Getting to the Bottom of Things

By Dan Kervick

Since the crisis of 2008, professional and academic economists have grown increasingly concerned that something is wrong with their profession.  Sometimes that anxiety springs only from the recognition that most of their colleagues failed to predict the oncoming crisis.  But sometimes a nearly opposite concern is voiced: We sometimes hear the complaint that economists are offering good advice, but none of the decision-makers are paying attention.

I am not a professional economist, so I can only speak to the way the profession looks to me from the outside.  Now, if people are not paying attention to what an expert has to say, it could be that those people are too ignorant or inexperienced to grasp the important things that the expert is trying to get across.  But it could instead be that the expert doing the saying is not offering anything relevant to the most urgent problems the listeners are attempting to grapple with in their own lives, or to the institutional and political constraints that decision-makers must grapple with in carrying out their jobs.  And it could also be that they are just not saying anything very interesting.

Perhaps part of the reason that both the profession of economics and the public discussion of economics are failing to generate solutions and palpable improvements in our lives springs from how economically specialized and atomized our society has become.  Most of us are now too far removed from the most important phenomena of economic life to understand them very well or converse intelligently about them.  For many of us, the sphere of economic reality in which we have any real competence grounded in experience is quite tiny, and so a comprehensive grasp of the economic organization of our society eludes us.  We fill in the gaps with some textbook learning; a certain amount of radio listening, internet browsing and television watching; and a great number of rumors, stereotypes and conspiracy theories.

What does a person who sells shoes in Philadelphia, or writes code in California, know about how hogs are raised in Iowa, or about how their butchered bellies are bought and sold in Chicago?  What does a 28-year old renter in Brooklyn know about a 48-year old homeowner with a mortgage in Greenville, Wisconsin?  What does the CEO of a health maintenance organization in Boston know about a fast food worker in suburban Phoenix?  How many of us could tell a credible story about how even 10% of the commodities and appliances in our homes got to their present locations?  And how much do most of us know about the shadow world of crime, corruption and corner-shaving that is too ugly or unpleasant to make it into most of the happy, official stories told everywhere?

And then, what does a 30-year old assistant professor, a specialist in mathematical technique who went straight from college into graduate school, and then on into academia, know about how real-world economic decisions are made in almost any of these fields?  (The older full professor whose entire professional life consists in academic study in an academic institution is not much different.)  We don’t let doctors start treating patients without long internships and residencies in which they have hands-on experience with actual human beings and their diseases, lives, sufferings, deaths and responses.  Why are academic economists offering policy advice without similar apprenticeships out beyond the quadrangle?

One thing everybody does know something about is money.  Apart from their own very specific jobs, people interact with the economy primarily through the medium of money. As a result, when something goes wrong, the first impulse is to think there is something wrong with the “money system.”  And as the financial sector has become much larger than it used to be, there are surprising number of people whose entire economic experience comes mainly from money and finance.  They use money to buy and sell financial assets, which are nothing much more than packages of money spread out over time.  The actual industrial processes and human labor that occur somewhere at the origin of those cash flows and financial transactions are as remote from the money managers as the Andromeda Galaxy.  And the sprawling industry of money managers – big fish and little minnows combined – have created their own self-contained universe of media and blogs, where they spend their days screaming and fainting over microscopic fluctuations in yield curves and the rise or fall in central bank financial asset swaps.

Now I think it is indeed very important to understand the architecture of the monetary and financial system in deep detail.  A great deal depends on the massive flows of financial assets and liabilities through our economy, and on the way those financial obligations are generated and extinguished.  The roots of financial crises lie in the proliferation of unsustainable chains of debt, and with feeble firms and households strung out on unmanageable leverage.  And the post-2008 crisis period seems to have brought out a whole host of monetary reformers, convinced that various modifications of the monetary system above all else will provide important solutions to our problems.   These proposals come in all shapes and sizes, some well-informed and well-thought out; some nearly ludicrous.

