Is the Wealth of the Rich Legitimate? Part 2

In a previous post I argued that the wealth of the rich (more precisely: of capitalists) could not be justified by reference to the principle that "each person deserves that amount of wealth that reflects her productive contributions". Capitalists need not do anything productive in order to be capitalists. The pure capitalist earns everything from owning and nothing from working (that is, to the extent that a capitalist can be said to earn from working, she is to that extent not a pure capitalist).

But, as I discussed in the previous post, this story about desert and productive contributions is only one among many. Another (perhaps the most popular?) story that's told to legitimate the wealth of capitalists is that their wealth is a reward for having taken bold risks. Or, put another way, since the capitalist risks her capital when she invests it in some business venture, she deserves exclusive rights to all of the returns above and beyond costs paid out for raw materials, wages for workers, etc.

This story is told so frequently that it almost seems odd to question its plausibility. But how plausible is it?

Let's try to first figure out exactly what its saying. Is it saying that people should be rewarded in proportion to how much risk they take on? That can't be right. That would mean that the riskier I behave, the more I should be rewarded (whether or not the risk pays off). But, of course, it's a fact about risks that they can turn out for better or for worse (otherwise they wouldn't be risks). Risks always involve some element of luck and chance wherein the risk could turn out badly. But nobody in their right mind would say that the mere fact that I've taken on some risk (whether or not it pans out) means that I should be rewarded. For example, no one would say that some particular capitalist, just because they take on risks, deserves a return on their investment. If I, for example, invest in a business that has a 10% chance of succeeding, and it doesn't succeed, nobody thinks that this entitles me a cash "reward" of any kind.

But if that's not what's meant by "reward for risk", what is? Perhaps what's meant is that the capitalist's riches are her reward for having taken a risk that ended up panning out. If I bet against the odds and win, then it looks like what I get is my reward. Why not say the same about capitalists whose investments pay off?

There are several things to say here. First, it's just false that risky capitalist activity actually gets higher rewards when it pays off. Sometimes it does, sometimes it doesn't. And lots of capitalist activities aren't risky at all. An investment need not be risky to be very lucrative. If some public asset (a natural monopoly, say) is privatized and I get ownership of it, I may be able to charge fees and earn big profits even though there is virtually no risk. Or, consider that many financial institutions are, and they know that they are, "too big to fail."

We must also take into account that risk context sensitive in various respects. What may be risky for me (given my situation) may be less so for you (given your situation). Imagine a working class person who saved money for years to open up a small coffee shop. This is surely a risky activity since she will need to take out big loans on a project that could very easily go bust (and it's not as if they have millions to spare if it does). Now, imagine that I invest $40 million of a $140 million fortune in relatively low-risk securities that turn out to pay out big dividends. Instead of risking my capital on start-ups, I put it all in well-established, multinational corporations. So, I'm reaping large cash "rewards" from my investments, much larger (even in proportional terms) than the returns a successful small coffee shop owner will ever earn. But I am taking on very little risk whereas the newly petit bourgeois coffee shop owner is taking on a great deal of risk. There are innumerable examples of this sort. What they show is that capitalism doesn't, as a matter of fact, distribute wealth in accordance with the principle that riskier bets (that pan out) receive larger cash rewards than those that involve less risk.

But this isn't likely to satisfy defenders of the "risk and reward" view of why the capitalist's earnings are legitimate. They will probably reply by offering two different objections. The first has to do with the idea that capitalism is a fair game where the winner deserves to take all the spoils of victory. The second has to do with incentives and innovation. I'll examine (and refute) each in turn.

The first objection is as follows. Capitalism can be thought of as a fair game in which everyone (legally speaking) has a chance to be a successful capitalist. As long as the rules of this game are fair, then whatever outcome results from it is legitimate. So, for example, when I play blackjack and the casino hasn't rigged the game in their favor, and both the casino and I have consented to play the game, whatever I take home in winnings is legitimately mine. Capitalism, you might think, is the same way. If I risk $10 million on a risky investment and it pans out, why aren't I entitled to (or deserving of) all of the cash returns in the same way that I'm entitled to the cash returns of the game of black jack? In fact, wouldn't taxing the capitalist's profits be similar to stealing a gambler's winnings, even though she made a fair bet in both cases?

There are a number of things to say here. We might ask whether the "game" of capitalism really is fair (I shall argue that it isn't, and that the gambling/investing metaphor is misleading). But even if it is fair, we might still ask whether it makes sense to structure our economy like a winner-take-all casino game. I shall argue that there are deep problems (both structural as well as normative) with allowing the economy to be run like a casino.

Let's examine the fairness of the "game of capitalism." First, recall where capitalism comes from (read Part 8 of Capital for a detailed historical analysis): the expropriation and killing of indigenous peoples and European peasants, the forcible seizure and enclosure of commonly owned land, colonial domination and forced labor, the enslavement of human beings, and so on and so forth. And we could add that capitalism didn't leave imperialism, violence, oppression, racial domination, coercion, theft, and expropriation behind after the 17th and 18th century: these have been permanent features of the system throughout its existence. So the "game" is rigged from the start. There has never been a "level playing field" from which to begin the game.

But, suppose that there was a level playing field. Would that fix capitalism's problems? Would that mean that the "game of capitalism" is actually procedurally fair? I think not. First of all, not everyone can play the game of capitalism. In order to play, you must have something to invest (because that's one of the rules of the game). Now, defenders of capitalism will say that nobody is legally excluded from playing the game. But that's clearly a flawed argument. First of all, it's a fact that lots of people, indeed the vast majority of people, do not have the discretionary funds to play the game. David Schweickart makes the second point forcefully as follows.

Suppose you and I flip a fair coin; we each bet a dollar per round; heads I get your dollar, tails you get mine. The game is "fair" in the sense that we both face the same odds at any toss of the coin. However, a complication arises when we look at the game in light of its initial conditions. If I enter the game with $20 and you with $10, you are twice as likely as I to go bust. If you do go broke, and another player enters with $10, he will be three times more likely to be cleaned out than will I (because my initial stake has been supplemented by your losings)... So the large investor, although he has more to lose, is less likely to lose than is the small investor. Add to this that wealth gives one access to information, expert advice, and opportunities for diversification that the small investor lacks, and we see that the balance between magnitude of loss tilts toward the wealthy.

What this shows is that even textbook "ideal" capitalism isn't a fair game.

But there are further problems with this game, even if it was "fair". First of all, it presupposes that some people are playing the game--the capitalist investors--while others, who own no capital to invest, do the work--the workers. And while the capitalists are busy playing the casino-like game of capitalism, workers have no say in what is going on. Yet, and this is key, they stand to lose even more than the capitalists if the bet fails. That is, if a capitalist investor loses $10 million on a deal, but still has $3 million back at home, it's not as if he will be going hungry any time soon. But if 2,000 workers lose their jobs, we can be sure that they don't have million dollar nest eggs sitting at home waiting to be spent. Unemployment, as millions of Americans know first hand, can be absolutely devastating--particularly when wages and benefits are so meager even during periods of full-time employment. Capitalists, of course, stand to lose more in absolute dollar terms, but because of the diminishing marginal utility of money, it means much less to them. Think of the way that the economic crisis has gone thus far. The reckless, profit-driven investments of the financial sector produced a global crisis that has had devastating effects on working class living standards at the same time that it has primed the pumps for austerity administered from above. The point is this: casino capitalism is unfair because it presupposes a class of working people who can't play the game but, nonetheless, stand to lose a great deal if the capitalist's gambles don't pan out.

Imagine a capitalist who replies to a labor union as follows. "I risked all of my capital on this business, so who are you to collective bargain to get a piece of it? That's unfair because I assume all the risk, yet you want to share in the rewards." Now, we've already seen that this doesn't work because the workers do share in the risk--the risk of losing their job--even though they are guaranteed none of the winnings. But we can also add that it's not as if the workers were asked to share in the risk. It's not as if the boss will ever say: look, if you like, we can make this a worker-owned and worker-run collective in which we all share the risk (and the profit) equally. So it doesn't make sense to complain that workers share none of the risk.

