Posts Tagged ‘economics’

political-22

To judge by Christopher Snyder’s attempt to defend contemporary economists, the answer is clear: nothing!

Yes, Snyder is right, economists have expanded their domain, to analyze such issues as art auctions and corruption. But then he goes off the rails.

That’s because the only kind of economics Snyder appear to know about and give credence to is mainstream economics—in terms of what he argues are the “core concepts” that underlie economists’ thinking.

What are those core concepts, around which all economists supposedly organize their theories and models?

For starters, Snyder thinks the most important one is “scarcity”:

Devoting resources to one project—say, preventing diabetes—means some other worthy project—curing cancer—goes unserved. So, in determining whether a choice should be undertaken, one of the functions of economics is to argue that its benefits should not be considered in isolation but weighed against its costs. Costs put a dollar value on what has to be given up when one choice is made over another.

But he never even considers the possibility that scarcity is institutionally created, not a given. And different economies are characterized by different kinds of scarcities, which are endogenously produced and reproduced. Thus, capitalism both creates and is characterized different scarcities from other economic systems, such as slavery and feudalism. Where is that in Snyder’s definition of what economists do and the core concepts they supposedly hold.

And then there’s “value,” which for Snyder “is the result of the interaction of several impersonal market forces,” illustrated in the usual fashion:

Figure-2-Snyder-768x671

But there’s no mention of long-run “natural” prices (of the sort classical economists such as David Ricardo or, more recently, Piero Sraffa focused on) or a class theory of value (emphasizing surplus labor, which Karl Marx developed in his critique of political economy)—or any one of a large number of other ways value can be, has been, and is being analyzed within economics.

Finally, Snyder, discusses “modern empirical research” and the attempt to uncover “true causal relationships rather than overinterpreting apparent correlations as causation.”

Uncovering causal relationships is difficult in economics. Opportunities to run experiments are limited by the expense and ethics involved in controlled interventions in markets (although these opportunities are growing, owing to an explosion of interest in laboratory and field experiments).

Once again, Snyder overlooks the many alternative approaches—concerning both “facts” and “causation”—within economics.

Sure, mainstream economists might claim they’ve finally solved the problem of “causal identification” (as they’ve claimed so many other times in the past). But they still fail to acknowledge the possibility that different economic theories produce different sets of facts. Nor do they consider the idea that economists actually use different notions of causation: some limit themselves to essentialist, one-way causation (from given causes to effects), while others, criticize essentialism and look at mutual effectivity (in which everything is seen to be both cause and effect).

The existence of different notions of scarcity, value, and causation within economics doesn’t prove that mainstream economists are wrong. It merely shows that reducing economics to a set of core concepts that pertain only to what mainstream economists do is wrong.

The problem, of course, is that’s the only set of concepts to which generations of students, who have been taught by mainstream economists, have been exposed. And Snyder just continues that tradition.

In the end, mainstream economists are good for nothing precisely because they exclude all other ways of thinking about and doing economics.

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Mark Tansey, “Coastline Measure” (1987)

 

I’ve been over this before.

But I continue to be amazed at the ubiquitous, facile references to science, evidence, and facts and the derision that is directed at the proposition that we live in a post-truth world. On topics as diverse as climate change, globalization, and the role of the working-class in electing Donald Trump, commentators invoke Truth, with a capital t, as an obvious, unproblematic characteristic of making statements about what is going on in the world.

To me, they’re about as silly—and dangerous—as attempting to measure the coastline using a tape measure.

This is the case even in studies, such as those conducted by Tali Sharot [ht: ja], about the supposed diminishing influence of evidence and the existence of confirmation bias.

The very first thing we need to realize is that beliefs are like fast cars, designer shoes, chocolate cupcakes and exotic holidays: they affect our well-being and happiness. So just as we aspire to fill our fridge with fresh fare and our wardrobe with nice attire, we try to fill our minds with information that makes us feel strong and right, and to avoid information that makes us confused or insecure.

In the words of Harper Lee, “people generally see what they look for and hear what they listen for.”

It’s not only in the domain of politics that people cherry-pick news; it is apparent when it comes to our health, wealth and relationships.

