Economists vs the Public

They don’t agree:

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My responses:

Question 1 — Agree

Economists in Sapienza and Zingales’ study resolutely agreed that it is hard to predict stock prices. A majority of the public agreed with the statement, but not so resolutely. Stock prices are the culmination of transactions between humans, and human behaviour is hard to predict because it is often irrational and informed by cognitive fallacies.

Question 2 — Agree, with a bitter taste in my mouth.

Economists were vastly more bullish on the stimulus’ effect on unemployment than the general public. And the data is actually quite unkind toward the economists’ view — the real unemployment path was far worse than the path projected by those in the Obama administration who promoted the stimulus. However, this is more of a symptom of the stimulus’ designers underestimating the depth of the economic contraction that the financial crisis caused. There is no doubt that the stimulus created jobs and lowered the unemployment rate in the immediate term. Whether the jobs created were really useful and beneficial — and to what extent the stimulus was a malinvestment of capital  — is another question entirely, and one which can only be answered in the long run.

Question 3 — Agree

Economists overwhelmingly agreed that market factors are the chief cause behind variation in petrol prices. The public agreed, but to a lesser extent. Presumably, the dissenting public and dissenting economists see government intervention as a more significant force? Certainly, the present global oil market is a precarious pyramid of supply chains balanced on the back of the petrodollar empire. But the market reflects these factors.  When governments start a war, that is reflected in the oil price. That’s a force that the market responds to. If a central planner was directly setting the oil price (rather than merely influencing it) — as is the case in communist countries — that would be a price determined by non-market forces.

Question 4 — Uncertain

Economists were broadly certain that a carbon tax is less costly than mileage standards. I think this is far too general a question. Without nuts-and-bolts policy proposals, it is not really possible to assess which would be more costly.

Question 5 — Uncertain, leaning toward Disagree.

This was the only question where economists and the public were largely agreeable — and economists were largely split. As I stated above, the “success” of the stimulus package can only really be assessed in the longer run, and even then there are difficulties with measurement. Generally, I suspect very much that the various interventions in 2008 onward have preserved and supported economically unsustainable and inefficient sectors and industries that ought to have been liquidated and rebuilt (especially the financial industry, but also other sectors, e.g. Detroit). Had the government in 2008 followed the liquidationary trend in the market, the slump would have been much deeper, unemployment would have risen much higher, but the eventual rebound may have been much quicker and stronger.

Question 6 — Agree

This is where economists and the public disagree the most. It is the point on which the public was the most bullish, and economists almost unanimously bearish. Economists in general seem to believe that what they define as free trade is best, even when it destroys domestic supply chains and drastically decreases manufacturing employment. To economists, this means that the American government should not discriminate against foreign products but buy for the best product and the best price. This ignores some important externalities. Buying American certainly supports American jobs, because money goes to American companies, and toward American salaries. This might foster inefficient and otherwise-unsustainable industries, but if the American public chooses to favour American products for their government, that is their right. And a strong domestic manufacturing base is no bad thing, either.

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What is Profit?

In neoclassical macroeconomic models that assume perfect competition, there can in the long run be no such thing as profit — defined as revenue left over after all costs have been subtracted.

Clearly, in the real world where many businesses have lived and died profitably there is no such thing as perfect competition, and therefore the neoclassical models that treat profit as a short-run anomaly are working from an unrealistic assumption.

My definition of profit is that profit is what happens when a business’s input transactions are priced less than its output transactions. That is, the sum of the cost of a business’s inputs from those it buys is transacted for a lower price than the sum of those it sells its goods and services to. Because transactions are assumed to be voluntary — and when they are not voluntary, any residual gain is theft, not profit — and businesses are assumed to try to negotiate the best price in both inputs and outputs, any profit is due to those who purchase the business’s output valuing the output higher than those who sold the business its inputs. That an output or input transactor would accept a profit-creating price could be for any number of perceived reasons: convenience, or expertise, or prestige, or necessity, or even outright trickery. Their decision to accept the price is subject to their own subjective valuation, and it is the difference between prices that creates the profit.

