Lars P. Syll and Brad de Long on True Keynesians

So I don’t fully understand the argument here. Brad de Long (BDL) seems to be claiming that Lars P. Syll (LPS) is claiming that to be a ‘true Keynesian’ one must believe that temporary demand-shocks lead to a permanent decline in output.

BDL says, in contrast to what LPS claims, John Maynard Keynes (JMK) himself did not believe that short-term demand-shocks lead to a permanent decline in output.

To this end, BDL quotes a passage from Ch22 of The General Theory in which JMK describes how a crisis can eventuate. In this description, business managers are disappointed at lower than expected profits (i.e. a ‘declining marginal efficiency of capital’). This causes them to reduce investment and increase their liquidity preference, which in turn causes unemployment.

I disagree with BDL’s claim that the quoted passage suggests Keynes did not believe that a temporary fall in aggregate demand could lead to a long term decline in output. In all honesty, the passage doesn’t seem to suggest anything one way or the other. Perhaps business manager’s profit-expectations were disappointed because of an unanticipated decline in demand. Or perhaps demand remained utterly constant and the business managers just duped themselves into thinking demand was about to take off, and then it didn’t.

This is probably just me being dense, but I just don’t see why BDL thinks that passage proves anything about what Keynes thought about the ‘long term’ effects of ‘short term’ demand fluctuations. The marginal efficiency of capital is defined by Keynes as:

being equal to that rate of discount which would make the present value of the series of annuities given by the returns expected from the capital asset during its life just equal to its supply price. This gives us the marginal efficiencies of particular types of capital-assets. The greatest of these marginal efficiencies can then be regarded as the marginal efficiency of capital in general. The reader should note that the marginal efficiency of capital is here defined in terms of the expectation of yield and of the current supply price of the capital-asset.

The ‘expected annuities’ here are going to depend on what business managers think future profits are going to be, which they determine by ‘projecting forward’ the situation at the present time. The situation at the present time could be the actual number of sales they had that period, which is (part of) aggregate demand. A sudden fall in demand will reduce the expectations of future profits and hence the marginal efficiency of capital.

On a broader point, the use of ‘short term’ and ‘long term’ is massively confusing. The ‘non Keynesian’ argument seems to be that a short term dip is cancelled out by another short term rise, so that the integral of the overall output level for the entire history of human civilization remains constant regardless of period-by-period fluctuations.

I genuinely don’t know (or even much care) what the ‘proper Keynesian’ argument is vis a vis the effect of short term fluctuations on the long term. It seems obvious to me that short term falls in output (i.e. unemployment) will sum to a fall in ‘long term’ output. Perhaps I’m wrong about that, and I’d be grateful if someone could explain why.

The dearth of *monetisable* investment opportunities

Isn’t the problem here that there is a lack of monetisable investment opportunities, rather than a lack of investment opportunities per se?

I mean, the Internet is a great invention, but a lot of the benefits it brings people’s lives aren’t directly exploitable by capitalists. The blogosphere has been a huge benefit to my personal education and self-actualisation, but none of those benefits have resulted in profit going to capitalists. People write blog posts for free and I read them for free (modulo the cost of an Internet connection and PC). Both bloggers and readers get something beneficial out of the exchange, but no actual money changes hands.

This highlights one of the big problems with capitalism: investment isn’t directed towards things that are actually useful or beautiful, but towards things out of which capitalists believe they can make money. A classic example of this problem is the development of new antibiotics. Because of the development of drug-resistant bacteria, we need new antibiotics, and we need new ways of combating bacterial infection.  But these new ways aren’t being developed because there isn’t any obvious way for private businesses to profit. “Antibiotics are a one-and-done treatment, and are far less profitable for Big Pharma than drugs taken daily to treat chronic conditions and, preferably, have no competition to keep costs down.”

Another acute technological problem lies in transport. This guy has a good explanation as to why private-sector companies won’t invest in Elon Musk’s Hyperloop concept, but he can’t seem to recognise that the obvious solution is to simply have government pay for it. Investing in uncertain, expensive, and speculative technologies is one of the things that government is for.

