Right Reason

The Most Dangerous Political Animal

In his first set of lecture notes on what I gather is a series of lectures about the Great Recession, Paul Krugman cites John Maynard Keynes’ “The Great Slump” as follows:

This is a nightmare, which will pass away with the morning. For the resources of nature and men's devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life—high, I mean, compared with, say, twenty years ago— and will soon learn to afford a standard higher still. We were not previously deceived. But today we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time—perhaps for a long time.

The technocratic point of view is that wealth is simply an artifice, it’s simply a matter of solving the problem in front of us. To paraphrase someone I read on Facebook the other day, inventing the iPhone is a matter of taking research and adding water. From the technocratic point of view, the slump is our fault and every day that it goes on, it is a failure of human ratiocination. If we had not blundered in our control of the delicate machine that is the economy, the slump could have been avoided. In sum, slumps are our fault, which is why Paul Krugman wrote a book two years ago titled, End This Depression Now!. 

I agree with Mr. Krugman that “what is going on in a depressed economy? How is it that “our possibilities of wealth may run to waste for a Time?” is a key issue for understanding the wealth of nations in the context of slumps. Yet, I think that he errs in asserting that the question “what leads to the crises that precede a depressed economy?” distracts us from considering the first question. The answer to neither is obvious. The reason we cannot end slumps with the ease of pushing a button is that we lack the dispersed bits of knowledge about the causes of the slump and the long-run results it heads towards. 

After all, the slump isn’t an event all its own; rather, it’s a continuation of events that had happened before and are, themselves, heading towards their long-run consequences. To therefore understand the first question Mr. Krugman offers, we have understand the second question. There is no such thing as ‘depression’ or ‘slump’ economics, only economic processes continuing themselves. 

 

The wealth of nations is a manifestation of a lengthy history of market selection. Entrepreneurs do create order, but whether that order is wealth, that is whether it serves the human race’s most urgent appetites, can only be determined by the markets. Although entrepreneurs make bold conjectures about what can add to a nation’s wealth, those conjectures are, nevertheless, fallible. Whether they will prove right, or at least advantageous, is a matter of the market process, and entrepreneurs are exposed to both the possibilities of success and failure, profit or loss. The fragility of an individual entrepreneur’s situation adds to the greater health of the market. The markets are thereby antifragile. They love volatility. Slumps should be understood as being part of that volatility—the rest of this post will largely be me punning the table on that point. 

Here, the feedback mechanism between entrepreneur’s conjectures and the market process is critical. As Eric Beinhocker argues in The Origin of Wealth, wealth is fit order The market process is what tests the fitness of the variety of orders created by entrepreneurs. Here, we’ve got the three conditions for evolution: a population of various entities, a means of those entities surviving through time, and the non-random selection of entities better suited to their environment. 

 

Figuring out what actually adds to the wealth of the United States, or France, or Japan, or the world for that matter, takes time. There is a knowledge problem that needs to be conquered in figuring out what is wealth and that problem can only be solved by the joint efforts of producers and consumers all trying to appease their own particular appetites. Those interactions nonlinearly add up to constitute the market process. No one knows what actually adds to the wealth of nations, so therefore everyone has got to wait for the final market test, determined by the market process. Will the iPhone profit? Will house prices continue to go down. Will this or that commodity be the future? Creating wealth simply isn’t a matter of taking scientific knowledge and adding water, it’s a matter of being alert to new possibilities for mutually beneficial exchange. 

As Arnold Kling writes in “Wither Macroeconomics?,” we have to take very seriously the idea that slumps are a product of the breaking down of the capitalist system. While such a choice of words may sound downright Marxist, it is an apt description of what happens when the patterns of specialization and trade that once constituted an economy break down. The economic ways of life that people once relied on go underwater without an immediate replacement available. All that is solid seems to dissolve to air and people, having to look for new specializations to fit into the greater economic ecosystem they are embedded in, begin to doubt the future. Going ever more Medieval, we can talk about the forces that corrupted those patterns, say policies that aggressively encouraged homeownership and mortgage lending, and still be talking more sense than attempts to explain all slumps in AS/AD fashion. 

 

The technocratic point of view would lead us to believe that the problem  of slumps is a matter of technological knowledge that requires a conscious decision to jump-start the economy, whether by fiscal or monetary stimulus. In “The Great Slump,” Keynes declared that “We have magneto trouble.” Earlier in the same article, he had declared, in the quote above, “to-day we have involved in control of a delicate machine, the working of which we do not understand.” Keynes is right that we do not understand the working of the economy, but he errs in calling it a machine. The economy is an ecosystem of production and exchange, not a machine. Injecting a little bit of stimulus here or there won’t have a linear impact, but will create a cascade of changes we can scarcely know. In the long run, we may be dead, bit the effects of our policies will live on in unpredictable fashions. 

