Contradictory Beliefs

How do we reconcile the need for more jobs, and the need for reducing environmental impacts?  Chris Bertram started a great thread on this at Crooked Timber, though many of the commenters seem not quite able to grasp the difficulty of it all.

Here's a great post by Bruce Wilder, though i might change a few things:

The weakness of the Keynesian program is its non-specific, open-endedness. People naturally want to ask, spend on what? and when does the deficit-spending end? (and then what?) These are reasonable questions. There’s a sense, within the abstract insights of Keynes’ analysis, in which it doesn’t matter what the money is spent on, as the objective is reflating the economy’s circular flow to a level of full-employment. But, in actual politics, those details cannot be abstracted away; they must be met.

The tragedy of era is that the answers to the question of what do we focus Keynesian spending on, is not difficult or mysterious. The U.S. economy, and the leading European economies, and the Japanese economy for a long time, are severely handicapped by structural problems and dysfunctional financial systems, and face looming challenges from global warming, peak oil and ecological collapse. Our political systems stand around paralyzed by their devotion to rentier interests, and the Left remains largely silent, barely able to rise above a faint endorsement of neo-liberal pablum.

With all due respect to those gentlemen (seriously), if Reagan Administration veteran Paul Krugman and self-proclaimed Eisenhower Republican Brad DeLong are your idea of “left-leaning”, your “left” is seriously palsied. They are preservationists, at a time, when preservation is simply not a viable option. We cannot preserve our dysfunctional financial system side-by-side with a prosperous economy. We cannot preserve our fossil fuel economy. We cannot preserve the global ecology, without radical change.

U.S. politics is dominated by the rentiers of finance and oil. We need to end that. They are the enemy. Bring them low, make them poor. That will be a good beginning.

I wouldn’t worry too much about “job growth”. The abstraction is confusing, in any case. There’s a lot of work to do, if we are to change the energy basis of the developed world’s economy, and to head off a smoky sojurn thru fossil fuels for the developing world. In the U.S. we need to completely replace the systems for powering transportation and structural heating by 2050. Completely. We need to invest in systems that use considerably less energy as well. We need a rail transporation system that reaches 80% of the population, passengers and goods. That means building a lot of rail, and relocating a lot of residential and business structures.

We might, indeed, seriously consider the welfare-enhancing effects of reducing wasted effort in a Red Queen’s race. More than half of Americans are employed in organizations of more than 100 employees, and most of those are engaged in various forms—not of “production”—but of salesmanship. Maybe, we could tax advertising, and dial down on the salesmanship, without reducing actually needed material consumption much at all. Watch less television. Spend more time on caring for our own, over-programmed children.

None of this is going to happen, as long as the U.S. and, by extension, the world, is ruled by greedy, corrupt, near-sighted oilmen and financiers. The economy and institutional system put in place in the American New Deal and the international order of post-WWII have played out to the endpoint of entropic collapse. It’s over. Gone. Post-post-post. Politically, we need a revolution and a vision for the future.

Sandwichman made another great hit:

 The difference between a recession and a steady state, or even “de-growth”, economy is that one is an accident and the other is a design. It’s the difference between skating and slipping on the ice. When I had a car and depended on it to get to work and shop, my life would be disrupted if the car broke down. I haven’t owned a car for two decades now and my life revolves smoothly around walking, biking and transit [plug: my daughter, Amy Walker’s new book On Bicycles has just been published by New World Library].

I have the very odd opinion that what we need is a spurt of a very specific kind of growthfor maybe a decade or two before easing off into a steady state or low growth scenario. This would be transition-to-a-new-economy growth and couldn’t be accomplished by traditional (Krugman, de Long, et. al.) fiscal stimulus or quantitative monetary easing. Since the late 1970s, the rich countries have been “enjoying” what Stefano Bartolini has termed “Negative Externality Growth,” which means that we’ve been spending more fixing the social and environmental messes we’ve been making and making even more messes in the process.

What we haven’t been doing is promoting the arts, culture and education at anything near the level we could afford to. Education has increasingly been yoked to “marketable job skills” training, whatever that means with narrower and narrower career opportunities for graduates.

