Mark Blyth on the past and Future of Capitalism

The indispensable Scottish economist Mark Blyth has written an article for Foreign Affairs Magazine called Capitalism In Crisis where he reviews three recent books on the past, present and future of capitalism. In fact, they break down along those lines:

  • Capitalism: A Short History, by Jürgen Kocka – Capitalism’s past.
  • Buying Time by Wolfgang Streeck – Capitalism’s present.
  • Postcapitalism by Paul Mason – Capitalism’s future.

Although in reality, that’s a vast oversimplification; all three of these deal with both the past, present and future of capitalism, each in their own way. And, at least some of them depart from the hoary standard economic orthodoxy that sees no problems with our current trajectory and everything getting better for everyone in the future forever. Another theme linking all three of these together according to Blyth is the escalating tensions between capitalism and collective governance, i.e. democracy:

Ever since the emergence of mass democracy after World War II, an inherent tension has existed between capitalism and democratic politics; capitalism allocates resources through markets, whereas democracy allocates power through votes. Economists, in particular, have been slow to accept that this tension exists. Instead, they have tended to view markets as a realm beyond the political sphere and to see politics as something that gets in the way of an otherwise self-adjusting system. Yet how democratic politics and capitalism fit together determines today’s world. Politics is not a mistake that gets in the way of markets.

The first book is a straightforward history of capitalism in only 163 pages, but does provide some interesting philosophical insights:

For [Jürgen] Kocka, capitalism is …a set of institutions that enshrine property rights, promote the use of markets to allocate resources, and protect capital. is also an ethos, he claims, a set of principles and ideas. Defining capitalism so expansively allows Kocka to see its earliest forms developing among traders in Mesopotamia, in the eastern Mediterranean, and along Asia’s Silk Road, until, by the eleventh century, the beginnings of a merchant capitalist bourgeoisie had emerged on the Arabian Peninsula and in China.

Capitalism developed later in Europe, boosted by long-distance trade with Asia and the Arab world, between the twelfth and fifteenth centuries. Merchants formed cooperative institutions that led to greater risk sharing, which encouraged the accumulation of capital. This develop­ment, Kocka writes, led to “the formation of enterprises with legal personalities of their own,” rudimentary capital markets, and, finally, banks whose fortunes became intimately connected with the rise of modern states through the management of their debts.

This alliance between merchant capitalism and the emergent state helped usher in the age of colonialism. Merchants, entrepreneurs, and conquistadors, with increasingly powerful states backing them, propelled European expansion. Critical to this expansion was the tri­angular trade, in which European merchants brought finished goods to Africa, traded them for slaves, and then exchanged those slaves in the New World for sugar and cotton that went back to Europe. This process helped embed capitalism deeper in Europe than in the Middle East and China: the scale of investment that such ventures required led to the rise of what would become known as “joint-stock companies” and the beginnings of what economic historians call “finance capitalism”—stock exchanges opened in Antwerp in 1531 and Amsterdam in 1611.

When discussing the possibility of full employment and the existence of unemployment, a number of readers have pointed me to the work of Michael Kalecki. Kalecki’s insights are central to the second of Blyth’s reviewed books, and he ably summarizes the ideas of the Polish economist in a very clear and concise manner:

Kalecki argued that if full employment ever became the norm, workers would be able to move freely from job to job. Not only would this undermine traditional authority relationships within firms; it would also push wages up regardless of productivity levels, since workers would have more leverage to demand higher wages.

In response, firms would have to raise prices, creating a spiral of inflation that would eat into profits and lower real wages, which would, in turn, promote greater labor unrest. Kalecki argued that to restore profits, capitalists would rebel against the system that promoted full employment. In its place, they would seek to create a regime in which market discipline, with a focus on price stability rather than full employment, would be the primary goal of policy. Welfare protections would be rolled back, and the discipline that unemployment provides would be restored.

The response to this situation was to unleash Neoliberalism, one of the central tenets of which is the “disciplining” of labor through various means, outsourcing, mass immigration, automation, union-busting, student debt, and so forth:

Kalecki’s predictions proved aston­ishingly accurate. By the 1970s, as Kalecki had foreseen, inflation had risen dramatically, profits had fallen, and capital began its rebellion. Organ­izations…pressured governments to reduce taxes, especially on high earners. But cutting taxes in the recessionary early 1980s meant that revenues fell, deficits widened, and real interest rates rose as those deficits became harder to finance. At the same time, conservative govern­ments, especially in the United Kingdom and the United States, set out to weaken labor and shrink the role of the state as they dismantled the regulations that had reined in the excesses of finance since the 1940s.

This “financialization” of the economy reduced taxes on wealth and shrank the tax base by hollowing out the middle classes of the formerly industrialized world. To finance government expenditures in the era of haute finance, politicians turned to debt instead, but government debt is also an asset on the balance sheets of major financial institutions and the one percent, giving them effective control over the politics of nation-states. As I have described it before, we stopped taxing the rich and started borrowing from them instead:

The financial industry could now grow unchecked, and as it expanded, investors sought safe assets that were highly liquid and provided good returns: the debt of developed countries. This allowed governments to plug their deficits and spend more, all without raising taxes. But the shift to financing the state through debt came at a cost. Since World War II, taxes on labor and capital had provided the foundation of postwar state spending. Now, as govern­ments began to rely more and more on debt, the tax-based states of the postwar era became the debt-based states of the contemporary neoliberal era.

The debt-based states of the Neoliberal era were hamstrung by the investor class who demanded safe returns and high interest rates, and could exercise veto power over government spending through the bond market. So not only were the workers forced to compete against the labor pool of the entire world thanks to Neoliberalism, but governments could do nothing to ease the pain of the transition or redistribute the spoils of globalization even if they wanted to:

This transformation has had pro­found political consequences. The increase in government debt has allowed transnational capitalists to override the preferences of domestic citizens everywhere: bond-market investors can now exercise an effective veto on policies they don’t like by demanding higher interest rates when they replace old debt with new debt. In the most extreme cases, investors can use courts to override the ability of states to default on their debts, as happened recently in Argentina, or they can shut down an entire country’s payment system if that country votes against the interests of creditors, as happened in Greece in 2015. The financial industry has become, Streeck writes, “the second constituency of the modern state,” one more powerful than the people.

