Game stop 2: What are stock markets for?

from Peter Radford

The sudden attention being given to the gyrations of Game Stop stock prices has caused all sorts of hand wringing within the hallowed walls of high finance.  In typical fashion the people who like to carry on their trading and associated activities beyond the public gaze are all a twitter because a bunch of apparently crazy outsiders are not adhering to the sedate rules of the game.  This produces truly odd results.  Normally virulently anti-government voices are suddenly calling for SEC investigations and even regulation to prevent outsiders spoiling things.  Some are swooning over the event as a demonstration of the awful greed and selfishness that has overtaken even average Americans — rather than just Wall Street denizens.

How dare average people become as greedy as Wall Street bankers!  The horror of it all.  Whatever next?

Then, naturally, there are the libertarians who use the chaos as a reason to argue against any further government intervention in the economy.  In their view the entire disruption is a result of people having too much money to play with.  Which must be the government’s fault.  So the answer, obviously, is to make sure that only a few people people have too much money to play with.  That the select few who have spare cash happen to be the clients of Wall Street banks and other houses of high financial wisdom is not something we peons should concern ourselves with.  For goodness sake, can’t the regular people just stick with their little 401K retirement plans and be satisfied?  Leave the fun of gambling and money making to the grown ups.

More seriously, the current episode helps explode the mystique of the stock market and Wall Street more generally.

A reminder from Berlin

from Peter Radford

Sorting out my old bookshelves I came across an old Isaiah Berlin Essay “The Pursuit of the Ideal”.  At the risk of being boring here is a very long extract, he begins the essay this way:

“There are, in my view, two factors that, above all others, have shaped human history in this century.  One is the development of the natural sciences and technology, certainly the greatest success story of our time — to this, great and mounting attention has been paid from all quarters.  The other, without doubt, consists in the great ideological storms that have altered the lives of virtually all mankind: the Russian Revolution and its aftermath — totalitarian tyrannies of both right and left and the explosions of nationalism, racism, and, in places, of religious bigotry, which, interestingly enough, not one among the most perceptive social thinkers of the nineteenth century had ever predicted.

When our descendants, in two or three centuries’ time (if mankind survives until then), come to look at our age, it is these two phenomena that will, I think, be held to be the outstanding characteristics of our century, the most demanding of explanation and analysis.  But it is as well to realize that these great movements began with ideas in people’s heads: ideas about what relations between men have been, are, might be and should be; and to realize how they came to be transformed in the name of a vision of some supreme goal in the minds of the leaders, above all the prophets with armies at their backs.  Such ideas are the substance of ethics …”

Yes indeed.

The substance of ethics.

The ideas that have dominated the minds and actions of our leaders over these past few decades, those that produced the day-to-day world we live in, those that resulted in the inequality and inequity of our modern western societies, those that created a giant rift in society between the mass and the few, and those that now need urgent reconsideration and change, those ideas are in sore need of an ethical reckoning.

High on the list of those ideas are those that came to dominate economics starting in the mid-twentieth century.

Memo to self

from Peter Radford

This is short:

I have been accused recently of mis-using the word “coup” when I discuss the events of January 6th.  Worse, I have been called ignorant.

Here is what the dictionary says:

Coup = a sudden, violent, and illegal seizure of power from a government.

Perhaps my critics would feel safer with “insurrection” which seems to be the preferred word in the media.

Here is what the dictionary says:

Insurrection = a violent uprising against an authority or government.

The subtlety of the difference between the two words seems to revolve around the first being seizure of power, whilst the second is an uprising against those in power.  Beyond that they are both a reference to violence and an attempt to unseat, or change government.  Presumably a failed coup implies that power was not wrested from the government despite the attempt.

Let’s review January 6th:

Corporate reckoning

from Peter Radford

The aftermath of a coup attempt is one of those moments when a nation gets a really serious insight into its values.  Do, for instance, its politicians rally around some higher set of principles, or do they slide quickly back into the day-to-day argy-bargy of political positioning and infighting?