The reasons for this huge misallocation are what I see as a deficient understanding of things that are commonly known as “market failure” and its complement “government failure”. In Economics of Welfare (1920), Cecil Pigou identified what have come to be known as “externalities” and argued that the resulting market failures constituted aprima facie case for government intervention. Probably due to a lack of comprehension of Latin among subsequent economists, the Pigovian tradition overlooked the fact that the adjective prima facie may have been meant by Pigou as an equivocation not an intensifier.

Forty years later, Ronald Coase presented a counter-argument that, in the absence of transaction costs and with full assignment of property rights, an efficient allocation of resources would be worked out through negotiation. That is to say “there is no market failure”. Of course, the fine print was in the transaction costs. There’s no such thing as “in the absence of transaction costs.” That’s like saying commodities would be free in the absence of labor costs. Whoop de doo!

Coase’s insight, though, brings to light something more important, though: market failure s all about transaction costs. And the term externality is a misnomer. Transaction costs are the very heart and soul of economic production and exchange.

You can’t escape transaction costs. BUT you can reduce them OR you can increase them. Wait a minute! Why would anyone want to increase transaction costs? The short answer is because that’s where the scope for claiming profit and rent resides. The long answer has to engage the political opportunities for shifting transaction costs, so that they are apportioned as “social costs”.

War, for example, is a tremendously effective way to inflate transaction costs and profit opportunities exponentially while fobbing them off as social and environmental costs.

Is Better Growth the answer to Limits to Growth?

This is one of my core contemplation areas, the possibility of continued growth despite Limits to Growth.  It is possible to have "better" economic growth indefinitely?  Perhaps, depending on how you define "better growth."  Anyway, Chris Bertram kicked off a good discussion by asking a good questions, and describing the political dilemma.

http://crookedtimber.org/2011/09/22/contradictory-beliefs/#comments

The Basic Problem with Capitalism

Brad DeLong noted Nouriel Robini's call of the double dip.

In comments, Graydon made these observations with which I strongly concur:

I think it's much more basic than that. The problem is that capitalism's core goal -- wealth concentration -- is not actually a good idea in terms of general prosperity. Climax forests are great if you're a mature redwood; they're lousy if you're anything else, and almost everyone is something else. (and even the mature redwoods have crowding-out issues among themselves.)

What we're seeing now is analogous to climax forest formation; all of a sudden, a whole bunch of organisms that were getting by OK aren't getting any light anymore, and the whole ecology changes. (From the point of view of the seriously wealthy, they're all still a bit panicked that they're not going to have a chair when the music stops/their tree isn't going to be quite tall enough to avoid being crowded out by the neighbors.)

Doing the obvious and nigh-certain-to-work things aren't morally acceptable to the mature redwoods -- they'd stop towering over all those little organisms -- so they won't. Indeed, they can't, unless they adopt a different moral position. (Or until they stop being, as Duncan Black keeps pointing out, incompetent.)

So the only two really plausible outcomes are a general, protracted -- generationally protracted -- slow collapse of prosperity into plutocracy in at least the developed world, with widespread resumption of defacto debt peonage for the working and professional classes, or a general replacement of the "redwoods" with persons interested in securing the general prosperity.

The poverty of economic rationality (as in egoistic agent models)

In another great Crooked Timber thread, John Quiggin criticizes a review of his work, Zombie Economics (truly great, I'm reading it a second time now), by economist Steve Williamson, in order to point out the fallacies of "rational" (purely egoistic) agent models in economics.

And right near the top, he links to a great work by the hugely underappreciated philosopher and essayist William Hazlitt, who more than two centuries ago skewered then (even) then popular notion that self-love was the basis of all desirable human actions, including benevolence.

A pity that William Hazlitt * is now mostly out-of-print.  His posthumously compiled book Sketches and Essays can actually be obtained from several sources, but all merely printed on demand from photographs of one original edition that landed at Harvard, full of typos and blotches, which you can also read free at Google Books (as in the link above).