The use of debt financing initially seemed to restore prosperity to nations and citizens after the crisis of capitalism that occurred during the stagflation and oil shortages of the 1970s. But it was all illusory, created by bringing spending forward in time through the unrestrained extension of credit (following Catton’s Overshoot, let’s call this “phantom wealth”). This blew up giant bubbles of indebtedness which were certain to burst at some point. In other words, none of this solved the basic underlying problems of capitalism that have been festering since the late 1970’s:

This shift from taxes to debt initially bought time for capitalism: it restored profits, destroyed labor’s ability to demand wage increases, tamed inflation to the point of deflation (which increases the real value of debt), and even seemed to provide prosperity for all after the crisis of the 1970s. Mortgages and credit cards allowed private citizens to rack up deficits of their own—a process the sociologist Colin Crouch has described as “privatized Keynesianism.” But it was all an illusion. Credit sustained the appearance of pros­perity for the lower classes. In reality, the rich captured most of the newly created wealth. In the United States, for example, the top one percent more than doubled their share of the national income over the last three decades, as wages for the bottom 60 percent stood still.

In 2008, as we know, it all came crashing down, and the world has been in stagnation mode ever since, thanks in part to debt overhangs. Another factor is the fact that “disciplining” labor has been so effective that the incomes are not there to drive consumer spending anymore, increasing the severity of the downturn and preventing expansion (since your spending is my income). The hourglass shaped incomes caused by Neoliberal economic policy also mean that escalating housing and education costs (both underwritten by lending) are eating up much of the spending power of the former middle class. Much of the wealth captured by the rich has been plowed back into the political system in order to throttle any attempts at reform and catapult propaganda messages that argue that system is doing just fine, and no one is to blame but the workers themselves (“the Chinese are getting rich!!!!”) It all leads to a downward spiral:

In 2008, the financial crisis shattered this illusion. Governments bailed out the banks and transferred the costs of doing so to public budgets. Public debt exploded as governments bailed out the rich, and austerity measures, intended to reduce this new debt, have only com­pounded the losses of the majority of citizens. Capital continues to dominate democracy, especially in the EU: in Greece and Italy in 2011, technocrats replaced democratically elected govern­ments, and in 2015, the so-called troika—the European Central Bank, the European Commission, and the International Monetary Fund—bulldozed Greek democracy.

So where Kocka blames profligate governments and debt-laden citizens for the current crisis, Streeck instead sees them as the victims. It’s not lavish public spending, he shows, but rather falling tax revenues and financial bailouts that have created so much government debt and empowered capital. If states are spending extravagantly on voters, as Kocka and those who fetishize austerity maintain, there is precious little to show for it. “Had the rise in public debt been due to the rising power of mass democ­racy,” Streeck writes, “it would be impossible to explain how prosperity . . . could have been so radically redistributed from the bottom to the top of society.” Streeck foresees a prolonged period of low growth and political turmoil ahead, in which states commanded by creditors, allied with transnational in­vestors, struggle to get resisting debtor states into line…

Blyth then turns to Paul Mason’s book, Postcapitalism, which I have written about before.

In Postcapitalism, [Paul] Mason writes that capitalism is “a complex, adaptive system which has reached the limits of its capacity to adapt.” The roots of capitalism’s demise, Mason argues, lie in the 1980s (also when Kocka saw problems arise), when capi­talism was taken over by neoliberalism: an ideology and a set of policies that recognize no limits to the commodification of the world. Unfortunately for capi­talism, “neoliberalism is broken.” To explain why, Mason turns to the work of Nikolai Kondratieff, a brilliant Soviet economist whom Stalin had murdered in 1938. According to Kondratieff, capitalism goes up and down in 50-year cycles. At the bottom of a cycle, old technologies and business models cease to function. In response, entrepreneurs, both public and private, roll out new technologies to open up untapped markets, and an upswing begins. This leads to a loosening of credit, which accelerates the upswing.

Blyth then summarizes Mason’s description of the various Kondratieff waves that have determined the course of market capitalism since the onset of the Industrial Revolution in the English Midlands:

Mason’s first cycle runs from 1790 to 1848. The upswing began when British entrepreneurs first harnessed steam power to run their factories, and it ended with the depression of the 1820s. The subse­quent downswing produced the revolutions of 1848, when the emergent bourgeois classes of Europe burst onto the historical stage.

Mason’s second cycle runs from 1848 to the mid-1890s. The spread of railways, the telegraph, and shipping drove growth until the depression of the 1870s. In the decades that followed, strong labor movements gained momen­tum all over the world, and capital, in response, became more concentrated.

Electricity and mass production then powered a third upswing that crashed in the Great Depression and the massive capital destruction of World War II.

After the war, a fourth cycle began with innovations in electronics and synthetics, improvements in the organization of production, and labor’s relative victory over capital in the institutions of the welfare state. That cycle’s upswing peaked in the mid-1970s, but this time, there was no major depression. The fourth cycle stalled.

Why did the fourth cycle stall? Mason’s analysis has four components:

  • After U.S. President Richard Nixon took the dollar off the gold standard in 1971, the United States moved to a paper standard, which eliminated the constraints on deficit financing that the gold standard entailed.
  • The financialization of the developed economies masked the reality of stagnant incomes by substituting credit for wage increases.
  • The emergence of global imbalances in finance and trade allowed the United States to keep consuming as Asian countries stepped in as producers.
  • Advances in infor­mation technology empowered capital and weakened labor, and helped spread neoliberal practices across the globe.

This where automation comes into the picture. In all of the previous crises, labor managed to organize and fight for more rights and higher living standards. This caused capitalism to adapt, to the benefit of all stakeholders (including the capitalists themselves). However, this time, automation, globalization and mass immigration (and, I would add, the influence of the corporate mass media), have combined in an engine that has succeeded in crushing labor. Add to that the fact that the proliferation of digital goods has meant that Markets can no longer price goods correctly, since markets rely on excludable goods and scarcity, and digital goods are abundant, non-rival, and non-excludable:

Mason borrows from Marx and Kalecki the idea that average profits in any market will fall due to both compe­tition and the flood of capital into a new market, which reduce returns on investment. As a result, capitalists will always try to replace human labor with machines to protect their share of profits.

