“Utilitarianism, with the potentially left-wing bits stripped out”

by Henry on July 24, 2015

There’s been a lot of back and forth about economic reasoning and the EU. This article by Kevin O’Rourke, takes a different perspective, one that is well worth reading, exploring the consequences of economists’ handwaving over utility for the technocratic politics that we face today. I’ve seen other efforts to make this kind of case, but they haven’t been nearly as clear or accessible.

{ 144 comments }

1

Bruce Wilder 07.24.15 at 4:39 pm

I would like to see Kevin Hjortshøj O’Rourke confront a text: choose some specific examples of EU policy cum justifacatory rationale, and show us where and how utilitarianism makes its stealthy way into the sausage-making. This article takes flight in its abstractness to an extent that makes it difficult to trust. What policy choice is the EU taking? What is the role of economics? What are the role of economists?

There are many well-known and less well-known problems in economics that might be relevant. Risk and insurance: why social insurance is often cheaper (more efficient). The theory of the Second-best and why idealist versions of free markets are often poor guides to policy. And, there is the reality of power politics, where “economist” is a poor label for Goldman-Sachs alumnus.

There is a risk of scholasticism, acknowledged in the article, in approaching these problems without more disciplined attention to what has been specifically said, done and argued.

2

A Friend 07.24.15 at 4:59 pm

That second link 404’d on me.

3

P O'Neill 07.24.15 at 5:54 pm

One example is the Transatlantic trade and investment partnership (i.e. the USA-EU free trade deal). The EU’s webpage for the deal is riddled with utilitarian claims. Of course the main example in O’Rourke’s article should speak for itself — the Troika-monitored bailouts.

Nonetheless, a point in favour of the technocrats. Dsquared has made the point that when the southern European countries signed up to the EU, it was with the express purpose of getting a download of northern EU-style governance. That came with a price. But the governance issue remains. Take a look at this NYT article on Rome and consider it as a data point on whether Italians are entirely content with their version of democracy and accountability.

4

Thomas Colthurst 07.24.15 at 6:06 pm

Second link in the post appears to be broken.

5

HK 07.24.15 at 6:12 pm

I hate to whine, but for those of us on mobile, would you mind marking PDFs as such?

6

Doctor Science 07.24.15 at 6:47 pm

The second link doesn’t go anywhere.

7

Donald Johnson 07.24.15 at 7:03 pm

My outsider’s impression based on Krugman is that it isn’t so much economists having influence as it is politicians and other VSP’s picking the economists who tell them what they want to hear. Of course Krugman is defending his field, so he would say that. But he seems somewhat convincing to me.

8

Keith 07.24.15 at 9:11 pm

re: 3 , how does having the same money as germany get rid of the mafia and corruption? So far the ECB seem to have had no success solving this problem or any other.

9

Bruce Wilder 07.24.15 at 11:37 pm

P O’Neill: The EU’s webpage for the [Transatlantic trade and investment partnership] is riddled with utilitarian claims.

Really? I looked, but I did not see. Doesn’t mean they are not there, only that my expectation for what constitutes a utilitarian claim might need adjustment.

Could you copy and past 3 examples of such claims, please? I’d like to see what you are seeing.

P. O’Neill: Of course the main example in O’Rourke’s article should speak for itself — the Troika-monitored bailouts.

I tend to see the rhetoric for that to be dominated by virtue economics, a liberal theme older than utilitarianism that emphasizes moral rather than quantitative factors. ymmv, but again I’m looking for strong evidence of utilitarianism per se and not finding it.

10

John Quiggin 07.25.15 at 12:06 am

As is common, I think utilitarianism is being used as a boo-word for consequentialism in general.

That said, I think O’Rourke is on to something. A couple of points:
(i) Exactly the same argument can be, and has been, made to claim democratic legitimacy for the Communist Party in China
(ii) The problem (obvious in China, but increasingly evident in the EU) is that, once people cease to view the consequences as sufficiently good to require no change, there’s no democratic way to change things. Either the existing dictatorial state rules by force, or the system collapse

11

Bruce Wilder 07.25.15 at 12:52 am

The website O’Neill linked to shows a lot of concern for the rituals and tokens of democracy in the EU. I suspect that the base problem is too many member states combined with too many veto points. You cannot expect unanimous consent, and that is what is theoretically required at several junctions. A modus operandi has been worked out that allows the EU to function, but will it also allow democracy to function?

12

Timothy Scriven 07.25.15 at 2:47 am

This is for everyone on this website but especially John Q and Henry – what do you make of the argument that the whole point of the New Welfare Economics (Praeto optimality as criterion for policy etc.) is to create a form of watered down utilitarianism which is compatible with technocratic capitalism- a framework to enable economic management which is ostensibly value neutral, and quantitatively tractable- yet really prioritises the good of accumulation over all other goods.

I guess what I am saying is that this watering down of utilitarianism is but a special case of the general trend, of which the chief example is the framework of contemporary welfare economics itself?

13

John Quiggin 07.25.15 at 4:25 am

@12 Here’s a recent statement of my views on Pareto optimality and (why I don’t talk much about) utilitarianism

http://crookedtimber.org/2015/05/19/the-most-misleading-definition-in-economics-draft-excerpt-from-economics-in-two-lessons/

14

c 07.25.15 at 2:20 pm

Welfarism and maximization are necessary features utilitarianism. The view described in the article does not have the feature welfarism. Hence the view described is not a form of utilitarianism and should not be called utilitarianism. Not by Kevin O’Rourke, not by Henry, not by anyone. Adding homemade prefixes (bastardized, watered down, …) doesn’t help. Just stop doing it.

Bentham already some 300 friggin’ years ago wrote about the marginal diminishing utility (welfare!). As the Stanford Encyclopedia of Philosophy summarize Bentham’s view on DMU:
“While we might plausibly assume that, of two individuals with unequal fortunes, the richer of the two would be the happier, it does not follow that adding increments to that person’s wealth will continue to make him happier in the same proportion. It is in the nature of the case that the amount of increase in happiness will not be as great as the increase in wealth; the addition of equal increments of money will eventually bring successively less of an increase in happiness. Modern economists know this analysis as the law of “diminishing marginal utility”. One of its practical consequences for a utilitarian such as Bentham is that, where choices present themselves between giving an additional increment to a rich man or to a poor man, more happiness will result from giving it to the poorer of the two. Also, the analysis underscores why money cannot be a direct measure of utility, since the utility represented by a particular sum of money will vary depending on the relative wealth of the person who receives it. Moreover, it is evident that diminishing marginal utility is also a feature of the additional increments of pleasure a person may experience beyond a certain point; equal increments of pleasure will not necessarily add to the stockpile of happiness if a person has reached a saturation point.”
( http://plato.stanford.edu/entries/bentham/#DimMarUti )

15

bianca steele 07.25.15 at 3:01 pm

The article makes the case, it seems to me, that first year econ students are taught specious arguments about how the field owes nothing to utilitarianism, along with specious, pretend common sense arguments about how awful utilitarianism is. Thus they’re well prepared to keep anyone who hasn’t taken Econ 101 from discussing either subject.

The minute they learn about marginal utility, presumably, they learn what the slogan “utility is a meaningless concept” is worth.

16

Swami 07.25.15 at 3:33 pm

“Here economics lecturers say various things to students at different points in the undergraduate curriculum, not all of them consistent with each other. They start by being purist: strictly speaking, they say, we can only prefer one policy outcome to another if it makes at least somebody better off, without making anyone else worse off; in other words, if the policy shift leads to what is known as a ‘Pareto improvement’.

But if economists took this injunction seriously, then they could never say that free trade was preferable to protection, or that the European Single Market was a Good Thing, since trade and competition produce both winners and losers. What is an economist determined to be useful to the world, by distinguishing between good and bad policies, to do?”

Nonsense.

The dynamic of properly function markets works by observing we can solve more problems, better, more efficiently by a process of specialization and exchange. Individuals can choose to access the potential benefits of markets by agreeing to compete constructively with other producers to solve problems for consumers. This competition involves a fascinating type of zero sum dimension within a larger positive sum game.

The “lose” in the win/lose relationship between competing producers is a form of non-interaction. The competitors don’t interact with each other, and the consumer didn’t interact with the “loser” either. Indeed, the loss is by definition actually the absence of an imagined or desired gain.

But to put it into perspective, this wasn’t a single phantom event. Every single human on earth can be said to have lost the opportunity. For example, we may choose to view the competition to quench my thirst as between Coke and Pepsi. But in reality, there are 7 billion people who are free to enter the market and offer to sell me a drink. When I choose a producer, every human on the planet “loses” out on this hypothetical or phantom or imagined gain.

Two of us gain and 7 billion lose? Hmmm, maybe something is wrong with how we are accounting for these supposed “losses”?

The confusion is that we are counting real gains (producer got profit, I got a refreshing drink) and counting them against opportunity losses. When producers choose to enter the market they are agreeing to the terms which is that they gain infinite opportunities when entering the market, most of which never pan out. The best producer exchanges one of his potential opportunities for a real gain and I get a real drink. This is a win win situation flat out full stop.

The other advantage of the market is of course the dynamic that it has on producers. The difficulty in winning sales acts as an incentive and signal to potential producers to either change their product, their production technique, their industry or their consumer target. As such it drives producers to problems which they are best, comparatively, at solving.

Of course, some people are incapable of solving any problem for others at a net benefit. For example, paraplegics or mentally disturbed people. In their cases, they may require non market solutions as they are incapable of surviving within a system of competitive division of labor and exchange.

In summary, counting lost imagined opportunities the same as actual gains and losses is simply bad accounting and economists should know this. At a minimum they could factor this out by counting the phantom opportunities gained when entering the market minus the phantom opportunities lost every time a consumer choice is made. The math comes out positive sum in either case.

17

Colin Danby 07.25.15 at 6:36 pm

I’m sympathetic with the “democratic deficit” argument, and the point about the difficulty of separating efficiency from distribution is fine.

Nonetheless the way the theoretical discussion is tied to events is odd.

Greece appears in the first and penultimate paragraphs, but nothing in the rest of the essay addresses the questions of money, finance, and macro policy salient in the Greek crisis.

O’Rourke is perhaps trying to tie in Greece with the 3rd para bit on “Decisions that matter are being taken, not by parliaments, but by … bodies staffed by technical experts and not directly accountable to the electorate.” But that is clearly not what has been going on with Greece, an intensely political process in which the concerns of technical experts were brushed aside (see https://www.cigionline.org/person/3696/publications and read the first two papers). O’Rourke appears to recognize this argument in footnote 9.

Trade: Neither the EU, with its common external tariff, nor the TTIP, built to enforce patent and copyright monopolies, are the kind of simple trade-freeing policies that are the core example in this essay. The EU is fundamentally protectionist. I understand that O’Rourke means this to be an essay about the problems of assessing policy in general, and so the evergreen debate about the merits of freeing trade is meant as an example. It’s also true that market-freeing arguments remain significant in particular EU policy debates. But the impression one gets from this essay that the EU is about technocrats imposing free trade is pretty misleading.

18

Bruce Wilder 07.25.15 at 6:39 pm

Swami @ 16

I agree that the phantoms of imagined, counterfactual opportunity costs are not a productive way to discuss any problem in economics.

I will object, as well, to the model of the idealized market mediating specialization and exchange. As I repeat endlessly, there are very few actual markets in the economy, and talking about the economy as a “market economy” is inherently deceptive. If we are to dispense with the confusing counterfactuals, and point to actual processes and results, we must begin by letting go of the myth of the market.

What we have in a money economy — a capitalist economy, if I can use that label without inviting the pseudo-marxists among us to anthropomorphism — is competition to realize opportunities thru investment.

The opportunity to supply the world with carbonated, sweetened beverages, cheaply, is taken up by the expedient of large-scale, long-term sunk cost investments in systems of production and distribution. That is, if you will excuse the pun, the capital fact of the modern world economy and the 300 years of its still on-going industrial revolution(s).

Capital investment — sunk-cost investments in dedicated organization and equipment (and intangibles like reputation thru advertising) — are made strategically with an eye to changing costs and benefits, and capturing economic rents funding a return on that sunk-cost investment. The opportunities available at large are different post the initial investment, and continue to change as the scale of investment changes.

The “cost” of serving you a Coca-Cola has been significantly reduced, and strategically shaped, over time by 130 years of successive development and investment. Not everyone is equally well-placed to offer an alternative, which is another way of noting that Coca-Cola earns an economic rent on the sale of its products. Nor is everyone equally well-placed to make further investment. The capacity of the Coca-Cola Company to organize investments within the shelter of its ability to earn an economic rent on those investments, makes it possible to finance those investments. Most potential competitors have no such capacity, and so do not have the same “opportunities”.

Political power matters to bargaining over the distribution of income in these circumstances.

An ideology of “free trade” derived from the myth of a market economy is not a guide to these disputes, but rather a cover story for power, which cares not to be questioned.

19

Ronan(rf) 07.25.15 at 7:13 pm

I’ve also never really understood what the term ‘technocrat’ means in this context (although I haven’t gotten around to reading Mair yet). As has been mentioned above, the policies implemented to ‘resolve’ this crisis have been the result of an explicit political process (not only within the supposedly technocratic institutions, but also within – and between – European countries) Im not sure in what sense they’re ‘technocratic?’ (although when looked at in certain ways they might plausibly be seen as undemocratic)
And the political system’s that the crisis developed in were far from technocracies, arguably they were too responsive to their populations.

Worth keeping in mind also that although a substantial lack of trust and resentment has developed against the EU in the South and Ireland, it still polls higher than their domestic political classes and institutions:

http://www.bruegel.org/nc/blog/detail/article/1643-waiting-for-the-four-presidents-report

20

kidneystones 07.25.15 at 7:14 pm

14@ I commend your pedantry. Did you notice Henry’s title, per chance, which seems to me to pretty clearly confirm that Bentham’s utilitarianism does contain left-wing bits. Kevin, of course, makes no mention of Bentham whatsoever. You’re saying that utilitarianism that departs from Bentham’s view ‘can’t’ be Bentham’s utilitarianism. The fact is that many people today employ the term to mean something very different from Bentham’s use of the term. That’s bad, huh?

I’m no economist but this phrase from article jumped right out at me:

“According to the Kaldor–Hicks compensation criterion, a shift from one state of the world to another –say from protection to free trade – can be judged as beneficial to society if it would be possible for the winners to financially compensate the losers, and still
remain better off. The losers don’t have to be compensated – to make such a
claim would be to stray into political territory, off-limits to economists.”

The operative phrase “losers don’t have to be compensated” seems to hold several universes in my tiny mind.

21

john c. halasz 07.25.15 at 7:43 pm

Ronan(rf) @19:

I think the technocrat bit applies especially to the IMF who were deliberately brought in to monitor and enforce the “bailout agreements”. And if you read the reports on what’s in the agreements, you can’t help but be impressed by how picayune the details of “structural reforms” being imposed. And clearly the Troika repeatedly refused to negotiate any agreement at the “political level”.

22

Colin Danby 07.25.15 at 7:56 pm

jch, if you read the two papers by Paul Blustein that I linked @17, you’ll see that’s the wrong analysis. Among the Troika, the IMF were the good guys.

23

Swami 07.25.15 at 8:34 pm

Bruce 18

Thanks for the reply.

Sorry, but I am not familiar with your particular arguments on the myth of the market. I agree we have “competition to realize opportunities thru investment”, but I don’t see how this reveals a myth.

Yeah, large aggregations of investors, managers, entrepreneurs, employees, distributors and such cooperate to provide various refreshments for our benefit. A few large cooperative ventures dominate the space with numerous smaller upstarts vying for a piece and countless small players down to the corner lemonade stand.

I am not sure if you are suggesting that the world would be better or that markets more be more free if everyone had identical opportunities to enter this market as a full scale producer. If so, I don’t believe I agree. But I am certainly open to hearing your argument. The onus is on new producers to find other consumer problems to solve. The potential is infinite in scope. Alternatively, for those less creative, or industrious, they can join into the existing cooperative teams by buying Pepsi stock, and/or applying for a job as a manager or driver or human resource trainer. Most of us join a successful venture, rather than start our own.

“Political power matters to bargaining over the distribution of income in these circumstances.”

Your transition from market interactions to political power has thrown me off. What does political power have to do with this at all? Why are political forces having any say in how solutions are created or distributed? In a market, the assumption is that the choice goes to the consumer with minimal outside interference on entry or exit of potential producers. There is no assumption every person on earth would be equally qualified or capable of successfully competing… Just that they can enter the game if they choose.

“An ideology of “free trade” derived from the myth of a market economy is not a guide to these disputes, but rather a cover story for power, which cares not to be questioned.”

Sorry, you are still losing me. What myth? Are you suggesting that equal skill at production is necessary to qualify as a free market? You will need to explain and/or justify this first. I am all ears though.

24

Bruce Wilder 07.25.15 at 9:54 pm

Colin Danby @ 22: Among the Troika, the IMF were the good guys.

Within the IMF, the economics side (reporting to the highly visible Chief Economist, Olivier Blanchard) often plays the reasonable (within strict neoliberal bounds) good cop, while the program side plays the bad cop, although even the program side can evidently do the math.

Yves Smith, in her tireless curating of articles and analysis by a variety of economists and other observers has emphasize this dynamic.

I rather like this one, which took down Olivier Blanchard, whom I have come to believe is well-intended, ineffectual and seriously overrated as an economist.
http://www.nakedcapitalism.com/2015/07/the-imfs-olivier-blanchard-writes-a-greek-tragedy.html

25

john c. halasz 07.25.15 at 10:11 pm

Colin Danby @22:

I was responding to Ronan, who, in his typically moderate and centrist way was confused about the epithet “technocratic”. That said, looking back at the abstracts of your link, I think I read somewhere something of that guys perspective. And I think “less evil”,- (not that I favor highly moralized terms),- would be better than (relative) “good guys”. At any rate, would you agree that the “structural reforms” are often, micro-economically, precisely, the wrong ones, and that such “reforms” would take a long time to take effect, especially under such depressed conditions, and would contribute little to useful medium term recovery, which is largely a lack-of-demand and impaired payments-and-credit system problem?

B.W. @24:

The fun part is that Mody was, if I understand correctly, Blanchard’s former deputy.

26

Ronan(rf) 07.25.15 at 10:49 pm

John- perhaps I’m being overly pedantic on the terminology*, but is the IMF really ‘technocratic’ either ? Afaik, going from past debt crises, the IMF response has generally been overtly political (ie it represented the interests of its main funders, the major western powers) The policy advice of the IMF is always more dependant on politics (internal and geopolitical) than the detached, problem solving logic of experts.

* looking it up, I guess ‘technocrat’ doesnt have to mean ‘independent policy advice removed from political interference’, but can just mean something like ‘non elected experts offering advice.’

27

Bruce Wilder 07.25.15 at 11:05 pm

Swami @ 18: Your transition from market interactions to political power has thrown me off.

Yes. I suppose that was my intention.

I’m not trying to push a particular ideological agenda, so much as to just stop having discussions of the economy, where we cannot refer in common to observable facts.

There are some actual markets in the economy. Not so many really, but actual “market mechanisms” are used sometimes to match demand and supply, buyers and sellers at an equilibrium price that achieves some kind of allocational efficiency. There’s nothing wrong with analyzing an economic relationship mediated by a market by reference to a theory of markets and market price.

It is deceptive, though, to wave one’s hands, and apply “market” as a loose metaphor for all the exchange relationships in the money economy and talk as if price is formed in market processes of competitive bidding, or as if price reflects a market equilibrium, where marginal cost is rising and just equals price, so that demand and supply are just and optimally balanced. The famous results of economic theory, as presented in Econ 101 and frequently reference in political opinion, depend rather delicately on conditions of cost structure that would permit markets (actual markets, not metaphoric “markets”) to organize an economy thru determining equilibrium price. Those conditions of cost structure do not exist: the metaphoric “market” economy is a lie.

I am not saying you have to become a raving socialist, because of anything I say. I’m not a raving socialist, so there’s that. All I’m saying is, don’t argue a lie.

Most of the economy involves no markets at all. Coca-Cola is only very rarely in the world sold thru actual markets. (It does happen I believe, but it is rare and quantitatively insignificant.) The price is not formed by a process of market bidding. The price is administered by the Coca-Cola Company, a giant multinational corporation using a vast administrative bureaucracy and cooperating with other bureaucratic corporations, such as supermarket chains.