One further thing to say regarding the idea that our economy is best thought of as a casino-like game in which the winner takes all. It is not clear that it makes any sense to structure basic economic institutions in this way at all. The economic system should exist to draw on the mutual benefits that we get from social cooperation. What we can accomplish together is far greater than what we can accomplish alone: that should be the basic organizing principle of any just economic system. The casino-style setup, however, exploits the fact that an economy requires mass participation, takes this mass participation for granted, and then haphazardly doles out lump sums to individuals who happen to get a good roll on the dice. That makes no sense to me. Let's use the power of economies of scale and increased productivity to maximize human capabilities, to meet socially recognized needs, to do great things together that we couldn't have done alone. Rather than being trapped inside a casino that I never asked to enter in the first place, I'd rather be a member of a self-governing community in which the condition for the free development of each individual is the free development of all.

But there is one last objection to my argument--which has to do with incentives and innovation--that I mentioned above. It goes as follows. A flourishing society requires that people take risks, innovate, try out new methods and techniques, and produce new things that may not ever pay off. I agree so far, but the objection isn't finished. It continues: in order to get people to take risks and innovate, they must be motivated by large cash rewards. And that means that capitalism is the only system in which innovation and risk-taking can flourish, because without the big cash rewards that the market hands out to successful businesses people wouldn't be motivated to innovate.

First of all, we've seen that capitalists don't need to do any innovating at all. They can pay someone else to do it. Capitalism--where there is private ownership of the means of production which are run in order to enrich the owners--does not distribute wealth in accordance with who is the most innovative or who takes on the most risk to make some socially useful good. There is no close connection between being a capitalist and being an innovator. R&D departments--many of them subsidized by public funds (this is called "externalizing costs")--do that. Much R&D is located within universities--which are more feudal, guild-like institutions than they are capitalist.

Second, it is demonstrably false that people need huge cash rewards in order to innovate and do great things. Great scientists, great novelists, great musicians and artists, and so forth rarely do what they do out of a single-minded focus on cash reward. Think of those who develop open-source software. I think it is true of a lot of people that if they were guaranteed a basic standard of living, they would be happy to spend a large portion of their time developing open-source, free software for the betterment of all. There are too many examples here to count. People, of course, want an adequate standard of living in which they don't want for any basic necessities, in which they have adequate leisure and a degree of discretionary spending. But that doesn't mean they have to have huge million-dollar rewards to socially-useful things.

Finally, capitalism thwarts a ton of really important innovation while it privileges others. Many know about the strange murder of the electric car. There are other examples of this kind --particularly green technologies that aren't profitable or undermine the profitability of natural resource extraction. In fact, we may never know how many great ideas are out there that haven't been given a try simply because capitalist production can't earn a profit off them (or because they take too much long-term planning or upfront investment, as is the case with much green technology). To be sure, there is a place for competition to determine who should win socially-produced funds for some new innovative project. But that doesn't require capitalism. Despite encroachment from corporations and moneyed interests, grant funding for scientific projects doesn't involve capitalist markets or profits.

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Is the Wealth of the Rich Legitimate? Part 1

Is the wealth of the rich in contemporary capitalist societies legitimate? Of course not. But the rich have a vested interest in making sure that the majority of the population --who aren't rich-- think that their wealth is legitimate. It hardly matters whether it's aristocratic privilege, family lineage, racial or sexual supremacy that makes a group dominant. It remains true that dominant groups almost always try to preserve the basis of their own dominance.

Dominant groups typically have two (analytically distinct, but in practice interwoven) means of maintaining dominance. The first is obvious. Dominant groups typically monopolize control of the means of exerting physical repression. If you push too hard against the status quo, dominant groups will always (if possible) push back with physical repression in order to protect their dominant status.

But dominant groups never maintain their dominance through naked violence alone. They have another means at their disposal: ideology. That is, dominant groups stabilize their rule by telling stories about why their rule is legitimate. Think of the "divine right" of Kings, the "positive good" doctrine that purported to justify the dominance of Slave owners, the so-called "civilizing mission" that Colonization attempted to carry out, the supposedly "scientific", technical expertise of bureaucrats. The stories the rich tell about the supposed legitimacy of their wealth are a key part of this long tradition of lying to the masses to protect privilege and power.

What are those stories? The most common one is that the rich deserve their wealth because they work hard to produce it. Because the wealthy (the "job creators"!) make such important productive contributions to society, the story goes, they deserve every cent they earn. Another story is that the rich deserve their wealth because they undertake a great deal of risk when they invest it. Yet another story that is told, perhaps the least plausible of all of them, is that the rich deserve their wealth because they sacrifice more than others (by saving and foregoing consumption). Finally, there is the claim that the wealth of the rich is legitimate because they are legally entitled to it in a regime of private property where ownership titles are distributed by way of voluntary exchanges.

Now, in practice these legitimating narratives are often run together and interwoven. The war of ideas is never as clear cut and organized as academic discourse aims to be. But for our purposes --that is, for the purpose of showing that all of these stories are pure fiction-- we'll examine them each separately in a series of blog posts (of which this is the first). In examining each, I'll follow closely along the lines of the arguments put forward in David Schweickart's excellent book Against Capitalism. Anyone interested in seeing a detailed, rigorous refutation of every familiar argument in favor of capitalism would do well to pick up a copy. In what follows, we'll just examine the first. The other stories will be taken up in subsequent blog posts.

The first story says that the wealth of the rich is legitimate because it is their reward for making productive contributions to society. A more technical way to say this would be the following: in a "purely competitive free market" what the wealthy earn directly corresponds to their marginal productive contribution in the economy. In neoclassical economic theory --which is little more than an elaborate way of cheerleading for (rather than critically analyzing) capitalism-- this is called the "marginal productivity theory of distribution." As an early defender of this view puts it, "the natural effect of capitalist competition is... to give each producer the amount of wealth that he specifically brings into existence."

Before we show why capitalism is not a system in which each receives according to what each produces, we need to do a bit of table setting. In order to produce anything at all, two things are required: labor and means of production (e.g. factory equipment, instruments, technical knowledge, land, space, etc.). It is a fact about capitalist societies that the vast majority of those who labor for a living do not own the means of production they use at work. The owners of the means of production are usually distinct from the group uses those means. Up to this point we've been talking about "the rich" or "the wealthy" --but to be more precise we're actually interested in capitalists (i.e. that group who earns a living by owning, rather than using, the means of production).

Now, everyone knows that those who labor (by using means of production) to produce goods make productive contributions to society. Auto workers, for example, use their own two hands to build cars that wouldn't have existed if they hadn't built them. Their productive contribution is clear, and so it is with all workers in society. But what we want to know is whether capitalists actually make any productive contributions to society in order to receive their income. If they did, and if capitalism rewarded their productive contributions proportionately, it would look like their wealth was pretty legitimate.

But what is the productive contribution of capitalists in our economy? Notice that we can't just define their productive contribution in terms of what they receive from the market, since that is circular. We want to know whether the market actually gives each what they deserve. So we can't very well say that what people deserve is what the market gives them --that begs the question. What we're trying to figure out is whether the market actually distributes according to productive contribution.

Some will say that the contribution capitalists is their entrepreneurial spirit and innovating attitude. Others will say that capitalists do a lot of work co-ordinating and managing the productive process. No doubt ingenuity and creativity are required to make a capitalist firm successful. Even a socialist society would require ingenuity, innovation and "entrepreneurial" spirit of some kind or other. Likewise, co-ordination and workplace organization are essential. But notice that capitalists can simply pay someone else to do all of the innovating, all of the managing, and all of the co-ordinating. And they often do. If I'm a capitalist, I can hire a management consultant, an industrial engineer, and a research and development team to do all of the managing, organizing and innovating. But I'm still a capitalist --and I'll still earn handsome sums of cash for myself (indeed, I'm in a position to earn far more than anyone else in the entire firm even though I don't do any real work). So in this case, where's the productive contribution that supposedly legitimizes my massive sums of wealth?

Some will say that what I'm doing is "providing capital". After all, we said that two things --means of production and labor-- were needed to produce goods. We know that workers make contributions by laboring to produce things. But it is, of course, true that the means of production (e.g. capital, the factory space, instruments, etc.) add value to the final product. And capitalists, by definition, own and control the means of production. So aren't they performing an essential productive function by providing it? Couldn't we say, then, that this is productive contribution that justifies capitalist wealth?