During a downswing, as profits shrink, capitalists will do everything they can to boost their share of profits at the expense of labor: they will force employees to work intensively and will accelerate their attempts to replace workers with machines…In the past, such attempts to restore profits simply by crushing labor failed. In each of the first three waves, one way or another, workers managed to resist. The best examples of such resistance were the postwar constraints on capitalism: strong unions, rigorous regulations, and generous welfare systems. When workers defy capitalists’ attempts to squeeze profits from them by building such institutions, firms have to adapt. Rather than fight labor over the fixed distribution of income, they are forced to invest in improving workers’ produc­tivity, to the benefit of both parties: this was the post–World War II growth story.

But under neoliberalism, capitalists have managed to squeeze labor in an entirely new way. Globalization oblit­erated the power of workers to resist, because if they did, capital—and jobs—could easily flow elsewhere. This explains why the number of labor strikes has declined so steeply all over the world. As Mason writes, “The fourth long cycle was prolonged, distorted and ultimately broken by factors that have not occurred before in the history of capitalism: the defeat . . . of organized labour, the rise of information technology and the discovery that once an unchal­lenged superpower exists, it can create money out of nothing for a long time.”

Hence the plummeting living standards all over the industrialized world–North America, Western Europe, Japan. Meanwhile the abundance of digital goods has meant that copyright and legal protection have become onerous and excessive to protect corporate profits (and no other reason). Mason’s hope is that digital technologies will allow new para-capitalist and extra-capitalist (my terms) structures to emerge which will be the seeds of a new and growing economic arrangement that will ultimately be better for people and for the planet:

Still, Mason believes that these factors have only delayed capitalism’s inevitable collapse. Where Marx thought that organized labor would rise up and overthrow the system, Mason bets that information technology will destroy it from within. Digital goods, such as music files and software, create a real problem for markets: they destroy the role of price in balancing supply and demand. People can copy digital goods freely forever: they have zero marginal cost and are nonrival in consumption. When one person downloads a music file or a piece of code from the Internet, for example, she makes it no harder for anyone else to do the same. So the only way that firms can maintain their profits is by enforcing monopoly property rights…

Mason is optimistic about what will replace the profit motive. He points to decentralized networks such as Wikipedia…and the rise of the so-called sharing economy: nonmarket peer pro­duction systems, where work has value but cannot be priced in a traditional manner. The result is a “contradiction in modern capitalism . . . between the possibility of free, abundant socially produced goods, and a system of monopolies, banks and governments struggling to maintain control over power and information.” In such a world, the central battle will be between those who want to preserve property rights and those who wish to destroy them in the name of democracy. The stakes, Mason argues, could not be higher. Without the revolution he calls for, the world will be vulnerable to a much greater threat: catastrophic climate change.

Mark Blyth makes a major, major mistake in this otherwise excellent review, however. The fact that even someone as knowledgeable and aware as Mr. Blyth has fallen for the propaganda is both astonishing and very depressing: “A group of experts called the Club of Rome famously published The Limits to Growth in the 1970s, forecasting economic and environ­mental crises—and those predictions have failed to come to pass. But this time may be different.”

No, no no! Limits to Growth did not make any predictions. Let’s say that again: Limits to Growth did Not make any predictions!!! It used models to forecast a number of possible scenarios. The standard run scenario is actually very close to how the world economy has unfolded over the past few decades. In fact, one could argue that it’s so-called “predictions” are far more accurate than any economists’. As Ugo Bardi has explained multiple times:

Now, you may have heard that “The Limits to Growth” (let’s call it “LTG”) is an outdated work; that it was all a mistake, that they made wrong predictions and the like. Those are just urban legends. People tend to disbelieve what they don’t like and that is why LTG was so widely rejected and even demonized. ..Limits to Growth was a very advanced study for its times; it was not a mistake and its predictions were not wrong. In any case, these models are there to show you trends; not to give you exact dates for what will happen.

Mason argues that capitalism in its current form will engender catastrophic climate change:

The world is in trouble…The world cannot burn 60 to 80 percent of remaining known carbon fuel stocks without causing catastrophic warming. But under capitalism, this is exactly what the world will do. Carbon taxes will do little to change this reality…Add to this mix an aging developed world with huge pension liabilities and a climate-shocked developing world of young people who have nowhere to go, and it’s little wonder that the Organiza­tion for Economic Cooperation and Development has forecast stagnant growth for the global economy for the next 50 years and an almost 40 percent rise in inequality in the world’s rich countries…Mason thinks that climate change may be the one bullet that capitalism cannot dodge. Neoliberals often naively assert that capitalism will generate a miracle technology at just the right moment to stave off catas­trophe. But Mason argues that previous Hail Mary passes, such as geoengineering and carbon capture, have failed to pay off. What gives him hope is that large-scale technological innovations may not be as important as micro-level changes in the structure of property rights themselves…

Blyth concludes:

Mason emphasizes an aspect of capitalism that both Kocka and Streeck underplay: its adaptive potential…Although capitalism may be reaching its adaptive limits, it has been more robust than most doomsayers realize…Whether or not such a restructuring will be enough to save the world remains unclear. But Mason is right to hold out hope. Capitalism, in its current form, has reached a dead end. If ever there were a time for pessimism of the intellect and optimism of the will, it is now.

Or, it could all lead to collapse. I guess we’ll see. But that’s another column…

More Mark Blyth:

Austerity’s Big Bait-and-Switch (Harvard Business Review) (P.S. the joke’s on him–in Milwaukee we all have thick Scottish accents!)

In a highly indebted world, austerity is a permanent state of affairs (Aeon)

The World Is Run by Folk Theories

I noticed my thoughts on democracy, or the lack thereof, were echoed very closely in a recent column in The Guardian by George Monbiot. Monbiot asks a trenchant question:

What if democracy doesn’t work? What if it never has and never will? What if government of the people, by the people, for the people is a fairytale? What if it functions as a justifying myth for liars and charlatans?

