The Theory of Business Enterprise Part 1: Introduction

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Thorstein Veblen

Thorstein Veblen

Thorstein Veblen wrote The Theory of Business Enterprise in 1904. He is best know for The Theory of the Leisure Class, with its famous phrase, conspicuous consumption. Here’s his Wikipedia entry. There are two things that recommend him to me. First, he studied with Charles Sanders Peirce, one of the central figures of American Pragmatism, and eventually worked with John Dewey, another central figure in the only genuinely American philosophy. Second, he studied with John Bates Clark, one of the earliest neoclassical economists, and rejected his views. In general, he saw the economy as embedded in social institutions, not as an entity on its own. Mark Thoma presents the views of Veblen and Clark on the state of the worker in a capitalist system; the two short pieces will help set the context for this series.

Much of what I have written here is directed at showing that neoliberal economic theory is almost useless as a guide to policy that works for the 99%. The series on Thomas Kuhn’s The Structure of Scientific Revolutions showed that in the hard sciences, successful ideas are been verified and formalized and organized into textbooks to speed up learning. In economics, the academics took the same route. That’s how we got economics textbooks like Samuelson and Nordhaus and Mankiw, both of which are I have addressed in a number of posts. The difference is that practicing economists don’t believe that Econ 101 textbooks are the best understanding of the way the economy works. Those ideas can be quite dangerous. For example, academic economists used models that don’t predict crashes to advise policymakers that deregulating the financial sector would be just fine. That led to the Great Crash. There is no penalty for being wrong. The same old failures just maunder on until death knocks them out of the expert hierarchy. As far as I can tell, they have never managed to excise a single one piece of the arrant nonsense they spout to an ignorant reporter or a politician looking for validation of a crackpot idea. They can’t even kill off the gold standard which is out there today thanks to the supposedly-educated Ted Cruz.

Why is that so? Marion Fourcade and her colleagues have some answers. What I want to do is to examine older books by the dissenters, people who didn’t buy into the silly ideas like this one from The Theory of Political Economy, 1871, by William Stanley Jevons:

I wish to say a few words, in this place, upon the relation of Economics to Moral Science. The theory which follows is entirely based on a calculus of pleasure and pain; and the object of Economics is to maximise happiness by purchasing pleasure, as it were, at the lowest cost of pain.

By “moral science” Jevons means the utilitarian philosophy of Jeremy Bentham. It was Jevons’ intent to translate those ideas into calculus. The discussion was not meant to be humorous. Keynes said that if people knew the principles underlying economics, they’d consider them preposterous, but sadly he was wrong. Nowadays, those ideas are taught to everyone as gospel. Keynes in his time, and I in mine, doubt that academic economists ever read Jevons or Pareto or any of their other intellectual ancestors, let alone the dissenters, including Veblen.

It’s my hope that by reading older books at the boundary of economics and sociology and other disciplines, we can unearth a different tradition and different solutions. And here’s a story.

I went to a sort of book club moderated by a very old man who had long since retired from the University of Chicago where he taught English literature. One of the books he selected was De Rerum Natura, by the Roman writer Lucretius, a fascinating work from about 50 BCE. It’s usually described as an early version of atomic theory. He started by telling us a story. He said that when he was in college he read a lot by the ancient Greeks, plays, philosophy, and even a bit of Euclid. It made him wonder why such smart people would take Greek Mythology seriously, when it was obviously just a bunch of fanciful stories. There were the Sophists who rejected the philosophy of Plato and Aristotle [cf. Zen and the Art of Motorcycle Maintenance by Robert Pirsig], but as we know from Plato, Socrates was condemned to die in part because he did not believe in the gods of Athens. It wasn’t until this session of his book club and his reading of Lucretius that he realized that there were Greeks who flatly rejected the mythology and attempted to conjure up from their limited knowledge a completely material description of the world.

In just the same way, there have always been dissenting economists who offered completely different views of the way a capitalist economy works. The dominant version has concealed the dissenters, not least from themselves, but we are more likely to get a good ideas from the dissenters than from people trying to tweak the dominant structure.

Wonks and Activists

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Marcy took on the excellent Jonathan Cohn’s piece on wonks vs. activists here, but I want to pile on. Wonks only get heard if politicians want to hear them, and even then, they aren’t always right.

Paul Krugman has written many laudatory pieces about Obamacare in both his blog and his column, but it is not working to the level the policy wonks promised. Enrollment levels are turning up lower than anticipated. Insurance company profits are up, leading to mergers and a loss of competition. And, of course, there are too many who have policies under Obamacare who can’t use them because of the costs.

In other posts I wrote about how Paul Krugman, a genuine expert, was completely wrong about the impact of trade treaties, especially NAFTA. Larry Summers, a genuine expert with a lot of real-world experience, has been disastrously wrong on a number of occasions, not least of which was his loud endorsement of financial deregulation, even after the Long Term Capital Management debacle. Summers was one of the people who quashed the efforts of Brooksley Born to regulate derivatives.

In each of these cases, there were plenty of people warning of disaster ahead. In each case, the liberal experts rejected the warnings. Krugman insulted the trade union leaders and the economists who supported them. Many people think the attacks on Brooksley Born were personal, or even sexist, but she had a proven track record of being right, while her opponents, who included Alan Greenspan and Robert Rubin along with Summers, don’t.

It’s important to note that unlike their conservative counterparts, who are always wrong, liberal experts are frequently right. For example, Krugman has been the loudest voice calling for use of fiscal policy to confront the current economic situation. From the outset of the crisis in 2008, he called for a bigger stimulus, and has done so steadily ever with increasing vigor and with some signs of anger. He is one of the few prominent economists to look at the failures of the discipline in the wake of the Great Crash.

Even so, the fact remains that wonks don’t have the greatest batting average. And there are several reasons for this.

1. Economists and most wonks use models for the bulk of their work, but the models are inherently limited. All models are based on data from the past, and operate on the principle that the past is reasonably predictive. The point of activism is to change the future so that it isn’t like the past. Activists can see the past clearly, and many leftish activists can see that the past was dominated by the rich who arranged things solely in their own interest. The work of the activist is directed at changing things so that the future doesn’t look like the past.

2. Models are inherently utopian. Krugman has written extensively about his views of the importance of models. there are inherent problems with models, as Krugman said himself:

Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year.

