Home > Uncategorized > Beyond the standard explanation

Beyond the standard explanation

from David Ruccio

Robert Reich is right: the standard explanation of—along with the standard debate about—inequality misses the point.

The standard explanation for why average working people in advanced nations such as Britain and the United States have failed to gain much ground over the past several decades and are under increasing economic stress is that globalisation and technological change have made most people less competitive. The tasks we used to perform can now be done more cheaply by lower-paid workers abroad or by computer-driven machines.

The left’s standard solution has been an activist government that taxes the wealthy, invests the proceeds in excellent schools and in other means that people need to become more productive, and redistributes to those in need. These prescriptions have been opposed vigorously by those on the right, who believe the economy will function better for everyone if government is smaller, public debt is reduced and taxes and redistributions are curtailed.

Reich’s view is that the existing common sense, among both liberals and conservatives, “overlooks the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs.”

But what Reich, for his part, overlooks is that, during the postwar period he views nostalgically and to which he’d like to see us return, there was no shared prosperity. And there couldn’t be. Even though real wages were rising, it was still the case the members of the “corporate and financial elite” were allowed to keep control over the surplus. What that means is they had the interest and the means to rewrite the rules so that they could appropriate, capture, and do what they wanted with the surplus produced by workers in the United States and around the world.

It is clear, during the postwar period, the economic elite wanted both more surplus and the ability to keep in their own hands more of that surplus, which meant attempting to evade and eventually rewrite the “rules by which the economy runs”—the rules governing labor unions, intellectual property, bankruptcy, finance, and so on. And, given their control over the surplus, they had the means to do so.

There’s no doubt the capitalist class succeeded both in undoing many of the existing regulations and in making sure few new regulations were put in place. Or, to put it differently, that the only regulations that would be passed and enforced were ones that favored a growing gap between them and everyone else.

While I’m all in favor of campaign finance reform, in order to level the playing field when it comes to choosing and electing candidates, it is still the case that the fundamental “rules by which the economy runs” keep the surplus in the hands of a tiny group at the top that has the right to do with it what it wants.

An effort to change those rules is what the United States needs now more than ever.

  1. November 16, 2015 at 2:15 pm

    This is a subject for which I have maintained life-time independence. I have studied and attempted to solve the riddle of inequality for many years. As a naive and uneducated youth I fervently believed the logic that led to liberty and peace for all would be eagerly adopted by everyone as soon I applied myself with sufficient enthusiasm and diligence to find it. I forced my youthful naiveté to remain committed to this quest well into my sixties.

    Now I am old and in the way and know better. The tiny group at the top has the right to do what they want because they kill and torture anyone who gets in their way. Murderous pirates wear fine clothes and occupy high office. They used and still use theft and force to privatize the bounty of Earth.

    Few young economists gain the understanding that unrestrained capitalism is simply the mafia while still in school. This is because their professors have become part of the system in order to make a home and raise a family as best they can. Now Earth has replaced the appropriated free lunch with environmental friction.

    The pie is shrinking. Land, sea and air no longer supply the same bounty. Earth can no longer recycle and accept pollution, which, along with wage slavery, are the only real sources of profit to economies of scale. The elite has conscripted a large number of young from their families and trained them to kill before those families could finish normal human socialization of the young.

    As environmental friction increases the pirates will begin fighting amongst themselves using the children of the masses as canon fodder and for genocide. The line has been drawn. The curse has been cast. There is no where else to go. Earth life support systems are changing and humans will not be here to see what lives in the new environment of this popular life supporting little blue dot.

  2. Tom Welsh
    November 16, 2015 at 2:21 pm

    The first giant, obvious, gaping hole in the “left wing” solution outlined here is that it doesn’t matter in the least how well educated, hardworking and efficient workers are – managers simply won’t pay them any more than rock bottom wages.

    • November 16, 2015 at 3:05 pm

      You describe a familiar personal journey, Garrett.
      The solution, though, is to operate between the legs of the clumsy giants and bite their toes to make ’em squeal : ) Our advantage is that we are smarter than they. They simply rely on being able to manipulate the minds of slave-type people whose brains have been numbed by a continuous onslaught of bullshit.

  3. November 16, 2015 at 5:42 pm

    “…rewrite the “rules by which the economy runs”—the rules governing labor unions, intellectual property, bankruptcy, finance, and so on.”

    I am most inclined to agree, but this is not my area of expertise (I think I have one!) so can some of you give me a few of the better references that explain how and what specific rules/laws/power have been most detrimental to the distribution of income and wealth in the US economy?

    • November 16, 2015 at 9:07 pm

      I think the repeal of the Glass-Steagall Act may have something to do with it, causing a free-for-all operating environment in the financial system. So now it is a lot easier to simply channel funds into the speculative financial economy for quick profits, rather than sponsoring longer term productive efforts.
      The evidence for this trend is found in the fact that financial institutions are posting record profits in a severely depressed world economy.

