, there was something called "institutional economics." This approach analyzed the economy through the interactions of various institutions in society - corporations, the government, labor unions, the financial industry and so forth. They looked at how corporations, the government and banks actually worked in the real world and incorporated economic history into their analyses. They weren't adverse to using mathematical tools, of course, you can't analyze money flows without them after all, but it was a supplement to the actual study of how economics operated in the daily lives of actual people and institutions. After all, what is economics but a set of social relations between actual human beings?

This definition from Wikipedia is useful:
Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour...Institutional economics emphasizes a broader study of institutions and views markets as a result of the complex interaction of these various institutions (e.g. individuals, firms, states, social norms). The earlier tradition continues today as a leading heterodox approach to economics
Let's use an example using trade. An institutional economist might look at Wal-Mart using its monopsony power (one buyer, many sellers) to force down prices. She might talk to actual factory owners who shut down their factory in North Carolina and moved it to the Pearl River Delta about why they did it. She might talk to union leaders. She might cruise down the main avenue of the town looking at the boarded up storefronts, potholed streets, empty weedlots and boarded-up houses. She might interview the employees who have worked at the factory their whole life and now have fast food and government jobs as their only other options. She might talk to government officials about how they deal with the loss of revenue and what options they have in a globalized system. She might even fly to China and talk with workers in their cinderblock dormitories who have just moved to the city from a pig farm and now work sixteen-hour days six days a week. What conclusions might be drawn from this approach?

By contrast, the "real" economist never even has to leave his tree-lined suburban neighborhood or ivy-leafed university office. He will not have to talk to all those dirty, unwashed people. He will instead argue from first principles that free trade is always good for everyone. He will spin a tale about Ricardian Equivalence developed by David Ricardo (b. 1772) about English wool and Portuguese wine, and show you any number of complex graphs and charts based on crunching copious amounts of government data. He will never visit a town devastated by free trade, or talk to a worker or factory owner. If you disagree, he will question your intelligence, accuse you of arguing from emotion rather than "science," and not understanding human nature and how the world actually works. He will also assure you that "free trade" has been proven by centuries to be just a necessary part of the human condition that cannot be stopped anyway, so it is futile to argue against it. For this, he will be invited to write columns for the likes of Bloomberg, Forbes and Businessweek, will have prestigious professorships teaching the next generation of economists, be published in the top journals, and appear as a talking head on the television whenever matters of the "economy" crop up.

Many economists of the past were primarily institutional economists. I think the preeminent practitioner of this in the Progressive Era was Thorstein Veblen, whose work has completely disappeared down the memory hole except for his concept of “conspicuous consumption.” The most preeminent of the post-Depression era was probably John Kenneth Galbraith, whose books should be required reading even today. Both of these economists explained the functioning of how the economy actually operated in plain English and wrote bestselling popular books. But their conclusions were insufficiently enthusiastic about the capitalist system in America, and thus they were scrubbed from the record.  For example, Veblen contrasted the needs of business to increase money and profits with that of production of goods for actual use, and argued that businesses wanted to actually curtail production to keep profits high. Galbraith, in addition to writing a book about the Great Depression which skewered the underlying greed and fear, had the temerity to suggest that we had solved the production problem and that big business had to artificially create demand for their products through the use of incessant advertising so that goods would not build up on shelves unsold as they had during the Great Depression. For this, and for their lack of mathematical equations, both of these men were scrubbed from economics discourse (despite the bestselling books and the fact that their conclusions were never disproven).

Institutional economics was driven out of the discipline and replaced with abstract theory and fiendishly complex math which viewed the economy as a complex, well-ordered and finely-tuned machine subject to mathematical laws as precise and rigorous as those of quantum physics. For example, rather than explain economic growth by the development of various technologies, or the discovery of fossil fuels, and so on, it was now described thusly:

Got it?

These abstruse mathematical equations allowed practitioners of economics to not only claim that they were the only “real” social science because they used math, but also scrub the discipline of actual people and institutions, political decisions, class conflict, power relations, debt, wars and natural resources, and the resultant messiness, all of which are assumed away. Institutions, politics and social relations are all eliminated in favor of rational markets heading towards equilibrium delivering ideal social outcomes, if only government can get out of the way and not interfere with these “natural” laws. The actual history of capitalism as explained in my previous post was now gone. The economist who derived the above equation (Robert Solow) won every prize he could be given by the establishment, including the John Bates Clark Medal and Bank of Sweden Prize (usually incorrectly referred to as the “Nobel Prize in Economics”).