To make a model, you make assumptions about the economy, and what can safely be left out of the unending complexity of the real world so that the math and piles of data can be run through a computer. Most of the real world is left out of models and we can assume that important things are missing. For example, as Joseph Stiglitz says here, there are banks in the real world, but not in the models. The linked article gives a great example of the problems created by this choice.

But it’s actually worse. Markets are assumed to be stable, and people are assumed to be rational agents. That means that the models also do not incorporate fraud, which is a real problem in the US. They also don’t include corruption, in the form of legislative favors, regulatory capture, a politicized judiciary, and wimpy to non-existent criminal and civil law enforcement. It also means that markets are assumed to be competitive, which they aren’t. In other words, these models are utopian, and the people who rely on them to inform their punditry are bound to be wrong.

3. Obamacare rests on the idea that the solution had to be based on markets. Health insurance markets are primitive, so we have to make better ones. The competitors in these new markets are health insurance companies. But these new markets required insurance companies to compete, and that’s not the goal of insurance companies. Their sole interest is their profits. Competition drives down profits. They want to merge and eliminate competition so they can make all the profits possible market by market. How could the healthcare wonks fix that problem? They had to assume that other parts of government would enforce antitrust laws. That didn’t happen. So Aetna merged with Cigna and there will be more.

Here’s the ugly reality. If politicians like the liberal argument, the liberals get to be heard, to the exact extent the politicians like. The health policy wonks didn’t get to do anything beyond what Obama wanted. Krugman was heard on trade, because Bill Clinton wanted to hear NAFTA would be fine. If politicians don’t like the argument, they get new wonks who agree with them. Liberal wonks don’t get to argue for the public option or single payer because politicians don’t want to hear it. Krugman doesn’t get to be heard on fiscal stimulus, because politicians don’t want to hear it.

The point of activism is to exchange one set of politicians for others who agree with the activists. Then liberal wonks can get to work and do something useful.

Military Keynsianism, American Exceptionalism, and Trump

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This Chas Freeman piece, The End of the American Empire, has gotten a lot of attention since it got posted yesterday. He talks about several key issues, starting with how counterproductive our “sphere of influence” Empire, which brings an expectation we can dictate the rules for all other countries (save China and Russia, and — I’d add — until recent successes in undermining Bolivarism, parts of South America) around the world.

The notion of a sphere of influence that is global except for a few no-go zones in Russia and China is now so deeply ingrained in the American psyche that our politicians think it entirely natural to make a number of far-reaching assertions, like these:

(1) The world is desperate for Americans to lead it by making the rules, regulating global public goods, policing the global commons, and doing in “bad guys” everywhere by whatever means our president considers most expedient.

(2) America is losing influence by not putting more boots on the ground in more places.

(3) The United States is the indispensable arbiter of what the world’s international financial institutions should do and how they should do it.

(4)  Even if they change, American values always represent universal norms, from which other cultures deviate at their peril. Thus, profanity, sacrilege, and blasphemy — all of which were not so long ago anathema to Americans — are now basic human rights to be insisted upon internationally. So are homosexuality, climate change denial, the sale of genetically modified foodstuffs, and the consumption of alcohol.

These American conceits are, of course, delusional. They are all the more unpersuasive to foreigners because everyone can see that America is now in a schizophrenic muddle — able to open fire at perceived enemies, but delusional, distracted, and internally divided to the point of political paralysis.

This sphere of influence Empire, on top of being horrible for the rest of the world, is also sucking the US dry internally.

Diplomacy-free foreign policy blows up enough things to liven up the TV news, but it generates terrorist blowback and it is expensive. There is a direct line of causation between European and American interventions in the Middle East and the bombings in Boston, Paris, and Brussels as well as the flood of refugees now inundating Europe. And so far this century, we’ve racked up over $6 trillion in outlays and future financial obligations in wars that fail to achieve much, if anything, other than breeding anti-American terrorists with global reach.

We borrowed the money to conduct these military activities abroad at the expense of investing in our homeland. What we have to show for staggering additions to our national debt is falling living standards for all but the “one percent,” a shrinking middle class, a rising fear of terrorism, rotting infrastructure, unattended forest fires, and eroding civil liberties. Yet, with the notable exception of Bernie Sanders, every major party candidate for president promises not just to continue — but to double down on — the policies that produced this mess.

[snip]

Whatever the cure for our foul mood and foreigners’ doubts about us may be, it is not spending more money on our armed forces, piling up more debt with military Keynesianism, or pretending that the world yearns for us to make all its decisions for it or to be its policeman.

As it happens, I’m also reading Greg Grandin’s biography (I think the better description is “intellectual history”) of Henry Kissinger, which I also recommend. Grandin portrays Kissinger (a New Left figure with an old right morality or lack thereof, Grandin suggests) as the cornerstone for this process, down to what Freeman points to as one key problem with our Empire, that it gets run out of the National Security Council. I’m just part way in, but Grandin describes how Kissinger, partly in a bid to remain in Nixon’s good graces, packaged a bunch of foreign intervention (and because it’s Kissinger, outright genocide) for domestic consumption. We extended the Vietnam War to Cambodia and Laos not for strategic reasons but for domestic political consumption, dead protestors notwithstanding.

Both pieces resonate with something I’ve increasingly been thinking: that what gets called American Exceptionalism — which is really the sphere of influence Freeman describes packaged up under an always dubious and increasingly tarnished moral claim to authority — significantly served a domestic purpose (though it also served to accrue power for America’s elites, including its big corporations): to make Americans content with their lives, even if we never got the kind of social welfare that Europe instituted after World War II.

Europe got universal healthcare. We got the right to claim ourselves morally superior to the rest of the world, even if we paid more for crappy health insurance.

I’d add something neither man focuses on: American exceptionalism always has a domestic component, which largely involves white people (especially men) lording over people of color.

I raise all this because it’s something I’ve been thinking about increasingly this election year, to explain Trump especially, but also the counter-establishment mood generally. I think the electorate really consists of three blocks: Trump voters who want to reclaim the privileges of American exceptionalism for their own benefit (which is why his supporters so often express their outrage in terms of race, because exceptionalism involves the domination of both the rest of the world and of people of color domestically). Then there are the Hillary and mainstream GOP voters, who are trying to squeeze some benefit out of what Freeman rightly calls military Keynesianism (though I’d argue neoliberalism is about corporate welfare Keynesianism more generally). And then lefties — many but not all of whom support Sanders — who question both the corporate Keynesianism and, especially, the sphere of influence empire.