But let's think about this for a moment. What exactly is going on when a capitalist provides capital? They are doing nothing more than "allowing it to be used". They are doing no more than granting permission to make use of an already existing material thing --e.g. factory equipment, raw materials, etc. But, as Schweickart points out:

...an act of granting permission, in and of itself, is not a productive activity. If laborers cease to labor, production ceases in any society. But if owners cease to grant permission, production is affected only if their authority over the means of production is respected. If it is not, then production need not diminish at all. Workers can continue doing exactly what they were doing before --producing corn and bread and steel and machine tools and all the other commodities required by their society. Whatever the owners are doing when they grant permission for their assets to be used, it should not be called 'productive activity'.

To drive the point home, consider the following example.

Suppose a government suddenly nationalizes the means of production, then does nothing else but charge workers a tax to make use of it. We wouldn't say, would we, that the government is engaging in productive activity, or that the tax is a return for the government's productive contribution? Not even if the tax rate is exactly equal to the marginal product of the productive labor.

But some will reply here that there's a difference between providing physical means of production (e.g. raw materials, tools, factory equipment, etc.) and providing capital investment funds to finance a productive endeavor. Surely providing an already existing material thing --whether it be factory tools, land, etc.-- is not a productive activity. It is no more than granting permission. But isn't financing production by lending capital a productive activity that takes a great deal of skill? Schweickart gives us an excellent example here: "Consider a person with a chest full of cash, eager to invest. How he acquired it need not concern us. We want to understand how his disposal of it will increase production. To produce something, there must be brought together equipment, raw materials, and laborers. Let our investor lend his money to an entrepreneur who purchases these necessaries. The laborers are set to work with the machinery and raw materials, and soon goods are produced. It is all quite simple. But notice, this is also a matter of granting permission. The workers, the raw materials, and the machinery already exist. The workers could begin production themselves, except that property rights intervene. They cannot gain access to the machinery and raw materials, for these things are the property of others. To use them, one must have permission, which the entrepreneur secures by means of her borrowed capital." But permission is only needed if one respects the authority of the legal titles to ownership of the things needed to produce. So the workers could produce just as well without permission if they didn't respect that authority. It follows, then, that permission is in no way a productive contribution.

Take another of Schweickart's examples:

Suppose, instead of relying on our friend with the chest full of money, the government simply rolled out its presses to produce the same quantity of crisp bills and gave them to our entrepreneur. Exactly the same production would result. But would we want to call the printing of the money a productive activity? That would surely be misleading, perhaps dangerously so, tempting officials to believe that rolling the presses longer and longer would miraculously generate wealth.

The point of all of this is that "providing capital" is not a productive activity. But if that's true, then we are forced to conclude that capitalists, qua capitalists, make zero productive contributions even though the market gives them the lion's share of the surplus created by society. As even John Kenneth Galbraith put it,

No grant of feudal privilege has ever equaled, for effortless return, that of the grandparent who bought and endowed his descendent's with a thousand shares of General Motors or General Electric. The beneficiaries of this foresight have become and remain rich by no exercise or intelligence beyond the decision to do nothing, embracing as it did the decision not to sell.

Or, if you'd like another example, examine a graph showing real wages for workers and worker productivity from 1973 to the present. What you'll notice is that productivity goes way up whereas wages stagnate. Someone reaped all of the difference and got filthy rich, but it wasn't the workers who were producing more and more each year. Again, we see that market distributions don't reflect productive contributions.

So what explains the fact that capitalists own the vast majority of wealth in our society? They don't receive this wealth as a result of any productive contribution they make. When they earn interest or dividends on their invested wealth, they need not do anything productive at all. When they make millions from arbitrage, they haven't done anything productive whatsoever. So in virtue of what do they earn such vast sums of wealth? In virtue of their ownership. Whereas the vast majority of us have no choice but to earn a living from the work that we do, capitalists earn their riches merely by owning things. But if the vast majority --the 99%-- does 100% of the productive activities in society, how could be legitimate that the unproductive 1% owns and controls the lion's share of the wealth produced? Good question.

So, what I've shown is that a certain argument, i.e. that capitalism distributes wealth according to productive contributions, is false. In a series of upcoming posts, we'll look at other fairy tales told by the rich to protect their wealth and power.

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Democracy and Economic Planning

I'm currently halfway through Pat Devine's incredible book Democracy and Economic Planning. It should be required reading for everyone on the Left. It is rigorous, clear, well-written and refreshingly radical. The goal of the book is to determine what sort of economic structure is required for a genuinely self-governing society. His argument, contra defenders of market socialism, is that democratic planning (which combines elements of centralization as well as de-centralization, local as well as national-level coordination) is what's needed. He insists on genuine participatory political democracy at the society-wide level, as well as serious industrial democracy at the level of the workplace. He also offers arguments to help navigate the potential tensions between society-wide goals and the goals of particular self-managed, worker-run firms. Devine sharply criticizes the statist Stalinist regimes that constituted so-called "really existing socialism", while at the same time offering a withering Marxist critique of capitalism. He also offers a detailed analysis of attempts at worker self-management in Hungary and Yugoslavia, showing what we can learn from their mistakes. I'm surprised that the book has not received more attention; but in an era in which the spell of neoliberalism is being shattered to pieces, the arguments in the book are more poignant than ever. There is a democratic alternative to the boom and bust cycles, deep crises, exploitation, war, environmental degradation and oppression characteristic of a global system dominated by capitalism. Read Devine's book to get a sense of the basic contours of what the socialist Left is fighting for. It's not a detailed blueprint for a new society, but it is an excellent example of spelling out concretely how it might be possible to institutionalize the basic aim that animates socialist, i.e. a self-governing society in which the means of production is under the democratic control of the people.

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On "Efficiency"

(Neo-classical) economists love to talk about efficiency. Markets, we're told, are nothing if not efficient. Businesses that succeed, supposedly do so because they're efficient. Talk to an economist, and you'll hear a lot about "efficient allocations" of resources, and "maximizing efficiency", and so on. What does all this talk mean? Why is it billed as such an important criterion for evaluating social institutions and public policy?

It's worth noting that economists themselves haven't always taken "efficiency" to be the most important goal of policy. As Andrew Levine notes: "For economists who came of age during the Great Depression and their students, unemployment was the major theoretical and practical concern. Nowadays, efficiency has taken its place." Levine is correct. It hardly needs to be said that full employment has long since ceased to be even a rhetorical goal of public policy. But if the old demand for full employment was concrete and easy to endorse, the new lingo of "efficiency" is abstract and unconnected with the needs and interests of working people. Again, as Levine puts it, "it is hard, at least for strangers to the economics profession, to understand why economists today focus so doggedly on a structural property of economic systems that represents real world concerns in only the most indirect and attenuated fashion."

So what is that economists mean by "efficiency"? For all their talk about being a rigorous science, conventional economists are actually quite unclear about what their favored criterion means. As Levine points out, "sometimes it is used loosely as a synonym for productivity...sometimes it invokes a cluster of non-technical ideas- delivering the goods, avoiding waste (of time, effort and resources), running smoothly, and so on." But in more technical contexts, it means "Pareto optimum". In the reigning jargon, an allocation of "resources" is "efficient" if it is "Pareto optimum", that is, "if any change would make someone worse off (holding technologies, preferences and the (initial) distribution of resources constant)." Or, put another way, a "Pareto optimum" or "Pareto efficient" allocation is one in which no individual can be made better off by redistributing resources without making another worse off.

Now, I want to draw your attention to two things at this point. First off, take note of the fact that the ordinary, non-technical uses of "efficiency" do not necessarily coincide with the technical definition embodied in the idea of "Pareto efficiency". That is, there is a substantial gap between our ordinary understanding of the word "efficiency" and the way that the term is used in technical contexts in neo-classical economics.

Second, note that "Pareto efficiency" isn't necessarily always a good thing. As Levine points out, "the most vile situations can be Pareto-optimal if a change would make someone worse off". That is, Pareto-efficiency is compatible with any degree of equality or inequality. Thus, an extremely unequal distribution could be Pareto-efficient just in case it is not possible to make one person better off without making another person worse off. Pareto efficiency also fulfills a subtle ideological role in justifying capitalism, often being invoked as a theoretical tool for justifying the dogma of "trickle down". It can be used to argue against re-distributive taxation on grounds that huge increases in the wealth of the rich (and thus huge increases in overall economic inequality) either increase or have no effect on the welfare of the worst off.