One of the most frustrating things about the privatisation vs. nationalisation debate is how irrelevant it is. Ultimately, you’ll still have scientists and engineers in labs and workshops trying to solve the problem. It is not clear to me that there is any systematic difference between private and public enterprise in this regard. Great innovations have come out of both publicly and privately-funded initiatives (although it should be noted that most of the really big, important innovations have been paid for by the government; aerospace, the development of the electricity grid, the Internet, the World Wide Web, GSM, most of the early work in computers…).

The solution to both anti-bacterial resistance and the transport problem and global warming is to “just get on with it”. If the private sector won’t pay for it then democratically-accountable governments should. Ultimately someone needs to pay for and manage the research and technological investment programmes necessary to solve our problems. Rather than dicking about playing at shops, we (i.e. humanity) should just get on with it.

Shackle and uncertainty

Reading this interview with G.L.S. Shackle, I am struck by this point:

“involuntary unemployment” merely means that there are people who haven’t enough faith in their expectations to give employment.

Something I’ve always been unclear about with regards to Keynes is whether he (and the post Keynesians, and weird hybrids like Shackle) believed that uncertainty was the only barrier to full employment. There is no obligation on anyone to use all the resources at their disposal. You could argue that the only reason anyone ever maintains excess resources is because of uncertainty, but this presupposes that you – the individual entrepreneur – have direct control the quantity of the resources available to you.

In this context the “resource” is the population of employable people. The entrepreneurial class does not control the population of employable people, and it is not clear that they would necessarily choose to employ the entire population of employable people, even if they had perfect foresight. Indeed it could be argued that the *ahem* entrepreneurial class has an interest in keeping a reserve army of labour unemployed so as to maintain discipline within the ranks of those they do choose to employ.

Once again, economics ignores the political dimension.

Two economic realms

There is a real world of production, consumption, exchange, and distribution. At any given moment in time the economic system has a certain capacity. This capacity is determined by the total number of people available to work; and the total amount of tools, plant, and infrastructure they have available with which to work.

REMARKS

This capacity is not fixed in time. The total capacity can change through time. This change in total capacity can occur in several distinct ways:

  1. Changes in technology may enable more desirable economic outputs (or fewer undesirable outputs) with a fixed given set of inputs;
  2. Changes in the skills of the workforce may change the nature and quantity of the goods and services the economy is capable of producing; and,
  3. Changes the relative amounts of plant, tools, equipment, and infrastructure may change the nature and quantity of the goods and services the economy is capable of producing.

Point 1 is about changes in the quality tools through time, as well as the creation of new tools in response to new desires. Points 2 and 3 are about changes in the relative ratios of different existing desires. WWII provides examples of all three types of change. The war saw technological change, but it also saw changes in the type of outputs that the economies of the combatant economies were actually producing, and hence the skills and tools that were deployed.

THE REAL WORLD AND THE SYMBOLIC WORLD

Because this real world of production, consumption, exchange, and distribution involves people interacting and coordinating their efforts, there needs to be some way for them to communicate with each other. One of the unique features of the animal known as homo sapiens is our use of symbolic communication. This enables humans to coordinate their actions in ways that other animals are simply incapable.

There are lots of tools for symbolic communication. Books and instruction manuals are one example; prices and money are another. Although a particular form of symbolic communication will be instantiated in a particular way (for example, being recorded in a notebook, or stored in magnetic charges on a computer hard drive), it is their meaning, which is generated within human minds, that is really important as far as economics is concerned.

Symbols have meanings, and, depending on those meanings, symbols cause humans to behave in different ways. If I have lots of the symbol known as “money” (i.e. if my bank balance is high) I will behave differently than if I have little money. A share in a company is a symbol of the estimate of the real wealth that that company possesses at the moment and an estimate of the wealth it will generate in the future. This estimate is generated by the judgements of many different people, including accountants and market participants.

If I have purchased a share in a company I will behave differently depending on whether that symbolic value increases or decreases. If it decreases in value I may choose to “sell” my share in the company, thus cutting my losses, in doing so I will affect a small change on the collective estimate of that company’s prospects for generating real wealth.

REAL WEALTH AND SYMBOLIC WEALTH

There are two kinds of wealth; real wealth, and symbolic wealth. Real wealth is the ability to acquire a particular real good or real service at a time I wish. Symbolic wealth is the method by which we humans keep track of what our real wealth is, who is belongs to, and how it should be organised.

In praise of hierarchies

In which your humble correspondent has a minor disagreement with Chris Dillow.

