Neoliberal Utility and the Paradox of Taxation
I’ve written about definitions and uses of “market” in several posts. The term “utility” is equally important in the development of mainstream economics. Here’s what Samuelson and Nordhaus say in Economics, 2005 ed.:
In a word, utility denotes satisfaction. More precisely, it refers to how consumers rank different goods and services. If basket A has higher utility than basket B for Smith, this ranking indicates that Smith prefers A over B. Often, it is convenient to think of utility as the subjective pleasure or usefulness that a person derives from consuming a good or service. But you should definitely resist the idea that utility is a psychological function or feeling that can be observed. Rather, utility is a scientific construct that economists use to understand how rational consumers divide their limited resources among the commodities that provide them with satisfaction. Emphasis in original.
The idea of a “scientific construct” seems at first glance to be far from the early neoclassical economists; in fact it seems downright bizarre. Recall from this post that the neoclassical economist William Stanley Jevons defined utility this way, quoting Bentham:
”By utility is meant that property in any object, whereby it tends to produce benefit, advantage, pleasure, good, or happiness (all this, in the present case, comes to the same thing), or (what comes again to the same thing) to prevent the happening of mischief, pain, evil, or unhappiness to the party whose interest is considered.”
This perfectly expresses the meaning of the word in Economics, provided that the will or inclination of the person immediately concerned is taken as the sole criterion, for the time, of what is or is not useful.
Jevons recognizes something Samuelson and Nordhaus seem to think, but do not make explicit: utility is solely related to each individual in the role of consumer of goods and services at a specific point in time. Jevons says that we get the total utility of all consumers by adding up the utility of each consumer, and argues that for perfectly competitive markets, this is the highest possible total of utility given a specific group of resources.
But it’s easy to show that even with the highly unlikely circumstances of rational consumers and competitive markets, there are plenty of outcomes that are far less than optimal. One obvious example is the paradox of thrift, first identified by John Maynard Keynes, and popularized by Paul Krugman; here’s an example from his blog, complete with charts and graphs. Here’s another example:
… [S]ometimes the economy is not like a household, [and] our individual choices sometimes lead to outcomes that are in nobody’s interest.
In particular, when you have economy-wide deleveraging — when everyone is trying to spend less than his or her income, so as to pay down debt — you have a fundamental adding-up problem. My spending is your income, and your spending is my income, so if both of us try to spend less at the same time, what we end up achieving is mutual impoverishment.
Those who reject the paradox of thrift, including the Austrians, suggested that something else would happen in the current economic circumstances. They have been proven utterly wrong. For the individual consumer, it is easy to see why the choice of paying down debt is better than the choice to consume more, but the result is an interminable recession.
Here’s another example. No body wants to pay taxes. For each of us, it would be much better not to. But there’s a disaster waiting to happen if everyone ducks taxes, as the examples of Greece and Italy show. The problem is also present in the US, though so far only the rich and their corporations and trusts have managed to escape taxation in a big way; most of us just got miserly tax cuts, and cheating by the 99% is still low. But the results are just as horrible. As Elizabeth Warren and Elijah Cummings pointed out in this op-ed in USA Today, the US middle class is collapsing. They explain the problem this way:
Beginning in the late 1970s, corporate executives and stockholders began taking greater shares of the gains. Productivity kept going up, but workers were left behind as wages stagnated.
Families might have survived as their incomes flattened, except for one hard fact: the costs of basic needs like housing, education and child care exploded. Millions took on mountains of debt and young people began struggling to cling to the same economic rung as their parents.
The response of both political parties at the state and federal level to this slowly growing disaster was the standard neoliberal prescription: tax cuts and reduced regulation. There were some small tax cuts for the working classes, and massive tax cuts for the very rich and their corporations. At the state level, the damage was especially great as governments also doled out huge tax cuts to keep businesses or lure them from other states. See, e.g., Kansas.
Those tax cuts starved state and local governments, and led to cuts in federal spending on all discretionary programs except military and spying. The result was that the cost of education rose dramatically, and that meant a staggering increase in student debt. The cost of housing rose for reasons related to the stunning increase in money in the hands of the wealthy with no investment prospects in new productive enterprises. Child care rose as two worker families and single mothers worked longer and harder to pay for necessities.