At one level, this makes sense to me. There’s a great deal of confirmation bias when we try to make sense of various dimensions of lives and the world in which we live.

But. . .

I also think people are curious about things—information, experiences, and so on—that don’t seem to fit their existing theories or discourses. And, when they do attempt to make sense of those new things, their ideas change (and, of course, as their ideas change, they see things in new ways).

Perhaps even more important, while people like Sharot acknowledge that people often “accept evidence that confirms their preconceived notions and assess counter evidence with a critical eye,” they never consider the possibility that the people who are conducting the research concerning confirmation bias are themselves subject to that same bias.

Why is it always people out there—you know, “the ones who are thinking about health, wealth, and relationships”—that cherry-pick the facts. What about the so-called scientists, including the ones who invoke the Truth; why aren’t they also subject to confirmation bias?

Sharot invokes “the way our brain works”—without ever acknowledging that she and her coinvestigators also use one theory, and ignore or reject other theories, to make sense of the brain and the diverse ways we process information. Others rely on the “scientific evidence” concerning climate change or the gains from globalization or the existence of a resentful white (but not black or Hispanic) working-class, which in their view others deny because they don’t believe the obvious “facts.”

What’s the difference?

I can pretty much guess the kind of response that will be offered (because I see it all the time, especially in economics): the distinction between everyday confirmation bias and real, Truth-based stems from the use of the “scientific method.”

The problem, of course, is there are different scientific methods, different ways of producing knowledge—whether in economics or cognitive neuroscience, political science or physics, anthropology or chemistry. All of those forms of knowledge production are just as conditioned and conditional as the way nonscientists produce (and consume and disseminate) knowledges about other aspects of the world.

As for me, I can’t wait for this period of fake interest in capital-t Truth to pass. Maybe then we can return to the much more interesting discussion of the conditionality of all forms of knowledge production.

wage-inequality

Apologists for mainstream economics (such as Noah Smith) like to claim that things are OK because good empirical research is crowding out bad theory.

I have no doubt about the fact that the theory of mainstream economics has been bad. But is the empirical research any better?

Not, as I see it, in the academy, in the departments that are dominated by mainstream economics. But there is interesting empirical work going on elsewhere, including of all places in the International Monetary Fund (as I have noted before, e.g., here and here).

The latest, from Mai Dao, Mitali Das, Zsoka Koczan, and Weicheng Lian, documents two important facts: the decline in labor’s share of income—in both developed and developing economies—and the relationship between the fall in the labor share and the rise in inequality.

I demonstrate both facts for the United States in the chart above: the labor share (the red line, measured on the left) has been falling since 1970, while the share of income captured by those in the top 1 percent (the blue line, measured on the right) has been rising.

labor shares

Dao et al. make the same argument, both across countries and within countries over time: declining labor shares are associated with rising inequality.

And they’re clearly concerned about these facts, because inequality can fuel social tension and harm economic growth. It can also lead to a backlash against economic integration and outward-looking policies, which the IMF has a clear stake in defending:

the benefits of trade and financial integration to emerging market and developing economies—where they have fostered convergence, raised incomes, expanded access to goods and services, and lifted millions from poverty—are well documented.

But, of course, there are no facts without theories. What is missing from the IMF facts is a theory of how a falling labor share fuels inequality—and, in turn, has created such a reaction against capitalist globalization.

Let me see if I can help them. When the labor share of national income falls—the result of the forces Dao et al. document, such as outsourcing and new labor-saving technologies—the surplus appropriated from those workers rises. Then, when a share of that growing surplus is distributed to those at the top—for example, to those in the top 1 percent, via high salaries and returns on capital ownership—income inequality rises. Moreover, the ability of those at the top to capture the surplus means they are able to shape economic and political decisions that serve to keep workers’ share of national income on its downward slide.

The problem is mainstream economists are not particularly interested in those facts. Or, for that matter, the theory that can make sense of those facts.

Henry_P._Moore_American_-_Slaves_of_General_Thomas_F._Drayton_-_Google_Art_Project  5c79dba28c324a9794507ced2a6987c95c392552

As I tell my students, nothing gets a mainstream economist frothing at the mouth quite like mentioning Karl Polanyi.