But it seems to me that most of the monetary reformers and financial experts, with their fixation on monetary transactions, are barely scratching the surface of what is actually going on in our society.  They are studiously avoiding the areas where the fundamental sources of economic dysfunction and injustice lie.  The ground truth of the economic world is ultimately about the ownership, production, transportation and distribution of material things, and the human sweat and strain that go into generating these things from the precursors that are the conditions of their existence.  It is about the power of wealth and the reality of the social control of institutions and people.  These social structures often have deep and mysterious historical roots, and are by no means constant and unchangeable,  And yet people often seem seem unwilling to look at them or come to grips with them; nor are  they willing to grapple with how many of our social and economics problems, the everyday texture of preventable loss and cruelty, are rooted in systemic inequalities and hierarchies.   Perhaps it is understandable why they don’t want to look.  If they look they might want to do something about what they see.  But doing something about the fundamental structures of power and control is both difficult and dangerous.

And here is where the contemporary economics profession seems to be failing the most.  The professional academic economist seems to take the tools of control and exploitation for granted.  They are unquestionable facts of life that lie outside the economists’ proper field, at least as they now conceive that field.   Economic education seems dedicated to the practice of status quo stabilization.  The contemporary academic economist doesn’t seem particularly concerned with the various alternative ways an economy could be run; about the history of ways in which economic systems have been run; about how one such system evolves into another such system; or about the ways in which social mores, values and tastes evolve in conjunction with the evolution in economic systems.  The economist seems to live in a fixed, abstract and peopleless landscape of the mind describing a fixed and providentially arranged world of interacting forces.  For them, economics consists of a fundamentally good system running perpetually in natural equilibrium unless something very unusual, something perverse and weird and inexplicable, something called a “shock”, hits the system like an asteroid from outer space.  When that happens, the economist is concerned above all to restore the system to its previous, psychologically comforting pattern of approved existence.

To make a start toward a deeper, more critical and more fully human understanding of economic reality, and toward real systemic progress, perhaps economists (and the rest of us for that matter) might think about focusing more on the ground level, not just the flows of immaterial and formless digits in the hyperactive world of money markets, and not just the intersections of curves in well-behaved mathematical spaces bounded by a small number of strict rules and parameters.   It should be possible to start instead with actual economic units in their concrete and very human embodiment: a farm, a factor, a warehouse, a transportation terminal, a household.  Our society isn’t curves floating in a pure mathematical space.  It is a complex system in which a great number of people and institutions interact.  These fundamental units need to be known by close and empathetic acquaintance in their embodied actuality. Let’s all get out into the field and look.

Cross-posted from Rugged Egalitarianism

Follow @DanMKervick

12 responses to “Getting to the Bottom of Things

  1. The post-Depression, post-WWII situation in America, where there was a real effort to build up a middle class, looks more and more like an anomaly in our history. Technology allows everyone a better standard of living than the last century, even people at the bottom. But, we are clearly moving toward levels of inequality that parallel the last century.

  2. The middle class as a viable and sustainable group existed for a mere three generations by my count. My mother left school after grade 8 and was a single parent who worked at back-breaking jobs without decent pay but she eventually enjoyed the universal health care that came along in the 1960s. When she died in 2003, she paid nothing for her prescriptions, received individual care when confined to bed and died in a hospice with caring people around her. Previous to that, her children were able to attend University partly because the university agreed to pay the tuition of those with high grades. Her children entered a work force where jobs were plentiful.

    Now, a university education is getting too expensive; there are few well-paying jobs available and we are receiving threats from government of more austerity (cuts to public employment and public institutions) and more planning to devolve the public institutions we now have into private-public partnerships. The next generation will have health care but even that is being whittled away.

    Our memories of how families had to struggle in the early part of the 20th century seem to have faded and we are left with neoliberal conservatives mouthing platitudes while supporting corporations and banks and ignoring the environment and all of the hard-working people who are having to defend their pensions that they worked for over the years. Yes, it only took three generations to forget what a democracy looks like.

  3. ” The ground truth of the economic world is ultimately about the ownership, production, transportation and distribution of material things”

    Yes and these things cant happen if you dont have a balanced an efficient monetary system to underpin these acitvities.

    “The contemporary academic economist doesn’t seem particularly concerned with the various alternative ways an economy could be run”

    Exactly most people dont care less about anything but making money for themselves and furthering their career.

  4. “It should be possible to start instead with actual economic units in their concrete and very human embodiment: a farm, a factor, a warehouse, a transportation terminal, a household.”

    It does start that way, or it did. The first semester of Econ 101 used to be microeconomics, the study of businesses and households, how they behaved (economically) and why. Including why some, and not all, might react to certain stimuli. Very much a social science.