My real point, however, is that the Trump effect is secondary. It is absolutely true that American workers and middle class, generally, have been losing ground. And it absolutely true that whites may perceive themselves to be losing more ground as people of color equalize outcomes, however little that is really going on. It is, further, absolutely true that large swaths of flyover country whites are killing themselves, often through addiction, at increasing rates, which seems to reflect a deep malaise.

But I also think the effect of the Trump side of the equation — the thing that’s driving rabid adherence to an orange boob promising a big wall and domestic investment as well as promising to treat other countries with utter disdain — is secondary malaise, the loss of the self-belief that America actually is exceptional.

(White) America needs to stop believing its superior stems from the ability to lord over much of the rest of the world and start investing in actually living with the rest of the world.

The Origins of Totalitarianism Part 7: Superfluous People

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The last chapter of Hannah Arendt’s The Origins of Totalitarianism is devoted to discussion of the totalitarian regime, which comes when the totalitarian movement has taken power. Arendt says that totalitarian movements don’t offer a specific program for government. Instead, they propose to operate under a “scientific” program. For the Nazis, this was the law of nature with its eternal progress towards perfection, which Arendt thinks arises from a skewed form of Darwinism. For the Communists it was the laws of history as supposedly discovered by Marx. Once in power, the totalitarian regime becomes an instrument for the will of the leader, who in turn is an instrument for imposing and acting out those laws. It is here that Arendt takes up the issue of concentration camps. She says that they are instruments for studying ways to reduce individuals to oblivion, to being superfluous, which is the goal of totalitarianism.

Men insofar as they are more than animal reaction and fulfillment of functions are entirely superfluous to totalitarian regimes. Totalitarianism strives not toward despotic rule over men, but toward a system in which men are superfluous. Total power can be achieved and safeguarded only in a world of conditioned reflexes, of marionettes without the slightest trace of spontaneity. Precisely because man’s resources are so great, he can be fully dominated only when he becomes a specimen of the animal-species man.

…

The totalitarian attempt to make men superfluous reflects ihe experience of modern masses of their superfluity on an overcrowded earth. The world of the dying, in which men are taught they are superfluous through a way of life in which punishment is meted out without connection with crime, in which exploitation is practiced without profit, and where work is performed without product, is a place where senselessness is daily produced anew. Yet, within the framework of the totalitarian ideology, nothing could be more sensible and logical; if the inmates are vermin, it is logical that they should be killed by poison gas; if they are degenerate, they should not be allowed to contaminate the population; if they have “slave-like souls” (Himmler), no one should waste his time trying to re-educate them. … P. 457.

Why is it necessary that people become superfluous? The answer appears in the final chapter, Ideology and Terror: A Novel Form of Government. Ideologies are “… isms which to the satisfaction of their adherents can explain everything and every occurrence by deducing it from a single premise…”. P.468. They are the scientific programs offered by totalitarian movements as the organizing principles of societies. For Arendt, the Nazi ideology revolves around the idea of the laws of nature, of blood, while the Communist ideology revolves around the historical laws of Marxism. In both cases, human beings are in the way of the historical forces, and must be forcibly denied the ability to interfere with the primal force.

Terror is the realization of the law of movement; its chief aim is to make it possible for the force of nature or of history to race freely through mankind, unhindered by any spontaneous human action. As such, terror seeks to “stabilize” men in order to liberate the forces of nature or history. It is this movement which singles out the foes of mankind against whom terror is let loose, and no free action of either opposition or sympathy can be permitted to interfere with the elimination of the “objective enemy” of History or Nature, of the class or the race. Guilt and innocence become senseless notions; “guilty” is he who stands in the way of the natural or historical process which has passed judgment over “inferior races,”, over individuals “unfit to live,” over “dying classes and decadent peoples.” Terror executes these judgments, and before its court, all concerned are subjectively innocent: the murdered because they did nothing against the system, and the murderers because they do not really murder but execute a death sentence pronounced by some higher tribunal. The rulers themselves do not claim to be just or wise, but only to execute historical or natural laws; they do not apply laws, but execute a movement in accordance with its inherent law. Terror is lawfulness, if law is the law of the movement of some supra-human force, Nature or History. P. 465.

That idea, the idea of the unrestrained movement of supra-human forces, should sound familiar. That’s how Arendt described Imperialism, the early form of unrestrained capitalism. It also describes today’s world as seen by the architects of neoliberalism. They warn that everyone loses if The Market is subjected to even the slightest restraint, whether to movement of jobs and capital overseas or to prohibit dumping toxins into earth, air and water. They insist that foreign limitations on patents and copyrights are impossible restraints. They preach that the only legitimate goal of government is to enforce property rights to the utter maximum. For them, the restless movement of money in the hands of the rich and powerful operates in accordance with its own internal logic, logic which cannot be questioned by quasi-humans not gifted with the power to control vast sums of wealth. They tell us that The Market knows all and fixes everything as long as we mere humans do not interfere with its workings. Neoliberal capitalism is a form of supra-human force that Arendt warned us about.

Neoliberalism forms world view of movement conservatives. Here’s an article in the National Review on this issue by one Kevin Williamson. :

The truth about these dysfunctional, downscale communities is that they deserve to die. Economically, they are negative assets. Morally, they are indefensible. Forget all your cheap theatrical Bruce Springsteen crap. Forget your sanctimony about struggling Rust Belt factory towns and your conspiracy theories about the wily Orientals stealing our jobs. Forget your goddamned gypsum, and, if he has a problem with that, forget Ed[mund] Burke, too. The white American underclass is in thrall to a vicious, selfish culture whose main products are misery and used heroin needles. Donald Trump’s speeches make them feel good. So does OxyContin. What they need isn’t analgesics, literal or political. They need real opportunity, which means that they need real change, which means that they need U-Haul.

Williamson’s NRO colleague David French agrees:

My childhood was different from Kevin’s, but I grew up in Kentucky, live in a rural county in Tennessee, and have seen the challenges of the white working-class first-hand. Simply put, Americans are killing themselves and destroying their families at an alarming rate. No one is making them do it. The economy isn’t putting a bottle in their hand. Immigrants aren’t making them cheat on their wives or snort OxyContin. Obama isn’t walking them into the lawyer’s office to force them to file a bogus disability claim.

