Posts Tagged ‘markets’

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Has the policy consensus on economics fundamentally changed in recent years?

To read Mike Konczal it has. I can’t say I’m convinced. While some of the details may have changed, I still think we’re talking about different—liberal and conservative—versions of the same old trickledown economics.

But first Konczal’s argument. He begins with a pretty good summary of the policy consensus before the crash of 2007-08:

Before the crash, complacent Democrats, whatever their disagreements with their Republican peers, tended to agree with them that the economy was largely self-correcting. The Federal Reserve possessed the tools to nudge the economy to full employment, they thought. What’s more, government programs, while sometimes a necessary evil, were likely to be an inefficient drag compared with the private market. Inequality was something to worry about, sure, but hardly a crisis, and policies were correspondingly timid and market-focused.

And it’s true: the debate about the conditions and consequences of the crash—after Occupy Wall Street, in the midst of the Second Great Depression—challenged that consensus, by focusing much more attention on inequality and disrupting the idea that the growing gap between rich and poor is somehow natural and necessary and by calling into question the idea that capitalist markets are self-stabilizing and full employment can be guaranteed by relying on markets.

In all honesty, that’s the least that can be expected, especially on the liberal side of mainstream political and economic thinking in the United States.

But then, when Konczal outlines the policies that make up what he calls the “new liberal economics,” embodied in Hillary Clinton’s campaign and the current Democratic Party, the evidence is very thin. In terms of specific policies—like following the dual mandate for the Fed of stabilizing prices and maximizing employment and supporting paid family and medical leave—the new liberal economics looks a lot like the old liberal economics of the Great Society programs (and, for that matter, of the Nixon administration). And while the policies Democrats support are certainly different from those of current Republicans (which Konczal summarizes as a “mix of Kempism, austerity, and favorable taxes and regulations for businesses that characterizes Paul Ryan’s ideas” and “Trump’s agenda of mercantilism and a chauvinistic welfare state”), they aren’t evidence the existing policy consensus represents a radical change.

That’s because the consensus before the crash, and now seven years into the recovery, has been based on trickledown economics. On both sides of the political and economic aisle.

The overarching idea, shared by liberals and conservatives, is that the existing economic system—with the surplus being appropriated by a small group at the top, who then decide what to do with it—will eventually deliver benefits to everyone, including those at the bottom (through, e.g., more jobs and higher incomes).

There are differences, of course. While the conservative view of trickledown economics emphasizes individual decisions and private markets, the liberal view is based on the idea that individual decisions are constrained by larger institutions and structures and and government programs are necessary to achieve desirable social outcomes. But, in both cases, the benefits created by existing economic arrangements are supposed to start at the top and trickle down to the bottom.

The consensus before the crash was that the liberal and conservative approaches to trickledown economics represented the limits of the relevant debate about economic policy. And now, seven years into the recovery from the crash, the debate that takes place between those limits remains the policy consensus.*

So, to my mind, there’s nothing new about the “new liberal economics.” It’s just a different mix of policies that together make up the latest version of liberal trickledown economics.

 

*If the existing policy consensus has been disrupted, it’s only because Donald Trump has highlighted the fact that trickledown economics, in both its versions, represents an unfair hustle.

Joseph Stiglitz usefully explains that there’s more than one theory of the distribution of income. One theory, he writes, focuses on competitive markets (according to which “factors of production” receive their marginal contributions to production, the “just deserts” of capitalism); the other, on power (“including the ability to exercise monopoly control or, in labor markets, to assert authority over workers”).

In the West in the post-World War II era, the liberal school of thought has dominated. Yet, as inequality has widened and concerns about it have grown, the competitive school, viewing individual returns in terms of marginal product, has become increasingly unable to explain how the economy works. So, today, the second school of thought is ascendant.

I think Stiglitz is right: with the obscene levels of inequality we’ve seen emerge over the course of the past four decades, the notion of “just deserts” is being called into question, thereby creating space for other theories of the distribution of income to be recognized.

The only major problem with Stiglitz’s account is he leaves out a third possibility, an approach that combines a focus on markets with power, that is, a class analysis of the distribution of income (which the late Stephen Resnick begins to explain in the lecture above).

