Weekend read – An order of men

by
Peter Radford
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from Peter Radford

And women in this more enlightened era.

One of the great ironies of the last few decades is the ascendancy of “individualistic” thinking in  economic theory combined with the primacy of the “collective” we call the corporation in the real world.  The two offer highly contrasting explanations of how economic activity takes place.  The one is based upon relationships between individuals acting rationally and equipped with amounts of information — and, presumably, the computation power to go with it — that only deities can possess.  The other is based upon the hierarchical assertion of power over a circumscribed set of resources carved out in time and space to defy competition and create rents.  

Individualistic thinking is, of course, highly attractive politically.  It sells well to voters.  No one wants to think of themselves as merely a cog in some vast machine.  Plus, the battles of the past two or three hundred years to unshackle ourselves from the deadweight of religious, monarchic, military, or other authoritarian rule has led us, necessarily, to create a politics of affirmative individuality.  How can we break free of millennia of oppression without first establishing ourselves as free agents to do whatever we please?

Smith’s observation of the incessant division of activity in an economy appeared to create space for the individual-as-agent to co-exist with collective action.  Someone has to occupy the ever increasing speciality niches and someone else has to organize or connect those specialities into a coherent whole.  But that isn’t how theory developed.  Economists bent on defending the hyper-individual argue that no one organizes anything, but that the coherence is emergent from the interplay of the individuals — this is the “hidden hand” argument.  Realists argue that such a coherence cannot emerge without the assistance of considerable energy being spent on forcing connections into being — this is the “visible hand” argument.

Both sides of the debate put considerable emphasis on the role of information or knowledge as a factor behind the process of attaining coherence or emergence.  Hayek is often referred to in such a context.  His views on knowledge in society are deployed by the invisible hand team to denigrate the possibility of centralized planning of economic activity.  Knowledge, he argued, is held in such a decentralized way that no central locus of decision-making could possibly have access to all needed to make planned organization feasible.  His was, in essence, an argument against the computational possibility of central organization.

The problem Hayek had thus created is that, given the intractability of this computational conundrum, no one has knowledge of an economy as a total entity.  The invisible hand team, by virtue of this emphasis on extreme decentralization, invalidate any claim they might want to make subsequently regarding the efficacy of decentralized production.  No one knows whether an outcome is efficacious.  This is by definition.  If no one can know enough to organize centrally, no one has sufficient central information to consider the outcome.  No one knows, that is, that a decentralized marketplace is good, bad, or indifferent.  It just is.  Beyond describing it as best we can we can make no judgement as to its efficiency, social welfare provision, or other computationally dependent observation.  We are reduced to bystanders.

It is for this reason that local chunks of the computational problem have been carved up and relocated within the boundaries of collectives called business organizations.  A business firm is, in effect, a response to the problem presented by the need to compute arrays of decentralized information and to make, consequently, coherence out of them.  The setting of boundaries within which such computation can take place is the rendering visible of what remains opaque on the outside.  Hence the “visible” hand that Alfred Chandler described back in the late 1970s.

However, one of the great virtues of the invisible approach is that it removes from consideration the notion of power.  Concentrations of knowledge imply associated concentrations of power.  Such power would inevitably distort relationships based upon knowledge.  Those with the knowledge would be able to gain advantages over those without it.  Opportunities would present themselves more quickly to the knowledgable, who would also have an incentive to maintain that advantage.  So, by focusing theories of economic organization along the lines of the invisible hypothesis it is possible to avoid such distortions.  It becomes possible to theorize all sorts of smooth and neutralized outcomes.  The invisible domain denies the possibility of economic power.  The visible domain is constructed around the reality that such power exists.

Issues arise between these two poles only when one or the other is translated into politics.  When, for instance, the invisible domain with its emphasis on hyper-individuality is deployed in an ideological setting for political advantage.  Then a discontinuity is created.  Hayek’s bifurcation becomes an important factor in the real world rather than simply in the arcane world of academic discussion.

The problem is simple: a politics that denies the collective is at odds with the reality that modern economic organization is predominantly processed via hierarchically managed collectives.  So even though concentrations of power exist in the economy, they are ignored as features in the political landscape.  Moreover, by building politics primarily on an individualistic vision of society we disable its ability to contend with the growth of power accumulated via business organization.  A conflicting duality of power centers is established.  One within the polity where the individual is venerated.  The other within the economy where the collective dominates.  A clash is inevitable.  

