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The Market Turn

from Peter Radford

I am going to be writing an extensive review of Avner Offer and Gabriel Söderberg’s excellent book: “The Nobel Factor” in the near future. Meanwhile allow me to share a a couple of early comments because they bear heavily on how we all approach the Trump administration.

Offer and Söderberg clarify the circumstances behind the shift in economics that occurred in the late 1970’s and came into full effect in the subsequent decades. Their  focus is heavily on how the Nobel Prize in economics has reinforced that shift and how the very origins of the prize were steeped in political bias on the part of the Swedish Central Bank, which was involved at the time in a guerrilla war against the then prevailing (in Sweden) economics of social democracy.

This history is, perhaps, the clearest indication of the inherent anti-democractic intentions of modern economics.

Democratically aware economics and the more commonly quoted mainstream or neoclassical economics have very different attitudes towards the mitigation of lifetime risks that we all experience.

In a socially democratic world such risks are borne by the community via the redistribution of wealth, taxation, and the establishment of government provided safety-net programs of various sorts. In the world of modern economics the libertarian approach dominates: people provide their own risk mitigation through the purchase of private insurance. In this latter world the government plays no role. Indeed, any attempt on the part of government to play a positive role is regarded as, by definition, an attack on the ability of so-called free markets to produce maximal social welfare. 

The two approaches rest on totally different bases. The democratic version assumes the existence of community with citizens bearing collective responsibility towards each other. The libertarian version expunges the collective altogether and assumes that all activity is best left to individuals pursuing purely individual interests.

There are, of course, anomalies. Especially in the libertarian version. For instance the community is suddenly brought back from the dead and presumed to be the locus of the provision of certain services including defense, and the enforcement of laws that protect private property. Libertarians also tolerate the collective action of the market with its emergent properties of prices, supply and demand quotients and so on. This tolerance brings into full view the political nature of their agenda: the elimination of a role for democratically inspired government in the economy.

In contrast, the democratic version limits the activity of the community to the provision of risk mitigation. It allows plenty of space for the activities of the private sector to innovate and create wealth. It simply takes a collective view of the allocation of that wealth.

This is far better presented in the Offer and Söderberg book and I urge you to read it.

Meanwhile we can trace the emergence of the libertarian and anti-democratic strain of economics from its rise and ascendancy right through to the 2017 agenda in American politics. The vocal opposition of the Republican Party to the Affordable Healthcare Act [aka “Obamacare”] rests squarely on the political agenda that the libertarians introduced into economics under the false guise of “positive” theory subsequent to the work of Hayek. So we can see the enabling role that economics plays in our political discourse. There is nothing “positive” at all about it. Indeed the libertarian version of economics sits proudly in the van of the Republican efforts to get rid of any semblance of entitlement.

Think about that for a moment: even the word “entitlement” drips with a scornful dismissal of the possibility of community action. Someone who presumes to be “entitled” cannot be said to have earned it as an individual. They simply stake a claim because they are a citizen, and citizens have certain rights to collective protection. The libertarian attitude is based, as Offer and Soderberg remind us, on a vision of a “Just World Theory”. In such theories individuals earn outcomes that they deserve. Luck, accidents of birth, and other adjustments to the experience of lifetime risk are inconsequential. Outcomes are fully earned.

We hear this dismissal in the voices of right of center politicians who are fully invested in Just World Theories. To them people earn and deserve whatever outcome they experience. There is no concept of citizenry egalitarianism in such a position. Inequality is simply a just outcome of the hurly burly of life. Corporate CEO’s fully deserve their riches even if the results of their actions don’t seem to accord with them. Innate talent must account for all outcomes and no one does well because of privileged upbringing.

Along the way the libertarian version of economics spawned corporate technologies such as the notion of “shareholder value”. So it is not simply economic policy making that is in the thrall of anti-democratic theory. Corporate governance is too. The current version  of capitalism that dominates our economy is managerial and oligarchic. It is ossified. It is creaking under the weight of the failure of the logic of its libertarian theoretical underpinnings. Innovation is stifled by big businesses who fear competition. Business start-ups are less frequent. Young businesses, the epicenter of employment growth, are fewer. Why? Because the asymmetrical burden of risk on everyday workers has made them risk averse, less able to consume the goods being produced by big business, and far less optimistic. This version of capitalism is suffocating itself.