You’ve gotta hand it to the guy, he’s willing to go where other journalists aren’t. He is riffing off a book called Democracy for Realists by Christopher Achen and Larry Bartels. That book refers to something that they term “The folk theory of democracy,” which is something I was also trying to get at in my post. The folk theory of democracy that we learn in our civics textbooks bears little resemblance to the reality we all live with:

[T]he “folk theory of democracy” – the idea that citizens make coherent and intelligible policy decisions, on which governments then act – bears no relationship to how it really works. Or could ever work…

In the real world, however, instead of rational people coming together to consider the best course of action on various important issues, people form antagonistic tribes and vote based on emotion, rationalizing their decisions after the fact based on their preconceived notions or social group affiliation. I find it endlessly amusing to see all the “Trump/Pence” signs in the white separatist enclaves and rural exurbs outside of the city given that four years ago those same signs were for Mitt Romney, someone who believed the 180-degree opposite than what Mr. Trump currently espouses on any number of issues. Heck, Mr. Romney’s very business was carving up American companies and offshoring jobs! But, of course, we’re told that we vote for candidates based on “issues.” Yeah, right. Anyone who has ever tried to have a “rational” discussion about the issues with an American voter has had a rude awakening.

Voters, [Achen and Bartels] contend, can’t possibly live up to these expectations. Most are too busy with jobs and families and troubles of their own. When we do have time off, not many of us choose to spend it sifting competing claims about the fiscal implications of quantitative easing. Even when we do, we don’t behave as the theory suggests.

Our folk theory of democracy is grounded in an Enlightenment notion of rational choice. This proposes that we make political decisions by seeking information, weighing the evidence and using it to choose good policies, then attempt to elect a government that will champion those policies. In doing so, we compete with other rational voters, and seek to reach the unpersuaded through reasoned debate.

In reality, the research summarised by Achen and Bartels suggests, most people possess almost no useful information about policies and their implications, have little desire to improve their state of knowledge, and have a deep aversion to political disagreement. We base our political decisions on who we are, rather than what we think.

In other words, we act politically not as individual, rational beings, but as members of social groups, expressing a social identity. We seek out the political parties that seem to correspond best to our culture, with little regard to whether their policies support our interests. We remain loyal to political parties long after they have ceased to serve us.

The idea that parties are guided by the policy decisions made by voters also seems to be a myth; in reality, the parties make the policies and we fall into line. To minimise cognitive dissonance – the gulf between what we perceive and what we believe – we either adjust our views to those of our favoured party or avoid discovering what the party really stands for. This is how people end up voting against their interests.

Lies, fearmongering and fables: that’s our democracy (Guardian)

My argument was a little different. I argued that it doesn’t matter anyway, since the government is run by technocrats. As I pointed out earlier this year, since the rise of Market Liberalism the economy has been “disembedded” from society by design, and operates within its own strict set of rules and limits, walled off from any political “interference.” So what can politicians do anyway? It is the Market which determines whether people can or can’t find work, or afford to rent an apartment, or whether they have to live on the street and go without necessary health care. What can the government—any government— do under these circumstances? The answer is usually some sort of “program,” but we’re constantly told over and over again that programs don’t work, that they distort the Market and cause “inefficiencies,’ and that there simply is not enough money around to fund them, anyway.

There’s another different, but related, argument. Reader Apneaman points out this article: The right to vote should be restricted to those with knowledge (Aeon).

The idea here is not that knowledgeable people deserve to rule – of course they don’t – but that the rest of us deserve not to be subjected to incompetently made political decisions. Political decisions are high stakes, and democracies entrust some of these high-stakes decisions to the ignorant and incompetent. Democracies tend to pass laws and policies that appeal to the median voter, yet the median voter would fail Econ, History, Sociology, and Poli Sci 101. Empirical work generally shows that voters would support different policies if they were better informed.

Voters tend to mean well, but voting well takes more than a kind heart. It requires tremendous social scientific knowledge: knowledge that most citizens lack. Most voters know nothing, but some know a great deal, and some know less than nothing. The goal of liberal republican epistocracy is to protect against democracy’s downsides, by reducing the power of the least-informed voters, or increasing the power of better-informed ones.

The author of this article also wrote a book, called Against Democracy. In it, he champions the idea of epistocracy–voting would be restricted to those with a basic level of competence. In this case, voting would still determine the leadership of the nation, and be done in some sort of regular time period, but there would need to be qualifications to vote. Not just anyone, no matter how ignorant, would be allowed to cast a ballot:

…most of of us still believe that the voters have a right to rule, no matter how ignorant and biased they might be. As political scientists Christopher Achen and Larry Bartels put it in another important new book on political ignorance, “the ideal of popular sovereignty plays the same role in contemporary democratic ideology that the divine right of kings played in the monarchical era.” Much like the kings and emperors of an earlier age, the people are seen as having an inherent right to wield political power, whether or not they do it well. Unlike Achen and Bartels, Brennan is willing to knock our multiheaded king off his pedestal.

In most situations, he points out, we readily assume that people should not be allowed to make important decisions for others unless they have at least a reasonable degree of competence to do so. Brennan calls this idea the “Competence Principle.” We don’t allow quacks to make medical decisions, for example. This is especially true when the medical decisions in question are extremely important, and the “patients” have no choice but to obey the doctor’s orders.

Voting, of course, often literally involves matters of life and death, and the politicians who get elected rule over the entire society, including those who voted against them or chose to abstain. Ignorant or illogical decisions by voters can easily lead to ill-advised wars, economic recessions, abusive law enforcement, environmental disasters, and other catastrophes that imperil the lives, freedom, and welfare of large numbers of people. If we refuse to tolerate ignorant medical practice or ignorant plumbing, we should take an equally dim view of ignorant voting.

