“Markets don’t reward merit; they reward value”

This article by Shikha Dalmia makes some of the points I tried to express in the notes I posted here a few weeks ago under the title “The Economic Argument.”  Two key passages are these: “Markets don’t reward merit; they reward value—two very different things.”  And  “The idea that there is no god (or some secular version of him) meting out cosmic justice through the market’s invisible hand is unsettling, even to market advocates, but it shouldn’t be. It opens up the possibility of a defense of markets that is, as it were, more marketable.”  In other words, when economists say that market competition tends toward rationality they are not saying the same thing Plato says when he imagines a form of learning that culminates in a vision of absolute truth.  Efficient social structures may emerge from market competition, but there is no guarantee that these structures will exemplify justice or reveal the secrets of the cosmos.

“The economic argument”

Last week there was an xkcd strip that bothered me for three reasons.  Here’s the strip:

Two of the three things that bothered me about it were raised in this comment in the forum, more forcefully than I likely would have done.  So I’ll take the liberty of quoting “woodrobin”:

1. Dowsing is used by oil prospectors, as well as people looking for places to dig water wells. Less often these days, but it’s still used. Does that mean it works? No. Does people not using it mean it doesn’t work? No. Very few people use horses to pull plows, except the Amish and people in developing countries. Does that mean that horses can’t pull plows?

2. Health care cost reduction. That was funnier, taken seriously, than the original joke. When was the last time you ran into a doctor, hospital or insurance company that was interested in cost reduction through treatment? Any treatment, scientific or otherwise? Doctors and hospitals want to make money, and insurance companies have figured out it’s easier to save money by denying coverage for treatment, either in whole by canceling coverage, or in part by excluding anything “experimental” or “unproven.” In other words, it’s cheaper to exclude entire types of health care than to consider or cover them, whether or not they’re quackery notwithstanding.

“woodrobin” goes on to make two more points, about irrational practices that are in fact quite common in financial planning and military operations.

I would add one thing to woodrobin’s point 1, that people who defend dowsing usually claim only that it is a good way of finding water that is near the surface.  Most oil prospecting these days is concerned with deposits that are deep underground, so no method of shallow surveying is going to “make a killing” for anyone in that area.

My third objection hinges on the word “eventually” in the caption.  In the long run, the caption seems to say, market competition tends to eliminate irrational practices.  That may well be true.  However, that long run can be very long indeed, and in the interval those irrational practices can be reinforced by any of a wide variety of social forces.

Moreover, the rationality that competitive markets enforce is not the rationality Plato talked about in The Republic, not a single process that must culminate in a vision of unmixed truth and untainted justice.  Rather, it is the rationality Max Weber had in mind when he said that modern society traps its members in an “iron cage of rationality.”  Economic agents respond to the incentives of the market and develop ever more efficient ways of meeting the demands of other economic agents who have purchasing power.  Whether those demands accord with the sort of truth and justice Plato hoped to discover has nothing to do with it.  The mouseover text on this strip reads “Not to be confused with ‘selling this stuff to OTHER people who think it works,’ which corporate accountants and actuaries have zero problems with.”  The distinction between making a killing selling financial advice based on astrology to suckers who think astrology works and making a killing selling financial advice based on astrology because astrology really works may have made perfect sense to Plato, but it seems awfully tenuous from the viewpoint of someone like Weber.


Border Adjusted Value Added Tax

Ernest "Fritz" Hollings of South Carolina ran for president in 1984

Former US Senator Ernest Hollings wants the United States to replace its corporate income tax with a border adjusted value added tax.  He writes that he wants to see “the President and the Congress beginning to solve the deficit, debt, jobs, economy, and health cost problems by replacing the corporate tax with a 5% VAT- NOW!”  He may be onto something, but I think he’s also missing something.  Surely, a 5% border adjusted value added tax would send more revenue to Washington than the corporate income tax now does.  However, the reason the corporate income tax does not raise more revenue is that American corporations shelter their income by taking advantage of deductions.  End the tax, and you end those shelters.  Since employer-provided health insurance is one of those shelters, a 5% VAT would probably not “solve” the problem of access to health care in the USA.

Secular Calvinism?

Adherents of the political tendency known as libertarianism often defend their positions with appeals to economic theory.  They do not often show a high regard for the concerns of environmentalism.  So when a libertarian think tank publishes a book that equates the academic discipline of economics with the environmentalist movement, one may well take notice. 