Ours are perilously close to the latter.  And this after their own place of work was invaded and trashed while they hid and cowered in sundry hiding places.  Profiles in courage are few and far between right now within our politics class.

The reason is obvious: one of major political parties is complicit in the ruin of democracy and in the rise of a far right version of populism based on white supremacy, nativism, and grievances of various sorts.  Perhaps this was the inevitable consequence of forty years of false doctrine and anti-social agitation during which the very word government became reviled and scorned by those swept along by that doctrine.  Perhaps it was the inevitable consequence of the highly planned and disciplined attack on democracy orchestrated by the panoply of right wing think tanks and media outlets established during the late 1970s for the specific purpose of ruining the ability of the middle class to protect itself from our oligarchs and big corporate interests.  Or, perhaps, it was

Under pressure

– the vital difference between a “firm” and a “corporation”

from Peter Radford

I am learning that it takes a while to come to terms with the trauma of an attempted coup.

Various people are reacting differently depending on their state of mind prior to the attempt.  What catches my eye, given my own perspective on the role of business in society, is the pressure emerging on our large corporations.  Having spent the past few years busily ignoring the moral corruption and ineptitude of the Trump regime business leaders are suddenly trying to appear pious.  Many of them are suspending their support for political groups and individuals.  Others are suspending social media platforms that were used to organize insurrection and ferment violence.

This is all too little too late.

The equivocation that allowed major corporations to support Trump whilst overlooking his manifest moral failings simply so that they could benefit from tax cuts and reduced regulation stains those corporations forever.  It is an example of the transactional thinking produced by a rigid application of the flawed notion of shareholder value permeating the business world.

Let’s set the record straight: corporations are wards of the state.  They exist because the state says they can exist.  That’s what obtaining a corporate charter implies.  Actually it is an explicit, not implicit, relationship.  In return for being given a charter a firm, which then becomes a corporation, commits to providing socially beneficial services.  It is a classic example of a state/private sector partnership.  The charter brings with it a variety of benefits available only to corporations.  So as firms accept those privileges they surrender their market purity: they become hybrids, they become agents of the state.

JANUARY 6, 2021

from Peter Radford

The crisis lingers on.

One would think, although we are now in an odd world, that abetting, instigating, and applauding an attack on Congress would result in more than a gentle rebuke.  Apparently not.  The wheels of American politics move extremely slowly and the perpetrator of the crime still is hunkered down in the White House bloviating, no doubt, about how he was robbed of his victory in November’s election.  Perhaps there will be enough spine amongst those who were attacked to exact appropriate revenge.  Perhaps not.

For, already, the political calculation that infects everything done in Washington is slowing and possibly preventing prosecution.  The Republican Party, now terrified of its full complicity and concerned about whatever is left of its public image, is doing its utmost to avoid punishing its soon to be ex-leader.

What do we know?

Congress was invaded with the intention of stopping it from performing its Constitutional obligation to recognize, formally, the November election result

The invasion came at the explicit behest of Donald Trump who ordered the mob at his January 6th rally to march on Congress with that aim in mind.

Several of the more extremest members of the mob had been planning various acts of mayhem for several weeks.

That planning had been overt: many of them had spoken, written, and communicated about their intentions for months.

Many others in the mob had simply fallen for the serial lying of Donald Trump or had fallen prey to various conspiracy theories allowed to float freely on social media platforms that think of themselves as above regulatory control.  This group consisted of people from all over America who believed Trump’s lies concerning the election.  They thought he had been robbed.  That he never, not once, produced evidence to support his claim was not enough to stop them joining in the assault.

Adding these facts together we see something as stark is an insurrection or a coup.  America has just survived an attempt to topple its government through the use of violence.

The firm, yet again

from Peter Radford

There is a new eBook published by the Stigler Center which is an offshoot of the Booth Business School at the University of Chicago.  The publication contains a number of short essays either attacking or defending the infamous pronouncements by Milton Friedman on the role of the corporation.  This year, you may recall, is the 50th anniversary of the newspaper article in which Friedman described his view that the purpose of the corporation is too maximize shareholder value.  The subsequent decades have seen that view permeate the business and  legal systems such that to argue against it is seen as oddball in the extreme.