Democracy vs. Epistocracy? (Washington Post)

The technocracy idea I was proposing is somewhat similar, but it eliminates the idea of voters. The idea that we could find enough average voters to weigh in on, say, atmospheric science, or nuclear regulation, is slim to nil. What exactly are even these “knowledgeable” voters going to vote on, then? And furthermore, I contended that voting doesn’t change much anyway, since most departments are bureaucracies staffed with professionals that run themselves regardless of who is elected into office.

The “Folk Theory of Democracy” reminds me of the “Folk Theory of the Market” that I always like to bring up. It’s just as much of a fairy tale. The folk theory of the market usually describes some sort of idealized farmer’s market-type situation where relatively equal sellers are competing against one another with simple products, and rational consumers have enough time and knowledge to pick and choose among them, so that everyone ends up better by “mutually agreeable” trades in perfectly “free and open” markets. Much of economics (practically all of it, actually), is attempting to describe this idealized situation using advanced mathematics. However, the above situation bears no resemblance whatsoever to the anything that has ever existed in reality. In economists’ conception of the Market, there is no coercion, no monopolies, no externalities, no advertising, no marketing, perfectly rational omniscient consumers, buyers sellers on an equal footing, etc.

In reality, the market is plagued with constant bubbles, manias, booms, busts, panics and crashes, always swinging from overproduction to underproduction and threatening to tear the whole fabric of society apart. Markets do not lead to “rational allocation of goods and services,” but are fueled by “animal spirits” and driven by things like the cognitive biases, the herd mentality, Ponzi dynamics, and the Greater Fool Theory. This is what history shows outside of economic textbooks and academic papers. The other thing that economists spend a lot of time doing is trying to get markets to work the way the textbooks say they should, while simultaneously extolling “private enterprise” and berating government “distortion.”

This article pointed out something relevant – we’re almost a decade into slow/stagnant growth that’s causing the world to progressively deteriorate poltically and socially, and economists have no answers. Instead they award the “Nobel prize” to economists who study contract theory. Really, that’s all the relevance the mighty economics discipline has anymore? It’s like the economic discipline has become so far removed from actual reality that it just can’t provide any real answers to our mounting problems.

This is predictable, and, I submit, is the most predictable phenomenon within the ambit of the discipline. Economics is in disrepute, and its current elite are determined to keep it there. The latest ersatz Nobel prize went to a couple of guys who theorize a lot about contracts. This is the kind of work that now dominates much of economics. Tinkering with mathematics, incentives, and other aspects of minutiae whilst steadfastly turning away from the rapidly approaching storms that threaten the lives of real people outside the tenured redoubts professors hide within.

The Market and Nobels (Real World Economics Review)

The whole article is an excellent summary of the history of economics – where it came from, and why it is inherently hostile to the state from its inception:

All mainstream economics begins with the proposition that there exist markets endowed with utopian qualities. These magical places are populated with people who behave in only one way: they exercise rational choice. Indeed, so rational are they that they exhibit no choice in any real world sense of the word choice. When presented with an array from which to choose these people will make only one choice. They are, thus, perfectly predictable. They can be accorded incentives to induce predictable behavior. They will never err. They will never fail prey to human weaknesses. Nor will they alter. They are, in sum, the perfect grist for the mathematical modeling mill. Which is why they were invented.

With this nirvana thus established, economists systematically explore various forms of relaxation of their utopian rules. This, they argue, allows them to home in on sundry “inefficiencies”. For it can only be that a fall from the sublime grace of utopia is to decline into a less than sublime underworld. That underworld inevitably includes the state.

So, from its very inception, economics was designed to “prove” that state intervention into markets was inherently to disrupt this utopian order.

One example of market irrationality I always like to point out is the farmers who poured milk down the drain during the Great Depression while many people were unemployed, starving and hungry. I used to have to refer to the 1933 Wisconsin Milk strike. But now I can use a much more relevant example, as milk is currently being poured down the drains thanks to a massive dairy glut:

Dairy farmers in the United States have dumped more than 43 million gallons of milk between January and August of 2016. This milk has been poured into fields, manure lagoons, and animal feed, or down the drain at processing plants. According to the Wall Street Journal, this amount of milk is enough to fill 66 Olympic-sized swimming pools and is the most wasted in at last 16 years.

The problem is that the United States is in the midst of a massive dairy glut. Farmers responded to a shortage two years ago that is now catching up with a nation unable to absorb the quantity of dairy being produced. Prices are so low – down 36 percent from in 2014 – that “many can’t even afford to transport raw milk to market at current prices.” Two years ago, U.S. dairy farmers were exporting tons of milk, but it has all crashed…

43 million gallons of milk have been dumped so far this year (Treehugger)

Traditionally, the solution has been for the government to buy up excess, and then release it to the market when the price is high. This has “smoothed over” the repeated boom-and-bust cycles and prevented wild price swings. In truth, the “cheap abundance” we enjoy today is as much due to government intervention as free market capitalism, yet our indoctination will not allow us to accept this fact (another example of irrationality related to the above). As economist William Mitchell has often argued, this same system could be theoretically used to keep the price of labor high and eliminate the wasted excess, but the powers that be will not allow it.

And continuing on the idea of the Folk Theory of the Market, while looking for something else I came across this excellent blog with several posts pointing out how many parts of standard economic theory make no sense. For example, No One Has Time For A Completely Free Market:

The free market often sounds quite simple and straight forward. Consumers simply decide whether product A or B benefits them more and then choose accordingly. If the same or similar product is sold by shop A or B consumers simply choose whichever is cheaper, better quality or otherwise benefits them. It is easy and doesn’t require any complicated plan or someone telling consumers what is best for them, people simply decide themselves. This is the market as described by economists, politicians and writers, especially when they are trying to make a political point. After all, if the market is so simple and straight forward, why do we need the government interfering? All these rules and regulations only get in the way, surely it is better for everyone if we just leave the consumers to decide for themselves.

The road to Hell is paved with good intentions and although this sounds like a completely reasonable idea, it is completely unworkable in reality. As tempting as it is to simply remove regulations and let people figure it out for themselves, the free market is not simple and straight forward. It is an extremely complex mechanism that none of us fully understand. The biggest reason we shouldn’t remove regulations is because simply do not have the time.

