Free-market economic theory is flawed, and with dangerous to economies in the modern world.
Granskad i USA den 25 mars 2020
Binyamin Appelbaum's recent book, the Economists' Hour (Little, Brown & Company, 2019) is a well-written, accessible history of the dominant trends in economic thinking from the Great Depression until the present day. It is lively, entertaining, insightful, and a valuable addition to any well-read reader's library, and it is especially helpful to readers who are having trouble distinguishing the propaganda that emanates from the Wall Street Journal's editorial page from the history of what actually happened to the American economy during the ninety years that spanned the start of the Great Depression to the near-collapse of the American, and by extension, the world economies a decade ago.
The book is really about capitalism, the dominant economic theory of the last third of the 20th century, and the first two decades of the present century, and it raises the question of how much collateral damage societies and governments are willing to tolerate to give the advocates of unfettered free markets almost carte blanche in their efforts to create and sustain economic growth. The answer appears to be, an enormous amount, as wealth piles up exponentially around the world, but the inequalities inherent in that distribution and the social dislocations that follow are severely testing society's tolerance for a system that provides increasingly cheaper consumer goods, while at the same time impoverishing working-class families and small businesses whose jobs and livelihoods are increasingly shipped overseas in search of lower production costs generally, and wage earners' demands for better pay and working conditions as counterweights to the already oversize political influence that corporations already exert over national governments and national economies. Indeed, there are strong warning signs that unfettered capitalism has become an increasing threat to the very existence of democratic forms of government. Indeed, by its own terms, the United States Constitution, adopted in 1787, left to the political branches of government, and not to industrial magnates, the power to determine economic choices.
Until the late in the Nineteenth Century, economics was essentially a school of political philosophy seized upon by entrepreneurs made wealthy by the burgeoning Industrial Revolution who used the slogans and catchwords of nascent economic thinking to justify their untrammeled freedom of action, so they claimed, because their way was more 'efficient' than the methods used by the landed gentry and inheritors of accumulated wealth from previous generations. In the United States in particular, economic determinism grounded in its quest for more efficient means of creating wealth soon became part of the legal landscape as entrepreneurs and businessmen battled with farmers, small businesses, and labor interests or political dominance. The battle was one-sided, and the moneyed interests generally got their way; that is, until the onslaught of the Great Depression, so severe that capitalism itself came into disrepute, and a program of correctives characterized by the Roosevelt 'New Deal' and its political successors through the early 1970s sought to reign in corporate overreach and manufacturing, distribution, and in banking and financial services. Grounded in the experience of the 1930s in which a full 25 percent of the American workforce suffered from chronic unemployment or under-employment, the American political establishment focused its efforts on maintaining full employment, even as the dollar value of economic growth during those years increased, but at a moderate rate compare with what came afterward.
The dominant voice in economic policy was that of John Maynard Keynes, a British economist and mathematician, whose advocacy for public spending as a counterweight to the ups and downs of periodic business cycles became the dominant public policy in the United States and in Great Britain.
Ousted from national dominance in the Nation's capital, Washington DC, free-marketeers retreated to academia where they sought to develop and hone their economic theories based upon the natural superior of market economies in opposition to the regulations that the politics of the day demanded. It is within that context that we meet the leading actors in the revolution that free market economists eventually carried off. One was Milton Friedman, an inveterate propagandist for keeping government out of economics; George Stigler, whose disdain for socialism was grounded in the theories of Friedrich Hayek; Paul Volker, Paul Samuelson, and a host of other lesser-known academics whose theories were largely untested before they were tried, viz. Arthur Laffer).
These Free Market and Libertarian propagandists (you couldn't call them philosophers, because their programmatic advocacy consisted largely of propositions they regarded as self-evident truths) gave primacy solely to economic growth to the denigration of all other societal values. Free-market theories also had the effect of applying downward pressure on working-class wages. Shipping jobs overseas, where labor was cheap, but technical skills were burgeoning, had the effect of making foreign goods cheaper, better made, and more available than ever before, whether it was from Japan, Taiwan, China, Vietnam, Philippines or Bangladesh. Before World War II, the United States protected its homegrown industries through the imposition of tariffs intended to neutralize the cheap labor advantage importers enjoyed. After World War II, that was no longer the case, as multilateral trade agreements were quickly negotiated to square with the political imperatives the United States during the Cold War. Improving overseas trade relationships was essential to protecting the national security of the United States, regardless of the domestic consequences at home. And once in place, those trade relationships tended to persist. It comes as no surprise, therefore, that solid-state electronics technology, exemplified by the semi-conductor invented by Bell Labs found its way to Japan; and within a decade after that, American-manufactured consumer electronics had largely vanished from the marketplace. The same could be said about photography where high-end cameras, lenses, and other photographic equipment were manufactured either in Japan or in Taiwan. Those consumer electronics industries also came to include home computer components and final assemblies. Clearly, market dominance was highly effective in those industries where consumer acceptance dependent upon high-quality that was also price-sensitive. More than that, as Japan and Taiwan developed their capabilities of manufacturing high-end products, they became industry leaders to the extent that it became unfashionable to purchase American-manufactured automobiles because of public perception that they were lower in quality of manufacture, handled less well, and represented technologies that were passe. The same could be said for dozens of other industries in which manufacturing was transferred overseas, the finished products to be imported by American companies needing to meet a price point below that which domestic manufacture could otherwise provide. The trade-off was American consumers got a windfall; foreign manufacturers honed workers’ skills but kept wages low, American corporations and suppliers abroad profited; but American factory workers in the communities in which they lived, and the states in which those communities and workers were located came out poorer.
