Keynesian Coffee
from Peter Radford
What is the difference between a neoclassical cup of coffee and a Keynesian cup of coffee? Answer: you can drink the latter and the former exists only in your mind.
This thought came to me this morning when I decided to test the vaunted market mechanism that my neoclassical friends so adore. They always distinguish between it and the version of a market I have in mind: it being pristine and akin to a Platonic pure form; mine being intensely mucky and debased due to its earthly uncertainty polluted existence. So my test was this: I expressed my preference very clearly for a cup of coffee. Then I waited for it to turn up. At my desk, which was something I also clearly included in my preference. And I waited.
Well, as you can imagine nothing turned up and I was forced to replay the experiment. This time I helped the market mechanism by setting out the coffee, water, milk, sugar cup, and spoon. I realize this is interference and may cause suboptimal outcomes, but sometimes you just have to nudge. And I waited.
Still nothing.
In the end I made the coffee myself. While the water was boiling I gave more thought to Adam Smith’s awe at how all this material stuff moves around and how it all magically seems to end up in the right places. The coffee gets to my cup eventually. Even if I have to intervene and give the market a helping hand.
This is, of course, all nonsense. But no more so that the absurd claim that there can be a market mechanism abstracted away from human activity. There is no mechanism. Just a lot of people doing things. Some good, some bad, some clever, some not so clever. And stuff seems to turn up in just about the right place. A market is no more and no less than a specific group of people. There is no mechanism, just a web of relationships. Study those and you study economics.
The great folly of orthodox economics is that it has systematically eliminated people from its theorizing in order to focus on the pure “forces” and “mechanisms” that appear to provide the impulse to exchange in market spaces. Some of these forces exert such pull that they bring, according to these economists, the economy into equilibrium, which is a state where everything adds up neatly and everyone is happy. Or rather it is a state where were anyone to make another exchange, someone somewhere would be worse off. The magic of the mechanism is that it inevitably arrives at this extraordinary state. And the only reason we don’t arrive there is, get this, human error.
Sometimes, it turns out, humans are just too dumb and they muck up markets. If only we could learn to leave markets well alone we would all be so much better off.
The more astute amongst the orthodox theorists realize this is all just a mind game. They understand full well that they are making stuff up just for fun, and in order to see what could happen were there no people in an economy. They make up fabulous models knee deep in intricate and very clever math that produce perfect outcomes. They then compare these models with the real world and despair of the latter. They also make suggestions about how we can alter the real world to bring it closer to their dream worlds. But, since we are human and thus very limited and error prone, we never arrive at their desired dream world end state. We keep missing the mark. We cannot compute fast enough, we seem not to have enough information, we cheat, we hoard, we rig the game, and we just generally act like children when compared with the robotic supercomputers who inhabit their models.
Our humanity lets us down.
Which is why I played my little foolish game. I reversed the process. I took out all the human activity from the coffee making to see what would happen. And I conclude, not very scientifically, that we need humans in an economy in order to get anything done. In other words the word market refers not some abstract mechanism. Nor does it refer to a set of forces that inevitably produce predictable and replicable results. It simply is a word that refers to a group of people interacting for the purpose of exchanging stuff. This is something that has been going on for millennia, and will no doubt continue to go on.
Most of the silliness of orthodox economics stems from the misuse of the word market. And from the subsequent attempt to eliminate humans from what is a human activity. Orthodox economists mean mechanism when they say market. Which is to say, in my view, they mean nothing in the real world.
So ranting on about the superiority of markets over governments is a waste of time. We are simply discussing different forms of human association. Both limited. Both flawed. Both riven through with uncertainty. Both incomplete. And both prone to exploitation, personal vanities, cheating and all the other venality humans bring to the table. In other words we are talking about politics.
Which is why economics is so inextricably intertwined with politics, and can never be split apart and retain human contact. It is also why economics is not scientific in the way we understand physics to be. It is scientific in the original and now largely disused use of that word: it is an organized, coherent, and challenging investigation of a specific set of phenomena. It explores and seeks to explain certain regularities in the real world.
One of which is what caught Adam Smith’s attention: the observed regularity with which all the necessities of life, and a great number of luxuries, tend to be available in convenient forms and places for each of us to access them. All this in what appears to be a very complex and spatially extensive environment.
I just wish he had chosen a better metaphor. That reference to a “hidden hand” set us all off on a wild goose chase searching for magical forces and mechanisms that just don’t exist. At least in reality.