The cost structure is such that Coca-Cola could not be produced and distributed at an equilibrium market price. At the relevant range of output, marginal unit cost is quite low relative to common, administered prices, and probably in many local circumstances, marginal unit cost is declining. That kind of language may be hard to digest, but basically, it means that Coca-Cola would like to sell more at current prices, if it could, and is willing to spend on advertising and promotion to do so. That would not happen in an actual market, at actual market equilibrium prices; if Coca-Cola were selling for a market equilibrium price, where the marginal cost of the last unit equaled price, Coca-Cola would lose money on the next unit — it would not want to sell anymore, even if it could. That’s what a true market equilibrium price looks like: sellers do not want to sell anymore. That’s not the world we live in.

And, the reason we don’t live in that world governed by market prices is pretty clear, if you just look. It is because Coca-Cola has invested a great deal in producing and distributing Coca-Cola efficiently. Where “efficiently” means mostly technical and managerial — not the economist’s allocational — efficiency. This is undoubtedly a good thing. We get Coke really, really cheap. At my supermarket, it sometimes sells for $0.25 per 12 oz can, which is phenomenal. I understand in India, farmers have sometimes bought Coke to use as an insecticide.

I am not saying that you are trying to deceive. Like most people, you are familiar enough with the actual economy that you kind of treat the market metaphor as a loosey-goosey notion, that reasonable people know only roughly applies. The trouble is all that “roughly” and “loosey-goosey” makes it really hard to communicate, because when it is convenient the ideologues will insist on drawing conclusions from the theoretical market model, which don’t apply to what is a non-market transactional environment. In other words, they lie.

What does political power have to do with this at all? Why are political forces having any say in how solutions are created or distributed? In a market, the assumption is that the choice goes to the consumer with minimal outside interference on entry or exit of potential producers.

Coca-Cola can produce and distribute its soft drinks very, very cheaply because it has this vast sunk-cost investment in an apparatus for production and distribution, and, not incidentally, can make use, in many places in the world, of a vast infrastructure of public and private investments in transportation systems, electric grids, law enforcement, blah-blah-blah.

The doctrine that Coca-Cola is governed by a competitive market mediating consumer sovereignty is a lie. It is an elaborate lie — or if you prefer, a myth. Myth or lie, it is not factually true. It can not be supported by simple straightforward denotation of actual processes and structures. The “market” is just a metaphor, a bit of ill-advised poetry at best. “In a market, the assumption is that the choice goes to the consumer with minimal outside interference on entry or exit of potential producers.” is repeating an ideologist’s carefully crafted lie; it is certainly not descriptively accurate.

The reality is that Coca-Cola has this vast sunk-cost investment and an administrative bureaucracy operating its systems of production and distribution, embedded in and cooperating with other systems, also administered by bureaucracies. That’s where the politics comes into it. A bureaucracy is a political organization, a way of generating and exercising political power. Coca-Cola needs the cooperation of governments to enforce its trademarks, to protect its product during shipment, and it needs the cooperation of other private business bureaucracies to distribute and retail its products. It needs to negotiate shelf-space with supermarkets, for example. It administers coordinated campaigns of promotion and advertising with retailers, advertising agencies, subsidiaries of giant media conglomerates.

Coca-Cola is earning a return on its vast sunk-cost investment 130 years in the making. By definition, a return on a sunk-cost investment must be a kind of economic rent. Where the return is reproducing the sunk-cost investment on a long time horizon, it can be called a quasi-rent. In market parlance, economic rents are “unearned” and “economic rent” is treated as an unqualified pejorative by some right-wing economists and the real ideologues can fume and fart over the horror of politics creating economic rents, while a real, competitive market economy supposedly eliminates economic rents. This is all misleading bull excretions. The reality is that all returns on sunk-cost investments, if there is any return at all, constitute economic rent, which means that if the political economy is to find a way to finance investment, whether public or competitive private investment, it must find political means to capture and channel economic rents to do so.

It may be a good thing, on the whole, that Coca-Cola Company was able over the course of more than a century to earn economic rents and use them to finance investment to build up a highly-efficient world-wide system of production and distribution. I am inclined to believe it was. It was a huge achievement. But, it was a political achievement as much as an economic achievement. It was an achievement of assembling a great organization. It was an achievement of winning political acquiescence from many public and private entities, with which it cooperated. Many are aware, I am sure, of how Coca-Cola leveraged its participation in WWII to build up a worldwide network of highly efficient bottling operations. That’s the reality of how business is done. Some may know of the long, slow process by which the corporation has surpassed and suppressed independent bottlers and distributors in many advanced economies. That’s also how business is done. It is political. For sound economic reasons. And, there’s no point in denying, . . . except ideological deception.

28

Bruce Wilder 07.25.15 at 11:23 pm

I should have said something, too, about the essentially political nature of organizing the operations of, say, a bottling plant. There’s a hierarchy controlling the operation, selecting people and rewarding them with status, exercising and extending authority. It is intensely political. None of the internal transactions are likely to be the least like a “market”. If anything, it is probably more like being in the army or a civil service administering a public utility.

29

Colin Danby 07.25.15 at 11:41 pm

jch: you might see also http://www.bruegel.org/publications/publication-detail/publication/629-an-evaluation-of-imf-surveillance-of-the-euro-area/

There’s much support there for your views e.g. “The Fund placed excessive focus on fiscal policy and neglected private-sector vulnerabilities” (20) or the stunning page 15 discussion of 2007 recommendations re Ireland. There was clearly a pre-crisis tendency automatically to attribute observed imbalances to failings in “competitiveness” to be addressed by micro reforms, in particular measures to squeeze labor.

OTOH, as the Bruegel document argues and the Blustein papers spell out much more vividly, the IMF staff view on Greek debt and the plausibility of adjustment packages has been since 2008 pretty good, and has been overridden by the rest of the troika with disastrous results, and is still being overridden by the troika with more disastrous results yet to come. Europeans are too powerful on the IMF executive board and the IMF has been run by too many French finance ministers.

The key areas of IMF staff expertise in crisis mgt are macro: public finance, the financial system, monetary questions, debt service. IMF staff have always been pretty clear that micro or market-level reforms are part of medium to long-run policy and are unlikely to help much in the middle of a crisis.

Hence the essential euroswindle: you’re offered a tradeoff between messy democracy and cold efficient neoliberal technocracy, and maybe you say OK I’ll take the latter. But you don’t get the latter! You get a stunningly wasteful botch of the financial/monetary system plus permanent recession in the European South, swamping any likely effects (good or ill) of particular market reforms.

30

b9n10nt 07.26.15 at 12:05 am

BW,

Earlier this week David Brooks wrote about the minimum wage and climaxed with the inevitable formulation “you can not intervene in the market without unintended consequences”.

Thanks to continued efforts to unlearn my capitalist-libertarian upbringing, I can begin to see that this is pure Religion, even a kind of ritualistic incantation (I’m not being metaphorical): there’s a clockwork mechanism called The Market that can only be Intervened in (rather than, say, engineered or designed) by causing a cascade of defects to the otherwise benign mechanism.
My question is this: could you further clarify? Perhaps by a kind of reductio ad absurdum argument: What would it look like, institutionally, if Coca-Cola really were produced and distributed within a market. I realize you touched on this somewhat directly above. Could you elaborate or suggest non-technical literature that elaborates on the gulf between what an actual market society might look like and the actual institutional reality that David Brooks purports to describe?

Thanks.

31

Ram 07.26.15 at 4:14 am

Pareto efficiency seems to get a bad rap on the internet. Let configuration A be better for some people than configuration B, and let B not be better for anyone than A. Surely we can agree that A is a better configuration than B from a social point of view? If so, then it trivially follows that the social optimum, which is at least as good as all other configurations, is Pareto optimal. In short, it is uncontroversial that Pareto efficiency is a *necessary* condition for social welfare optimality.

Pareto efficiency is not, to be sure, sufficient. If one person has everything, Pareto efficiency holds, yet society would be better off under any number of Pareto inefficient configurations featuring at least some equity. Still, it is a mathematical fact that *any* Pareto efficient configuration can be implemented by combining cost-benefit optimality with some kind of redistribution. Since we’ve established that Pareto efficiency is necessary for social welfare optimality, it follows that the social welfare optimum, whatever it is, can be implemented by maximizing benefits net of costs against an appropriate distribution of endowments.

This is why economists care so much about Pareto efficiency. We can separate, mathematically, the controversial question about the appropriate distribution of income, from the uncontroversial question that benefits should be maximized net of costs. Economists can then focus their analysis and advising on the latter, and let society make a decision one way or another about the former. At least that’s the way it’s taught. Economists can push for labor market deregulation, for example, without worrying about its distributive implications, because labor market deregulation can always be paired with greater transfers to achieve the appropriate distribution while moving us towards the Pareto frontier.

Some economists might support such deregulation, while others might oppose it, but the nice result above allows them to disagree on its implications for economic efficiency, without having to worry about its distributive implications, which complicates the analysis considerably, and necessarily introduces controversial normative assumptions.

All of this ignores the political observation that, whether or not greater transfers could make up for deregulation’s distributive implications, such transfers don’t materialize. Note, however, that this analysis doesn’t assume that each policy change is paired with its own compensation scheme. It simply assumes that they take place against a background of institutions constraining the distribution of income from spreading too wide. A well-designed, generous welfare state can accomplish this. We may feel that a particular country’s welfare state is inadequate, but if we’re worried about distributive issues, we should focus on that, and not on policy instruments like regulations, public ownership, and so on which have major effects on economic efficiency.

(I say all this as someone who wants the US to look more like Denmark, so I’m not a libertarian troll. Note, however, that but for its welfare state, Denmark has some of the most market-oriented policies on Earth.)

32

John Quiggin 07.26.15 at 5:04 am

Ram, rather than rehearse the textbook case, why not respond to the post I linked?

33

Peter T 07.26.15 at 5:11 am

Ram @31

For starters:

– assumes “benefits” can be calculated, and summed to some common denominator;

– assumes ditto for “costs’;

– assumes that any scheme of distribution is separable from the general scheme for maximization of benefits (that is, that people only care about how much they and others receive, and that this is separable from the ways in which the social surplus is earned).

None of which I would regard as empirically true.

So where do we go from here?

34

Swami 07.26.15 at 5:47 am

Bruce,

Thanks for the lengthy reply and clarification of your views. I can assure you that I’ve spent decades designing products, bringing them to market, pricing them, and trying to sell them in a heavily regulated industry within a large “political” corporate bureaucracy. You are preaching to the choir.

That said, I stand behind every paragraph on my initial comment. Nothing you said affects the dynamic of which I was referencing. Indeed, I am not entirely clear why you assume they would. If you believe I am overlooking something, it would be productive to quote me and point out specifically why it is wrong.

35

Ram 07.26.15 at 5:57 am

John,

I read your post. Personally, I’m not interested in Pareto the man, nor in the history of the idea–I think the usefulness of Pareto efficiency can be evaluated independently of its intellectual origins. Your second point seems to be concerned with the term “optimality”. Unfortunately, I’m also not interested in semantics. Call it “Pareto efficiency”, or if you like, call it “Pareto french fry”, as I don’t think that is relevant to its assessment either. You also seem to concede my point in passing, that optimality consists not only in Pareto efficiency but also in an appropriate distribution of (in your formulation) property rights. So I think on the substance we’re agreed, which makes me think you also see that Pareto efficiency is a useful concept, even if you don’t care for its history or the terminology.

And I agree with you that opportunity costs are an even more useful concept. But it doesn’t have to be either/or.

36

Ram 07.26.15 at 6:05 am

Peter T @ 33:

On your first two, the result I’m referring to is invariant to how we compute benefits and costs, except to say that people are willing to pay for changes that make them better off, and to prevent changes that make them worse off. Define benefits as total willingness to pay for a change, costs as total willingness to pay to prevent it. Then everything else goes through, without us having to spell out how the benefits and costs are actually calculated. Of course, to actually do cost-benefit analysis we have to do that, but the point I was making isn’t committed to any specific algorithm.

Your third point is an interesting one. The framework I’m considering is one where society is choosing between different configurations, and people’s preferences range over these configurations. You’re considering the possibility that the range also over the mechanism of social decision. Certainly people have such preferences, as revealed in their political acts, but I’m a consequentialist, so I interpret those preferences as mixtures of preferences over outcomes and beliefs about consequences, and these beliefs may be mistaken. But you’re right, I’m presuming consequentialism.

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Peter T 07.26.15 at 6:23 am

John in the OP, (and Ram) arguments are based not on utilitarianism broadly, nor on consequentialism broadly, but on what might be labelled “economism” – the assumption that consequences or utility can be measured, transferred, accounted for…In the end this always comes down to money, since the other things cannot be measured.

Note Ram’s “Define benefits as total willingness to pay for a change, costs as total willingness to pay to prevent it”, with it’s telling word “pay”.

38

Ram 07.26.15 at 6:35 am

Peter T,

Yes, but don’t think about money playing its conventional role here. In this setting, payment is a kind of voting mechanism, and money is votes. If society, given its distribution of votes, is willing to put more votes for something than against it, it is a benefit-cost improvement. And every benefit-cost optimum is a Pareto optimum and vice versa (though not every benefit-cost improvement is a Pareto improvement).

The analysis here is really about weighted decision mechanisms. Some decisions dominate others, and some can’t be dominated. Any non-dominated decision can be implemented with a certain set of weights on the deciders. Replace “weight” with “money”, and “decision” with “configuration”, and you get welfare economics. Replace “weight” with “prior probability” and “decision” with “rule”, and you get statistical decision theory. It’s not really an economic fact, it’s a mathematical fact about the nature of optimization.

Note that all of this is totally separate from questions about whether markets are good at optimizing benefits net of costs, or any other mechanism. It’s just a way of thinking about the problem of optimization itself. And it’s useful in economics because it allows us to break one very hard problem down into two separate, still quite hard but somewhat less hard, problems–viz, efficiency and distribution.

39

gabrielfgm 07.26.15 at 8:04 am

Hi Ram,

Thanks for laying out your view on pareto optimality you have a very clear way of putting the matter. However, I don’t agree with your analysis.

I had this argument with my micro-econ professor several years back. I thought then, and I think now, that the belief – common amongst economists – that the ‘efficiency’ question can be separated from the ‘distribution question’ is false.

The problem is that you are assuming that the choice of policies governing efficiency, and the choice of policies governing distribution, are somehow exogenous to the actual distribution of goods in the economy. This doesn’t seem to be true at all, and that means that a ‘pareto improving’ intervention at time T may have effects on both efficiency and distributional outcomes at times T+1, T+2, etc.

To take your example from above:

“Economists can push for labor market deregulation, for example, without worrying about its distributive implications, because labor market deregulation can always be paired with greater transfers to achieve the appropriate distribution while moving us towards the Pareto frontier.”

This only holds true if labor market deregulation does not impact the relative ability of labor/business to influence the creation of subsequent policy interventions. If the policy process is endogenous (as it would certainly appear to be to me), than an ‘efficiency’ intervention can have predictable effects on the choice of policies selected subsequent to that intervention. You note that the requisite transfers to achieve some desired distribution seem to rarely materialize, but seem to be treating this as somehow unrelated to the effect of the ‘efficient’ policy advice itself.

More broadly, this comment is pointing out that if you think political economy matters – and really irrespective of which flavor of political economy you prefer – then any policy intervention that shifts relative economic outcomes can have effects on the sets of rules going forward that govern either efficiency or distribution. And in consequence it doesn’t make sense to treat ‘efficiency’ and ‘distributional’ issues like they can be considered in isolation from each other.

40

john c. halasz 07.26.15 at 8:43 am

41

ccc 07.26.15 at 1:27 pm

@kidneystones: Not pedantry, only moral philosophy 101 stuff. Henry’s title confusingly implies there is a form of utilitarianism without “left-wing bits”. But the article only describes a non-welfaristic form of consequentialism, no view that can non-confusedly be called utilitarian.

“You’re saying that utilitarianism that departs from Bentham’s view ‘can’t’ be Bentham’s utilitarianism.”

Obviously. But maybe you meant to say that I claim that no view that departs from Bentham’s utilitarianism can be a form of utilitarianism? I don’t think that. E.g. Mill’s utilitarianism is not (on the dominant reading) the same as Benthams but Mill’s theory is still maximizing and welfaristic and therefore utilitarian and rule utilitarianism is different from act utilitarianism but both are forms of utilitarianism. But a “GDP maximizing” theory is not utilitarian because not welfaristic. There are some gray areas (e.g. Moore’s “ideal utilitarianism”) but a “GDP maximizing” theory is clearly outside of the set of possible utilitarian views.

“The fact is that many people today employ the term to mean something very different from Bentham’s use of the term. That’s bad, huh?”

Lots of people misuse lots of terms. That often adds confusion which is bad. Bentham’s use isn’t the final word, the crucial thing is instead that there is an widely established contemporary moral philosophy definition of utilitarianism. Check a few intro to ethics textbooks and you’ll see that none will label “gdp maximization” a utilitarian view.

42

Ram 07.26.15 at 1:40 pm

gabrielfgm,

Excellent observation. Daron Acemoglu has made this point nicely in several places. The concern is that, if we deregulate the labor market, this will generate a level of inequality that will put some individuals in a position to undermine efficient policies (which threaten their privileged position) and equitable policies (that threaten their wealth and political power). Suppose, however, that we made the following deal: every time we pass a policy that (we think) increases efficiency, but also increases inequality, we pair it with an increase in the generosity of transfers. This way, economic and political inequality will not change, while efficiency will increase. Would you (and others) be more favorably disposed to the policy recommendations of economists if they met this standard?

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Ram 07.26.15 at 1:46 pm

Note that I’m not claiming this is on the table, politically speaking. The point is just that, while we haven’t separated efficiency-increasing policies from equality-maintaining policies in this framework, as you point out, we have restricted them to separate policy domains: the instrument of producing and maintaining a measure of equality is a system of progressive taxes and transfers, with other policy instruments reserved for efficiency considerations.

44

Swami 07.26.15 at 3:48 pm

Ram,

Seems like this pretty much describes the actual trend in most of the western world for the last century or so (informally). The benefits are the safety nets (and all their ensuing advantages to human welfare) and public goods built into most modern economies. The costs are of course potential negative dynamics of zero sum wrestling over the fruits and costs of the distribution, and the effects on incentives (free rider issues).

Once the nature of the game fundamentally shifts to a zero sum dimension, all is lost. As my initial comment above reveals (which rejected the win/lose framework of market competition the author of the article proposed), markets may have pros and cons as a problem solving system, but they are essentially and empirically positive sum, value creating processes. This is not necessarily the case with redistribution.

Also, we need to be careful about assuming we know what the proper level of inequality is. In other words, we aren’t necessarily at the magic number today, nor is the magic number perfect equality.

45

Ram 07.26.15 at 4:19 pm

Swami,

Yes, under the influence of economists, lots of regulations have gone away, lots of formerly public enterprises have been privatized, lots of government spending has been reduced, and marginal tax rates have come down. At the same time, countries throughout the developed world have been increasing the generosity of their welfare states. The broad contours I see as desirable, though there is a great deal to dispute in the details of course.

I agree that the potential to improve people’s lives through growth is far greater than the opportunities afforded by redistribution, but I don’t think this has to be either/or. We can have growth and a reasonable measure of equality. Yes, there is a tradeoff, but there are points on the boundary that feature a good pace of growth and a high degree of income compression (see, e.g., Denmark).

I’m not sure there is anything to “know” with respect to the proper distribution of income. The target, ceteris paribus, is equality, simply for fairness reasons. At some point, this cuts against efficiency. Different people will trade these off to different extents depending on their (implicit) social welfare function. I don’t think it’s meaningful to speak of a true SWF, so there is really nothing to “know” per se. Still we can see that for any reasonable SWF, efficiency is a priority, but so is equality, and so when we have egregious inequality or egregious inefficiency, we know we’ve gone too far in one direction or the other. When things are less egregious, there is room for reasonable people to disagree, and there is no fact of the matter about the right course, in my view.

46

Bruce Wilder 07.26.15 at 6:46 pm

Swami @ 34

I do apologize for what may appear to be a bit of a shaggy dog story, and one where I seemed to omit the punchline.