Meanwhile, cuts to education were inadequate, so governments stopped maintaining infrastructure. Driving around Chicago is a nightmare of “Rahmholes” and invisible lane dividers. Bridges collapse, inadequate transit systems collapse under winter weather, schools rot, and generally life is more unpleasant.
This list could be extended indefinitely, but I’ll stop. It should be clear that for most of us, the extra costs imposed by the inadequate provision of public goods far outweigh the minimal savings from the tiny tax cuts available to the bottom 90% of income earners.
Here are three lessons I draw from the paradox of taxation:
1. Tax policy focused on the middle class won’t help. That’s the Third Way Democrat policy, and it’s the policy of the remaining sane Republicans. Warren and Cummings suggest getting rid of tax loopholes for the rich and their corporations. That’s a start. Heavy top end income taxes, heavy capital income taxes, heavy estate taxes, greater taxation of corporations, and a heavy wealth tax are a better goal. The key to higher incomes is reducing the ability of the rich to buy up politicians, reporters and compliant academics.
2. Neoclassical economics turns on a simple form of total utility in an economy. They teach that we just add up the utility of all consumers, and claim that we are maximizing utility. That is inadequate for accurate analysis of a complex economy. In fact, it is guaranteed to produce an inadequate supply of public goods, and thus a rotten distribution of scarce resources. It doesn’t deal with the future in any intelligent way. It doesn’t handle scale problems like poisoning of the atmosphere, or filling up the oceans with plastic.
3. The rich take advantage of the inadequate supply of public goods by privatization.The problem the rich have is what to do with all the money they’ve gouged out of the economic system. One solution is to buy roads and rent them to you, to buy street parking and rent it to you, to establish training schools to sell you an education and keep you in debt and hungry for income so you’ll take any rotten job. They want to profit from goods and services we can buy cheaper through government.
The plain fact is that neoliberal economic theory is solely about keeping the rich happy. It has nothing to offer average people who only have labor to sell for the money they need to live.
You forgot to mention that the other end of the Reagan tax cuts for upper incomes, there was a huge tax increase on the working class through FICA, and this was absolutely regressive because it was from the first dollar of income, no deductions or personal exemptions. And this money served to help hide the deficit caused by the upper income tax cuts. It amounted to a huge transfer of wealth from working people to the rich, the first of many such transfers.
One of the things that was pretty clear is that economists in the latter part of the 19th century and onward were carrying on a protracted argument to try to sideline the analytical framework that Marx described in Capital. That caused a lot of very interesting wiggling instead of taking on the challenge that Marx presented. One of those wiggles was trying to frame it within the context of science; there were all sorts of complete systems offered up borrowing a tradition of terminology. They soon converged on “utility” without a consistent closure on exactly what that meant–which opened up the business world of the 20th century and after to concepts like “value proposition”.
Samuelson and Nordhaus are struggling hard to make the definition operational in a modeling sense. What is the mechanism by which utility is expressed? If it’s satisfaction, it must be ranking. And they warn that it really is not about real people and real utility and anything other than the model.
Jevons makes utility the property of the object. Is this the property of the object that a particular individual in a particular time and place grasps? Is it a relative property of the object, related only to certain individuals, times, and places? What does “whose interest is concerned” mean relative to utility? Is it utility objective, subjective, relational, or what? Can it be more of these at once? Then Jevons definitely subjectifies it by talking about the will or inclination of the person immediately concerned. What exactly are these economists adding up to compare one time period with another and one economy with another?
Krugman’s example points out the conflation of individual action (micro-level) and the the system consequences of the pattern through which the individual actions are aggregated (macro-level). Aggregation is a metaphor of heaping up without any interference of patterns in the way things are put together or taken apart. The fact that the system is closed on itself means that in the end you amplify what the previous part of the pattern does or modulate with the previous part of the pattern does, and that gets fed back to you in ways that might not cause you to act in a way that moves the system towards growth, equilibrium, or stability. The radical discontinuity between the micro and the macro hides problems that can bite.
