Economics as Neoliberalism: The Beat Goes On

Boston Review: Economics after Neoliberalism

  by Suresh Naidu, Dani Rodrik, Gabriel Zucman

This essay really is a demonstration of how impervious economists and economics as a discipline are to fundamental criticism.

The criticisms are acknowledged but their response is to tout the need for "a broad and deep public discussion of new policy ideas".  Apparently, they think "a policy framework" -- essentially a new coat of paint in a brighter color -- is all that is needed; economics as it is, is sound, but misunderstood.  They think the problem with economics -- that economics is wielded as a dogma to support neoliberal policymaking -- is a matter of deceptive appearances.

They acknowledge that it looks bad for economics, as neoliberalism's unwavering policy sponsor and rationalizer.

In the eyes of many, the turn towards neoliberalism is closely associated with economic ideas. Leading economists such as Friedrich Hayek and Milton Friedman were among the founders of the Mont Pelerin Society, the influential group of intellectuals whose advocacy of markets and hostility to government intervention proved highly effective in reshaping the policy landscape after 1980. Deregulation, financialization, dismantling of the welfare state, de-institutionalization of labor markets, reduction in corporate and progressive taxation, and the pursuit of hyper-globalization—the culprits behind rising inequalities—all seem to be rooted in conventional economic doctrines. The discipline’s focus on markets and incentives, methodological individualism, and mathematical formalism all seem to stand in the way of meaningful, larger-scale economic and social reform. In short, neoliberalism appears to be just another name for economics.

It has all been just a terrible misunderstanding, you see.

Many of the dominant policy ideas of the last few decades are supported neither by sound economics nor by good evidence. Neoliberalism—or market fundamentalism, market fetishism, etc.—is not the consistent application of modern economics, but its primitive, simplistic perversion.  

No True Scotsman?

Economics is in a state of creative ferment that is often invisible to outsiders. 

Yes, invisible.  For decades.

Weirdly, though they claim that market fundamentalism "is not the consistent application of modern economics", they go on at length praising markets and economic analysis of markets as central to economics as a discipline and doctrine.

Economists study markets (among other things), and we naturally feel a certain pride in explaining the way markets operate to those who lack our specialized knowledge. When markets work well, they do a good job of aggregating information and allocating scarce resources. . . . The typical course in microeconomics spends more time on market failures and how to fix them than on the magic of competitive markets. . . . the “competitive equilibrium model” in which free markets are maximally efficient—even if they are not good for fair distribution—is the dominant framework only in introductory economics courses. Thoughtful economists (of which there are many) quickly move away from it. . . . Economists still have a strong bias towards market-based policy solutions, and the policy prescriptions endorsed by economists tend to be narrowly focused on addressing precise market failures. . . . Economics does have its universals, of course, such as market-based incentives, clear property rights, contract enforcement, macroeconomic stability, and prudential regulation. These higher-order principles are associated with efficiency and are generally presumed to be conducive to superior economic performance. 

Their core argument is that economics is more flexible than fundamentalist.  Even a fairly stupid economist can produce an argument in favor of her own prejudices.  And, this is treated as a feature, not a bug.  No really, they make that argument!  I quote:

.  .  . the science of economics has never produced pre-determined policy conclusions. In fact, all predictions and conclusions in economics are contingent: if x and y conditions hold, then z outcomes follow. The answer to almost any question in economics is “it depends,” followed by an exegesis on what it depends on and why. Back in 1975, in a collected volume entitled International Trade and Finance: Frontiers for Research, an economist named Carlos F. Diaz-Alejandro wrote: “by now any bright graduate student, by choosing his assumptions . . . carefully, can produce a consistent model yielding just about any policy recommendation he favored at the start.” Economics has become even richer in the intervening four decades. We might say, only slightly facetiously, that today the graduate student need not even be that bright!

Oh, my, god.  Just look at this reasoning -- in one paragraph, they go from "the science of economics has never produced pre-determined policy conclusions" to "any bright graduate student . . . can produce a consistent model yielding just about any policy recommendation he favored at the start" without noticing the contradiction!

Well, I was once a mediocre graduate student and I could tell them where they went wrong: it was at the beginning.  Neoclassical economics, the economics of the market economy, is in the nature of a Big Lie, in Goebbels sense, that is, a colossal lie consistently adhered to.  If you accept the premise of the lie, if you follow the White Rabbit, you will soon find yourself down the rabbit hole in Wonderland with no way out.