In your first comment @ 16, you took O’Rourke to task for his rather confused whining about Pareto improvement and his claim, “trade and competition produce both winners and losers”.

You recalled the logic of gain or benefit from market exchange, competition, specialization and trade, and made some points about the nonsensical introduction of an infinite regress of counterfactual speculation about opportunities lost, as “costs”.

I don’t think O’Rourke quite knows what he’s talking about either, and the careless, sloppy claim, “trade and competition produce both winners and losers” reflects that. Comparative advantage is a very robust argument to the effect that trade and specialization in the context of competitive market exchange sets up the framework of a positive-sum game. Increased specialization and trade, in almost any circumstance (within that context), yields a gain, and more than that, mutual benefit to the participants.

O’Rourke appears dazzled and confused by the scholastic stylizations of formal economics — Stolper-Samuelson, Kaldor-Hicks, Pareto improvement, yada-yada. Who can blame him, really? That sort of thing is meant to transform fundamental insights into esoteric jargon. Falling down that rabbit hole, as O’Rourke demonstrates but doesn’t quite realize, takes one into a surreal landscape, where reasoning takes on strange powers and nothing is as it ordinarily seems. Be that as it may.

My objection to your comment was no defense of the indefensible O’Rourke.

My objection to your account of “market” competition, specialization and trade is that it rather conspicuously left out the role of capital investment as a strategic means of changing costs and bargaining positions.

You have a coherent account of competition, trade and specialization in the context of market exchange, and make some claims about the dynamics of “properly function[ing] markets”. But, you omit the most conspicuous dynamic of the last 300 years: capital investment embedding technological advancement. You talk confidently about a “market” that scarcely exists, except as the most strained bit of poesy.

The actual developed world economy is an economy of bureaucratic hierarchies. Very little exchange takes place in the context of an actual market in the economics sense of exchange with competitive bidding determining an equilibrium price. The “market” dynamic that you so confidently expounded in your first comment scarcely exists, and the dynamics that do exist, you ignored.

It is weird to me that you could spend your career working competently at a high professional level in a corporate bureaucracy, and still believe that a myth of competitive market exchange explains and justifies our actual economic system. I suppose that is somehow in the nature of myth.

I tried to take up the soft drink example you proposed, as an illustration. You wondered: “I am not sure if you are suggesting that the world would be better or that markets more be more free if everyone had identical opportunities to enter this market as a full scale producer. “ I wasn’t suggesting a counterfactual or a moral imperative; I was pointing out the factual.

I deliberately did not resort to emphatic declarations about what’s right or wrong policy, with regard to our actual economy of bureaucratic hierarchy. People leap too easily, too quickly to simple moralism to see the mechanisms, as it is. That’s one of the ways the Myth of the Market keeps going: people like the confident moral judgements it legitimizes, while failing to notice that it is mechanically and descriptively a lie.

I will note in closing that many actual policy problems and dilemmas follow from the dynamic of sunk-cost capital investment changing costs and bargaining positions and the necessity of business securing sources of economic rents (in property rights), in order to earn a return on their investments. This is how a “free trade agreement” like the proposed Transatlantic trade and investment partnership referenced in comments above, becomes in fact and detail about intellectual property and making democracy safe for corporate investment planning.

The economists are instructing us into the myth of a market economy and inviting us to evaluate the logic of international agreements on trade in light of that myth, in light of the supposed dynamics of properly functioning competitive markets. (Markets that mostly don’t exist, and ceased to exist as much as a century ago or more.) But, the actual details of such an international agreement have to do principally with the needs of an economy organized around sunk-cost investments and hierarchies and economic rents.

Intellectual property claims are pretty nearly pure political claims on economic rents. I wouldn’t say that IP or economic rents are per se some evil things. That’s just mind-numbing moralism. Large business corporations — private enterprises organized as hierarchies (bureaucracy), not “markets” — organize much of the most remunerative economic activity in advanced economies, and they are organized around the property rights and structures that allow them a claim on economic rents. There’s no necessary relationship between the social value of what they do or what they invest in, and their capacity to collect an economic rent, but the ability to collect an economic rent determines if they are able to finance investment (i.e. to capture a return on sunk-cost investment) or able to operate as a bureaucracy. Movie studios depend on their extensive rights under copyright law for example, and pharmaceutical companies their rights under patent and trademark law. It isn’t surprising that they would be deeply interested in international agreements to extend and strengthen these claims.

Are there “winners and losers” in tweaking the international rules that govern these claims on economic rent? Is there a clear moral imperative of mutual or general gain from strengthening the claims of established business corporations to IP economic rents?

I don’t think the myth of the market is helping us much in identifying the public policy interest in “free trade” agreements that are focused on IP and protecting the economic rents of corporate capital investment planning. I don’t see this as a problem stealth utilitarianism and cost-benefit analysis, either. YMMV.

47

Collin Street 07.27.15 at 12:31 am

> a claim on economic rents

It is not possible to be profitable in an environment entirely free of rent, because:
+ perfect competition sets prices at the marginal cost of production of the lowest-cost producer
+ prices matching the marginal cost of production don’t cover the fixed cost of production, which is never zero, and that price doesn’t even cover the marginal cost of production of any higher-priced producer anyway.
[in fact it’s worse than that: it’s not the marginal cost of the lowest-cost producer, it’s what the most optimistic producer believes their cost to be, which law-of-large-numbers we can pretty much guarantee doesn’t cover anyone’s marginal cost let alone fixed. In a perfectly competitive market everyone is making a loss on each unit sold.]

[Which means that the existence of an opportunity for profit is the gift of the state, although of course whether you can take advantage of the opportunity and be profitable in any niche the state permits you to hold is up to your own abilities as well. In light of this fairly-straightforward result the existence of economists who aren’t some form of socialist is just baffling, and actually pretty concerning.]

48

Andrae 07.27.15 at 6:15 am

CS @47

I don’t see how “the existence of an opportunity for profit is the gift of the state”?

Your model includes fixed costs, and therefore presumably, capacity constraints on producers. If prices are below the marginal cost of production, we can expect that only a very few producers will produce inventory—only those who estimate their marginal cost of production incorrectly. While the law of large numbers will guarantee some supply at this level, the capacity constraints implied by the existence of fixed costs will prevent the market from clearing at this price.

Therefore, there will be unsatisfied demand that will allow the price to rise slightly, resulting in a classic supply/demand equilibrium. Although, at this level some producers will be losing money after accounting for fixed costs.

The most efficient producer will be able to sell at the higher price, collecting an economic rent that has the potential to cover the fixed costs associated with production.

I’m not sure how you get from here to these rents being “gifts of the state”, but I am happy to learn.

49

Swami 07.27.15 at 1:50 pm

Andrea 48,

Yeah, that comment has me scratching my head too. Best I can figure is that the simplified theory/model “proves” reality as it is cannot exist, so therefore the difference between theory and reality needs to be explained via state interference. I’d suggest first double checking the model simplifications….

50

reason 07.27.15 at 2:15 pm

Bruce @46
I think you are being too fair to swami. The key question is “what is the counterfactual”. Swami’s counterfactual is total autarchy. While you could literally read O’Rouke as meaning that, any rational person would assume that he was talking at the margin, and noting that changes in the regulatory/tax environment will leave some people as losers. I don’t think this is controversial.

51

Swami 07.27.15 at 2:52 pm

Bruce @46
“My objection to your account of “market” competition, specialization and trade is that it rather conspicuously left out the role of capital investment as a strategic means of changing costs and bargaining positions.”

It was a blog comment. I left out all kinds of stuff, imo none significantly relevant to my argument. Here is what I actually said about market dynamics…

Start self quote; “The dynamic of properly function markets works by observing we can solve more problems, better, more efficiently by a process of specialization and exchange. Individuals can choose to access the potential benefits of markets by agreeing to compete constructively with other producers to solve problems for consumers. This competition involves a fascinating type of zero sum dimension within a larger positive sum game… The other advantage of the market is of course the dynamic that it has on producers. The difficulty in winning sales acts as an incentive and signal to potential producers to either change their product, their production technique, their industry or their consumer target. As such it drives producers to problems which they are best, comparatively, at solving.” End self quote.

“You have a coherent account of competition, trade and specialization in the context of market exchange, and make some claims about the dynamics of “properly function[ing] markets”. But, you omit the most conspicuous dynamic of the last 300 years: capital investment embedding technological advancement. You talk confidently about a “market” that scarcely exists, except as the most strained bit of poesy.”

Sorry, my comment stands. I am well aware of the effects of capital investment, network effects , and regulatory disturbances within and around this dynamic. In fact I am sure I could add to your list of horror stories (dark comedies?). Do note that the term “change their product” often explicitly means entering a different market altogether. If productive investments can’t be made in soft drinks, the potential producers can go into B&Bs, start a dentistry practice or open a laundry. As I believe I added in a later comment, the other natural action (by far the most common) is to enter the world of production within one of these existing bureaucratic corporate teams as a specialist.

“The actual developed world economy is an economy of bureaucratic hierarchies. Very little exchange takes place in the context of an actual market in the economics sense of exchange with competitive bidding determining an equilibrium price. The “market” dynamic that you so confidently expounded in your first comment scarcely exists, and the dynamics that do exist, you ignored.
It is weird to me that you could spend your career working competently at a high professional level in a corporate bureaucracy, and still believe that a myth of competitive market exchange explains and justifies our actual economic system. I suppose that is somehow in the nature of myth.”

Nonsense. I spent untold hours of meetings and serving the God of bureaucratic BS. But in the end the dynamic which held our mighty corporation to task is that we had to actually get consumers to buy the product, to choose us rather than one of our myriad competitors. To sell more and gain profit, I had to change the price, change the product, design new products, create new product categories, refine our production or distribution processes for better quality or efficiency, or expand into a new market.

And guess what… That is what we did. And our competitors did the same. That is what I was paid to do, and if the story you are telling yourself from your computer conflicts with that, I would suggest you stop your elaborate rationalization and yarn spinning and actually spend some time with the people who make a living doing it.

One of is indeed living in a myth. In other words, I spent almost three decades successfully building bridges, which your theory posits cannot exist, and you are suggesting I am confused? Hmmmmm….

52

Swami 07.27.15 at 3:05 pm

Reason @50

I don’t find that controversial either. Policy changes will indeed create relative winners and losers. I was taking exception to his comment that markets are themsleves inherently zero sum. They aren’t. Here was the snippet I was riffing on in my initial comment….

“But if economists took this injunction seriously, then they could never say that free trade was preferable to protection, or that the European Single Market was a Good Thing, since trade and competition produce both winners and losers. What is an economist determined to be useful to the world, by distinguishing between good and bad policies, to do?”

53

reason 07.27.15 at 4:01 pm

This clearly refers to the evaluation of the difference between free trade between nations as against trade between nations with tariffs, not the difference between trade of any sort and no trade of any sort. I regard you interpreting it in the more extreme way as taking liberties.

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reason 07.27.15 at 4:05 pm

P.S. The fact that some process is positive sum in general, does not mean that it is a pareto improvement and there are no losers. It is only absolutely true that the move from (individually) no trade to (voluntarily) some trade is a positive gain (because it is voluntary). But once there is already some trade and reducing barriers results in trade diversion, this universality of the improvement disappears.

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JimV 07.27.15 at 4:27 pm

I worked for the General Electric Large Steam Turbine Engineering Department for 35 years, mostly under Jack Welch’s reign. Welch’s market appeared to be based on the overall GE quarterly performance versus financial analysts’ expectations. As long as he could meet or beat those expectations (which were monotonically increasing) every quarter, his salary and prestige would also increase.

Meanwhile, back in the Turbine Department, we were trying to “get consumers to buy the product, to choose us rather than one of our myriad competitors” by “chang[ing] the product, design[ing] new products, …”. Turbines are big (up to roughly 1000 tons), expensive machines. To test our changes and new features we ordered large forgings of high-strength alloys for prototypes, costing millions of dollars. Twice in the early 1990’s the order came down from Welch to reduce our costs by xM$ because some other division of GE “was not making its numbers”, and the shortfall had to be made up so that Welch’s private market would continue to succeed. So we had to cancel the forging orders (paying cancellation costs) and/or sell the ones we had received for scrap, and start our test program over again the next year.

Perhaps one of the problems of simplistic market ideology is that there are many overlapping markets with conflicting sources of profit; perhaps another is that markets are run by humans.

56

bianca steele 07.27.15 at 5:05 pm

What’s interesting about Bruce’s argument, if I understand it correctly, is that it logically implies that Jim V’s group was doing the wrong thing. If the most important person in the corporation is the CEO (his perceptions and motivations drive the corporation), the correct thing for others to do is to behave as if they’re in a military hierarchy, as he says, and to accept the CEO’s worldview for themselves. To think otherwise would be immoral or improper. Presumably he allows that the CEO (of GE and of smaller companies) behaves according to a market, as Jim says, and doesn’t himself act within a military style hierarchy, where in fact decisions are made top down, somehow. I’m sure Bruce will correct me if I have it wrong.

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Bruce Wilder 07.27.15 at 6:44 pm

bianca steele @ 56: Bruce’s argument . . . is that the most important person in the corporation is the CEO (his perceptions and motivations drive the corporation), the correct thing for others to do is to behave as if they’re in a military hierarchy, as he says, and to accept the CEO’s worldview for themselves. To think otherwise would be immoral or improper.

The Führerprinzip? Wow!

It wasn’t my intention to argue the duties of participants in hierarchical business. And, even if I were to argue out the functions and performance standards of a private business bureaucracy, I certainly would not adopt as my unalloyed ideal, Neutron Jack Welch, nor would I argue that CEOs, in general, can do no wrong.

The ambition of my argument is far more modest: just to establish the fact of bureaucratic hierarchy as the actually existing dominant mode of economic organization, against the persistent myth of “the dynamic of properly function[ing] markets”(Swami), and particularly the religious faith that politics should stop at the edge of the competitive market. To quote Swami:

What does political power have to do with this at all? Why are political forces having any say in how solutions are created or distributed? In a market, the assumption is that the choice goes to the consumer with minimal outside interference on entry or exit of potential producers.

I think this is nonsense on stilts. I took Jim V to be supporting my view that politics permeates the organization and operation of the actual institutions of the actual economy.

I hope that clarifies things at least enough to redeem me from the implicit accusation that I am thorough-going authoritarian.

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William Timberman 07.27.15 at 7:50 pm

I think I get the idea that sunk-cost investments can create pricing power, and guarantee market share, at least for a time, and that the profits accrued may thus be thought of as a form of economic rent. It also seems plausible that defending the initial advantage of those who’ve made such sunk-cost investments can result in all sorts of successful assaults on what we’ve otherwise been disposed to think of as a market’s pricing power. What I’d like to hear about, though, is BW’s take on the effects of so-called disruptive technologies.

Microsoft, for example, required little in fixed-cost investment, had a marginal cost of production close to zero,, but was nevertheless able to destroy the value of quite a lot of other companies’ sunk-cost investments, and collect colossal rents on what amounted initially to some pretty shaky intellectual property. Now, the environment has changed again, and were it not for other people’s sunk-cost investments — enterprise client-server architectures etc. — Microsoft might already be toast, and may yet be, if they can’t eventually figure out how to swim in an Apple/Google ocean.

And what about Uber, AirBnB and such? Write a smartphone app, charge folks with a car and some spare time, or an empty room in their house in Miami or Honolulu or Paris to use it, and bingo! taxi and hotel companies in cities all over the world go berserk. The founders’ biggest investment, far bigger, one presumes, than the salaries of their programmers, seems to be for lawyers to fight regulatory bans. (The regulatory agencies for all sorts of good and bad reasons, seem to be appalled by these revoltin’ new developments, and determined to wipe them off the face of the earth.)

Is this a phenomenon with limited economic effect, or will it, if some of our new-age prophets are correct about information being the new capital, affect a much broader range of economic activity than it does now? Does it threaten the ability of industries with large sunk-cost investments to extract rents from their customers and to secure assistance from governments in defending those rents? Is this just a modern take on the race to drag the newest and fastest spinning machine into your cotton mill before any other capitalist rival can get his hands on one, or is it something new, different, and world-changing? (I’m thinking of BW’s Coca-Cola example, and contrasting it with the successful rise of microbreweries. They’re no threat to Anheuser-Busch, but if I read his analysis correctly, they shouldn’t have been able to exist at all, unless somebody at A-B was asleep at the switch 45 or so years ago.)

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William Timberman 07.27.15 at 8:00 pm

pay folks with a car….to use it. (If I can’t at least get the cash flow right, I probably should stick to lawn-bowling.)

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bianca steele 07.27.15 at 8:15 pm

Bruce:

I confess I’m not getting it. You think the importance of hierarchical bureaucracy, which I think we agree operates only within firms, not between them or between them and government or them and customers or them and investors, is so great that we should stop talking about markets (which operates only between firms, I think we agree, and perhaps wrt customers) in favor of bureaucracy. So: we should emphasize that competitive markets are a thing of the past, old fashioned, in the new administered society? We should reeducate people like Jim who think they should have the market in mind, rather than mindlessly obeying the higher ups, in the real hierarchical nature of reality? Or should we stop before that?

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john c. halasz 07.27.15 at 8:22 pm

W.T.:

Have you drunk any Budweiser lately?

Not that Bruce Wilder needs any defense from me, but he’s in his early 60’s and IIRC has long worked in both public and private bureaucracies. Hence, his standard rants about bureaucratic hierarchy, sunk costs and economic rents, error reduction through production process control, etc. are derived from experience, at least as much as anyone else here.

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William Timberman 07.27.15 at 8:36 pm

john c. halasz @ 61

Pfui Teufel! I’ve never drunk Budweiser, and wouldn’t even if the only alternative were swamp water. I doubt, though, that the demographic I represent has much influence on the marketing decisions of Anheuser-Busch InBev, or any other multinational corporation. I don’t think BW needs defending either, and certainly not from me. I’m just asking: if we ain’t got markets like some people would like us to think we got markets, but on the other hand, if the nature of production, consumption, and marketing-whether-we’ve-got-markets-or-not is changing radically, what’s coming next? Will it be more of the same until the end of time, or is there really something radically new afoot? Or both, or neither? I’m not trying to argue with the teacher, I’m just looking to unconfuse myself a little.

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john c. halasz 07.27.15 at 8:47 pm

W.T.:

Perhaps one clue is how much the “business models” of internet firms relying on advertising revenue and thus the ever expanding scope of consumption. Or else also on predation against the regulation of local economies.

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William Timberman 07.27.15 at 8:58 pm

jch @ 63

And turning everything into piecework at the lowest piece-rates possible, yes. In that, though, they’re not so awfully different from their more established brethren. The nature of their innovation may make getting away with it easier for them for a time, but not forever, I suspect. That’s another discussion, in any case, but one I expect CT will re-visit from time to time. I can’t think of any issue more likely to produce humongously long comments threads.

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kidneystones 07.27.15 at 9:07 pm

@ 51 This rings very true to me. On a related note of people doing the unimaginable, you have to listen to three Labour dunces breath real life into a new, New Labour. http://www.independent.co.uk/video/?videoid=4369574673001

I’m not sure about Corbyn’s policies but he’s the only candidate to capable of matching the optimism I find in 51. http://www.independent.co.uk/news/uk/politics/labour-leadership-jeremy-corbyn-win-would-effectively-form-new-party-says-socialist-group-10419988.html

I try to explain to students that in communist countries, the state owns everything. The kinds of activities @51 is discussing are normal. Creating a society where the state defines markets and demand sounds a lot like hell to me.

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bob mcmanus 07.27.15 at 9:29 pm

BW 57 et al: Sorry, I don’t get it. I am about your age and remember the era of three television channels and three automakers. I can’t see CEO’s seeking economic rents actually controlling the economy, unless the atomization and molecularization and acceleration of consumption, production and markets is a means of domination. I kinda wish you would show a little empirical work on an actual micro market or sector.

I continue to work bottom-up, from the individual to those micro-social structures she creates or is forced into, her self-perception and articulation of desire etc. I want to look at the call-center worker and see her in the regime of accumulation. CEO’s don’t interest me much.

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john c. halasz 07.27.15 at 10:21 pm

Really, Bobby Mc., you’re demanding “empirical studies”? Of what provenance? Given your ADD style of scholarship…

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hix 07.27.15 at 10:30 pm

No, ADD would be me. Maybe Bob really does not understand current accounts then.