Blogging titan Chris Dillow does not like managers.

As you would expect from such a luminary, Chris’s reasons for disliking the Boss Class are astute and well-thought-out:

The pursuit of efficiency – managerialism’s main goal – cannot be a value-free exercise. “Efficiency” has many conflicting meanings. Does it mean increasing GDP per head, Pareto-optimality, utilitarianism, maximizing Rawlsian primary goods or maximizing capabilities, in Amartya Sen’s sense? How do we choose a meaning of efficiency from this menu? And if we choose utilitarianism (as managerialism often does) what is the moral justification for imposing costs on some – up to and including death, Mr Hoon – so that others can gain?

Chris makes the important distinction between managerialism and management. Managerialism is the ideology of the managerial class, and as such is the ruling ideology of our age. Management, or technocracy, is the application of science to the problem of achieving certain ends given certain resources, and is therefore a branch of engineering*.

I disagree with Chris that all top-down management is harmful. My reasons for thinking this are as follows.

An industrial society requires specialisation. Our world is too complex for one individual intellect to encompass any more than a tiny fraction of it in any depth. In order to function, our industrial society requires that people specialise and develop expertise in particular areas. We need teachers, nurses, paramedics, electrical engineers, baristas, taxi drivers, geologists, science fiction writers, booksellers, economists, entertainers, and economics bloggers. No one (contra Heinlein) can learn how to excel in every one of these areas.

Specialisation requires informational transfer. Individual people, with their individual specialisations, need a way of communicating. It is only through communication that these individual experts will be able to co-ordinate, and it is only through co-ordination that they will be able to deliver the products, projects, and services that we desire.

How is this co-ordination to be achieved? There are two broad answers to this question. One is hierarchy, and the other is… Something. I’m not going to say ‘markets’ because I’m fed up with that word. Call it decentralised co-ordination.

DIGRESSION

I know what a hierarchy is. I understand what a hierarchy is. It is a situation in which one person is vested with authority, and this authority entitles them to tell other people what to do, and it requires that those people do actually do what the first person tells them to do (within various limits and subject to various contextual caveats yaddah yaddah…).

But what is a market?

Seriously.

At this stage a market might as well be an invisible unicorn that grants magical wishes, or a pair of intersecting lines on a page of a textbook, or a place you go to at weekends to buy overpriced honey with bits of honeycomb left in it. I honestly don’t know any more. “The market” means so many things to say many different people that I give up on trying to understand it.

So instead of market, I will use the term decentralised co-ordination. This encompasses a much broader set of behaviours than just whatever markets are taken to be. When motorists are traversing a roundabout they are engaging in decentralised co-ordination. The crowds who walk down Oxford Street are engaging in decentralised co-ordination when they avoid bumping into each other (most of the time).

END OF DIGRESSION

De-centralised co-ordination has a problem. This problem is best illustrated by an example. Suppose we want to build an aeroplane. This is a complex task and therefore requires specialisation. Specialisation requires co-ordination. Co-ordination requires communication. The problem is that within a completely  decentralised system of co-ordination each individual would have to communicate with each other individual. This results in a combinatorial explosion in the amount of communication that has to go on.

If you have, say, 300 engineers working on the design, manufacture, and commissioning of your aeroplane then, in a completely decentralised situation, each engineer would have to engage in 300! interactions (that’s factorial 300) in order to co-ordinate her individual efforts with her fellow engineers.

How much is 300 factorial? If we assume that each interaction will be a “brief chat”, how many “brief chats” will our engineers have to engage in so as to design, manufacture, and commission our aeroplane?

According to Wolfram Alpha, about this many:

30605751221644063603537046129726862938858880417357699941677674125947

65331767168674655152914224775733499391478887017263688642639077590031

54226842927906974559841225476930271954604008012215776252176854255965

35690350678872526432189626429936520457644883038890975394348962543605

32259807765212708224376394491201286786753683057122936819436499564604

98166450227716500185176546469340112226034729724066333258583506870150

169794168850353752137554910289126407157154830282284937952636580145235

23315693648223343679925459409527682060806223281238738388081704960000

00000000000000000000000000000000000000000000000000000000000000

00000000

Wow. OK.

So, what do we do?

