Economic reality is yesterday’s political choice

Economics is an agenda-setting system. Here’s a working example – Noah Smith engaging Robert Gordon (who is in his turn drinking from the poisoned well of Tyler Cowan). Gordon’s big idea is that y’know how things aren’t so great? Well, they’re always going to be awful, so there’s nothing can be done about it! And therefore, we don’t need to discuss any action and shut up.

He argues this for the following reasons. One, he thinks technological progress is slowing down. Two, he thinks the US labour force won’t grow as fast as it did. Three, educational attainment has “plateaued”, based on the OECD PISA comparison. Four, high income inequality means structurally weak demand from the “consumer” (aka labour) sector. Five, globalisation. Six, the environment. Seven, “debt” of whatever sort.

Well, the first of these is an arguable proposition. Personally, I can think of plenty of people who are convinced that technical progress is accelerating, others who think it is slowing down, and still others who think (like David Harvey) that it is illusory or even undesirable. I would argue that both the declinist and Kurzweil-ist views are wrong for the same reason: they are both exercises in cherry-picking the data. Singularitarians love computing and sometimes genetics, because both fields give you an instant optimism hit. Declinists prefer to pick problems that remain unsolved and projects that failed, because that’s what their prior assumptions are set to. Both views are dependent on prior value judgments.

But I have a more subtle and useful critique. Economists tend to think technology is exogenous. Historians of technology couldn’t disagree more. In their view, technical progress happens through learning-by-doing. This has an important corollary – you learn nothing by being unemployed except that it sucks, and a set of survival strategies that aren’t much use except in the context of being on the dole. Technology is, in part, endogenous, and therefore it is influenced by macroeconomic policy.

Surely demographics is an independent, structural force? The answer to this is “bullshit”. There is a reason why the European countries with welfare states that are more generous to parents in particular (like the UK, Sweden, and France) have much higher TFRs than the Mediterranean ones that are getting told that they aren’t having enough kids and also that they need to slash their welfare provision. Further, people who are thinking of starting a family need to know that they are likely to have a job.

And the US is a country, despite everything, where people queue up to get in. Therefore, there is an even more direct way in which its population is a political choice. They can issue more green cards.

As for education, Gordon argues that the US is doing badly, and that it is doing badly compared to its competitors. The competitors, presumably, did something different. Perhaps they didn’t spend so much time teaching the controversy? It is a political choice.

It seems to me hardly worth saying that inequality is an expression of political power, but perhaps it should be banged home. The US could become more equal by changing the tax code, hiking the top rates and putting the money into the earned-income tax credit. If income inequality is the problem, the answer is surely to do something about it.

Globalisation, well, I thought it was meant to be good for growth? Snark aside, if the US wants to deglobalise, it can increase its tariffs, subsidise exports, and devalue the dollar. It is a political choice.

As for the debt, surely nothing is more subject to politics than the size of the government budget deficit, and the incidence of taxation? Further, if it’s the fact that consumers want to save/reduce their debts that’s the problem, the government ought to be running a deficit, because how else can the private sector save on aggregate?

As for the environment, well, where the fuck have you been all these years, smartarse?

But the interesting point here is how a succession of political choices, which were all originally sold as being economic requirements, are now recycled as being structural economic forces in themselves. As such, it turns out, they explain the problems of the day entirely, and get rid of the need for further political choices. A structural force is very often nothing else than an unrespectable political choice.

This is the spirit of what I call Sad Donkey economics, although sadly my prediction hasn’t yet delivered. Now, Chris Dillow argues in Gordon’s favour that equities are pricing-in low growth. But then, why would they do anything else if the politicians have chosen it?

14 comments

  1. Metatone

    Great piece.

    I’ve written clumsily on a related topic over at Eurotrib – I call it Learned Helplessness.

    Short version: it was Hayek wot did it. Long version, Hayek had some nuance, but many of his acolytes don’t and they’ve blown up the tacit knowledge problem into a total paralysis where the only people who undertake large project are big companies/industrialists.

  2. TACJ

    Correct.

    So what does a fightback look like? First: you have to sell people on the idea that prosperity is a *choice*. This is essentially a marketing problem.

    Second: you have to Reform Economics. As you say: economic ideology sets the agenda, so you need to change the agenda. Economics is not physics; it’s engineering. It isn’t about studying some abstract thing that exists independently of human existence, it’s about finding ways to achieve desirable states within the realm of human existence.

    TO DO:

    1) Enter the professional economics academy.

    2) Achieve status within the economics academy.