Generally, slumps are a symptom of a greater knowledge problem and thereby need to be understood as millions of people all trying to jointly solve it. Slumps are an occasion for celebrating entrepreneurs, not policy makers. Getting out of the lump not about a jump starting an engine as it is discovering new opportunities for mutually beneficial trade. The problem is, therefore, less a matter of a stuttering engine as it is a matter of evolutionary search. The decisions to be made by millions of entrepreneurs, not hundreds of technocrats. 

Slumps are a part of the evolution of wealth. Anyone who denies that is selling snake oil. The technocrats who promise otherwise are of the most dangerous animals in the political menagerie. 

John Maynard Keynes: Advocate of Crony Capitalism?

 

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.

- Dwight D. Eisenhower, "A Chance for Peace"

 

As the clouds grew darker over Europe following Germany's invasion of Czechloslovakia in March of 1939, John Maynard Keynes took to the radio to argue that the return of tensions between Germany and Britain brought with it a silver lining: Expenditures on arms would contribute to aggregate demand which might alleviate problems of unemployment in Britain:

It is not an exaggeration to say that the end of abnormal unemployment is in sight. And it isn’t only the unemployed who will feel the difference. A great number besides will be taking home better money each week. And with the demand for efficient labor outrunning the supply, how much more comfortable and secure everyone will feel in his job. The Grand Experiment has begun. If it works–if expenditure on armaments really does cure unemployment–I predict that we shall never go back all the way to the old state of affairs. Good may come out of evil. We may learn a trick or two, which will come in useful when the day of peace comes.

A recording of Keynes' speech can be found here. The outcome of that experiment, though, wasn't governments figuring out new means to rationalize their economies and to manage aggregate demand to maintain full employment. There were many outcomes to that experiment, including  helping the development of the Postwar Consensus, but the most important one wasn't felt in Britain, but in her ally, the United States. That outcome was the gestation of the military-industrial complex. 

 

Dwight D. Eisenhower was right. Good did not come of evil; instead the evil persisted and become stronger in peacetime. The squandor of the United States' resources in useless armaments programs became a part of America's own postwar consensus that the United States had to become an active participant in world politics lest the Soviet Union triumph. Eisenhower criticized this development of a perrenial aramement industry in his 1961 Farewell Address:

A vital element in keeping the peace is our military establishment. Our arms must be mighty, ready for instant action, so that no potential aggressor may be tempted to risk his own destruction.

Our military organization today bears little resemblance to that known by any of my predecessors in peacetime, or indeed by the fighting men of World War II or Korea.

Until the latest of our world conflicts, the United States had no armaments industry. American makers of plowshares could, with time and as required, make swords as well. But now we can no longer risk emergency improvisation of national defense; we have been compelled to create a permanent armaments industry of vast proportions. Added to this, three and a half million men and women are directly engaged in the defense establishment. We annually spend on military security more than the net income of all United States corporations.

This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence -- economic, political, even spiritual -- is felt in every city, every State house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.

Rather than aramaments providing the knowledge of how to manage an economy, araments became its own interest, and ensured the development of a new pattern of crony capitalism in America. War shall ever be the friend of the crony capitalists, and workers will always suffer the costs of a little bit less butter on their tables to satisfy the appetities of the gun producers. War simply shall never be for the health of the commercial society. Those who argue otherwise don't understand its essence as a system of cooperation rather than as a system of production. 

 

The Economic Cake: A Tired Metaphor

 

As it is by treaty, by barter, and by purchase, that we obtain from one another the greater part of those mutual good offices which we stand in need of…

- Adam Smith, The Wealth of Nations

 

From The Economic Consequences of the Peace by John Maynard Keynes:

Thus this remarkable system depended for its growth on a double bluff or deception. On the one hand, the laboring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of Society into accepting, a situation in which they could call their own very little of the cake that they and Nature and the capitalists were co-operating to produce. And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice.

The notion of a single economic cake, or pie for that matter, hides the underlying heterogeneity within the market. Whether it is a red velvet or a hummingbird, cakes are homogenous. Negligible roughness in texture aside, one slice of cake is very much just like any other. Yes, there may be layers or a different distribution of solid ingredients across the cake, but those are, as said, negligible. All that the baker need to do to get a cake is to get the recipe right. It’s mostly just chemistry. The grand market order, though, has no such recipe; instead, the cake metaphor, still all too widely used even by those who should know better, only serves to confuse and obfuscate talk about the real market order.  

Simon Newcomb got it right in his  Principles of Political Economy when he talked about the market order as a grand ecosystem (though he himself used the metaphor of an organism) spreading across the work: 

We readily perceive that the system by which the body of farmers on the prairies of the West exchange goods with various countries in Europe, Asia, and South America is exceedingly intricate in its detail. Its successful operation depends upon the proper co-ordination of the efforts of manufacturers, merchants, ship-owners, and managers of railways. There being little real concert of action among these widely separated individuals, the co-ordination of their work is matter of slowly growing habit.

Rather than a monolithic cake, what a great demigod spectator beholding the entire economic order would see is a massive system of social cooperation in which people synchronize their actions so as to be adapted to actions beyond their spheres of knowledge and perception.  