For those theorizing within the invisible domain the empirical result appears unintended.  It cannot result from their theories.  There must, therefore, be some sort of “failure”.  This is why much effort has been placed on thinking about both market and government failures.  From the perspective of the visible domain, however, those failures are actually features of the real world where the distorting effects of power are inevitable.  It is precisely these so-called failures that provide the “moats” behind which savvy owners of capital build their fortunes.

Which gets us to … 

You can’t have it both ways.

For instance, you cannot build models of individuals making supremely rational decisions based upon full information and then claim that those decisions might have had unfortunate unknown consequences.  What was missing from the “full information” when the decision was made?

Nor can you give any quarter for those consequences: they were intentional.  Rational decision making must be intentional.  So there are no “unintentional” consequences.  Everything that happens was foreseen and fully embraced by the decision maker.

That’s the way you set the game up.

Live with it.

So, when we read that there appear to be unfortunate consequences from so-called free trade, such as a considerable social and economic dislocation in an old industrial center as a result of production having been shifted somewhere else, we must remember that, according to the strictures of our gospel, those dislocations were deliberate on the part of the person shifting the production.  Some might even call it “creative destruction”.  It might be creative, but it is destruction nonetheless.

There is, of course, nothing new in this.  What is becoming apparent, though, is the way in which various analysts and commentators are gradually realizing what has gone on these past few decades.

I find it alternately amusing and bemusing to read the slow realization that the neoliberal shift executed by our elite during the 1980s and 1990s was a deliberate action aimed at reducing the status and comfort of our middle and working classes in order that our elite might benefit.  There is no news in this discovery.  There is no unintended consequence.  It was, I will repeat, deliberate.

It was always the intention of the neoliberals to reduce the welfare of those without capital in favor of those with it.  It took minimal reading, listening, or comprehension to understand that intention.  Here in America the goal was to undo the distributive effects of the New Deal and to set capital “free”.  

And free capital roams the globe looking for the lowest cost and highest return opportunity.

As one example: there was no sudden decision by the people of America to enter into a frenzy of trade with China.  There was, however, a deliberate move by American owners of capital to exploit the low cost and liberty-constrained labor force there.  America does not trade with China.  American businesses do deals with Chinese businesses.  The two nation states — America and China — are shunted to one side in order that capital can be relocated to a more favorable setting.

Whatever happens to the socio-economic contexts within those two nation states is a problem their respective politicians must grapple with.  The goal of the capital owners having been fulfilled, the rest of society has to follow along and clean up the mess. 

It was deliberate.  It was always meant to be deliberate.

The vast panoply of intellectual fabrication designed to mask this deliberation is finally being seen for it always was: an excuse.  The leaders of the long march into the free market wilderness were designing a world in which an earlier arrangement of society could be undone because that earlier arrangement was uncomfortable and less profitable for the sponsors of the  desired changes.  The ideas of mid-century economics were not designed to understand economic behavior so much as to construct a sort of economic behavior that benefited certain people.  Thus it was necessary to eliminate the stain of power from the analysis.  Power distorts every human relationship.  With power included, those nice models skew off on odd directions.  Without it they do what they are supposed to do: smoothly justify a social order that provides privilege to a few.  

Either our mid-century intellectual leaders were bewilderingly naive and incompetent in their inability to perceive the power shift inherent in their new dogma.  Or they were stooges of those  seeking power.  Cleansing economic theory of the taint of its context was one way of mitigating against the latter criticism.  But, the notion that economic theory can be de-coupled from its political or social milieu is an absurdity.  Worse, it is an error that has imposed its cost on millions — no hundreds of millions — of innocent citizens.  Yet it persists and continues to hamper our intellectual advance.  Oddly, having sanitized their models of the corrupting influence of real-world relationships, economists reveled in the power and status accorded their profession by its technocratic support of the corporate and neoliberal elite.

As we emerge from the long shadows of the hyper-free market insanity we are realizing its performative nature.  The beauty of its logic is sullied by its intent.  Let me repeat: it never was an attempt to understand the economic world.  It was an attempt to construct an economic world.  And, having imposed many of its requirements upon society over the past fifty years, it is now standing exposed as exactly that.  It is an “as if” world designed without the inclusion of humanity in order to justify a return to an old social order with a copiously indulged elite sitting atop a vastly less privileged mass.  