    In the second semester, we studied macroeconomics. Why the sum of all the households and businesses behaved differently from the individuals. The paradox of thrift, for instance. Much more abstract than the behavior of one business or household, and much less intuitive. It is described in terms of probabilities, not individual decisions. Very much the way we do things in other sciences. In medicine, for instance, we can know the survival rate for an illness or an operation, and have no knowledge of whether any particular individual will survive.

    “Our society isn’t curves floating in a pure mathematical space. It is a complex system in which a great number of people and institutions interact.”

    True, and the only way to understand complex systems with large numbers of interactions is mathematically. You can’t analyze each neutron and each uranium atom in a nuclear reactor, and you don’t have to do that in order to know how it works and to predict how it will behave. You just have to know the averages. Likewise, in order to gauge the impact to the economy of a certain size tax increase you don’t have to know which workers will be laid off and how it will affect their families, you just have to know the averages.

    Our problem with macroeconomic policy is one of understanding of principles, not of a failure to understand microeconomics.

    Mosler often says that every economist who is paid to get things right will revise his forecast upward when taxes are cut or spending is increased, and downward when taxes are raised or spending is cut. That is not anything new, and it does not depend on an understanding of MMT. Adam Smith would have done the same. It is what I was taught before 1971 in a very standard economics curriculum.

    I have always remembered October 1, 1990. It was the first day of the quarter, obviously, and the great economic news of the day was the pressure on President Bush to go along with a tax increase, which he had been resisting. It was just as he said in his famous “read my lips” speech, right up until the end. On October 1, I was on a business trip, staying at the Holiday Inn in Gaithersburg, MD, and the USA Today headline was that Bush had caved. I said “the recession starts today”, and, indeed, the 4th quarter was negative, the first of two to follow.

    This was not some unique and brilliant insight on my part. Any economist paid to get it right would have known the same thing, and I was not even an economist. How did we forget such basic knowledge in such a short time?

  5. Mike Riddell

    Great post in my mind. For me, the solution lies in linking one’s entitlement to one’s contribution. We need a better way to keep score since money doesn’t serve that purpose.

  6. Pingback: Getting to the Bottom of Things | The Money Chr...

  7. It is not the mechanics of money that is important, it is the transactions. The study of transactions is difficult, while the study of money is easy. There is some self-serving that dissuades the study of transactions. It is true that the mechanism of money can be manipulated which then impacts the conduct of transactions. Almost no one understands the mechanism of money because it is not taught. People think money is an asset or an object that they own and economists perpetuate that belief.

    For example, when the number of ALT-A option ARM, no doc,t liar loan contracts increased, those transaction increases were a red flag. Because economists don’t study transactions (don’t analyze the micro metrics nor investigate underlying causes) the red flag was missed and in some cases the increase was applauded as a sign of innovation because money was circulating as it had not, before. Later, a basketful of innovative stinker loan types were to be labeled subprime. or more accurately, noprime, because they fostered corrupt underwriting . Corrupt underwriting is the death of borrowed credit. For some unknown reason, Wall Street celebrates corruption as they did as far back as 1700, when stocks were issued.

  8. Mike Riddell

    @Ransme – ‘the study of transactions’. Now we’re talking. We need a currency that incentivises sustainable transactions. The effect of money on transactions, as i see it, is to encourage transactions that aren’t sustainable. Why is when QE was first announced that the price of commodities shot up? Surely we need transactions that serve the common good, not rape and pillage it?

  9. “It is not the mechanics of money that is important, it is the transactions.”

    Both the mechanics of money and the transactions are important. The mechanics of money influence what transactions are performed.

    • Indeed they do. But money, in addition to being a means of exchange to effect transactions, is also a store of value. But what it values is mindless consumerism. We need a valuation system that values mindful consumerism and helps drive more sustainable purchasing decisions.

  10. Dr. Kervick,
    I really appreciate the big picture viewpoint your blogs show. I’m an old philosophy prof, who came to MMT less than a year ago, but am hopeful about the perspective its advocates encourage. They understand that debt and money are social things, and that economics has always been part of ethics – the study of the public purpose, and what makes a good society. I just finished a long, long essay – a book, really – on “Inequity, Iniquity and Debt – Musings on Money Making, Macro-Eonomics and Public Purpose,” which I’ll put up on in manageable sections. I’ve cited your thoughts several times, thank you.
    Yours truly,
    Justin Synnestvedt