Let me use an example. I once went to the shops to buy some bacon. In my economics classes this was always presented as a simple affair. I would just compare two types of bacon see which was better (in terms of price or quality) and choose whichever gave me the most utility. However, when I came to the aisle, to my surprise, I saw that there were 40 different types of bacon. There were different sizes, different brands, different parts of the pig etc. How was I supposed to know which was best? Perhaps I could give each one a taste test and rate them accordingly and devise a system that combines taste and price to calculate the most efficient option. But I would have to cook each piece identically with similar food in order to give a fair test and perform it more than once, to avoid the risk of getting an unusually good or bad piece. Needless to say this would be an enormously time consuming task that would take weeks (by which time need bacon products would probably be released) and no one has the time for.

Yet this is only one product. Supermarkets contain thousands of products that all must be considered, compared and a decision made on them. I am a skinny lad with incredibly unimaginative tastes in food (I’ve never cooked myself a meal with more than three ingredients) who only shops for myself, yet a full shopping involves buying 30-40 goods. More imaginative people and those with families have even more decisions to make. Plus there is also all the other goods you decided not to buy, meaning that doing the shopping involves over a hundred decisions and hundreds of comparisons. All of this occurs in one supermarket but there are also a dozen others that you could go to instead (also containing hundreds or thousands of products) further multiplying the calculations that could be made. No human has the time or willingness to do a full and comprehensive comparison of all the economic costs and benefits.

So what do people do instead? Sometimes they just choose randomly. As an economics student it always struck me as odd that I was spend all day learning complex equations that supposedly related as to how consumers made their decisions and then randomly choose what to eat for dinner. Most times, people just buy the same product they did before. Or they’ll choose one with nice packaging or that they recently saw an ad for. I usually buy the cheapest.

No One Has Time For A Completely Free Market (Whistling In The Wind)

Remember, economic “science” assumes that we all have “perfect information” about literally everything we do. No, I am not making that up. The author then points out what would happen if we repealed all consumer protection, environment, anti-discrimination, worker protection, and other laws, and let the unregulated market decide as libertarians demand that we do:

So without regulations the already complicated decision of picking which bacon to buy, becomes exponentially more difficult. Now I have to compare the 40 or so brands based on their relative price, taste, quality, risk of disease, treatment of animals, environmental impact, working conditions, sanitary conditions, attitudes towards minorities and women, both in terms of willingness to hire, pay an equal wage and promote, nutrition, origin (people like to support local businesses), honesty (is this actually bacon?) and a dozen other factors I have probably forgotten. Needless to say your brain would melt if you tried to calculate all these factors (assuming you had all the information you needed), so instead people pick one or two that matter and ignore the others. This means that I’ll buy the cheapest, even if the workers aren’t treated well or the quality is shoddy. So contrary to what some would have you believe, consumers don’t have the power to compel businesses to act as they wish and the threat of switching brands merely means switching some disfavourable factors for others.

This is why regulation is actually helpful to consumers and simplifies life. This might sound odd and contrary to what you’ve always heard about regulations, so I’ll repeat it. Regulations simplify decisions. When I go to the supermarket, I know that the products have to meet some basic standards such as health & safety, environmental impact and working conditions. This means I don’t have to worry as much about it and reduces the number of factors by which I judge products. By standardising other factors, I am freed to focus mainly on price and quality, which makes comparison and competition much easier to determine. It also means this is where businesses have to compete instead of undercutting each other where consumers don’t see.

So contrary to what most people think, removing regulations would actually complicate, not simplify our life. No one has the time to make the endless calculations that are necessary for a completely free market to function.

Another good post is this one, skewing the idea that markets exist on some sort of platonic, frictionless universe and somehow reach equilibrium.

Even on its own grounds, the argument for equilibrium to naturally occur is flawed. The market forces that are supposed to push the price towards equilibrium and hold it there are either too weak or non-existent. But won’t a business that charges too much have too few customers? Won’t a business that sells too cheaply not be able to pay its costs? True, but this does not mean it will reach equilibrium. You see, not all costs are equal, rather they all run on separate time frames. Repaying your mortgage on the building is a fixed cost not related to production. Not all employees are directly productive (managers and security guards provide benefit but are not directly related to the production of goods). Therefore it is not as easy as simply equating supply and demand when it is such a variable cost. It is quite possible for a business to run a loss for quite some time and still remain in business.

Do we ever reach equilibrium (Whistling In The Wind)

So, we’re told that choosing in the market as consumers is the only kind of choice that matters. Yet we clearly see in both markets AND democracy that it really amounts to no choice at all. Instead we cling to outdated folk theories as the world goes to hell around us. So much for “rational choice.”

Why Is College So Expensive? Blame The Powell Memorandum

I spent some time recently listening to the Powell Memorandum, courteously read aloud by the Attack Ads podcast:

If you have some time to kill and a strong stomach, it’s a fascinating document to listen to all the way through.

The Powell memorandum struck a paranoid tone that the “free enterprise” system was a under merciless and sustained assault centered mainly on collage campuses. I had not realized the extent to which the Powell Memorandum specifically focuses the spotlight on America’s higher education system as the prime source of discontent. If you take the memorandum’s argument seriously, Americas universities were virtual leftist madrassahs inculcating revolutionary fervor in America’s youth and doing it on corporate America’s dime. According to Powell, Communist firebrands were barnstorming the country brainwashing America’s youth to overthrow the free enterprise system and inculcating contempt for its core institutions. College campuses were nothing less than an injection system for radical ideas into the body politic, funded by corporate America itself, and they needed to be stopped, or else the free enterprise system was doomed!:

“Yale, like every other major college, is graduating scores of bright young men who are practitioners of ‘the politics of despair.’ These young men despise the American political and economic system . . . (their) minds seem to be wholly closed. They live, not by rational discussion, but by mindless slogans.” A recent poll of students on 12 representative campuses reported that: “Almost half the students favored socialization of basic U.S. industries.”