It's also worth pointing out that the way mainstream economists interpret "better off/worse off" is problematic. They're supposed to be measuring human well-being, but they use problematic surrogates such as possession of money or the satisfaction of "revealed preferences". And individual's "preferences", according to economists, are "revealed" in market transactions. It is assumed that these preferences are fixed and to be taken as given. But in reality, individual "preferences" are shaped by and formed within social conditions. Moreover, they are open to rational criticism and democratic debate; surely no critical approach to understanding society can take preferences as mere givens. So, the economist's metric for measuring how "well off" a person is is deeply flawed. Contrast it with the Marxist/Aristotelian view of human well-being, where a person is well-off to the extent that she is able to develop and exercise her talents and natural powers (e.g. creative faculties, physical capabilities, capacity to form meaningful relationships, intellectual powers, etc.). The juxtaposition makes clear that mainstream economists work within a framework for understanding human welfare that is thoroughly pro-capitalist, in that it contorts the definition of human well-being to fit the structural needs of the capitalist economy. It has the ideological effect of leaving us unable to articulate grievances or unmet needs, because it defines our needs and welfare in terms friendly to market society.

So much for Pareto efficiency. But what about the "ordinary" conception of efficiency? Why shouldn't that be the fundamental measuring stick by which we evaluate economic and political institutions?

Because "efficiency" in the ordinary sense is of merely instrumental value. It has no intrinsic value. Doing some task efficiently is good, but only insofar as the task is itself a good one. So, if the goal of some institution is to treat human illness, then doing so efficiently would appear to be a good thing. Efficiency, in this case, would be instrumentally valuable for achieving the goal of treating human illness. But the metric of efficiency doesn't tell us whether or not treating human illness is a good or bad thing. This is made clear by way of another example. Suppose the goal of some institution, imagine a colonial military venture, was to oppress some group of people. We can, of course, imagine the goal of oppression being carried out more or less efficiently. And we wouldn't want to say that efficiency is a good thing in this case, because the goal that is being efficiently achieved is abhorrent. So what we come to see is that the metric of efficiency tells us nothing of the worthiness of the goals of some process or institution. But the overall goal or end that some process aims at is crucial, indeed far more important than whether it is efficient. Because if the goal is unworthy, it doesn't matter whether its efficient.

So the fetishism of efficiency has the effect of obscuring the goals of certain social processes or institutions. Within the idiom of efficiency, in fact, we can't even have a discussion about what the goals are; they are taken as given. Thus, if you think that the function or goal of the health care system should be to treat sickness and ill health, you'll quickly find that there is no space for you to express such a position within a narrow debate about whether the present for-profit health care system is "efficient" or not. The same could be said of public transportation. It is sometimes said that public transit is not "efficient" because it doesn't run the way that a for-profit firm runs (e.g. fare prices are set lower than their market value, services are allocated more according to need than effective demand, etc.). But that judgment typically smuggles in and ascribes irrational goals/functions to public transit systems. The basic function or goal of public transit should be to create a maximally accessible system that helps everyone get where they need to go in a safe, comprehensive way. But if that's so, it hardly makes sense to complain that it doesn't produce profits. That's not the point of it! So, to ask whether it is efficient or not would really be to ask whether or not it fulfilled its function well. But more often than not, talk about "efficiency" smuggles in tacit goals and preferred functions. Thus, public transit can be attacked as "inefficient", where the thing it doesn't do efficiently is accumulate surpluses.

So where does this leave us? Efficiency, in the ordinary sense, clearly matters. For whatever it is that we're doing, it would be irrational for us to want it to be done inefficiently. Even if we're aiming to lay about on the couch and veg out, there are more or less efficient ways of doing it (e.g. it wouldn't make sense to do sixteen jumping jacks every 10 minutes in order to achieve the goal of laying on couch). But efficiency is not, as we've seen, intrinsically valuable. It is only valuable insofar as what we're doing is valuable. So what really matters is the choice of goals or ends. And that holds both for individual goals (e.g. how to live one's life, what sorts of relationships to cultivate, what career path to choose, etc.) as well as collective/social goals (e.g. what should the basic goal of social institutions be? what kind of life do we want to live together? what forms of association do we want to enter into with one another?, etc.). All of this drops out of discussions about mere efficiency. In order to know what goals are worthy of our assent, we need robust democratic debate between free and equal citizens. But, as economists will quickly point out, such a radical democratic vision is not compatible with structuring social life around market forces. Economists take this to be a problem with democracy; but socialists see things precisely the other way around. That is, socialists see that as a reason to reject the fetishism of the market as the central organizing structure of society.

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It's impossible to deny the obvious...

"...which is that we are not now and have never been on the road to recovery." That's what Krugman is saying in his most recent Op/Ed.

Now, he's certainly right that "we are not now and have never been on the road to recovery." That's true. But is it impossible to deny this obvious fact? Of course not. Obama and the Democrats will continue to do it right up until election day in 2012. And large portions of the liberal left will be prodded into plugging fallacious narratives about "green shoots" and "recovery" and the like in order to advertise Obama's "accomplishments" during the campaign.

Readers of Krugman's column will by now have noticed a couple of frustrating trends. First of all, the guy repeats himself quite a lot. Part of that's not his fault. The economy really does suck, Washington really is worsening the crisis by holding tightly to neoliberal orthodoxy, austerity really is awful, etc. He's right that Washington cares about all the wrong things. That's not changing, so neither should critical commentary. I can't blame him for being repetitious in this sense.

But there are other repetitious features of Krugman's work that are less excusable. His perpetual surprise at the "excessive compromise" and "betrayals" of the Democrats (and Obama in particular) lacks rational grounding. Didn't Einstein say something about doing the same thing over and over and expecting different results... The fact is that Krugman, while his solidly liberal critique of existing policy is commendable, has nothing to say about how we can get out of this mess. He doesn't appear to have any views about how social change happens. He doesn't have a critical analysis of the electoral mechanism in our society and how it forecloses the possibility of real change. He doesn't have any perspectives on the role of social movements. Although his work sometimes shows brief glimpses of an analysis of class power, he doesn't follow through on these questions enough to understand why it is that the Democrats are flipping the bird at liberals. For the most part, he just seems perplexed that the Democrats aren't listening to his good ideas.

But the problem isn't that Obama and the Democrats are simply ensnared by "bad ideas". Neither is the problem that they are "cowards" or poor bargaining strategists. The certainly aren't cowardly when it comes to ridiculing and chastising the Left. They certainly weren't timid when it came to saying at onset of the health care "debates" that single-payer was absolutely off the table.

In order to understand the Demcorats' political trajectory as a party, one needs both a historical analysis of role of the Democrats have played at different points in time, as well as an analysis of the role that corporate-backed political parties play in a capitalist system. We get neither from Krugman.

For an excellent historical analysis of the role the Democrats have played, their relation to left-wing social movements, and so on, I highly recommend Robert Brenner's New Left Review article "Structure or Conjuncture?". Lee Sustar's The Democrats: A Critical History is also worth noting. But any critical study of a progressive social movement in relation to the DP will suffice, because the pattern is always the same. The Democrats (or Republicans, as the case may be, historically speaking), pressured by unrest and militancy from below, enact policies meant to quell social unrest and co-opt militant forces into the "official" political realm. The following co-optation typically leads to the terminal decline and passification of the movement in question and, with it, the hopes for deepening the process of reform. It's for this reason that many on the Left refer to the Democratic Party as the "graveyard of social movements".

For an excellent analysis of the role of the state in capitalist society, there are several sources of good, quick information. The basic point is this: regardless of which party is in power, the state is structurally dependent on the capitalist class. What that means is that the state relies upon capitalists to invest, employ people, grow the economy, produce necessary goods, and, importantly, to accumulate profits which can then be taxed to fund the state's activities. When the capitalist class isn't accumulating profits, they don't invest, jobs are lost, tax revenues plummet, and a political and economic crisis ensues. For this reason, state officials are compelled to do what they can to make sure the capitalist class is happy. Making the ruling class happy means creating a "good business climate", or putting in place "pro growth" policies aimed at creating the conditions for the maximal accumulation of profits. Call this the imperative of accumulation. Left to it's own devices, the system tends to encourage state officials to fulfill this function to the detriment of other functions (e.g. looking after the well-being of citizens).