    • November 17, 2015 at 1:27 am

      I wrote about some of the main explicit mechanisms promoting inequality here:
      https://rwer.wordpress.com/2014/04/19/more-effective-remedies-for-inequality-than-pikettys/
      I also refer there to Dean Baker’s lists.

      No fancy theory, just some rather obvious factors. They don’t seem to get much attention though.

      • November 17, 2015 at 3:09 am

        Thanks, Helge Nome and Geoff Davies. John McDonald

  4. November 16, 2015 at 9:26 pm

    THE BIG LIE, “The standard explanation for why average working people in advanced nations such as Britain and the United States have failed to gain much ground over the past several decades and are under increasing economic stress is that globalization and technological change have made most people less competitive. The tasks we used to perform can now be done more cheaply by lower-paid workers abroad or by computer-driven machines.”,Robert Reich (https://rwer.wordpress.com/2015/11/16/beyond-the-standard-explanation/)
    As Frederick Soddy said,
    ” So elaborately has the real nature of
    this ridiculous proceeding been surrounded with
    confusion by some of the cleverest and most
    skillful advocates the world has ever known, that
    it still is something of a mystery to ordinary
    people, who hold their heads and confess they
    are ” unable to understand finance “. It is not
    intended that they should.”
    ————————
    Yes, the truth has a solution:
    ————
    Reverse “ an economic recovery program that has privileged the recovery of financial markets and corporate profits has fueled the increase in wealth inequality, in the United States and across the world.”, reverse that program, make it fund “…a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…”
    “Capitalism is the “best” system to date devised by mankind. As it is administrated, perhaps, is where the “flaw” is manifested. If capitalism used its Central Bank properly,that is for the betterment of the common good, with equality and justice for all, capitalism would be the best ways and means to help “form a more perfect union….”, Pontifical Council.
    SOLUTION.
    “LEGISLATE FOR “We the People” WHAT WE HAD LEGISLATED THE CENTRAL BANK TO DO FOR THE Private For Profit Banks (PFPB) ! ISSUE OUR OWN MONEY AS LOANS AND CHARGE A TAX CALLED INTEREST ! ! ! ”
    Create an honest Central Bank that shall fund-
    ““We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…””
    When a honest Central Bank uses “QE” for the betterment of the community in a capitalistic economy, it will be the greatest system ever devised by mankind.
    FREE DOWNLOAD: “The Role Of Money”
    ”http://archive.org/…/role…/roleofmoney032861mbp_djvu.txt

  5. November 17, 2015 at 8:25 am

    What you all appear to be saying is that it’s easier than ever for anyone who already has substantial wealth to add to that wealth with minimal effort. Now that is news.

  6. November 17, 2015 at 10:29 am

    There have to be specific misconceptions/deceits at the root of something so systematic as the rich getting richer at the exppense of the poorer. One is the “superman” self-image of the rich inviting them to think of the rest of us as farm animals rather than family, for which we can “thank” Machiavelli’s arse-licking princes and Hume, having rejected God as the basis of morality, redefining it “democratically” as landlord’s law.

    The other would be resolved in a credit-card economy, but I’ve just been trying to get my head round Lonergan’s “Macroeconomic Dynamics”. This uses a crossed diamond flow model similar to my own, but focusses on basic “standard of living” finance as flows, with surplus flows available for investment to accelerate production.

    His discussion of arbitrage on pp.12-13 triggered the insight that the logic of overvaluing currency seems reasonable when one assumes EQUILIBRIUM and QUANTITIES rather than flows of money, but the effect is to justify the overvaluing the currencies of importing countries and devalue that of exporting countries on the basis of PAST performance, whereas to achieve equilibrium in the FUTURE one needs to devalue the currency of net importers and upgrade the currency of net exporters who have already earned their keep.

    In other words, the “invisible hand” controlling the system is using positive rather than negative feedback. As seen in the effects of boosting the output of a radio circuit by positive feedback, it is no wonder the bandwidth of economic diversity is narrowing and large windfalls like bail-outs pushing the “radio” into stable oscillation, supplying not the diversity of a real economy but circulation with the one useless purpose of moneymaking.

  7. November 17, 2015 at 1:15 pm

    The substandard standards of distribution theory
    Comment on ‘Beyond the standard explanation’

    “Everything can be ‘explained’ if we place no restrictions on what we mean by ‘explanation’.” (Blaug, 1994, p. 123)

    Everything can be explained by the actions of benevolent/malevolent entities. This is what myth, religion, ideology, and folk psychology have done since time immemorial. This kind of explanation consists essentially of storytelling.

    Scientific explanation is different and consists of the true theory. We know from history that it is by no means a simple task to develop the true theory. Storytelling is much simpler and good enough for almost all practical purposes.

    In economics things are rather straightforward: we can be sure that neither Orthodoxy nor Heterodoxy has come close to the true theory — with truth defined as satisfying the criteria of material and formal consistency (Klant, 1994, p. 31).