In The New Holy Wars: Economic Religion vs Environmental Religion in Contemporary America, Robert H. Nelson of the Independent Institute argues that the forms of academic economics that have influenced policymaking in the US in recent decades, like the forms of environmentalist thought that have begun to play a role in public affairs, are secularized versions of Calvinism.  How so?  To quote the Independent Institute’s summary:

The deepest religious conflicts in the American public arena today—the New Holy Wars—are crusades fought between two secular religions: economic religion and environmental religion. Each claims to be scientific, even value-neutral, yet they seldom state their underlying commitments explicitly, let alone subject them to scrutiny. Environmental religion views wilderness as sacred, seeks salvation through the minimization of humankind’s impact on nature, and proselytizes using imagery meant to stir spiritual longings. In contrast, economic religion worships technological innovation, economic growth (as measured by GDP), and efficiency (as revealed by cost-benefit analysis) and is presided over by a priesthood of Ph.D. economists who communicate in a liturgical language unintelligible to the layperson.

Nelson is himself an economics Ph.D, having received that degree from Princeton University in 1971.  If one of the tenets of the religion of economics is that economics is not a religion, that would make him a wayward priest.  The summary goes on:

Although rarely acknowledged, environmental religion owes its moral activism, ascetic discipline, reverence for nature, and fallen view of man to the Protestant theology of John Calvin. A remarkable number of American environmental leaders, including John Muir, Rachel Carson, David Brower, Edward Abbey, and Dave Foreman, were raised in the Presbyterian church (the Scottish branch of Calvinism) or one of its offshoots. Earlier forerunners of modern environmentalism who were influenced by Calvinism include the American transcendentalists Ralph Waldo Emerson and Henry David Thoreau and the French philosopher Jean-Jacques Rousseau, who offered a secular version of the fall of man from the original “state of nature [in which] man lived happily in peace.”

That’s an interesting claim, and a list of very diverse people.  Nelson seems to focus on the USA, but it would be interesting to contrast the environmentalisms that have taken hold in countries with histories of Calvinism with the environmentalisms that have taken hold where Calvinism was never ascendant.  Onward:

Economists often rely on assumptions that are better categorized as theological than as scientific. Many economists assume that human welfare is a product of the consumption of goods and services alone and that the institutional arrangements that produce those goods and services can be ignored. Some economists assume that eradicating poverty will end crime and usher in a new era of morality. Also, economists typically assume that psychological stress caused by an economic transition to a more efficient allocation of resources is negligible and not worth factoring in. “If [emotional burdens] were actually given full account, it would be impossible to say in principle whether a market system is economically efficient,” writes Robert Nelson.

Coming from a libertarian economist, the statement that “If [emotional burdens] were actually given full account, it would be impossible to say in principle whether a market system is economically efficient” is as amazing as Luther’s Ninety Five Theses were coming from a Roman Catholic priest in 1520. 

The missionaries of environmental religion have managed to get some of their dogmas implemented in poor countries, often with devastating consequences for local populations. Under the banner of saving the African environment, they have promoted conservation objectives that have displaced and impoverished Africans. This catastrophe has occurred because environmental religion has misunderstood African wildlife management practices and problems.

To the extent that this is true, I suspect it is not because of the intellectual forebears of contemporary environmentalists, but because those environmentalists have come to Africa as agents of Western bureaucracies.  As such, they have been constrained to act and think in the terms those bureaucracies made available to them, terms which often have little connection to the social and ecological realities of Africa. 

There is another, shorter, summary on the same page:

“Economics and environmentalism are types of modern religions.” So writes Independent Institute Senior Fellow Robert H. Nelson, author of The New Holy Wars: Economic Religion versus Environmental Religion in Contemporary America, an in-depth study of the origins and implications of the conflict between these two opposing belief systems.

“If it makes a reader of this book more comfortable, he or she may think of it as an examination of the ‘spiritual values’ of economics versus the ‘spiritual values’ of environmentalism,” writes Nelson in his introduction. “For me, though, it is a distinction without a difference.”

In The New Holy Wars, Nelson probes beneath the rhetorical surface of economic and environmental religion to reveal their clashing fundamental commitments and visions. By interpreting their conflict as theological, Nelson is able to show why these creeds almost invariably talk past each other and why their conflict is likely to continue to dominate public discourse until one party or the other backs down—or unless an alternative outlook rises to challenge their influence in the public arena.