A far more sensible option is to divide the engineers into functional groupings and have each group sub-divided into smaller groups, where each group reports to one particular engineer who digests their information and then passes it up the chain, whilst receiving instruction from those above based on what she has told them; in other words, a hierarchy.

If we have one engineer at the top of the chain, and if she has seven engineers reporting to her, and they have seven engineers reporting to each of them, and they have seven engineers reporting to each of them… we end up with a potential capacity of 1 + 7 + 49 + 343 engineers. What are the total number of “brief chats” required now?

Well let’s see, we have one to seven, then each one of those seven to seven, then each one of those seven to (substantially less than) 343.

So it’s 7 to the 4 right? That’s how many brief chats are going to have to take place. Which according to Wolfram Alpha is:

2401

Which is a lot, yeah? But a lot less than we’d be dealing with if we expected our engineers to communicate on a completely non-hierarchical basis. Two thousand four hundred and ten is a tractable number. You can do business with that kind of number.

This is why hierarchies exist. They are more informationally efficient than non-hierarchies. We have managers because if we didn’t, we couldn’t have cheap flights, we couldn’t have a nuclear deterrent, we couldn’t have the Internet, we couldn’t have electricity. We couldn’t have almost all of the goods and services afforded by our wonderful industrial society.

Bosses exist for a reason; if we didn’t have them, we’d have to create them. Or live in mud huts and grow all our own food.

This may sound strange. Many people think of hierarchies as barriers to communication. We see them as controlling, fusty, bureaucratic, and inefficient.

But really they’re not. Like democracy, hierarchies are the least bad solution to the problem they are intended to solve.

LEFT OUTSIDE SUGGESTS KAIZEN

Some guy on Twitter disagreed with my disagreement with Chris. So what about Kaizen? Well Kaizen is all very well. But the other pillar of the Toyota production system is something called Just In Time. JIT is not a system that spontaneously arose because of the self-interested actions of atomistic individuals working as equals. JIT requires enormous amounts of discipline, morale, and managerial gumption to implement in the first place, and then requires that workers maintain that level of discipline consistently for a long period of time.

So how does one ensure that the workers maintain that level of discipline? Whose responsibility is it to ensure the workers are kept in line?

Well, the bosses, of course.

Once again, the question devolves to an issue of who benefits. Are workers better off for being corralled and controlled? Are the fruits of hierarchical, specialised industrialisation such that workers are – on the whole – better off for being managed? I honestly don’t know.

The real problem here is…

THE POLITICAL ELEMENT

Chris has a point. Left Outside has a point. Hierarchies lend themselves to rent-seeking and power-grubbing. Here’s a points from Left Outside:

I’m thinking more along the lines of avoiding bad news, important people overriding the more knowledgeable.

This happens. But I submit that this will happen in basically any situation involving human beings ever. This is a problem of power, not hierarchy, per se. The problem, as ever, is politics. It is about the morality of the right of some people to dictate to others, as opposed to the effectiveness of the right of some people to dictate to others.

Kaizen is a good thing to have, but it only works if you treat your employees with respect. I don’t know what ‘respect’ means in this context. Some people would argue that demanding that people work for a capitalistic enterprise is inherently disrespectful, but there you are.

Bosses are always going to exist. I’d rather they were all elected by their peers, rather than being appointed by our capitalist overlords; but the fact remains they are necessary. Any socialist utopia worth living in will have bosses, because any socialist utopia worth living in will need the kinds of products, projects, and services that can only be provided by hierarchical organisations.

IN SUMMARY

Like any technology, hierarchy can be used for malicious and anti-social purposes. But that doesn’t mean the technology is intrinsically harmful or that it isn’t worth using in the first place.

*Chris calls technocracy a practice, in the sense used by Alasdair MacIntyre.

Why do people care so much about inflation?

Economists are fond of asking this question. Why do people care so much about inflation? Nick Rowe does it here, Noah Smith does it here. From Nick Rowe:

A lot of non-economists believe the inflation fallacy. I’m an expert on what non-economists think about economics. That’s because I have spent the last 30 years trying to teach non-economists how to think about economics.

Sometime in February, I will ask my ECON1000 students: “So, why is inflation a bad thing?”

I can anticipate the look on their faces. Some will give me that look of sympathy, normally reserved for those who aren’t too bright. Others will look like they know this must be a trick question, since I wouldn’t ask anything that were really quite so obvious. Finally one will answer.

