The Neoclassical Mythos
Apr. 28th, 2011 07:39 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peristaltorBack in August of last year, I ended the last episode of Swatting the Swarm with this paragraph:
I figured it only fitting to do some reading on the economy and how it works before laying out my damning indictment of Greenspan. I'm still reading, of course, but have still found enough hard informed commentary to all but dismiss that group of economic thinkers and theorists to which Greenspan belonged as a starry-eyed gaggle of dogmatic optimists sometimes led by (in some cases) out-right con artists. Sadly, this group wields an enormous amount of power and influence today, all but dictating policy in defiance of the democratic process and skewing toward their conclusions far too many aspects of our everyday lives.
Economics purports to be, you see, a science, and as such should rely on supporting its claims with empirical evidence. That's what other branches of science do, after all. Much of the following 150+ years of biology and paleontology have, for example, supported Charles Darwin's 1959 Origin of Species and his theory of natural selection found therein. That same year brought us one of the most important foundation observations supporting today's science of climatology.
As the two examples of science provided suggest, though, is that a lot of damage can be done to the reputation and understanding of good and well-supported theories if enough people with money find it in their best future interest to distort and obfuscate the official record. Believe it or not, even given the massive distortions climate change deniers and creationists have wrought on those other disciplines, economics has suffered an even greater attack and for a far more extended time. The Neoclassical and Neoliberal branches of economic theory prove far less supported in their tenets or their conclusions than either climate change denial or intelligent design, yet very few in the media even question the veracity of these assertions. As a result, we get a never-ending blast of neoclassical nonsense regurgitated by pundits, noise that effectively deafens the populace clamoring for real information they can use at the ballot box and with their checkbooks. Until that clamor is stanched, few will hold the qualifications to make informed decisions governing their very lives.
With this in mind, the following Too Long; Don't Read post addresses some of the tenets of neoclassical economic theory with explanations where I am able to provide them and dissenting opinions discussing why said tenets are theoretical at best and delusional at worst, backed by some of the books in which my nose has recently been buried.
I thought I would start with this myth simply because it seems to be the most ill-understood of all the goobledegook, and therefore the least challenged. Essentially, according to Moshe Adler:
I've been hearing that assertion for decades now without even seeking it out. Until very recently I had very little interest in economics, yet it seemed every chance folks in the media got they would schedule some set of flapping gums who would bad-mouth unions in general and Roosevelt's New Deal worker protections specifically, claiming these actions prolonged the Great Depression by failing to lower wages and thus speed an economic recovery. Adler points out that this theory is based on something called the Value of Marginal Product, or the marginal revenue productivity theory of wages. From the Wiki: "The theory states that workers will be hired up to the point where the Marginal Revenue Product is equal to the wage rate by a maximizing firm, because it is not efficient for a firm to pay its workers more than it will earn in profits from their labor."
The Wiki entry includes all kinds of formulae one can peruse, if one is so inclined. I get antsy, though, when formulae are presented without actual numbers inserted to demonstrate the veracity of the theory backing the math. In his explanation of VMP, Adler agrees. He continues:
That bold quote shows that economists disturbed or threatened by Keynes' assertions built the VMP theory not to describe an economic phenomenon -- as sciences generally do -- but as a tool to reach the conclusion the economists felt should be reached. Just like Creationism or Climate Change Denial, this is, in my humble opinion, the exact opposite of science.
Let's get back for a moment to that nagging phrase stating that workers are paid what "they are worth." That has long bothered me, not just because it stands out as a complete denial of conventional theory as proposed by most economists (more on that later), but because of how often I hear it spouted in its various forms by people working in the financial sector. One Planet Money episode featured a bunch of drunken bankers letting off steam in a Wall Street bar (sorry, I don't have the episode number). Amidst the shouting and clanking of glasses, these guys respond to the question: do you feel guilty about the financial collapse? They pretty much deny any culpability, saying that they are "smart" and therefore that they "deserve" the money they're earning while everyone else in the country sees bleak times ahead. That attitude would be hard to justify without VMP, the theory that people are paid what they are "worth."
In fact, think about the justifiable controversy surrounding banker bonuses. Bankers can easily point to VMP and note that, according to the theory, their employers would have to lower those bonuses if their actions as bankers did not justify them, wouldn't they? After all, if they earned that money it's because they are worth it.
The entire issue of what an employee is worth seems silly in sticky terms. After all, both employers and employees seek each other in a "labor market," and markets are the bedrock of economic theory.
Economists are ever yapping and flapping about "market equilibrium," aren't they? That's the balance between the demand for goods and the supply. Supposedly, demand is reduced when the supply is increased. In a labor market, too many laborers available for work dilutes the bargaining power of each potential worker, thus lowering what any given employer need pay for given labor (just like I pointed out here). Likewise, when there are fewer workers, employers will undoubtedly need to listen to the market and pay more to those available for work. "What they're worth" doesn't even enter into the equation.
Those whiny drunken bankers have failed to realize that their employer can pay outlandish bonuses to whiny drunken bankers simply because of (I strongly suspect) a quirk in our nation's laws that has created a market way out of equilibrium, one that enables the banks to be flush with cash when few in this country enjoy that situation. (Alas, this point is too critical to deal with only in passing. I promise to dedicate an entire entry to it later. See my later post script. For now, I'll stick to theory.)
There's another glaring problem with the neoliberal view of wages. These economists are forever spouting that high wages drive higher productivity. There's only one problem with that assertion: It proves completely wrong, at least when it comes to jobs that require creativity:
I suppose if one is going to challenge the orthodoxy of business schools, one gets fired. Deci is far from the first and will be, I'm certain, far from the last, fired for simply daring to speak the truth about human behavior.
Pink cites several examples of studies that reveal a glaring truth: if you want people to solve problems, rewarding them will actually inhibit their ability not only to stick to the problem (as shown above) but to finish the problem in a timely manner (compared to those who are rewarded differently) or even find novel solutions.
Back in February I shared Pink's synopsis of Drive. It's well worth a listen. As to the über-rich earning "what their worth," no, sorry. That money thrown their way doesn't motivate them, unless they don't even think about it. Listen to Danial explain the phenomenon and learn.
Oh, and if this VMP nonsense holds any water whatsoever, can any neoclassical economist tell me with a straight face why outsourced jobs in overseas factories and call centers don't offer exactly the same wages as the same job did when it was located within US borders? No, I didn't think so.
Actually, that little point leads to my next tenet of the Neoclassical Mythos.
Those of the neoclassical set are forever invoking the spirit of poor Adam Smith. If they were to have their druthers, Smith would be remembered only as the author of the Invisible Hand, a phrase that appeared in Smith's Wealth of Nations exactly once. It appeared in a section on tariffs and how they affect economies, so introducing that Invisible Hand here is entirely appropriate.