I began thinking about this when citing the work of Michael Perelman in my previous post. Perelman has written a large number of books debunking the various myths that are deployed to justify our current economic order. For this, he is cast out of the mainstream. I read this about him on Wikipedia:
Perelman writes that he was drawn away from the "framework of conventional economics," noticing that the agricultural system was "consuming ten times more energy than it was producing in the form of edible food." Perelman's research into how "profit-oriented agricultural system created hunger, pollution, serious public health consequences, and environmental disruption, while throwing millions of people off the land" led to his first book, Farming for Profit in a Hungry World (1977). Perelman continued to write extensively in criticism of conventional or mainstream economics, including in all his books (and especially his books published from 2000 to date), papers and interviews.
For daring to question economic orthodoxy and actually write about its shortcomings and limitations of the economy instead of rationalizing it, Perelman has been “exiled to Chico State, a redneck college in rural California, for his lack of freemarket friendliness,” according to journalist Mark Ames, who has himself been exiled from the mainstream media (it’s even the name of his news magazine). As Perelman has said in an interview about reaction to his work "...They hardly notice me.” Yes, every field has a way of enforcing conformity and disciplining heretics, and the “science” of economics is no exception. Notice that there is no actual engagement with Perelman’s criticisms, no refutation of his conclusions, just silence. Skeptical views are suppressed and ignored in the media.

In fact, there are a whole suite of economists who are put out to pasture for making even the slightest criticism of the free market system. Or, they raise inconvenient questions about "conventional" economics described by the mainstream Neoclassical/Neoliberal schools of economic thought. Here are a few whom you may have heard of in addition to Perelman, Veblen and Galbraith:

  • E.F. Schumacher – questioned the one-size-fits all technology of developing counties as well as the underlying “bigger is better” value system of economics. Author of “Small Is Beautiful.”
  • Ha-Joon Chang - questions whether "free trade" policies are good for economies. Author of “Twenty-three Things They Don’t Tell You About Capitalism.
  • Steve Keen - questions why money creation, banking, and debt are completely removed from economic analysis. Author of “Debunking Economics.
  • Herman Daly - questions the limitless resources and infinite growth assumptions of conventional economics. Author of “Steady State Economics.”
Even conventional capitalist economists like Hyman Minsky were sidelined for being too critical and insufficiently enthusiastic about the free-market system. Minsky had the temerity to write a book arguing that “stability is destabilizing” and that cycles of speculative bubbles were standard features of a freewheeling capitalist economy, rather than exceptions which could be controlled and avoided (which should be obvious from history). For this “crime” his books were soundly  ignored and he was put out to pasture at Washington University in St. Louis, where he died in 1996. His book, of course, was 100% accurate in predicting the latest financial crisis. You might think this would validate him, but, as Wikipedia states:
Minsky's theories have enjoyed some popularity, but have had little influence in mainstream economics or in central bank policy.

Minsky stated his theories verbally, and did not build mathematical models based on them. Consequently, his theories have not been incorporated into mainstream economic models, which do not include private debt as a factor. The post-Keynesian economist Steve Keen has recently developed models of endogenous economic crises based on Minsky's theories, but they are currently at the research stage and do not enjoy widespread use.
Instead we get “Freakonimics” which has spawned an entire cottage industry – books, sequels to books, a podcast, even its own movie! Is it any coincidence it is written by a University of Chicago economist and promotes a pro-Market, anti-government, Neoliberal World view? (laissez-faire, we just need to get the right ‘incentives’, etc.) Books written by flacks funded by think-tanks like the Cato Institute or the Heritage foundation that sing hosannas to the free market are on the shelves of libraries and bookstores all over the world.

And then there is the whole behavioral economics school, which incorporates psychology and studies the actual behavior of real human beings (imagine that!), Behavioral economics has uncovered all sorts of irrational behavior, and has won some grudging recognition (one of its founders, Daniel Kahneman, won an economics “Nobel”), yet it has not been incorporated in economic analysis, probably because it undermines the whole mathematically-based approach which views people in the economy as undifferentiated lumps of rationality and productivity to be plugged into various equations as need be.