“Because if all prices rise 10% we will only be able to afford to buy 10% less stuff. Duh!” Except the “Duh!” is silent.

That’s the inflation fallacy.

Why is the inflation fallacy a fallacy?

Apples bought must equal apples sold. What is an expenditure to the buyer of apples is a source of income to the seller of apples. Every $1 rise in the price of an apple means the buyer is $1 poorer and the seller is $1 richer.

But there’s a problem with Rowe’s argument; in fact, it’s a problem that crops up again and again in economics: wilful obtuseness on matters of politics. Economists want so much to be an a-political ‘scientific’ discipline that they’d rather sit around being smart-arses and saying stuff like: “if all prices double, and all wages double, that would have no effect on the quantity of labour demanded,” than actually addressing what actually concerns people about inflation.

When people say they are “worried about inflation” what they actually mean is that they are “worried that their real wage will be eroded because commodity prices rise faster than their wages.” Inflation is a worry because it represents one (very effective) way of bosses reducing workers’ wages and increasing profits without the workers being in a position to do anything about it.

If unemployment is high and unions are weak – as is currently the case in the UK – then workers are not in a position to demand rises in their real wage, so commodity inflation represents a threat. 

Now, as Smith argues, there are good reasons to think that the ‘best’ situation is one of moderate, positive inflation; but that necessary upward price adjustment cannot occur simultaneously across all sectors of the economy. Someone has to move first. So the question arises: who shall bear the short term burden of differential price rises, workers or firms?

There has been a great deal of opposition to fiscal stimulus because it is claimed that fiscal stimulus will lead to inflation. This is obviously wrong in the present situation of high-unemployment, because if there is excess capacity in the economy (and what is unemployment but excess capacity?) then using some of that extra capacity will not necessarily result in inflation.

But warnings of inflation are a very effective tool for cowing the masses into doing what the ruling class wants. The ruling class want weak trade unions, low inflation, and a high profit share out of total income. The masses ought to want a high wage share out of total income, strong trade unions, and moderate inflation. Insofar as a trade-off exists between unemployment and inflation the masses ought to prefer a situation of full employment and moderate inflation, over a situation of high unemployment and low inflation.

But there are many cognitive biases that exist to prevent the masses from expressing a rational preference. Although people fear unemployment, even in the worst economic situation, the majority of people remain employed. Unemployment is awful for the people experiencing it, but those people are only ever one small fraction of the total working population. But inflation is experienced by everyone in the working population.

The salience effect leads people to overweight the importance of things that are in front of them. People spend more time shopping and looking at rising commodity prices (especially of big-ticket items like petrol) than they do looking at unemployment figures. The just world fallacy and fundamental attribution error leads people to blame individual unemployed people for being unemployed, rather than blame the impersonal economic forces that are actually its cause. As George Orwell writes in The Road to Wigan Pier, this can even lead people to blame themselves:

When a quarter of a million miners are unemployed, it is part of the order of things that Alf Smith, a miner living in the back streets of Newcastle, should be out of work. Alf Smith is merely one of the quarter million, a statistical unit. But no human being finds it easy to regard himself as a statistical unit. So long as Bert Jones across the street is still at work, Alf Smith is bound to feel himself dishonoured and a failure.

On the other hand, if the supermarket jacks up the price of petrol, I – and many others – are far more likely to demand that Something Must Be Done; and we are more likely to be listened to, because petrol prices affect more people, and their impact is more immediate and obvious than that of unemployment.

In summary: anti-inflation policy is a wedge issue that enables the rich to persuade the poor to vote against their own interests. I have no idea what to do about this.

Some distinct arguments in favour of free markets

What follows is a list of arguments in favour of free markets. I have made no attempt to critically analyse each argument, as my intention is merely to present and label various arguments so that I can refer to them at a later date.

It should be noted that many arguments in favour of free markets present markets in opposition to some alternative, usually something called ‘central planning’.  This opposition strikes me as a false dichotomy, as it is entirely possible to imagine a system that incorporates some elements of central planning with some elements of markets. In fact, we don’t have to imagine such a system because we actually live in one; the real world of economic activity is characterised by an intermingling of central planning (e.g. within firms and governments) and market systems (e.g. between firms, households, and sole traders).