Steve Kaplan leads the defense of Friedman with the opening essay and slides almost immediately into a humdrum general defense of capitalism rather than staying on the specific topic of the corporation.  Thus we read this:

“Many observers, including the organizers of the Stigler Center’s Political Economy of Finance Conference, believe that his view has been extremely influential. It has been implemented in the US and globally starting in the 1980s, encouraged by scholars like Michael Jensen (a Booth alum and my thesis advisor).1What has been the result of corporate shareholder value maximization mixed in with globalization? Let me cite Nicholas Kristof, of the New York Times, who wrote at the end of 2019 (and pre-pandemic): “For humanity over all, life just keeps getting better.” People living in extreme poverty fell from 42 percent of the world’s population in 1981 to below 10 percent today. That is 2 billion people who are no longer suffering extreme poverty. Absolute poverty declined substantially in the US, from 13 percent in 1980 to 3 percent today. And this is more or less what Friedman predicted. The pandemic will affect these numbers, but I am hopeful that the effect will be temporary.”

Notice that the reduction in world poverty is, apparently, a consequence of the acceptance that corporations ought to devote themselves exclusively to enriching their shareholders.

Historic Perplexity

from Peter Radford

A week or so ago I wrote that I was in the midst of reading Robert Skidelsky’s book “What’s Wrong With Economics”.  His account is complete and balanced, he clearly has a great deal of respect for the discipline, but his critique is well worthwhile the time it takes to read.  At the end the reader might well ask what is left of the mainstream line of theorizing after all the holes Skidelsky punches through it.

The problem that many of us might have is that this ground is all too familiar.  The absurdities of the neoclassical method are well known and have been shredded time and time again.  Yet the discipline plods its merry way forward apparently oblivious to the farce that it appears to those on the outside.  It applauds itself endlessly and ignores the steady accumulation of demerits that history provides us as its predictions founder endlessly on the rocks of reality.

History itself one of the main bases of attack that Skidelsky deploys.  History both of the development of economics and then the ignorance of history within economics.

A primary feature of modern economics is that the current generation of its exponents assume that the development of the subject represents a steady progression of finer, more rigorous, and formal exposition: the sloppy less formal errors of the past have all been expunged so that the modern corpus is a distillation rather than a compendium.

“A primer for the perplexed”

from Peter Radford

That’s the subtitle of Robert Skidelsky’s little book “What’s Wrong With Economics”?.  A primer for the perplexed.  With the U.S. election past us, I decided to start reading some of the books that had accumulated in my “to read” pile.  Skidelsky being one of my favorite authors I started with his.  The problem is that perplexity is insufficient to describe my usual emotion or state of mind whenever I engage with economics.  So, here I am, a mere fifty or so pages in, and already I am experiencing that same exhaustion I have felt these past few decades any time I wander into the morass that passes for economics.  Time and again I do this to myself.  It seems such an important topic.  It seems so relevant and useful to understand.  It seems so necessary for anyone who wants to think about the policy or policies we need to further the lot of our fellow citizens.  But.  Then economics slaps you on the side of the head.

Just what purpose does all this nonsense have?

It employs lots of economists.  So that’s useful.  It is the intellectual equivalent of digging holes and then filling them in.  No long term use comes from the endeavor, but paychecks are cut and unemployment is lower.

I know.  I know.  I am being a tad critical.

Which is why it’s useful to read someone like Skidelsky.

He is clearly exasperated too.

Friedman’s bad turn

from Peter Radford

Today is quite an anniversary.  It is fifty years since Milton Friedman’s article on the responsibilities of corporate management appeared in the New York Times.  Whilst it was not the only argument in favor of the shift towards a narrow focus on shareholder value, it was certainly one of the more persuasive and influential.  I have long held that Friedman’s reputation was ill-deserved because of his overt ideological bias and thus lack of any pretenses to scientific thought, but I realize he is well respected and protected by his peers.  His academic peers keep pointing us to his many “contributions” and accomplishments in order to prevent too dramatic a revision of his stature.  I prefer to reflect on the enormous impact his relentless pursuit of libertarian politics under the guise of economic theorizing has had on working people throughout the world.  He and his fellow travelers have a great deal of responsibility for the current fiscal insecurity that their ideas produced.