In addition, by exploring little-known corners of American intellectual history, Nelson shows how environmentalism and economics have adapted Judeo-Christian precepts in ways that make them more palatable in an age of secularism. In many cases, Nelson is able to demonstrate a direct lineage from traditional religious beliefs to tenets held by mainstream economists and environmentalists.

Some readers of this blog have expressed interest in “political theology,” the idea that there are no truly political belief systems, but that all political theories are simply theological doctrines in disguise.  This notion is often associated with the German legal scholar (and onetime NaziCarl Schmitt (1888-1985.)  Say what you will about Schmitt’s detestable activities from 1933 to 1937, he made a powerful case for political theology.  Nor did he originate the notion; it can be traced back to Cicero’s Laws (especially book 1, chapter 8), and back of Cicero to the Stoics, with the idea that a certain memory of the Divine lingers in the human mind and that the various legal codes and religious practices of the world result from the attempts of various peoples to translate  that memory into a guide for action.  If there is truth in political theology, then we would expect both economics and environmental theories to be driven by unacknowledged theological commitments.

The Economist, 18 July 2009

economist 18 july 2009Three pieces in this issue address the state of economics as an academic discipline.  One laments the current state of macroeconomics, characterizing it as a discipline in which too many practitioners have been “seduced by their [theoretical] models” and have lost interest in data that might contradict those models.  Another discusses the efficient markets hypothesis, the role that hypothesis has played in shaping the theory and practice of modern finance, and tries to asses the likelihood that the efficient markets hypothesis will retain credibility in light of the world’s current financial crises.  A leading article calls on economists to bring about a “reinvention” of their discipline.  Evidently the requirements of this reinvention dictate that “Economists need to reach out from their specialised silos: macroeconomists must understand finance, and finance professors need to think harder about the context within which markets work. And everybody needs to work harder on understanding asset bubbles and what happens when they burst.”  Economists must recognize that “in the end” they are “social scientists, trying to understand the real world.”  I’ve always been rather skeptical of economics, but I suspect that most economists knew that last part already. 

There are also two pieces about lunar exploration.  One asks whether it makes sense to send more people to the Moon, quoting Buzz Aldrin’s opinion that it would be wiser simply to move on to other destinations.  Another reviews two new books on the Apollo 11 landing, in time for the 40th anniversary of that event.

The American Conservative, 20 April 2009


humane-economyAn old, and possibly apocryphal, story anchors Dermot Quinn’s appreciation of twentieth century German-Swiss economist Wilhelm Röpke.   Röpke was walking along a road with Ludwig von Mises, the great champion of free-market economics.  The two saw a neighborhood garden in a crowded urban center.  Seeing land that was in high demand for residential and commercial development given over to an elaborate tangle of separate plots and shared irrigation,Mises sniffed that it was “a most inefficient way of producing vegetables.”  Perhaps so, said Röpke.  “But it is a most efficient way of producing human happiness.”  Röpke has attracted every label in economics, from socialist to free marketer.  None of those labels really fit Röpke, because they all classify thinkers by which answer they offer to questions about what sort of economic system allocates resources most efficiently.  These questions struck Röpke as absurd.  Though as a technical economist Röpke had few peers, his interests were always in human beings and their development, not in any of the fashionable abstractions of his time such as “The Economy” or “The Market” or “The State” or “The Proletarian Revolution” or “The Aryan Race.”     

Barack Obama was elected president with the votes of millions of Americans who had had enough of war.  Now that Mr O has announced plans to increase troop levels in Afghanistan and officials of his administration have suggested that they may expand the Afghan war into Pakistan, his antiwar supporters are hardly raising a peep.  This leads Justin Raimondo to ask “Was the Left antiwar or just anti-Bush?”  Raimondo started antiwar.com when President Bill Clinton ordered US forces to bomb Serbia in 1999.  At the same time, your humble correspondent was also active in the antiwar movement.  Like Raimondo, I was struck by the passivity with which the supposedly dovish members of the Democratic Party went along with that adventure.  I’d always been curious about the antiwar Right, ever since I was a little kid hearing my parents reminisce about how their staunchly Republican parents had opposed FDR’s military interventionism with the same fervor that they opposed his economic interventionism.  After 1999, I was convinced that the “Old Right” was indispensible to any effort to break America of its addiction to warfare. 