The White Rabbit, in this case, is the presumption that the political economy can be usefully understood to be organized by and as a system of markets.  There are few actual markets in the actual, institutional economy, and pretending otherwise will rot your brain.  Certainly, the institutional realism and turn to empiricism that the authors hold up as the great hope for the future will remain out of reach as long as they adhere, as they assiduously do in this essay, to the Big Lie that the political economy is a system of markets.

There may well be a great deal of value to salvage from economics as bits and pieces, once the architecture of the market is abandoned as the organizing principle and the intellectual structure collapses.  But, these fools are not going to do anything but get in the way of that project.

Michael Hudson: How Financialization Makes You Poorer

This is a blog about what is wrong with economics, not what is wrong with the economy, but the reason what is wrong with economics matters is because what is wrong with the economy can be traced, in many ways, to what is wrong with economics. Economics and economists ought to help us to understand how the economy -- our decentralized decentralized system of production and trade and investment -- works, and macroeconomics ought to help us understand what choices we are making collectively. In that sense, it ought to inform government, especially democratic government. But, mostly, it doesn't. It confuses, and talks up a lot of rot. But, there are a few people out there, who are zeroing in on the essence of the choices we are making. Michael Hudson is one. Michael Hudson: Productivity, The Miracle of Compound Interest, and Poverty « naked capitalism:

"After World War II many women stayed home and raised families. But since the 1950s they have been forced increasingly into the labour force for what are called two-job families – and now, three-job families (with only two family members). If you project labor participation rates, by the year 2020 every woman will have to work 18 hours a day or economic trends will falter. What was applauded as a post-industrial economy has turned into a financialized economy. The reason you have to work so much harder than before, even when wages rise, is to carry your debt overhead. You’re unable to buy the goods you produce because you need to pay your bankers. And the only way that you can barely maintain your living standards is to borrow even more. This means having to pay back even more in years to come. That is the Eurozone plan in a nutshell for its economic future. It is a financial plan that is replacing industrial capitalism – with finance capitalism. Industrial capitalism was based on increasing production and expanding markets. Industrialists were supposed to use their profits to build more factories, buy more machinery and hire more labor. But this is not what happens under finance capitalism. Banks lend out their receipt of interest, fees and penalties (which now yield credit card companies as much as interest) in new loans. The problem is that income used to pay debts cannot simultaneously be used to buy the goods and services that labor produces. So when wages and living standards do not rise, how are producers to sell – unless they find new markets abroad? The gains have been siphoned off by finance. And the financial dynamic ends up in austerity. And to make matters worse, it is not the fat that is cut. The fat is the financial sector. What is cut is the bone: the industrial sector. So when writers refer to a post-industrial economy led by the banks, they imply deindustrialization. And for you it means unemployment and lower wages."

This is so important to understand. In 2008, the finance sector, after failing spectacularly, demanded that government take emergency measures to preserve the financial sector, alleging that any other course would destroy the global economy. Those emergency measures have destroyed the global economy. And, yet, we -- the general, voting public and the politicians, who represent us and the centrist busybodies, who decide what is wise and "serious" policy -- are apparently paralyzed, like deer in the headlights, unable to understand and move forward on a sensible rational policy And, why? Well, one critically important reason is that economics -- particularly macroeconomics -- has never bothered to figure out what money and finance is all about. What is the function of money? What is the function of finance? These are basic questions. The answers are not exactly rocket science. And, yet the essentially predatory nature of financialization is ignored, except by a few, articulate scholars, like Michael Hudson, who are marginalized for their trouble.

Eschaton: Fine, Galtian Overlords, Make Us Poor, But...

Eschaton: Fine, Galtian Overlords, Make Us Poor, But...:

...do you have to make people suffer so? It's one thing to take an income hit, it's another thing to spend an entire life with high degrees of income insecurity. It isn't just stagnant or declining incomes that's the problem, it's that most people face a daily nontrivial probability that they're going to be completely fucked.

At the risk of pointing out the obvious -- or what should be obvious, at least -- one thing is a means to the other.

The only uses for financial wealth are "ownership" and "insurance" (I am using quotes to indicate that I am using the term in a broad, economic sense to mean something more than auto insurance or life insurance), and the only way to obtain high returns to financial wealth, is lots of volatility, which has the effect of separating poorer people from their wealth, or ownership claims, making them desperate enough to buy "insurance" at usurious rates and at risky terms, which will result in many of them, say, experiencing medical bankruptcy or the foreclosure on a home.

Atrios -- Duncan Black -- it will be noted was a Ph.D. economist in another life.