For generations, conservatives have rightly railed against deterministic progressive notions that put human choices at the mercy of race, class, history, or economics. Those factors can create additional challenges, but they do not relieve any human being of the moral obligation to do their best.

Williamson and French agree that the white working-class people are superfluous, and so are their communities and their way of life. Millions of them should just hire U-Hauls and move to the blessed land of plentiful jobs. They must all lose themselves and their way of life to the inexorable laws of movement, only this time, it’s the inexorable laws of neoliberalism, of rampant unrestrained capitalism. By those rules, individuals cannot act collectively, through unions or through active government. They are permitted to act collectively in their Churches, which emphasize their helplessness in this world except through the will of the Almighty, and therefore pose no real threat to the interests of the rich and powerful.

These white working-class people and their communities aren’t economically viable, and nothing can or should be done to make things different. They should surrender to the external and ungovernable force of hyper-capitalism. They are superfluous, and if they die in misery, leaving their families in poverty, it’s just the natural law of economic freedom working itself out in the passive voice, with the invisible hand of the rich and powerful hidden in a fog of words.

Index to prior posts in this series

The Problem of the Liberal Elites Part 4 Conclusion

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Most economists supported NAFTA, and then spent years justifying their support with models and econometric studies they claimed showed that it had little effect. They continued to support trade treaties when China entered the World Trade Organization. They supported the KORUS deal and most supported TPP. Meanwhile, manufacturing job losses increased from the allegedly minor losses of NAFTA to astonishingly high levels.
Link. Link. The linked studies don’t count ancillary job losses, including the jobs that never came here because US corporate executives took US generated capital and know-how overseas to build new plants, many with advanced manufacturing capability. The damage done by these trade deals to people and communities is obvious now, especially after Bernie Sanders won the Michigan primary, and an increasing number of economists are talking about it in public.

There is a strong parallel here with the crucial role played by economists in deregulation of the financial sector. This too had widespread support from economists across ideological spectrum.

How did these experts get it so wrong, and wreak such damage on so many people? I think it’s because they have so much confidence in their models, and use their authority as experts to push through policies based on those models. And if I’m right, this is a genuine problem for liberal experts.

We can see the confidence in models in Krugman’s work. In this blog post, Krugman takes up the question of why economists were so late to the study of inequality. He says he agrees with this Bloomberg View column by Justin Fox (which gives a nice history of the issue), but says that Fox missed a critical part of that failure: inequality is “a hard issue to model”.

The other [issue one might model] involves the personal distribution of income and wealth. Why are investment bankers paid so much? Why did the gap between CEOs and the average worker widen so much after 1980?

And here’s the thing: we really don’t know how to model personal income distribution — at best we have some semi-plausible ad hoc stories. Part of why Piketty made such a big splash was that he offered a sketch of a model of wealth inequality that tied it into broader macro numbers — r > g and all that — which gave all of us something systematic to talk about. But he himself concedes that the big rise in inequality so far has come from a surge in the right tail of earnings, which may have had something to do with norms, but in any case isn’t well explained by any model we have right now. Emphasis in original.

Krugman claims to rely on his models. He’s written a number of blog posts explaining his views and defending the process against those who argue that models are worthless if they don’t predict disasters and other bitter criticisms. Here’s an example from earlier this year.

And that really gets at my point, which is not that existing models are always the right guide for policy, but that policy preferences should be disciplined by models. If you don’t believe the implications of the standard model in any area, OK; but then give me a model, or at least a sketch of a model, to justify your instincts.

Conservatives and their economists insist that the vast increase in incomes at the top and the decrease at the bottom are the result of some special skill or lack of skill, or that the “market pays people what they are worth”; but that is just false, as I explain in detail here and here. Fox says that economists should look outside their specialties and consider the possibility of changing social norms, as some sociologists suggest, or changes in laws and political priorities, as some political scientists suggest. I doubt that social norms have changed. Every survey I’ve seen says that people don’t know the actual figures about wealth and income inequality, and wildly underestimate them.

Krugman says Piketty offers the explanation of “r > g and all that”, but what I read in Piketty is his theory that the rich use their economic and political power to get favorable changes in laws, regulations and court rulings, changes that increase wealth and income inequality solely for their benefit, with the losses inflicted on the rest of us. As far as I can tell, raw economic and political power are completely outside the economist field of view, simply because they cannot be modeled. And on top of that, those models don’t even consider fraud and corruption, which play a large role in our version of capitalism.

In his 1993 article in Foreign Affairs, Krugman makes the case that the real basis for NAFTA is foreign policy. It was intended to help Mexico transition to a more Westernized economy, which he thought was a good idea. That is a policy judgment, not an economic judgment. But whatever the government and the economists thought, NAFTA was an experiment in the exercise of raw economic power.

The same thing was true about China and the WTO, and TPP and TISA and US/China deals like BITs. The point of these treaties is to change the nature of existing markets and social structures, to create non-governmental forms of control of trade and property, and to protect and enhance the economic power of some US industries at the expense of the lives of millions of workers. Hiding behind weasel words like Free Trade and the professional reputations of most economists, Congress has ceded US sovereignty to a bunch of rogue corporations acting strictly in the interest of profits and shareholder returns, with neoliberals in both parties supporting Fast Track approval of whatever they want.

Krugman counts himself a lukewarm opponent of TPP, as do other liberal economists, for political and not economic reasons. Even though the damage is done, it’s nice to see this change.

That leads me to the conclusion that liberal elites, especially liberal economists, have a real problem: they have been wrong too often on too many important issues. They were wrong about trade. They were wrong about neoliberal economics in general, the Washington Consensus, and, as Queen Elizabeth II pointed out, they couldn’t even see the Great Crash coming.

After the Great Crash, they searched for explanations, but while some focused on the effect of deregulation, there were still plenty of defenders, including many who denied the relevance of the gradual weakening and then elimination of Glass-Steagall, but none of those explanations touched on fraud and corruption. No liberal economists called for prosecutions. Instead they focused the debate on the nature of their models, claiming that they were unfairly blamed for not predicting the Great Crash. Of course, those were the very models they used to advise policy makers that deregulation would be just fine.

