By Graham Peterson
Bob Solow, the great man that he is, has written an incredibly good piece over at The New Republic, the great magazine that it is, on Alan Greenspan’s new book. Bob’s not happy. According to Bob, Alan made an enormous mistake in encouraging financial deregulation because of his alleged Randian ideology. Apparently Greenspan turns economics into ethics, and poorly.
In elementary economics, workers freely enter and exit firms, turning firms into customers of workers’ services, which bids up workers’ wages to what’s called the workers’ marginal product. That means I get paid exactly the value of the last widget I churn out at the end of the day, and Karl Marx was wrong about exactly everything.*
Greenspan puts it thusly: “Market competition ensures that [workers’] incomes equal their ‘marginal product’ share of total output, and are justly theirs” (my bold). Solow returns the volley, reminding us that people start life with different endowments (sociology!) that affect their marginal productivity, and that we end up with an unequal distribution of consumption opportunities. “There is nothing just about it,” says Bob.
There it is — justice. This, I believe, is the principle driver of the last few hundred years of macroeconomic debate — cultural negotiation of the moral desserts in the economy. It’s why I’ve never bothered to learn much macroeconomics. Economists have possessed in the last half of the 20th century some of the most accurate national income data in the world, and some of the most sophisticated statistics anywhere in the academy. With these data they have been able to resolutely determine that the effects of fiscal and monetary intervention are ambiguous, maybe.
So the leading figures in the discipline have taken to a public pageantry on the internet (hi, Paul!) , neatly separated into an interventionist and laissez faire camps. Ad hominem about a lack of scientific ethics: “No, YOU’RE the ideologue,” have become a perfectly acceptable go-to in order to settle debates . . . that never get settled.
Now, I love economists. And Solow’s growth model is one of the main reasons I left for sociology — the foundations of economic innovation, and economic growth hence — appear to be sociological. But some candor in these debates would be refreshing. And frankly that would begin with macroeconomists (and the rest of social scientists for that matter) admitting that they are, roughly put, ideologues, and that there’s nothing wrong with that. The issues here are ethical, and the self-styled positivists unselfconsciously construct elaborate mathematical and statistical arguments that are consistent with their ethical priors. The way to stop this is to ask people to unmask their ethical and political priors instead of asking them to pretend they don’t have any when they sit down to solve for an equilibrium.
The basics of Keynesian intervention are that low aggregate demand, caused by a variety of proposed mechanisms, make businesses hesitate to invest in production. The logic then becomes, “give people money to consume, they’ll consume, business will want to invest in greater production and hire people.” Laissez faire types argue in turn that if you want more stuff, you have to make more stuff — employment starts and ends with saving more, so that one can invest more, and hence produce more. Note right away the ethical arguments being made here, in the style of what George Lakoff has called the Strict Father (leave it alone!) versus Nurturing Mother (intervene!) views of government.
Keynes’ book wasn’t revolutionary because he had mind blowing and revolutionary mathematics that suggested a clear functional form to fit statistically, and inarguably well-fit data — it was revolutionary because he turned the basic tools of economics on their head in a mostly fiscally conservative political environment to suggest that the government should indeed help the damn poor, and massively. And old Uncle Milton’s political economy and monetary theory wasn’t successful and informing of a rejuvenated fiscal conservatism because he had a mind blowing theory of the money supply — it was successful because it was all backed by claims on human freedom — strict father says the best way to parent the kids is to let them skin their knees and learn.
What’s really being fought over here are deep-felt ethical and political principles. Economic stimulus, whether by unemployment benefits, earned income tax credits, or other social spending — to laissez faire types — is coerced charity. Most of these people have no problem with charity in principle, as long as it’s private and voluntary. But what really gets laissez faire types mad is Robin Hood with a Ph.D. in economics.
Financial regulation, or really all business regulation, in the laissez faire view, is not a matter of a reasoned cost benefit analysis over whether the stimulating effects of it outweigh its distortionary effects — it’s a simple matter of interference in private affairs. You know how most sane women feel about their uteruses and their right to dispose of them as they please? That’s how laissez faire types feel about their right to transact with whom they please.