The Madness Behind the Method, Part 1

There's an old saying in the military to the effect that amateurs focus on strategy, while the professionals do logistics. It highlights the prosaic reality that a commanding general's job consists largely of making sure his army is fed, clothed, supplied and moved; strategy and tactics are almost an afterthought, and success in logistics may well overshadow what is called strategy or tactics, in determining the outcome of conflict and battle. There's a useful analogy in this wry observation to the situation in the intellectual battlefield of economics: the amateurs focus on theoretical modeling, while the pros do methodology. For the past month of so, there's been a quickening of exchanges in the econblogs over the merit of "microfoundations" in macroeconomics: the pre-occupation of the field with connecting analysis of the behavior of economic aggregates with the expectations and inter-temporal optimizations of (representative) individual actors, largely in models of a type known as Dynamic, Stochastic General Equilibrium (DSGE) models. Although conducted largely in good humor, the exchanges have been fairly stark in terms of outlining alternative views of the value of the DSGE/"microfoundations". On one side, some bloggers have been somewhat dismissive; on the other, some have tried to explain the approach and its value. I say, "tried" without prejudice, since the topic is somewhat technical and esoteric. It is an unusual discussion for the econblogs, because it goes directly to the usefulness of economics, as a body of knowledge and doctrine, and is not a subspecies of ideological partisan sniping over ephemeral policy issues. The usual pattern resembles a kind of ritualized tribal warfare, in which the same tropes are rehearsed. Allies close ranks around their champion, or join together to harass some hapless victim or to engage with a talented provocateur. Some allegedly left-of-center econbloggers would scarcely have an opinion, if they were not constantly provoked by Tyler Cowen (Marginal Revolution). But, here, we get to see some genuine transparency of thought, as bloggers on the same "side" expose their differences and doubts and deepest assumptions. And, this is real core stuff. "Microfoundations" trace back to the Lucas Critique, an event that has helped shape macroeconomics as a field for a couple of generations. Robert Waldmann, in his comment, contrasts the Lucas Critique with Friedman's outline of Positive Economics, as the two methodological touchstones for macroeconomics. As Simon Wren-Lewis observes practically every paper published in what are considered top journals includes several pages laying out the "microfoundations" for the model presented in the paper. And, it is precisely the value of doing so in every case, that is being called into question in this blogospheric back-and-forth. A nearly universal practice, closely associated with professional prestige, is being called into question, with regard to its practical value. And, the back-and-forth is occurring among people of good will and a more-or-less common ideological world-view. It's a remarkable development, a breach of some kind of barrier, I think. Economics is subject to a great deal of scornful criticism from the amateur laity (such as my own lovely self), as well as from gadfly and apostate economists. I don't think the mainstream of the profession likes to engage with this criticism much. There's a tendency to close ranks, and to defend the professional reputation of prominent members of Tribe Econ; if an economist is attacked by other economists, it will be for the partisan claims made in an op-ed written for popular consumption, and not for professional accomplishments. It's OK, somehow, for a Krugman or a Barro to take potshots at each other's popular opinion-writing about, say, Obama's stimulus; disagreements about the useful of technical and professional approaches and accomplishments are another thing.

Arrogance

When I created this blog, I was having one of those super-caffeinated manic moments, when I could see an extensive outline for a critique of economics. Once I recovered, I immediately saw how far my vision had soared past not only my ability, but my ambition, and even my arrogance. I've since thought about using these pages to review some of the other critiques, floating out there -- particularly the ones written for a popular audience -- Steve Keen, Yves Smith, John Quiggin, etc., as well as some of the short bits spun out daily by various econ bloggers. Ability limits me; ambition fails me, too. Arrogance? I really do not care. But, as I stumble on, I find myself very angry, about the failure of economics to say anything coherent or useful. The more I understand of what economics has become, as an academic discipline and a college of science and a tool of popular discourse, the more angry I become. So, maybe, I will try to channel a bit of that anger, and see if it can supply the deficit of ability and ambition. At least, it may produce some useful or interesting rants. And, that's what blogging is for, no?

The Scam-Economy

Here's a link to a N.Y. Times article on a Law School scam.  It is run by second and third and fourth-rate law schools.  They offer a "merit" scholarship, to cover the cost of tuition, but with the condition that a certain GPA is maintained.  If the student fails to achieve the grade, the scholarship ends, and the student must pay to complete school.  Of course, students are graded on a strict curve, which ensures that a fair number of merit scholarship recipients must lose out.
The students recognize that it is a kind of "bait and switch" game.

Nobody knows exactly how many law school students nationwide lose scholarships each year — no oversight body tallies that figure — but what’s clear is that American law schools have quietly gone on a giveaway binge in the last decade. In 2009, the most recent year for which the American Bar Association has data, 38,000 of 145,000 law school students — more than one in four — were on merit scholarships. The total tab for all schools in all three years: more than $500 million.
It’s a huge sum, particularly when you realize that merit scholarships were exceptionally rare at law schools a mere generation ago. But given that many students lose their grants after the first year, the question is this: What exactly are law schools buying with all of that money?