Economists have all used the same introductory textbooks for decades now, teaching the simple tropes of capitalism. That sets the baseline for economic theory for the great mass of citizens who have been taught to think the ideas of Econ 101 as laid out the textbooks of Mankiw or Samuelson and Nordhaus are Gospel. Liberal economists who move away from those ideas are rejected by conservatives.

Now liberals say we trusted you to be right, and you weren’t. And not just that, you were wrong in the worst possible way: you concurred with conservative economists. That costs the liberal elites credibility with liberals and even many centrists.

And progressives, the heirs to FDR, by nature more suspicious of wealth and power, say: we trusted you, but you didn’t even question the goals and motives of the rich and powerful. Why would we ever trust you? We aren’t even sure we’re on the same side.

That presents liberal economists with a real problem. Why would anyone listen to them now?

Index to prior posts in this series.

The Problem of the Liberal Elites Part 3 on Trade

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Paul Krugman has been walking back his nearly unbridled support of trade treaties lately. In this blog post, he says “I think I’ve never assumed away the income distribution effects.” Those distributional effects are, he says, predicted by the standard models. In the Foreign Affairs article I’ve discussed in the last two posts in this series, he must be referring to his statement that NAFTA will “…probably lead to a slight fall in the real wages of unskilled U.S. workers”. Here’s part of of his explanation:

When a country with a highly skilled labor force increases its trade with a country in which skill is at a greater premium, it can expect a decline in the real wages of its own unskilled workers. As a matter of economic principles, we should expect to see at least some adverse impact of NAFTA on the wages of American manual workers.

All the evidence suggests, however, that this effect will be extremely small. For one thing, since the existing barriers to trade between the United States and Mexico are already quite low, it is hard to see how removing them could have any dramatic effect on wage rates.

At first, the evidence did better, but then the trade explosion with China began. That resulted in enormous job losses directly and indirectly in the US, The rest of what happened is that real wages of both the working class and the middle class stagnated, and substantially all the gains went to a tiny minority of rich people. I don’t see that prediction in this or any of Krugman’s other writings. In fact, inequality plays no role in any of these early works of Krugman or, for that matter, any other liberal or conservative economists.

As part of his walk-back on free trade, Krugman says this:

Furthermore, as Mark Kleiman sagely observes, the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins — but we now have an ideology utterly opposed to such redistribution in full control of one party, and with blocking power against anything but a minor move in that direction by the other.

Here’s what Kleiman said:

The Econ-101 case for free trade is straightforward: Trade benefits those who produce exports and those who consume imports (including producers who use imported goods as inputs). It hurts the producers of goods which can be made better or more cheaply abroad. But the gains to the winners exceed the gains to the losers: that is, the winners could make the losers whole and still come out ahead themselves. Therefore, trade passes the Pareto test.

[Yes, this elides a number of issues, including path-dependency in increasing-returns and learning-by-doing markets on the pure-economics side and the salting of actual agreements with provisions that create or protect economic rents on the political-economy side. It also ignores the biggest gainers from trade: workers in low-wage countries, most notably the Chinese factory workers whose parents were barefoot peasants.]

So, the key point in this analysis is the Pareto test. This is the idea that any change in any change in economic allocation that makes one person or group better off without hurting anyone else is good. Suppose the 1% has 90% of the wealth of a society, and the 99% has the rest. If you try to take some of the wealth from the 1% to balance things out a bit, you violate the Pareto test, because the 1% is made worse off by loss of a bit of wealth, even though the bulk of society is better off. That principle sounds like a justification for the way the rich whine about taxation. It also sounds like a lousy way to run a society.

The Pareto test also implies that if a change benefits one group and another group loses, then if the winners pay enough to make the losers whole financially, then it should be just fine. That’s what Kleiman means when he talks about the government redistributing the benefits of trade. So, suppose the allocation of the social goods in a society gives the 1% all the gains but the 99% all lose. Then we redistribute money from the 1% to the 99%. Krugman and the rest of the liberal elites accepted this as a justification for the damage which their models predicted free trade would inflict on the working class. This astonishing idea is common in the economist tribe, even among more conservative economists.

I hardly need point out that neither political party ever contemplated any reallocation of gains either on the expected losses from NAFTA (small decrease in real wages of low-skilled workers), or on the massive losses that arose from trade with China. Krugman didn’t mention this argument in his 1993 Foreign Affairs article. Congress did set up a small program to support the hundreds of thousands who lost jobs because of NAFTA, but those funds were quickly exhausted, did little to ameliorate the problem and never reached anyone who didn’t get a job because US corporate executives built new advanced manufacturing facilities in China and Taiwan. And there was no compensation for anyone whose job was an indirect casualty of the closing of US factories, and no compensation to communities wrecked by plant closures, or forced to bid tax concessions and more to keep jobs.

So, how did things turn out so badly when the great brains all told us it would all work out on average?

The Problem of Liberal Elites Part 2 On Trade

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Paul Krugman begins his 1993 defense of NAFTA by insulting its opponents gratuitously and wrongly. Then he offers the readers of Foreign Policy the defense of trade treaties they love.

The truth about NAFTA may be summarized in five propositions:

• NAFTA will have no effect on the number of jobs in the United States;
• NAFTA will not hurt and may help the environment;
• NAFTA will, however, produce only a small gain in overall U.S. real income;
• NAFTA will also probably lead to a slight fall in the real wages of unskilled U.S. workers;
• For the United States, NAFTA is essentially a foreign-policy rather than an economic issue.

NAFTA won’t affect the number of jobs, says Krugman, because the only important factor driving number of jobs is interest rates set by the Fed.

Moreover, it is a choice that responds to economic conditions; the decision to raise or lower interest rates represents a trade-off between the Fed’s desire to raise employment (drive somewhere) and its fear of inflation (a speeding ticket). …

Suppose that NAFTA really does lead to a rise in U.S. imports from Mexico, one that would, other things being the same, reduce U.S. employment by 500,000 over the next ten years. Will other things actually be the same? Of course not. The Fed, faced with the prospect of a weaker economy, will set interest rates lower than it otherwise would have. Conversely, other things being equal, if NAFTA would add half a million jobs, interest rates would be higher. The Fed will, without doubt, miss the target-but it is as likely to overshoot as to undershoot, and over the course of a decade there is no reason to suppose that the average level of employment will be any different with NAFTA than without.

