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Doomed to Repeat

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By Peter Radford

[Editor’s note: This version taken from on 2nd January 2018.]

One of the great pleasures of living here in southern Vermont is that we have a terrific local bookshop. I go there simply to absorb that book shop vibe unattainable in the bits and bytes of Amazon. And like all good bookshops this one throws up surprises. About three weeks ago I was browsing the small business and economics section and found a book by Heinz Kurz. It’s his “Economic Thought, A Brief History” I recommend it for all of you who want to understand the predicament of modern economics.

Now I admit I am a sucker for reading about the history of economics. It’s a great parallel story to the broader social history of the past few centuries. Economics as it weaves back and forth from one emphasis to another is a much more humble adventure than the arrogance of the overly formal neo-mathematics that is has become nowadays. There was a time when it attempted to explore reality, when it included lumpy and vague concepts, when it allowed for collective action, and when it related to experience: how different from today’s pseudoscientific axiomatically self-determining oddity.

Many of you, of course, will be completely familiar with such a history. Most of you will have your own heroes and villains as the story unfolds. Reading the Kurz book reminds me of mine.

I love the early stories.

The physiocrats for instance. They reflect their time perfectly. Agriculture reigns supreme. Industry is dismissed as a sterile sidebar. Landowner interests dominate. That was the reality of the age. No one can criticize their effort, no one can undermine their achievement. French society was teetering on the brink and was about to fall behind its industrial rivals — except, of course, those rivals were only just beginning the industrial adventure and didn’t understand it themselves. In any case, Quesnay’s “Tableau Economique” is one for the ages. None of our contemporary economists could or would attempt such an effort.

Then there’s Smith. We’ve been chasing his tail, and his tale, ever since. He is a cornucopia of observations that echo on through to today. Everyone knows about the invisible hand. If ever there was a metaphor that needs explanation this is it. What did he mean by this? We really don’t know. He only mentioned it once in “The Wealth of Nations” and probably didn’t mean it the way we commonly think of it nowadays. Subsequent economists adopted the phrase as their own. That twist in meaning is a later part of our story. Quesnay was all about flows, Smith observed a different kind of order. But is it order? Or is it the illusion of order? Your answer will depend on your point of view.

Smith’s other ideas are more interesting. The division of labor sits at the heart of modern economic society. His understanding of this makes him the first to see underneath the surface of industrialization, although I am not convinced he realized just how the revolution he was within would shake our world. Then again he understood the prominence of knowledge in spurring growth. He called it the quantity of science. Even now economics doesn’t accommodate knowledge well. The weirdness of Total Factor Productivity is a testimony to just how difficult it is to squeeze a public phenomenon like science into modern models that are simply homages to individual effort and reasoning.

Let me fast forward.

Where do the wheels start to come off? The early writers, those we call the “classical theorists” talked about economics very differently from the way we do today. We lost a lot when the change occurred. Frankly I blame the “marginalists” but that’s just me.

Between Smith and the so-called marginal revolution sits Marx and his critique of capitalism. The problem with Marx is that he is spot on: circa 1848 his observations made a ton of sense, and post-1848 the staid and the wealthy were terrified he might be right. They needed a new narrative to counter him. They needed to change the conversation.

And the marginal revolution was the response from economics.

The classical theorists thought in social terms. They observed and thought about social, political, and economic interconnections. Their vision of economics was rooted in a larger social context. It was obvious for all to see that the early years of industrialization were not altogether happy ones for a large portion, if not the majority, of society. Sure incomes were rising, but health and living standards were deteriorating. Urban squalor replaced the older rural idyll that the romantics imagined as reality prior to the rise of factory life. Marx was the ultimate critic of this squalor and his stories of the horrors characterizing the industrial interlude between that past idyll and his imagined future utopia unnerved high society.

History is a devil sometimes. Right when those in power needed to fend off their own queasiness about the effects of industrialization, and needed to arm themselves against a rising tide of worker unrest, economists could reach into the physical sciences and pull out miraculous concepts to defeat all that Marxist nonsense.

Back to the fore came the invisible hand, but now it was altered and updated with lots of mathematics and the notion of marginal productivity. There was, the economists of the time taught, no point in pushing back against the tide. Workers earned exactly — precisely and unequivocally — what they, well, earned. Productivity entered the lexicon. Efficiency was borrowed from physics. Inputs and outputs were tied inexorably together. And the economy was conceived, in distant echoes of Quesnay and Smith, as a great big equilibrating machine. There was no room in this scientific interpretation of the economy for romanticism or recourse to narratives. Society was only ever better off if we leave the machine to run by itself. Don’t meddle or interfere became the mantra of the age. Which, for some, it still is.

That cautionary note against interference was bulked up because of arguments going on outside economics.

The journey from ancient tyranny to modern democracy had, inevitably, to pass through its own middle ages. That was when the modern notions of liberty emerged. A problem that still haunts us today is that no single definition of liberty was passed forward to us.

There is liberty as individual freedom that motivates capitalism — the freedom to own and dispose of private property is the result of the development of this notion. And there is liberty as citizenship and equality that motivated democracy — the idea of one-person-one-vote flows from here. What happens when the two liberties conflict? Well, the answers are manifold.  And our current political battlefield is littered with the debris of the consequence of our inability to balance the two very well all the time.

What we can say, is that when Hayek distorted history to tell his story about the “Road to Serfdom” he deliberately set economics along an anti-democratic path. He valued personal liberty above all else. Democracy is, he thought and his heirs still think, a perversion of the purity of the great economic machine. It allows politics to act as a distributional mechanism alongside economics. And surrendering to the democratic wishes of the majority will inevitably doom liberty.

The taint of Hayek’s anti-democratic convictions still sullies economics. Keynes tried to find a middle path, but the trajectory of modern economics and its obsession with the unobservable phenomenon of equilibrium, and its equally opaque partner of efficiency, has led it, inevitably, to become an ideological rather than a scientific enterprise.

There is, for instance, a straight line from Hayek to the notion of shareholder value, which is nothing more than weaponized neoclassical economics. And from shareholder value there is a straight line to the modern workplace replete with tales of woe, depressed wages, household insecurity, and tenuous employment all living in the shadow of record profits. To libertarians like Hayek undermining the futures of millions of workers is a mere nothing alongside the desire to preserve individual liberty. It makes me wonder whether such liberty is worth preserving.

Economics always has, its history teaches us, been a child of its context. What is, and is not, considered appropriate subject matter is a function of the moment. There are signs that the choice of subject matter is changing. Maybe the whole marginal era will be looked back upon as a curious misadventure. Perhaps equilibrium will be seen, at last, as an illusion. And maybe efficiency will be viewed as the chimera it is.

Hayek was right about one thing: information is paramount. Economics is the study of information: who has it? What do they do with it? How does it shape exchange? And so on. He was wrong to jump to the conclusion that he did. He argued that if the totality of information is inscrutable to any one person or group of persons, then we can conclude that it is pointless to interfere in the economy. The government, he said, ought stay well away. The price mechanism of the private market will, he went on, coordinate all that information and produce the “right” answer for us.

But how do we know?

If information is that inscrutable? How does anyone know? Prices might be wrong. How would we know otherwise?

We wouldn’t. We couldn’t.

There’s more to this history yet.

From: pp.8-9 of WEA Commentaries 7(6), December 2017

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