The fallacy of the tax cut/spending cut crowd is the formula “money is wealth” or “financial independence is wealth”. That doesn’t matter at all if no one is continuing to make the goods and provide the services that those with money desire. And even billionaires cannot completely do without infrastructure.
I’m still having a problem figuring out what exactly “total utility” is supposed to mean? Is it supposed to be the decommodified actual product of production of a specific time and place that holds the place for all the cars, automobiles, building demolitions, court sessions, and days in prison provided–the balancing term for the gross product (expressed in money) that in turn balances the national income in accounts–the amount of money that passed Go?
Insight 1: Yes, indeed.
Insight 2: “In fact, it is guaranteed to produce an inadequate supply of public goods, and thus a rotten distribution of scarce resources. It doesn’t deal with the future in any intelligent way. It doesn’t handle scale problems like poisoning of the atmosphere, or filling up the oceans with plastic. ” Definitely this. Elaborating how those consequences proceed from the faulty neoliberal logic is one point of work.
Insight 3: Grabbing rents on top of the public taxes just through intermediation. This is a result of government giving the private sector the benefits of the supply side without having to fully pay the costs of supplying those government services. And the use of leverage to raid budgets and funds.
The “middle class” were the ones with enough wealth (in personal finance terms) to think that they were doing something other than just selling labor for the money they needed to live. Those are the folks who have been scammed over the past generation of policies. And too many of them do not know it, which is what puts pressure on lower taxes.
I like where you are taking this series of diaries. Keep it up.
I’ll be looking at these issues in my next post, which I think is as weedy as anything to appear in this garden. Hint: the key is “scientific construct”.
The question of what is meant by the aggregate of utility in an economy is just fascinating. Samuelson and Nordhaus and Jevons seem to agree that you get this aggregate by adding up the individual utilities of each consumer. Jevons seems clear that this is to be done at each point in time, but S & N are not clear at all. Jevons goes to some length to figure out the units of utility, which you may remember from a physics lecture. Equations don’t balance unless the units are the same on both sides of the equation. You can read it here: http://www.econlib.org/library/YPDBooks/Jevons/jvnPE3.html#Chapter%203, starting at 43, particularly at 51. It might take a diviner to get this point.
” …the key is ‘scientific construct’…” To me this translates into “hypothetical construct”. As I alluded once before, focusing on nouns (objects) is misleading, as in thinking of utility as a property of an object, instead of a response to that object. You cite Jevons as describing utility as satisfaction or pleasure, which may be OK, but then to go on to say that one persons pleasure is of such a character as to be AGGREGATED with others’ pleasure to produce a sum total of pleasure in an economy strikes me as Alice-in-Wonderland nonsense. Pleasure or satisfaction, as we ordinarily understand them, simply are not the kind are notions that can be arithmetically summed (no matter how badly one’s career needs such constructs).
Oops. Should read: kind of notions
Here’s a chart from the AAAS showing federal R&D spending: http://www.aaas.org/sites/default/files/DefNon_0.jpg
Ugly.
The key to higher incomes is reducing the ability of the rich to buy up politicians, reporters and compliant academics
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and overturn Citizens United
The rich have always been able to do buy whoever they wanted to. You won’t change that unless you change the laws. The only way to change the laws is to get legislators who vote to help poorer people. The best way to do that is to get tons and tons of poorer people to vote. No?
It depends on where you live
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My two senators and house members want legislation to overturn Citizens.
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“The plain fact is that neoliberal economic theory is solely about keeping the rich happy. It has nothing to offer average people who only have labor to sell for the money they need to live.”
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Excellent post, and I agree with your last statement. I feel, though, that one thing that’s been left unsaid is how the wealthy use propaganda to sell their crappy ideas to the proles, who increasingly agree and go along with it.