But, as history makes clear, sometimes the imperative of accumulation comes into conflict with what we might call the imperative of legitimation. No society can reproduce itself over time unless it manages to convince a large portion of its citizens that it is legitimate. But when the imperatives of accumulation compel governments to, say, slash social spending and bail out banks, this creates legitimation problems. A contradiction between accumulation and legitimation arises. Governments will attempt to solve this in any number of ways. The main strategies we've seen thus far as "budget cut fatalism" and "deficit fear mongering". Both of these arguments aim to convince citizens, against their better judgment, that the policies meant to re-establish the accumulation process are, in fact, legitimate (in the interests of society as a whole).

Notice that I haven't even mentioned the problems raised by the colonization of state officials by big business. That is a serious problem, and, of course, public financing of elections would be a small step toward reducing the efficacy of some of the more common ways that politicians are bought off. But the problems go deeper than campaign financing and lobbying. There are fundamental problems here that have to do with the ways in which large amounts of social/economic power are concentrated in the hands of a small class that has a monopoly on the control and ownership of the means of production. A truly democratic society wouldn't be one in which democratic bodies were subordinated to a powerful economic class that owns the basic structure of society. Nor would a truly democratic society be one in which citizens are subordinated to the inhuman systemic imperatives of accumulation for accumulation's sake. A genuinely democratic society -that is, a socialist society- would be one in which the basic structure of society was under the democratic control of citizens. It would be one in which the operations of the economic system were subordinated to the needs of human beings, rather than the other way around.

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Harry Magdoff on "Keynesianism"

From a 1998 edition of Monthly Review:

The term “Keynesian state” has become a catchword that covers a variety of concepts and is usually misleading. It may have some meaning for the Scandinavian countries and elsewhere. But the United States? Although the concept is often applied to the New Deal, the deficit spending of the New Deal had nothing to do with Keynes (nor did Hitler’s recovery via military expenditures). It’s true Washington economists were delighted with the appearance of Keynes’s The General Theory of Employment, Interest, and Money because it gave them theoretical handles for analysis and policy thinking (e.g.,the offset to savings concept and a framework for gross national product accounts). Nevertheless, despite a promise of heavy government spending, and Keynes’s theoretical support, the New Dealers were stumped by the 1937-38 recession, which interrupted what looked like a strong recovery. There was then as there is now an underlying faith that capitalism is a self-generating mechanism. If it slowed down or got into trouble, all that was needed was a jolt to get back on track. In those days, when farm life supplied useful metaphors, the needed boost was referred to as priming the pump. The onset of a marked recession after years of pump-priming startled Washington. Questions began to be raised about the possibility of stagnation in a mature capitalism, the retarding effect of monopolistic corporations, and other possible drags on business. These concerns faded as war orders flowed in from Europe, and eventually they disappeared when the United States went to war. The notion of the “Keynesian Welfare State” has tended to disguise the fact that what really turned the tide was not social welfare, Keynesian or otherwise, but war. In that sense, the whole concept of Keynesianism can be mystification.

Make sure to read the rest here (hat tip to Louis Proyect).

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The Non-Recovering Recovery

THE STRUT of confidence is gone, and the jitters are back. A flurry of dreadful statistics at the end of April made sure of that.

On April 26 came the news that the British economy grew a mere 0.5 percent in the first quarter of 2011. Coming on the heels of a contraction by that amount in the previous quarter, one commentator was prompted to declare that "the UK is teetering on the brink of a doubledip recession."[1]

Forty-eight hours later, the Commerce Department revealed that the U.S. economy had slowed to a crawl, recording a meager 1.8 percent growth rate in the first quarter, down from over 3 percent at the close of 2010. A day later, word arrived that the Canadian economy had shrunk in February, and that the official rate of unemployment in Spain had jumped to 21.3 percent--and the youth jobless rate to a staggering 40 percent.

Read the rest here.

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Of the 1%, by the 1%...

Stiglitz has a piece in Vanity Fair (here) blasting neoliberalism. It's worth reading. Here's an excerpt, blasting the bullshit marginal-productivity theory of distribution:

Economists long ago tried to justify the vast inequalities that seemed so troubling in the mid-19th century—inequalities that are but a pale shadow of what we are seeing in America today. The justification they came up with was called “marginal-productivity theory.” In a nutshell, this theory associated higher incomes with higher productivity and a greater contribution to society. It is a theory that has always been cherished by the rich. Evidence for its validity, however, remains thin. The corporate executives who helped bring on the recession of the past three years—whose contribution to our society, and to their own companies, has been massively negative—went on to receive large bonuses.

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What Vulgar Economists Do

"The vulgar economist does practically no more than translate the singular concepts of the capitalists, who are in the thrall of competition, into a seemingly more theoretical and generalized language". -Karl Marx, Capital (Vol. III), p.817

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On the Ideological Character of "Revealed Preferences"

Neoclassical economists purport to be able to give rigorous and accurate explanations of human behavior. But to explain actions, you have to have an idea of what it is that agents are doing. It used to be that early economists, who were utilitarians, held the view that what we're doing when we act is trying to maximize utility (construed as felt or experienced pleasure). But insofar as pleasure is difficult to quantify and measure, economists decided they needed a more easily quantified view about what agents are doing. Reality must simpler than that, they thought, because otherwise how could it fit into clean formal models? Moreover, some economists bought the argument that social science could be "value free", and they worried that utility (pleasure) was too value-laden and tendentious. At first, economists went with "desire-satisfaction" instead of felt pleasure, but then the problem arises as to how economists can describe what desires people have. The resting consensus today is that economists should just talk in terms of an agent's "preferences" and whether or not such preferences are being "satisfied".

But how do economists know what an agent's preferences are? According to contemporary orthodoxy, an agent "reveals" her preferences in certain behaviors. We look at what she in fact does (e.g. buys a coffee) and infer her preferences from that. It's actually a bit narrower than that: the only behaviors where agents reveal their preferences is in market transactions (and, maybe voting), and the measure of how to rank one's preferences is given by the amount of money they're willing to pay for some thing. When I buy a coffee everyday for a year, economists hold, it is reasonable to say that I have "revealed" a certain preference. It is in this way that economists think that they can explain everything about us that matters.

There are tons of things wrong with this whole setup. I just want to point out one glaring problem.

First, take the problem of environmental degradation. Now, it should be pointed out that neoclassicals are falling all over themselves in trying to explain how their enterprise, which essentially adopts the perspective of the capitalist and spells out what it's "rational" for capitalists to do, can account for the obvious problem of environmental degradation. At first glance, their approach seems to either say that the environment is not of value, or that it only has value insofar as it can be commodified and traded on markets. Contemporary economists are aware that this is a problem. So they are scrambling to try to re-package the same old game in order to fend off some recent criticisms of their discipline.

As is well known, one obvious problem with capitalism is that it encourages investors and capitalists to take a very narrow, short-run perspective. Big profits this quarter are often all that matters. Among it's many problems, this narrow perspective obviously clashes with the long-term perspective we would need to even begin to seriously address the problem of environmental degradation. So what do economists say about this?

Well, according to them, if we care about anything at all, it can be modeled by "revealed preference theory". We all place different emphasis on the value of the future, they'll say, so we all have different preferences regarding the importance of the future (as opposed to the present). How do we know what different preferences people have regarding the future? Look at how they're "revealed" in market activity.

Do capitalists then have a very low preference ranking for the future, and a high preference ranking for short-run profits? Capitalists, it turns out, "reveal" such preferences all the time. And insofar as capitalists are merely satisfying their preferences like the rest of us, they aren't doing anything wrong. Economics, in this way, is "neutral".

But here's the rub. This behaviorist setup is circular. It says that what people want, indeed what it would be rational for them to do, is basically just what they're already doing. That is extremely conservative. It suggests that we couldn't fall short of what we want, that we couldn't fail to be rational. It suggests that what we want just is what we're already doing. On what basis could someone, then, want to change anything? Could I have a "preference" for radically changing society? It seems not, since I'd have to actually change it in order to "reveal" such a preference. This setup is ideological because it suggests that there is no gap between the way we think things should be and the way that they are. It leaves us without very language we'd need to articulate what's wrong with existing states of affairs.

In the case of the narrow-minded capitalist chasing down short-run profits, it seems like the thing we'd want to say is this: she is acting irrationally. By her own lights, she is undermining the possibility of continuing her own enterprise in the long run. More strongly, she's undermining the possibility of doing much of anything at all in the not-so-distant future. But we cannot say this on the "revealed preference" model. For that model says that her preferences regarding the future are simply "revealed" by what she is presently doing. Thus, she's just satisfying her revealed preferences for the present, so there is no self-undermining problem. The theory forces us to say that she is acting rationally after all.