Or at least it used to, when mainstream economists actually knew who Polanyi was and grasped—however dismissively—what he wrote about the history of capitalism.

To his credit, Eric Hilt (pdf) appears to know something about the author of The Great Transformation and how his work influenced the new history of capitalism. And his review of ten recent books, including Edward Baptist’s The Half Has Never Been Told and Sven Beckert’s Empire of Cotton: A Global History, is not as dismissive as those of other mainstream economists, such as Alan L. Olmstead.

Much of the research of economic historians focuses on questions originating in economic theory, which tend to be quite narrow. In contrast, these book present expansive narratives and explore questions that may not be amenable to the analytical tools of economists. The authors’ critical perspectives also distinguish their work from that of economic historians and make it relevant to the concerns of many popular readers. The historians of capitalism rightly remind us that economic growth and development can have human costs not captured in average incomes; that our economic history includes no small measure of cruelty, coercion, and expropriation, rather than free exchanges occurring in the context of secure property rights; and that the economic system we have today is not a natural condition, but the outcome of policy choices that could have been made differently.

Hilt is, I think, correct: the new history of capitalism does represent a reminder to—and thus an indictment of—contemporary mainstream economics, precisely because it includes an analysis of the “cruelty, coercion, and expropriation” of the emergence and development of capitalism and the idea that contemporary capitalism is “not a natural condition.”

Generations of economics students won’t have seen or heard either of those propositions. Indeed, what little history has been presented to them emphasizes exactly the opposite: that capitalism emerged both smoothly—without conflict, through voluntary decisions and the spread of markets—and naturally—in a manner that corresponds to human nature.

But then, as if he can’t help himself, Hilt chooses the side of mainstream economists against the new historians of capitalism—because they haven’t demonstrated the appropriate respect. On Hilt’s reading, Baptist, Beckert, and the others haven’t respected capitalism, either historically (because of the role of slavery and its coercive institutions in the history of capitalism) or today (especially after the crash of 2007-08 and the misery it has visited on tens of millions of ordinary citizens, in the United States and around the world). And they don’t respect the “rigor” and “sophisticated analyses” of mainstream economic history, which they “have failed to engage.”

The influence of the recent crisis and the Great Recession in these works. . .creates something of a pitfall for their analysis. Just as poor historical analogies can distort our understanding of the present, modern analogies can produce fallacious or unsound is misapplied. Although financial development often leads to volatility, and although venality and corruption among financiers seems to be as close to a historical constant as one can find, not all finance is harmful. The financial sector performs of vitally important function. . .

Ignoring the economic history literature has led historians of capitalism to make assertions that have been refuted conclusively and to get important elements of their arguments wrong.

In the end, what Hilt can’t seem to abide in the new history of capitalism are two things: first, that historically violence played an important role in the emergence and development of capitalism—rather than, as mainstream economists would have it, that the brutal institutions of slavery and government imposition of market forces are fundamentally incompatible with capitalism; and second, that methodologically the new historians fail to articulate and test “counterfactual” statements.

The fact is, mainstream economists always seek to minimize the role of violence and force in the emergence and development of capitalism and to resort to problematic causal inferences in an attempt to isolate the effects of economic, cultural, political and natural forces within a complex, evolving social totality.

So, no, capitalism didn’t need to resort to “cruelty, coercion, and expropriation” over the course of its history. But it did—and those conditions that are often hidden underneath the “very Eden of the innate rights of man” have stamped both its origins and the way it continues to operate today.

Or, as Polanyi (pdf) himself wrote,

the market has been the outcome of a conscious and often violent intervention on the part of government which imposed the market organization on society for noneconomic ends.

 

Trump

It wasn’t a homogeneous block—whether the white working-class or anti-immigrant nativists or the victims of globalization—that put Donald Trump into the White House. That’s the kind of reductionist narrative that has proliferated both before and after the fateful 2016 presidential election, all in an attempt to make sense of Trump’s “base.”

Instead, it was a complex coalition of voters, with different resentments and desires, that combined, at least via the electoral college (but not, of course, in the popular vote), to defeat Hillary Clinton and elect Trump.