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Bruce Wilder 07.27.15 at 11:56 pm

I think of blog commenting as something akin to singing in the shower. I kind of pretend no one is listening and in acoustic isolation I can pretend that I sound OK. Just so, I often imagine my comments are pictures of great clarity. Yikes! Screech!

bianca steele @ 60

I wouldn’t call the interstices between firms, “a market” unless it actually was a market, with competitive bidding forming prices that determined the allocation of resources.

When I went to lunch at a restaurant today, I did not imagine that opening the menu or paying the check constituted participating in a market. The restaurant’s prices are not formed by a market process, such as the competitive bidding at an auction. Those prices are set by, and maintained by an administrative process. When I walk down the aisle at my local supermarket, I am not “in” a market, in an economist’s sense of the word. The prices are artifacts of administrative processes of the supermarket chain and manufacturers and wholesale distributors. There’s no market supply and demand at work: when inventories of bread or milk or toothpaste run short, the price doesn’t ordinarily increase; a bureaucracy swings into action and brings more bread or milk or toothpaste. If the price can be said to change at all, it is as part of a scheme of price discrimination or advertising and promotion. Most of the firms involved are varying their prices on a carefully planned schedule the better to monitor demand and manage promotional activities and competitive marketing.

And, when firms work with one another, bureaucracy rarely stops at the door. There are products that exchange at spot prices, of course, but I think the more usual practice is to contract at fixed prices with standard contingencies. And, contra Hayek or Friedman, no one imagines that much information is packed into price: they pass along all kinds of elaborate specifications. The bureaucratic apparatus with which an automaker manages its parts suppliers is a marvel of 21st century modern major generals. Ever heard of Toyota’s Just-in-time system or Six-Sigma quality control?

I’m not trying to talk hierarchy up or down. The good or bad of it is less important to me than simply observing the reality. This is how we do things. This is how we achieve whatever modicum of efficiency we manage. Bureaucratic fiat, not market price, is how we organize things.

We have prices and money, and money is the lubricant for a loosely coupled system. But, the couplings are only rarely markets. As with supermarkets and malls, the interstices are themselves carefully administered spaces. So, yeah, it is handy that you can go out and buy an iPhone for $200 (on a 2 year contract from a phone company that has agreed to subsidize the phone and charge you for the subsidy). But, no where in that net of relationships between Apple, the cellphone company and possibly other businesses is there anything recognizable as a market or market price. Price, yes. But, administered prices, with explicit or implicit contractual contingencies.

In the economist’s story, a market price allocates resources. The market is a kind of valve and the price is a setting of the valve, and supply and demand flow thru the valve, with the equilibrium price bring the two, opposed flows into equality.

That’s not what is happening in our money economy, at least in most cases. Again, there are some markets, where there happens. There’s a spot market for gasoline, and when supplies are restricted the price of gas will rise. The gas station where you fuel your car is unlikely to engage in bidding with you. For the gas station, the price they charge you is an administered price; the price they set is simply a markup on what they pay. Chances are, their “real” business is the grocery or the repair shop, and they expect to simply breakeven on the gas.

In the actual economy, the price is administered as one aspect of the administrative control of the business (or more specifically, the production and distribution processes). If I’m operating a bakery, administering the business means making sure employees show up, the shop opens on time, the goods are baked according to recipe, motivating customers to show up, and so on. I am subject to some bureaucratic regulation by the government: somebody shows up periodically to make sure the bakery is clean enough, that I am following procedures deemed necessary to hygiene like I’m doing my part to make sure employees wash their hands in the bathroom and wear hairnets. Libertarians are horrified of course by this regulatory “burden”, and the bakery manager experiences it as annoying and intrusive, but it is one of many ways that bureaucracy crosses the interstices between government and business enterprise.

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engels 07.28.15 at 12:03 am

blog commenting as something akin to singing in the showe

Think of it as singing in the shower which is recorded on tape and made permamently accessible to billions of people.

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bianca steele 07.28.15 at 1:44 am

Bruce,

I don’t know who you’re arguing with. Nobody has said (or even implied, at least not in this thread, or anywhere on CT in the past month) that markets operate within organizations to control interactions between individuals, or that they should. There is no reason to think we should be operating with an absolute dichotomy between markets and “the army”, where everyone’s decisions are controlled by either the (as you say now, nonexistent) market, or by a military style hierarchy.

Really, you think there is nothing like a market, at all? No “information transmitted” by price and demand, even in an abstract sense? (Not that that’s what firms mean when they use the word “market”, but leave that to one side.) Even if that were true, even if everything were calculated top down within an organization in an administrative manner–even if government controlled firms, and big firms controlled smaller ones–you have to know that “hierarchical bureaucracy” is precisely totally wrong to describe what would be going on. And surely this is a sudden change of heart! Are you making fun of me for saying a year or so ago that there was no real market for something or other? Are you making secretly defending the deep truth of fun of “I, Pencil”? Are you making fun of the commenters in the free beer thread and daring them to develop a theory that might rival the standard one?

What are you doing? Are you trolling? Are you playing some weird discursive game that no one else is aware of? Truly, if comment threads had something like a Zeitgeist, it would have to be said (until recently) that you have a talent for articulating it even before its birth. Is that worth it?

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bianca steele 07.28.15 at 1:49 am

I want to look at the call-center worker and see her in the regime of accumulation.

What a lovely sentence.

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john c. halasz 07.28.15 at 2:46 am

I missed that global shower stall theory before. By that standard, I must be Caruso!

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LFC 07.28.15 at 2:54 am

Coming in late to the thread and this comment won’t deal w the OP (whose links I haven’t read). But I have to say something re the bianca steele /Bruce Wilder exchange in the last several comments here.

BW is saying, ISTM, what he frequently says: that truly competitive markets in the textbook sense are rather rare, and that most prices set by big enterprises are not market prices in the textbook sense but “administered” prices, set by firms (and their bureaucracies) in some way that does not relate in any direct way to supply and demand. I’m a bit younger than BW and I’m not an economist, but I first heard or read the term ‘administered prices’ when I was in college or possibly even high school, from which (h.s., I mean) I graduated 40 years ago. This is not new. Galbraith and others popularized the notion of administered pricing a long time ago. The phrase got into the culture to the point where non-economists became conversant with it, even if (like me) they probably couldn’t produce a very precise definition of it.

To what extent prices are ‘administered’ in the Wilderian/Galbraithian sense in an economy dominated in significant part by oligopolies I don’t really know (a non-trivial extent, I suppose), but I sort of take it for granted that perfectly competitive markets are rare. If there’s an early frost in Florida and the supply of oranges drops, the price of Florida-produced orange juice will likely go up; ditto for the spot market for gasoline, as BW said. But these examples are prob. more the exception than the rule. That’s the part of what BW is saying, at any rate, that I understand.

The rest of the stuff about corporate hierarchies seems to be related in some way, but I’m not sure the points are intrinsically connected in the way BW seems to think. A big corporation w a relatively flat, non-hierarchical structure could still ‘administer’ prices, istm, particularly in any sector of the economy where there’s not a lot of classic price competition, i.e. quite a few sectors of, e.g., the U.S. economy. Or so it seems to this non-economist.

I don’t know whether this is helpful or reasonable or whatever, but…

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bianca steele 07.28.15 at 3:38 am

LFC,

You’re endangering your reputation for moderation by defending the rants displayed on this thread as if they were just more of the usual calmly disputing Bruce Wilder. I think probably you haven’t been following closely and/or don’t really understand what’s being discussed.

Bruce wrote: As I repeat endlessly, there are very few actual markets in the economy, and talking about the economy as a “market economy” is inherently deceptive. If we are to dispense with the confusing counterfactuals, and point to actual processes and results, we must begin by letting go of the myth of the market.

This was in response to one person, apparently new to CT, having the audacity to speak in the tones of the academic economics Bruce himself vaunts as his own specialty.

Let’s agree that “market” in the sense meant is an idealization, an abstraction. It’s nonetheless central to a significant part of economics itself. Get rid of the concept, and you can no longer meaningfully talk in terms of the theory.

Let’s agree that the application of the theory often assumes “market” in just this sense is real, and is wrong and misleading to do so, and as a result generates misleading conclusions. This is something even a layperson like you or me can understand. It doesn’t affect the fact that experts and so on continue to use the term that way. And let’s set aside that Bruce would be among the first to jump to the defense of the field and its credentialed experts if a layperson tried to make such an argument (to the extent that I am close to certain a number of commenters find it impossible to believe he could actually be serious when he criticizes it, and who knows, they may be right and we may be wrong to think he is serious).

But we have to add that this use of the word “market” is narrow and names only one of the many concepts it’s used to identify. No one in their right mind would think that an argument against misuse of the word “market” is an argument against the idea that market ideas more generally have some applicability in describing the real economy.

Similarly, in some social science theory used for some other purpose, perhaps, “market” and “hierarchy” are used as a binary to divide up the world. In that same field, I suppose, hierarchy is always understood to mean bureaucracy as we understand it. But to assume that this can be merged with critiques of the concept “market” as used in economics is nonsense.

Most people, I think, would recognize that they’re not experts in economics. They would look at the jargon in Bruce’s comments and walk away. They wouldn’t feel guilt that they’re ignoring the perspective of an obviously intelligent person without making an effort to come to grips with what he’s saying. But since what he’s saying is nonsense, and they have no tools to help them recognize that it’s nonsense, or where it’s nonsense, they will probably think real hard about it (assuming they’re not a postmodern deconstructionist who’d instead just paraphrase it and report it wholesale) and come to extremely misleading–yet quite plausible–conclusions. His behavior in this thread is irresponsible

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b9n10nt 07.28.15 at 3:44 am

I come at this from reading Chomsky, who would say “real capitalism would never be tolerated by our Corporate Elite. The standard mythology about free markets is invoked as an intellectual bulwark against social democratic impulses. Free markets for thee, various modes of state intervention (“socialism”) for me. And [this is exactly what BW is on about] the vast amount of economic exchange that takes place in our supposedly free market economy are transfers within firms that are essentially centralized beaurocracies.” End paraphrase.

Perhaps you could look at Vodka production vs. Tequila in the USSR and say, “hey, here’s a beaurocracy producing x and not y based on consumer demand: Capitalism!” That would be ridiculous, of course. But how less ridiculous is it to make the same claim for our economic system when compared to the idealized version of private exchange that the term ” free market economy” is invoked.

What’s the point then? The point is that what Very Serious People tell us is reasonable economic policy is itself obfuscation. Raise the minimum wage? Unintended consequences…intervention…harumpf! But the system that we actually have is full of unintended consequences due to “interventions” (to keep a system with certain beneficiaries afloat). Create a beaurocracy that democratizes drug development, production, and distribution? Statism…inefficiencies…market discipline…harumpf! But the system we have is already full of beaurocracies lovingly-protected from true markets, and they do just fine thankyouverymuch.

So, given that the rhetoric of free markets is 1) not an accurate description of reality and 2) typically invoked strategically to limit potentially democratic aspirations (or at least aspirations that get in the way of the 1%), we should ditch it as a mode of lazy, submissive discourse.

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john c. halasz 07.28.15 at 4:02 am

Bianca:

Fliberidy-do! You’rejust an IT specialist and you obviously don’t know what you’re talking about. Instead you substitute VSP moderation. And then talk about “responsibility”!

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reason 07.28.15 at 7:06 am

I sort of find the arguments of Swami – and I know of at least one commenter on another blog who adopts a similar style interesting. I wonder who they think they are arguing against? (Perhaps they have lived under communism which would explain a lot.) They seem always to be arguing for the idea of capitalism (as set out in first year micro textbooks), as though it is that pure simplified, almost touchingly naïve concept was under dire threat instead of being the dominant and destructive narrative. We mostly just want to channel the monster so it flows in a less destructive path, a bit like flood engineers.

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reason 07.28.15 at 7:35 am

Ram @45
“I agree that the potential to improve people’s lives through growth is far greater than the opportunities afforded by redistribution, but I don’t think this has to be either/or. “

I think this is in fact wrong headed. It is not “either/or” but it is not simply “and” either. You cannot have redistribution without production in the first place (and what has “efficiency” to do with it, think carefully about what you mean by “efficiency”, I think it is harder to define than you think). And you cannot have large scale production without large scale distribution of the gains (whether the distribution occurs spontaneously or deliberately). Setting the two things up as a dichotomy is a mistake in the first place. The two aspects feed into one another.

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bianca steele 07.28.15 at 2:50 pm

@77

Not that it matters, but I would prefer “jumped up IT specialist,” if you don’t mind.

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JimV 07.28.15 at 3:23 pm

For my part, I am bewildered by what bianca steele is writing in response to Bruce Wilder – I support her right to say it of course, and have tried to parse it, but I don’t get it. “The Myth of the Market” seems to me an interesting and valuable point of view, if perhaps a bit hyperbolic (I copied BW’s original long comment on it to a text file hoping I will have an opportunity to promulgate it). It reminds me of what Thornton Hall commented on a similar topic – something like, if markets cleared by price equilibrium, the garbage bins of supermarkets would not reek of thrown-away vegetables and fruit, which they always do.

Both BW and bs are valued commenters (by me). Can’t we all get along – perhaps by agreeing that the market concept gives some useful insights but is often a gross over-simplification of actual economic practice?

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Swami 07.28.15 at 4:19 pm

“This clearly refers to the evaluation of the difference between free trade between nations as against trade between nations with tariffs, not the difference between trade of any sort and no trade of any sort. I regard you interpreting it in the more extreme way as taking liberties.”

No, it is primarily an argument for increased technocratic involvement in redistribution across nations in the EU. I went back and reread the article twice… Slowly. Let me summarize it.

The author suggests the EU has replaced local democracy with increasing rule by technocrats. The justification for the EU is greatly economic in nature — it will lead to increased GDP. However increased GDP cannot be justified on strict utilitarian grounds as you cannot compare utilities yadda, yadda, Pareto, Kaldor-Hicks, yadda yadda, Robinson Crusoe.

A political scientist by the name of Majone suggests that technocrats should focus their domain of influence on non redistributive policies which increase aggregate welfare and improve the conditions of almost all involved participants (and can thus be decided by unanimity). Redistribution according to Majone establishes unavoidable conflict and should thus be decided democratically (by majority rule). The author objects to Majone because he wants the technocrats involved in redistribution too, otherwise we have policy making with all the “left-wing bits left out of it.”

Essential to the author’s arguments are that larger networks of trade do have a zero sum dimension and thus are not different in essence from redistributive policies. Basically he is stomping up a cloud of dust around the issue of whether we can prove trade networks are utilitarian even though he admits utilitarianism is unprovable. Somewhere along the line unprovable becomes no different from win/lose redistribution, and if there is some type of winners and losers in free trade then we should just go all the way and admit that the unelected technocrats need to be empowered to redistribute too. Got to make sure we get all the left-wing bits in!

“I sort of find the arguments of Swami – and I know of at least one commenter on another blog who adopts a similar style interesting. I wonder who they think they are arguing against?”

I am arguing against the assumptions of the linked article, pretty obviously. I disagree with the author on his characterization of the differences between voluntary trade and technocratic redistribution. Isn’t that the point of this discussion? I could very well be wrong, and am open to counterarguments. Preferably counterarguments that are directed on what I say rather than sweeping dismissals that because I happen to disagree with people here I am naive and under the hypnotic influence of an all powerful myth.

“The fact that some process is positive sum, does not mean that it is a pareto improvement and there are no losers. It is only absolutely true that the move from (individually) no trade to (voluntarily) some trade is a positive gain (because it is voluntary). But once there is already some trade and reducing barriers results in trade diversion, this universality of the improvement disappears.”

The English common law defense of allowing the zero sum dimension of competition between producers goes back to at least 1707 where a judge Holt argued that producers do not have a property right in their customers, thus “stealing” of customers by offering a better alternative was not just acceptable, but good overall from a social perspective. In my initial comment, I suggested if we shift frame of reference or justification standard from Pareto to “problem solving capacity” then clearly larger networks of voluntary specialization and exchange can clearly solve more problems better and more efficiently all else equal to smaller networks. The author pretty much alludes to the same point with his Crusoe comment before waving it away as “messier in the real world.”

Of course the real world –with its networks of hundreds of millions — of people is indeed ‘messier,’ that is probably why Majone recommends the use of technocrats to help sort through the messiness of this inherently positive sum process (and pretty much everyone agrees it is overall a positive sum process, even you as above). My point is that there is something extremely different between overseeing the domain of voluntary interactions between rational adults and redistribution. Categorically different. And I suggest the author of the art is muddying that with hand waving about winners and losers based upon competition among producers. Common Law would seem to have long agreed with Majone and me.

“They [refering to me] seem always to be arguing for the idea of capitalism (as set out in first year micro textbooks), as though it is that pure simplified, almost touchingly naïve concept was under dire threat instead of being the dominant and destructive narrative. We mostly just want to channel the monster so it flows in a less destructive path, a bit like flood engineers.”

So this is a web site where you and “mostly” everyone else agrees that voluntary trade is a destructive monster, and needs to be not just controlled, but controlled and channeled by you? And that those disagreeing can be dismissed as “touchingly naive”?

Well I agree that markets need to be controlled. If any of my comments come across as naive, please do me a favor and quote me and offer your correction, rather than the all too common practice of using the spirit of my comment to riff against some imaginary dragon.

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Swami 07.28.15 at 4:20 pm

Sorry, the above comment is to Reason.

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hix 07.28.15 at 6:14 pm

“Coca-Cola can produce and distribute its soft drinks very, very cheaply because it has this vast sunk-cost investment in an apparatus for production and distribution,”

No. Coca-Cola doesnt even own most of the production/distribution system, its just a brand and marketing people. Drink topstar or any other no-name discounter cola and get a product that wins all blind taste tests for a quarter of the price. Also, suppose the 130 year ongoing brainwashing through ads is also kind of a sunk cost.

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Bruce Wilder 07.28.15 at 10:25 pm

jumped up IT specialist @ 75: Let’s agree that “market” in the sense meant is an idealization, an abstraction. It’s nonetheless central to a significant part of economics itself. Get rid of the concept, and you can no longer meaningfully talk in terms of the theory.

I am not suggesting that economics give up the concept of markets or the study of actual markets.

I am saying that before talking about the economy as a system of markets, economists ought to establish that their conceptual definition of markets have some definite relationship to whatever they are denoting as markets. If they are arguing a market equilibrium in price governs the system, show that that happens in fact. They often do not do that.

The field of macroeconomics, which provides theory to guide the world’s central banks and fiscal authorities in how to periodically crash the economy, has invested heavily in a theory that national and global economies are sufficiently like a system of markets approaching a general equilibrium in price, that we should hesitate to imagine that it isn’t very near an efficient state at all times. I am not making this up, or exaggerating for effect. These are people, who regularly make the lives of ordinary, unsuspecting people quite miserable. They are the experts, who have managed to visit 25+% unemployment on Greece and blame the Greeks for being irresponsible. Some of the leaders in the field have endowed chairs at universities, expensive textbooks that sell well, and faux Nobel Prizes on the shelf.

bianca steele:

Most people, I think, would recognize that they’re not experts in economics. They would look at the jargon in Bruce’s comments and walk away. They wouldn’t feel guilt that they’re ignoring the perspective of an obviously intelligent person without making an effort to come to grips with what he’s saying. But since what he’s saying is nonsense, and they have no tools to help them recognize that it’s nonsense, or where it’s nonsense, they will probably think real hard about it (assuming they’re not a postmodern deconstructionist who’d instead just paraphrase it and report it wholesale) and come to extremely misleading–yet quite plausible–conclusions.

I can scarcely argue that people reading what I have written, won’t come to extremely misleading conclusions, plausible to themselves, since bianca steele, at least, managed it in spades.

From the perspective of my own intent, I am trying to warn people about how misleading is the reasoning and ideology of some experts in economics. When I point out that there are few actual markets in the economy that the official propaganda calls a market economy, I am not asking people to believe me so much as I am asking them to look around them.

I am convinced I need to go further in drawing out inferences and implications, but my comments are, imho, too long as it is. For the moment, I’d like to think it accomplishes something just to add a voice to the chorus, singing, “The Emperor’s economists have no clothes”. But, if people just imagine that I advocate an authoritarianism, that’s clearly not working.

As for being irresponsible, I’m not responsible. The people running the Euro are responsible, and therefore able to be irresponsible. The people negotiating and pushing the Transatlantic trade and investment partnership forward are responsible , and therefore in a position to be irresponsible.