How did that work out? It seems to be true that the overall impact of NAFTA on employment was neutral, though not necessarily for the reason Krugman gave. See, for example this chart showing all manufacturing (definition) jobs for the period 1987 to the present, from the Bureau of Labor Statistics:
Manufacturing jobs 1987 - present

Formulating the issue in terms of total employment, by sector or otherwise, fails to answer any of the crucial questions. What was the effect of NAFTA on communities where the factories were closed? What kinds of jobs are the new ones? How do those jobs meet the needs of workers for income, financial security and job satisfaction? What happened in specific areas? Were the results the same for Los Angeles and for Celina, Tennessee? What happened to the losers? Who profited? Aggregate studies hide the real impact of trade treaties in exactly the way that they miss the point of the farmers’ anger as I discussed in this post.

So, here’s a a story. My law partner was a Bankruptcy Trustee in Tennessee; he was assigned to handle all the cases from the area around Cookeville, TN. In the mid to late 1990s, he was called to deal with an emergency bankruptcy of a cut and sew plant in his area. This is a company that has machines to cut fabric to a pattern and sewing machines; the workers cut the cloth and sew it into clothes. In this case, it was blue jeans. One Friday after work, trucks pulled up to the factory, loaded all the machines and office equipment and moved them to Mexico. They left behind several pallets of completed jeans, which needed to be secured and sold. The workers were not paid. The jeans were “hot goods”, and became property of the US Department of Labor, which hired the Trustee to sell them and distribute the funds to the workers so they got partial payment. The secured creditors and general creditors got nothing. It was about that time my partner reported that one of his cases was a 35 year old guy with few teeth, which, his lawyer said privately, was the result of heavy meth use. That was only the first such case.

Perhaps Krugman would be surprised to learn that the Fed did not intervene to create new jobs in the Cookeville area. How exactly would that happen? Workers who lose their jobs burn up their savings or live off their friends and relations and churches, or on credit cards or the safety net until they get back on their feet. Many don’t. Trade economists like Krugman don’t count these and related losses when they run their computerized models. Most people don’t care because they get cheaper jeans. All the discussion, all the studies of NAFTA, ignore these and many more localized effects.

Krugman admits that if the job losses were very large, his model might not work. Even if the impact of NAFTA on manufacturing jobs was small, that isn’t so with China. Recent studies say that imports from China might have resulted in 2.4 million jobs lost between 1999 and 2011. Is that enough to upset Krugman’s certainty? How many millions of jobs never happened here because US corporate executives exported US-made knowledge, US-generated capital, and frequently entire US factories to other nations. Computer chips and other high-tech equipment weren’t invented in Taiwan or China or Japan, but they got the advanced manufacturing jobs, not the citizens of the US whose hard work laid the groundwork for creating those valuable assets. Worse, the corporate executives arranged to duck US taxes on their profits. Their refusal to pay taxes leads to the further deterioration of conditions in the US.

Krugman knows this. His Nobel Prize was for his demonstration that “national location of specialized production is indeterminate; there will be specialization, but how it is distributed across countries cannot be determined ex ante”, as a correspondent explained it to me in a private email. The policy of Asian nations is to grab those manufacturing operations by nay means necessary. The US, dominated by single-minded free marketeers, doesn’t have an industrial policy, or a safety net, for that matter. It relies on some magic and undefined “market” to fix everything.

Congress won’t lift a finger to help the people of Cookeville. Liberal elites, like Krugman, tell us everything will work out fine. On average.

Index to prior posts in this series.

The Problem of the Liberal Elites Part 1

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As I pointed out in this post, conservative elites have completely lost their minds. But liberal elites have problems as well. The problem is more complex with liberals, and it will take several posts of reasonable length to get into it. To make things concrete, I’m going to begin with the liberal approach to trade, which gives me an opportunity to tie together several ideas I’ve raised based on books I’ve discussed here and at Firedoglake:

1. Karl Polanyi’s argument in The Great Transformation that societies can only handle a certain amount of change before they revolt and demand protection. Social changes will come, but the pace of change dictates how much misery will be inflicted on the losers.

2. The absence of a clear definition of market in standard economics.

3. The failure of economic theory to incorporate the impact of raw economic power, including fraud and corruption.

The text for this post is a 1993 article in Foreign Policy by Paul Krugman titled The Uncomfortable Truth about NAFTA: It’s the Foreign Policy Stupid.

Krugman begins by insulting the anti-NAFTA people.

It is as hopeless to try to argue with many of NAFTA’s opponents as it would have been to try to convince William Jennings Bryan’s followers that free silver was not the answer to farmers’ problems.

Indeed, the parallel is quite close. The populism of the 1890s represented a desperate attempt to defend agricultural America against deep economic forces that were changing it into an industrial nation. The choice of a monetary standard had very little to do with the real problems of the farm sector; a burst of inflation might have given some highly indebted farmers a brief respite, but it would have done nothing to reverse or even materially slow the industrializing trend.

Well, as I remember my high school history and related reading, that’s just wrong. My sophomore history teacher, a woman whose name I sadly have forgotten, encouraged us to read the muckrakers, and I chose Frank Norris’ The Octopus and The Pit. They tell an entirely different story, one that revolves around fraudulent financial schemes of a railroad company and traders in the pits of the Chicago Mercantile Exchange. Things haven’t changed much.

Norris’ stories fit better with this analysis published by a site operated by the Economic History Association, The Economics of American Farm Unrest, 1865-1900, written by James I. Stewart of Reed College. He explains that farmers “perceived” that their political and economic status was deteriorating. According to Stewart, farmers had three main complaints: a) farm prices were falling, decreasing their incomes, which they thought was the result of overproduction; b) monopolistic railroads and grain elevators were gouging them; and c) financial conditions, including usury by lenders, an inadequate supply of money and deflation which forced them to repay loans with more expensive dollars. They were not able to get government help for these problems because the legislatures were dominated by financial interests including banks and railroads, the oligarchs and monopolists of the day.

Stewart says that these claims do not match the statistical testing done by economic historians. For what it’s worth, I think his explanations are weak, but I’m no expert, and perhaps those silly farmers didn’t understand their lived situation as clearly as economic historians reading aggregated data decades later. Perhaps, for example, there were no usurious loans in that mix that resulted in mortgage loans averaging 2-3% above the norm in New England. After reciting the contents of several studies, Stewart explains that the real issue facing farmers was a massive increase in uncertainty and risk. As he puts it, farmers might experience one or more of the problems he discusses, or they knew someone who was affected by them, and this increased their concerns.