A tariff is simply "a tax levied on imports or exports." To the neoclassical economist, it is also an evil to be avoided at all costs:
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bleaknemesis turned me on to Chang's book some months ago. It contains quite a few surprises, ones (not surprisingly) that don't seem to be taught at most business schools today. For example, used with care a system of tariffs can greatly enhance an economy over time. Take England and its sheep:
I've removed the actual action path followed by the Tudor monarchs for the sake of brevity, but it's an enlightening tale given the anti-tariff rhetoric to which we have been subjected for so many years now. Essentially, any nation that wishes to develop its economy -- to develop the "people who can do difficult things which others cannot" and earn the extra profit from that development -- must take an active role in shaping the trade allowed into and out of its borders. It is something Chang noted himself while growing up in South Korea, as the government after World War II used tariffs, reinvestment and a public relations campaign -- emphasizing sacrifice now for prosperity later -- to bring the country up from its agrarian roots to become in just 40 years a major industrial center in several fields. Furthermore, Moshe Adler also notes that in Wealth of Nations Adam Smith himself would have approved of such development moves (Adler, ibid, p. 120):
That bold section proves important when we consider that most free market cheer leading concerning tariffs enables a powerful nation to export its liabilities (say, high wages and pollution) and import that which it finds profitable. Chang notes this early in his book, mentioning the influence well-known organizations seem to play in the inevitable outcome:
I would go further, noting Richard Wilkinson and Kate Pickett's groundbreaking book, The Spirit Level. Following Smith's observation that "(n)o society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable," The Spirit Level provides ample empirical evidence strongly suggesting that the greater the inequalities in income, the greater the suffering of the entire society on a vast number of indicators:
The book explores many, many facets of society that correlate almost exactly with the gap in income between the richest and the poorest. Delving into that book would fill a number of posts, but I can't leave this topic without noting what I found the most surprising correlation: Big Fucking Trucks.
I put that stat in bold because, like much of the book, real data can be found to support the claims they make. Real data, not just the massaged theories thrust into the debate when the actual data proves inconveniently counter to the prevailing opinion of the theorists . . . as one finds with the neo-liberal economists.
(Wilkinson & Pickett felt strongly enough about their work in writing the book that they have created a website to share much of the information and many of the graphs presented. One need not buy the book to be therefore familiarized with their premise and supporting evidence. Just sayin'.)
Okay, so wages ain't the only determinant of worker worth, and rather than leave economic activity a cratered wasteland tariffs can strengthen a nation over time. What other myths must be subjected to further scrutiny?
Much of neo-liberal economics is based on the simple theory that people act in their own best interests. Jeremy Bentham pioneered the field of "utilitarianism" about the same time that Adam Smith mulled over the whole of economic activity, and for many of the same reasons. Both were enlightenment characters, those (like our Founding Fathers) who believed more in the possibility and potential of un-enslaved individuals than in the primacy of previous monarchies (and the assumptions of divine right that supported them).
When a founding principal like utilitarianism meets the meat grinder of neoclassical economics however, little of what went in resembles what comes out. Still, let's take what Bentham started and see where it leads. This take comes from yet another Smith named Yves, an author and financial blogger at Naked Capitalism:
Smith is here getting back to that little graphic I made and presented above, the equilibrium model between supply and demand. Actually, since people are involved, perhaps it would be better to modify that graph a bit:
After all, Supply and Demand don't get together on their own and party. People need things. People have things other people need. They are the ones that get together. With that in mind, economics needs to consider above all other considerations people -- how they actually behave, how they make their decisions, how they work. As Smith notes above, though, the neoclassical model fails to do that in any real sense. Every example Smith provided in the quoted passage included reference to a paper in some economic journal or another. I only found one link, and provided it. Every single time, if Smith is to be taken at her word, these papers show that theory is butting up against the reality of What People Do so severely as to be essentially non-workable. She continues:
Nassim Nicholas Taleb could not agree with that assessment more strongly. He spends pretty much his entire book The Black Swan outlining the shortcomings in economic theory as they apply to human behavior. It turns out we base our entire world views on our brains, which are not necessarily equipped to form world views that can prove applicable in all situations. As I said, just about the entire book explores the disconnect between what we know as it relates to economic theory and the deficiencies in our cognitive process. It's worth noting one disconnect, developed by "a school called the Society of Judgment and Decision Making. . . . mostly composed of empirical psychologists and cognitive scientists whose methodology hews strictly to running very precise, controlled experiments (physics-style) on humans and making catalogs of how people react, with minimal theorizing." This school noted that we humans use two separate thinking systems:
I started the Swatting the Swarm series based simply on the disconnect between why we think we make decisions (rationally) and why it turns out we make decisions (irrationally). Given the enormous body of evidence supporting the claim that knowledge of psychological tendencies can make for better advertising, I doubt any would scoff at the suggestion that many purveyors of product use known weaknesses in our brains (part of System 1) to influence our purchasing decisions. (Really, how else can one explain the ubiquity -- and prominence -- of boobs in ads?)
Yet, according to both Taleb and Smith, nowhere in neoclassical economics is the suggestion that the balance of product information is in any way unequal. For example, one way a participant in an economic exchange can get just a little advantage would be to band with like-minded individuals. Each of these individuals would contribute his or her expertise to the operation. Every little bit of this accumulated expertise helps gain some advantage over the vagarities inherent in the market. This reality, though it seems obvious, proves a blindside to the neoclassical theory:
Which is just weird. How can any economist go about his or her business observing market activity without coming to the very simple realization that some people have more information about their product than others? To them, my graphs above would make as much sense as the wacky variant below:
This simply doesn't balance.
Finally, we have to consider why things have changed so much in so few years.
That's a bold statement to make, I know, but make it I must. A science, as I noted above, needs to be based on reality, meaning empirical data must conform to whatever working theory is being considered. Yet time and time again we find that is not the case, especially with neo-liberal economics. For example, consider what happened when Benoit Mandelbrot got interested in economics:
Taleb had the benefit of not only knowing Mandelbrot, but calling him friend. He finishes this sad story.
To understand why Mandelbrot's mathematics and its application to economics "threatened the entire edifice", one must understand how most economists arrive at their conclusions, what mathematical processes are involved in most "predictions" of "risk." The preferred method is called (as noted above) normal distribution, aka Gaussian distribution. From the wiki intro: "In probability theory, the normal (or Gaussian) distribution, is a continuous probability distribution that is often used as a first approximation to describe real-valued random variables that tend to cluster around a single mean value. The graph of the associated probability density function is “bell”-shaped, and is known as the Gaussian function or bell curve. . . ."
We've all seen the bell curve. We have, most of us at least, even been judged by that curve if our teachers ever graded "on the curve." The smart few occupy one side flange of the bell, the stupidest few the other, and in between the rest dwell in averaged mediocrity. Mandelbrot noticed that the curve didn't apply to all events. He even created the field of mathematics called fractals to describe mathematical phenomenon that did not scale, that did not lie within the bell or the tail ends.