And it goes the other direction — interventionists will sing a beautiful harmony about the supposedly value-free and measurable impacts of sensible regulation. What ultimately motivates their analysis is a story in which bad or ignorant or negligent businesspeople do bad things to people. “Unfettered market,” is a fancy term for a group of out-of-control assholes who, if we keep a leash on them, can give us lots of neat stuff despite themselves, but will eat us for dinner if we don’t hold a gun to their head while they do business.
These macro stories you see, are all about good and evil, and about ethical harms and justices. The actual material impacts of macroeconomic policies are almost entirely ambiguous, and anyone with an undergraduate understanding of economics should understand as much — the little dead weight loss triangles and price movements you get by shifting supply and demand curves around are small relative to the total quantity of goods represented in a partial equilibrium diagram. So where do macroeconomic fluctuations come from?
Some economists have begun to use the term Animal Spirits again, but per usual, this bold-faced cultural argument lacks any serious or systematic study of . . . culture. How do you get low aggregate demand in 2013? Scare the shit out of 317 million people with a financial panic and political scandal, undermine their trust in one another, and then keep twisting the knife on the national news with a pageantry of political punditry for the following five years.
How do you get a post WW-II boom? Conquer a symbolic specter of evil, construct a story about how it constitutes a final victory of freedom and the promise of modernity, and get communities rallied around shared themes of opportunity, freedom and prosperity.
How do you get financial markets to respond to monetary policy despite the fact that the Fed possesses a tiny fraction of loanable funds in the world? Construct an elaborate theory of the supply of money and institutionalize tens of thousands of people with a belief in it, putting a group of magisters at center stage who pull leavers. It’s a sure fire way to get people to react dramatically to their own forecasts.
Now these colleagues of mine are some of the smartest women and men I know, most of them much smarter than me. I got a B in Real Analysis. They’ve accomplished important things: the conquering of hyper-inflations was one of the greatest victories of social science in the 20th century. The collection of aggregate economic statistics is inviolably important — without them we’d have never found out that growth, amazingly, doesn’t really come from simple saving and investment. Talk about a whopper.
But the idea, at bottom, that we can control the business cycle and edge unemployment up and down with statistical regressions and a big enough check book is a complete fantasy. It’s also fashionable. Manly men of intelligence and conscience read The Economist and get graduate degrees and have prestigious and esteemed debates (including regular name calling and mud slinging) about the subtle particularities of steering the actions of 317 million people with monetary and fiscal nudges.
And for the most part, everyone believes in them. People are mysteriously convinced that someone must at the very least attempt to control the freight-train force of hundreds of millions of people inventing things, selling to one another, and transacting. It is a magnificent drama to watch — Mom and Pop and Suzie and her girlfriend tune in to economic news that they barely understand in anything but its simplest moral narrative terms. Pundits and journalists and politicians pretend to understand macroeconomic theory above the level of freshman course economics. And graduate students all over the world and their mentors busily keep up the illusion that they’re not precisely communicating moralistic narratives to the public — all the while doing an elaborate two-step around the reality that they are, after all, telling stories about good guys and bad guys and full blood victims and the dealing of punishments and rewards.
Are we all brainwashed? No. Is economics not a science? No. Economics nor any other human science can get around telling human stories with deliberate political implications. And politicians nor the man in the street can get around using precisely these stories in order to form their beliefs about the world and make decisions. What we believe is real is real. If the prospect of our culture ultimately being a relativistic fairy tale disturbs you, it should. But the next step is to realize that that’s what we’ve got, and that only by understanding it’s mechanics, up to and especially including the way it impacts economic behavior, can we tell better stories and help one another create a more prosperous world.
Update: Paul Krugman himself has just highlighted that employers don’t cut workers’ wages during recessions (which would bring marginal workers whose skills are worth less into the job market), because employers understand that organizational loyalty and ethical reciprocity are economically efficient to production. This is the kind of progress we need in macroeconomics — an understanding of how moral narratives shape actor’s behaviors.
*Everything about class exploitation, that is, which drives the majority of his corpus. There are good sociological and political reasons to believe the basic economic story doesn’t always hold. We won’t explore them here.