What were the sources of risk? First, agriculture had become more commercial after the Civil War (Mayhew, 1972). Formerly self-sufficient farmers were now dependent on creditors, merchants, and railroads for their livelihoods. These relationships created opportunities for economic gain but also obligations, hardships, and risks that many farmers did not welcome. Second, world grain markets were becoming ever more integrated, creating competition in markets abroad once dominated by U.S. producers and greater price uncertainty (North, 1974). Third, agriculture was now occurring in the semi-arid region of the United States. In Kansas, Nebraska, and the Dakotas, farmers encountered unfamiliar and adverse growing conditions. Recurring but unpredictable droughts caused economic hardship for many Plains farmers. Their plights were made worse because of the greater price elasticity (responsiveness) of world agricultural supply (North, 1974). Drought-stricken farmers with diminished harvests could no longer count on higher domestic prices for their crops.

Stewart uses the passive voice throughout this passage. But except for growing conditions each of the causes he lists is the direct result of the intentional act of specific human beings either in government or business. In particular, the section on railroads makes it clear that managers took every advantage of their monopoly status, as did the owners of grain silos. There is no doubt that the same is true of bankers and merchants in many places. The deepening involvement of the US in international grain dealings was another opportunity to hurt farmers. In bad years, some of the losses from low harvests were made up from higher prices, until the “integration” world markets. In combination, these efforts of government and business effectively dumped all the risk of bad harvests on tens of thousands of farmers, while increasing the profits of a few shippers, grain merchants and speculators.

In other words, the effect of the policies chosen by the rich and powerful was to make the lives of an important segment of the population worse. Or in Stewart’s bloodless words:

Uncertainty or risk can be thought of as an economic force that reduces welfare

In Krugman’s world, the forces facing these farmers would have been unstoppable. In the real world, as Stewart reports, the farmers organized themselves and forced legislative changes at the State and Federal level that protected them and enabled them to stay in business, the socially important business of growing food for their fellow citizens. They were able to transform the conditions of the markets they faced, using the power of government. They were able to slow the pace of change to a level that didn’t ruin their lives despite the best effort of the powerful. It’s a neat demonstration of Polanyi’s idea about people demanding protection from violent social change.

There were massive changes in the markets facing farmers as they moved from subsistence farming to commercial farming at the local and state and then federal levels, and then into the world market. There were changes in the markets from lenders, railroad companies and other vendors. There was constant change in the terms of the markets during this period, to the point that it would be unreasonable to compare the grain market in 1865 with the grain market in 1895. And Stewart says nothing about mechanization during that period. Economic historians treat the price of wheat as the outcome of market activity without apparently looking at the changes in the nature of the markets. But, as Stewart points out, the regulation of these markets changed steadily over this period, and the outcomes to farmers were improved by those changes.

Third, the central part of Stewart’s story is international trade in grain. The impetus for that change came from the powerful and wealthy shipowners, railroads, merchants and grain speculators, and not from the farmers. The roles of the people who operate railroad and overseas shipping lines, the merchants who import and export grain, and the grain speculators in Chicago is not even touched by Stewart’s account. He does not even discuss the fraud and corruption that dominated the lives of those farmers and all of society. He and other economists neatly hide the power structures that created the problems of farmers and the forces the farmers beat down to protect themselves.

That pattern is repeated over and over in the story of trade.

Index to prior posts in this series.

How Hillary Turned Her Support for Welfare for Banks into an Auto Bailout Attack

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For a campaign that has spent days insisting Bernie Sanders should not launch attacks against her, the Hillary Clinton campaign sure engaged in some dishonest hackery last night.

During the debate in Flint, Hillary attacked Bernie for “vot[ing] against the money that ended up saving the auto industry.” She was talking about a January 15, 2009 attempt to withhold the second $350 billion of TARP funding that failed (here’s the resolution); Bernie voted not to release those funds. But the vote was not directly about auto bailout funding. It was about bailing out the banks and funding what turned out to be completely ineffective efforts to forestall foreclosures.

It is true that Bush’s failure to fund an auto-specific bailout meant that TARP funds got used to fund the $85 billion auto rescue (Bush had already spent some money on the auto companies — basically just enough to ensure they’d go under on Obama’s watch, but not enough to do anything to save them). But that’s not what the vote was (and there might have been enough money for the auto bailout in any case).

Larry Summers’ two letters in support of the additional funding (January 12, Janaury 15) in support of the additional funding certainly didn’t describe it as an auto bailout bill. He mentioned “auto” just three times between the two of them. In the January 12 letter, in support of auto loans to consumers, and in the January 15 letter, limits on what I believe is a reference to GM Finance (now Ally)’s Christmas holiday move to turn into a bank so it could access funding. Contemporary reporting on the vote also did not mention the auto bailout (though there had been discussion that it might be used the previous month).

Moreover, there had been an auto bailout vote in the Senate (on a bill already passed by the House) on December 11, which failed. Both Bernie and Hillary voted in support.

So while Hillary’s attack was technically correct — Bernie did vote against giving Jamie Dimon more free money, which had the side effect of voting against the second installment on the fund that would eventually become the auto bailout — he did not vote against the auto bailout.

But Hillary’s attack did its work, largely because national reporters appeared completely unaware that they were fighting about TARP much less aware that there had been votes in December that directly pertained to the auto bailout. Even some local reporters now appear unaware of what went down in 2008-9. John Podesta helped matters along by sowing confusion in post-debate speeches.

Here’s one of what will end up being several exceptions to the shitty reporting on this that will come too late for people to figure out what actually happened.

During the testy exchange over the auto bailout, Clinton called Sanders a “one-issue candidate” for voting against the release of $350 billion in Jan. 15, 2009, to continue funding the bailout of the nation’s banks and mortgage lenders.

Sanders joined seven Democratic senators in voting against the second wave of TARP funds. President Barack Obama ended up using some of TARP to fund the $85 billion rescue of GM, Chrysler and their auto lending arms.

“If everybody had voted the way he did, I believe the auto industry would have collapsed, taking 4 million jobs with it,” Clinton said.

[snip]

David Axelrod, a former top adviser to President Barack Obama, questioned Clinton’s attack on Sanders’ voting record in the middle of the debate.