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pragmaticrealist@1 mentions the original Reagan tax cuts for the mega wealthy with the stealth increase in FICA, a regressive tax that affected lower wage earners much more. When the Reagan tax cuts were passed my rightwing family was positively joyous and giddy with happiness. Why? Because of propaganda. My dad was retired, so saw no real benefit from this (and wouldn’t have anyway because he never made enough to make him eligible for this tax cut). When I showed them my pay stubs highlighting how the FICA increases resulted in me getting a tax increase and less take home pay – very factual – they pretty much told me to STFU. They simply didn’t want to hear about it in their unbridled love for their great hero, Reagan. Go figure.
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Propaganda works. It’s not just those who identify as conservative. I’ve witnessed the gradual capitulation of those I know who consider themselves liberal/progressive/lefty to accepting NeoLiberal policies as “good” and somehow in the accepted order of how things should be run.
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Mention stuff like failing infrastructure and even so called “liberals” will start railing about how welfare entitlements are driving us all into the poor house. And those dastardly illegals!!! Why it’s positively shameful how they are ruining “my” country.
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Attempt to discuss the tax and regulatory system while providing real facts pretty much gets nowhere. I keep trying. At best I might get some passing agreement that “maybe rich people should pay more” in taxes… but heaven forfend, not too much more!!!
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Just to say, that from where I sit, it’s a process of (re)educating citizens as to how things actually work, how the system has been eroded gradually – and then quickly – since FDR passed the New Deal, and how the declines we witness are simply not due to poor people sucking off the govt tit.
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How we accomplish that in this day and age of incessant ubiquitous lying propaganda is the great conundrum.
The minute you start arguing against a theoretical ideal you are missing the main problem. Perfect competition is just that, a theory. It will never exist, nor will perfect allocation, nor will perfect information.
If perfect information existed, we would all use Bitcoin, work freelance, and telecommute.
Quick jump there from emotional attachment (not to a singular “thing” but suddenly to a basket of them, presumably each item having a varying degrees of attractiveness or its lack), to a “scientific construct” on which an ueber-rational, quantitative economist Ph.D., could base a theory. The sample paragraph, if illustrative of this writing, is a marvel of obfuscation, hiding the political basis for these claims.
I continue to marvel at how resistant the construct of a rational actor is to the billions of dollars of persuasion, propaganda and limitation-as-choice thrown her way.
One dollar, one vote, the unstated assumption behind much of neoliberalism. It is a logical consequence of demanding that constipated notions of a “market” become the basis for all social interaction. The action doesn’t all quite fit behind neoliberalism’s proscenium arch. The audience should state the obvious, then leave: neoliberalism’s utility as an accurate description of society, as a way to describe, order or predict social, political and economic choices, is poor, unless you already have more dollars than anyone else in the theater.
Thanks Ed. I think we’re in fundamental agreement here:
“But there’s a disaster waiting to happen if everyone ducks taxes, as the examples of Greece and Italy show.”
And if we’re not, it must be something I’m doing wrong.
@wbmosler @stephaniekelton all the Modern Monetary Theorists say the same thing, fiat currency issuers like the US, Japan, China, can never default. It’s not the federal budget that has to “balance,” it’s the three economic sectors, private (domestic), foreign, and public. Mosler uses Japan as an example of a country that gets away with huge public deficits, because their trade surplus “balances,” it.
Economist Pavlina Tcherneva @ptcherneva summarizes it brilliantly in these 2.5 pages.
“If the government puts into the economy more than it takes out, the private sector as a whole takes in more than it pays out to the government….
If you consider for a moment the financial position of the U.S. government vis-a-vis the financial position of the non-government sector (domestic and foreign), it is always the case that the government deficit “goes somewhere”–it is accumulated as a surplus by the private sector. There is no law that can repeal this logic. If the government puts into the economy more than it takes out, the private sector as a whole takes in more than it pays out to the government.
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If we want the government to correct its budget stand, then we must necessarily be asking ourselves to correct ours. If we demand that the government runs a surplus, then we are demanding that we, the private sector run a deficit.
…So, take your pick: would you like the private sector to be in surplus or the government? You cannot have both. Presumably, we’d prefer the private sector to save and accumulate financial assets, which means that the government must run a deficit and accumulate financial liabilities. …
If our trade balance was zero, then in order for the private sector to save, the public sector must dissave to an equal amount–to the penny! But when both private domestic and private foreign sectors want to run surpluses, the federal government will by definition run deficits equivalent to those surpluses in magnitude (again to the penny).