A visiting professor from England at Rockford College gave a series of lectures entitled “The Ideological War Against Western Society,” in which he documents the extent to which members of the intellectual community are waging ideological warfare against the enterprise system and the values of western society. In a foreword to these lectures, famed Dr. Milton Friedman of Chicago warned: “It (is) crystal clear that the foundations of our free society are under wide-ranging and powerful attack — not by Communist or any other conspiracy but by misguided individuals parroting one another and unwittingly serving ends they would never intentionally promote.”

Powell makes corporate America out to be like a cuckolded husband, underwriting the very people who sought to destroy it. In other words, corporations were funding their own demise. Imagine if Star Wars’ rebel alliance were cashing checks signed by Darth Vader. He chides big business for being “apathetic” to the gathering storm developing on college campuses:

One of the bewildering paradoxes of our time is the extent to which the enterprise system tolerates, if not participates in, its own destruction.The campuses from which much of the criticism emanates are supported by (i) tax funds generated largely from American business, and (ii) contributions from capital funds controlled or generated by American business. The boards of trustees of our universities overwhelmingly are composed of men and women who are leaders in the system.

The message was clear: education was a threat to big business. This led to the radical divestment of big business from education, part of the overall “revolt” against taxes which precipitated a dramatic shrinking of all of America’s public institutions (except military/security and corporate welfare) across the board.

In the public sector, which educates 80 percent of American students, state funding hit a peak in 1980 and has been falling ever since…[1] If states had continued to support public higher education at the rate they had in 1980, they would have invested at least an additional $500 billion in their university systems, according to an analysis by Reveal from The Center for Investigative Reporting.That’s an amount roughly equal to the outstanding student debt now held by those who enrolled in public colleges and universities.[2]


The Powell Memorandum is, of course, the impetus for the creation of all of the subsequent right-wing think-tanks (AEI, Cato, ALEC), propaganda news outlets (FOX, talk radio), foundations (Bradley, Heritage etc.), astroturf groups (Tea Party) and the like. But the extent to which all that was driven by what was happening on America’s college campuses in the late 1960’s and early 1970’s is often overlooked. What is also overlooked is why this led to America’s spectacularly expensive and wasteful education system.


One of the reasons there was so much protest in Universities was that almost anyone could go. College was not prohibitively expensive before 1980. Places like the University of California–whose Berkeley campus was synonymous with anti-war protests and leftist ideas–was practically free. It became an attractor to intellectual, independent youth from all over the country who came into contact with each other and could form a critical mass of opposition. The Vietnam War was a major driver of this. Colleges were safe havens from the draft.

It’s hard to believe today, given the apathy on collage campuses, but there was a very real concern in the days of Cold War paranoia that the intellectual ferment on campuses was an existential threat to capitalism itself. As Powell’s paranoia above indicates, corporate businessmen and right-wing politicians were genuinely scared and on the defensive.

Richard Nixon cannily realized that all the concern over bombing those poor brown people in Vietnam had nothing to do with selfless concern for others; what the students were really protesting was that their privileged white asses might be sent over to die in the jungle via the draft. In other words, they were protesting the draft and feigning concern for peace and justice and all that. So he got rid of the draft, and, just as he had predicted, the protests petered out and eventually ceased.

But then, how would America get troops for its military?

By divesting public support for education through taxes and replacing them with student loans—debt servitude—students would no longer be questioning the system, but instead be trying to get into the system as quickly as possible in order to pay off their huge debt burdens. Student loans were a way of “disciplining” students, so they wouldn’t have time to question the system, as Noam Chomsky points out:

“Students who acquire large debts putting themselves through school are unlikely to think about changing society, Chomsky suggested. “When you trap people in a system of debt they can’t afford the time to think.” Tuition fee increases are a “disciplinary technique,” and, by the time students graduate, they are not only loaded with debt, but have also internalized the “disciplinarian culture.” This makes them efficient components of the consumer economy.”

Mission accomplished.

It also served a second purpose. Because military service would fund higher education, it would drive students from poorer backgrounds to serve in America’ foreign wars. Originally, the G.I. Bill was to help returning World War Two veterans (which most college-age men were) fund a higher education so as to bring about a more educated and—the thinking went—more productive workforce. This was to compete with the Soviet threat (where everything was theoretically state-funded).

But what they had also done was accidentally stumble upon the perfect way to get plenty of recruits without having a draft and without any protest. As education costs soared into the stratosphere, more and more people would sign up “of their own free will” to get government money to pay the enormous costs burdens of that education. No reason to protest – there’s no draft. Students from affluent backgrounds didn’t have to worry, they could afford the higher education costs. And the military service option would make America’s wildly expensive college seem “just.” Can’t afford to pay? Just put on uniform and head overseas!

It was diabolically brilliant. Another mission accomplished.

Fast forward nearly forty years. Now students are told they must get a “valuable” degree that pays dividends. Anyone wasting time studying anything not “practical” has only themselves to blame. College is all about ROI (return on investment). Students are spending all their time studying, especially if they are from poorer backgrounds, to “compete” in the harsh job market upon graduation. Who has time for protests when you’re studying all day and working a job at night to get through college? Besides, a black mark on your rerecord will make you unemployable, a serious problem when you’ve got tens of thousands of dollars in debt hanging over your head before you even graduate.

The coup-de-grace of this movement is the push to completely eliminate liberal arts studies from college campuses, and make universities solely for the education of STEM topics (science, technology, engineering, math). Students in STEM courses are not a threat to the “private enterprise” system. No one in engineering or medical school is going to learn about alternative economic theory or America’s foreign policy, nor do they care. The protestors at Berkeley and elsewhere were probably not engineering/science majors after all.

Florida’s…governor, Rick Scott, wants more of the state’s youths to pick up college degrees… but only if the degrees are useful to corporations and don’t teach students to question social norms. “You know what? They need to get education in areas where they can get jobs,” Scott told a …radio host Monday morning. He continued:

“You know, we don’t need a lot more anthropologists in the state. It’s a great degree if people want to get it, but we don’t need them here. I want to spend our dollars giving people science, technology, engineering, math degrees. That’s what our kids need to focus all their time and attention on. Those type of degrees. So when they get out of school, they can get a job.”