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Bruce Wilder 07.28.15 at 10:47 pm

hix @ 84: “No”

No, they cannot produce their product cheaply? Because they do. And, no they do not own all of their production and distribution system — no firm in any industry ever does, not even Ford in the heyday of the River Rouge. Coca-Cola does own a pretty big chunk of the key production facilities though, which are fantastically efficient in a technical sense. Taking over and squeezing out what used to be a large subsector of efficient, large-scale independent bottlers has been a widely recognized feature of the industry’s evolution over the last 30 years. Where have you been?

hix @ 84: “suppose the 130 year ongoing brainwashing through ads is also kind of a sunk cost.”

Not “also kind of a” — IS! Their advertising is and pretty much has been since near their beginning, a key strategic lever. People, who look at the early history of the company are often astonished to find how much money they poured into advertising even in their earliest days, distributing syrup to Georgia soda fountains.

As a matter of industrial organization theory, that sunk-cost investment can be an effective barrier to entry against competitors for a firm that also has a unit cost of production advantage over its competitors. That unit cost of production advantage can be small, but it is necessary. Otherwise, it is not possible to recover the costs of the advertising, and the advertising bill sinks the firm financially, while failing to deter or disadvantage potential competitors. That’s all a bit wonky to demonstrate in game theory.

hix: Drink topstar or any other no-name discounter cola . . .

Good advice for the economically minded, who like cola. Also good advice: drink water from the tap.

It is pretty rare, I think, that anyone certified as an economist ever asks these days about the social efficiency of the kind of competition Coke and Pepsi engage in, with its massive commercial propaganda encouraging questionable nutritional behavior and cultural creation. Good on hix for bringing it up.

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bianca steele 07.29.15 at 12:40 am

Bruce,

I think we mostly agree. McDonald’s doesn’t bid on a market for paper napkins; they have a supplier who meets their needs, though presumably with some negotiation, and the supplier is loyal to McDonald’s but operates independently. Walmart doesn’t bid on a market for what they sell; they tell suppliers what to make and at what cost, and suppliers do what Walmart wants, but operate independently and have to satisfy others as well. HBO tells production companies what to do. Software manufacturers hire outsourcing firms. But there are limits on how much control is involved, and if you’re buying produce for a restaurant, or if you’re selling Linux into a “market” (in a different sense) where customers could choose Windows or free software, that seems to be more classically market like.

I absolutely agree that arguments that rely on a system being a classical “market” (like ones about the significance of unemployment numbers, say) will be nonsense if the market doesn’t fit the theoretical constraints that would make the math work out.

But where does hierarchy come into it? If we were more interested in hierarchy, would we have fewer disruptive startups because we’d prefer people to work in large corporations? Would we have a better understanding of how the economy actually works, at the firm level where most of us spend our time, (and the economy, not society as a whole) or would we think top down direction of the economy is better than what we have? Would we want to learn about Marxist theories of how our lives are dictated by the 1%, or would we want to learn about. traditional virtues and obedience and make sure our work wasn’t improperly independent? Would we stop worrying about Europe imposing on Greece because everything was top down by definition already? All those things are much more likely than that we’re going to realize our ideas about monetary policy were all wrong.

Because it’s very unlikely we were thinking about macroeconomic policy at all, unless we are doctrinaire libertarians. And, to repeat myself, you don’t have to be a doctrinaire libertarian to work for an industrial corporation, or even to believe your sales have something to do with markets (even when they’re affected by government policy, which is not something that is a deep dark secret in any place I’ve ever worked).

So what’s with this jumping to the attack whenever anyone shows familiarity with the way the economy is discussed in the business world? If what you’re interested in is administration at the macroeconomic level, how does that refute the idea that people who sell things to individual people think in terms of markets (which, again, have different characteristics than markets in the macroeconomic sense)? No one commenting here is responsible for the Euro.

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john c. halasz 07.29.15 at 1:34 am

hix @ 68:

Maybe even you could develop a learning curve:

http://blog.mpettis.com/2015/06/internal-and-external-balance/

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Bruce Wilder 07.29.15 at 1:46 am

bob mcmanus @ 66: I kinda wish you would show a little empirical work on an actual micro market or sector.

I’ll try to think about a different, maybe more anecdotal approach. I’m subject to NDAs on things I know really well, but I do find it disturbing that people read my comments as so CEO-oriented, if that’s the right term.

William Timberman @ 58: What I’d like to hear about, though, is BW’s take on the effects of so-called disruptive technologies.

I am not going to take that apparent request for prophecy too seriously.

Disruption is often a long time coming.

The kind of collapse of administrative structures and costs that is at the core of an Uber is interesting as a model. There’s a lot of disinvestment going on, underneath the cycle of system reproduction, even where structures don’t visibly collapse or get replaced. In some ways, the big incomes of the CEOs really do represent a kind of controlled looting in a big cashing out, as disinvestment is carried out under an intact shell. I cannot help, but wonder what happens when it runs off the edge of the cliff, if there is a cliff and I suspect there is. (Judging by the financial collapse underway in China, that cliff might start now.)

I don’t think enough people will willingly become the lifelong customers of payday lenders, to fund the “capital stock” of the mega-rich, once there isn’t a large stream flowing from cashing out. I don’t know, maybe the economists can keep the volley of double-talk going long enough and loud enough to convince people that 400% interest rates are Pareto Optimal.

The advance of communication and computing technologies has been a very long time coming. Everyone has heard of Moore’s Law, to the effect that the number of transistors that can be crowded onto a postage-stamp of silicon has doubled every two years since the 1970s. We’re close to running out of that runway, but it will remain a lot of underutilized potential for a long time, as it continues to get cheaper. It takes an order of magnitude change in the number of transistors to enable revolutionary change at the level of software — so 3+ doublings or ~ 7 to 8 years to get from DOS to Windows 2.0, and again another 7 to 8 years to get to Windows 95 and the initial internet mania. The first commercial Intel integrated circuit had something like 2300 transistors and drove a simple calculator (for a company that immediately failed financially). The 8086 in the first IBM PC has roughly 30,000 transistors. The 80486, introduced in 1989 and widely cloned by competitors to Intel, had up to a million transistors; the so-called feature size was about a micron. The Apple A8 in my iPhone 6 has transistors of roughly 20 nm, making those “features” roughly comparable in size to a small virus, and 2 billion transistors in total. Bill Gates used to like to tell people that he could still remember every line of code of Microsoft’s first product, a version of the computer language BASIC — he had memorized them, all three pages. Windows 10, officially debuting tomorrow (though one of my computers upgraded itself this morning!) reportedly has 50+ million lines of code (which I think works out to about 90,000 pages printed out).

The thing about sunk costs is that they sink. Windows 10 might be 30,000 times as much code, but it is a free upgrade, and Microsoft is losing money at a staggering rate. They had a better margin on their three-page BASIC; at least it was a positive number. I wouldn’t worry about their ability to muscle their way between Apple and Google, though; the PC will have one last hurrah at least.

Even outside the go-go of digital hightech the mundane world of manufacturing has been on a long, long path to reducing labor costs. When I was young, managerial accounting was designed around the expectation that direct labor was big; overhead relatively small, and we could just arbitrarily assign overhead costs to units as a proportion of direct labor. That ceased to be at all feasible by the late 1980s or early 1990s. The marginal unit costs of a wide range of manufactured goods are very small relative to their American retail price. If some fascist Dictator wanted to make the common people happy, he could just bully down the cost of everything. I fear the pending trade agreements are designed to be the prophylactic, securing rentiers and insecuring everyone else.

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William Timberman 07.29.15 at 3:25 am

The thing about sunk costs is that they sink. –snip– Even outside the go-go of digital hightech the mundane world of manufacturing has been on a long, long path to reducing labor costs.

The quoted bits, especially, have helped clear up some of the fog, thanks. Prophecies I don’t need — not as long as I have some idea of where those imprudent enough to be making them are getting their material. Reading the good sense provided here helps with that, for which I’m grateful.

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Tyrone Slothrop 07.29.15 at 6:37 am

I do find it disturbing that people read my comments as so CEO-oriented, if that’s the right term.

I’ve not read you that way in the slightest, FWLIW. There’s a passel of smart’uns about these parts, yet the continuous misreadings never fail to astound (and entertain)…

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reason 07.29.15 at 7:20 am

Swami, @82
I don’t think you really understood the point of the OP (maybe you read it too closely rather than getting the main drift). The main drift is that just concentrating on maximising “growth” is not really maximising anything that people actually care about, and putting the technocrats in control may make subsequent redistribution impossible. It is like the catch 22 with pareto improvement, you can make everybody better off if you redistribute, but if you do actually redistribute they say you undercut their “efficiency” improvements.

The point is that we are never at equilibrium, that all sorts of history are built into existing wealth and investment (including investment in work skills, work tools, family and jobs) and changes can’t be make instantaneously without hurting people. That (as Bruce Wilder never tires of pointing out) uncertainty and risk are major issues if people are being forced by technology to make large up front investments, and pretending that competition is the solution to all problems is naïve. Sometimes you need to reduce uncertainty not increase freedom to make the economy more dynamic – there I’ve said it.

The key word in this is “efficiency” which means many different things to different people. We really need to ask – “efficiency” AT WHAT. What is the target – where do we actually want to go. More people need to ask this rather than just accepting drift.

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Swami 07.29.15 at 3:55 pm

Reason @ 92

“I don’t think you really understood the point of the OP…. The main drift is that just concentrating on maximising “growth” is not really maximising anything that people actually care about, and putting the technocrats in control may make subsequent redistribution impossible.”

I think you just told us what you would have written if you could have written the piece. The author never even begins to make an argument that growth isn’t something people care about (he does state it shouldn’t be the ONLY thing they care about, but who would argue with this?) He basically says there is no perfect way to measure aggregate utility therefore we cannot perfectly measure the value or utility of economic growth. In no way does he make any serious argument that economic growth isn’t good or isn’t something people care about. If I would summarize my spin on the author’s point, it is that we can’t measure the utility of either redistribution or economic growth so let’s not treat them differently.

And for the record, I agree with some of the author’s concerns about unelected transnational technocrats deciding policy, and his point that there are natural conflicts between those promoting growth and those promoting other interests (and that both views are legitimate).

“…pretending that competition is the solution to all problems is naïve. Sometimes you need to reduce uncertainty not increase freedom to make the economy more dynamic….”

Yes, of course. Who would argue differently? Oh, I see, you are assuming I believe these things! See my above quote on talking to me not a cardboard cutout of what you and Bruce want to believe I believe. Bad form if interested in learning from an exchange. Great form if you want to monologue and protect your precious ideas from contact with reality.

“The key word in this is “efficiency” which means many different things to different people. We really need to ask – “efficiency” AT WHAT. What is the target – where do we actually want to go. More people need to ask this rather than just accepting drift.”

Fair enough. My take on the Majone snippet and how it addresses your point is that economic affairs (properly constructed) are decided between parties who gain pretty much unanimously and thus can be administered differently than the win/lose dynamic inherent by definition in redistribution. They are very different beasts and need to be handled as such. One requires more ongoing consensus than the other.

Economic growth via decentralized markets does have value and empirical arguments are easily constructed which can be presented to the electorate to offer the terms of the deal (pros and cons).* Part of the deal is the electorate and their representatives abdicate responsibilities for micromanaging the outcomes. Redistribution is important and here the local electorate and their reps can decide on these with the necessary specificity.

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Bruce Wilder 07.29.15 at 7:22 pm

john c. halasz @ 88

Michael Pettis is great. I wish there was some snappy, bumpersticker way to bring home the Pettis hypothesis that wage suppression in Germany is driving unemployment on the periphery.

bianca steele @ 87

I’m going to think about recasting how I talk about control structures and functions in the economy in light of your comments.

reason @ 92

The circle-jerk of formalizations that O’Rourke identifies may be confusing and even pointless for anything except what b9n10nt identified as reactionary harrumphing, but it really is a weakness of O’Rourke’s argument that he doesn’t square himself clearly with the idea that expanding trade is a positive-sum game. Ultimately, I can’t get past feeling O’Rourke has some good bits of rhetoric, but not the important “drift”.

Ultimately, the problem is that the technocrats cannot figure out what is properly technical, and leave people to pursue their ambitions. Their ideology leads them to believe the Single Market will fail if Greece has early pensions or Lisbon has rent control. But, they can’t or won’t take responsibility for banking regulation, the payments system or managing capital flows or the current accounts of member states.

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Ronan(rf) 07.29.15 at 7:45 pm

“I wish there was some snappy, bumpersticker way to bring home the Pettis hypothesis that wage suppression in Germany is driving unemployment on the periphery.”

If it wasn’t for German wage suppression this car would be Greek (?)

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Ronan(rf) 07.29.15 at 7:47 pm

Bruce, more seriously. Have you read francis fukuyamas New books on “the origins of political order and decay”? I’m reading through the first one at the minute and it has passages that are positively wilderian (in a good way)

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john c. halasz 07.29.15 at 7:56 pm

B.W. @94:

Heiner Flassbeck made the point very clearly in a video presentation at a J. Galbraith sponsored conference on the EUro-crisis several years ago. Of course, he was fired from his job at the German finance ministry, presumably for opposing the prospective policy, which became the Hartz reforms. Pettis makes the same point, but from a slightly different angle.

Ronan(rf) @95:

Good job of entirely missing the point. Did you read the link?

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Ronan(rf) 07.29.15 at 8:33 pm

I did, and I read (most of) The Great Rebalancing. (though admittedly am still not good on the specifics) My understanding of his argument is that when wages dont grow in line with productivity a country’s savings rate will increase (due to the discrepancy between goods produced in an economy and household income), and so will the capital account deficit as excess savings are invested abroad .

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LFC 07.29.15 at 8:44 pm

BW @89
Windows 10, officially debuting tomorrow (though one of my computers upgraded itself this morning!) reportedly has 50+ million lines of code

The newer of my two computers I bought as a refurbished machine running Windows 7. It better f*cking well not upgrade itself to Windows 10 without asking me first. If it does, I’m going to be quite pissed off. This has nothing to do with Windows 10, on which I have no opinion, but rather with the idea that a computer should not change its operating system without first asking the person who owns it and is using it.

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Collin Street 07.29.15 at 9:03 pm

He basically says there is no perfect way to measure aggregate utility therefore we cannot perfectly measure the value or utility of economic growth. In no way does he make any serious argument that economic growth isn’t good or isn’t something people care about.

These are the same claims. “care about” == “utility”. You don’t get it, but that’s kind of the defining factor in “being wrong”, and taking “I don’t get it” as evidence of correctness is kind of like taking the blood spurting from the bullet holes as evidence you’re in rude good health.

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john c. halasz 07.29.15 at 9:34 pm

@98:

Then why the crack about Greek cars? (They’ve never had such an industry. The largest auto manufacturer in the world per capita is actually Slovakia). But Germany productivity growth wasn’t very good before the crisis, less than 1% annual average. (Greek productivity growth was actually much higher, though one could argue that some of that was a statistical illusion of the unsustainable boom). Of course, Germany is still far more productive than Greece, (as witness the irrelevant discussion on who works more hours on this thread), but it’s the relative rates of productivity and inflation that count, and German domestic demand suppression virtually forced unsustainable demand expansion on its partners. (The German CA surplus is now 10%, the same as China at its peak, which is now down to 2%. And they’re very proud of balancing their fiscal budget ahead of schedule, but that’s almost inevitable with such a large surplus). At any rate, in order to rebalance the gap between saving and investment (itself an accounting identity), rising unemployment in the periphery, i.e. decreasing savings, to match declining investment inflows, and stopping imports through decreased national income, results in an almost inevitable vicious circle. Germany’s position now is completely dominant, but it’s also completely unsustainable, a winner’s curse.

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LFC 07.30.15 at 12:34 am

ronan @96
Bruce… Have you read francis fukuyamas New books on “the origins of political order and decay”? I’m reading through the first one at the minute and it has passages that are positively wilderian

Bruce W. has occasionally been given, although not on this particular thread, to ruminations on cycles in history and use of the word “anacyclosis” (or something close to that; I suppose I shd look it up one of those days). Not sure Fukuyama wd go for that (though I haven’t read F’s ‘Origins’), but curious what you might have been referring to.

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LFC 07.30.15 at 12:35 am

one of these days

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bob mcmanus 07.30.15 at 12:41 am

Anacyclosis ?

“Polybius’ sequence of anacyclosis proceeds in the following order: 1. Monarchy, 2. Kingship, 3. Tyranny, 4. Aristocracy, 5. Oligarchy, 6. Democracy, and 7. Ochlocracy.”

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LFC 07.30.15 at 1:11 am

@104
noted. not v. Fukuyama-ish I think, though F. has undoubtedly read Polybius and Cicero and Machiavelli’s Discourses and the other stuff mentioned in that Wikipedia entry.

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reason 07.30.15 at 1:28 pm

Swami @93
“My take on the Majone snippet and how it addresses your point is that economic affairs (properly constructed) are decided between parties who gain pretty much unanimously and thus can be administered differently than the win/lose dynamic inherent by definition in redistribution”

Sorry but there is a hole the size of elephant in that little argument – it is the words “decided between parties”. But what about the unrepresented (in the decision) but affected parties?

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Swami 07.30.15 at 1:34 pm

Collin @100

Reread my comment which you at least had the good form to quote. They are absolutely not the same claims. If someone makes an argument that our thermometers aren’t very good at measuring the temperature, it is not the same as an argument that it is not hot outside. O’Rourke took a swing at attacking the precision and completely sidestepped the larger issue.

I am not surprised you are confused by this, as I think the desire to muddle the issue was implicit in O’Rourke’s rhetoric.

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reason 07.30.15 at 2:04 pm

Swami @107
???? But that is not the argument at all. The argument is not about the temperature but about what is to be done. You are saying that saying our navigation device is inaccurate, is not the same as saying we are lost. True. But he point is that if the navigation device is inaccurate we shouldn’t be following it. That is another point entirely. Thanks for the analogy it is very useful.

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Ronan(rf) 07.30.15 at 3:14 pm

jch – I was just being an ass. I do want to get back to clarify something re Pettis later if I get the time, and my thoughts in order.

LFC – rhetorically and in emphasis it’s very Wilderian (and again I dont say that against Bruce, I like Fukuyama)
A concern with the long term evolution (and decay!) of political institutions, a distate for economists abstractions and historians particularisms and favour for mid range theory, a clasification of humans as ‘rule following animals’, a fear of the ‘new patrimonliasm’ that is undermining the current institutional order etc.
I’m only two chapters in though, but this gives a good enough account of where I think people have misunderstood Fukuyama (and is what convinced me to read the book)

http://thepointmag.com/2015/politics/forward-with-fukuyama

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Swami 07.30.15 at 3:24 pm

Reason @ 106

I addressed this point in my initial comment @16, and provided several supporting arguments in later comments.

But to answer your objection specifically, any interaction with significant negative externalities would NOT be mutually unanimous and thus I assume not covered under his quote. I assume we all agree here.

My argument above was that this does not apply to harm to prospective producers based upon lost opportunity. They do not have a legitimate claim on prospective interactions which have not yet been agreed to. I think I laid out the case pretty clearly in @16.

Certainly we can all come up with exceptions and caveats, and common law has indeed developed for centuries addressing these. The point is that the overall dynamic is different between mutually agreed upon interactions without negative externalities, than with win/lose acts of redistribution. Thus they need to be handled differently, with a higher burden of consensus required for the latter.

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Swami 07.30.15 at 3:38 pm

Reason @108

“But his point is that if the navigation device is inaccurate we shouldn’t be following it. That is another point entirely.”

Kind of…. But note he makes the same point about redistribution. Neither is perfectly measurable in terms of utility. But he isn’t arguing we shouldn’t redistribute (nor am I ). My take on Majone snippet is that the rules and system dynamics of voluntary interactions is different than that of redistribution. Both are essential parts of every complex succesful state known to man, but the two are different and need to be handled as such.

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reason 07.30.15 at 3:40 pm

Swami @110 – you have lost me completely – what the hell has common law to do with anything? How do private arrangements (which privately are mutually unanimous) include externalities? (And externalities effect NOT ONLY other producers, but other consumers as well – basically the system is complex and everything effects everything.)