According to this class or Marxian theory of the distribution of income, markets are absolutely central to capitalism—on both the input side (e.g., when workers sell their labor power to capitalists) and the output side (when capitalists sell the finished goods to realize their value and capture profits). But so is power: workers are forced to have the freedom to sell their labor to capitalists because it has no use-value for them; and capitalists, who have access to the money to purchase the labor power, do so because they can productively consume it in order to appropriate the surplus-value the workers create.

That’s the first stage of the analysis, when markets and power combine to generate the surplus-value capitalists are able to realize in the form of profits. And that’s under the assumption that markets are competitive, that is, there is no monopoly power. It is literally a different reading of commodity values and profits, and therefore a critique of the idea that capitalist factors of production “get what they deserve.” They don’t, because of the existence of class exploitation.

But what if markets aren’t competitive? What if, for example, there is some kind of monopoly power? Well, it depends on what industry or sector we’re referring to. Let’s take one of the industries mentioned by Stiglitz: health insurance. In the case where employers are purchasing health insurance for their employees (the dominant model in the United States, at least for those with health insurance), those employers are forced to transfer some of the surplus-value they appropriate from their own employees to the insurance oligopolies. As a result, the rate of profit for the insurance companies rises (as their monopoly power increases) and the rate of profit for other employers falls (unless, of course, they can cut some other distribution of their surplus-value).*

The analysis could go on.** My only point is to point out there’s a third possibility in the debate over the distribution of income—a theory that combines markets and power and is focused on the role of class in making sense of the grotesque levels of inequality we’re seeing in the United States today.

And, of course, that third approach has policy implications very different from the others—not to force workers to increase their productivity in order to receive higher wages through the labor market or to hope that decreasing market concentration will make the distribution of income more equal, but instead to attack the problem at its source. That would mean changing both markets and power with the goal of eliminating class exploitation.

 

*This is one of the reasons capitalist employers might support “affordable” healthcare, to raise their rates of profit.

**The analysis of wage or consumer goods would be a bit different. But I don’t have the space to develop that here.

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There’s no doubt, after the crash of 2007-08, students—including those in middle schools—could use more economics education.

Unfortunately, they’re not getting it. They’re just being exposed to propaganda.

“What is the basic economic problem all societies face?” April Higgins asks her sixth-grade class.

Ava Watson, raises her hand: “Scarcity.”

The teacher asks for a definition and the class responds, in unison: “People have unlimited wants but limited resources.”

Not bad for a bunch of sixth-graders.

What April Higgins is engaged in is not economics education. It’s just neoclassical economics.

You see, there is no single “economic problem.” It all depends on which theory we’re looking at. According to neoclassical economists, all societies in all places and times have faced the same problem: scarcity. And, of course, private property and markets are their proposed solution.

But that’s not the economic problem as defined by Keynesians (how to analyze and use the visible hand of government to get out of less-than-full-employment equilibria) or Marxists (how is the surplus produced, appropriated, and distributed and how can exploitation be eliminated) or many other schools of thought.

The fact is, middle-school economics education (like high-school, undergraduate, and graduate economics education) is dominated by one school of thought, one approach among many, that is presented as “economics.” In the singular.

And that’s because it’s run by the Council for Economic Education and stipulated, in some instances, by government decree:

The Texas education code states that economics must be taught with an emphasis on the free market system and its benefits.

Economics education, at any level, means exposing students to and having them grapple with the assumptions and consequences of different economic theories and systems. Focusing only on one approach and system—neoclassical economic theory and capitalism—is just propaganda.

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Those of us in economics are confronted on a regular basis with the fantasy of perfect markets. It’s the idea, produced and presumed by neoclassical economists, that markets capture all the relevant costs and benefits of producing and exchanging commodities. Therefore, the conclusion is, if a market for something exists, it should be allowed to operate freely, and, if it doesn’t exist, it should be created. Then, when markets are allowed to flourish, the economy as a whole will reach a global optimum, what is often referred to as Pareto efficiency.

OK. Clearly, in the real world, that’s a silly proposition. And the idea of “market imperfections” is certainly catching on.