There is nothing inherently damning about Gaussian averages. The bell curve works very well describing limited phenomena like the average size in a population or waves crashing on a beach. These events do not scale, in that they are self-limiting through the laws of physics. Economics, however, is not limited; it is scalable. An economic phenomenon can be as small as a single transaction, or as large as an entire nation's economy. There is no upper limit to the amount of money in play in any given market, so importantly there is no limit to the amount of money that can be lost should something unexpected happen. Even so, complete collapses of the market are considered as likely as partial downturns or minor setbacks; all three phenomena occupy the tail end of the bell. Once a Gaussian modeler of any given economic probability reaches the tail of possibility, it is general practice to truncate that tail, grouping all possible downsides equally, and the most damaging scenario as not "statistically significant."
In Mandelbrot's equations, complete collapses are representable and thus not truncated from the data and dismissed as "noise." The math is more complex, to be sure, but even more damning is the suggestion that unheard-of events are not only possible, they can be represented by and extrapolated from the available data. All one would have to do would be to go far enough back in history and one could find precedent for collapse. In the Gaussian view, only more recent history fits into the bell; distant pasts get compressed -- and therefore forgotten -- under history's long tail.
Imagine for just a second what would happen in investment houses the world over if this way of examining the world became vogue. Investors would have to admit that, no, there really is no way to predict the future, and no, there really is no way to mitigate all risk of total loss. First and foremost in every investor's mind would be the specter of poverty from improbable -- but eventually probable -- events. Taleb continues on Mandelbrot's fate:
We should note one detail of the above section, that concerning "Nobel medals." It proves important. You see, Alfred Nobel created no prize for economics. Don't believe me? Head on over to the official Nobel site. What is traditionally called a "Nobel prize" in economics is actually The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. From the official site:
Many recipients of the prize are getting frustrated with the situation, which requires no extensive testing of theory or peer review:
I'll let Taleb run down the controversy:
Why would an award in an evidence-optional "science" be awarded? That phrase "public relations coup" is mild, if what many like Taleb and others are saying is true:
Essentially, by making economics more "respectable" as a science, neo-classical economics becomes analogous to Intelligent Design . . . except that it has been in the mainstream now for over 60 years. Combined with its support by the wealthy -- who promote the neoclassical flavor of economics in the media, in the schools, and everywhere else they can -- scientific "credentials" lend to economics a gravitas that has permeated through our culture all the way to the top.
And policy formation proves the core the the next author's book. In his mind, economics as an empirical analysis of our lives -- economics done properly -- would prove as valuable as anything offered in medicine. Done improperly, however . . . .
In a world where both economics and medicine are awarded what most conflate to be the highest award a scientist can receive, sorting the "anecdotal" from the rigorously tested and peer reviewed becomes the greatest challenge of all.
Actually, not "of all." Once we as a society recognize that we need information to be proven and to be accurate for it to be in any way useful, we will seek it out. What proves a much greater challenge is cutting through the mystique of the authoritative and finding that any unproven "science," including neoclassical econ, is not a science at all. Our blinders of what We Want To Be True can quite effectively blind us to What Is. This is what drives the sincere creationists; this is what drives the sincere climate change denialists. In all three examples, a tenet of faith is magnified with misdirection -- data unsupported, logic fallible and unproven -- and called a science.
Back for a moment to Adler's observations on wage theory, on how the available science -- peer reviewed, properly vetted science -- does not support the neoliberal view of "sticky" wages.
No, not everyone is hurt.
Only most of us.
In order to reclaim our democracy, we must insist as Ms. Hertz (in her dry, dull delivery) suggests: question experts, all the time. We cannot let experts deliver the bad news that a decision affecting our very lives are too complicated for us to be a part of the decision itself.
Back to the first installment of the Swarms and Brains saga, we must all realize that the masses make better decisions than a cadre of even well-selected experts. Otherwise, we must admit that we simply no longer live in a democracy.
I'll offer this post-script in closing. As you can see above, the most valuable reference for debunking the mythos provided by those vested interests backing the neoclassical economists was Yves Smith's Econned. It was, however, far from the only reference. In all, 15 books went into forming the consilience of induction that led to my conclusions. I could not see a way to incorporate all those voices into this piece, sadly, without turning a too-long piece even longer.
That said, like all of us, Smith is not perfect. I specifically refer here to a passage in her book which I know from quite a few other recent books is just plain wrong. In and of itself, this just plain wrong-ness is no issue. All of us make mistakes. More importantly, few of us, even those few of us with extensive experience in life itself, understand all of the nuanced realities which must be understood before certain realities can be appreciated. Taken with other statements she makes in Econned, however, the issue become not just glaring but almost tectonic, a mis-statement that affects profoundly the soundness and validity of specific conclusions she later draws. I quoted none of the affected conclusions above, deciding instead to reserve them for later analysis and careful scrutiny. Just to give you a teaser here: Those conclusions, when amended for her early error, helped me just today understand more about the most recent economic crisis than just about any other realization.
This happened just today.
Alan Greenspan may not have been in charge of the Fed during the most severe and obvious part of the collapse, but his actions -- or rather, his ideological inaction -- sowed the seeds for the impending disaster. To understand what happened, we need to note how systems work in general, how our economic system works in particular, and how we individuals within the systems can have more control over system outcomes than the leaders supposedly guiding the system with their authoritarian control.
I figured it only fitting to do some reading on the economy and how it works before laying out my damning indictment of Greenspan. I'm still reading, of course, but have still found enough hard informed commentary to all but dismiss that group of economic thinkers and theorists to which Greenspan belonged as a starry-eyed gaggle of dogmatic optimists sometimes led by (in some cases) out-right con artists. Sadly, this group wields an enormous amount of power and influence today, all but dictating policy in defiance of the democratic process and skewing toward their conclusions far too many aspects of our everyday lives.
Economics purports to be, you see, a science, and as such should rely on supporting its claims with empirical evidence. That's what other branches of science do, after all. Much of the following 150+ years of biology and paleontology have, for example, supported Charles Darwin's 1959 Origin of Species and his theory of natural selection found therein. That same year brought us one of the most important foundation observations supporting today's science of climatology.
As the two examples of science provided suggest, though, is that a lot of damage can be done to the reputation and understanding of good and well-supported theories if enough people with money find it in their best future interest to distort and obfuscate the official record. Believe it or not, even given the massive distortions climate change deniers and creationists have wrought on those other disciplines, economics has suffered an even greater attack and for a far more extended time. The Neoclassical and Neoliberal branches of economic theory prove far less supported in their tenets or their conclusions than either climate change denial or intelligent design, yet very few in the media even question the veracity of these assertions. As a result, we get a never-ending blast of neoclassical nonsense regurgitated by pundits, noise that effectively deafens the populace clamoring for real information they can use at the ballot box and with their checkbooks. Until that clamor is stanched, few will hold the qualifications to make informed decisions governing their very lives.
With this in mind, the following Too Long; Don't Read post addresses some of the tenets of neoclassical economic theory with explanations where I am able to provide them and dissenting opinions discussing why said tenets are theoretical at best and delusional at worst, backed by some of the books in which my nose has recently been buried.