The only jobs in which American workers prospered were those that were protected from foreign competition by the nature of the jobs themselves; but invariably, the assimilated companies and their workers saw their wages cut, sometimes as much is 30 percent. Faced with systemic job losses, cities and towns in which unemployed workers lived no longer had the resiliency to adjust to the loss. As Appelbaum noted, the losses exceeded the sum of their parts. Life expectancy in those communities declined.
The further damage to the American economy, the part that was not given away to foreign manufacturers and sources of supply, occurred through the fiction that tax cuts for the wealthy and the corporations that they controlled, would somehow improve the economy. Tax cuts that targeted the wealthy in hopes that they would stimulate job creation proved to be illusory; nothing required those tax refunds to be reinvested in job creation.
Keynesian economic theory presupposes that when unemployment reached a target level, government would invest public funds in various programs to create jobs, public works being one of them. Friedman and other free marketers opposed public spending for any purpose; and tax revenue giveaways in the form of tax rebates or lower tax indices reduced the ability of government to maintain the infrastructure it had, let alone new infrastructure to replace that which had been worn out, or which was now needed to address the needs of an expanded population. It was assumed therefore, that through the exercise of monetary policy achieved through manipulation of interest rates managed by the Federal Reserve, that reduction in interest rates would have a positive effect on job creation. For almost a generation, inflation was seen to be the chief evil to be combated, and inflation was expected to be the natural consequence of cheap money. Conservative economists were loath to endorse policies that risked increased inflation, regardless of their effect on job creation.
For some 25 years until the Carter Administration, there was a rough balance between fiscal policy, meaning the Keynesian approach by which government spent money to smooth out the ups and downs of the business cycle, and those in favor of monetary policy using interest rates raised or lowered by the central bank to influence investment and job creation. When Ronald Reagan became president in 1981, Keynesians proved incapable of managing 'stagflation', a condition in which the overall economy stagnated, while inflation increased. Paul Volker became chairman of the Federal Reserve, and he instituted a policy of tight money, pushing interest rates above 20 percent that precipitated a recession resulting in painful job losses. Nevertheless, Volcker's overall objective was achieved. Appelbaum notes that the size of the American economy tripled over the next four decades, but wages remained stagnant throughout.
The Volcker recession conferred enormous benefits on the financial services industry, achieved largely through that industry's ability to create financial derivatives that served as investment vehicles whose principal contribution to the economy was to raise profits with little or no appreciation for the risks that were incurred, including mortgage-backed securities, credit default swaps, and a host of other complicated and esoteric investment vehicles enabling traders to place enormous bets on the outcomes of market events with outcomes few of them could have predicted. As a result, because many of these funds are federally insured through deposit insurance, the taxpayer ended up paying enormous amounts to keep depositors from losing their savings, while at the same time significant numbers of federally insured financial institutions went under.
At the beginning in the Carter administration, governmental regulation of transportation industries, particularly the airlines, became extremely popular with both economists and the general public, as the cost of regulation as translated into high ticket prices proved to be politically unsustainable. Discounted airline fares precipitated a surge in air travel, but at the cost of the comfort and convenience passengers.
At the same time, pressure for deregulation in the form of diminished protections for environmental controls, viz. air pollution, water pollution, public parkland and open space, brought into question the quality of life versus profit-taking on the part of those who would exploit those resources for private benefit. The institution of benefit-cost analysis had for decades been used as a metric for determining who benefited from public investment, and by how much. Now government agencies were asked to put dollar values on natural vistas, parkland, recreation, and a host of other artistic and cultural activities that government had supported or sponsored on their perceived merits. What counts, however, are the ways assumptions that way into the decision-making are framed, as most of them involve a host of shared values and benefits, all of which are highly subjective, and allocation of benefits speculative.
