by From Peter Radford I have been digging around a fair bit lately trying to understand the role of economics in the extent of the inequality being laid bare by the pandemic — more on that later. A few interesting nuggets worthy of a quick note popped out along the way. Thomas Phillipon opens chapter one of his recent book this way: “The big debates in economics are about growth and inequality. As economists, we seek to understand how and why countries grow and how they divide income among their citizens. In other words, we are concerned with two fundamental issues. The first is how to make the pie as large as possible. The second is how to divide the pie.” Presumably his approach ignores the ugly dismissal of inequality by the likes of Lucas who said it was of no enduring interest.
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from Peter Radford
I have been digging around a fair bit lately trying to understand the role of economics in the extent of the inequality being laid bare by the pandemic — more on that later. A few interesting nuggets worthy of a quick note popped out along the way.
Thomas Phillipon opens chapter one of his recent book this way:
“The big debates in economics are about growth and inequality. As economists, we seek to understand how and why countries grow and how they divide income among their citizens. In other words, we are concerned with two fundamental issues. The first is how to make the pie as large as possible. The second is how to divide the pie.”
Presumably his approach ignores the ugly dismissal of inequality by the likes of Lucas who said it was of no enduring interest. Or words to that effect. Distribution is one thing. Inequality is another. Sliding back and forth between the two words elides the moral centerpiece of the discussion: what level of inequality is acceptable? Economics, once it adopted the marginal method, has avoided such a discussion and has, instead, hidden behind the “it’s the way the world works” argument. In other words it took an ideological stance under the guise of scientific discovery. Even today we can easily find economists blithely arguing that people get paid equivalent to their contribution. As if calculating said contribution is that simple. As if that’s the only factor in determining pay. As if … well you get the picture.
Economists are fond of playing neat tricks like this.
They stumble on something pretty useful, martialism being one example, they elevate it to become a universal truth impervious to attack, and then they assume they know something about the world that others just don’t “get”.
They also, conveniently, sanitize their subject from the rather nasty need to ponder or take into account factors like power relations. Not that they ignore such things entirely. Look hard enough and you can find dark references to horrible things like monopoly and monopsony tucked safely away in marginal notes. We are assured in those notes that these murky issues ought not divert us from applauding the truths of “free” markets. That the real world is more characterized by the exceptions economists shove into those margin notes than by the pristine centerpiece of their thought is left for the assiduous reader to divine.
Which is why most people come away from a study of elementary economics with a thoroughly distorted view of economic “truths”. When the average student takes a single economics class, the odds are that they emerge thinking that free markets are wonderful and that government intervention stinks. After all, that’s the ideological thrust inherent in most economics and the way it’s most often taught.
If Philippon is correct and growth and inequality are the two big issues, why don’t the elementary books focus on them more? Why do we waste precious time in setting up the perfect and decidedly unreal model of market workings first? Why not relegate that silliness to the appendix where it belongs? Wouldn’t it be more productive for the average student to engage in discussion of the real world rather than in the fantasy of perfect markets etc?
Anyway, Phillipon has written a good book. He helps the interested reader learn precisely why economics has contributed to the growth of inequality. He doesn’t say it quite that way, of course, but by describing the drift away from “free” markets — the subtitle of his book is “How America Gave Up on Free Markets” — he implies that there were, or are such, things and that much of the present awfulness is due to the aforementioned drift. Economic theory gave vital intellectual heft to the drift away from freedom. All in the name of freedom, of course.
Another book I have been tackling is “Unequal Gains” by Lindert and Williamson. This is also an excellent read. Some of you might be surprised to find this as one of their findings:
“There is no fundamental law driving the history of income inequality. Inequality movements are driven not by any fundamental law of capitalist development but instead by episodic shifts in six basic forces: politics, demography, education policy, trade competition, finance, and labor-saving technological change. These forces appear to be exogenous with respect to inequality. If they are indeed exogenous and hard to predict, then four centuries of American inequality can hardly be driven by some capitalist law of motion.”
It has, of course, become axiomatic on the left that capitalism, whatever that is, is to blame for pretty much everything we find horrible. And inequality certainly sits high up that list. The problem is, from my point of view, is that leaves too much unanswered. It leaves very difficult questions on the table. My right wing friends all chatter on about liberty and how the modern existence of that concept set the stage for the fantastic growth in prosperity most nations have experienced at different ages over the past two hundred years or so. “Ideas matter” or “bourgeois values” are rallying cries for the right as they seek to defend capitalism from the onslaught of criticism it well earns.
And I agree to an extent.
Which is why I see the co-evolution of modern democracy as essential to the mitigation of all the manifest errors that excessive liberty [aka capitalism] generates.
I am always drawn back to the work of Balibar in this respect. His notion of “equaliberty” still fascinates me. It is a strikingly simple idea. At the dawn of the modern era, when the word liberty was being tossed about within the elite sector of society that craved more space for itself, it had many meanings. It became refined and narrowed as the elite sought and secured more power and eventually excluded some of its original content. It did not, for instance, extend to equality for minorities or women. And it certainly did not include any notion of self-government for the masses. Battles had to be fought to re-generate the other meanings of liberty that had been cut away as the modern elite entrenched itself.