Friedman’s ability to straddle between academia and public media stardom made whatever he said more potent than it might have been otherwise.  His legacy is questionable.  His contribution to the malaise of those unfortunate enough to be caught in the vise of the corporate rush for every last scintilla of profit is not.  He was one of the main actors in the bad turn in economics  that blinded the discipline to reality, to the cost that it imposed on society, and to its inability to force the disaster of 2008.

Pandemic Musings

from Peter Radford and WEA Commentaries

I have been digging around a fair bit lately trying to understand the role of economics in the extent of the inequality being laid bare by the pandemic — more on that later.  A few interesting nuggets worthy of a quick note popped out along the way.

Thomas Phillipon opens chapter one of his recent book this way:

“The big debates in economics are about growth and inequality.  As economists, we seek to understand how and why countries grow and how they divide income among their citizens.  In other words, we are concerned with two fundamental issues.  The first is how to make the pie as large as possible.  The second is how to divide the pie.”

Presumably his approach ignores the ugly dismissal of inequality by the likes of Lucas who said it was of no enduring interest.  Or words to that effect.  Distribution is one thing.  Inequality is another.  Sliding back and forth between the two words elides the moral centerpiece of the discussion: what level of inequality is acceptable?  Economics, once it adopted the marginal method, has avoided such a discussion and has, instead, hidden behind the “it’s the way the world works” argument.  In other words it took an ideological stance under the guise of scientific discovery.  Even today we can easily find economists blithely arguing that people get paid equivalent to their contribution.  As if calculating said contribution is that simple.  As if that’s the only factor in determining pay.  As if  … well you get the picture.

Economists are fond of playing neat tricks like this.

They stumble on something pretty useful, marginalism being one example, they elevate it to become a universal truth impervious to attack, and then they assume they know something about the world that others just don’t “get”.  read more

More on what’s missing

from Peter Radford

I suspect economic theorists are not alone in shunting to the side issues or phenomena that might upset the applecart.  But they appear to do it with a determination that other disciplines mind find somewhat alarming.  This is why I relentlessly and repeatedly mention Cause and his 1937 question about the existence of the firm.  It isn’t because I imagine that theories of the firm began in 1937, or that they are somehow restricted to a peculiar Anglo-Saxon view — Coase would have been an ideal advocate of such a view having spent his career on both sides of the Atlantic — but because he typifies the dilemma he raised.  He cannot quite accept the enormous ramifications of his question, and so he wanders off and tries to invent a reason for firms to exist that can be kluged together with the pre-existing purist view of marketplace superiority.  Firms, in the theoretical tradition born to help Coase out of the box of his own making,  are made out to be exceptions rather than the rule.

Well, when you have theorized utopian markets, how can any other phenomenon be anything other than a sullied alternative?  You’re stuck with trying to make everything else out to be a result of some mysterious “failure”.

Economists have done a wonderful job of hiding from the demons that reality might unleash and the damage such demons might wreak on their pristine imaginings.

The missing middle?

from Peter Radford

A couple of things before we get started:  when I say that economics is not history, I mean exactly that.  Geology is not history either.  That is not the same as saying that economics ought pay no heed to history.  Let’s not get confused over that.  Economics is its own discipline with rules and territory that its exponents determine.  That might frustrate or annoy some of us who would like to think of it more broadly, but it’s up to us to find doors to open to help in that broadening.