Marx and Lenin represented this idea as surplus value; that businesses make a profit by extracting uncompensated labour value out of their workers. But why not the other transactors? In my view, profit is derived from the sum of the business’s transactions with all of its transactors: consumers, supplies, labour (etc). Workers (etc) cannot extract a greater share of the firm’s revenue than they can negotiate, and at various points in history (including the present day) the working class seems to have had little real leverage for negotiation.

In my view, any model that attempts to represent real world markets should begin from the historical fact of profit and loss, and the historical fact of a disequilibrium between input transactions and output transactions.

Is Marxism Coming Back?

It is true that as the financial and economic crises roll on, as more and more disasters accumulate, as more people are thrown into unemployment and suffering that more and more of us will question the fundamentals of our economic system. It is inevitable that many will be drawn to some of the criticisms of capitalism, including Marxism.

The Guardian today published a salutary overview of this revival:

In his introduction to a new edition of The Communist Manifesto, Professor Eric Hobsbawm suggests that Marx was right to argue that the “contradictions of a market system based on no other nexus between man and man than naked self-interest, than callous ‘cash payment’, a system of exploitation and of ‘endless accumulation’ can never be overcome: that at some point in a series of transformations and restructurings the development of this essentially destabilising system will lead to a state of affairs that can no longer be described as capitalism”.

That is post-capitalist society as dreamed of by Marxists. But what would it be like?It is extremely unlikely that such a ‘post-capitalist society’ would respond to the traditional models of socialism and still less to the ‘really existing’ socialisms of the Soviet era,” argues Hobsbawm, adding that it will, however, necessarily involve a shift from private appropriation to social management on a global scale. “What forms it might take and how far it would embody the humanist values of Marx’s and Engels’s communism, would depend on the political action through which this change came about.”

Marxism is a strange thing; it provides a clean and straightforward narrative of history, one that irons out detail and complication. It provides a simplistic “us versus them” narrative of the present. And it provides a relatively utopian narrative of the future; that the working classes united will overthrow capitalism and establish a state run by and for the working classes.

Trouble is, history is vastly more complicated than the teleological narrative provided by dialectical materialism. The economic and social reality of the present is vastly more complicated than Marx’s linear and binary classifications. And the future that Marx predicted never came to fruit; his 19th Century ideas turned into a 20th Century reality of mass starvation, failed central planning experiments, and millions of deaths.

Certainly, the system we have today is unsustainable. The state-supported financial institutions, and the corporations that have grown up around them do not live because of their own genius, their own productivity or innovation. They exist on state largesse — money printing, subsidies, limited liability, favourable regulation, barriers to entry. Every blowup and scandal — from the LIBOR-rigging, to the London Whale, to the bungled trades that destroyed MF Global — illustrates the incompetence and failure that that dependency has allowed to flourish.

The chief problem that Marxists face is their misidentification of the present economic system as free market capitalism. How can we meaningfully call a system where the price of money is controlled by the state a free market? How can we meaningfully call a system where financial institutions are routinely bailed out a free market? How can we meaningfully call a system where upwards of 40% of GDP is spent by the state a free market? How can we call a system where the market trades the possibility of state intervention rather than underlying fundamentals a free market?

Today we do not have a market economy; we have a corporate economy.

As Saifedean Ammous and Edmund Phelps note:

The term “capitalism” used to mean an economic system in which capital was privately owned and traded; owners of capital got to judge how best to use it, and could draw on the foresight and creative ideas of entrepreneurs and innovative thinkers. This system of individual freedom and individual responsibility gave little scope for government to influence economic decision-making: success meant profits; failure meant losses. Corporations could exist only as long as free individuals willingly purchased their goods – and would go out of business quickly otherwise.

Capitalism became a world-beater in the 1800’s, when it developed capabilities for endemic innovation. Societies that adopted the capitalist system gained unrivaled prosperity, enjoyed widespread job satisfaction, obtained productivity growth that was the marvel of the world and ended mass privation.

Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.