The Myth of Sticky Wages
I thought I would start with this myth simply because it seems to be the most ill-understood of all the goobledegook, and therefore the least challenged. Essentially, according to Moshe Adler:
Keynes explained that the level of employment in the economy is determined by the aggregate demand for goods and services, and not by the level of wages, whether nominal or real. But contemporary economists, even those who describe themselves as Keynesians, strongly disagree. According to them, the level of wages is precisely what determines the level of employment (and therefore of unemployment). During the Depression, they argue, wages were too high. Had they been sufficiently lower, the level of employment would have been higher.
(Moshe Adler, Economics For the Rest of Us: Debunking the Science That Makes Life Dismal, The New Press, 2010, p. 169.)
I've been hearing that assertion for decades now without even seeking it out. Until very recently I had very little interest in economics, yet it seemed every chance folks in the media got they would schedule some set of flapping gums who would bad-mouth unions in general and Roosevelt's New Deal worker protections specifically, claiming these actions prolonged the Great Depression by failing to lower wages and thus speed an economic recovery. Adler points out that this theory is based on something called the Value of Marginal Product, or the marginal revenue productivity theory of wages. From the Wiki: "The theory states that workers will be hired up to the point where the Marginal Revenue Product is equal to the wage rate by a maximizing firm, because it is not efficient for a firm to pay its workers more than it will earn in profits from their labor."
The Wiki entry includes all kinds of formulae one can peruse, if one is so inclined. I get antsy, though, when formulae are presented without actual numbers inserted to demonstrate the veracity of the theory backing the math. In his explanation of VMP, Adler agrees. He continues:
Why is the opposition to Keynes's theory so strong? Not because it was tested empirically and found wrong, but because of the conclusions that follow from the recognition that lower wages cannot eliminate unemployment. The first conclusion is that the free market system is not self-adjusting and that therefore the government should intervene and regulate the economy. The second conclusion is that the (Value of Marginal Product) theory of wages is wrong and, therefore, so is the claim that workers get paid what "they are worth." Economists therefore set out to develop theories to prove that wages are sticky in general, and that sticky wages caused the Great Depression.
(Adler, ibid, emphasis mine.)
That bold quote shows that economists disturbed or threatened by Keynes' assertions built the VMP theory not to describe an economic phenomenon -- as sciences generally do -- but as a tool to reach the conclusion the economists felt should be reached. Just like Creationism or Climate Change Denial, this is, in my humble opinion, the exact opposite of science.
Let's get back for a moment to that nagging phrase stating that workers are paid what "they are worth." That has long bothered me, not just because it stands out as a complete denial of conventional theory as proposed by most economists (more on that later), but because of how often I hear it spouted in its various forms by people working in the financial sector. One Planet Money episode featured a bunch of drunken bankers letting off steam in a Wall Street bar (sorry, I don't have the episode number). Amidst the shouting and clanking of glasses, these guys respond to the question: do you feel guilty about the financial collapse? They pretty much deny any culpability, saying that they are "smart" and therefore that they "deserve" the money they're earning while everyone else in the country sees bleak times ahead. That attitude would be hard to justify without VMP, the theory that people are paid what they are "worth."
In fact, think about the justifiable controversy surrounding banker bonuses. Bankers can easily point to VMP and note that, according to the theory, their employers would have to lower those bonuses if their actions as bankers did not justify them, wouldn't they? After all, if they earned that money it's because they are worth it.
The entire issue of what an employee is worth seems silly in sticky terms. After all, both employers and employees seek each other in a "labor market," and markets are the bedrock of economic theory.
Economists are ever yapping and flapping about "market equilibrium," aren't they? That's the balance between the demand for goods and the supply. Supposedly, demand is reduced when the supply is increased. In a labor market, too many laborers available for work dilutes the bargaining power of each potential worker, thus lowering what any given employer need pay for given labor (just like I pointed out here). Likewise, when there are fewer workers, employers will undoubtedly need to listen to the market and pay more to those available for work. "What they're worth" doesn't even enter into the equation.
Those whiny drunken bankers have failed to realize that their employer can pay outlandish bonuses to whiny drunken bankers simply because of (I strongly suspect) a quirk in our nation's laws that has created a market way out of equilibrium, one that enables the banks to be flush with cash when few in this country enjoy that situation. (Alas, this point is too critical to deal with only in passing. I promise to dedicate an entire entry to it later. See my later post script. For now, I'll stick to theory.)
There's another glaring problem with the neoliberal view of wages. These economists are forever spouting that high wages drive higher productivity. There's only one problem with that assertion: It proves completely wrong, at least when it comes to jobs that require creativity:
(Edward Deci) revealed that human motivation seemed to operate by laws that ran counter to what most scientists and citizens believed. From the office to the playing field, we knew what got people going. Rewards -- especially cold, hard cash -- intensified interest and enhanced performance. What Deci found, and then confirmed in two additional studies he conducted shortly thereafter, was almost the opposite. "When money is used as an external reward for some activity, the subjects lose intrinsic interest for the activity," he wrote. Rewards can deliver a short-term boost -- just as a jolt of caffeine can keep you cranking for a few more hours. But the effect wears off -- and, worse, can reduce a person's longer-term motivation to continue he project. . . .
Thus began what for Deci became a lifelong quest to rethink why we do what we do -- a pursuit that sometimes put him at odds with fellow psychologists, got him fired from a business school, and challenged the operating assumptions of organizations everywhere.
(Daniel H. Pink, Drive: The Surprising Truth About What Motivates Us, Riverhead Books, 2009, pp. 8-9, big black letters mine.)
I suppose if one is going to challenge the orthodoxy of business schools, one gets fired. Deci is far from the first and will be, I'm certain, far from the last, fired for simply daring to speak the truth about human behavior.
Pink cites several examples of studies that reveal a glaring truth: if you want people to solve problems, rewarding them will actually inhibit their ability not only to stick to the problem (as shown above) but to finish the problem in a timely manner (compared to those who are rewarded differently) or even find novel solutions.
(Researcher Teresa) Amabile and others have found that extrinsic rewards can be effective for algorithmic tasks - those that depend on following an existing formula to its logical conclusion. But for more right-brain undertakings -- those that demand flexible problem-solving, inventiveness, or conceptual understanding -- contingent rewards can be dangerous. Rewarded subjects often have a harder time seeing the periphery and crafting original solutions. This, too, is one of the sturdiest findings in social science -- especially as Amabile and others have refined it over the years. For artists, scientists, inventors, schoolchildren, and the rest of us, intrinsic motivation -- the drive [to] do something because it is interesting, challenging, and absorbing -- is essential for high levels of creativity. But the "if-then" motivators that are the staple of most businesses often stifle, rather than stir, creative thinking. As the economy moves toward more right-brain, conceptual work . . . this might be the most alarming gap between what science knows and what business does.
(Pink, ibid, p. 46, emboldenation mine.)
Back in February I shared Pink's synopsis of Drive. It's well worth a listen. As to the über-rich earning "what their worth," no, sorry. That money thrown their way doesn't motivate them, unless they don't even think about it. Listen to Danial explain the phenomenon and learn.