…What must happen if the government budget moves into surplus? Answer: in the presence of a large trade deficit (i.e., foreign sector surplus), there is only one solution–the private domestic sector (that is non-financial, financial firms, and household) must move into a large deficit position to make up for the surpluses accumulated by government and foreigners. That is a ‘solution’ of pushing the private sector into more debt. Hardly a prudent solution. …
If you want both the U.S. private sector and the government to be in surplus, then the foreign sector must be in deficit vis-a-vis the U.S….
Once you recognize the import of this irrefutable relationship, you can justifiably ask three questions.
First, “Will the U.S. government run out of money while it maintains its deficit position?” The answer to the first question is ‘no,’–the U.S. government pays all of its obligations in dollars (from veteran benefits to social security to interest payments on the debt) and for a nation that controls the issue of its own currency (in our case the dollar) there is no economic rationale that will ever justify default–promising to make payments in dollars, but refusing to do so.. …
The second question (or series of questions) is “If deficits always go somewhere, where do they go? Whose incomes, cash flows, and balance sheets do they improve? What do we get in exchange for this deficit spending, how many jobs are created and do the deficits foster shared economic prosperity?” If you do not like the answer to these questions, then the proper electoral response is to demand from the government not to cut programs to ‘fix’ the deficit, but to redirect the deficit to fix the real problems of the economy.
Once you take care of the economy, the debt and deficits will take care of themselves.
And the third question should be “Should the government spend willy-nilly on whatever it pleases since it doesn’t face involuntary default?” and the answer to that question is most definitely NO. Not all deficits are created equal: some create more inequality and more rentier income, as it seems to be the case in the current crisis. Others can cause inflation. Yet others can directly create jobs, public investments, and productive capacity without generating inflationary pressures. In sovereign currency nations, a truly responsible government spending is one that is measured both by the debt-(or deficit)-to GDP ratios, but by the real impact of that spending on the economy–job creation, poverty alleviation, stable prices, income distribution, social goods provisioning are all good measures for assessing how responsible government policy has been.”
http://pavlina-tcherneva.net/
Economist Steve Keen makes the same point here, http://www.forbes.com/sites/stevekeen/2015/01/14/beware-of-politicians-bearing-household-analogies-3/
IMHO, Mosler/MMT says, if you’ve got unemployment/lost output, your federal deficit is too small. If you’ve got full employment and demand-pull inflation, it probably means your deficit is too big. He says managing aggregate demand is one of the purposes of federal taxes and they will “shrink the deficit.” http://www.huffingtonpost.com/warren-mosler/taxes-for-revenue-are-obs_b_542134.html
IMHO, we have to aggressively tax the elites, because they control the government by virtue of how high a percentage of wealth they control through QE (Quantitative Easing) ,….and all the other corporate welfare you mentioned.
IMHO, David Stockman’s The Great Financial Shuffle,” is terrific, but I think his assessment of Keynes is wrong.
“…But here’s the thing. This entire massive capital market deformation appears to be invisible to the paint-by-the numbers Keynesian apparatchiks who run the Fed and their fellow travelers and cheerleaders in Washington and Wall Street. And the reason for this egregious blindness is not all that mysterious.
These folks do not understand capitalism nor the true ingredients of wealth creation and sustainable economic prosperity. They are simply glorified econometric modelers who pay no attention to balance sheets, economic history or enterprise level economic efficiency and investment. Accordingly, all borrowed dollars are the same; they are assumed to fuel the fires of “aggregate demand”, whether they are used to fund pyramids or machine tools…”
http://wolfstreet.com/2015/03/05/what-actavis-said-about-wall-street-engineering-with-its-near-junk-mega-bond-deal/
The elites get the lion’s share of the government welfare, which makes it easy to manipulate the media into not mentioning it. Since nothing “trickles down,” the 99% are starving.