And then there are explicitly Marxist economists like David Harvey, Andrew Kliman, and Richard Wolff, who are totally banished to the margins for engaging in the “forbidden” economics based on the works of Karl Marx. Even Thomas Piketty, with his best-selling book critical of inequality, has to preface every interview about his book with the boilerplate denunciations of Marxism and praise of the free market to get even a skeptical hearing. It’s almost like the self-denunciations we saw under Communism (Capitalism is the greatest system ever invented, but…).

It’s not just economists - philosophers such as John McMurtry and John Gray have been skeptical of conventional economics as well. McMurtry considers the unregulated free market to be destructive of human social values, and describes freewheeling finacialized global capitalism as a ‘cancer.’ Gray, has written, "Capitalism has lurched into a crisis from which it still has not recovered. Yet the worn-out ideology of free markets sets the framework within which our current generation of leaders continues to think and act."  Public intellectuals like Slavoj Zizek and David Graeber who are critical of economics are banished to the margins. Instead we get Paul Krugman and David Brooks holding forth from the pages of the New York Times.

Even relatively mainstream capitalist schools like Cartalism (aka Modern Monetary Theory) cannot get a hearing, despite the fact that their conclusions have not been invalidated, they are just politically inconvenient to the ruling class (government is not ‘revenue constrained’ – the money it spends into the economy comes back to it in the form of taxes so long as there are real resources to be utilized; government debt is the private sector surplus and vice-versa)

And then there were economic historians like the late Karl Polanyi and Eric Hobsbawm. Polanyi, for example, argued that:
Contrary to libertarian economists from Adam Smith to Hayek, Polanyi argued, there was nothing “natural” about the free market. Primitive economies were built on social obligations. Modern commercial society depended on “deliberate State action” by and for elites. “Laissez-faire” he writes, savoring the oxymoron, “was planned.”

Libertarian economists, who treat the market as universal—disengaged from local cultures and historic time—are fanatics whose ideas end in tragedy. Their prescription means “no less than the running of society as an adjunct to the market. Instead of economy being embedded in social relations, social relations are embedded in the economic system.”
Whereas Hobsbawm, a renowned Marxist historian whose views moderated over time, wrote:
"Impotence therefore faces both those who believe in what amounts to a pure, stateless, market capitalism, a sort of international bourgeois anarchism, and those who believe in a planned socialism uncontaminated by private profit-seeking. Both are bankrupt. The future, like the present and the past, belongs to mixed economies in which public and private are braided together in one way or another. But how? That is the problem for everybody today, but especially for people on the left."
And finally there are natural scientists who've taken a look at economics and come up with flaws. Historically, the greatest of these was Frederick Soddy, an actual Nobel Prize winner in the sciences who studied economics because he was alarmed at how economic ideas were leading to military and political conflicts like World War One. Soddy’s work was crucial to understanding radioactivity and nuclear reactions, and he felt that the economic problem needed to be dealt with, or else the increasing destructiveness of applied science would become more of an existential threat to the human race rather than a boon. Soddy observed that while money and debt can expand indefinitely, the real economy was under no such imperative and is subject to the laws of thermodynamics. Furthermore, our system of money is based on debt, and hence a claim on unrealized future resources leading to perpetual instability. Scientist Charles A.S. Hall, a self-described “fish biologist”  incorporates biological principles from ecology (following H.T. Odum) to arrive at the energetic basis of the economy through the concept of energy return on energy invested (EROEI). He has written a book called "Energy and the Wealth of Nations," which explains the role energy plays in the economy. This is resolutely ignored by economists, who consider our wealth to be exclusively a product of "innovation" (which can conveniently be neither quantified nor exhausted).

I didn’t even get to alternative economic thinkers like Henry George, Robert Owen and Clifford H. Douglas. And we haven't even touched on anarchist-leaning thinkers like Peter Kropotkin and Pierre-Joseph Proudhon. Or socialist thinkers like Charles Fourier and √Čtienne Cabet. The list is almost endless!

Gone! All gone! Banished from economic debate in favor of a narrow slice of specialists justifying the current flavor of expansionist corporate globalized capitalism based on debt and infinite growth who claim, without irony, they are practicing a “science” Can anyone believe that all of the above thinkers are somehow invalid?

Despite what Margaret thatcher said, there is an alternative. It's the primary job of the economics priesthood to make sure that we don't know it.