Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Sunday, November 17, 2019

Against Economics

I wrote my impressions as I read this article.  H/T to my old virtual friend Nanute.

Since some time in the 80’s we’ve had the great stagnation.  Presumably less volatility [and low inflation,] but at the cost of slower average economic growth.  Yet we had the recession of 2001, which was bad enough, and then the great recession of ’08 - from which we have yet to recover.  So - in my view - it has not at all been worth it.

As I see it, inflation is a resultant, not a cause.  It’s the result of a healthy, growing economy - and therefore - at the very least - not a bad thing, per se.  When conservative economists voice their concerns about inflation, it seems like there is always the implicit but unmentioned specter of hyper-inflation lurking over their shoulder.  Except under very rare and special circumstances, that is not a concern.  But I think Hayek was deeply influenced by that fear, and  passed it on to his acolytes.

What we have now is economic disparity similar to that of the 1920’s.  This gets worse every day, as more money flows into the hands of the wealthy and hyper-wealthy.  It then gets hidden in a tax dodge, often off-shore; diverted into non-value-added speculative financial tail chasing; or, maybe worst of all, used to buy another senator.  This does exactly nothing to promote a healthy, prosperous economy.

Put a dollar in a poor person's hands and it gets into the productive economy immediately, because s/he has unmet needs.  This is not rocket science.

Several years ago, one of my Angry Bear colleagues - I’ve forgotten who - put forth the idea that economics as an intellectual discipline was invented to mainly justify the existence of a dominant wealthy class. I’m not sure that’s exactly correct, but following orthodox economics in our post-capitalist world seems to have the effect of increasing wealth disparity. 

I also believe that nobody really understands either money, nor inflation.  The classicists, neoclassicists, monetarists, Austrians, Keynesians, neo-Keynesians, market monetarists and MMT guys all have different ideas of how money works. They can’t all be right, but they can all be wrong. 

The empirical reality is that austerity impoverishes, and government spending leads to some relative level of prosperity.  What do we do to get out of recessions and depressions?  Spend, spend, spend.  I wonder why that works?

But, alas, wealth and power are fungible, and the rich cannot resist the urge to buy control of government and then seek to enforce policies that further favor their already exalted positions.  So we get things like austerity and low inflation.  Another thing that’s happened over the last 40 years is the dismantling of unions.  Only government and unions have the power to stand up to capital.  So capital has suborned government and pretty much destroyed unions.

Interestingly, the author posits that, contrary to orthodoxy, central banks don’t control the money supply; they control interest rates.  I’m on record saying they don’t even do that. The blow back I got on that was mainly that they set expectations, and interest rates follow.  Not only does this seem like magical thinking - or, at least dog-wagging, I also wonder whose expectations?  How many people are even aware of central banks, let alone what they can or cannot do?

I’m writing this as I read, and see my thoughts have gotten a bit ahead of the author.  But I’m happy to see we are in broad agreement.  Especially about the disastrous effects of austerity.  So why do we repeat this same error so many times?  The author has the answer buried in parentheses: “tight-money policies (which benefited creditors and the wealthy)”

Interestingly, he then goes on to criticize what I was harping about several years ago - that when reality differs from an economic model, economist go with the model and deny reality. The basic assumption that people are reliably rational actors is absurd on its face.  It is completely indefensible.  Yet, on that foundation, the entire edifice of scholarly economics rests. 

And here is my favorite quote from the article — “lunatic premises lead to mad conclusions.”  This, by the way, is also the fundamental flaw of libertarianism - but I digress.

Aha - some competition for my favorite quote: “Secondly, if shares are always correctly priced, bubbles and crises cannot be generated by the market….” Or even the types of 1500 to 2000 point CORRECTIONS [!] we’ve seen three times in the DJI30 index, just this year.

I share the pessimism of the article’s last paragraph.  But for what might be a slightly different reason.  As I suggested earlier, the rich control the government.  The difference between Republicans and Democrats in this dimension is a matter of degree, not kind. It took the Great Depression to bring about the New Deal reforms that led to America’s golden age.  But it also brought on World War II.  The current economic conditions are closer to those of 90 years ago than most people are aware of, or willing to recognize. And there is certainly no dearth of international tensions.

So, there might be a light at the end of this tunnel we’ve been digging for 3 or 4 decades. But the journey to the other side - if we can even get there - is likely to be long and very painful.