The article emphasizes that the merit scholarship money is used as a competitive weapon among schools attempting to climb in their U.S. News and World Report rankings, rankings which rely heavily on the statistical character of incoming students.
I classify it as an example of the rise of the scam-economy, because it is an example of deliberately exposing people, who can not bear much financial risk, to increased financial risk.

       

Bill Black, the Nemesis of  control frauds in banking, takes on the Lewis Powell memo, which now stands symbolically as the blueprint for pro-corporate movement conservatism.  His analysis suggests that Powell's viewpoint was one of social and economic class partisanship, masquerading as an economic analysis.  To highlight the departures from economic analysis, Black takes a detour in his narrative, to consider the classic Akerlof paper, which helped win its author a share in a Nobel Memorial Prize.

The Market for “Lemons”: Quality Uncertainty and the Market Mechanism. Akerlof, George A., The Quarterly Journal of Economics, Vol. 84, No. 3. (Aug., 1970), pp. 488-500.

Bill Black:

Economists have a Pavlovian response to any mention of Akerlof’s seminal article on lemon’s markets – “asymmetric information.” The committee that awards the prize in economics in honor of Nobel cited Akerlof and his co-awardees’ work in developing the economic implications of asymmetric information. Economists have tended to ignore, however, the context of Akerlof’s famous article. The specific examples of the sale of goods that Akerlof discusses are frauds. More particularly, each is an anti-customer control fraud – a fraud instigated by the person(s) controlling a seemingly legitimate entity where the primary intended victims were the customers. Akerlof did not discuss the variants of anti-customer control fraud that maim or kill – he focused solely on examples of economic injury due to fraudulent misrepresentations by the seller of the quality or quantity of the goods sold. More precisely, two of Akerlof’s examples – the fraudulent sale of defective cars and rice deliberately intermixed with stones – do maim and kill some customers, but Akerlof did not discuss this aspect. (Biting down on a stone can easily shatter a tooth. That causes excruciating pain, but it also exposes an Indian peasant – the fraud victims Akerlof was discussing – to a greatly increased risk of dental infection, which causes an increased risk of severe cardiac illness.) Akerlof had appropriately large ambitions in his article. He sought to provide a “structure … for determining the economic costs of dishonesty” (p. 488). Goods that maim and kill the customer impose the primary economic costs of dishonesty.

Akerlof explained [how unprosecuted fraud undermines market mechanisms] in his 1970 article:

Gresham’s law has made a modified reappearance. For most cars traded will be the “lemons,” and good cars may not be traded at all. The “bad” cars tend to drive out the good (p. 489).
[D]ishonest dealings tend to drive honest dealings out of the market. There may be potential buyers of good quality products and there may be potential sellers of such products in the appropriate price range; however, the presence of people who wish to pawn bad wares as good wares tends to drive out the legitimate business. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence (p. 495).

When cheaters prosper, market mechanisms become perverse and can drive the honest from the marketplace. The market becomes dominated by cheats because they obtain a competitive advantage. The most common reason that firms can cheat with impunity is that their CEOs are cronies of powerful politicians. The defining characteristics of crony capitalism are that the cronies receive subsidies, favors, and immunity from normal rules and laws. The cronies dominate the big corporations and provide reciprocal benefits to controlling politicians. Managerial incompetence and wealth flourishes under crony capitalism. Merit and efficiency suffer, income inequality surges, and class and who one knows become the primary determinants of economic and political success and power. The elites become pervasively corrupt. 

 I wanted to quote at length here, because Black highlights a peculiar lacunae in the customs and language of Economics: the allergy to, and disinterest in fraud.  The use of opaque jargon, "asymmetric information problems" to obscure the nature of the beast is an imperative cultural norm of economics.  And, it is not just the professional need for a distinguishing jargon, which drives it; it is linked, always, to the need to see the economy as "natural" and naturally tending, without government intervention, to optimal results.

Consideration of the phenomena of market economy certainly doesn't suggest to an unclouded mind that achieving optimal results is effortless or even usual.  I would say that there's nothing inherent in good economic theory to suggest that actual economies will be "naturally" efficient.  Something else is driving the economists to an unwarranted faith in certain precepts.

Black suggests that Powell, a lawyer and moderate conservative, was blinded in his point-of-view by his commitment to class solidarity.  With regard to academic economists, I think the roots of the poisonous weeds grow primarily from other seeds; though class may sow some seeds, there are others, more shameful to an intellectual.