But they have been fought. What we sometimes forget, and this I think is where economists go wrong, is that those battles must be fought continuously. The context for the emergence of that we now call economics is the social battleground on top of which relatively free people can execute exchanges without arbitrary occlusion by the state. Ignoring the socio-political implications of growth and distribution undermine the efficacy of the results of study.
Which brings me to my next snippet.
Hayek has always been a source of interest to me. His ideas on knowledge are intriguing. Yet he is a great example of the myopia modern economics developed when it took its ideological turn in the mid twentieth century. Hayek inspired people like Thatcher and Reagan to adopt a severe anti-social political stance because he was unable to distinguish between the “state” as arbitrary autocratic power, and the “state” as modern democratic government. Economists still struggle along those lines.
He said in 1979, and I paraphrase, that the word “social” is a weasel world because nobody knows what it means. Perhaps this is true. But by that standard no one knows what a market is either. Come to think of it, what does the word “free” as in “free markets” mean? Can everyone join in? Are we all free to participate? Or are some people more “free” than others?
Economics has been encumbered by this muddy sort of definition of its terms as long as it has existed. Even the most rigorous axiomatic constructions seem to leave the barn door open to question. Or, rather, they are designed to remove all the awkward bits from the subsequent analysis in order to render an elegant result rather than one that might be a tad opaque, but which might also reflect the complexity of life.
Hayek had a habit of tossing around what appeared to be wonderful insights: his notion that an economy contains too much information to be processed by a central body remains a classic assault on centrally panned economies. But if there is too much information for that, how can we possibly “know” anything about the economy? We cannot, for example, ever “know” whether a market has aggregated all the relevant information. To know that it has, we would need to know the full extent of the information, in which case we would be in a good position to execute a central plan.
But we will let that slide.
Let me end with Paul Romer.
I recently read one of his blog entries in which he expressed surprise that economists could be blamed for much of what is wrong in our contemporary economy.
Earth to Paul!
Perhaps nothing more summarizes the state of the discipline than this. The relentless anti-social message inherent in most modern economics is stark. Silly results such as the fact that there is no such thing as involuntary unemployment ought to be sufficient for any reasonable person to conclude that economics is manifestly detached from reality. The reliance on marginal productivity as the sole determinant of wages is another. Or the entire edifice of modern business school thought around shareholder value, which is a simple derivative of right wing economics, and along with its pernicious add-ons like agency theory and “core competency” became the driver of outsourcing, globalization, and the suppression of wages. Romer might shunt that error onto the laps of business school professors, but the intellectual lineage is clear: economics claimed certain truths and consequently spread the contagion into related subjects.
Economists might shun the blame for shareholder value, but the rest of us ought not allow them to. Pull on the thread and you quickly follow the idea back to its ancestral home alongside non-existent involuntary unemployment.
Now I agree whole heartedly with Romer that economics has produced some really socially useful ideas. He references counter-cyclical fiscal and monetary policies as a good example. I agree. But those ideas date back a way. It’s the clutter and anti-social ideology that post-dates them that caused the modern antipathy towards economics.
Ultimately economics is a very difficult discipline to imagine ever being wholly socially responsible. It is an ongoing conversation that attracts people who prefer to exclude complexity in order to distill truths about reality. They love the counterintuitive nature of some of its main results. It is excessively mathematical, and so it allows those people to express themselves and elide the full murkiness of reality. It applauds elegance and thinks it encourages efficiency. But it has gone too far away from its origins. It is no longer trying to explain the world. It is trying to explain itself.
It rewards the wrong things. Instead of seeing Arrow/Debreu as an amazing disproof of the existence of general equilibrium, it is awed at the technical achievement of cobbling together such a fantastic assemblage of make-believe. General equilibrium was not a discovery. It was an invention. It began as a search for the infamous invisible hand and ended with the creation of a ghost that haunts us still.
Arrow, I think, would agree. Economies are a bit like nature. They create themselves. The illusion of design is what draws us in. But there is no design. An economy just is. It self-organizes within socially and politically established boundaries. Which means that any distribution of resources is as legitimate as any other because politics and social relations pre-exist the economic transacting. These relations give legitimacy to the economics. Indeed, they define it.
So Phillipon is correct: there are two big issues. How to grow the pie so we all prosper and how to divide it so we all prosper. The solutions are not, however, the unique domain of economics. They are social questions which involve all the elements that Lindert and Williamson list, and more. They defy Hayek’s anti-social agenda, and they require a lot more sensitivity to the real world than many economists are willing to show. Which is what Paul Romer has discovered.
But enough!
My pandemic induced seclusion has allowed me to meander too far.
Stay safe everyone, and remember that economists don’t know as much as they appear to claim. Which means they’re just like the rest of us.