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reason 07.30.15 at 3:44 pm

P.S. I don’t think redistribution is necessarily zero sum either. Just as the market has both zero sum and positive sum components, so does redistribution (remember a good example of a low redistribution system was feudalism). Having more players capable of playing the competition game makes the game better.

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Bruce Wilder 07.30.15 at 4:32 pm

I agree with Swami: O’Rourke’s rhetoric muddles the issues, whether he intends to, or not.

Pareto efficiency belongs to economics as scholasticism — it is like trying to measure temperature with a drawing of a thermometer. All of the dichotomies proposed by the process of formalization are false in the way a drawing is false: the drawing is a representation not the object itself. And, guided by the highly abstract reasoning of Pareto and Ricardo, not a recognizably accurate drawing of a specific object, but more like some surreal, perhaps Cubist sketch of a Platonic Idea of some category of objects. It should not be surprising that a stroll thru such a meta-land ends in a hall of fun-house mirrors reflecting a dizzying regress of counterfactual speculation.

Challenging that scholastic nonsense does not confront the mundane problems of economic cooperation at all. Certainly, it is no refutation of the insight that the wealth of nations is enhanced by the extension of specialization and trade.

As Swami has pointed out, falling back on undifferentiated “winners and losers” and giving a moral claim of compensation to obsolescence because we are so transcendentally existential in our new perspective, that we cannot recognize increments of technical progress, doesn’t seem sensible.

There have always been good arguments for separating concern for the general or public good from individualistic preoccupation with pursuing private good. They may have been hijacked on the High Street of Abstract Theory by Pareto, but they don’t go away, because philosophers get easily confused. The problem of the democratic deficit emerging in Europe is not that the technocrats have tried to take the politics out of policy, it is that they’ve tried to take power out of politics.

Lurking in the shadows of these abstract arguments is the incubus horribilis of the self-regulating market and it is about to have congress with the corpse of government paralyzed by debt obligations and unable to avail itself of the deus-ex-machina of a tame Central Bank. This has little to do with Ricardo’s comparative advantage and Pareto’s concept of efficiency.

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reason 07.30.15 at 6:10 pm

Bruce, Swami
I went back and read the article again – and I seriously don’t know what you are talking about (although I think that Bruce is saying something quite different to Swami). The old story with technocrats and politicians was that the politicians should say what they wanted to acchieve, and the technocrats should say how it could best be done. Unfortunately, things seem to work these days exactly the other way around. It is all a bit of disaster, and I don’t see anything wrong with people pointing that out.

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reason 07.30.15 at 6:37 pm

Swami,
when you back to the O’Rourke argument, the bit about Majone was about what could be safely delegated to technocrats, and O’Rourke was arguing that the preconditions have been forgotten (near uninamity of benefits) via a sleight of hand called Kalder-Hicks. You cannot now turn around and criticise his argument on the basis that Majone’s conditions are in fact satisfied without real proof – and I don’t think you have any. I consider externalities to be a pervasive fact of life.

Consider the circumstances we had a few years where years of neo-liberalisation (in the European sense) had reduced once substantial stock piles of grain combined with a couple of poor seasons in key countries resulting in a substantial vulnerability of the global food supply.

Now consider financial markets and the possibility for instance that somebody or some firm or some group of bodies and/or firms who had commited to supply large amounts of grain in futures contracts started buying large amounts of grain on the spot market on the basis of long-range weather forecasts. Momentum speculators join them. The forecasts for the next year were actually good and some (fuddy-duddy) farmers respond to the spot market rather than futures markets so the futures markets actually fall as a result of this buying. But poorer people, for whom the grain in question is a staple start finding their budgets under strain. Some people start suffering malnutrition, or cannot pay their rents, some of the poorest of the poor (living on the other side of the world) are faced with famine. Of course charities start publishing heart-rending pictures of these people starving and begging for donation from the charitable and from richer governments to avert the humanitarian crisis. So they buy the grain that has been stockpiled at a high price and those that caused the problems are paid by rich governments tax payers and the charitable.

Are you really so sure that private business (financial deals) and redistribution (charity and taxation financed gifts) are such independent and distinct aspects of policy? I don’t think there is an in principle argument for this, even if there may be one that can be made as a rough guiding principle. But taking the democratic hands off the steering wheel? It is just like driving and blindly trusting an inaccurate GPS navigation device. Sometimes you might end up in the harbour.

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reason 07.31.15 at 7:49 am

P.S.
Of course the neo-liberal come back to the above is that the poor and the poorer than poor should have hedged their essential grain by buying grain futures. How stupid of them – own silly fault.

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Swami 07.31.15 at 3:52 pm

Reason @116

My initial argument was simply that producers gain hypothetical opportunities for sales when they enter a market, roughly equal to the hypothetical opportunity lost by all other competitors. It is a zero sum dimension of a voluntary positive sum game with gain going to consumers (which is the whole point of production) in improved variety of choices for price and quality. The “game” leads on average to better consumption (more problems solved better) for less.

Any cursory review of history post “wealth of nations” easily reveals this, with living standards, lifespan, education, nutrition, etc rising at levels incomprehensible to those pre Capitalism. This is indeed an expansion of the Robinson Crusoe explanation which O’Rourke waves away. It was a magician’s trick of focusing readers’ attention on the wrong thing to fool them. It worked.

The Pareto and Caldor-Hicks arguments are dead ends. Yes, an economist cannot be 100% sure of utility improvement unless at least one gains and none loses. But saying I can’t measure something perfectly is not the same as saying it doesn’t exist, and history shows that we can on net gain via in part to reasonably constructed institutions of voluntary division of labor and exchange.

The reality of human history is that we spent ten thousand years after the advent of agriculture “in the harbor.” Lifespans were the same or lower and standards of living worse than our forager ancestors. Markets, along with science and open access politics helped us get out of the harbor.

Part of the deal with accepting markets is that consumers no longer have a right to a certain price based upon custom, tradition, history or even need. As such the price of grain may go up, or down. On average, as above, price and quality have improved faster than under any non market system. Thus it has been not an awesome bargain in total, those sitting out of the process have greatly regretted it, and the debate is how those left out can enter the game and pull themselves out of the metaphorical harbor(China, Vietnam, N Korea, Cuba, India, Russia, Africa).

Of course high grain prices can create problems. As such most modern nations have non market systems to deal with this, including reserves, safety nets, etc.

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b9n10nt 07.31.15 at 9:40 pm

Swami,

First I want to acknowledge that I’m butting in and perhaps lack the expertise required for useful contributions…but this is the internet.

So here’s the question: whence comes your certainty about the beneficial world-enhancing effects of markets and Capitalism? “Markets, along with science and open access politics helped us get out of [material impoverishment endemic to pre-18th
C societies]”, you write. There is great cause for epistemic humility ™:

-a society’s reliance on market pricing (in the strict sense that is historically invoked by laissez-faire pundits amidst political debates) to guide production is, where investigated, generally more limited and culturally-contingent than assumed.

-as you say, other factors (science, open access politics, for example) will not be teased apart from the rise of markets in assessing historical causation of the Great Advance. Other factors may as well be correlates: the rise of the modern beaurocratic state, a polity’s internal cohesion and stability, and the refinement of the social “technology” of beaurocracy itself (referencing Bruce Wilder’s contributions to the thread)

-to extend the nautical analogy of “leaving the harbor”, can not history also attest to social policies that have at times hindered and/or abandoned market pricing in broad ways that have “raised sails, jettisoned ballast, and positioned rudders” toward material prosperity and social harmony?

-given the complexity of the topic, we should probably invoke a principal that is as robust as supply and demand and similarly rests upon a biological, and not merely sociaological, foundation: we tend to believe that which is emotionally gratifying and use our reason in service of these pre-rational drives. We would thus expect that predominant theories of social progress will flatter the elites of that society. So of course, when the branch sociology called “market economics” is developed and used by and for predominantly elite ends, we should rationally be particularly skeptical of its claims. Much as gravity bends light, the pull to “comfort the comfortable” will bend reason and distort what the comfortable choose to measure, where they choose to look, and how they choose to reason about what they find. Unlike realms of true science, there is no adequate check upon this tendency in other politically relevant modes of inquiry.

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john c. halasz 08.01.15 at 12:44 am

@118:

Namaste, Swami. The reason many here don’t engage with your arguments and their rationality is that your offering fairly standard neo-classical boilerplate, which we’re all familiar with and often don’t find a terribly realistic, nor normatively justified representation of the actual workings of actual economies.

I’ll just pick om a few points.

” It is a zero sum dimension of a voluntary positive sum game with gain going to consumers (which is the whole point of production) in improved variety of choices for price and quality. The “game” leads on average to better consumption (more problems solved better) for less. ” -But why is consumption the sole point of production? Work serves no other purpose than delayed but increased leisure satisfaction? Might there not be other motives and satisfactions involved. such as enjoyment and develpment of vital capacities and skills, taking care for the world and others, ensuring a sustainable relation to the natural world, etc.

“Any cursory review of history post “wealth of nations” easily reveals this, with living standards, lifespan, education, nutrition, etc rising at levels incomprehensible to those pre Capitalism.” -“Cursory” is the right word. Why should the several scientific, technological, and industrial revolutions that have occurred in the past 2.5 centuries, be entirely ascribed to “market capitalism” and why should that not involve several conjunctural historical contingencies, with no “necessary” associations going forward?

“history shows that we can on net gain via in part to reasonably constructed institutions of voluntary division of labor and exchange.”- The intuition is that if market exchanges weren’t “voluntary”, i.e. yielding a positive sum surplus, then they wouldn’t occur. But how can the evolution of any extended system of division of labor and thus required exchange and technical specialization be described as “voluntary”? Further, just who is occupying the “voluntary” positions? Isn’t it much more a matter of interacting agents operating under constraint and respectively imposing their constraints on each other, depending on the differential positions they occupy and their access to “resources”, (which aren’t reducible to monetary budgets, nor subjective “utility”)? And don’t those interacting agents then generate systemic constraints, which then feed-back upon them, beyond their ken or intention, further conditioning and constraining them? So isn’t your use of “voluntary” basically ideological and superstitious, since it operates without any realistic account of human agency to begin with? The fact that there are increased more-or-less material surpluses and thus that there can be “positive sum games”, doesn’t obviate the “negative sum games” embedded therein, which might have nothing to do with optimizing “social welfare”, nor sustainability, especially amongst the lower orders and on the periphery. IOW what do you mean by “we”, Kemosabe?

But I basically think that Bruce Wilder is right with his more institutionalist and production oriented account of “free markets”, (which obfuscates the notion of “freedom”, however metaphysically construed, with the relative functional autonomy of economic systems). And which doesn’t confuse markets in goods, with “markets” in capital, labor and “land”, which are far more institutionally constructed. And I think “reason”, an otherwise quite moderate fellow, is entirely correct about the pervasive reality of “externalities”, (which can be both/either positive or negative), in economies. Just consider the case of traffic jams. And consider that a system that promotes individualistically private ownership of ” personal”autos not only promotes also such results, but under-invests in mass transit systems, which are not just much more resource efficient, i.e. economical, but allows those who don’t want to participate in fetishized status competition to actually afford to go somewhere.

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Peter T 08.01.15 at 2:59 am

Why do we assume that “the economy” can be usefully analysed by deduction from basic principles? It is not really contestable that the activities in any modern economy are organised (roughly) 20 per cent government, 25 per cent household, 10 per cent not for profit, 10 per cent highly-regulated utilities, and the remaining third in the “private sector”, of which last the bulk is organised bureaucratically in very large corporations. Figuring out how this works best is a complex enterprise, but hardly done best by ignoring the bulk of the landscape.

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Swami 08.01.15 at 2:43 pm

B9 @119

Thanks for the reply.

“…whence comes your certainty about the beneficial world-enhancing effects of markets and Capitalism?”

My view comes from extensive studies of the topic of the great enrichment of humanity post 1776. My position is that wide scale free markets are necessary, but not sufficient. Other important factors were printing, institutional innovation, science, and mindsets or world views. I could go on for hours explaining my take on the situation, but it probably would be more appropriate in a post on this particular subject.

“…can not history also attest to social policies that have at times hindered and/or abandoned market pricing in broad ways that have “raised sails, jettisoned ballast, and positioned rudders” toward material prosperity and social harmony?”

Probably. Markets are one particular type of problem solving system, which is particularly good at solving certain types of problems via extensive networks of cooperation and competition. As above it is not the only type of problem solving system, it is not appropriate in all circumstances, and as with all problem solving systems, they can create problems as well as solve.

I am not a libertarian and I in no way am suggesting that freedom and markets are the solution to everything. They are however the solution to lots of things.

“…when the branch sociology called “market economics” is developed and used by and for predominantly elite ends, we should rationally be particularly skeptical of its claims.”

Nonsense. The elites of ancient Egypt, Ming China, the Ottoman Empire and the Soviet Union did fine without wide scale markets. A distinguishing characteristic of market economies is the enrichment of the ninety percent of the population who lived in strict poverty as serfs, slaves or peasants. The average standard of living in places such as Australia and Sweden with extensive market economies is twenty to forty times higher than the average prior to “Wealth of Nations and the great enrichment. The places which liberalized their markets tended to grow while those that didn’t didn’t, and later as states shifted to the new model they began to see their population gain in prosperity and innumerable other ways. Hundreds of nations over hundreds of years paints a clear picture to anybody interested in observing real human welfare. Communist nations clearly drafted upon the solutions generated by the very system they hoped (using catastrophically poor judgment) to replace — machines, mass production, factories, capitalist generated prices, and capitalist generated and tested products. Even the leaders eventually recognized the futility of their vision, reluctantly bailing on their model.

The reason for the enrichment of the entire population, rather than just the elites as in pre liberal economies, is the insight Smith had on the Invisible Hand. In modern terms, voluntary market interactions tend to self amplify positive sum interactions. They allow us to solve problems for each other better together than apart. To become rich in a properly administered market you need to do it by enriching others (customers, employees and suppliers via positive sum, win/win interactions). See my initial comment for the affect on competing producers — it is still a positive sum game with overall positive sum externalities. However, markets are embedded in other institutions and mind sets and in no way stand alone. Necessary, not sufficient.

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Swami 08.01.15 at 3:45 pm

Thanks for the feedback John @120

“But why is consumption the sole point of production? Work serves no other purpose than delayed but increased leisure satisfaction? Might there not be other motives and satisfactions involved. such as enjoyment and develpment of vital capacities and skills, taking care for the world and others, ensuring a sustainable relation to the natural world, etc.”

Of course, but we should not confuse the how with the why.

“Why should the several scientific, technological, and industrial revolutions that have occurred in the past 2.5 centuries, be entirely ascribed to “market capitalism” and why should that not involve several conjunctural historical contingencies, with no “necessary” associations going forward?”

It shouldn’t. See my reply immediately above. Necessary not sufficient pretty much sums it up.

“But how can the evolution of any extended system of division of labor and thus required exchange and technical specialization be described as “voluntary”? Further, just who is occupying the “voluntary” positions? Isn’t it much more a matter of interacting agents operating under constraint and respectively imposing their constraints on each other, depending on the differential positions they occupy and their access to “resources”, (which aren’t reducible to monetary budgets, nor subjective “utility”)? And don’t those interacting agents then generate systemic constraints, which then feed-back upon them, beyond their ken or intention, further conditioning and constraining them? So isn’t your use of “voluntary” basically ideological and superstitious, since it operates without any realistic account of human agency to begin with?”

I am honestly having trouble envisioning any decision, action or interaction which doesn’t “operate under constraints”. By voluntary I mean that there is an established domain of actions which a person is at liberty to engage as long as she desires to do so, is able to do so and is able to convince others of the action (if involving multiple actors ie interactions). In no cases are any of these constraint free.

Below are some actions in the domain of markets which I can voluntarily choose to try to accomplish without others using coercion or force to stop me:

I can devise what need in life I would like to try to solve (let’s say I want an apple pie)
I can decide whether to try to solve it alone or with others’ assistance (for example by reaching mutually voluntary terms of exchange)
I can choose whether I will seek self employment or to work for others.
I can choose who I will work for as long as they too agree.
Others can choose to compete with me/us to try to cooperate with customers

The terms of the domain are determined by sets of property and contract rules (more constraints!). It is a market, and has extensive ranges of freedom of voluntary action and mutually voluntary interactions. It also has clearly defined ranges of actions which are unacceptable. In no case which I am familiar with is it free of constraints, nor is anyone guaranteed success. They are simply free to try. Modern markets involve hundreds of millions or billions of people engaging in unimaginably large networks of said voluntary actions. It is a decentralized complex adaptive problem solving system (there are others).

“The fact that there are increased more-or-less material surpluses and thus that there can be “positive sum games”, doesn’t obviate the “negative sum games” embedded therein, which might have nothing to do with optimizing “social welfare”, nor sustainability, especially amongst the lower orders and on the periphery. IOW what do you mean by “we”, Kemosabe?”

By we, Tonto, I mean, you and me and the other six billion people on earth who probably would never have been born absent the productivity and prosperity which the above complex adaptive system helped generate. It was necessary (not sufficient) to generate the education you and I got, the computer you and I are each typing on and most importantly it was necessary to offset the fundamental Malthusian forces (which along with exploitation), managed to keep people like you and me down for ten thousand years of history post agricultural revolution. I strongly recommend learning about the shitty living standards, lifespan, child mortality and such people. I assure you my review of such has not been cursory.

“And I think “reason”, an otherwise quite moderate fellow, is entirely correct about the pervasive reality of “externalities”, (which can be both/either positive or negative), in economies. Just consider the case of traffic jams.”

I thought I made it clear that negative externalities do exist and that some need to be handled via non market mechanisms (others via refining market mechanisms). If you want to expand the definition of negative externality to anything that has any impact anywhere then I am sure you can indeed rationalize treating voluntary interactions the same as redistribution (see O’Rourke). You can then replace individual choice and decentralized cooperation and competition with a democratically generated central plan and you can impose this unified plan on everyone. Wonder how that will turn out? Does it matter to you how it will turn out?

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Swami 08.01.15 at 3:49 pm

Good point Peter @121

Do note that the rules and management and institutional “constraints” (using John’s term) of each of these domains differs and should differ as they are different beasts. That has been my argument.

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JimV 08.01.15 at 4:37 pm

“… the shitty living standards, lifespan, child mortality …”

I have always given science, engineering, public education, and democracy the majority of the credit for such improvements. I went to a small public school which was built by the WPA in 1935, and to Michigan State University which was a land-grant college. At GE I used a lot of technology that originated from DARPA and NASA, and I understand the NIH is responsible for a lot of medical developments. Capitalistic markets were one way to spread the benefits around, but in my somewhat disgruntled opinion, six billion people are way too many, there are too many cars (I don’t own or want one), and too many cable TV channels.

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b9n10nt 08.01.15 at 5:29 pm

Me: “…when the branch sociology called “market economics” is developed and used by and for predominantly elite ends, we should rationally be particularly skeptical of its claims.”

You: “Nonsense. The elites of ancient Egypt, Ming China, the Ottoman Empire and the Soviet Union did fine without wide scale markets.”

But the fact that elites have at times neglected market liberalizations is unrelated to my point:  namely, the market liberalizations that do occur tend not (understatement) to come as a result of populist groundswells or concentrated interests of non-elite economic interests.   The bourgeois revolutions of 18th/19th C Europe were not tidy battles between “middle class” producers and aristocracy.  They were elite, non-democratic programs. (And, again, the market liberalizations were only part of  economic programs that these societies’ elites engaged in: whether programs included imperialism or tariff-based economic nationalism amidst other correlated developments that were occurring. These factors can’t definitively be teased apart from other aspects of economic history).  

“The places which liberalized their markets tended to grow while those that didn’t didn’t, and later as states shifted to the new model they began to see their population gain in prosperity and innumerable other ways. Hundreds of nations over hundreds of years paints a clear picture to anybody interested in observing real human welfare.”

And this is fine as a reasonable conjecture.   You mention that your experience in business gives you insight into the reality of consumer-driven production.   In parallel, my limited experience in the natural sciences gives me a parallel insight:  valid claims regarding discreet causation are constructed with painstaking care upon empirical/observational foundations that take our human propensity to deceive ourselves as a given.   In comparison,  the claim you are making (independent, voluntary agents being freed to engage in private economic exchange to the enrichment of their societies) simply isn’t grounded in empiricism.  A “thick” conceptual apparatus animates concepts of “voluntary”, “private”, etc… This isn’t hydrogen you’re measuring, in other words.  We would obviously expect the human sciences (sociology, economics,etc…) to fall far short of the singular epistemological achievements of the natural sciences: the insights of the former will be a product of their times and (serve, in part, to) give psychological comfort to their 
defenders and promoters.  Be Skeptical!