This augers well for social democracy.

To re-ignite growth, to make that growth sustainable both through time and with respect too our environment, and to offset the fragmentation of employment — the so-called “gig economy” — we need more explicit collectively driven responses. Workers will have to act together to re-capture a decent share of our collective prosperity. And since they are now bearing more risk than their former employers and big business, that share can justifiably come from the taxation of those former employers and big businesses. After all, aren’t we all taught atet risk and reward ought be in balance?

After forty years of drift into the desert created by libertarian driven economic theory, it is time for a push back. That’s an agenda we can embrace while Trump does whatever he does.

So ignore him. Focus on the future.

  1. Grayce
    January 4, 2017 at 11:05 pm

    Even the election itself followed “corporate technology,” that is, Carl Icahn’s corporate raider technique–or the politically correct rhetoric of “activist shareholder” technique–was in the background. Consider that the election, with its focus on Electoral College votes from the non-usual middle states, is the exact parallel to a proxy fight. In a proxy fight, a loud outsider stirs up the small shareholders to join in a battle to dethrone the incumbent board of directors or to weaken them. The loud outsider promises to increase “shareholder value” and it can go several ways if the fight is successful. The loud outsider gets a seat on the board and forgets the others, or it devolves to the detriment of the corporation itself and value is squeezed to the point of bankruptcy.
    One of the ways cash is squeezed out has already happened with Icahn and Xerox Corporation. He first purchased a commanding share of stock and applied pressure to board decisions. In 2015, a billion dollars cash was used to buy back shares of Xerox (increasing earnings per share), then in 2016 a billion was borrowed for “strategic transformation” and the company was split in two. Conduent went on the market as CNDT January 2, 2017, and Icahn gets to name two or three board members of Conduent as well as select the CEO.
    Recently, Icahn was revealed as an advisor to Trump and will be on his advisory council.

  2. patrick newman
    January 5, 2017 at 9:45 am

    It is a big step forward that laissez faire-neoliberalism-freemarket economics is increasingly seen not as a way of describing and analysing economic reality but a political ideology supporting the engine of poverty, inequality and environmental destruction.

  3. January 5, 2017 at 3:11 pm

    One-point on self-funded retirement and risk insurance. It requires not only that people disclaim any altruistic responsibility, as per libertarian thought, but also that there be enough financial assets to be purchased, with enough yield to effect the inter-temporal transfer of income that the individual desires. Socialists tax current earners to pay current pensioners. Libertarians require that there be enough public companies with enough profits to transfer a sizeable chunk of income from current earners to current shareholder-pensioners. It’s no less collective or a transfer in the present, it’s just privatised taxation.

    And there’s not even a guarantee that there are enough assets with enough yield. In the US it looks doubtful given the very unequal allocation. In smaller economies there are plainly not enough capitalist companies to effect a transfer comparable in size to tax-and-spend redistribution. Even if all the shares in Greece or Italy or Finland were owned by pensioners, they just wouldn’t pay enough in dividends.

  4. January 7, 2017 at 11:25 am

    Three points. First, social scientists who are not economists but study aspects of the economics discipline have been aware of the items discussed in this book at least since the 1990s. The bibliography of such work in too extensive to list here. Contact me off list for a list of readings. Economists it seems possess virtually no self-awareness of the historical origins of the discipline they claim. Although they do understand and repeat strongly and frequently the justifications for the theories and actions of economists.

    Second, you state, “Workers will have to act together to re-capture a decent share of our collective prosperity. And since they are now bearing more risk than their former employers and big business, that share can justifiably come from the taxation of those former employers and big businesses.” but the game you describe is a dangerous and violent one. “Re-capturing” may be difficult and risky. Look at what happened to unions in 19th and 20th century America, or the destruction of careers and lives by the HUAC, or the new Republican Congress’ plans for America’s middle and working class.

    Finally, markets for all their glory within the current versions economics, are not economic creations. And, for that matter, neither is economics. They are both created and sustained in political, religious, moral, and legal discussions and interactions. In these property is defined and rules for allocation set-up, market transactions are defined, rules for market participation created, and the actors allowed and not allowed to participate in markets identified. Economists almost exclusive focus on economic theories, and particularly the mathematics of economics means they don’t study and thus have little awareness or understanding of the actual processes of creating markets or their failure.

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