DSGE is a plutocratic tool

from Peter Radford

Hah! That caught your attention.

People who criticize General Equilibrium – henceforth GE – often fail to mention one of its major benefits to mainstream economists, one that explains its tenacity despite its obvious irrelevance as a real economic artifact.

This is that it is a weapon that allows economists to expunge politics from their subject.

Ever since Adam Smith’s fateful reference to the invisible hand, economists have been obsessed with finding an alternative to overt power relationships as a way to distribute resources and hence wealth in a social setting. Any conversations about power relationships invokes politics, since the latter is the rightful study of said relationships. This would establish political theory as a competitor to economic theory as a source of social welfare allocation. It would also alert the democratic citizenry to the positive role they can play in that allocation.

Economists have long tried to rid their subject of the supposed taint of overt politics and thus establish as a purer – in their eyes – and more scientific subject. Presumably this is because they see the study of politics as somehow unscientific.

But behind this so-called scientific agenda lurks a shadowy figure: it is the rejection by classical economists and their heirs of democracy. After all democracy is the tyranny of the masses, which to those struggling to throw off the tyranny of autocracy was an equal evil. If democracy is to be denied, if the masses are to be kept away from deciding the allocation of wealth, then some other force has to be located that can accomplish allocation in a less tyrannical way. 

Note that the ironic motivation was, from the beginning, political. The newly emerging intellectual tradition in the 1700′s  found its deepest resonance amongst the merchants, landowners, and traders who felt oppressed by the vestiges of autocratic monarchies, even though those monarchies had in many cases seen their power severely trimmed. Indeed it was exactly because the first tentative steps had been taken to diffuse power into the merchant and landowning class that the freedom existed to push further into what became republican thought.

The best way to locate a system that can allocate wealth within a society and yet prevent its domination by the masses is to push the politics off center stage. Politics can never be fully eliminated, all human activity is political in nature, but it can be argued to be superseded as long as the force doing the supersession is presented as inevitable.

To be inevitable such a force needs to be scientific. It must be so ever present and pervasive that it appears futile to interfere with it. Further, it must be so perfect that any interference violates that perfection and thus can be represented as a diminution or loss of benefit.

The invisible or hidden hand of the market was conceived for just this purpose.

It is argued, though has never been proved, to provide society with an allocation of wealth that cannot be improved upon. Especially it cannot be improved upon by the overt and direct methods of politics.

Its strength is its anonymity. It does its great work in the background unbeknownst to all those who participate in its activities. The active pursuit of individual goals is translated – in the background – into an unsurpassed social benefit. That is to say individual goals, however dispersed and contradictory they may appear, are collected, collated, and harmonized without any active debate, argument, dissension, or need for compromise. In short the very heart and soul of social arbitration – what we call politics – is displaced and made redundant.

A purified market economy, economists argue, has no need for politics. Indeed politics can only degrade and never improve the outcomes of the purity of a free market.

GE is simply the formal descendant of this vision. Dynamic Stochastic General Equilibrium – DSGE – is the more modern and more formal next generation.

We must remember, though, the anti-tyrannical origins of this great theme of economics. GE beguiles us precisely because it allows us to pretend that social harmony is achievable without politics. It allows us to pretend that politics can somehow be erased from society and thus from human interaction.

In this way GE is a parallel to Marxist theory: they both posit the ultimate extinction of politics from economic allocation.

Both are idealist illusions presented to us to divert our attention from the growth and meaning of democracy.

The history of democracy is the history of inclusion. Of the constant extension of the rights and burdens of citizenship. And, consequently, of the right to dare to be equal and the right to engage in politics. This inclusion invades and degrades whatever existed prior to it. The ever growing voice of the newly empowered threatens to overwhelm that of the previous generation.

In the realm of economic allocation this growing voice may express a desire for a greater share of society’s wealth to be dispersed. Since the first economists were representatives of landowners and merchants such a tide or force had be resisted.

And preferably scientifically, since that would hide the political objective: to preserve the allocative status quo.

Most subsequent economists working in the GE/DSGE tradition find it convenient to ignore the essential anti-democratic core of their endeavor. They simply argue they are being scientific. But others have been overt. Hayek and his heirs, especially Friedman, had no compunction or pretense. They openly presented the hidden hand as a socially virtuous force and were quite clear about the perils of political interference. They elevated GE/DSGE, as it has become, to the level of a faith or dogma. One cleansed of the dirty influence of the very forces that, at the individual level, Smith identified as the material essential for input into the hidden hand’s magical transformative process. In their view that transformative power has supplanted, because of its universal efficacy, the need for politics. It has especially supplanted the need for democracy, since the democratic impulse includes the rudeness we know as a desire for equality. Or, at least, greater equality.

That the outcomes of a society built upon an anti-democratic formula may be unpleasant to the masses, that they may render some into permanent poverty, or others into permanently inherited wealth, is never touched upon by the faithful. Their faith protects them from such moral quandaries. Their belief in magic and in the scientific nature of GE/DSGE provides them a shield against criticism. They know, above all, that whatever those outcomes are, however apparently unpalatable, they are the ‘optimal’ we can expect. To suggest otherwise is an example of our lack of understanding of the ‘laws’ of economics.

Thus for us to suggest a positive role for the government in the day-to-day allocation of wealth is to deny the scientific verity of a two hundred year old tradition.

That even a cursory study of GE/DSGE reveals it to be bogus, that its basic assumptions belong in the realm of fantasy, or that for it to produce its perfect outcomes it has to be rigged – should I say stapled? – in mid air so that it can be untainted by the realities on the ground beneath, is of no concern to the faithful. It is what they ‘know’.

That the outcome of the actual economic process in which we are active benefits only a small minority is also of no concern to the faithful. For they long ago left behind any pretension of the study of real economies. Instead they are content in their faith to provide exactly the same service that their intellectual ancestors sought to provide: a justification for the elimination of politics from the social allocation of wealth.

So, just as the history of democracy is the extension of inclusion, the history of market magic economics is its counterbalance. It is the history of exclusion. It is a defense of the plutocracy via an attempt to neuter the role of government as an active economic agent.

“We the people” is a concept that undoes the pretense, however elegant its math may be, of any theories sitting atop that defense.

We the people assert the right to interfere in the allocative outcomes of the economic process. Indeed we are the active agents within that process. Are we not?