Please remember this next time you hear a politician or pundit argue we should leave decisions to the market. Ask yourself which set of people constitutes the market in question. Then ask whether you trust those folks to get the job done well? Where are they? What is their belief system? Are they likely to cheat? How do they know each other? Are they biased or privileged in some way that might tilt the outcome? What technologies do they have access to? Do they share your knowledge base? Do they observe the same rules, norms, and other institutional limits that you do? Are they culturally bound to ignore or include your wishes? Do they have the information or power to enforce an outcome you don’t like? And why do they get to do the job and not you?
Economics in the real world, human economics rather than robotic economics, asks all these questions and many more.
If you ask these questions thoroughly and consistently you will be a better economist than many Nobel prize winners I could name.
And you probably give an assist to those market mechanisms to make your own coffee.
You interventionists! Keynesian coffee anyone?
Peter,
In the past year you have written many brilliant posts, but by my lights this is finest of them all.
Cool. I’ve just started reading “23 Things They Don’t Tell You about Capitalism” from Ha-Joon Chang. Chapter 1: There is no such thing as a free market. And his bad news for all economists: “95 per cent of economics is common sense made complicated, and even for the remaining 5 per cent, the essential reasoning, if not all the technical details, can be explained in plain terms.”
Pedantically again — not hidden hand, but invisible hand.
The believers in the free market have been able to do something mere mortals such as Peter are vincapable of. They have created a world remote from reality and then manage to live inthat world consistently.
for mere mortals such as Peter their common sense keeps breaking in and preventing them from being logically consistent with this model world.
Paul
Reminds me of the old joke: How many neoclassical economists does it take to change a light bulb?
None-the market do it on its own!
If by luck we all agree that we want a monetary system of production grounded in real logistical measurement of things we need and ways to deliver them, it seems to me we would need to move away from taxation just as fast as we move away from laissez faire. In place of tax revenues would be money received from government sales and money created on purpose as needed to facilitate both production and sales of needs.
In the absence of private sector rules and operations we would need government coverage of all private activity. This would probably prove to be impossible — it would be abandoned as deliberate clogging of our arteries. So we would want to formalize government policy only where it was practical. Would we then be happy? I say, not if we still had taxes.
So what kind of picture have I drawn? Without taxes, money becomes so common we all become billionaires. What keeps us from spending? What keeps all that money locked up in banks where it does no harm? We certainly cannot buy more than there is for sale.
I agree there is no market purpose or substance beyond human thought and action. But there are systems of production — and some are better than others. Is it not our duty to improve the system we use until needs are generally satisfied and people all feel rich?
@john gelles, please do not exclude the collection of all land rent (not actually a tax but a user fee) even if it is not for revenue but just distributed as a citizen’s dividend.
Marx writes:
A commodity is therefore a mysterious thing,simply because in it the social character of men’s labour appears to them as an objective character stamped upon the product of that labour; because the relations of the producers to the sum total of their own labour is presented to them as a social relation, existing not between themselves, but between the products of their labour.
…
There, the existence of the things qua commodities, and the value relation between the products of labour which stamps them as commodities, have absolutely no connection with their physical properties and with the material relations arising therefrom. There it is a definite social relation between men, that assumes, in their eyes, the fantastic form of a relation between things.
Carol Wilcox~ Thanks for comment. A citizens dividend payable in cash is, IMO, a likely necessity if we move away from debt constraints on jobs toward rational support of necessary work and desirable hobbies, recreation and quiet. Such dividend would be paid to agree with calculated deficits in demand (relative to both need and supply) and deficits in a minimum standard of living of which no nation would be ashamed.
As you can see what the skinny text I offer, details like government sales of “WHAT” omitted. Government would sell almost everything, as would the private sector. This would force some competition into a system bent on avoiding sweat shops and prison labor.
I like the tone of your interest. If you visit http://www.ustaxreform.us there is need and opportunity for necessary detail.
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Juan Konig ~ Your quote from Marx is not familiar to me. I believe our experience with Marx and political economy counsels against replacing the rich with the powerful. We need both rich and powerful people. But we need them to obey the Golden Rule. How can we compel this without tyranny? I am not sure. But I think it would help if we tenured the rich and convicted the powerful of any crimes against humanity proved in a fair court. Similarly, human economic rights must be enforceable in courts of equity with rational rules and free of charge to plaintiffs. If denied a job, the remedy would be a government micro-loan to equip any plaintiff to make a living. This would be very practical where machines supplied most things, and people worked to supply the love and affection for others that machines may not be capable of offering. I do not exclude great numbers of dogs and horses to supply the objects of affection in a world where so many of us are difficult.
i think these are the basic things that every teacher must deliver to their students so that they do not connect these concepts to todays economic systems coz of which most of the students remain confused throughout their studies