Anyway, without further rambling, I present the arguments…

Markets as disciplined pluralism

In The Truth About Markets John Kay argues that what makes markets really useful is that they allow for what he calls ‘disciplined pluralism.’ Markets are pluralistic because they allow people to ‘propose’ different projects, usually in the form of business ventures. Markets are disciplined because if these business ventures provide goods or services that are not in demand then the business will fail, and the resources used by that business will be allocated elsewhere.

Kay distinguishes the disciplined pluralism of the markets with the lack of discipline and pluralism one often finds in government-controlled enterprises. Because governments wield a monopoly on the legitimate use of violence, government-supported projects can survive long after they have been shown to be inadequate or wasteful. Kay illustrates this point with examples like Concorde and the British AGR nuclear power stations. Both of these ‘white elephant’ projects cost billions of pounds and survived long after a private company would have gone bankrupt.

Furthermore, Kay argues, governments tend not to be pluralistic; they encourage industries to speak in ‘one voice’, or simply ignore alternative viewpoints altogether, with the result that potentially good ideas are not given a fair hearing.

Disciplined pluralism means markets act as filters, allowing good ideas to pass through and spread, whilst suppressing bad ones. This pro-market argument explains how markets provide for dynamic efficiency in the form of innovation, invention, and technological progress. Good innovations are rewarded with increasing market share, and bad innovations are allowed to fail.

Markets as aggregators of tacit knowledge

‘Tacit knowledge’ or ‘tacit knowing’ is a theory introduced by the polymath Michael Polanyi. It denotes the idea that a great deal of our day-to-day knowledge is deeply personal, intuitive, and cannot be reduced to a set of written or spoken propositions. Friedrich Hayek applied this concept to economics, and argued that much economic activity relied on this kind of in-expressible knowledge; and for so no central planner could ever hope to co-ordinate economic activity, because the central planner could not express the commands necessary to instruct people to do what they needed to do.

Markets provide a solution to this problem. Individuals no longer have to communicate explicit instructions for everything every other individual has to do. Instead, individuals use the price mechanism of the markets to transmit information between themselves.

Markets as systems of co-operation

In The Market System Charles Lindblom characterises the market system as a tool that enables co-operation. This notion has something in common with the idea that markets aggregate tacit knowledge. I discussed Lindblom and his book in more detail in this post.

I suspect that this argument in favour of the market system can be collapsed into one of the other arguments, possibly the tact-knowledge aggregation argument or the decentralised optimisation argument.

In fact, this isn’t so much an argument in favour of markets as a description of what markets are for, without necessarily demonstrating that markets are superior to alternative means of co-operation. Lindblom is very clear that markets have both positive and negative characteristics.

Markets as decentralised optimisation systems

It is possible to show that, under certain highly restrictive conditions, market systems can achieve something called ‘static efficiency’, whereby scarce resources are, in some sense, allocated in an optimal fashion. The most complete expression of this view is to be found in Gerard Debreu’s Theory of Value.

I have yet to read Theory of Value, but I am reliably informed that it contains some elegant and beautiful mathematics; however it is not clear that the theories that Debreu presents has and relevance to the actually-existing economic world. Indeed, it seems that Debreu himself was at pains to point out that his theory had no real-world implications. In fact, it could be said that Theory of Value constitutes a negative result, essentially demonstrating that the conditions required for markets to achieve optimal results are so restrictive that they will never be met in practice.

Markets as revelation of democratic preference

I am vaguely aware that certain people argue that markets are tools for revealing the collective ‘will’ of diverse groups of people. Without wishing to burden this notion with more credence than it can support, I shall include this in the list, if only to ease future referral.

 

Marxism vs. social democracy

Whilst re-reading Straw Dogs by John Gray, I came across this remark on the post-war consensus:

The welfare state was a by-product of the Second World War. The National Health Service began in the Blitz, full employment in conscription.

Look back to the nineteenth century, to the time between the end of the Napoleonic Wars and the outbreak of the First World War. That great era of peace in Europe was also a period of great inequality. The majority of the population lived from hand to mouth, and only the very rich were safe from sudden poverty.

In affluent, high-tech economies, the masses are superfluous – even as cannon fodder. Wars are no longer fought by conscript armies but by computers – and in the collapsed states that litter much of the world, by the ragged irregular armies of the poor. With this mutation of war, the pressure to maintain social cohesion is relaxed. The wealthy can pass their lives without contact with the rest of society. So long as they do not pose a threat to the rich, the poor can be left to their own devices.