Appelbaum also discusses demise of the Bretton Woods system of international currency exchange and payments. Bretton Woods pegged foreign currencies to the value of the dollar. Milton Friedman worked to undo the Bretton Woods system, pressing for floating exchange rates in a belief that the international currency markets would automatically consider risk and uncertainty as to the value of any national currency when compared to the dollar. The United States withdrew from Bretton Woods in 1971, setting the stage for the dollar’s devaluation; but floating exchange rates delivered neither balanced trade nor stability. Imports boomed; but the outcome was disaster for American manufacturers. Rather than stem the tide of ever-increasing imports, a floating dollar appreciated in value, thereby making exported American products more expensive abroad. This was a long-term trend; but decline of American manufacturing was more attributable to innovation and automation than foreign competition. appreciated dollars accelerated and distorted the evolution of the American economy. Reliance upon market values alone created disruptions abroad, particularly in Latin America. It also made the United States more susceptible to foreign pressure, such as the 1973 oil shock and other efforts by the OPEC oil cartel to manipulate prices for political advantage. Paul Volker, in his memoir (2018) conceded, "We failed to recognize the costs of open markets and rapid innovation." Volcker's statement was self-serving as prewar research on increasing overseas trade predicted working-class job losses. Economists justify their views simply by saying that those that lose ground due to trade can be compensated for their losses. As anyone who has ever filed a worker’s compensation claim for an on-the-job injury, the likelihood of achieving meaningful compensation is largely illusory. Legislation passed to ameliorate economic losses is comparatively rare; the Uniform Relocation Act (42 USC 4601) that was enacted by Congress in 1970 in order to ameliorate the effects of eminent domain on federally assisted large-scale infrastructure projects, including but not limited to, highways, public mass transit lines and facilities, airports, and similar public works. Loss of jobs due to plant closures that are indirectly precipitated by overseas trade policies are not covered by the Relocation Act.
Overall, Appelbaum's book is a fair, if understated, appraisal of the collateral damage on American society and the American economy as it pertains to manufacturing as a consequence of the counterrevolution against Keynesian fiscal policies, which revolution Appelbaum and others believe has gone too far in catering to the 'animal spirits' unleashed by free market economic theory. As dogma, free-market policies are demonstrably inadequate, as they reflect no universal laws, and are simply policy preferences aimed at maximizing what they call the 'efficiency' of markets, that is, without accountability or safeguards. It is true that putting primacy on markets, especially in the international import-export arena, has raise living standards far above the subsistence level economies that existed around the world beforehand. But it is beyond argument that the world will ever see that sort of transformation again, because once the diverse areas of the undeveloped world became part of the international trade system, whether was for agricultural products, natural resources, textiles and finished goods of every description, there was no going back. The question remains what happens next.
Overall, in my considered opinion. The Economists' Hour deserves a '5' for readability, if one is not too concerned about pulling things together in a tightly woven matrix that would highlight and emphasize their interconnectedness from one another. I wish Appelbaum had been able to go further and to go into some depth on some of the issues he addresses. The economic arguments he relates regarding the pressure to eliminate military conscription are clearly inadequate why the military draft ultimately failed.
What Appelbaum fails to fully appreciate, and that may relate to his job as a New York Times investigative reporter, is that the economic theories that free market advocates used to tout the storied efficiency of the market system have a singular failing. Preference for markets, at least in theoretical terms, go back to 1776 when Adam Smith wrote his 'Wealth of Nations'. Since then business promoters and populists of free-market theory have inveterately treated markets as agglomerations of single buyers and single sellers meeting on common ground to transact business. Missing from this analysis is the matter of scale and the velocity with which transactions may be accomplished en masse. As to scale, mathematical models employing power law functions, meaning that statistically, these phenomena are long-tail distributions in which certain events that are described as rarely occurring, and therefore outside the normal Gaussian bell curve, have enormous impact when they do occur. The current coronavirus pandemic that the world is currently experiencing is a prime example of that phenomenon.
Scale is also important because complexity science is now able to track the evolutionary development of self-organizing phenomena like markets. Increasing layers of complexity act as force multipliers. As layers of complexity increase (think of electronic instantaneous stock trading), their collateral effects multiply unpredictably. Along with force multiplication comes a phenomenon known as emergence, meaning phenomena that could not have been predicted beforehand, and whose effects are largely unknown. What we are now seeing goes far beyond serial transactions of imports and exports; the worldwide networks of supply chains reaching every corner of the globe mean that disruptions of every significant portion of them can bring down the entire network. We saw this happen in the 2008 economic collapse and subsequent recession.
Under a power law scenario, light and heat energy released by a lighted candle could grow exponentially into the equivalent effects of an exploding liquefied petroleum gas tank ship. The candle and the stored LPG are reservoirs of potential energy; and a flame is a flame. The differences are spectacular; the former provides heat and illumination at a metered rate, and has been used since civilization began. The latter, however, also provides illumination and heat radiation, but the scale is far different. If the candle is tipped over, a house fire may start, or it may self-extinguish depending upon luck. If the LPG pressure sphere somehow ruptures and ignites, luck is not a factor; not only is the tank carrier ship destroyed, but every living thing surrounding the explosion to a radius of about a mile, and with significant damage a long distance beyond that. Right now, the financial service industries are using computers to complete their transactions within a few microseconds of initiation; and during the past fortnight trading on the exchange floors has been halted several times in one day as markets responded to public announcements regarding the exponentially expanding pandemic that has now gone worldwide.