(* Not to be confused with the 20th century libertarian Henry Hazlitt.)

Neoliberalism uses market mythology to enrich rentiers

There is so much excellent analysis at the Crooked Timber website these days, I never get around to linking to all of it.  But a comment made by Bruce Wilder on a post by Henry about the strange Non-Death of neoliberalism is so well crafted, I'm going to have to quote it here.  And the whole thread is worth reading too.

http://crookedtimber.org/2011/09/26/colin-crouch-the-strange-non-death-of-neo-liberalism/#comment-379361

I do sometimes argue that the static allocative efficiency of markets, which economists traditionally focus their attention on, is less important in practice than the dynamic technical efficiency of adminstrative organization and technology-embedding capital. And, I am wont to point out, for example, that the recent breakdowns in mortgage origination and mortgage-backed securitization were, at their cores, breakdowns in administrative processes and procedures; as such, trying to force these square pegs into the roundholes of the canonical catalog of “market failures” risks misunderstanding the problems and mis-prescribing remedies.

In the comment above, though, I was using a much broader form of this complaint. (I really only have the one opinion; it’s just a very elaborate opinion.) I wasn’t saying that adminstrative organizations have advantages over markets. I was saying that theimplicit neoliberal claim that markets exist, is, itself, objectively false in many cases, where neoliberals advocate “market-friendly” or “market-oriented” policy. There’s no actual market there. We are so used to the market as metaphor, we cease to recognize that it is a metaphor (and not a very good one, in many cases).

Markets—actual markets—exist, but they are rare. There are financial markets, commodity markets and auction markets, but most of us don’t have much contact with these. We go to the supermarket, and that is a definitely a metaphoric use of “market”. In most of our economic interactions, price is not a variable optimally digesting information and resolving conflict, it is a strategic instrument, held fixed as part of a scheme of administrative control and information discovery.

I am not making a claim about the efficacy of central planning. I am making a claim about the Hayekian vision of an economy radically decentralized by markets—I claim that it is a lie. Hayek lied about the feasible set of responses about to the problems of limited knowledge and information. He asserts that markets can overcome these problems, optimally. It is the origin of “the two-step of terrific triviality”, in which claims of weak rationality by individual actors in constrained optimization alternates with claims of super-rationality for “market” players engaged, supposedly, in global optimization.

It is not possible to deductively model the optimal response to incomplete information. The inability to arrive at an optimal solution by deductive means is what defines incomplete information. The insistence on exclusive reliance on deductive methods is what leads back, again and again, to super-rationality. The real world of practical attempts is imperfect, but it will be the real world of imperfect attempts. In that world—the real world—global maximization of profit cannot be defined. All rational maximization is constrained maximization, which is to say, constrained by rules.

The actual, decentralized “market” economy is not coordinated primarily by market prices—it is coordinated by rules. The dominant relationships among actors is not one of market exchange at price, but of contract: implicit or explicit, incomplete and contingent. (Yeah I know incomplete and contingent is contradictory in the abstract, but all actual contracts are both; welcome to the messiness of the real world.) The contingencies are the important incentive feature, not the marginal rate of income. You take a job, and the risk of being fired (or promoted) is what shapes your behavior.

Rules rule, you might say, even in the absence of central planning. The rules of game, whether in actual markets or metaphoric markets, are what constitute the game as a game, and those rules are a public good, whether the state does an adequate job of making and enforcing good rules or not.

The political process has to produce the public good of rules for economic interaction. There’s no option or alternative, where rules are not instituted. The only questions are whether the rules will be fair and the process they institute, dynamically efficient, in resolving conflict and organizing cooperation.

Neoliberalism, it seems to me, uses the myth of the market, to rationalize rule-making, which serves the rentiers (is dynamically inefficient) and which promotes authoritarian, and therefore unfair, resolution of conflict.

Another exposition of IS-LM

Here's the New School version, which I think I like better than Roubini's, however it does get quite mathematical.

The great explosion of inequality

From a great post by Mark Thoma, quoting Uwe E. Reinhardt.