W/R/T the paradox of thrift, “Rethinking the idea of a basic income for all,”
“In October, Swiss voters submitted sufficient signatures to put an initiative on the ballot that would pay every citizen of Switzerland $2,800 per month, no strings attached….”
http://economix.blogs.nytimes.com/2013/12/10/rethinking-the-idea-of-a-basic-income-for-all/?_r=0
is about conservative and libertarian support for what Milton Friedman called a negative income tax.
Since Buffett, Gates, … are all getting the same check as the rest of us, it’s not “welfare.” IMHO, it would be tougher for a guy like Cass Sunstein to use Executive authority at a place like “Office of Information and Regulatory Affairs,” to block or dilute it. I don’t think it’s going to happen quickly, but the negative income tax could create momentum for a federal job guarantee. http://ineteconomics.org/blog/institute/plan-all-detroits-out-there
John, we certainly agree about MMT. I’ve read Wray’s book, and I was thoroughly persuaded. But.
First, no country operate under MMT principles. They all think they have to raise taxes to pay for stuff.
Second, Greece is not sovereign in its own currency, so it can’t take advantage of the ideas of MMT even if it wanted to. In that way, it is like US states. They can only spend what they get in taxes plus borrowings.
Third, taxes serve a number of purposes even in MMT. For example, the MMT says that the limitation is inflation. One of the tools a government can use to control inflation is taxation.
Fourth, taxes serve a number of purposes beyond raising revenue. This 1946 paper by Beardsley Ruml, a former Fed Chair, outlines several, including redistribution of wealth. http://home.hiwaay.net/~becraft/RUMLTAXES.html It’s a sort of precursor to MMT, and well worth a read.
Finally, the problem in both Greece and Italy is that there is no social support for taxation, in fact, there is serious support for evading taxes. The governments of both countries are unable to use taxes for any purpose, especially raising revenue, since that is their mindset, but for the other purposes Ruml outlines, or those MMT supports. That is the real problem we are beginning to see in the US. When support for taxation dries up, we lose a big piece of our ability to govern ourselves.
That last sentence is very important. Without it the government is. Well, not.
Ed, thanks much for the response.
On utility as mystification rather than “scientific construct” see Sahlins (full text here).
I’ve skimmed this excellent article, and will read it closely later. Amazingly, the author is at the University of Chicago; I wonder if they read him at the Booth School or the Law School.
As I research and write about the basic definitions and principles of neoclassical and neoliberal economics, people link me to brilliant essays that leave me thinking that economics is dominated by singularly narrow-minded and culturally ignorant people; with a few exceptions like Piketty.
Sahlins is a very well-known American cultural anthropologist, who, like many other cultural and social anthropologists, has written extensively about economics. You can’t escape exchange in anthropology. However, there is very little engagement between anthropology and the neoclassical economics. Anthropologists tend to see the neoclassical economics as imperialistic and less than enlightening. If you are interested, I would suggest reading Chris Gregory, an economist who became an anthropologist. Here’s a talk he gave in 2013: On Money, Debt and Morality. His classic Gifts and Commodities is to be reissued later this month.
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Sahlins isn’t the only critic who was at Chicago. Other critics of neoclassical economics that were there include Deirdre McCloskey and Bernard Harcourt.
FYI: You should check out the the politics surrounding the UK election in early May.
The Scots have been deeply unhappy since the election on Thatcher in 1979 and the continuation of Thatcherism under the two main UK political parties: the Labour and Conservative parties. This has led to the rise of the Scottish National Party and the independence vote last September. Independence didn’t pass but neither did the vote make the issues of concern to the Scottish electorate go away. Polls suggest that the SNP may do to Labour in Scotland what the electorate previously did to the Conservatives. This will mean that neither of the main parties will have a majority to form a UK government alone or with the existing third party, the Liberal Democrats. It’s not very clear what will happen. There is a lot of fear and loathing in the UK press vilifying the Scots. It looks like the UK is heading into a constitutional crisis that may end up in the the Union of 1707 coming apart over part of the electorate rejecting neoliberal economic policies (although the debate isn’t framed that way usually).
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See Irvine Welsh: this glorious failure could yet be Scotland’s finest hour.