He explained the strategy Monday in a separate interview with the Sarasota Herald-Tribune:

Scott said Monday that he hopes to shift more funding to science, technology, engineering and math departments, the so-called “STEM” disciplines. The big losers: Programs like psychology and anthropology and potentially schools like New College in Sarasota that emphasize a liberal arts curriculum.

“If I’m going to take money from a citizen to put into education then I’m going to take that money to create jobs,” Scott said. “So I want that money to go to degrees where people can get jobs in this state.”

“Is it a vital interest of the state to have more anthropologists? I don’t think so.”

Rick Scott to Liberal Arts Majors: Drop Dead (Mother Jones)

This was all part of the Neoliberal revolution on college campuses. As the Guardian summed up the situation, “Higher education is stuffed with overpaid administrators squeezing every ounce of efficiency out of lecturers and focusing on the ‘profitable’ areas of science, technology, engineering and maths. Are the humanities at risk of being wiped out?”

The emphasis on STEM degrees means that collage campuses will not be places where the system is questioned, just vocational schools were compliant corporate drones will be reliably churned out. After all, you probably won’t be questioning the system if you’re in engineering or nursing school. Economics education has been taken over by Neoliberal ideas and free-market fundamentalism–academics who even mention Marx (except as ridicule) are exiled. And rather than genuine protests, affluent students spent their time bickering over nonsense like “trigger alerts” and “safe words” and gender/sexual identity issues egged on by the corporate media echo chamber. The New Left was cleverly used to neuter the Old Left, supported by corporate America. Powell would be proud.

Republicans’ inherent hostility to higher education can be illustrated by a revealing anecdote. Wisconsin governor Scott Walker attempted to rewrite the “Wisconsin Idea”–a largely symbolic statement that guided the mission of University of Wisconsin system. Walker famously not only cut 300 million dollars of support for this formerly world-class institution (while simultaneously funding a new stadium for the Milwaukee Bucks), but also stealthy attempted to rewrite the Wisconsin Idea with new corporate-friendly language slipped into the bill:

In Section 1111 of Walker’s proposed budget legislation, Senate Bill 21, he strikes language specifying that the UW has a public service mission to “extend knowledge and its application beyond the boundaries of its campus” and to “serve and stimulate society.”

Walker adds “to meet the state’s workforce needs” as a core mission of the university.

Walker also strikes language ensuring that the mission of the UW is to extend “training and public service designed to educate people and improve the human condition,” as well as the language: “Basic to every purpose of the system is the search for truth.”

Scott Walker removes ‘Wisconsin Idea’ from UW’s mission in budget bill (updated) (The Capitol Times)

“Searching for truth” is the last thing these guys want. Neither do they care about “improving the human condition.” And they certainly don’t want people with the time or inclination to think for themselves.

A public outcry derailed his plans. But the story itself is telling. There is really no reason for messing with this statement besides pure ideology. What is that ideology? A hostility to free thinking and a desire for education to be nothing more than a handmaiden to serve big business. Wildly costly education serves that purpose nicely. Debt serfs don’t question.

Powell would surely approve.

In other words, cutting funding for higher education and student debt was all part of the plan since the 1970’s. Now you can see why “free education” is such a threat to the authoritarian structure of the United States. Corporate America spent decades putting down the insurrection on college campuses, and they surely don’t want to go thorough that again.

So, given their hostility to higher education, why do businesses universally require degrees for everything from CEO to janitor?

One reason is what we saw above – they want people to be struggling and in debt. Struggling people don’t have time to think or criticize; they’re too busy just trying to survive. They will be docile, compliant workers, because they are essentially indentured servants. Student loans cannot be discharged in bankruptcy. Their fear will keep them in line. There are bills to pay, and delinquent loans will ruin your credit rating.

Another is something called “signaling.” A degree is a way to say, “I’ll jump through any arbitrary hoops in order to climb the ladder.” I’m a docile, obedient worker, hire me!” It’s a social marker more than anything else.

Requiring a degree is one of the last remaining forms of legal workplace discrimination. A degree is a way of filtering out people and making sure only the “right” candidates apply (from affluent backgrounds, white, etc.) and are hired.

But the main factor driving this trend is the fact that today’s corporations just don’t need that many educated workers anymore. Thanks to the Neoliberal “disciplining” of labor, and the rise of the “service” economy, the majority of jobs now pay a pittance wage–barely enough to survive on. So this will drive people to struggle to acquire a degree—just like people will purchase lottery tickets no matter the cost—in the hope of getting a leg up on the competition for the few remaining jobs that pay a decent wage. This allows corporations to divest  from funding higher education and yet still have plenty of willing, educated workers banging down their door. And besides, in the global economy, corporations can sponge off of the education systems of other countries, hiring qualified workers from all over the world. Not willing to do what it takes? Well, then, you have only yourself to blame. Why invest in “American” education anymore in a global economy? America’s students are on their own. Training costs are now entirely borne by the workers/government, even as corporations constantly moan about “socialism” (another legacy of the memorandum).

For all of the above reasons, costly college is not a bug; it’s a feature. It serves so many simultaneous purposes for the elites. And I didn’t even mention the gravy train loans are for the financial sector, since they are backed by government (and hence low risk). It’s not likely they’re going to do anything about any of this without a fight.

BONUS: Good interview with Chomsky on education.

“You Just Don’t Understand Economics”

I see this argument all the time, especially on Reddit: “you don’t understand economics” or “clearly this person doesn’t understand economics.”  Whenever anyone says this, they don’t actually attempt to explain what it is the person doesn’t understand, or even how their argument is wrong, or even engage with what’s being said in any way at all. It’s just tossed out there like a mic drop. “You just don’t understand economics” is the ultimate thought-stopping technique deployed whenever anyone questions conventional free market orthodoxy. The subtext is that anyone who has any opinion outside of the narrow box of laissez-faire capitalism is a foolish, starry-eyed dreamer, whereas the hard, grounded poster “gets it.” But, of course, the only thing they really “get” is the economic doctrines they’ve been spoon fed their whole life.

This lecture by Ha-Joon Chang is a good refutation of the non-argument “you just don’t understand economics.”