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Robert Pollin: "Back to Full Employment"

Read his generally excellent Boston Review article here.

This is a much-needed corrective to the consensus among Democrats and Republicans regarding the "need" for austerity and tax gifts for the rich. Pollin also does nice job of ridiculing the heinously flawed neoclassical analysis of employment (e.g. the neoclassical view that "it is a fundamental posit of our theory that all unemployment is necessarily voluntary").

But there are problems. He rightly notes that the obstacles to full-employment aren't merely technical or economic, but political. That is, he rightly says that the class compromise needed to make Keynesian social-democracy work is politically unstable, because capital eventually gets upset and breaks the pact as the political and economic confidence of workers increases.

For me, this is the single most important objection to social democratic politics. Yet, having made this important point, Pollin strays from it and suggests elsewhere that "healthy profits can be made" under such an arrangement. There is a question of how to read this claim: is he merely making certain kinds of moves to try to win over those who aren't yet ready for the claim that capitalism as such is the problem?

He is also a bit naive about Sweden I think. He basically gets things right, but underestimates the role of capital in thwarting the class compromise and he misses a more general point. That point is this: an inherently unstable system that only functions when capital is happy with it's rate of profit is a recipe for disaster. Even if capital continues to play nice for a while and maintain the class compromise, there are other sources of instability that threaten to upset capital. Inflation is only one example. To be sure, Pollin does point to the global political pressure on Sweden to adopt a neoliberal model, but the fact that such a move looked reasonable to Swedish policy makers speaks to an unjust configuration of class power on the one hand, and the contradictions of premising all economic well-being on decent profits for capital on the other. In other words, Pollin appears to have an unduly sanguine picture of what's possible within the confines of the capitalist state on the one hand, and doesn't take seriously enough the internal contradictions of capitalism as a system on the other.

Still, this is the kind of debate I'm happy to see in public as compared with what we usually have to stomach (e.g. Democrats asking each other "how much should we screw workers and cut services?"). We should be having more debates like this: between Keynesian left-liberals and more radical critics of capitalism. So it is more than a little frustrating that the "forum" put together by Boston Review to discuss Pollin's argument appears to have no serious Left critics at all. Though Pollin spends time discussing Marx and the left-wing arguments against achieving full-employment under capitalism, it doesn't appear that any of the participants in the forum will be defending such a position. This is a shame.

The Right response to the Pollin piece is nauseating and not even worth responding to. Reihan Salam's response is typical neo-classical garbage. He begins by acting skeptical about the idea "neoliberalism" suggesting that it is not a real historical phenomenon but a bit of a left-wing boogey-man. He is so far off-base in understanding how the world works, it's hardly worth reading what he thinks should be done to fix it. His argument seems to be that we need to "remove barriers" so that workers will get up off their "lazy" butts and go get a job. I don't really know what to say to that. Where does one begin? I sort of just want to ask Salam if he's ever heard of this place called "earth". Seriously, how many times over does this tripe have to be refuted and discredited before we stop wasting our time. To put it in a slightly klunky Marxist way, the only reason it still gets a hearing is because of its functional utility in maintaining unequal relations of power.

Thus, the best way to make sense of the neoclassical stuff is not to take it as a set of serious arguments, because in many ways that's not what it is. The best way to make sense of it is to understand it as an ideology, in the Marxist sense. There are numerous dimensions in which such an approach is fruitful: from remarks in the Grundrisse regarding ideological types of abstraction, to arguments to the effect that neoclassical economics merely expresses the point of view of the capitalist, i.e. that neoclassical economics is merely a commentary on a capitalist firm's financial accounting practices. Allowing the neoclassical view to assert itself as a "reasonable" participant in the debate is a bit like tolerating "intelligent designers" in scientific discussions.

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Is Keynes the Answer to Crises?

Is Keynes the answer? Read John Molyneux's answer here.

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Markets and Transportation

"Let us first turn to other sectors of the economy to which the "straight" market criteria do not apply without very considerable modification. Transportation is a case in point. Thus most of the world recognizes that urban transit benefits those who do not use it (e.g. by reducing congestion and increasing property values), and that it should be provided by a public authority, with a sizable subsidy to cover inevitable losses. Even in Reagan's United States, docks, airports, and rapid-transit systems remained publicly owned. Involved here are external economies (time-saving, convenience) and diseconomies (congestion, pollution) and also elements of system, of network, which render the conventional neoclassical marginal-cost and marginal-profitability analysis both misleading and irrelevant, and the public-service aspect of high importance. Of course, in making decisions one should always compare costs and results, but one can do so only in the context of network, on the one hand, and the purpose of the activity on the other." - Alec Nove, "Central Planning in Capitalism and Socialism"

This last sentence is crucial. This is the antidote for those who confusedly lament the "inefficiencies" of public institutions like urban transportation and extol the alleged virtues of profit-driven markets. First of all, marginal-cost/marginal-profitability analysis is basically useless here and distorts matters considerably. Secondly, asking that public transit be run "like a business" evinces a deep misunderstanding of the function of public transportation.

This is the crux of the issue. To demand that public transit networks "turn a profit" is to misunderstand what a public transit system is.

What, then, is the function of urban public transit? Quite obviously, it is to most effectively facilitate movement of everyone, on a city-wide systemic basis, in a way that is sustainable, comprehensive, egalitarian, efficient, organized, and user-friendly in the broadest sense. It is decidedly not to exploit certain needs that are profitable while ignoring those that aren't, which is precisely what for-profit transportation does. For example: if you're a capitalist, why invest in means of transportation for, say, poor pensioners who are not a good source of profits? Why not just ignore them completely and focus on markets where there is "effective demand" and the potential for hefty returns? This is, incidentally, what happens with health insurance when it is fully commodified: the poor and sick are left by the wayside whereas private insurers "cherry pick" the wealthy and healthy patients that will better aid the company in maximizing profits.

Now, obviously, rejecting neoclassical marginal analysis here doesn't mean that there isn't some cost/benefit analysis to be undertaken at the system-level by a public transit authority regarding how to allocate funds, service, etc. But this analysis will not look much like the rent-seeking behavior of capitalist investors, first and foremost because the relevant benefit here is not "profit" for the transportation authority, but the extent to which the public transit network fulfills its function well. We need to know what the relevant good is that we're trying to maximize before we can begin an analysis of what an optimal public transit system would consist in. Assuming the metric of cash returns on a balance sheet in the ways that capitalist firms do here is to completely miss the issue at hand (yet, this is precisely what neoclassical economic theory does: it elevates the tendentious, narrow logic of the capitalist firm to a universal and quasi-natural status).

A good transportation system is not one that runs a surplus every year. A good transportation system is one that fulfills its function well. Making efficient use of resources is of course of value, but of purely instrumental value. Contrary to the dogmas of deficit-hawks and those who fetishize balanced budgets, a "cheap" but anemic transit system is not a good one.

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Latoya on feminism and the wealth gap

Latoya Peterson (usually of Racialicious) makes a compelling case for why feminists should be talking more about the wealth gap, and maybe less about the pay gap.

She cites recent statistics from the economic development organization Insight that indicate women of color in particular enter adulthood with zero wealth, while almost all other demographics come into the job market in the positive. Here is the core of the (pretty shocking) statistics:

Wage equity is still a large problem for women—while the gender wage gap is widest for white women compared to white men, black, Latina, and Native American women take home far less than their white counterparts. But earnings are only a small part of overall financial stability. What matters more than income in the long run is the accumulation of wealth. As lead researcher Mariko Chang explains in her presentation summarizing the data, “wealth confers benefits income doesn’t.” While income is vital for day to day survival, only wealth can generate further income, provide collateral for loans, be passed from generation to generation through inheritance, and provide the individual with the means to survive without a paycheck. Sadly, for many of women of color, the wealth gap is even wider than the income gap. Most women of color have no assets except for their cars—once the blue book value of the vehicle is removed from the calculation of median wealth, black women are left with a scant $100 in assets, while Latinas can only claim $120.