I suppose that, given the inequalities of both status and wealth produced by those mid-century intellectuals, we must accept their success.  Their intention was to fray, then discard, the protections that supported the middle and working classes so they classified those protections as distortions in the free market and advocated their elimination.  That intention was carried through with gusto.  Perhaps nowhere with more energy than in the corporate adoption of the notion of shareholder value, whose very core is distributive.  Narrowly distributive.  No neoliberal idea did more damage to the fabric of society than shareholder value.  Based upon the same fantasies that gave rise to those slick minimalist models of hyped up rational individuals that mid-century educated economists so admired for their beauty and logic, shareholder value spawned a slew of follow-on ideas that led, inevitably, to the hollowing out of the modern workplace and its replacement by an alternative redolent with Orwellian references to workers as “associates” — associates, mind you, without benefits, retirement provisions, health care, or the other protections that their superiors seemed to retain without regard to the obvious hypocrisy inherent in the distinction.  Associates, so to speak, without association.

It was always necessary for economics to avoid the collective.  To delve into the complexity of interconnection, hierarchy, and organization would dilute the pristine perspective built upon individuality.  There are two telltale consequences of this avoidance: total factor productivity and transaction cost economics.  Both result from the clash of individuality with reality.  Both are a measure of the ignorance essential to the prolonged attachment to concepts that hinge on rational impulses towards the myth of equilibrium.  Both masquerade as acceptable explanations of the complications that classical theory leaves unexplained.  Yet neither offer depth or insight into the real action of a modern economy.  They simply ignore reality in order to preserve the underlying “micro” based view.  Both perpetuate ignorance.  Both serve to protect economics from having to get its hands dirty with the power expressed in the collective we call the corporation.  But the corporation is so salient it cannot be ignored in any explanation of a real economy.  It is a central, if not the central, player in the story. 

Observers are finally noticing.

And so, just this morning, I read with interest a column by Rana Foroohar, whose judgement in these matters seems to be both fine and contemporary.  She says: “there has been a rethinking of overly simplistic notions of shareholder ‘value’.  We have left behind the era in which corporate leaders are expected only to raise share prices and lower consumer ones.”  Really?  I hope so.  Have we really reached the outer limit of the corporate seizure of power on behalf of the wealthy few?  Is the technocratic class really ready to embrace a more humble admission of the limitations of its knowledge and to shed the hubris that drove a wedge between it and the ordinary people who relied upon it for leadership?  We will see.  I remain my usual cynical self.  

After all someone once said of capitalists that they are “an order of men, whose interest is never exactly the same with that of the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”  That sounds about right.  The exercise of power, intentionally, to interfere with the smooth operation of the invisible hand and to gather inward even more power, is a characteristic of that collective we call a corporation.  The objective is to maximize rent not profit and thus slips beyond the grip of economic theories built upon the simplicity of a world of individuals duking it out on a supremely even playing field.  It’s about the construction and preservation of an elite.

Elites don’t like sharing privileges unless forced to.  And force is a topic for politics.  Which is why economists build models that ignore power relationships.  After all, power corrupts.  Doesn’t it?

__________________________

Addendum:

Antara Haldar says this:

“If neoliberalism’s core assumptions bear no resemblance to real-world outcomes, economists owe it to themselves – and above all to the public – to acknowledge its true nature.”

This is the last sentence of a column in Project Syndicate in which she ever so gently discusses the possibility that Chicago School doctrine is fading from view.  Sadly, I think its disappearance might only be temporary.  The elegance and logic of its core beliefs are too compelling for a discipline intoxicated, not by reality, but by elegance and logic in its method.    Explanatory power is secondary.  Beside what better front for those seeking power is there than a theory that ignores power but nonetheless argues that it explains economic activity?  Those with power will always advocate for such a theory.  They will fund professorships.  They will donate mightily to universities.  Just as they did when the modern Chicago School was established.  And they will press undying reality to free markets even while they subvert freedom and accumulate power.  In such a world awkward outcomes are easily ignored as “failures”.  Extreme distributions of either wealth or incomes are sniffily explained away as “natural” outcomes.  Ignorance is transformed into total factor productivity rather than skilled management.  The costs of organization are attributed to transacting and not organization.  And, in our current circumstance sadly, it is the worker who bears the brunt of adjusting for inflation, not the capital owner.  

I hope Holder is correct.  I doubt she is.