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Friday, January 09, 2009

Zona report

It's all right
To be mean

The Zona report today was strong enough to flummox even the priests. On Economix, the NYT blog, economists have been invited to do their usual ritual dances – they step on the skulls of the evil greedy and lazy laborer, they pray for efficiency, they come up with irresistible reasons to give one of the class of the 10,000 richest households another million or billion. During the Zona, however, the dances begin to seem frantic. The old prayers, the old demons and heroes, seem to get out of focus. Obviously, the normal order and the full stop of all human history was 2006, a year in which everything came together – corporate profits popping, median household incomes stagnating, the great warriors freer than ever before from the bonds of the Demon Regulation and the Demon Taxman. Now, however, with every month another half a million people sliding down the chute of darkness and into the netherworld of unemployment (surely, of course, by their own choosing – in general, the proles are inexplicably lazy, and the only way to get them to work is either to beat them or to lower their wages), some of the priests are starting to Doubt. Uwe Reinholdt’s heartfelt post begins with a survey of the faith:

“If, like every university, the American Economic Association had a coat of arms, its obligatory Latin banner might read: “Est, ergo optimum est, dummodo ne gubernatio civitatis implicatur.” (”It exists, therefore it must be optimal, provided that government has not been involved.”)

With only minor injustice, one may take this as the overarching mantra to which the core of the economics profession marches. Government is accorded a beneficial role in this vision only to provide purely public goods, such as national defense; to remove private-market imperfections, such as monopoly power on either side of the market; or to deal with so-called spill-over effects from private decisions, which economists call “externalities.” These exceptions aside, unquestioned belief in the sagacity, efficiency and beneficence of private markets reigns supreme.”

Reinholdt searches about for an answer to the problem that this credo seems to have failed. He doesn’t search about with the tools of his trade, and ask whether the intimacy between economic departments and the financial services sector, into which most economics students are tidily bundled, might have had something to do with it. Instead, he turns to behavioral psychology, and in particular, groupthink. LI doesn’t wholly disagree. Self-interest is never a bedrock explanation, since the self and the interest are constructions made out of glue, routine, dreams, sweats, traffic, boredom, and exorcisms – thus the tightness of the array of economic departments and the financial services sector is needs a stronger poem to explain it. But here is Reinholdt’s theory:

“If groupthink is the cause, it most likely is anchored in what my former Yale economics professor Richard Nelson (now at Columbia University) has called a ”vested interest in an analytic structure,” the prism through which economists behold the world.

This analytic structure, formally called “neoclassical economics,” depends crucially on certain unquestioned axioms and basic assumptions about the behavior of markets and the human decisions that drive them. After years of arduous study to master the paradigm, these axioms and assumptions simply become part of a professional credo. Indeed, a good part of the scholarly work of modern economists reminds one of the medieval scholastics who followed St. Anselm’s dictum “credo ut intellegam“: “I believe, in order that I may understand.”

An inference drawn from the profession’s credo is that private markets invariably are self-correcting and are driven by rational human beings whose careful decisions serve to allocate scarce resources efficiently — that is, these decisions maximize a nebulous thing economists call “social welfare.”

“Social welfare” on this view is thought to increase when those who gain from a change in the economy — e.g., a corporate restructuring or deregulation of the financial sector or increased foreign trade — gain more from the change than those who lose from it, even if the gainers had already been wealthy before the change and the losers poor. Thus, few economists were troubled by the explosion of executive compensation on Wall Street or elsewhere in corporate America. It was just the efficient market at work, rewarding these executives for the “value” they were creating.”

What does LI see here? Is it a perception, however distant, of the mangle of inequality? Oh that mangle, how it throbs in the background of the Zona! It is, of course, too sacred and awful to approach directly – after all, it might be that the mangle is producing us as we write! It could be the dreamer that dreams our dream!

“As far as diagnoses of economic trends and predictions about the future are concerned, the profession’s preferred analytic structure and the groupthink it begets might work superbly well on planet Vulcan, whence hails the utterly logical Mr. Spock of Star Trek fame.”

This, of course, show that even in the dark night of the soul, the priests still believe. They believe they have the keys to heaven and hell. What they call rational is rational, what they call irrational is irrational, let heaven and earth fade away. On the planet Vulcan, in a pleasingly closed system, their poems work! LI, however, must dissent. They were sold bogus keys by hucksters, what they call rational and irrational aren’t descriptions of the mind’s superb adapting to circumstances, but instead, looked at closely, are actually mummies, tightly wrapped and deoxidized, discovered under the Chicago pyramids in 1898, and no system depending on the AEA’s pube Manichianism will last for any length of time on any planet you care to name.

As for my prediction - oh reader, no bone will be unplucked by the Zona! Including yours and mine.


P.M.Lawrence said...

"in general, the proles are inexplicably lazy, and the only way to get them to work is either to beat them or to lower their wages)..."

[Irony alert.] No, no, no. French colonialists found that the best way to motivate lazy natives was through taxes, e.g. in Madagascar, although their hybrid approach included forced labour as a fall back sanction. They did similar things in other colonies of theirs too, and the British did much the same more subtly still in Kenya and elsewhere, with hut taxes (later changed to poll taxes). However, the Portuguese did use that more direct forced labour approach, and the Dutch had a forced labour sanction to enforce quotas of cash crop cultivation in a rigged market in which they had invested (using a depreciated currency, too). Oh, and they should be deprived of adequate independent subsistence resources too so they can't opt out of the cash economy, but they should be left enough so cash wages can fall lower than subsistence. The former has generally already been done but has often overshot too far for the latter. This should generalise to proles.

'"Social welfare" on this view is thought to increase when those who gain... gain more from the change than those who lose from it, even if the gainers had already been wealthy before the change and the losers poor' doesn't even use the idea of Pareto optimality, which has been around for ages. In my view, a genuine free market would work for the general benefit of all, only what we have now has selective distortions either put in or left in after "reforms" only going to one side of things. In particular, corporate structures and financing, foreign trade, and the labour market, all have huge dislocations at work - and their effects are often cumulative.

J'ai perdu mon Latin, but is that the correct use of "ne" in the Latin up there?

roger said...

I'm a solid mixed economy man myself, as you know, Mr. Lawrence. But I did enjoy the story of taxes among the colonies. I have read that the British plan in India was to use taxation to force the monetization of the economy - as taxes in the villages had traditionally been paid in-kind. This, of course, had a wonderfully invigorating effect on the growth of moneylending.

P.M.Lawrence said...

The British didn't have a deliberate plan to increase the role of money in India. Rather, before the early 19th century reforms short term approaches concentrated on taking bullion and other valuables from wherever they could be found, and later the emphasis was on something like the Dutch approach to raise cash crops wherever the British were directly involved, and to collect other revenues as cash rents through middlemen collecting from peasants (zemindars and ryotwary) - not neglecting traditional taxes like that on salt, of course. The institutional changes of land ownership and cash rents probably had that effect of increasing the need for cash, of course, but that worked against the British wish to get it out of India. And we should not forget the Fall of the Rupee that came with new silver sources later in the 19th century, no matter how excitable it may be to young minds; that shows the lack of policies to raise the need for cash (we may dismiss the idea that there were such policies but they were ineffective - the Dutch showed how that could be done).