That’s the conclusion arrived at by Emily Ekins [ht: db] of the Cato Institute and the Democracy Fund Voter Study Group.

According to Ekins, there were five unique clusters of Trump voters—American Preservationists (20 percent), Staunch Conservatives (31 percent), Anti-Elites (19 percent), Free Marketeers (25 percent), and the Disengaged (5 percent)—who hold very different views on a wide variety of issues, including immigration, race, American identity, moral traditionalism, international trade, and economics.

Here’s how Ekins describes these different clusters:

Staunch Conservatives are steadfast fiscal conservatives, embrace moral traditionalism, and have a moderately nativist conception of American identity and approach to immigration.

Free Marketeers are small government fiscal conservatives, free traders, with moderate to liberal positions on immigration and race. (Their vote was a vote primarily against Clinton and not a vote for Trump.)

American Preservationists lean economically progressive, believe the economic and political systems are rigged, have nativist immigration views, and a nativist and ethnocultural conception of American identity.

Anti-Elites lean economically progressive, believe the economic and political systems are rigged, and take relatively more moderate positions on immigration, race, and American identity than American Preservationists. They are also the most likely group to favor political compromise.

The Disengaged do not know much about politics, but what they do know is they feel detached from institutions and elites and are skeptical of immigration.

Call it the “unholy alliance” of Trump voters—clusters of people who had different motivations in mind when they went to the voting booth.

Figure4_ekins_e4aabc39aab12644609701bbacdff252

A good example of their diversity is their response to the question, do you have favor raising taxes on families with incomes over $200,000 a year? Overwhelming majorities of American Preservationists and Anti-Elites (and a plurality of the Disengaged) favor raising taxes, while Staunch Conservatives and Free Marketeers are opposed.

Figure12_ekins_e4aabc39aab12644609701bbacdff252

Much the same differences arise when asked if the economic system in the United States is biased in favor of the wealthiest Americans.

In fact, Ekins found only four issues that clearly distinguish Trump voters from non-Trump voters: an intense dislike of Clinton, a more dismal view of their personal financial situations, support for a temporary ban on Muslim immigration, and opposition to illegal immigration. Otherwise, as Ekins explains, Trump voters diverge on a wide variety of salient issues, including taxes, entitlements, immigration, race, pluralism, traditionalism, and social conservatism.

As I see it, Ekins’s analysis of Trump voters is significant for two reasons: First, it reveals how complex—and shaky or unstable—the coalition is. It’s going to make it difficult for Trump and the Republican Congress to govern in any kind of unified fashion. Second, it creates real opportunities for the political opposition, depending on how it reorganizes itself in the months and years ahead and whether or not it is able to move beyond the Clinton-dominated wing of the Democratic Party, to peal off significant numbers of Trump voters.

That’s only possible if, as Ekins writes, we acknowledge that “different types of people came to vote for Trump and not all for the same reasons.”

labor-income

John Hatgioannides, Marika Karanassou, and Hector Sala are absolutely right: mainstream macroeconomists and policymakers never venture beyond the “holy trinity” of economic growth, inflation, and unemployment.* Everything else, including the distribution of income and wealth, is relegated to the fringes.

This problem, while always serious, has been magnified in recent decades as inequality has grown to obscene levels, particularly in the United States. The labor share (the blue line in the chart above) has been falling since 1960 and, in the past decade and a half, it dropped an astounding 10.2 percent. Meanwhile, the share of income captured by the top 1 percent (the red line in the chart) has soared, rising from 10.5 percent in 1976 to 19.6 percent in 2014.

In order to rectify the problem, Hatgioannides, Karanassou, and Sala propose to bring inequality in from the margins as the “missing fourth statistic.”

They focus particular attention on inequality in relation to tax contributions. But they do so in the manner that departs from the usual discussion, which leaves the discussion at absolute income tax contributions (such as the share of income taxes paid by each economic group). Those are the numbers we often hear or read, which seek to show how progressive the U.S. tax system is. For example, according to the Tax Foundation, the top 1 percent paid a greater share of individual income taxes (39.5 percent) than the bottom 90 percent combined (29.1 percent).