Newcomb’s description of the global economic order is reminiscent of Charles Darwin’s final words when he contemplated how his theory of descent with modification made manifest the grand order of a tangled bank:

It is interesting to contemplate a tangled bank, clothed with many plants of many kinds, with birds singing on the bushes, with various insects flitting about, and with worms crawling through the damp earth, and to reflect that there elaborately constructed forms, so different from each other, and dependent upon each other in so complex a manner, have all been produced by the laws acting around us.

Both are constituted by separate orders, nested within the grander ecosystem, adapting to one another. Just as robins flourish by consuming the worms of the damp earth, so do the workers in a Bangladeshi garment manufactory earn their daily bread thanks to the fashion tastes of consumers across the world.  Unlike the monolithic order of the cake, the market’s order is ecological, and comparing it to a cake, or a pie for that matter, is therefore erroneous.

 

More important, I suspect, is the moral issue. Importantly, the economic-cake narrative lacks dramatis personae. The market is actually made up of named entrepreneurs who are providing the  Things would be different if it weren’t for people like Alfred Krupp or Richard Branson. Whether it is Virgin Records or Krupp steel, the economy is made up of the ideas which actual people, rather than dismembered production functions, have brought to life.  

Yet, in the description of capitalism which Keynes elucidated there is only an unfeeling production function, an unseen baker mixing this and that to cook together the economy. That the cake view of the economy necessarily has a moral dimension is revealed in Keynes’ article, “The Social Consequences of Changes in the Value of Money,” when he writes about how the moral justification of capitalism is that everyone gets their just deserts:

The economic doctrine of normal profits, vaguely apprehended by every one, is a necessary condition for the justification of capitalism. The business man is only tolerable so long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to Society.

 As long as someone receives in proportion to what he contributes to society, capitalism is just the doctrine goes. Yet, it implies that all that entrepreneurs do is to contribute to social well being as if they were unthinking inputs into a hegemonic production function. That is wrong, though, entrepreneurs are the dramatis personae of economic change, and economic change is brought about by what they do. To morally speak about the commercial society, we musn't speak about entrepeneurs as if they were machines, but rather human beings who are able to see potential in the world, and who make that potential actuality in their own particular cirumstances.

 

The “you didn’t build that” hoopla from 2008 well encapsulates the moral issues with the economy-as-cake point of view. The dramatis personae are very real human beings whose aspirations and accomplishments matter.  After all, the economic cake does not just exist. Instead, it is the product of an almost uncountable of human beings all seeking to improve their position in life. It’s easy to simplify that instinct for improvement as a money motivation, and more often than not useful to do so; nevertheless, the exact way that people end up improving their lives is depend on the particular circumstances each person finds himself in.

With “you didn’t build that,” we find the basic theme of the market order which the characterization of it as a cake so brusquely rolls over: The drama of the market order, and there certainly is drama, is found is the particular circumstances within the order.  Whether it is Branson signing the controversial Sex Pistols or Krupp’s belief in the superiority of breech-loading cannons, the economy is being created over again and again as the plans of different entrepreneurs fructify. 

“You didn’t build that” caused such an outcry because many Americans, especially small-business entrepreneurs, saw President Obama as ignoring their own particular drama which resulted in their own business, however small, itself fructifying. Like protagonists out of Atlas Shrugged, they saw themselves as building something which hadn’t existed before and then told that they didn’t create what they saw before them by a force which then proceeds to take credit. Whether the hoopla was deserved - it partially was, but like all good political scandals, President Obama’s words were blown out of proportions - is besides the point, what matters is that someone actually built those businesses. There are actually real entrepreneurs who put their plans into action, and they are very much the efficient cause of the economic order we see before our eyes.

 

The moral justification for capitalism - if I may speak as if such a justification were necessary - is not to be found in how the economic cake is doled out. When it comes to the market order, we needn’t compare it to either a five-year old’s birthday in the back lawn or to the casino floors in Macau’s Casino Lisboa. Such descriptions only serve to divert out attention from what matters: That the market system is a system of cooperation in which riches are available to those who make other people well off. What matters isn’t that one contributes to Society, as if it were some cake available to all. One man’s wants become another’s road to riches. What matters is that one assist other people in their own positions in life. Capitalism’s fruits aren’t a homogenous cake, but rather a diverse set of goods all of which satisfy particular needs in particular circumstances.   

What justifies capitalism is not that’s fair, that some wise baker in the sky gives everyone their just deserts. What justifies capitalism that it puts people’s efforts into serving one another.  Profit is not ordained by a social planner nor need to meet the economists’ notion of normal profits; rather, it is earned by someone else being willing to depart with his cash for something the seller is offering.  Francis D’Anconia got it right when he pontificated:

Money demands that you sell, not your weakness to men's stupidity, but your talent to their reason; it demands that you buy, not the shoddiest they offer, but the best that your money can find. And when men live by trade--with reason, not force, as their final arbiter--it is the best product that wins, the best performance, the man of best judgment and highest ability--and the degree of a man's productiveness is the degree of his reward. This is the code of existence whose tool and symbol is money.