Fortunately there are plenty of such doors because the current core of economics is rather narrow with respect to the full range of interesting topics or phenomena that appear to be economic.  In its endeavor to become a more formal activity economics has ceded swathes of territory to related fields of enquiry.   As I mentioned in the past couple of weeks, it has limited itself so that things like increasing returns are treated as novelties that periodically pop up  and need pressing back down so as not to cause a thorough re-thinking of its core principles.  The list of similar oddities is quite long and results, by and large, from the effort economists have put in to their relentless focus on market activities and their desire to hunt for the mysteries of hidden hands and so on.  Economists have, of course, every right to pursue this narrow and often sterile activity.  And there are many economists who diligently work away at investigating the oddities, although too many seem to want to bend their subject of study to obey the rules of the core rather than to state the more reasonable conclusion that the core itself needs a look at.

Damn facts

from Peter Radford

It seems appropriate to mention increasing returns today.  After all, this is the day on which several of our modern titans of industry are appearing before Congress to respond to the concerns raised by the gargantuan size that their respective businesses have grown to become.  The CEOs of Apple, Amazon, Google, and Facebook are all under the gun to defend the enormous clout that each wields in the modern marketplace.  Today is the culmination of a long investigation by Congress into the problems, or perceived problems, that these four companies represent.  Whatever the outcome the simple fact that the four are being clustered into one band of rogues taints them with an aura of indecency we normally associate with the pharmaceutical, banking, or tobacco industries.  That’s bad company to keep.

But back to increasing returns.

It’s one of those topics that economists like to tuck away and discuss out of the glare of public gaze. It represents a considerable challenge to the foundation of contemporary economics.  Economists love letting us know that they know about the potential various errors that might devastate the core of what they believe, but they equally love sweeping such anomalies under the rug so as not to have to re-invent their discipline.

Ontology, framing, and all that jazz

from Peter Radford

The collection of papers edited by Uskali Mäki and published in 2001 under the title: “The Economic World View, Studies in the Ontology of Economics” seems to be quite pertinent given the reaction to my recent comments on complexity.  It is a wonderfully rich source of thought about what, exactly, economics is, which is something that seems to confound a great number of people.  Quite often I get the sense that some critics are upset with economics because it isn’t physics, or chemistry, or, more controversially, biology.  No it isn’t.  Nor are they economics.  Hopefully we all agree on that.  Nor is it history or any other thing.  It is economics.  Which is something that has coalesced around certain ideas over the last couple of hundred years.  Quite what it is, though, remains a work in progress.

Economics is way more complex than the “natural” sciences simply because it involves us and our confounded intentionality, controversy, whimsy, and so on.  Physicist have it easy: atoms don’t “think”.  Which is why those economists who try to nail people down as if they are atoms do what they do.  It simplifies what is otherwise an enormous fog.  I happen to think they oversimplify, but I don’t criticize them for trying.

More Complexity

from Peter Radford

Economists have been talking about complexity for a very long time.  This may surprise many of you given the state of mainstream economics, but it is true.  A good place to discover a preliminary history of complexity in economics would be the short volume edited by David Colander published in 2000.  The papers it contains were all presented at a History of Economics Society Conference in 1998.  Colander provides a good introduction and tries to put complexity into the context of economics since its inception.  There are times when, in my opinion, he errs a little too much in favor of the older methodologies as if he finds it difficult to shed old habits himself.  Nonetheless the papers in the volume cover a wide and interesting territory, including the similarities between biology and economics.

There is no point in presenting a summary of the various papers here, but perhaps it is worth mentioning that in Colander’s own contribution he evaluates some of the more well-known names in the history of economics and determines whether they would be more or less important were their standing simply built upon their understanding of the role of complexity.  The people coming under his scrutiny are a who’s-who of economic thought: Smith, Malthus, Ricardo, Mill, Marx, Walras, Marshall, Hayek, and Keynes all get a going over.  Happily for those us unconvinced by the dead-end that is called general equilibrium Walras gets a solid demotion, as does Ricardo.

In my last note I mentioned that economics has, traditionally, been heavily interested in what I called “a battle with scarcity”.  This seems to have confused people.  It is not exactly a novel idea on my part! Robbins put it this way in 1932:

Complex ideas

from Peter Radford

The economy as a sea of information, constantly churning, far from equilibrium, with computation its key activity.  It is complex.  It is inscrutable to any method that fails to accommodate its multitude of layers, interconnections, feedback loops, and constant dynamism.  Since reading Ilya Prigogine ages ago I have never understood how anyone could not view the economy through such a lens.  The interplay between creative forces needed to sustain life and the constant dissipation or disordering that inevitably follows upon such creativity is, to me, the central theme being played out in an economy.