Instead, Hatgioannides, Karanassou, and Sala concentrate on the ratio of the average income tax per given income group divided by the percentage of national income captured by the same income group (what they call the Effective Income Tax contribution), whence they calculate an inequality index (the Fiscal Inequality Coefficient).

What the Fiscal Inequality Coefficient shows is the relative contribution of filling the fiscal coffers for different pairs of income groups.

FIC

In the figure above, they plot the Fiscal Inequality Coefficient based on income shares (they also report a related index based on wealth), of the bottom 90 percent versus the top 10 percent, the bottom 99 percent versus the top 1 percent, and the bottom 99.9 percent versus the top 0.1 percent for 1962, 1980, 1995, 2010, and 2014.

Thus, for example, the Fiscal Inequality Coefficient based on income shares remains relatively constant for all pairs for years 1962 and 1980 but increases significantly by 2010—with the bottom 90 percent effectively contributing 6.5 times more than the top 10 percent, the bottom 99 percent 21.4 times more than the top 1 percent, and the bottom 99.9 percent effectively contributing 89.7 times more than the top 0.1 percent.**

Clearly, the relative income tax burden for those at the top has fallen over time, demonstrating that the U.S. tax system has become less, not more, progressive.

And the authors’ conclusion?

In the current era of fiscal consolidation should the rich be taxed more? Our evidence suggests unequivocally yes.

 

*Their paper is discussed in the Guardian by Larry Elliott. The submitted version of their article is available here.

**The results are even more dramatic if one calculates the Fiscal Inequality Coefficient based on household wealth shares: in 2010, the Bottom 99.9 percent contributed 208.9 times more than the Top 0.1 percent, nearly four times more than what it was in 1980!

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By now, everyone knows that Joel Osteen, the Prosperity Gospel preacher in Houston’s Lakewood Church, initially refused to open the doors to shelter the victims of Tropical Storm Harvey.

That’s certainly a good reason for people to hate Osteen.

Kate Bowler [ht: ji], the author of Blessed: A History of the American Prosperity Gospel, offers three other reasons for hating Osteen:

#1—Osteen represents the Christian 1 percent

From aerial views of his jaw-dropping mansion to the cut of his navy suits, he always looks like a man with a good reason to be smiling. He is a wealthy man who unapologetically preaches that God has blessed him, with the added bonus that God can bless anyone else, too. The promise of the prosperity gospel is that it has found a formula that guarantees that God always blesses the righteous with health, wealth and happiness. For that reason, churchgoers love to see their preachers thrive as living embodiments of their own message. But the inequality that makes Osteen an inspiration is also what makes him an uncomfortable representation of the deep chasms in the land of opportunity between the haves and the have-nots. When the floodwaters rise, no one wants to see him float by on his yacht, as evidenced by the Christian satire website the Babylon Bee’s shot Tuesday at Osteen: “Joel Osteen Sails Luxury Yacht Through Flooded Houston To Pass Out Copies Of ‘Your Best Life Now.’ ”

#2—There is a lingering controversy around prosperity megachurches and their charitable giving

When a church that places enormous theological weight on tithes and offerings is not a leader in charitable giving, the most obvious question is about who is the primary beneficiary of the prosperity gospel? The everyman or the man at the front?

#3—The Prosperity Gospel’s answer to the question about evil in the world is not unlike the one offered by neoclassical economics

Its central claim — “Everyone can be prosperous!”—contains its own conundrum. How do you explain the persistence of suffering? It might be easier to say to someone undergoing a divorce that there is something redemptive about the lessons they learned, but what about a child with cancer? This week, the prosperity gospel came face-to-face with its own theological limits. It was unable to answer the lingering questions around what theologians call “natural evil.” There is a natural curiosity about how someone like Osteen will react in the face of indiscriminate disaster. Is God separating the sheep from the goats? Will only the houses of the ungodly be flooded? The prosperity gospel has not every found a robust way to address tragedy when their own theology touts that “Everything Happens for a Reason.”

For neoclassical economists, everything happens—good and evil, both prosperity and poverty—because of people’s choices.

I have offered my own reasons for questioning the Prosperity Gospel—what I have called the American Hustle—and yet for taking it seriously—especially in terms of support for Donald Trump.