I’m thinking, for example, of Robert Shiller (who, along with George Akerlof, recently published Phishing for Phools: The Economics of Manipulation and Deception):

Don’t get us wrong: George and I are certainly free-market advocates. In fact, I have argued for years that we need more such markets, like futures markets for single-family home prices or occupational incomes, or markets that would enable us to trade claims on gross domestic product. I’ve written about these things in this column.

But, at the same time, we both believe that standard economic theory is typically overenthusiastic about unregulated free markets. It usually ignores the fact that, given normal human weaknesses, an unregulated competitive economy will inevitably spawn an immense amount of manipulation and deception.

And then there’s Robert Reich, who focuses on the upward redistributions going on every day, from the rest of us to the rich, that are hidden inside markets.

For example, Americans pay more for pharmaceuticals than do the citizens of any other developed nation.

That’s partly because it’s perfectly legal in the U.S. (but not in most other nations) for the makers of branded drugs to pay the makers of generic drugs to delay introducing cheaper unbranded equivalents, after patents on the brands have expired.

This costs you and me an estimated $3.5 billion a year – a hidden upward redistribution of our incomes to Pfizer, Merck, and other big proprietary drug companies, their executives, and major shareholders.

We also pay more for Internet service than do the inhabitants of any other developed nation.

The average cable bill in the United States rose 5 percent in 2012 (the latest year available), nearly triple the rate of inflation.

Why? Because 80 percent of us have no choice of Internet service provider, which allows them to charge us more.

Internet service here costs 3 and-a-half times more than it does in France, for example, where the typical customer can choose between 7 providers.

And U.S. cable companies are intent on keeping their monopoly.

And the list of such market imperfections could, of course, go on.

The problem, as I see it, is that these critics tend to focus on the sphere of markets and to forget about what is happening outside of markets, in the realm of production, where labor is performed and value is produced. The critics’ idea is that, if only we recognize the existence of widespread market imperfections, we can make the market system work better (and nudge people to achieve better outcomes). My concern is that, even if all markets work perfectly, a tiny group at the top who perform no labor still get to appropriate the surplus labor of those who do.

Accepting that our task is to make imperfect markets work better makes us all look like fools. In the end, it does nothing to eliminate that fundamental redistribution going on every day, “from the rest of us to the rich,” which is hidden outside the market.

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Harry G. Frankfurt (the author of, among other books, On Bullshit) attempts to argue that we aren’t, or at least shouldn’t be, concerned about inequality.

I suspect that people who profess to have this intuition are actually not responding to the inequality they perceive but to another feature of the situation they are observing. What I believe they find intuitively to be morally objectionable in circumstances of economic inequality is not that some of the individuals in those circumstances have less money than others. Rather, it is the fact that those with less have too little.

Branko Milanovic correctly reminds Frankfurt that all our needs are social needs. Thus, there’s no way of distinguishing between “authentic” and “inauthentic” needs and thus no way of being concerned about poverty without worry about inequality.

So, his reasoning brings him back to the beginning where he is unable to define needs as separate from the context where they are expressed. He is  unable to do so because he is unable to distinguish between the so-called “authentic” needs and those that we develop simply by living in a society from the very moment when we are born.We cannot define what the “good life” is independently of the others.

So, his whole edifice crumbles.

Indeed.

That’s one dimension of the problem: all our needs are social needs. (And as Jack Amariglio and I argued back in Postmodern Moments, the modernist Marxian argument that “planning can succeed where markets could not in discerning all of the needs underlying the plan and in calculating all of the effects of instituting it” is “unhelpful and ultimately damaging in distinguishing between capitalism and socialism.”)

But there’s another dimension of the problem: the existence of inequality is bad for everyone within society, the rich and middle class as well as the poor (the argument made by Kate Pickett and Richard Wilkinson), and it is literally a killing field (because, as Göran Therborn has argued, millions of people die premature deaths because of it).

Taken together—the idea that all needs are social needs and that inequality kills individuals and society as a whole—we really do need to be concerned about the grotesque (and rising) levels of inequality in the world today.

To argue otherwise is bullshit.

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