Oh, and if this VMP nonsense holds any water whatsoever, can any neoclassical economist tell me with a straight face why outsourced jobs in overseas factories and call centers don't offer exactly the same wages as the same job did when it was located within US borders? No, I didn't think so.
Actually, that little point leads to my next tenet of the Neoclassical Mythos.
The Myth of Free Trade
Those of the neoclassical set are forever invoking the spirit of poor Adam Smith. If they were to have their druthers, Smith would be remembered only as the author of the Invisible Hand, a phrase that appeared in Smith's Wealth of Nations exactly once. It appeared in a section on tariffs and how they affect economies, so introducing that Invisible Hand here is entirely appropriate.
A tariff is simply "a tax levied on imports or exports." To the neoclassical economist, it is also an evil to be avoided at all costs:
Belief in the virtue of free trade is so central to the neo-liberal orthodoxy that it is effectively what defines a neo-liberal economist. You may question (if not totally reject) any other element of the neo-liberal agenda -- open capital markets, strong patents or even privatisation -- and still stay in the neo-liberal church. However, once you object to free trade, you are effectively inviting ex-communication.
(Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, Bloomsbury Press, 2008, p. 67.)
bleaknemesis turned me on to Chang's book some months ago. It contains quite a few surprises, ones (not surprisingly) that don't seem to be taught at most business schools today. For example, used with care a system of tariffs can greatly enhance an economy over time. Take England and its sheep:In his book [A Plan of the English Commerce, Daniel Defoe, the author of Robinson Crusoe] describes how the Tudor monarchs, especially Henry VII and Elizabeth I, used protectionism, subsidies, distribution of monopoly rights, government-sponsored industrial espionage and other means of government intervention to develop England's woolen manufacturing industry -- Europe's high-tech industry at the time. Until Tudor times, Britain had been a relatively backward economy, relying on exports of raw wool to finance imports. The woollen manufacturing industry was centred in the low Countries (today Belgium and the Netherlands), especially the cities of Bruges, Ghent and Ypres in Flanders. Britain exported its raw wool and made a reasonable profit. But those foreigners who knew how to convert the wool into clothes were generating much greater profits. It is a law of competition that people who can do difficult things which others cannot will earn more profit. This is the situation that Henry VII wanted to change in the late 15th century. . . .
Without the policies put in place by Henry VII and further pursued by his successors, it would have been very difficult, if not impossible, for Britain to have transformed itself from a raw-matierial exporter into the European centre of the then high-tech industry. Wool manufacture became Britain's most important export industry. It provided most of the export earnings to finance the massive import of raw materials and food that fed the Industrial Revolution. A Plan shatters the foundation myth of capitalism that Britain succeeded because it figured out the true path to prosperity before other countries -- free market and free trade.
(Ha-Joon Chang, ibid, pp. 40-42.)
I've removed the actual action path followed by the Tudor monarchs for the sake of brevity, but it's an enlightening tale given the anti-tariff rhetoric to which we have been subjected for so many years now. Essentially, any nation that wishes to develop its economy -- to develop the "people who can do difficult things which others cannot" and earn the extra profit from that development -- must take an active role in shaping the trade allowed into and out of its borders. It is something Chang noted himself while growing up in South Korea, as the government after World War II used tariffs, reinvestment and a public relations campaign -- emphasizing sacrifice now for prosperity later -- to bring the country up from its agrarian roots to become in just 40 years a major industrial center in several fields. Furthermore, Moshe Adler also notes that in Wealth of Nations Adam Smith himself would have approved of such development moves (Adler, ibid, p. 120):
Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers, and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed, and lodged. (I emboldened Smith.)
That bold section proves important when we consider that most free market cheer leading concerning tariffs enables a powerful nation to export its liabilities (say, high wages and pollution) and import that which it finds profitable. Chang notes this early in his book, mentioning the influence well-known organizations seem to play in the inevitable outcome:
The IMF and the World Bank play their part by attaching to their loans the condition that the recipient countries adopt neo-liberal policies. The WTO contributes by making trading rules that favour free trade in areas where the rich countries are stronger but not where they are weak (e.g., agriculture or textiles). These governments and international organizations are supported by an army of ideologues. . . . Together, these various bodies and individuals form a powerful propaganda machine, a financial-intellectual complex backed by money and power.
(Chang, ibid, pp. 13-14.)
I would go further, noting Richard Wilkinson and Kate Pickett's groundbreaking book, The Spirit Level. Following Smith's observation that "(n)o society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable," The Spirit Level provides ample empirical evidence strongly suggesting that the greater the inequalities in income, the greater the suffering of the entire society on a vast number of indicators:
When health inequalities first came to prominence on the public health agenda in the early 1980s, people would sometimes ask why there was so much fuss about inequalities. They argued that the task of people working in public health was to raise overall standards of health as fast as possible. In relation to that, it was suggested that health inequalities were a side issue of little relevance. We can now see that the situation may be almost the opposite of that. National standards of health, and of other important outcomes which we shall discuss in later chapters, are substantially determined by the amount of inequality in a society. If you want to know why one country does better or worse than another, the first thing to look at the extent of inequality. There is not one policy for reducing inequality in health or the educational performance of school children, and another for raising national standards of performance. Reducing inequality is the best way of doing both. And if, for instance a country wants higher average levels of educational achievement among its school children, it must address the underlying inequality which creates a steeper social gradient in educational achievement.
(Richard Wilkinson & Kate Pickett, The Spirit Level: Why Greater Equality Makes Societies Stronger, Bloomsbury Press, 2009, pp. 29-30, emboldenation mine.)
The book explores many, many facets of society that correlate almost exactly with the gap in income between the richest and the poorest. Delving into that book would fill a number of posts, but I can't leave this topic without noting what I found the most surprising correlation: Big Fucking Trucks.
Not only did the popularity of SUVs suggest a preoccupation with looking tough, it also reflected growing mistrust, and the need to feel safe from others. Josh Lauer, in his paper, 'Driven to extremes', asked why military ruggedness became prized above speed or sleekness, and what the rise of the SUV said about American society. He concluded that the trend reflected American attitudes towards crime and violence, an admiration for rugged individualism and the importance of shutting oneself off from contact with others -- mistrust. These are not large vehicles born from a co-operative public-spiritedness and a desire to give lifts to hitch-hikers -- hitch-hiking started to decline just as inequality started to rise in the 1970s. As one anthropologist has observed, people attempt to shield themselves from the threats of a harsh and untrusting society 'by riding in SUVs, which look armoured, and by trying to appear as intimidating as possible from potential attackers'. Pollster Michael Adams, writing about the contrasting values of the USA and Canada, pointed out that minivans outsell SUVs in Canada by two to one -- the ratio is reversed in America (and Canada is of course more equal than America). Accompanying the rise in SUVs were other signs of Americans' increasing uneasiness and fear of one another: growing numbers of gated communities, and increasing sales of home security systems.
(Wilkinson & Pickett, ibid, pp. 57-58, again me make words dark.)
