Sunday, December 14, 2014

The Laws of Economics

People on the Right are fond of accusing Leftists of not understanding the Laws of Economics. Specifically, this blog has posted many articles schooling my Trotskyist friends in the dismal science. Though they apparently never learn.

Back in the day, we comrades responded by noting that economics is not like physics. Instead, it is a human activity, and therefore amenable to human intervention. There are no "laws" of economics, but merely conventions that (not coincidentally) serve the interests of the ruling class. Accordingly, the so-called "laws" were constructs of "bourgeois" economists, who unfailingly acted in connivance with the rulers. Their advice could be safely ignored.

So as I aspire to be an amateur economist, it behooves me to learn more about the basics of the discipline. Accordingly, I have spent the past couple of months working through Robert Gordon's text, Macroeconomics. I'm about half way through. I'm using the 11th edition that I picked up used for about ten bucks, published in 2009, and obviously written before that. Indeed, the biggest problem facing macro in those days was understanding the great moderation, i.e., the attenuation of the business cycle in the form of shallower recessions and weaker booms. Would that we had such problems today.

So I am now in a better position to judge the "laws" of economics, and surprisingly, I think my Trotskyist friends are at least partially right.

Macroeconomics (as best I can judge) is based on three sets of premises. The first are accounting identities, such as the requirement that a balance sheet has to balance. These are as true as the rules of arithmetic, essentially unchanged since Sumerian times. The key equation of macro is that Y = E, where Y stands for the economy's income, and E for its expenses. This has to be true simply by virtue of accounting.

That means that raising the income of fast food workers to $15/hour, for example, is going to raise expenses or lower income for somebody else in the economy. Or put more colorfully, there's no such thing as a free lunch--not even at a fast food place. This is a law of economics that not even a Trotskyist can deny.

The second set of premises are assumptions that are based on empirical observations. For example, it is assumed that raising the interest rate will diminish the gross domestic product, all else equal. This is held to be true because it makes plausible sense, and because it looks to have been true in the past. But there is nothing here that constitutes a "law." It's more like a reasonable assumption.

Indeed, a couple of years ago some talking heads on television were arguing that the Fed should raise interest rates because it would increase GDP. Current rates, they argued, were too low to clear the market. I don't know if this statement was true, but if true then it renders much of Mr. Gordon's book irrelevant. The equations will all get turned upside down.

It seems fairly clear that this second set of assumptions no longer holds true as much as it did prior to 2007. That's why macroeconomics is often thought to be in crisis. The "laws" they thought were true turn out not to be as true.

The third set of premises assumes that we can collect reliable data about the economy. Historically, for example, extensive data on gross domestic product (GDP) were tabulated. The implicit assumption was that GDP corresponded reasonably well with social utility, i.e, benefit to human beings. That was surely true for much of the Twentieth Century.

But it is arguably less true today. Google, for example, creates enormous social utility while contributing negligibly to GDP. Craigslist is an even more extreme example. This blog (like most other blogs) contributes (slightly) to social utility, but almost nothing at all to GDP. Therefor the relevance of GDP has been called into question, and accordingly the "laws" that Mr. Gordon elucidates are less useful. Similarly, more ambiguity has crept into measurements of the labor force, the money supply, and even interest rates. Hard data are harder to come by.

So the Trotskyists have a point: once one advances beyond accounting identities, the "laws" of economics lose their legality and simply become descriptions--only more or less accurate depending on circumstance. That's why nobody can agree about when the Fed should raise interest rates, if at all, or even on whether or not that decision is important.

Still, my former comrades are way off the rails. First is the conspiracy theory underlying their dismissal of mainstream economics. Economists, they claim, have all been bought out, or are too stupid to understand the brown-nosing role they play in the bourgeois scheme of things. I don't believe that, and neither does nearly anybody else.

More seriously, Trotskyists claim that because the economy is a human invention, it can be treated like any other human invention. Good engineers have designed excellent airplanes that can fly half way around the world. Similarly, a good, Marxist economist could design an economy that would maximize benefits to human beings, i.e., maximize social utility. The only thing stopping us is that malevolent ruling class whose greediness keeps much of the world in poverty.

The first objection to this theory is that capitalism already maximizes social utility. The Marxist slogan human needs before private profits is completely empty. Meeting human need, e.g., maxxing out social utility, requires private profits.

But more, human needs is such an amorphous, undefined term. There are seven billion humans in the world. Which one of those gets to define human needs? Marx famously wrote "from each according to his ability; to each according to his needs." But isn't that exactly what capitalism does? My wife and I want to buy a retirement home in Las Vegas. That's a human need. Who are Jack Barnes or Jeff Mackler to say that I shouldn't be allowed to do that?

Where in the grand central plan have they made way for my vacation home--the one I want and can afford? They haven't, of course. The most I'd ever get from socialism is a vacation cot in some barracks somewhere on a South Carolina beach.

Socialism only works if you assume that somebody else is going to pay for all the goodies. But that violates accounting identities, because eventually somebody else is going to run out of money. Then the goodies need to be paid for by people who work, i.e., by people who do things to meet other people's needs. That depends on my abilities and your needs, and vice versa. With seven billion people in the world, there's no way all those interactions can be centrally planned.

All you'd get from socialism is slave labor working for slave wages.

Further Reading:

No comments:

Post a Comment