The “Deep Background” column is less pessimistic about Afghanistan, pointing out that while “the nation-building agenda” that Mr O has publicly espoused for Afghanistan “is unrealistic and likely unattainable, a security framework to facilitate the kind of limited political consensus that would permit American withdrawal might just be achievable.”  So, the grounds for hope is that the stated purposes of Mr O’s actions in Afghanistan are so patently absurd that they likely mask an unstated plan to withdraw American forces from the country. 

Peter Hitchens, whose brother is also a magazine journalist, worries that all is not well in the new South Africa.  President-designate Jacob Zuma’s fondness for the song “Bring Me My Machine Gun,” his closeness to the South African Communist Party, his refusal to be interviewed by journalists, his open practice of polygamy, his public boasts that he used to make a habit of beating homosexuals senseless, his apparent belief that HIV-AIDS is something that can be cured by a nice hot shower, and his former role as the defendant in a rape trial all combine to suggest to Hitchens that Zuma might be something less than the ideal leader for South Africa at this particular moment in its history.

A full world

Nicholas Georgescu-Roegen

Nicholas Georgescu-Roegen

The 1-15 February issue of Counterpunch carries the third of three short articles in which Paul Craig Roberts surveys the academic discipline of economics.  On the 15th, I noted the first two parts, in which he defended supply-side theory and attacked the theory of comparative advantage.  This third part concludes with Roberts declaration that “If economics is to be of any use to humanity, it must cease being absurd.” 

Roberts points out that the world mainstream economists describe is one empty of things humans have made.  In this “empty world,” the only limits on production are the limits of human productive activity.  “Nature has no role in the game.”  In the real world, by contrast, nature is full of things humans have made.  The limited availability of natural resources, of “natural capital,” imposes sharp, sometimes terrifying limits on production.  Roberts calls for economics to be reinvented to give a realistic description of this “full world.”     

Roberts takes up the banner of mathematical economist Nicholas Georgescu-Roegen, who proposed that the discipline of economics essentially start over.  Georgescu-Roegen attacked the “Solow-Stiglitz production function,” which, according to Roberts, “assumes that man-made capital ias a substitute for nature’s capital.  Therefore, as long as man-made capital can be reproduced, there are no limits to growth.”  Roberts asserts that Georgescu-Roegen “destroyed the Solow-Stiglitz production function,” but mainstream economists cling to it “because it is a mathematical way of saying that ecological limits on economic growth do not exist.”  Georgescu-Roegen proposed replacing the Solow-Stiglitz function and the body of economic theory that depends on it with a new understanding of production.  “In contrast to the Solow-Stiglitz absurdity, Georgescu-Roegen made it clear that production is the transformation of resources into useful products and waste products.  Labor and man-made capital are agents of transformation, while natural resources are what is transformed into useful products and waste products.  Man-made capital and natural capital are complements, not substitutes.”  Nicholas Georgescu-Roegen died in 1994; the most notable living exponent of his ideas is economist Herman Daly.  Roberts particularly recommends Daly’s 2007 book Ecological Economics and Sustainable Development.

The American Conservative, 9 February 2009

dorothealangeConsidering the state of America’s economic system today, it’s hardly surprising that this issue focuses chiefly on economics.

Adam Fergusson provides a synopsis of his long out of print book When Money Dies, an elegantly written study of the cultural and psychological effects of hyperinflation on the middle classes in Germany during the 1920s.  An introductory note mentions that Amazon lists a copy of the book for $2,500.  Gripping as the synopsis is, it isn’t hard to see why someone would be reluctant to part with a copy of the book for less.  On the other hand, the high price may represent a fear that Weimar-style hyperinflation will soon strike here, a fear that Fergusson’s prose, vivid as that of any nightmare-inducing tale of terror, will certainly feed.

George Selgin, professor of economics at the University of West Virginia, argues that while deflation resulting from a collapse in demand is a very bad thing, there is also a good kind of deflation.  This good deflation results from an increase in supply.  Indeed, Selgin points out, prices in gold-standard countries fell and average of 2% annually from 1873-1896, years during which output in those same countries increased at almost 3%.  This good deflation is perfectly natural- “technology was improving, so goods cost less to produce.  Why shouldn’t prices reflect that reality?”  In fact, Selgin argues, supply-driven deflation “never exceeds an economy’s rate of productivity growth, and that rate itself sets a lower bound to equilbrium real rates of interest.”  So, supply-driven deflation is not a destabilizing phenomenon, but a stabilizing one. 