    3) Use aforementioned status to separate political economy from economic cybernetics.

    4) ???

    5) Prosperity. (…?)

  3. Luis Enrique

    I think the idea that we might be in for a growth slow down, and that our ability to “choose” the growth rate isn’t as powerful as you imagine, is worth taking seriously and thinking about its implications. This doesn’t mean I’m convinced by the idea. That said, the idea that “we” ought to be thinking about how to achieve growth isn’t going to meet with much opposition from economists.

    oh and:

    http://scholar.google.co.uk/scholar?q=economics+endogenous+growth&hl=en&as_sdt=0&as_vis=1&oi=scholart&sa=X&ei=xlZgUMj_Iuva0QXFoID4Dw&ved=0CBoQgQMwAA

    http://scholar.google.co.uk/scholar?q=economics+learning+by+doing&hl=en&as_sdt=0&as_vis=1&oi=scholart&sa=X&ei=2FZgUOvQPKSa1AXf8YHgAg&ved=0CCYQgQMwAA

    • yorksranter

      However, did these structural issues suddenly appear overnight in July, 2007? Like one of those sudden outbreaks of laziness the RBC people believe in?

      Also, the evolution of the argument is interesting. It used to be that expansionary fiscal contraction would be great! Then it was yet another iteration of the moral macroeconomy. Suffering would be good for us in the end. Now it’s that any intervention would be useless, and therefore there is no case for it. I presume the next go-round will be that with no growth, we must tighten our belts, etc, etc, and hence another round of austerity. Which will of course deliver more unemployment and vindicate the arguments that justified it.

      • Luis Enrique

        the evolution of whose argument? are the economists who take this growth slowdown idea seriously related to the economists who thought fiscal contraction might be expansionary?

        I just don’t think it’s true that “economists” are trying to sell this idea that suffering would be good for us etc. Or rather, some economists think that but most don’t. Maybe you’re talking about what you regard as the right-wing economic narrative, or something, but not many economists sign up to that.

  4. aelilea

    Good points all!

    Also, re “Historians of technology couldn’t disagree more. In their view, technical progress happens through learning-by-doing.”, this is also why outsourcing production also has, umm, second-order problematic consequences which may already be part of what is termed the “slowdown”.

  5. jonathan hopkin

    Nicely done.
    The political choices not only beget results that get called structures, they also weaken the representation of the victims, and strengthen that of the beneficiaries, of those policies. And it takes something big to shake that balance of forces and allow some kind of change. See World War II for example. Workers were mostly incapable of taking power and elaborating a response to the depression, and only the war brought full employment and enough fear in the policy elite to make sure it didn’t happen again.

  6. banger

    We will get nowhere in dealing with economic problems unless we understand that there is no such thing as economics apart from politics. There is no such thing and has never been anything like a free market–all markets are subject to political realities.

    Just a note on inequality and the U.S. Americans believe in winners and losers almost as an ideology. Losers have to suffer miserably and winners must celebrate lavishly–this notion is deep within the culture. The U.S., with full approval of its citizens, has even given up on pragmatism and insures that it’s institutions are as impractical and irrational as is humanely possible to make the U.S. what it is. Fundamentally, Americans don’t want to solve their problems–they want the drama of deprivation and want and excess to be part of the fabric of life. They want the poor to have no chance and will put up with systems that insure that young people get into trouble, won’t be able to concentrate in school because they lack proper nutrition and care so that the jails can be filled and brutality can be institutionalized. Americans are replacing Russians as the craziest people in the world. Doestoevski would have been pleased because great art can only come from such a crazy world. Ok, I exaggerate a little….

    • Barry

      “The U.S., with full approval of its citizens, has even given up on pragmatism and insures that it’s institutions are as impractical and irrational as is humanely possible to make the U.S. what it is.”

      Actually, no. Root around on Google and you’ll find polls which show what Americans want. Those things are quite different from what the elites want. Economically, the elites want to make the rich richer and everybody else poorer (cut taxes on the rich, and spending on everybody else); the non-elites want to tax the rich more, and keep most government spending.

      It’s something you have to look for, because the elite media is dominated by the elite interests.

  7. Barry

    “As for the debt, surely nothing is more subject to politics than the size of the government budget deficit, and the incidence of taxation? Further, if it’s the fact that consumers want to save/reduce their debts that’s the problem, the government ought to be running a deficit, because how else can the private sector save on aggregate?”

    And as certain economists have pointed out, the markets are rather happy to loan the US government large loads of money for long terms at very low rates.

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