Given this, attempts to contain analysis within a neat box simply defy reality.  The instances of an economy that are unstable and out of equilibrium far outnumber, enormously, those that are stable or in equilibrium.  Disorder is normal.  Order is rare.  Vanishingly so.  And, given the radical uncertainty that permeates the economy, we can only focus on the short term.

So, an economy can never be “efficient” because we have no way of knowing how to anchor the universal analysis of such efficiency.

Nor can it be “optimal” because

Carter on Keynes

from Peter Radford

The biography of Keynes by Zachary Carter ends on a decidedly wimpy note.  The concluding chapter is devoted to the financial crisis of 2008 and the subsequent half-hearted sort-0f-Keynesian policy response.  Whilst Carter seems fine with his condemnation of neoliberal policies and is clear about the abject failure of the notion that financial markets act in either a self-correcting or a rational manner, he then goes on to ask why Keynesianism has proven to be so politically weak:

“But pointing the finger at neoliberalism raises uncomfortable questions for Keynes and his defenders.  Why has Keynesianism proven to be so politically weak, even among ostensibly liberal political parties and nations?  The Keynesian bargain of peace, equality, and prosperity ought to be irresistible in a democracy.  It has instead been fleeting and fragile.  Keynes believed that democracies slipped into tyranny when they were denied economic sustenance.  Why, then, have so many democracies elected to deny themselves economic sustenance?”

Surely the answer is obvious.  Indeed, the answer is littered throughout the previous pages of Carter’s book.

Neoliberalism as it cohered in the second half of the twentieth century was essentially a reactionary effort to undermine democracy.

Racism in America

from Peter Radford

I don’t often comment on politics here, but I want to record my thoughts as I watch the extraordinary convulsions running through America at the moment.

First: racism is a basic fact of American life.  It has been apparent to me since I moved here.  White America simply doesn’t want to be forced to engage with it, so it ignores all the plentiful evidence that it exists.  It is too painful and too difficult to deal with, no matter how sympathetic people are, so they want to avoid the topic.  They prefer, instead, to pretend that it is an historic artifact and not a current one.  Worse, when outrage hits the streets, as it has recently, a good proportion of the white population gets upset: they believe that there has been sufficient effort made to heal the breach, and that any current anger is a sign of disrespect for that effort.  They then accuse the black population of being ungrateful for, or of squandering, that effort.

Second: American politics is massively shaped by race.

More words that matter: capital and labor – Part one

from Peter Radford

I was having a conversation this morning in which I argued the word “capitalism” has no meaning.  Or, perhaps, it has too many meanings.  It is a fraught one as well.  People get vexed in its presence.  I ought also have said the same thing about the word “labor”. Both words are relics of the early years of industrialization when they meant more to those throwing them around back then.  In our contemporary economy they mean rather less.  To me they reference things quite different from what they are in typical economic thinking, they are place-holder words for a power relationship that exists in a modern economy between employer and employee.  That relationship is better described in a corporate context, in which case the notorious “capitalist” slides from view to be replaced by the sort of managers agency theory is purported to talk about, while the power lurks in the background.

That power relationship was massively asymmetrical in the decades before the emergence of modern democracy, but has been made more benign subsequently.  Note that I am not arguing all is well.  It has been made more benign, not perfect.  Far from it.  Democracy is the counterweight to the excesses erstwhile capitalists unleash on us all.  It is why plutocrats, as I prefer to call them, are constantly trying to pervert democracy.  It’s a power struggle that never ends.  So we ought expect the latest batch of plutocrats to seek to do evil to democracy: it dilutes their power and thus threatens their wealth.  There is nothing new in this power struggle, most societies have had a self-serving elite trying its damnedest to pillage the underclass.  Our modern economy is no different.