While income disparities are important factors in determining quality of life, wealth disparities can have devastating long-term effects, prohibiting the accumulation of retirement funds, extended unpaid job leave in personal crises, and investment, like in property or in other long-term assets. And we are talking about MAJOR gulfs between demographics here, economic gulfs that get lost when we stay on the terrain of wage gaps.

Read the whole thing.

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Things are more complicated than economists would lead us to believe

“The way people think about things is appropriate or not depending on the nature of the things in question; the way people think about people, themselves, is part of the reality about which they are trying to think in appropriate ways. The concepts which we employ to grasp what we are become part of what we are; or rather that we use them in this way becomes part of what we are. Thus in social theory we are using concepts to understand beings who define themselves by means of their use of concepts, in some cases the concept that we are using in trying to understand them. So to construct a theory and to propagate it is to afford people a new means of self-comprehension; to give the theory currency may well change the very behavior which the theory attempts to describe. Hence social theories can play a role in their own verification and falsification.” -Alasdair MacIntyre "A Mistake about Causation in Social Science" (1958)

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Why the Marginal Productivity Theory of Distribution is False

First of all, what is the "Marginal Productivity Theory of Distribution"? Before explaining what it says, I should mention briefly who it is that puts it forward and what they take it to justify.

Those on the Right (e.g. neoclassical types as well as the deceptively self-anointed folks that call themselves "libertarians") often claim that if we have markets that are "free" and competitive enough, then the distribution of wealth and income they generate will be just. The marginal productivity theory was developed by neoclassical economists who had this view, and most thought that the theory was a good reason to think that "laissez-faire" capitalism is the most just social formation.

Now here's what the theory says (the account that follows tracks the summary given by John Rawls in his lectures on the history of political philosophy). Very roughly speaking, the theory claims that the main factors of production (land, labor and capital) contribute a share in producing the total social output. And given that this is the case, the theory is then taken to imply that "it is just that those who contribute their land and capital should share in the output along with labor". In other words, capitalists, landlords and laborers should all get to share in the social output according to their contribution.

There are many problems with this picture. The first is that the three members (capitalists, landlords and laborers) in this "economic trinity" (as Marx put it) appear in the above as "three co-equal partners in the process of production... as co-equal partners each of whom receive their share of the out according to their contribution". In other words, this formula pretends that each of the three factors of production are "on a par", i.e. that they are "uniform and symmetrical".

But Marx's claim here is that if we understand exactly how a capitalist economy actually works, then we'll notice that landowners, capitalists and wage-laborers are clearly not on a par. What does this mean?

Capitalism is a society in which the ownership of the means of production is concentrated in a small fraction of the population's hands. The majority of people in capitalism do not have large amounts of capital or land that they could invest for a profit; the only important productive asset most people have is their ability to labor. Now this means that those who own the means of production are in a strategic position vis-a-vis others in that society, and thus they are in a position "to demand returns in the form of profit, interest, and rent". Since most people aren't strategically placed in this way, they are not in a position of economic power such that they may extract profit, interest and rent from others.

Let me say a bit more about this to drive the point home. Marx is not claiming that capitalists and landowners never derive any income from, say, improvements to their land or labor they expend managing their firms. What fraction of income landlords and capitalist receive as a result of their labor is not, strictly speaking, what angers Marxists. What Marxists see as problematic is that fraction of income that capitalists and landlords receive, just because they are owners of capital or land. Their complaint is about "money making more money" in a society in which most don't have such a luxury and must work for every dollar they earn.

In Capitalism, land (resources) and capital are scarce factors of production (relative to labor, which is more abundant), and this is why those who happen to own land or capital are in a strategic position of power in a competitive market such that they may command an income just for being in their position. As Rawls describes it, since Mother Nature is not around to collect her share of the productive contributions of natural resources... the landlord comes to claim it in her stead.

Notice that the above is not true of people who earn their income from working a job: all of working peoples' wages owe, in the last instance, to work they do. Since they do not have the same economic bargaining power as capitalists or landlords in a market economy, they are not able to draw an income just for being laborers. But notice here that it is just for being the owner of something that capitalists are able to draw the lion's share of their incomes. Thus it is hardly the case that those who own major productive assets are on equal footing, even in an ideally "free" and competitive market, with those who do not.

Another problem with the marginal productivity picture is that it implicitly suggests that the economic structure of capitalism is somehow natural, having "existed since time immemorial". Marx's project was in part to show why this illusion is perpetuated by the methodology of neoclassical economics. That is, by means of an accurate analysis of the way capitalism actually works, Marx wanted to show that what traditional economists take for granted as "natural" is in fact a contingent arrangement that owes to the actions of certain concrete economic agents. This means that we could arrange economic institutions differently, such that it would not be the case that some were strategically placed with respect to the means of production while other were not.

For Marxists, "all members of society have an equal claim to full access to and the use of society's means of production and natural resources." The reason why is that, even in capitalism, all wealth is socially produced by means of a complicated network of social coordination and cooperation. Nothing in contemporary societies is produced by one individual alone. Now, if we didn't live in societies built around social cooperation, then perhaps the issues of justice raised by Marxism wouldn't be relevant. If someone really were to produce something entirely in abstraction and isolation from all social labor, perhaps there would be no just re-distributive claim on that product. But as long as we participate in a massive system of cooperation and coordination to socially produce wealth, we should accord to everyone that is part of that system of cooperation an equal right of access to ownership of the means of production.

We already think this has got to be true of certain public institutions. We don't think, for example, that something like roads or sidewalks (given that everyone has to use them no matter what they do) should be the sorts of things that one person could purchase and own as private property. Why? Because that person would be in a position to exploit their strategic placement by demanding that everyone pay them tribute for something that everyone needs to use.

Now, those on the Right will sometimes respond here that the sidewalk case above is a special case, since it describes a monopoly. If there were more competition, they'll point out, perhaps the prices on sidewalk use might fall and the situation might be optimal.

This reply misses the point. First of all, certain kinds of infrastructure like roads and railroads, are not the sorts of things that competition can reasonably be expected to make more efficient. Railroads are a natural monopoly, given the sort of technological, physical thing that they are.

But the bigger picture here, is that even if there were several capitalists, rather than just one, owning the sidewalks and roads, this wouldn't change the fact that every non-sidewalk owner would still be forced to purchase their sidewalk use from a capitalist. They may be able to choose between two or three different capitalists, true, but they are still forced to transact with a capitalist. (Think here of recent healthcare debates: does it much matter that Aetna and Cigna compete with one another if, at the end of the day, I'm forced to choose between capitalist A and capitalist B? As Adorno put it, "freedom wouldn't be to choose between black and white, but to abjure such prescribed choices".)

Moreover, it will still be the case that some groups, because of their strategic position as owners of means of production, are in a position of power vis-a-vis everyone else such that they can exploit and draw income from the fact that they occupy this position. Thus it remains to be seen why this asymmetrical relation of power, generated by unequal ownership of the means of production, is justified. And it is worth point out that most "libertarians" or neoclassical-types don't have an answer here, because this isn't a question they think critically about. Far more often, they merely assume that the institutional "rules of the game" in capitalism are quasi-natural laws, and for good reason. Because if most ordinary people (who work for a living) were asked if they thought it was just that some people are able to get paid just for, as it were, already being rich... it's hard to imagine them unequivocally saying "yes".

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"Superfreakonomics" Quackery

Call it hokum, drivel, tripe, balderdash, bs. Call it what you like. My biggest problem is that a lot of it is just false.

Here's a nugget from "Superfreakonomics" (no, I'm not joking about title).

"Then there's this little-discussed fact about global warming: while the drumbeat of doom has grown louder over the past several years, the average global temperature during that time has in fact decreased..."

But as economist Brad DeLong points out, this is baloney:

As best as I can see from http://data.giss.nasa.gov/gistemp/graphs/Fig.A2.txt, this year is:

• 1/5 of a degree F warmer than last year
• the same temperature as 2007 and 2006
• 1/7 of a degree F cooler than 2005
• 1/10 of a degree F warmer than 2004
• the same temperature as 2003 and 2002
• 1/7 of a degree F warmer than 2001
• 2/5 of a degree warmer than 1999 and 2000
• the same temperature as 1998
• and warmer than every single other year since the start of the Industrial Revolution--a full degree F warmer than 1960, for example.

How do you get from that temperature record to the statement that "over the past several years... average global temperature... has in fact decreased"?