I put that stat in bold because, like much of the book, real data can be found to support the claims they make. Real data, not just the massaged theories thrust into the debate when the actual data proves inconveniently counter to the prevailing opinion of the theorists . . . as one finds with the neo-liberal economists.
(Wilkinson & Pickett felt strongly enough about their work in writing the book that they have created a website to share much of the information and many of the graphs presented. One need not buy the book to be therefore familiarized with their premise and supporting evidence. Just sayin'.)
Okay, so wages ain't the only determinant of worker worth, and rather than leave economic activity a cratered wasteland tariffs can strengthen a nation over time. What other myths must be subjected to further scrutiny?
The Myth of the Rational Actor
Much of neo-liberal economics is based on the simple theory that people act in their own best interests. Jeremy Bentham pioneered the field of "utilitarianism" about the same time that Adam Smith mulled over the whole of economic activity, and for many of the same reasons. Both were enlightenment characters, those (like our Founding Fathers) who believed more in the possibility and potential of un-enslaved individuals than in the primacy of previous monarchies (and the assumptions of divine right that supported them).
When a founding principal like utilitarianism meets the meat grinder of neoclassical economics however, little of what went in resembles what comes out. Still, let's take what Bentham started and see where it leads. This take comes from yet another Smith named Yves, an author and financial blogger at Naked Capitalism:
Another part of the neoclassical construct that breaks down upon further inspection is the concept of utility. Recall Bentham's notion of seeking pleasure and avoiding pain. Utility, as originally conceived, is a hedonistic construct.
But economists have noticed that humans are sometimes altruistic, and have struggled to incorporate this into neoclassical theory. For instance, going to church cannot be explained by "the expected stream of benefits," so one finesse was to posit "afterlife consumption." Similar contortions justify saving rather than consuming (a "bequest motive") or generosity ("a taste for the perception of the welfare of others"). Gifts are even more problematic. Neoclassical writers suggest that the present is not genuine (as in the donor wants to burnish his image) or that he derives pleasure from the enjoyment of the recipient.
Another vexing problem is when consumers spend money to improve their self-control. Diet support groups like Weight Watchers or clinics to help people quit smoking don't fit at all well with utility theory. Effectively, the individual has two sets of preferences that are in conflict (in these cases, pleasure now versus health later). But the neoclassical model holds that economic actors have consistent and stable tastes.
(Yves Smith, Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Captialism, St. Martin's Press, 2010, p. 98, I did it again.)
Smith is here getting back to that little graphic I made and presented above, the equilibrium model between supply and demand. Actually, since people are involved, perhaps it would be better to modify that graph a bit:
After all, Supply and Demand don't get together on their own and party. People need things. People have things other people need. They are the ones that get together. With that in mind, economics needs to consider above all other considerations people -- how they actually behave, how they make their decisions, how they work. As Smith notes above, though, the neoclassical model fails to do that in any real sense. Every example Smith provided in the quoted passage included reference to a paper in some economic journal or another. I only found one link, and provided it. Every single time, if Smith is to be taken at her word, these papers show that theory is butting up against the reality of What People Do so severely as to be essentially non-workable. She continues:
The problem is that a theory that is twisted to justify any sort of behavior means it is not theory. Acting on your own interest is quite different than acting for others' benefit. A construct that justifies actions that can be diametrically opposed cannot give practical guidance. . . . If the model yielded an accurate prognosis, it was treated as a black box, and therefore the axioms don't matter. But here we see a clear failure of the model, with people in fact behaving contrary to its predictions. Instead of abandoning the framework and finding explanations that work better, all sorts of complicated rationalizations are invoked to disguise the fact that the emperor, or in this case, the model, is wearing no clothes.
(Smith, ibid.)
Nassim Nicholas Taleb could not agree with that assessment more strongly. He spends pretty much his entire book The Black Swan outlining the shortcomings in economic theory as they apply to human behavior. It turns out we base our entire world views on our brains, which are not necessarily equipped to form world views that can prove applicable in all situations. As I said, just about the entire book explores the disconnect between what we know as it relates to economic theory and the deficiencies in our cognitive process. It's worth noting one disconnect, developed by "a school called the Society of Judgment and Decision Making. . . . mostly composed of empirical psychologists and cognitive scientists whose methodology hews strictly to running very precise, controlled experiments (physics-style) on humans and making catalogs of how people react, with minimal theorizing." This school noted that we humans use two separate thinking systems:
System 1, the experiential one, is effortless, automatic, fast, opaque (we do not know that we are using it), parallel-processed, and can lend itself to errors. It is what we call "intuition," and performs these quick acts of prowess that became popular under the name blink, after the title of Malcolm Gladwell's bestselling book. System 1 is highly emotional, precisely because it is quick. It produces shortcuts, called "heuristics," that allow us to function rapidly and effectively. Dan Goldstein calls these heuristitics "fast and frugal." Others prefer to call them "quick and dirty." Now, these shortcuts are certainly virtuous, since they are rapid, but, at times, they can lead us into some severe mistakes. This main idea generated an entire school of research called the heuristics and biases approach (heuristics corresponds to the study of shortcuts, biases stand for mistakes).
System 2, the cogitative one, is what we normally call thinking. It is what you see in a classroom, as it is effortful . . . , reasoned, slow, logical, serial, progressive, and self-aware (you can follow the steps in your reasoning). It makes fewer mistakes than the experiential system, and, since you know how you derived your result, you can retrace your steps and correct them in an adaptive manner.
Most of our mistakes in reasoning come from using System 1 when we are in fact thinking that we are using System 2. How? Since we react without thinking and introspection, the main property of System 1 is our lack of awareness of using it!
(Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable, Random House, 2007, pp. 81-82.)
I started the Swatting the Swarm series based simply on the disconnect between why we think we make decisions (rationally) and why it turns out we make decisions (irrationally). Given the enormous body of evidence supporting the claim that knowledge of psychological tendencies can make for better advertising, I doubt any would scoff at the suggestion that many purveyors of product use known weaknesses in our brains (part of System 1) to influence our purchasing decisions. (Really, how else can one explain the ubiquity -- and prominence -- of boobs in ads?)
Yet, according to both Taleb and Smith, nowhere in neoclassical economics is the suggestion that the balance of product information is in any way unequal. For example, one way a participant in an economic exchange can get just a little advantage would be to band with like-minded individuals. Each of these individuals would contribute his or her expertise to the operation. Every little bit of this accumulated expertise helps gain some advantage over the vagarities inherent in the market. This reality, though it seems obvious, proves a blindside to the neoclassical theory:
. . . [L]arger enterprises, or indeed anywhere group ties matter, are weirdly disturbing to neoclassical loyalists. One of the reasons they cling so fiercely to ideas like individuals as the locus of activity, along with rationality and welfare-maximization results (despite the considerable distortions that result) is that they believe any other stance would support a restriction of personal rights. . . .
Neoclassics seek to eliminate power from the construct. As Nobel laureate George Stigler put it: "The essence of perfect competition is . . . the utter dispersion of power."