    The standard explanation of distribution consists of the marginal principle. This explanation is derived from the following premises. “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states. (Weintraub, 1985, p. 147)

    Marginalism follows logically from the green cheese behavioral assumption of constrained optimization. What can be said with certainty is that the set of five hard core propositions has proven its worthlessness. More specifically, standard distribution theory is false.

    From this in turn follows: in order to develop the true distribution theory one has first of all to fully replace the premises of marginalism HC1 to HC5 with a superior set of foundational propositions.

    To say that ‘a corporate and financial elite has been able to influence the rules by which the economy runs’ is essentially a bad-guy/good-guy story that satisfies most peoples’ need for an explanation. From the scientific viewpoint, though, this ‘theory’ is not significantly better than the marginal theory of distribution.

    The root defect of all distribution theories is that the representative economist cannot even tell the difference between income and profit (2014).

    Egmont Kakarot-Handtke

    References
    Blaug, M. (1994). Why I am Not a Constructivist. Confessions of an Unrepetant Popperian. In R. E. Backhouse (Ed.), New Directions in Economic Methodology, pages 109–136. London, New York, NY: Routledge.
    Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2511741.
    Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
    Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
    http://www.jstor.org/stable/1805586.

    • November 19, 2015 at 5:51 pm

      Quote, “To say that ‘a corporate and financial elite has been able to influence the rules by which the economy runs’ is essentially a bad-guy/good-guy story that satisfies most peoples’ need for an explanation. From the scientific viewpoint, though, this ‘theory’ is not significantly better than the marginal theory of distribution.”

      Are you saying it is not necessary to understand the laws that shape the economy? That they have no scientific, objective content?

      • November 19, 2015 at 6:35 pm

        ICYMI (mcbockalds Nov 19)

        I am saying that there is no such thing as behavioral laws. There are, of course, structural laws which have objective content. For the difference and the First Economic Law as an example see the post ‘Prediction does not work? Try retrodiction first’
        http://axecorg.blogspot.de/2015/11/prediction-does-not-work-try.html

        Since Jevons/Walras/Menger economics is dealing with the false type of laws.

      • November 20, 2015 at 8:49 am

        Well, I would be saying it is necessary, but the laws of hierarchical deductive logic are fictions when the real world is changing and the real laws involve four scientifically and objectively valid but interacting and thus changing objectives, uncertain measures and malevolence as well as the necessity for giving way at cross-roads.

      • November 20, 2015 at 9:45 am

        On reflection, the laws of the sea provide an even better model than the laws of the road, for almost the only law is that powered vessels must give way to sail or oar, contrary to letting powerful multinationals plough through vulnerable rivals. Passing to the left (or is it right?) is an agreeable convention, while charts and weather forecasts merely advise of dangers, for these will affect some more than others.

      • November 21, 2015 at 8:50 pm

        EKH I do not disagree with you, “there is no such thing as behavioral laws.” When I taught economics I told my students that I did not believe we economists should be using the term “laws of supply and demand.” And I explained why through the course when relevant.

        I read your referenced article and looked at the “First Economic Law.” But I am not sure of the meanings of each of the four rohs, especially the last three. Is the equation something more that what might be called an “accounting identity?” I simply don’t know.

        Finally, I think the original article and following comments were not about “behavioral” laws, but legal rules and regulations that affect the economy in one or more of the activities of production, consumption, distribution, ecological effects, geographical ….

      • November 22, 2015 at 11:57 am

        ICYMI (mcbockalds Nov 21)

        (i) There is, of course, no such thing as a behavioral law of supply and demand. To accept the standard supply-demand-equilibrium model as an explanation of how the market system works is a sure indicator of abysmal scientific incompetence. Yet, there is a structural law, see the working paper ‘The Law of Supply and Demand: Here It Is Finally’
        http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2481840

        see also ‘How to Get Rid of Supply-Demand-Equilibrium’
        http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2263172

        (ii) The First Economic Law is a structural law. You ask ‘is it something like an accounting identity?’ as if this were something disreputable. It is important to stress with a view to the ongoing mathiness discussion that accounting is the natural mathematics of economics and the essential precondition of empirical testing. So the whole notion of economics as a science depends crucially on proper accounting. The fact of the matter is, though, that economists even messed up the elementary mathematics of accounting. For details see ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach’
        http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2124415

        see also ‘Why Post Keynesianism Is Not Yet a Science’
        http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1966438

        (iii) The successful implementation of rules and regulations presupposes an understanding of how the economy works, otherwise they are ineffective or even counterproductive. There is no use to discuss about rules, regulations or policies with the representative economist who neither understands the Profit Law nor the Law of Supply/Demand nor the elementary mathematics of accounting.

        (iv) Finally, note well, that David Ruccio speculates “the economic elite wanted both more surplus and the ability to keep in their own hands more of that surplus” while it is pretty obvious that he has no idea of what the difference between surplus, profit and income is. To get out of the cul-de-sac of behavioral second guessing and folk psychology see ‘Profit for Marxists’
        http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s