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Swami 08.01.15 at 6:40 pm

B9,

Let’s just make sure we are arguing from a fair and impartial set of standards. Neither of us has the epistemic high ground and we should both be skeptical of sources and look to air our ideas in a way which subjects it to dialectic scrutiny — such as we are both doing right now (and at least one of is apparently doing so in front of a not-so-friendly audience) . That applies just as much to your “economics is developed and used by and for elite ends” as it is to my claims that it was necessary though not sufficient for the prosperity of humanity over the past 250 years.

And I made no attempt to tease out one factor from the other aspects. I don’t think it is really possible considering the pretzel like feedback loops between institutions, technology, mind sets, and such.

Thanks for the feedback. This is exactly what I want to hear.

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john c. halasz 08.01.15 at 8:09 pm

Swami @123:

Just to clear up a few points.

Positive and negative externalities are pervasive. That wasn’t the point I was making. Rather the point was the complicated ways in which “negative sum games” can be embedded in overall “positive sum” ones, such that “transitivities” aren’t guaranteeed or preserved. IOW cost and losses can be and often are displaced onto other parties.

The more general issue is whether capitalist industrial economies can be adequately represented as a system of markets. The opposition between markets and central planning is a short-circuit. Planning is obviously pervasive throughout the economy, (which is part of Bruce Wilder’s standard point about bureaucracy/hierarchy). And the institutional structures that enable markets, themselves a kind of quasi-institution, depend on planning processes as much on the regularities of “voluntary” transactions. In fact, markets, of themselves, don’t produce much by way of productive increases. They might stimulate and promulgate innovations, (though not all “innovations” are genuine ones, nor are their originators generally the ones who necessarily reap the rewards), but the planning and development largely occurs off-market in organizational and institutional structures and networks. Coordination and realization problems are endemic to any advanced production economy with an extensive and technically specialized division-of-labor. Relying on the supposedly adaptive and self-regulating features of markets alone, while ignoring their endemic dysfunctions, isn’t likely to be “optimal”.

The most basic theorem of capitalist economics is that the equalization of rates-of-profit between firms and sectors would produce a general equilibrium allocating investment such that output is optimal or maximal and supply matches demand. Needless to say, this is not an empirical truth, and it misses the dynamic disequilibria it gives rise to. In it’s crudest form, often dubbed “Say’s law”, it is manifestly untrue. But it’s important to note that the “freedom” in “free markets” is primarily concerned with the freedom of capital investment, and there is nothing to guarantee that the increase in private profits corresponds to some general social welfare optimum. In fact, there is a frequent divergence between private and public interests rooted in the system, and collective public “goods” can be significantly under-provided and the collective interests of capital clash with the well-being and developmental trajectory of the overall population. Specifically, the claim that lowering costs through increasing productivity provides benefits for consumers and thus raises the quantitative “standard of living”, ignores the fact that increases in consumption are specifically required to maintain or increase profits and bears a rather, er, contradictory relation to the desire to cut labor compensation. I’m assuming that the intentionality of capitalists, though not unconstrained, still plays a significantly privileged role in what drives the overall system, such that the private pursuit of profit will tend to win out over increases in social welfare. Markets themselves are constantly redistributing incomes and benefits together with costs; there are no final, once-and-for-all winners. But there is every reason to believe that left to their own devices, they will redistribute incomes in ways that are suboptimal, often severely so, in terms of sustaining demand and employment. (The Michael Pettis piece I linked to in this thread above makes that point rather subtlely. But John A. Hobson, an early neo-classical economist, already made that point in the 1880’s, though he spent the last 2 decades of his life as a member of the Independent Labour Party). So the very contrast you make between market outcomes and redistribution makes little realistic sense.

Keynes remarked, (perhaps unconsciously echoing Aristotle), that economics only concerns the material provision of life, and doesn’t provide of the ends or goods of life, just their prerequisite. Let’s just say that over-consumption for the sake of over-production might not be a sustainable developmental trajectory.

You hold to a static ahistorical model, in neo-classical fashion, and then make over-generalized claims, without any historical periodization or phases, nor geographical boundaries. What distinguished the emergence of capitalism from prior formations was its ability to recirculate economic surpluses rather than just expropriating them, thus generating a more efficient and replicable mode of expanding domination. The plunder of the Americas, for example, was enabled by and enabled early mercantile capitalism. And when early capitalism ran into a contigent set of technological innovations, inculcated by the world-view of modern natural science, rather than directly derived from it, indeed, a certain historical take-off did occur of rising productivity and increasing material surpluses. But only for a restricted part of the world and its populations. In fact, only about 1 bn of the current 7 bn of the population has significantly enjoyed its mixed blessings. Increased life spans and populations, a dubious blessing in many parts of the world, in terms of poverty and sustainability, are not simplistically the product of markets, rather than more general civilizational advances, (often accompanied by brutal “costs”). And as the finance brochures always say, past performance is no guarantee of future returns.

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Bruce Wilder 08.01.15 at 9:28 pm

swami: we should not confuse the how with the why

My discomfort with what john c. halasz calls neoclassical boilerplate is the shouting down of questions about “how” with dubious answers to “why”.

“wide scale free markets are necessary, but not sufficient” seems to report a logical analysis, but terms like “free” and “(wide-scale?!?) markets” are not well-defined or well-denoted enough to be part of a logical analysis. They are more like slogans shouted at a rally of true-believers. There’s hand-waving at 300 years of history and cross-cultural comparison, but I don’t automatically know in what specific sense 17th century (or 18th or 19th or 20th) England had more of a “market economy” than the highly commercialized Ming or Ottoman Empires in their heydays. Swami assures us that the latter were without “wide-scale markets” — what does that mean? Obviously, they had “markets” and highly developed commercial networks to support urban civilization. What am I supposed to get out of “wide-scale” that would identify what was missing, when I cast my eye to those historic empires?

Swami, to his great, good credit, retreats to reality-based observations, when challenged, but his concessions just raise additional questions about the original assertions attributing wealth to market liberalization. What work does “voluntary” do, when it is conceded that no case is free of constraint? What do we make of such historic phenomena as the role of slave plantations in supplying cotton for English mills in the early 19th century, when the expansion of that industry was central to the visible progress of the Industrial Revolution? I’m not asking for a ritual denouncement of slavery, nor denying that capitalist liberals played a vital part in abolishing the slave trade and suppressing the American Confederacy.

What I am saying is that we take unnecessary risks with understanding, when we are too quick to shout hosanna along the path of the capitalist Industrial Revolution to our 21st Century New Jerusalem of globalization and iPhones. It may be the industrial revolution did raise the standard of living of many millions in the developed countries, although the advent of labor unions, the regulatory state and social insurance might have had something to do with it, too. Amidst the vast increase in productive potential in the early Industrial Revolution, the British managed a genocide among their Irish dependents — surely Marx was not wrong to note the immiseration of the working classes.

There’s too much of the Righteous Mind at work, when we start praising “free markets” as a kindly god with no understanding or respect for the actual institutions of the modern world. At a time, when the Eurozone lurches from crisis to crisis, because, apparently, none of the experts so confidently testifying that there is no alternative will admit in public to understanding even the most basic functions of a marketable public debt for a banking and payments system, for fear of being held responsible for the immiseration of Greece, I think we ought to be a little more than merely skeptical of the neoliberal fables about “markets” as the source of “growth”.

I appreciate that Swami has made an effort to remain reasonable, and focus on the how, even if he seems to have sometimes fallen into using the neoclassical apologist’s rhetoric of why. I don’t think we get very far, arguing virtue economics. even in the negative. It is too easy to slip into a blanket skepticism, as I think O’Rourke did, after losing his way in the abstract maze of Pareto efficiency, and forget that the industrial revolution did happen, and the how might be of material importance.

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Swami 08.02.15 at 4:11 pm

Thanks for the response, Bruce.

Please remember, this is a blog comment and I specifically mentioned not wanting to hijack this thread from O’Rourke’s article. But if you insist I will reluctantly expand on the nature of free markets and the great enrichment (the abrupt change in prosperity and living standards post 1800 or so).

By wide-scale markets — if I was to over-idealize the system for clarities sake — I mean a broadly decentralized system of institutions and beliefs defined by private property, impartial rules of contract and a general protection of the freedom to create, specialize, produce, buy, sell, employ, work for, invest, and use private property absent coercion and harm to others. Obviously each of these terms requires sub definitions, and every real society has caveats, exceptions and such. However, as a rule of thumb, the above definition gets you into the ball park.

It involves formal institutions to decide on these definitions and caveats (often courts and the rule of law) as well as institutions of money, personal property, contract enforcement, the control and punishment of “cheaters”, banks, insurance, stock markets, corporations and such. It also includes inter subjective norms and values including the possibility and desirability of increasing prosperity via mutual agreement of decentralized actors, and the idealized values of thrift, honesty, hard work, creativity, investment in the future, and constructive competition.

Some may find it easier to grasp the essential characteristics of markets by contrasting it to what it is NOT. It is not fundamentally about centralized planning and problem solving. Indeed the focus of centralized actions on economic affairs is to ensure the decentralized nature of the thing is preserved for this domain of problem solving. It also specifically rules out exploitation, cheating and coercion. Actors within the system are not allowed to harm others, nor to coercively restrict others’ actions, or to prevent entry or competition as defined by the system. Coercive monopolies, cartels (including employee cartels), slavery, guilds and such are all off limits. Just as importantly nobody is allowed a privileged position based upon class, incumbency, political connections, bribery, sex, race or whatever. It is an impartial “open access” game with the same rules applying to all. Prohibitions to compete is specifically considered a harm, where as the harm caused by competition within the rules is specifically defined as not a harm.

Again, I am only laying out the idealized, oversimplified version for clarity. Reality is messier, perfection is impossible and almost certainly uncalled for (there are great reasons to deviate from the simplified model). Just as importantly, one must remember that the domain of markets is related to a specific range of economic problems best solved via decentralized cooperation. Other types of problems (public goods, coordination failures, understanding of natural phenomena, etc) are best handled by other systems, and there is often extensive disagreement on which problem solving system is best for each problem.

Now, transitioning to the “great enrichment”… Do note that the proximity to the ideal of wide scale markets as above is in absolutely no way the only difference between Northwestern Europe and the other great states or empires of the 18th and 19th century. Other dramatic differences were relatively uncensored, inexpensive printing and wide scale literacy; political institutions; science and the enlightenment mind set; cheap backstop energy; and the “ghost acres” created by the new world. There is of course also the matter of Adam Smith first clearly and popularly laying out the vision of economics and the potential of markets. Even more central or core to the situation was the 1000 year competitive dynamic between multiple competing and cooperating states. A situation particular to Europe and essential to creating the institutions important to the rise in prosperity.

I don’t believe anyone can convincingly tease out the relative importance of any of these strands in the historically unprecedented rise in living standards and relative escape from Malthusian forces. The interactions were complex with extensive feedback loops. I could however argue extensively that they were probably necessary at the time. If you are interested, I could go on and take a shot at clarifying why the industrial revolution occurred first in Britain. But again, I fear we have already hijacked this thread.

Final note, by idealized I am not implying ideal as in this is how it should be, just ideal in description. Prescription is another matter.

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Swami 08.02.15 at 5:58 pm

John, I would like to thank you for your response, but I must first stress that you are not actually engaging in a discussion with me. You are blending a discussion with me with an argument against some hypothetical boilerplate classic economist. I actually agree with you in places (in which cases I have no idea why you think we disagree), in others I do disagree, but I am not sure I have the energy to separate out the two. Considering that I have repeatedly cautioned against this sloppy form of argumentation, I will broadly refrain from countering every sentence.

I will address two points though which are more relevant to the discussion… Note the appropriate use of quote and response.

“In fact, markets, of themselves, don’t produce much by way of productive increases. They might stimulate and promulgate innovations, (though not all “innovations” are genuine ones, nor are their originators generally the ones who necessarily reap the rewards), but the planning and development largely occurs off-market in organizational and institutional structures and networks. Coordination and realization problems are endemic to any advanced production economy with an extensive and technically specialized division-of-labor. Relying on the supposedly adaptive and self-regulating features of markets alone, while ignoring their endemic dysfunctions, isn’t likely to be “optimal”.”

I never intended to imply that planning is not pervasive in markets. I assure you I have as extensive (three decades) of experience with planning and bureaucracy within markets as anyone involved with this blog. The point, which you and Bruce continue to sidestep is that planning within a market is constrained (using your term) by the dynamic of getting others to voluntarily agree to consume the final product. Included in this dynamic is the threat that other planning agents have the right to compete with you for said consumer cooperation and the threat that the consumer won’t choose to cooperate at all. You guys have lost the forest (the market dynamic) for the trees (bureaucratic, within organizational planning), and when someone with a career of operating successfully (tens of billions of dollars of products, conceived, created, priced and sold via mutual agreement) within the trees points out the limitations of your models you are offended.

“And when early capitalism ran into a contigent set of technological innovations, inculcated by the world-view of modern natural science, rather than directly derived from it, indeed, a certain historical take-off did occur of rising productivity and increasing material surpluses. But only for a restricted part of the world and its populations. In fact, only about 1 bn of the current 7 bn of the population has significantly enjoyed its mixed blessings. Increased life spans and populations, a dubious blessing in many parts of the world, in terms of poverty and sustainability, are not simplistically the product of markets, rather than more general civilizational advances, (often accompanied by brutal “costs”).”

Poppycock, for multiple reasons. First, I’ve mentioned at least a half dozen times that the rise in living standards is only in part due to markets. You are not arguing with me you are monologuing against an imagined straw-man. See my use of the term “necessary not sufficient.”

Second, and most importantly, you are empirically wrong. Worldwide average living standards have included a near doubling of lifespan, and roughly factor of ten improvements in 1) per capita income, 2) reductions in child mortality and 3) increases in education and literacy. I could also throw out dramatic improvements in reduced violence, reduced war, elimination of slavery, reductions in internal parasites, and the reduction of chronic pain and disease, but you get the point. Importantly, the pace of growth is accelerating, with more people rising out of severe poverty in the last generation than at any time in the history of the human race. Honestly I am amazed you are unfamiliar with these trends. Or are they simply not important to you?

Do note that the places and human beings furthest behind are those who have least adopted the institutions of markets. Indeed they have often been places most screwed over by Marxist anti market propaganda. Tellingly, as they have increasingly (albeit always imperfectly) adopted the model of markets as I described to Bruce above, they have seen rapid convergence with market oriented cultures. Wow, my theory matches reality! Necessary, not sufficient!

Final point. I never implied that improvements come without costs. There are always pros and cons, benefits and costs, direct impacts and distant wakes. One such current wake is a lower recent trend in income growth in “western” nations due to increased competition of relatively lower skilled labor from these billion plus workers in these “freeing” nations. Thus, many of the issues related to inequality trends within advanced nations is in part due to the type of indirect harm that comes from the constructive competition implicit in the market dynamic.

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Bruce Wilder 08.02.15 at 8:04 pm

Swami: if you insist

I didn’t mean to insist. Is it too late to take it back? ;-)

I am scarcely in a position to complain about anyone else launching into comment monologues on one’s own obsessions, having done it myself (and this comment is being held back from becoming an epic rant by the slender thread of uncharacteristic self-restraint on my part), but . . .

Swami: Final note, by idealized I am not implying ideal as in this is how it should be, just ideal in description. Prescription is another matter.

Not a credible “Final note” when so much of your comment is given over to proclaiming the Good News of capitalism. I don’t want to get into an ideological food fight, and certainly not over matters of tone. That really would be a serious thread hijack. But, I will reiterate your own statement: we should not confuse the how with the why.

This:

I mean a broadly decentralized system of institutions and beliefs defined by private property, impartial rules of contract and a general protection of the freedom to create, specialize, produce, buy, sell, employ, work for, invest, and use private property absent coercion and harm to others.

And this:

Some may find it easier to grasp the essential characteristics of markets by contrasting it to what it is NOT. It is not fundamentally about centralized planning and problem solving. Indeed the focus of centralized actions on economic affairs is to ensure the decentralized nature of the thing is preserved for this domain of problem solving. It also specifically rules out exploitation, cheating and coercion. Actors within the system are not allowed to harm others, nor to coercively restrict others’ actions, or to prevent entry or competition as defined by the system. Coercive monopolies, cartels (including employee cartels), slavery, guilds and such are all off limits. . . .

are simply paeans to ethical norms. “rules out exploitation, cheating and coercion”!!! Really!?? Do you ever read your own b.s.?

You make it sound as if the Industrial Revolution was just a smidge away from Christ’s Millennial Return, a golden age of unparalleled probity giving rise to a bountiful cornucopia. No Slavery Plantations feeding cotton to Satanic mills in your history of the Industrial Revolution. No Dutch or English East India Company, no Bank of England, no DeWitt Clinton and the Eire Canal, no Pennsylvania Railroad or Standard Oil — pretty much nothing recognizable as an historic fact or actual institution. And, nothing falsifiable either, because other domains, messiness, and “complex with extensive feedback loops”. Also, “probably necessary at the time” covers a lot of sins. Too bad about the Irish peasants, who starved to death as their absentee English landlords exported food, though.

OK, so I said I would restrain my impulse to rant, and maybe I’m not doing a great job on that front. I doubt it would profit us to continue the dialog, attached as you apparently are, to a fantasyland version of the industrial revolution(s) and capitalist development. I don’t know what you thought I could do with a definition of “markets” that relies so heavily on a false assertion of norms and ethical probity and so little on any observable fact, event or institution. We cannot have a conversation, as far as I can see, because you won’t come into the real world or talk about things we can both observe.

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Peter T 08.03.15 at 12:26 am

Swami

Only one problem with your ideal type depiction of markets: the historical record does not support the narrative. Just on Britain, if you read, eg Brewster’s Sinews of Power; Colley’s Forging the Nation, NAM Rodgers on the economics of developing naval power (the navy bought 20 per cent of all food marketed in Britain), Knight on C18 government or much else, you simply do not see the picture you outline. Britain was much closer to a “market society” in say, 1750 than in 1850, and more so in 1850 than in 1950. If we want to explain this in any way that accords with the evidence, we have to look elsewhere.

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john c. halasz 08.03.15 at 2:03 am

Swami @ 132:

Just to be clear.

1) If you’ve been around here long enough, you’d know that threads derail in terms of the OP often enough, usually just partially, constituting what amount to sub-threads, but sometimes totally. But days after the OP, derailment is not a worry.

2) Your claim to be engaging in some sort of pure, disinterested argument is philosophically naive, at best. Further, you have laid out recognizably standard neo-classical arguments, not original to yourself, and then claim that others are not responding to your own “pure” intentions, but misinterpreting them, and thus arguing sloppily. When, in fact, you haven’t laid out your own arguments all that clearly and when challenged, you retreat into the very sort of qualifications that others have made. Let’s call that an inverted form of strawman argument.

3) You made an opposition between a centrally planned economy and a decentralized “market” economy. That is a core issue in dispute here, because it amounts to a fallacious use of an “excluded middle”, when such a stark opposition is precisely being rejected. Of course companies plan: not news. But so do a lot of other organizations, and such planning is not only required to sustain “markets”, but to correct for their endemic dysfunctions. Fiscal policies, (i.e. beyond demands for austerity and “balanced budgets”), regulation of lots of externalities, public investment and public indicative planning and industrial policy, redistribution from “market outcomes”, preferably on a constant basis and through “automatic stabilizers” might well be required to sustain your “pure” logical ideal. But then the logical “ideal” of perfectly competitive markets, to which all goods are to be attributed, amounts to just a logical inversion of realistic analysis. You claim to have worked in the corporate sector managing billions of $ worth of projects. Fine, but that implies that you’ve been working for corporate oligopolies, perhaps multi-national ones, and the sort of “competition” involved there is precisely not of the competitive, “free market” kind. (But, in general justification follows behavior rather than vice versa, so perhaps such confusion is not surprising). And then you say that your logical ideal is descriptive and not prescriptive, which is a typically confused claim of standard neo-classical economics, itself descended from 19th century positivism, which perpetually tries to smuggle normative claims into what is ostensibly purely positive analysis.