But large-scale organizations inevitably involve concentrations of power. If Wal-Mart has wiped out many local retailers and you badly need a job, you have to accept Wal-Mart's terms. And while neoclassical theory acknowledges the existence of monopolies and oligopolies, they are treated as curiosities and put aside. Moreover, industry groups can achieve economic power via their access to and use of political influence, as anyone even dimly familiar with special interest group politics knows all too well. . . .
But again, neoliberal thinkers see only the state as a threat to individual rights. They do not consider that businesses or other private groups can amass so much wealth that they can assume state functions or otherwise play a useful role in restricting concentrations of power by private parties.
(Smith, ibid, p. 102, bold and underlining mine.)
Which is just weird. How can any economist go about his or her business observing market activity without coming to the very simple realization that some people have more information about their product than others? To them, my graphs above would make as much sense as the wacky variant below:
This simply doesn't balance.
Finally, we have to consider why things have changed so much in so few years.
The Myth of Economics as a Science
That's a bold statement to make, I know, but make it I must. A science, as I noted above, needs to be based on reality, meaning empirical data must conform to whatever working theory is being considered. Yet time and time again we find that is not the case, especially with neo-liberal economics. For example, consider what happened when Benoit Mandelbrot got interested in economics:
Mandelbrot and his ideas began to circulate in the financial economics community. At first, the reception was positive. The European polymath became an informal thesis adviser to University of Chicago economist Eugene Fama, who had found that the prices of the members of the Dow Jones Industrial Average were indeed not "normal" but were what statisticians called "leptokurtic", with high peaks, meaning that they had more observations close to the mean that in a normal distribution, but also much fatter tails. In lay terms, that means day-to-day variability is low, but when unusual events occur, variability both is more extreme and occurs more often than would occur with normal distribution. MIT's Paul Samuelson and other economists started looking into Lévy distributions and their implications.
The problem with Mandelbrot's work, however, was it threatened the entire edifice of not simply financial economics, but also the broader efforts to use formulas to describe economic phenomena. . . .
The backlash was predictable.
(Smith, ibid, p. 81.)
Taleb had the benefit of not only knowing Mandelbrot, but calling him friend. He finishes this sad story.
In 1963 the then dean of the University of Chicago Graduate School of Business, George Shultz, offered him a professorship. This is the same George Shultz who later became Ronald Reagan's secretary of state.
Shultz called him one evening to rescind the offer.
(Taleb, ibid, pp. 260-261.)
To understand why Mandelbrot's mathematics and its application to economics "threatened the entire edifice", one must understand how most economists arrive at their conclusions, what mathematical processes are involved in most "predictions" of "risk." The preferred method is called (as noted above) normal distribution, aka Gaussian distribution. From the wiki intro: "In probability theory, the normal (or Gaussian) distribution, is a continuous probability distribution that is often used as a first approximation to describe real-valued random variables that tend to cluster around a single mean value. The graph of the associated probability density function is “bell”-shaped, and is known as the Gaussian function or bell curve. . . ."
We've all seen the bell curve. We have, most of us at least, even been judged by that curve if our teachers ever graded "on the curve." The smart few occupy one side flange of the bell, the stupidest few the other, and in between the rest dwell in averaged mediocrity. Mandelbrot noticed that the curve didn't apply to all events. He even created the field of mathematics called fractals to describe mathematical phenomenon that did not scale, that did not lie within the bell or the tail ends.
There is nothing inherently damning about Gaussian averages. The bell curve works very well describing limited phenomena like the average size in a population or waves crashing on a beach. These events do not scale, in that they are self-limiting through the laws of physics. Economics, however, is not limited; it is scalable. An economic phenomenon can be as small as a single transaction, or as large as an entire nation's economy. There is no upper limit to the amount of money in play in any given market, so importantly there is no limit to the amount of money that can be lost should something unexpected happen. Even so, complete collapses of the market are considered as likely as partial downturns or minor setbacks; all three phenomena occupy the tail end of the bell. Once a Gaussian modeler of any given economic probability reaches the tail of possibility, it is general practice to truncate that tail, grouping all possible downsides equally, and the most damaging scenario as not "statistically significant."
In Mandelbrot's equations, complete collapses are representable and thus not truncated from the data and dismissed as "noise." The math is more complex, to be sure, but even more damning is the suggestion that unheard-of events are not only possible, they can be represented by and extrapolated from the available data. All one would have to do would be to go far enough back in history and one could find precedent for collapse. In the Gaussian view, only more recent history fits into the bell; distant pasts get compressed -- and therefore forgotten -- under history's long tail.
Imagine for just a second what would happen in investment houses the world over if this way of examining the world became vogue. Investors would have to admit that, no, there really is no way to predict the future, and no, there really is no way to mitigate all risk of total loss. First and foremost in every investor's mind would be the specter of poverty from improbable -- but eventually probable -- events. Taleb continues on Mandelbrot's fate:
At the time of writing, forty-four years later, nothing has happened in economics and social science statistics -- except for some cosmetic fiddling that treats the world as if we were subject only to mild randomness -- and yet Nobel medals were being distributed. Some papers were written offering "evidence" that Mandelbrot was wrong by people who do not get the central argument of this book -- you can always produce data "corroborating" that the underlying process is Gaussian by finding periods that do not have rare events, just like you can find an afternoon during which no one killed anyone and use it as "evidence" of honest behavior. I will repeat that, because of the asymmetry with induction, just as it is easier to reject innocence than accept it, it is easier to reject a bell curve than accept it; conversely, it is more difficult to reject a fractal than to accept it. Why? Because a single event can destroy the argument that we face a Gaussian bell curve.
(Taleb, ibid.)
We should note one detail of the above section, that concerning "Nobel medals." It proves important. You see, Alfred Nobel created no prize for economics. Don't believe me? Head on over to the official Nobel site. What is traditionally called a "Nobel prize" in economics is actually The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. From the official site:
In 1968, Sveriges Riksbank (Sweden's central bank) established the Prize in Economic Sciences in Memory of Alfred Nobel, founder of the Nobel Prize. The Prize is based on a donation received by the Foundation in 1968 from Sveriges Riksbank on the occasion of the Bank's 300th anniversary. The first Prize in Economic Sciences was awarded to Ragnar Frisch and Jan Tinbergen in 1969.
The Prize in Economic Sciences in Memory of Alfred Nobel is awarded by the Royal Swedish Academy of Sciences according to the same principles as for the Nobel Prizes that have been awarded since 1901.
(I did, of course, emphasize.)
Many recipients of the prize are getting frustrated with the situation, which requires no extensive testing of theory or peer review:
Even with the use of math, theoretical work is seldom tested, and is by nature difficult to prove or falsify conclusively, and you are left with a discipline that has managed to convince itself that telling stories in mathematical form rather than a purely verbal fashion somehow comes closer to establishing their validity.
In fact, accomplished mathematician, Nobel Prize winner, and former president of the American Economic Association Wassily Leontif resigned from Harvard shortly after receiving the prize in 1974 and stopped writing economic papers altogether in 1984 out of his frustration with data-devoid theorizing, which by his tally accounted for more than half of the articles published in the American Economic Review. He argued that those who were interested in how the economy really worked were marginalized. He called for a reassessment and reorientation of the research methodologies in economics. Asked in the late 1990s if anything had changed, Leontief said, "No."
(Smith, ibid, p. 42.)
I'll let Taleb run down the controversy:
And now a brief history of the "Nobel" Prize for economics, which was established by the Bank of Sweden in honor of Alfred Nobel, who may be, according to his family who wants the prize abolished, now rolling in his grave with disgust. An activist family member calls the prize a public relations coup by economists aiming to put their field on a higher footing than it deserves. True, the prize has gone to some valuable thinkers. . . . But the committee has gotten into the habit of handing out Nobel Prizes to those who "bring rigor" to the process with pseudoscience and phony mathematics. After the stock market crash, they rewarded two theoreticians, Harry Markowitz and William Sharpe, who built beautifully Platonic models on a Gaussian base, contributing to what is called Modern Portfolio Theory. Simply, if you remove their Gaussian assumptions and treat prices as scalable, you are left with hot air. The Nobel Committee could have tested the Sharpe and Markowitz models -- they work like quack medicines sold on the Internet -- but nobody in Stockholm seems to have thought of it.
(Taleb, ibid, emphasis mine.)
Why would an award in an evidence-optional "science" be awarded? That phrase "public relations coup" is mild, if what many like Taleb and others are saying is true:
Finally, [supply-side economists and their supporters] benefited from the fact that few people understand economics. Utterly deluded though they may be, they express themselves in economic jargon that few Americans, even intellectuals, can judge. Debates between supply-siders and advocates of mainstream economics appear, to outsiders, like technical disputes between experts with equally valid points of view. Crackpot economic theories thus enjoy an inherent advantage over other sorts of crackpot theories because it's harder for ordinary people (or even elites) to recognize the lunacy.
(Jonathan Chait, The Big Con, Houghton Mifflin, 2007, pp. 32-33.)
Essentially, by making economics more "respectable" as a science, neo-classical economics becomes analogous to Intelligent Design . . . except that it has been in the mainstream now for over 60 years. Combined with its support by the wealthy -- who promote the neoclassical flavor of economics in the media, in the schools, and everywhere else they can -- scientific "credentials" lend to economics a gravitas that has permeated through our culture all the way to the top.
Most citizens like to believe that the push and pull of political processes will filter out bad, extreme, and untested ideas. But economists have become the only social scientists with a seat at the policy table, and their expert status is above challenge. This is a peculiar, and not sufficiently recognized, aggrandizement of the economist's role at the expense of democratic processes or even input from other disciplines. That in and of itself distorts policy formation.
(Smith, ibid, p. 22.)
And policy formation proves the core the the next author's book. In his mind, economics as an empirical analysis of our lives -- economics done properly -- would prove as valuable as anything offered in medicine. Done improperly, however . . . .
If it makes sense to seek out high-quality statistical information to make informed medical judgments, why does it seem natural to make policy decisions based on anecdotes? If we embrace statistics and controlled experiments for health choices, why take a casual, intuitive approach to policy choices? Both medicine and policy analysis require complex, multicausal analysis to separate the effect of interventions from other confounding factors. Both fields raise profound and troubling ethical issues. And both fields demand answers to important challenges that affect real people. If it is important to provide a single mother with the right medical treatment for diabetes, isn't it also crucial to provide her children with a decent education or to provide her with streets where she is protected from physical assault? If both fields are important and complex, why does it make sense to apply different standards of evidence to each one?
(Paul Gary Wyckoff, Policy & Evidence in a Partisan Age: The Great Disconnect, The Urban Institute Press, 2009, pp. 64-65.)
In a world where both economics and medicine are awarded what most conflate to be the highest award a scientist can receive, sorting the "anecdotal" from the rigorously tested and peer reviewed becomes the greatest challenge of all.
Actually, not "of all." Once we as a society recognize that we need information to be proven and to be accurate for it to be in any way useful, we will seek it out. What proves a much greater challenge is cutting through the mystique of the authoritative and finding that any unproven "science," including neoclassical econ, is not a science at all. Our blinders of what We Want To Be True can quite effectively blind us to What Is. This is what drives the sincere creationists; this is what drives the sincere climate change denialists. In all three examples, a tenet of faith is magnified with misdirection -- data unsupported, logic fallible and unproven -- and called a science.
Back for a moment to Adler's observations on wage theory, on how the available science -- peer reviewed, properly vetted science -- does not support the neoliberal view of "sticky" wages.
Arguably, the damage from the teaching of the economist's theory of wages is far greater than the damage from the teaching of creationism. Yet the theory of wages is part of economics education in any and all schools, and it continues without any notice or opposition. The reason is, of course, not hard to understand. While everyone is hurt when we teach religion and pretend it's science, not everyone is hurt when we teach economics. What workers lose, executives and capitalists gain; and it is the latter who study economics, hire economists, and endow schools.
The battle for a fair distribution of the product that we all produce together has so far been waged in the workplace and in the political arena. It must also be fought in the classroom, however, because it is there that the lie that "workers are paid what they deserve" is taught.
(Adler, ibid, p. 192.)
No, not everyone is hurt.
Only most of us.
In order to reclaim our democracy, we must insist as Ms. Hertz (in her dry, dull delivery) suggests: question experts, all the time. We cannot let experts deliver the bad news that a decision affecting our very lives are too complicated for us to be a part of the decision itself.
Back to the first installment of the Swarms and Brains saga, we must all realize that the masses make better decisions than a cadre of even well-selected experts. Otherwise, we must admit that we simply no longer live in a democracy.
I'll offer this post-script in closing. As you can see above, the most valuable reference for debunking the mythos provided by those vested interests backing the neoclassical economists was Yves Smith's Econned. It was, however, far from the only reference. In all, 15 books went into forming the consilience of induction that led to my conclusions. I could not see a way to incorporate all those voices into this piece, sadly, without turning a too-long piece even longer.
That said, like all of us, Smith is not perfect. I specifically refer here to a passage in her book which I know from quite a few other recent books is just plain wrong. In and of itself, this just plain wrong-ness is no issue. All of us make mistakes. More importantly, few of us, even those few of us with extensive experience in life itself, understand all of the nuanced realities which must be understood before certain realities can be appreciated. Taken with other statements she makes in Econned, however, the issue become not just glaring but almost tectonic, a mis-statement that affects profoundly the soundness and validity of specific conclusions she later draws. I quoted none of the affected conclusions above, deciding instead to reserve them for later analysis and careful scrutiny. Just to give you a teaser here: Those conclusions, when amended for her early error, helped me just today understand more about the most recent economic crisis than just about any other realization.
This happened just today.
Addendum, May 3, 2011: In my haste, I forgot contributions from Pink and Hertz (which sounds like an S&M porn, I know). They were included today.