Social democracy has been replaced by an oligarchy of the rich as part of the price of peace.

It is worth reminding ourselves that William Beveridge originally conceived of the British welfare state as a system to “keep men fit for service”.

I have suspected for a long time now that the post-war consensus was an historical one-off. A confluence of global and national factors enabled the creation of a relatively peaceful and relatively prosperous world, at least in the western democracies. Adam Posen argues that we are returning to the Victorian ‘old normal’ of a highly unequal, globalised, and multi-polar world. The world founded on what Cosma Shalizi calls the “useful work of mid-century optimism and intelligence” in monetary policy has collapsed, and been replaced with a world of floating exchange rates and neoliberal trade policy; a policy which benefits the global 1%, and results in stagnant or falling living standards for the majority – at least in the western democracies.

But of course, humanity as a whole has been made better off. The new working classes of China and India are massively wealthier than they were during the so-called ‘golden age’ of capitalism. Essentially, the last thirty years has seen a transfer of wealth from the middle and working classes of the developed world up to the global elite, and down to the Chinese and Indians. What I don’t understand is whether this transition could have been handled better; could it have been possible for politicians to ‘ease the fall’ as jobs went overseas? Is it true that many people in ‘post industrial’ countries are simply surplus to requirements, as Gray implies?

Chris Dillow is fond of pointing out that social democracy faces many inherent limitations in what it can accomplish, because it attempts to reach an accord with a capitalist system that is inherently hostile to the interests of most working people. I don’t know if Chris is right; after all, what was once achieved may again be achievable, but I agree that there are many systemic reasons to be sceptical of social democracy.

Markets vs. central planning: some distinctions

I left the following comment on Unlearning Economics’ post at Peria:

As I see it, there are three intermingled debates going on here. They are: 1) An argument about the relative information-theoretic and allocative abilities of centralised hierarchical systems on the one hand and decentralised market systems on the other; 2) an argument about the intrinsic ethical and moral status of various types of political economy; and 3) an empirical argument about which nation states have killed the most people, and been responsible for the most suffering.

On the subject of argument 1): Free markets are not the same thing as capitalism. Central planning is not the same thing as communism. There has been a tendency for capitalist countries to exhibit far greater decentralisation of decision making and a greater reliance on some form of market system; but this historical fact doesn’t mean that ‘private ownership of the means of production’ necessarily requires a market system, nor does it mean that the historical tendency for communist countries to adopt central planning means that *all* future communist or socialist economies must be built around central planning.

I would also note that the most economically successful countries have historically used *both* central planning (in the form of large, centralised private firms; large, centralised government departments; and government-directed industrial policy) and decentralised market systems. Markets and hierarchies are tools, and different jobs require different tools.

I recommend ‘The Market System’ by Charles Lindblom on this subject. ‘The Origin of Wealth’ by Eric Beinhocker is also very good.

 

Capitalism vs. communism and markets vs. central planning

Reading the comments under this excellent article by Unlearning Economics, I am struck by the fact that most of the arguments in the capitalism vs. communism debate are let down by the two sides failing to lay out rigorous definitions from the outset. In order for a proper debate to take place, both sides must specify what they consider to be the necessary and sufficient conditions for an economy to be considered ‘communist’ or ‘capitalist.’

I have pointed out before that markets are not the same thing as capitalism; it would be useful now to note that central planning is not the same thing as communism. Historically, most so-called communist states have attempted to engage in central planning, rather than in market-based solutions to problems of resource allocation; but this does not mean that all conceivable communist states must necessarily engage in central planning.

I’ve just realised I used the phrase ‘so-called communist states’ in my previous paragraph; in doing so, I could be accused of ‘special pleading’, and claiming that ‘true communism’ has never existed. This wasn’t my intention, which was to highlight the fact that just because people give something a particular name doesn’t mean that the name is accurate or descriptive.

So what is communism?

I’m not entirely sure. I can think of several highly limited and unsatisfactory definitions off the top of my head. Marx himself was somewhat vague on the subject of exactly what communism would look like. This continuing vagueness is part of the problem; communism can mean lots of things to lots of different people, just like capitalism. All this just shows how important it is to lay out rigorous definitions at the outset.