Right. And my next question is: are we going to be stuck walking by this on display tables as we enter Borders for the next 5 years? Ugh. In the long run, though, I feel like we can rest assured that ephemeral swells of the publishing industry such as this will probably just be fodder for garage sales in, say, 10 years time.

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Krugman on the state of Economics

Krugman has a long article about "How the economists got it so wrong" coming out in the NYTimes magazine this Sunday.

There's a lot to say about it, but I guess the most striking thing for me is how batshit crazy the neoclassical hardliners sound. e.g:

Edward Prescott, who was then at the University of Minnesota (you can see where the freshwater moniker comes from), argued that price fluctuations and changes in demand actually had nothing to do with the business cycle. Rather, the business cycle reflects fluctuations in the rate of technological progress, which are amplified by the rational response of workers, who voluntarily work more when the environment is favorable and less when it’s unfavorable. Unemployment is a deliberate decision by workers to take time off.

Put baldly like that, this theory sounds foolish — was the Great Depression really the Great Vacation?

Foolish is a polite word for what it sounds like. Make sure to check this out as well:

Thus Chicago’s Casey Mulligan suggests that unemployment is so high because many workers are choosing not to take jobs: “Employees face financial incentives that encourage them not to work . . . decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).” Mulligan has suggested, in particular, that workers are choosing to remain unemployed because that improves their odds of receiving mortgage relief. And Cochrane declares that high unemployment is actually good: “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.”

No joke. Jobs aren't scarce, and neither were they scarce during the Great Depression. People just didn't want to work, so they willingly became unemployed. That seems to accord perfectly with everything we know about the Great Depression... er... what!?

Didn't any of these people ever read Grapes of Wrath?

It's amazing to me, as someone outside the economics world, that these neoclassical hardliners have spent the better part of 60 years arguing that all unemployment is voluntary. Crazy stuff. I suspect that there is no such thing as involuntary employment, according to these dogmatists, because admitting there was would license the modus tollens: if all unemployment isn't voluntary, then markets are not inherently efficient and rational. Of course, those premises about inherent efficiency and strategic-rationality are the founding pillars of their whole intellectual edifice. One doesn't even really bring them up to talk about them, much less question them. They are to be worshiped not trifled with. That's how you come up with nuggets like this:

In 2004, Alan Greenspan dismissed talk of a housing bubble: “a national severe price distortion,” he declared, was “most unlikely.” Home-price increases, Ben Bernanke said in 2005, “largely reflect strong economic fundamentals.”

[...]

But there was something else going on: a general belief that bubbles just don’t happen. What’s striking, when you reread Greenspan’s assurances, is that they weren’t based on evidence — they were based on the a priori assertion that there simply can’t be a bubble in housing.

Right. Because you can't say there's such things as bubbles lest you expose those magical pillars about efficiency to empirical questioning. As Krugman explains:

But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.

Krugman insinuates (but leaves it at the level of insinuation) that some of the currency that this moronic dogma has in the Economics profession owes to its instrumental value (esp. in the 80s) in aiding financiers in landing massive profits. This isn't really very surprising, when you think about it. If you said something critical about the stock prices in the late 90s, if you threatened the neoclassical dogma with talk of recessions or bubbles, you were cast aside as a cook. And not just in the 'academic world'. In industry, people often don't want to seem to listen to nay-sayers when everyone seems to be having a good time and making a ton of money. This is how massive deceptions like Enron and Madoff go down. People are told they're making great returns, and they don't really bother to see if that's sustainable or even really true. Just keep the $$$ flowing. Some rational system indeed.

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David Harvey on 1970s New York

I'm currently reading David Harvey's excellent, clear, and politically sharp A Brief History of Neoliberalism (2005: Oxford University Press). I couldn't help but share a little bit of what I'm getting out of the book.

While I might post later on more holistic considerations raised by the text, I'd like to just focus this post on some of the facts and analysis he offers regarding 1970s New York city and the trajectory the city (and many others) have taken since.

To put some background in place, I should mention that (as Harvey notes) the early 1970s were marked by a global economic crisis of capitalist accumulation (i.e. profits were down across the board). Unemployment reached levels not seen since the onset of the Great Depression, and it was clear by the mid 70s that the "long boom" of the post-War era was over. The OPEC oil embargo, and the spike in oil prices, put an exclamation point on all of this.

Now to New York. We must recall that New York had a severe fiscal crisis which arose from "capitalist restructuring and deindustrializaion" which had for several years steadily eroded the economic base of the cit. Moreover, the rapid suburbanization and "white flight" of the 60s had "left a good deal of the city impoverished". The result, unsurprisingly, was social revolt and unrest among marginalized populations in the city in the late 60s.

This is what Washington called the "urban crisis" at the time, which afflicted nearly all major US cities in the late 60s/early 70s. As Harvey points out, "the expansion of public employment and public provision -facilitated through generous federal spending- was seen as the solution". But when the crisis of the early 70s hit, tax revenues dropped sharply and with it Federal aid.

Now this is where the deep fiscal crisis in New York emerged from. Due to the above, "the gap between reveunes and outlays in the NYC budget (already large because of profligate borrowing over many years) increased". The city was tanking.

But in the midst of this crisis there emerged a cabal of NY investment bankers and leaders of major financial institutions (led by Walter Wriston of Citibank) who refused to roll over the city's rising debt. This, as intended by the leaders of finance, forced the city into technical bankruptcy.

In the wake of the crisis and the subsequent bailout that was required to upright the capsized city budget, entirely new institutions were set up that attempted to blot out the sediments of social struggles that had shaped the old.

The financial elites now in control of city finances "had first claim on city tax revenues in order to first pay off bondholders: whatever was left over went to essential services". The effect, Harvey argues, "was to curb the aspriations of the city's powerful municipal unions, to implement wage freezes and cutbacks in public employment and social provision (education, public health, transportation), and to impose user fees (tuition was introduced into the CUNY system for the first time). "

Now I dont think Harvey is out of line when he suggests that this development represented a "coup by the financial institutions against the democratically elected government of New York City, and it was every bit as effective as the military coup that had occured earlier in Chile".

Meanwhile, Gerald Ford's Tresury Secretary, William Simon (a supporter of the military coup against Allende in Chile, and later a head of the super-conservative "Olin Foundation") strongly advised the president to withhold federal support to the deep fiscal crisis in New York City. ("Ford to City: Drop Dead, was the headline in the New York Daily News"). The idea here was that if any bailout of the city should occur, it should be seized upon as a political opportunity to restructure it in ways amenable to those who were appalled by the gains made by social movements in the city throughout the 20th century. Thus, any bailout must be made "so punitive, the overall experience so painful, that no city, no political subdivision would ever be tempted to go down the same road".

The result was that "within a few years, many of the historic acheivements of the New York working class were undone" and much of the city infrastructure (e.g. the subway system) "deteriorated markedly for lack of investment or even maintenance". Thus life in New York became "gruelling and the civic atmosphere turned mean". "Working-class and immigrant New York was thrust into the shadows, to be ravaged by racism and a crack cocaine epidemic of epic proportions in the 1980s that left many young people either dead, incarcerated, or homeless, only to be bludgeoned by the AIDS epidemic that carried over into the 1990s."

Thus, "redistribution through criminal violence became one of the few serious options for the poor, and the authorities responded by criminalizing whole communities of impoverished and marginalized populations".

"The victims were blamed, and Giuliani was to claim fame by taking revenge on behalf of an incresingly affluent Manhattan bourgeoisie tired of having to confront the effects of such devastation on their own doorsteps".

Of course, conventional wisdom has it that "(non-white) criminals took over New York in the 1970s" and the righteous Mayor Giuliani came in and "cleaned the city up". Of course, no one will dispute that the economic climate changed drasitically in New York from 1979 to 1999, but this is not tantamount to 'progress' in some holistic sense. The change from 1979 to 2009 perfectly exemplifies the contradictions internal to the logic of gentrification. Certain concrete features of the city improved (infrastructure, tax revenues, saftey, investment, etc.), this cannot be denied. But the condition of this resuscitation of the city was that poor and marginalized populations would be displaced and forced elsewhere, that city political and economic institutions would be restructured to the liking of capitalists (i.e. "to make a good business climate in the city"), that much of the city was evacuated of 'undesirables' to make room for a new set of professionals, fianncial technocrats, capitalists, and others able to afford preposterous rents and costs of living.

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