4) You then revert to your claim of “necessary but not sufficient”, but without specifying at all what the “sufficient conditions” would be, (leaving it up the the rest of us to supply them for you?), which amounts to question begging and leaves the claim of “necessity” indeterminate. And a 10 fold increase in per capita income? Over what time span and with what distribution, (since per capita means just average)? And you then resort to sheer asseveration about health outcomes, when that is hardly attributable to “markets”, but rather just general scientific advance, (and in Africa, often spread by missionaries). The largest advances were often the result of the simplest ones, such as the discovery of the infectious causes of many diseases or the originally accidental discovery of anti-biotics. (Just to be provocative, Cuba has excllent health care, by all reports, both with respect to the quality of their doctors and and to the public provision afforded. The main problem is the level of undernourishment, due to straightened economic conditions). Education and literacy obviously have budget constraints, but they have been spread many places without the “virtues” of markets. (And did you know that the literacy rate was far higher in 16th century England, due to the Reformation than early 19th century England, due of course to much higher population?) And while it’s true that before the GFC the global economy was growing at its highest rate, since the demise of Bretton Woods, much of that was due directly and indirectly to China. Just how would you characterize that regime? And what do you make of the GFC and its rather tawdry aftermath? Is that just a blip on your radar screen, which will surely be corrected by doubling down on “markets”? Would that necessarily result in “convergence’? And though impossible to disentangle, do you see no difference between the expansion of financial “markets” and real productive investment?

5) Finally, you want to attribute declining wages in “advanced” economies simplistically to the “law-of-supply-and-demand” in labor “markets”, without acknowledging that the opening up of “1 billion workers”, (just 1 bn?), was a deliberately constructed political project. (The aim of Bretton Woods, at least in Keynes conception, was to allow each country some relative autonomy in forming its own economic policies to suit its circumstances, such that domestic employment and productivity wouldn’t depend on export competition and thus rampant current account imbalances). Often you seem to veer from the merely neo-classical to the outright neo-liberal worldview. Governments only exist to enforce the dictates of markets and any other function is illegitimate. At the limit, privatize everything for the sake of markets, including the very idea of a public realm and contestable public interest. I think such a doctrine is just a disaster, even on a purely economic level. Hannah Arendt modeled her peculiar conception of the political on totalitarianism, which for her was the apotheosis of the anti-political. Sheldon Wolin, perhaps in response to her work, which he would know well, has characterized neo-liberalism as “inverted totalitarianism”. Its anti-political character resides in its extreme economic reductionism, even more severe than what might be attributed to various strains of Marxism. But I myself, in an abstract, broad-brush way, am a republican. The maintenance of the res publica, the public thing, with popular sovereignty and participation, is an essential and “necessary” value. Regardless of any fetishization of GDP growth, at the expense of distributional, employment and natural resource constraints

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Swami 08.03.15 at 6:56 pm

Hi Peter,

You are misrepresenting my narrative. To make a cake requires multiple ingredients, steps and processes. I have (to continue the metaphor) declared an operational oven was one such ingredient. Your argument is that the oven worked even better in some years than others. For arguments sake, let’s grant your point.* But you still need eggs, flour, vanilla, a whisk and a source of power to run the oven.

In 1750 we still lacked the knowledge to convert steam efficiently into more useful forms. The oven was not yet plugged in. In 1950, despite plentiful power, the source of growth had long since shifted away from Britain. It was losing ground and clearly a follower and no longer a leader. Indeed it was actively turning away from market-based problem solving.

If you want to argue whether any society EVER has substantially improved long term average living standards for the masses absent the ingredient of markets or by borrowing the creative organizations and products and processes of said markets, please take your best shot. My guess is even Marx would have conceded this point to me.

* I do not believe that the market mindset was even remotely dominant prior to the writings of a certain Mr Smith. It lacked any coherent narrative on the positive aspects of self-focused behavior.

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Swami 08.03.15 at 7:12 pm

Thanks for the reply, John.

“…you haven’t laid out your own arguments all that clearly and when challenged, you retreat into the very sort of qualifications that others have made. Let’s call that an inverted form of strawman argument.”

No, when challenged I have elaborated, and will continue to do so. I understand that it is easy to fall into the groove of arguing with what we think the person means or is going to say based upon prior experience. We all do it. Going forward let’s try to talk to each other. I think you did extremely well this round, and hopefully can return the favor.

“You made an opposition between a centrally planned economy and a decentralized “market” economy. That is a core issue in dispute here, because it amounts to a fallacious use of an “excluded middle”, when such a stark opposition is precisely being rejected.”

In no way do I believe or have I ever intended to imply that there is nothing between these extremes. The very notion of no middle ground is absurd. That said, it may be of value to characterize the ideal type, especially when specifically asked to do so. I was asked and I did.

“Of course companies plan: not news. But so do a lot of other organizations, and such planning is not only required to sustain “markets”, but to correct for their endemic dysfunctions.”

Agreed wholeheartedly. Again I never intended to imply otherwise. Not all problems are or can or should be solved by markets, and in general the institutional supports of markets are themselves not market generated. You are not arguing with a libertarian.

“…that implies that you’ve been working for corporate oligopolies, perhaps multi-national ones, and the sort of “competition” involved there is precisely not of the competitive, “free market” kind. (But, in general justification follows behavior rather than vice versa, so perhaps such confusion is not surprising).”

Again, one has to chuckle when you guys attempt to dismiss my viewpoint as deluded rationalizations. There should be a term for this rhetorical trick. Freudian Argumentation? I count three versions of this argument from three different sources.

My experience was entirely domestic in an extremely heavily regulated, extremely bureaucratic industry which in no way looked like some ideal market. However the market dynamics still dominated with myriads of corporate entities, some profit-driven and some not, competing within the regulated constraints for the voluntary act of cooperative exchange. I designed, marketed and priced new products focusing on superior consumer value, with the goal of enticing said consumers away from our competitors. They did the same. Consumers gained almost as if there was something like an invisible hand. Employees and stockholders got a lot of value too. Heck, I even had fun doing it!

“And then you say that your logical ideal is descriptive and not prescriptive, which is a typically confused claim of standard neo-classical economics, itself descended from 19th century positivism, which perpetually tries to smuggle normative claims into what is ostensibly purely positive analysis.”

Sounds like you’ve been practicing that line. I am well aware that people have contradictory values and that utilitarianism is RARELY the dominant value. To the extent people value health, wealth, education and such then markets are one well-proven addition to the recipe (you can easily support the argument with a consequentialist game theoretical or behind-the-veil argument). If, on the other hand, your goals are extreme egalitarianism, preservation of tradition, or some mystical property (heavenly rewards?), then markets may very well be antithetical to one’s goals. I will allow people to choose, and only recommend that they do so wisely.

“You then revert to your claim of “necessary but not sufficient”, but without specifying at all what the “sufficient conditions” would be, (leaving it up the the rest of us to supply them for you?), which amounts to question begging and leaves the claim of “necessity” indeterminate.”

The argument is a little deep for blog commentary. If you ask specifically I will elaborate, but honestly I don’t think the experts will ever be able to fuss out weights. The situation is simply too complex with too many feedback loops. It’s like arguing why Golden State was able to win the championship this year (actually it is much more complex than that). Was it defense? Offense? Coaching? The players? Which ones? Where is our empirical control group? How much of the results were contextual? Absent some of one factor how much more of another would be necessary to still take the championship?

In the end, we only have theories, and theories need to be tested and compared to their alternatives. In my case I am arguing that the recipe in the 19th C was as such and based upon this we should therefore do X going forward if we want to accomplish y. Others will provide alternative theories and goals and the alternatives will compete going forward, learning and improving along the way based upon both experience and values. (Not so different from what the NBA coaches are doing in preparation for next season).

I am not going to answer every one of your #4 questions due to overload. I will just encourage you to grok the cake metaphor above. The key to grasping the great enrichment post 1800 is that the rate of problem solving has to be greater than the rate of problem creation or humanity will not on net advance (and again, that is assuming we want to). If Malthusian forces, zero sum interactions and problem solving barriers dominate, then it doesn’t matter how many steps forward we take, as we will be doing as many or more steps back. History of the human race (pretty much of every species) is that movement forward is usually balanced by similar pushes back. One step forward, one back and the average standard of living doesn’t change a bit. Science, technology, institutions, markets and intersubjective norms and frameworks self amplify each other and in total determine how many steps forward we take relative to the steps back (some of which are side effects of the steps forward).

After 1800, societies began to learn how to make two forward for every one back. Or perhaps it was 102 forward for every 100 back. And yes, past results are no guarantee of future success. But we can learn from the past just the same.

“Finally, you want to attribute declining wages in “advanced” economies simplistically to the “law-of-supply-and-demand” in labor “markets”, without acknowledging that the opening up of “1 billion workers”, (just 1 bn?), was a deliberately constructed political project.”

I do so acknowledge and never meant to imply differently.

“Often you seem to veer from the merely neo-classical to the outright neo-liberal worldview [that] Governments only exist to enforce the dictates of markets and any other function is illegitimate.”

Huh? Again, you really seem to be arguing with some libertarian anarchist. I am unfamiliar with any successful society without an effective political state.

“At the limit, privatize everything for the sake of markets, including the very idea of a public realm and contestable public interest. I think such a doctrine is just a disaster, even on a purely economic level.”

I don’t think the market has a “sake” and though I probably do lean toward privatizing more than you probably do, I would agree that some things are best left to the state and to other institutions handled under completely different rules and constraints than markets. See what I mean about me scratching my head on who you are arguing with?

“Regardless of any fetishization of GDP growth, at the expense of distributional, employment and natural resource constraints.”

Again, I agree GDP growth should not be fetishized. It is important, but so are other things. The market just happens to be a good way to deliver a particular basket of goods.

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Swami 08.03.15 at 7:24 pm

And Bruce…

“…are simply paeans to ethical norms. “rules out exploitation, cheating and coercion”!!! Really!??”

You act surprised. You think a complex institution of decentralized behavior is remotely possible without well agreed upon ethical norms? My guess is — throwing your own rhetoric back at you — that you are so enmeshed in these norms that you take them for granted (I will not stoop though to saying you are deluded by myths). I assure you past societies haven’t taken these ethical norms for granted. War, bribery, kidnapping, slavery, privileged classes and castes, and might-makes-right were sewn into the very ethical framework and intersubjective mindset of what was acceptable and necessary. Even today, most people in capitalist states still rationalize privilege as opposed to impartiality (shame on us!)

“You make it sound as if the Industrial Revolution was just a smidge away from Christ’s Millennial Return, a golden age of unparalleled probity giving rise to a bountiful cornucopia. No Slavery Plantations feeding cotton to Satanic mills in your history of the Industrial Revolution. No Dutch or English East India Company, no Bank of England, no DeWitt Clinton and the Eire Canal, no Pennsylvania Railroad or Standard Oil — pretty much nothing recognizable as an historic fact or actual institution. And, nothing falsifiable either, because other domains, messiness, and “complex with extensive feedback loops”. Also, “probably necessary at the time” covers a lot of sins. Too bad about the Irish peasants, who starved to death as their absentee English landlords exported food, though.”

I stated that the world has gotten better in many ways and empirically demonstrate it. I further mention that markets were a necessary part of this, a comment which I am pretty sure you both reluctantly agree with and which you have agreed with in your earlier comments (please correct me if wrong). You counter that the real world has never looked like the ideal (a point I made too many times to count) and you then throw out examples which clearly were abject violations of what I defined as markets. The VOC and EIC were not anything even remotely similar to what I described, nor is slavery.

No society ever has existed absent exploitation, coercion, cheating, and exclusionary privilege. These actions exist in many places today, they existed in 17th C England, in 20th China, and so on. If YOUR point is that these exploitations were necessary in your explanation of material causes of the great enrichment, then please say so. In which case, I assume YOU are arguing that there was a positive externality of these horrible actions. I disagree that these actions made significant positive influence toward long term world prosperity, and would gladly argue the point (to the negative) if you have the energy.*

As to living standards in 19th C Britain, I think the empirical data shows that actual average incomes were a historically-unprecedented 4X higher than the worldwide average. Yeah, life sucked, but it was still much better than other places or to prior centuries in Britain, where it sucked even more. Indeed a key part of the explanation of “why Britain” was due to the abnormally high incomes relative to cheap energy.

“I don’t know what you thought I could do with a definition of “markets” that relies so heavily on a false assertion of norms and ethical probity and so little on any observable fact, event or institution.”

A perfect example of why I tried to drive the point on the idealized description. Contrary to your assertion, every descriptive point of markets is measurable (albeit imperfectly as this is a social science). You can measure freedom of entrance and exit, impartiality of rules, the way property is defined, pricing freedom, freedom from bribery and so on. There are even institutions which publish these results annually. Want a link?

Let me restate:
1) you asked for what I meant by broad scale markets and I responded via an idealized descriptive model. The equivalent of “this is a perfect circle.” At no point did I ever suggest perfect circles are either possible or desirable in the real world.
2). I stressed that ethics, norms and inter subjective mindsets are a critical part of this institution.
3). I stressed that markets were just one piece of the larger scale enrichment post 1800.
4) if I haven’t said so already, in no case do I believe that there are only pros and no cons of any solution. The same caveat applies to democracy, science and charity.

* I do suspect that the colonization of the new world was a necessary ingredient in the great enrichment despite its accompanying horrors.

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reason 08.04.15 at 7:22 am

“As to living standards in 19th C Britain, I think the empirical data shows that actual average incomes were a historically-unprecedented 4X higher than the worldwide average. “

You do understand the difference between mean and median, I assume? And between GDP (a measure basically of market turnover) and “living standards” (which include non-market production) for that matter.

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reason 08.04.15 at 7:33 am

Look Swami,
don’t get us wrong. I think most of us have a fairly similar view of the world as you do. It is just that you keep making careless statements like the one I pointed about above, and your general tendency to attribute definitely to capitalism progress that perhaps could be seen to be caused by something else leaves a certain unsatisfactory aftertaste.
I happen to agree that innovative competition and freedom of consumer (and employment!) choice are a benefit for which it is worth putting up with the negative sides of capitalism for. There are those here who would disagree with my “moderate” position. But I can’t agree that the rules by which society is organised can safely be left up to dictates of “technocrats” in areas where they have proved and reliable expertise. Simply because in the case of economics there are no such areas, and as O’Rourke points out there is no definitive goal to manage towards.

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reason 08.04.15 at 7:46 am

“If you want to argue whether any society EVER has substantially improved long term average living standards for the masses absent the ingredient of markets or by borrowing the creative organizations and products and processes of said markets, please take your best shot.”

The Inca?

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Peter T 08.04.15 at 10:43 am

“If you want to argue whether any society EVER has substantially improved long term average living standards for the masses absent the ingredient of markets or by borrowing the creative organizations and products and processes of said markets, please take your best shot.”

But what society has ever lacked markets? Aboriginal Australians traded over long distances, the law code of Hammurabi (c 1800 BCE) has numerous articles concerning trade, markets and merchants and so on. C17/18 southern China was a thoroughly market society. And so on.

In 1820 around 80 per cent of US workers were self-employed, a mass of farmers, craftpersons, merchants stitched together by innumerable local markets and by long-distance traders. By 1880, only 20 per cent were – the vast bulk had been corralled into corporations. And wealth had risen greatly (median welfare rather less so). So we have a conundrum – increases in wealth do not correlate in modern times with more market activity; rather it appears at best an irrelevance. And increases in welfare correlate even less so.

This is not to say that markets are unimportant. It’s to say that they are not the drivers of increasing wealth. Yet they remain an ideological focal point, because they offer a vision of a social world untainted by power. That vision is important, but not because it leads to wealth.

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Swami 08.04.15 at 3:47 pm

Peter (and Reason)

But what society has ever lacked markets?”

You guys are just being cruel now. Anybody following this conversation knows that I am specifically referring to wide-scale markets as defined in idealized form as above:

Begin self quote
“…a broadly decentralized system of institutions and beliefs defined by private property, impartial rules of contract and a general protection of the freedom to create, specialize, produce, buy, sell, employ, work for, invest, and use private property absent coercion and harm to others…. It involves formal institutions to decide on these definitions and caveats (often courts and the rule of law) as well as institutions of money, personal property, contract enforcement, the control and punishment of “cheaters”, banks, insurance, stock markets, corporations and such. It also includes inter subjective norms and values including the possibility and desirability of increasing prosperity via mutual agreement of decentralized actors, and the idealized values of thrift, honesty, hard work, creativity, investment in the future, and constructive competition…. Actors within the system are not allowed to harm others, nor to coercively restrict others’ actions, or to prevent entry or competition as defined by the system. Coercive monopolies, cartels (including employee cartels), slavery, guilds and such are all off limits. Just as importantly nobody is allowed a privileged position based upon class, incumbency, political connections, bribery, sex, race or whatever. It is an impartial “open access” game with the same rules applying to all. Prohibitions to compete is specifically considered a harm, where as the harm caused by competition within the rules is specifically defined as not a harm.”
End self quote.

“In 1820 around 80 per cent of US workers were self-employed, a mass of farmers, craftpersons, merchants stitched together by innumerable local markets and by long-distance traders. By 1880, only 20 per cent were – the vast bulk had been corralled into corporations. And wealth had risen greatly (median welfare rather less so). So we have a conundrum – increases in wealth do not correlate in modern times with more market activity; rather it appears at best an irrelevance. And increases in welfare correlate even less so.”

Mutually agreed terms of employment and voluntary organizations of producers clearly is part of a widescale market and your “conundrum” clearly relates to confusion over the nature of prosperity or collective problem solving using the principles of division of labor and exchange. Indeed, the form of voluntary cooperation called a corporation is part of the idealized form. It is clearly one of the greatest organizational solutions of the human race. And median welfare has improved greater than average. Have you already forgotten about the improvement in childhood mortality, lifespan, literacy and such? The gains were substantially larger for the bottom quintile than the top.

Allow me to elaborate though on the nature of productive networks:

People can solve more problems together than separately by specializing in production and cooperating with other producers and then exchanging these complex solutions with each other. The power of these wide scale markets is that they allow much deeper level of specialized problem solving and a much broader level of problem solving (than can generalists or individuals such as farmers and artisans working alone). Even more importantly, specialists serving large markets can afford to invest (actually the investment itself is a form of voluntary cooperation among vast numbers) in capital to increase productivity and quality. And even more importantly, the competitive dynamic of producers competing to cooperate with consumers and other producers drives an arms race of infinite variety, quality improvement and efficiency gains. It is a complex dynamic self amplifying problem solving system based upon voluntary interaction and constructive competition.

The prosperity generated by markets — excuse me, widescale free markets as above — is the outcome of this process. It is a factor of the size, complexity, and constructively-competitive nature of this now global problem solving system. For you to act surprised that prosperity increased in the US through the 19th C is flat out jaw dropping to me. You view the trends of 1)prosperity increases, 2) more complex coordinated corporations, 3) larger exchange networks and 4) fewer solo farmers and artisans, as a “conundrum”?

“This is not to say that markets are unimportant. It’s to say that they are not the drivers of increasing wealth.”

Yes they are. You and quite a few others on this site apparently do not grok that increased prosperity is essentially a factor of solving more problems better, more efficiently and that decentralized* wide scale markets with impartial freedom to enter and exit are necessary to create the competitive arms race (for profit) which drives this process. Add the routine caveat that “markets” are sufficient but in no way shape or form sufficient as several dozen of my prior comments have stressed.

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Bruce Wilder 08.04.15 at 8:15 pm

Swami:

What you have propounded isn’t an analysis; it’s a cargo cult.

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Ogden Wernstrom 08.04.15 at 9:22 pm

@142, Swami 08.04.15 at 3:47 pm:

You guys are just being cruel now.

I’d like to thank you guys for handling this. I’m usually not that nice when dealing with “jellyfish” arguments – you know, the kind that squirm around, shifting shape so that every attempt to nail down one little bit results in, “Ha! You missed me!”.

Plus, I’ll take this opportunity to point out that the greatest wealth is created by stealing – labor from slaves, land from indigenous peoples, retirement monies from Enron employees, oil/coal/lumber/livestock feed/etc. from publicly-owned land, the value of labor from workers, and so on – and markets help make that wealth liquid.

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