Another article notes the rise in popular opposition to central banking since Representative Ron Paul made the abolition of the Federal Reserve a central plank of his 2008 presidential bid.  A number of high profile financial commentators, such as potential US Senate candidate Peter Schiff, have taken up the “End the Fed” banner.

Counterpunch, 16-31 January 2009

free-tradeFrom Paul Craig Roberts, part two of a three-part survey of economics.  In Part One, published issue-before-last, Roberts had defended supply-side economics as the insight that reducing marginal tax rates increases the amount of goods available in the economy at every price range.  In this original sense, Roberts asserted, supply-side had “nothing to do with trickle-down economics or the claim that tax cuts pay for themselves.”  Roberts claimed that when inflation declined after the Reagan tax cuts of the 80s, the old Keynesian theory that loosening fiscal policy would raise prices was definitively refuted and supply-side just as definitively established.  This article was essentially a synopsis of Roberts’ 1984 book The Supply-Side Revolution

In this issue, Roberts argues that the doctrine of comparative advantage, for 200 years the cornerstone of the intellectual defense of free trade, does not apply to today’s world.  Roberts says that comparative advantage, as originally laid out by David Ricardo and elaborated ever since, rests on two basic presuppositions.  First, that the differing geographical, demographic, and climatic characteristics of countries would mean that in each country there would be different opportunity costs associated with choosing to make one product rather than another.  Second, that “the natural disinclination which every man has to quit the country of his birth and connections” meant that capital and, to a lesser extent, labor would remain fixed within national boundaries. 

Today, Roberts declares, both of these presuppositions are exploded.  In our world, “most combinations of inputs that produce outputs are knowledge-based.  The relative price ratios are the same in every country.  Therefore, as opportunity costs do not differ across national boundaries, there is no basis for comparative advantage.”  The second presupposition is even more thoroughly discredited.  Not only do owners of capital routinely migrate from country to country, but in the era of multinational corporations and electronic communications owners of capital need not follow their investments abroad to supervise their operations. 

Roberts cites many scholarly publications that challenge the doctrine of comparative advantage.  Among them: Global Trade and Conflicting National Interests, by Ralph E. Gomory and William J. Baumol; The Predator State, by James K. Galbraith; Robert E. Prasch’s January 1996 article in The Review of Political Economy,  “Reassessing the Theory of Comparative Advantage“; and, from 1888, R. W. Thompson’s History of Protective Tariff Laws



New Year, Old Right

The latest issues of my two standard “paleocon” reads, The American Conservative and Chronicles, include fewer really noteworthy articles than average.  The election of Mr O as president and a solidly Democratic Congress freed them to turn from the constant struggle to show how they differ from the Bush/ Cheney Right and toward standard-issue conservative territory, denouncing government spending, unconventional family structures, etc. 

The contest, 1972

The contest, 1972

In The American Conservative, Daniel McCarthy argues that George McGovern’s 1972 presidential campaign triggered a transformation of the Republican Party by driving Cold War liberals into its ranks.  Mary Wakefield reviews Richard Dowden’s Africa: Altered States, Ordinary Miracles, Wakefield reports that Dowden, the current director of the Royal African Society, is deeply pessimistic about western programs to aid Africa, but deeply optimistic about Africans’ ability to build a future for themselves if left alone. 

Sheldon Richman offers a succinct explanation of the Austrian school of economics’ theory of malinvestment and uses this theory to explain the current financial crisis.  David Gordon reviews a book by the most celebrated living opponent of the theory of malinvestment, Paul Krugman. 

Aung San Suu Kyi

Aung San Suu Kyi

Jim Pittaway,  licensed psychotherapist and friend of the late Michael Aris, applies his professional expertise and his personal animosity to Aris’ widow, Aung San Suu Kyi, to an analysis of western policy towards Burma.  The professional expertise part is quite illuminating.  Suggesting that we should view the Burmese regime’s relationship to its people as one of captor to hostage, he asks us to apply “the biggest rule of hostage crises: unless you can take him out right now, don’t threaten the perp.”  Since the 1990 election, the West’s dealings with Burma have consisted primarily of a series of idle threats, and the hostages have paid the price.