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Milanovic gets feisty

Summary:
From Peter Radford To ignore power is to ignore reality. How can you construct a theory of economic activity that excludes the power embedded in relationships between the various actors on the stage you are directing?  More to the point why would you?  To ignore power is to ignore reality. I think, perhaps we need to reverse those two questions.  You see, power matters even in the construction of economic theories. The reason you ignore power is because the powerful want you to. It’s that simple. I have just finished reading the excellent new book by Branko Milanovic.  It’s called “Visions of Inequality” and is a tour through the history of economics since the days of Quesnay.  More specifically it takes a look at how a handful of prominent economists have treated the topic of

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from Peter Radford

To ignore power is to ignore reality.

How can you construct a theory of economic activity that excludes the power embedded in relationships between the various actors on the stage you are directing?  More to the point why would you?  To ignore power is to ignore reality.

I think, perhaps we need to reverse those two questions.  You see, power matters even in the construction of economic theories.

The reason you ignore power is because the powerful want you to.

It’s that simple.

I have just finished reading the excellent new book by Branko Milanovic.  It’s called “Visions of Inequality” and is a tour through the history of economics since the days of Quesnay.  More specifically it takes a look at how a handful of prominent economists have treated the topic of inequality.  Most of you will have covered this territory before, but examining how people such as Quesnay, Smith, Ricardo, Marx, Pareto and Kuznets discussed the problem of distribution is not only an excellent refresher on their individual thought, but is also a tour through the evolution of economics itself.

We have known all along, have we not, that economics is contingent.  Ideas are created to explain problems that pose themselves in the era under study be individual economists.  Their solutions are designed to explain something they see before them.  It is only more recently that the arrogance of universality has crept in to infect the thinking.  At the beginning, economists appear to have been somewhat more modest.  They were problem solving.  They were trying to influence public policy.  They were engaged with the real world.  No one, of course, is more emblematic off this than Ricardo whose entire major treatise was meant to do just that.

As industrialization took hold and as trade steadily became more important the problems needing study evolved.  So too, therefore, did economics.  But it wasn’t simply the economic context that pushed theory along its evolutionary path.  Politics played a significant role as well.  None so more than in the case of Kuznets, whom Milanovic clearly holds in high regard.  The famous “Kuznets Curve” was developed in a very specific context.  Inequality, the model said, would rise as technology and industrialization proceed, and then decline naturally as countervailing forces emerge later in the cycle of development.  This rosy view appeared to match the circumstances of post-war America.  Inequality was, indeed, falling.  It looked as if the problem was solved.

If, that is, your regard distribution as a problem at all.

Kuznets was writing during a time of American hubris.  It was a time of triumph for capitalism.  It was a time of ideological conflict with the threat of communism as represented by the Soviet Union.  That conflict colored the conversation and theory making.  It was, therefore, particularly helpful to those so disposed that Kuznets could allay fears that capitalism was inextricably tied with ever rising inequality.  No fear, was the implication, the arc of development was such that  no one need worry.  The distributional problem would take care of itself.  Economists could move on to bigger and more important topics.

Which they did with gusto.

Unfortunately for the real world this is precisely the point at which economics departed it. .

This same contextual pressures that made Kuznets’ theory so comfortable were providing the impetus for that departure.  Economics was slowly being refashioned and stripped of all elements of power.  This had, naturally, started before, but now it gathered apace.  One victim of the economics that emerged from those decades was the study of distribution.  After all, as an example, there is no scope for the discussion of inequality in a world populated by a representative agent.  With whom would such a person be unequal?  So by definition economics expunged one of the most observable features of a real economy.  Not everyone has the same endowments of resources.

This is highly convenient if you are a wealthy person.  You naturally are drawn to theories that eliminate the possible discussion of your unequal status.

At this point Milanovic gets feisty.

Very feisty.

In his very long seventh chapter, where he lays bare the lean years for the study of distribution, he goes on offense.  He prefers to call the economics developed during those mid to late twentieth century decades “Cold War” economics because it was ideologically tainted by the preferences of the American ruling class.  It also suffered a catastrophic breakdown of method.  The two go hand in hand.  In order to eliminate power — and thus by definition things such as class — economics reduced its boundaries and focused only on matters that did not disturb its patrons.  In the words of Milanovic:

“With its main, or even sole, focus on price formation, it [neoclassical economics] leaves out class structure and the endowments of capital or skills with which individuals come to the market.  Wealth acquisition takes place offstage … Thus, the mathematically complex models of general equilibrium were only very distant relations of real-world phenomena.”

A page for two later he lacerates Alan Blinder whose book “Towards an Economic Theory of Income Distribution” he says is “full of rather meaningless equations where everybody was an agent optimizing over an infinite time horizon with full knowledge of what the future would bring, including their own income”.  He even uses the word ‘vacuity’ later in his critique.

Blinder is finally obliterated thus:

“To avoid this error [the absence of power structures], inequality work must situate the theoretical and empirical analysis in its historical context.  This is not something, however, that Blinder even tries to do: his world is an alien, abstract world that relates to life on Earth about as much as the theories that astro-biologists have developed about life on Mars.”

None of this ought surprise any of us.

We know full well that neoclassical theory has no relevance to life on earth. As I have said repeatedly: most economists study economics, not economies.  Re-connecting with real-life implies such a radical reworking of the discipline that it is unlikely to take place unless topics such as inequality play a central part in the theorizing.  Power matters.

What is more remarkable than even this outburst is the way in which Milanovic accuses the neoclassical economists of doing the bidding of the wealthy.  I am not sure I ever seen such an open or specific accusation.

He devotes a page or so, in his discussion of why the study of inequality disappeared from view after mid-century, to the influence of the wealthy themselves.  Again in his words:

“Another reason for the dissolution [of inequality studies] can be found in the implicit and sometimes outright political pressures that made the topic of inequality ‘undesirable’ — and unhelpful to authors hoping to climb normal ladders in their academic careers or to have social or political influence.”

That’s pretty blunt.  The trajectory of economics, he is asserting, did not follow a dispassionate course.  It followed a course heavily biased by the influx of money and support from business interests and the wealthy.  The changing of the guard at the University of Chicago in the early 1950s is a good illustration of the influence he is citing.  This is tantamount to arguing that the neoclassical enterprise was corrupt at its inception.  It wasn’t academic it was polemic.  I will leave it to you to decide whether you agree with that accusation.  It does, however, have significant explanatory power.  How else can we explain not just the lunacy of its assumptions but it willful disregard of the real world?

So we observe, according to Milanovic, that inequality produces sufficient influence to dampen, if not eradicate, the study of that same inequality.  Thinking is suppressed or channeled into benign and more comfortable topics.  Intellectual hegemony is a critical element that the wealthy employ to preserve their privilege.  Economics has obliged by avoiding some very sensitive subjects.

The book ends on a slightly more optimistic note: studies of inequality have burst back onto the scene.  Distribution is a genuine and worthy topic for research.  The likes of Piketty have given it a gloss of respectability.

Milanovic, I think, wants us to be encouraged.  Power matters.  The study of inequality allows us to reconnect economics with reality.  There is a path forward.

Go read the book.

Peter Radford
Peter Radford is publisher of The Radford Free Press, worked as an analyst for banks over fifteen years and has degrees from the London School of Economics and Harvard Business School.

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