Chapter 36: When Economists Become Theologians

| No TrackBacks
The University of Paris economist Thomas Piketty has marshaled a wealth of impressive data in his book Capital in the 21st Century. From an historical  perspective, the data shows that the market-based economies in the Western World - save for the brief, unique period caused by the economic disruptions of two world wars - have spawned increasing economic inequality.

Piketty also predicts that, without vigorous public intervention in the marketplace - as the rate of return on investments continues to exceed the rate of economic growth - economic inequality will continue to accelerate. Not surprisingly, Piketty has been denounced on the right as a neo-Marxist or a dangerous social democrat because he has had the audacity to suggest, as a basic proposition of democratic governance, that economic policy should be subordinate to political policy.  

Simultaneously, Piketty's colleague and collaborator at the London School of Economics, Gabriel Zucman, has reported in one of his many studies, Tax Evasion on Offshore Profits and Wealth, that U.S. corporations now declare 20% of their profits in tax  havens - a  tenfold increase since the 1980s - and that tax avoidance policies have reduced corporate tax revenues by up to a third.  At the global level, Zucman argues that 8% of the world's personal financial wealth is now being held offshore, costing more than $200 billion to governments annually and that decisions to shift to tax havens and offshore wealth havens are increasing.

  In the current economic debate, Piketty and Zucman - along with a few other prominent exceptions such as Paul Krugman and Joseph Stiglitz - remain the outliers in a profession that is overwhelmingly dominated by defenders of the status quo and conventional economic wisdom.

One such pathetic example of the latter is Tyler Cowan, an economist at George Mason University. Cowan enthusiastically cited a study which noted that, although economic inequality was rising in countries such as the U.S., "the economic surges of China, India and some other nations have been among the most egalitarian developments in history."
  Cowan piously concluded that "the true egalitarian should follow the economist's inclination to seek wealth-maximizing policies, and that means less worrying about inequality within the nation... [C]apitalism and economic growth are continuing their historic roles as the greatest and most effective equalizers the world has ever known."   
   In a prior book, Average is Over, Cowan extolled the rise of what he chronicles as the "big earners" in the emerging meritocracy that he foresees. He also argues that, rather than expand the safety net, governments should curtail spending.
      As an alternative and to maintain civic peace, Cowan suggests that local governments might offer engaging distractions to those whom he has identified in his Darwinian dystopia as the "big losers" and the "zero marginal product" workers. These "big losers" and "zero marginal product" workers presumably include the 162,000 U.S. architects and engineers whose jobs were shipped to third-world counties between 2000 and 2009, according to Bureau of Labor Statistics, and the 180,000 computer IT and programming professionals who, according to Yale University's Jacob Hacker, lost their jobs between 2000 and 2004.
     Perhaps taking an unconscious cue from Aldous Huxley's Brave New World, Cowan proposes a palliative that he suggests would enable the 49% mooching class that Mitt Romney decried to live contented lives, albeit with reduced means and with substantially reduced expectations: "What if someone proposed that in a few parts of the United States, in warmer states, some city neighborhoods would be set aside for cheap living? We would build some 'tiny homes' [that]...might be about 400 square feet and cost in the range of $20,000 to $40,000. We would build some very modest dwellings there, as we used to build in the 1920s. We would also build some makeshift structures there, similar to the better dwellings you might find in a Rio de Janeiro favela.  The quality of the water and electrical standards might be low by American standards, but we could supplement the neighborhood with free municipal wireless..."  

        Cowan's paen to globalization and the onward march of capitalism blithely ignores the systematic, well-documented failures of the capitalist system he extols. His apologia offers small solace to the millions of Americans whose jobs have been lost to out-sourcing and the de-industrialization of the U.S.; his soothing entreaty that, in the long run, everything will work out nicely - some fine day - ignores Keynes's sage observation that "In the long run, we will all be dead."  One also suspects that Cowan would be less sanguine about the economic landscape he surveys if he were informed that his tenured  position at George Mason University were about to be converted into an adjunct faculty position.  

  All of the empirical evidence, Cowan and other apologists notwithstanding, suggests that out-sourcing, deregulation, austerity, the commitment to the myth of "free-trade," -i.e. "laissez-faire" in trade policies - and reduced government regulation have been major contributing factors to the loss of manufacturing, stagnating wages and the growing impoverishment of the former middle class.

  The net effect of current economic policies - sadly endorsed by Democrats as well as Republicans-  has been an extraordinary concentration of wealth and power into the hands of financiers and other moneyed interests who have become the winners in this game of  economic Russian roulette. As a result, the decisions and predilections of fewer and fewer individuals now determine the outcomes in the American economy, while the overwhelming majority of Americans have little ability to influence macro-economic trends or economic and political policies.

         The contrast between "private affluence" and "pubic squalor" in America has only grown worse in the subsequent decades since Galbraith first used those terms to describe what he foresaw as evolution of inequality in the U.S. economy. The disparity between the few who are wealthy and the many who are poor has widened alarmingly in the United States since the advent of the Reagan era and the kind of "trickle-down" economics to which he and his advisers subscribed.
         In his General Theory, Keynes observed that "the ideas of economists and philosophers, both when they are right and when they are wrong, are more powerful than commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the salves of some defunct economist....But, soon or late, it is ideas, not vested interests which are dangerous for good or evil." 

           The classical liberal paradigm of the market economy has long since ceased to explain present day economic reality, but the intellectual chains of that received wisdom from long since dead economists continue to control the public narrative. Unfettered competition, based upon allegedly free market decisions made by solitary actors in which goods and services are sold to the most willing buyers, is a myth that does not create individual opportunity for the vast majority of Americans, nor has it maximized business opportunities. 

         Ultimately, the entire process is self-defeating and creates a negative-sum game: As entrepreneurs seek to maximize their profits by paying the lowest possible costs for labor and materials, the middle class is hollowed out. As the income of the middle class contracts, aggregate demand is reduced. As domestic spending contracts, the purchase of goods and services contract. Without the intervention of the government into market economies, as Hyman Minsky has argued, the buyers and sellers of goods and services become locked in mutually destructive death throes.

In addition, given a shared mind-set that sincerely believes that the pursuit of self-interest is somehow a public good, the defenders of the economic status-quo remain oblivious to the adverse effects of poverty, the lack of health care, pollution, climate change and to basic principles of social justice.  Further,  the insecurities of the marketplace persuade those who are successful to institutionalize their advantages. Monopolies and plutocracy are the inevitable result and, as the Forbes 400 list shows, economic inequality becomes more pronounced.

Market economies are affected by the frailties and the foibles of human actors. Although many of these actors are motivated by selfish, short-sighted concerns, the consequences of their actions harm everyone else. It is for that reason that regulation in the public interest and investment in public goods by the government - as the agent of the people 
in a democracy - are essential antidotes to the temper the excesses of capitalism and to create the foundations for a truly just society.

No TrackBacks

TrackBack URL: