Showing posts tagged economics

The gullible nature of Conservative and Mainstream Liberal Foreign Policy

The United States has become almost entirely dependent on the the good will  and stability of the Chinese Communist Party for manufacture of computer boards and many types of electronic components. Much of what manufacturing is not yet in mainland China is in Taiwan.  And it’s not just the components that are made in China, the machines to manufacture the components are more and more made in China (including ones with US or Japanese company names on them).  And yet, the “free trade” economics ideology that dominates US economic decision making is based on the assumption that nothing can go wrong. The Chinese government would never interfere in deliveries for political reasons, disorder or rebellion or even environmental collapse in China is impossible, the rock bottom  shipping costs based on cheap diesel (and foreign flag shipping) are ordained by fate or something. And many of the same people who demand massive levels of military spending for new equipment (that relies on Chinese made components) consider the idea of government industrial policy to preserve and grow US high tech manufacturing “socialism” or worse.

Any critique of this head-in-the-sand attitude it met with the usual false dichotomy argument. One can favor international trade (as I do) and still want to preserve US manufacturing capabilities.One doesn’t even have to consider China a particularly hostile country to consider the condition of dependency to be unstable.

Few of the people who are now raising the alarm over Vlad Putin’s new army were interested when some of us environmentalist wackos warned that sending billions and billions of Euros to Russia to pay for oil and gas was perhaps not so prudent. Well, Vlad has been busy spending that money modernizing the Russian Army. The continued Western tidal wave of money sent to the terrorist financing theocrats in Saudi Arabia and Sudan doesn’t seem to bother the “serious”  Foreign Policy thinkers. The proliferation of off shore banking and “free movement of capital” that our Doctrinaire Economists find so wonderful is a gift to terrorists, pirates, drug dealers, and tax avoiders but hardly anyone concerned with security seems, concerned.

Here’s the bottom line: trade is political too, just like everything else. This was true back when US oil companies and scrap dealers were helping Imperial Japan test out its new airforce in Manchuria, when the Koch Brothers dad was selling oil technology Stalin, and when Germany and the UK fund Putin’s military because “the free market” has decreed Russian gas to be cheap.

Economics and the mathematics of the Koch brothers.

Robert Lucas won the Nobel Prize for Economics and is widely cited as an authority. One of his more important papers from the 1990s  discuses tax policy and uses a mathematical model of the economy to supposedly show that taxing capital gains is a bad idea. The mathematical model is a variation of the “discounted utility” (DU)  proposed in 1937 by Samuelson who, at the time, expressed some reservations. Some testing has been done:

Virtually every assumption underlying the DU model has been tested and found to be descriptively invalid in at least some situations. [Frederick]

So here is Lucas, 60 years later, using the same model.


The idea is that we are going to model the whole economy over all time as a single number which is the sum of every infinitely small instant of enjoyment (“utility”) that a single “representative” household extracts from both consuming a single “representative” product and from leisure time. This “representative household” is immortal, but its enjoyment of consuming and hanging out in future shrinks exponentially over time depending on ρ (that “subjective rate of discount”) which is a constant value that is based on absolutely nothing  -just pulled from the air. One choice of ρ means the household  places no value on its members eating even a crust of bread in 10 years, another  postpones that moment for 100 years. There is no room in this model for “I’m not hungry right now” or “I’d prefer more leisure when I retire”  or “I want my great grandchildren not to starve to death”. Nobody in the Household enjoys working, even a little. There is no patriotism, no caring about the poor or the natural world, or beauty, or even civil order. For Lucas, taxes are only an expense, they don’t produce positives like firemen or sidewalks or education or the Internet or national defense or vaccinations against smallpox. And for Lucas, the representative household is  also an investor with inherited wealth and unbounded income from investment. When you get down to it,  Lucas is representing the economy as the Koch brothers - and his model validates their creepy values and politics as good for them.

Despite Samuelson’s manifest reservations about the normative and descriptive validity of the formulation he had proposed, the DU model was accepted almost instantly, not only as a valid normative standard for public policies (e.g., in cost-benefit analyses), but as a descriptively accurate representation of actual behavior. [Frederick]

It’s not just that the Koch brothers ugly politics  is accepted   “as a valid normative standard for public policies (e.g., in cost-benefit analyses)” but that Economists claim this nonsense is science. Here is how Lucas characterizes his work:

 I hope as well that my story will serve as illustration of the way in which the search for theory at a more fundamental level can revolutionalize our thinking about important practical questions, and hence of the way in which progress at the most purely technical, abstract end of economics serves as the fuel for what Alfred Marshall called our “engine for the discovery of truth.”

Even “liberal” economists buy into this. All over the economics literature we see respectful references to “the Lucas critique”  and to “rigorous microfoundations” - which is essentially a program to base all of economics on the kind of model Lucas uses. Because it is assumed, on the basis of nothing, that individual preferences of individual agents determines how large scale economic relations develop.

The usual  defense of this nonsense is that physics 101 is full of formulas that don’t take things like friction into account, and besides, um, quantum mechanics. But, dear Lord, that’s just general purpose misdirection that could be applied to anything at all. You could try to defend numerology with exactly the same argument. Or we often hear that it’s just an approximation. But like much in Economics, microfoundations is not an approximation, it is an ideological proposition. Microfoundations is  Margret Thatcher’s proposition that there is no such thing as society, just individuals. That is a moral assertion, not an approximation. Actually it is an immoral assertion. Mainstream economics has taken the values of rapacious sociopaths  as foundational principles, and then keeps endorsing  stupid, misery inducing policies that satisfy the short-sighted greed of those with too much.

Here’s Paul Krugman - about as far from Lucas as one can get in respectable Economics. After complaining that there has been a decades long “de facto blockade of the journals against anything without rational-actor microfoundations” (something that in itself is an indictment of the entire profession), Krugman writes:

I would agree that being willing to use models with hyperrational, forward-looking agents was a natural step even for Keynesians. The Faustian bargain, however, was the willingness to accept the proposition that only models that were microfounded in that particular sense would be considered acceptable. It’s one thing to accept that models with an Euler condition at their core can sometimes be useful; it’s quite different to restrict your discourse to models with that characteristic, while ruling out everything else.

When, exactly, can these kinds of models be useful? Shouldn’t the eagerness of “Keynesian” economists to latch on to such mythology give pause? Make one fear their judgment and standards are irreparably deficient and they never understood Keynes in the first place? Keynes even said that he had to work very hard to extract himself from the conceptual errors of Marshall’s economics, the same errors that Krugman tells us were so alluring to “Keynesians”.

Here’s Simon Wren-Lewis

I doubt that most New Keynesian modellers adopted the microfoundations perspective against their better judgement. Instead I suspect most saw the power of the microfoundations approach (in analysing consumption, in particular), recognised the dangers in ad hoc theorising about dynamics (as in the traditional Phillips curve), and thought there was no contest

This is a remarkable passage because he is making a favorable contrast between Microfoundations (remember that “subjective discount rate”) and something else he calls ad-hoc? Was that other stuff even less grounded in scientific research than what Lucas describes? But even “left” economists have internalized the microfoundations ideology. Here’s Mike Begg, writing in Jacobin to insist that the value of money is:

determined by countless price-setting decisions by mainly private firms, reacting strategically to the structure of costs and demand they face, in competition with other firms.

That’s a claim of neoclassical economic faith, not an actual fact. But if you believe this stuff you will perhaps unconsciously incorporate right wing ideology into your economic analysis. This is why, for example, Christine Romer dismisses industrial/manufacturing policy and Robert Reich opposed the auto-rescue. If you believe, as a matter of faith or axiom, that economics emerges from the interaction of individual optimizing agents, then you carry the Koch brothers politics into your work intentionally or not.

[This is a rewrite of a previous effort]

Ukraine Crisis shows that Conservative Economic Policies are National Security Threats

Europe’s weak response to Russian aggression in the Ukraine is the product of short-sighted “free market” and “frugal government” policies loved by Conservatives and their Pet Economists. Free Market Economic Ideology says Russian gas will be delivered to Western Europe at market rates, no matter what. But Vlad Putin is not a believer in the Efficient Market Hypothesis or Real Business Cycle Economics and suddenly Germany’s government understands that he can turn off the heat off if they make him mad enough. And all over Europe, but especially in the UK, the fragility of economies depending on Russian investment capital has also suddenly become clear. If you are depending on politically connected Russian investors to keep your banking system afloat, you do not have the option of imposing capital controls to respond to the Crimean invasion. After centuries of financial domination that followed military domination, Europe is seeing the tables turn and the religious belief that everyone in the world must always play by the market rules that the West has imposed is being shown to be not divinely inspired. 

Imagine that instead of short sighted, vindictive, and highly subsidized extraction of vigorish from Southern Europe to pay back reckless loans by German and French banks, the EU had funded a vast construction project to build solar and wind generation in the sunny states and connect Europe with high efficiency power lines.  The investment would have stimulated manufacturing in Germany and France, created jobs and wealth in the southern rim and reduced European dependence on both Putin’s gas and his blood money. Ah but that kind of policy is hippie dreaming. Hard headed economists know, or think they know, that the price of gas must be set by market demand, not by the actions of strongmen and that investment capital flows to the most efficient use. Thus when Russian billionaires choose to invest in soccer teams and gambling clubs, why what mere government could try to second guess them and direct capital into solar power or wind farms?

Of course, Europe is not the only place where market fundamentalism has replaced common sense. US national security planners, under the influence of market theory, have been operating under the assumption that abject dependence on China for electronics and other technology is not a problem. Because, the Government of China would never interfere with market pricing in order to extend geopolitical power. Of course not.