The system of corporatism we have today has far more akin with Marxism and “social management” than Marxists might like to admit. Both corporatism and Marxism are forms of central economic control; the only difference is that under Marxism, the allocation of capital is controlled by the state bureaucracy-technocracy, while under corporatism the allocation of capital is undertaken by the state apparatus in concert with large financial and corporate interests. The corporations accumulate power from the legal protections afforded to them by the state (limited liability, corporate subsidies, bailouts), and politicians can win re-election showered by corporate money.

The fundamental choice that we face today is between economic freedom and central economic planning. The first offers individuals, nations and the world a complex, multi-dimensional allocation of resources, labour and capital undertaken as the sum of human preferences expressed voluntarily through the market mechanism. The second offers allocation of resources, labour and capital by the elite — bureaucrats, technocrats and special interests. The first is not without corruption and fallout, but its various imperfect incarnations have created boundless prosperity, productivity and growth. Incarnations of the second have led to the deaths by starvation of millions first in Soviet Russia, then in Maoist China.

Marxists like to pretend that the bureaucratic-technocratic allocation of capital, labour and resources is somehow more democratic, and somehow more attuned to the interests of society than the market. But what can be more democratic and expressive than a market system that allows each and every individual to allocate his or her capital, labour, resources and productivity based on his or her own internal preferences? And what can be less democratic than the organisation of society and the allocation of capital undertaken through the mechanisms of distant bureaucracy and forced planning? What is less democratic than telling the broad population that rather than living their lives according to their own will, their own traditions and their own economic interests that they should instead follow the inclinations and orders of a distant bureaucratic-technocratic elite?

I’m not sure that Marxists have ever understood capitalism; Das Kapital is a mammoth work concentrating on many facets of 19th Century industrial and economic development, but it tends to focus in on obscure minutiae without ever really considering the coherent whole. If Marxists had ever come close to grasping the broader mechanisms of capitalism — and if they truly cared about democracy — they would have been far less likely to promulgate a system based on dictatorial central planning.

Nonetheless, as the financial system and the financial oligarchy continue to blunder from crisis to crisis, more and more people will surely become entangled in the seductive narratives of Marxism. More and more people may come to blame markets and freedom for the problems of corporatism and statism. This is deeply ironic — the Marxist tendency toward central planning and control exerts a far greater influence on the policymakers of today than the Hayekian or Smithian tendency toward decentralisation and economic freedom.

Secretly Serviced


I don’t understand the furore around Obama’s secret service handlers being (ahem) secretly serviced by Colombian hookers.

To writers like myself who specialise in salacious analogies, the incident was a gift. To the rest of the press, who don’t normally get to write about such matters, it was an excuse to shoot off pent-up sexual frustration. So I can understand the press pushing the story just the way Bill Clinton pushes expensive cigar cases (enthusiastically, by all accounts).

The worry, apparently, is the potential to compromise the President’s security. Rep. Peter King, chairman of the House committee that oversees the Secret Service, says the key question is whether the prostitutes could have accessed “any data or information that could have compromised the president of the United States or made an enemy force aware of the practices and procedures of the Secret Service.”

But surely this applies to all sexual relationships, not strictly ones for money? Surely prostitutes are absolutely the safest kind of liaisons? After all, why would a foreign agent trying to sequester intelligence information try and charge the American agent for sex? If you were setting a honey trap, why would you create some barrier to entry, such as a fee? There’s playing hard to get, and then there’s playing easy to brush off, and that would be the latter.

And certainly there does not appear to have been any breach of security, or danger to the President’s life. The agents were on their downtime, spending their own money. So isn’t this really a personal matter for betrayed spouses?

Doesn’t the government have better things to worry about than the sexual conduct of their employees? Like — oh I don’t know — the $15 trillion national debt? Or spiralling long term unemployment? Certainly there is no suggestion that any of the women involved were forced, or were trafficked.

The outburst that comes to mind comes from Janet “Big Sis” Napolitano who claimed their actions were “inexcusable”. Really? Engaging in consensual sexual acts for money is inexcusable, but blowing up innocent women and children in drone strikes in Pakistan is just fine?

These sentiments just seems like encroachment by big government into the sex lives of individuals. Here’s some news for you Sec. Napolitano: men sometimes like having sex with hookers. Hookers like the money. Voluntary transactions between consenting adults make the world go round.

Deal with it.