“It wasn’t explicitly a vote about saving auto industry,” Axelrod wrote on Twitter.

U.S. Sen. Debbie Stabenow, a Clinton supporter, said after the debate that senators, including Sanders, were aware the TARP money would be used to aid the domestic auto industry.

“A lot of folks said we shouldn’t do it because somehow it was helping the banks,” said Stabenow, D-Lansing. “It was the auto bailout we were talking about. I was very clear with colleagues that we had to do this.”

Stabenow’s comment, incidentally, is proof that the money shouldn’t have been granted as it was (it wasn’t spent on auto companies until much later). While she’s right that there had been public discussion of spending some money on the auto bailout, there obviously was still so little limiting what the Executive could do with the money that there needed to be nothing explicit supporting the auto bailout to make it happen. The flimsiness of the guidelines is one of the things that enabled the Obama Administration to avoid providing real foreclosure relief, choosing instead to “foam the runway” for banks.

Don’t get me wrong. Bernie did a number of other things at the debate that hurt him last night, such as his comment about ghettos that suggested all African Americans are poor and no whites are. I think, too, the optics of his efforts to stop Hillary from interrupting him as well as his own gesticulating while she was making responses will go over poorly.

But the auto bailout attack was a pretty shameful ploy, one that otherwise would make it fair game to really hit on Hillary’s own actions in a way Bernie has not yet done. That said, it was also a probably perfectly timed attack, because it will ensure victory for Hillary on Tuesday, eliminating one of the last possibilities that Bernie might really challenge Hillary.

Update: As it turns out, Hillary should be attacking Stabenow according to her own standards, because Stabenow voted no on the first TARP vote that actually paid for the first tranche of funding to the auto companies. (Here’s the second, January 2009 one.)

Hillary Is Now Picking and Choosing Which Obama Accomplishments to Take Credit For

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According to Hillary Clinton’s latest campaign ploy, she deserves credit for domestic policies passed under Obama — notably, ObamaCare — but not issues — in this case, trade deals — she negotiated as Secretary of State.

She rolled out former Governor and erstwhile Michigan resident Jennifer Granholm (when this story hit, some local folks were talking about how Granholm hasn’t been seen in these parts of late) to claim that Hillary can’t be held responsible for NAFTA — which she supported when it got passed by her spouse (who is, of course, a key campaign surrogate) — or for the Trans-Pacific Partnership — which she helped negotiate as Secretary of State. It’s the latter I find particularly remarkable.

“It’s not really fair to ascribe NAFTA to her when it was her husband’s administration,” Granholm said in an interview with The Detroit News. “And, of course, it’s not really fair to ascribe TPP to her when it was her boss’s administration. She can’t go against somebody who she worked for.”

As a U.S. senator from New York, Clinton voted against the Central American Free Trade Agreement (CAFTA) forged by Republican President George W. Bush’s administration.

“I think people have to be fair about looking at how she acted when she was on her own,” said Granholm, who is supporting Clinton’s candidacy.

Sanders has been talking about trade policy in speeches in Michigan this week. His campaign is planning a large rally a 7:30 p.m. Saturday night at Macomb Community College’s southern campus in Warren. Clinton and her husband were stumping for votes Saturday in Detroit.

On Thursday, Sanders highlighted trade policy at a press confernece in Lansing, previewing a potential topic of disagreement in Sunday night’s debate with Clinton at the University of Michigan-Flint.

“On the issue of trade, Secretary Clinton’s views and mine are very different,” Sanders said. “She has supported NAFTA, I opposed it. She supported permanent normal trade relations with China, I vigorously opposed the (permanent trade) with China. She supported permanent normal trade relations with Vietnam, I opposed that.”

“She supported the Colombia Free Trade Agreement. I opposed that. And she supported the Korean Free Trade Agreement. I opposed that.”

It’s unclear from Detroit News’ reporting whether Granholm includes the Colombian and Korean free trade deals in her absolution of Hillary’s responsibility or not. But as David Sirota has shown, Hillary’s own emails show some really damning details about her claims and enthusiasm for the former (which makes sense, because she is also an enthusiastic booster of Plan Colombia).

During her 2008 presidential run, Clinton said she opposed the deal because “I am very concerned about the history of violence against trade unionists in Colombia.” She later declared, “I oppose the deal. I have spoken out against the deal, I will vote against the deal, and I will do everything I can to urge the Congress to reject the Colombia Free Trade Agreement.”

But newly released emails show that as secretary of state, Clinton was personally lobbying Democratic members of Congress to support the deal, even promising one senior lawmaker that the deal would extend labor protections to Colombian workers that would be as good or better than those enjoyed by many workers in the United States.

One of the 2011 emails from Clinton to U.S. Trade Representative Michael Froman and Clinton aide Robert Hormats has a subject line “Sandy Levin” — a reference to the Democratic congressman who serves on the House Ways and Means Committee, which oversees U.S. trade policy. In the email detailing her call with Levin, she said the Michigan lawmaker “appreciates the changes that have been made, the national security arguments and Santos’s reforms” — the latter presumably a reference to Colombian President Juan Manuel Santos. She concludes the message about the call with Levin by saying, “I told him that at the rate we were going, Columbian [sic] workers were going to end up w the same or better rights than workers in Wisconsin and Indiana and, maybe even, Michigan.”

Note, too, in that email that there is no exemption claimed for the paragraph that follows on the discussion of KORUS, which has been particularly damaging to Michigan’s economy.

Look, last I checked, Hillary cleaned up on Super Tuesday claiming she is running on a continuation of Obama’s policies. While I recognize she mostly means the domestic policies she had a less direct role in, at some point we get to hold her accountable for the things she did in her actual job, which included negotiating trade deals that hurt American workers, especially while she’s claiming she’ll be Obama’s third term. Her role in trade deals — and her likely dishonesty about TPP (see this Larry Summers piece that assumes if Trump wins, TPP will be dismantled, which suggests he expects it to be fully implemented if Hillary wins) is part of who she is. Yes, she voted against a trade deal once. Yes, she also had an affirmative role in a lot more trade deals. That’s a shitty record to run on in MI (and it will be a shitty record that Trump will hammer her on mercilessly if they end up being the nominees), but it is her record, part of the extensive experience that she points to as making her best qualified to be President.

 

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