Behind the Crisis in American Governance: Delusions about the Economy Treated As a Matter of Differing Economic “Taste” – Pt. 2/2

By Michael Hoexter

[Part 1] [Part 2]

Why It’s Delusional:  The Critical Dependencies of Capitalism

The mythical market and view of an autonomous, self-managing capitalism is contradicted by the multiple real critical dependencies of our economy.  These critical dependencies, i.e. necessary relationships with other non-capitalist systems/entities, are integral to capitalism rather than optional features.   Dependencies between these social and natural systems are the object of any meaningful economic policy or, for that matter, any government policy with economic effects.  They are “critical” because they are non-optional and therefore not a matter of individuals deciding that for ideological reasons they “don’t like” one or the other of them and we can therefore jettison them, while maintaining something that is recognizably capitalism.  If people in society were to seek to change the economic system to some other system, either by conscious effort or by historical accident, it then may be the case that one or the other of the dependencies listed below may no longer be “critical”.  However no mainstream political actors in this drama are claiming that they are making a break with capitalism; in fact, to the contrary, right-wing Republicans claim to be its sole political defenders.

Our current economic system then has the following critical relationships with not-capitalist social and natural systems that are both internal and external to the monetary accounting system, property rights framework, and system of incentives that are at the heart of capitalism:

1)    Financial Dependency – The capitalist system relies on a “third-party” unit of account as the ultimate measure of value, usually national currencies regulated and controlled by a combination of national governments and their central banks.  Capitalist firms, and for that matter banks, are not in the business (or anymore in the business) of producing their own currencies, though banks are allowed to create credit money in the national unit of account.  All-important for the maintenance of the capitalist system, economic growth is predicated on national governments supplying (spending and thereby creating) more currency than they remove from circulation via taxation.  The macroeconomic accounting system would “dry up” or collapse without government’s continual re-supply of money, especially in areas of the economy that are liquidity constrained, i.e. do not attract money via market exchange.  This need for more money in the system stems from the drive of the private sector (businesses, families, individuals) for growing savings/wealth accumulation, a process which gradually removes money from circulation. So capitalism is dependent upon non-capitalist government institutions for both the unit of account and for supplementation and control of overall liquidity in the economy.
2)    Ethical/Legal Dependency – Capitalism, built on, for the most part, self-interested actions in markets, tends toward amorality, especially in relationship to the traditional deontological (i.e. rule-based) ethics that is the basis of the legal system.  If policymakers influenced by neoliberal and libertarian propaganda create policy as if the market will supply its own morality, i.e. weakening or removing government’s legal and ethical role, it comes to operate as an immoral system and eventually turns into non-capitalism.  Capitalism depends upon the legal-ethical systems enforced by government, which have some of their origins in various religious traditions.  Without government supplying an effective legal system with enforcement, fraud and criminality drive out anything approximating the relatively fair or fair-enough seeming deals that enable people to transact with each other in capitalism.  The “third-party” position of government is then a critical condition for an economic system that is recognizably capitalistic. An economy based on banditry and transactions dominated by what anthropologists call “negative reciprocity” would no longer be a capitalist system.
3)    Orientation to Objective Reality – While businesspeople tend to think of themselves as hard-headed realistic types, their reality-orientation is largely to the changeable and intersubjective world of business transactions and getting things done in the here and now.  It takes institutions like government to provide a perspective that sees beyond the contemporary realities of doing business, including such typical governmental operations as funding scientific research and collecting data from the natural world.  The see-sawing of market trends as well as the close linking of individuals’ fates with market tides, means that a view of a constant, objective reality is easily lost by those who may nevertheless retain a realistic view of the business world.  Not accidently, businesses often mention that they have received the imprimatur of or have a relationship with government institutions when trying to reassure the public that their products or services are trustworthy.
4)    Energy Dependency – Capitalism requires the constant input of free or low-cost non-food energy to continue its functioning and growth.  Non-food energy (i.e. fossil fuels, nuclear, renewable energy) along with the technologies that require it, have become a defining characteristic of the development of capitalist economic systems, as they seek to reduce the unit cost of labor or reduce the demand for labor overall.   The reduction of unit labor costs enables increased profits, the goal for capital.  In requiring energy input from outside, capitalism is analogous to biological systems which by their nature require free energy input, mostly from solar radiation.  This non-food energy dependency is of course over and above the required production of food energy within the economy or input of wild-grown foods into it to sustain the participants in the economy.
5)    Material Inputs Dependency – For the capitalist system to grow it has historically required continual massive inputs of material “stuff” from an “outside” physical world or universe to transform and/or assign new value to.  The waste stream from capitalist societies is partially recycled or reused but the search for a growing stream of material goods to which to assign the increase in overall monetary value in the system has turned preferentially outside society’s waste stream to “virgin” material.  A completely recycling capitalism is unlikely or very far away given the disparity between the value assigned to new inputs and current diminished market values of most “used” material goods and assets.
6)    Ecosystem Dependency – As suggested above, the capitalist economic system shows no signs of being able to fully reprocess and revalue its own physical waste stream and requires a surrounding non-capitalist nature to absorb and regenerate some of what has been deposited into it.  As the capitalist economic system expands its physical boundaries and deposits unprocessed wastes poisonous to biological systems into the environment, the regenerative capacity of the earth is diminished.  In addition, the “supply” of a natural context, at first either non-valued or undervalued, then assigned a monetary value because of physical beauty, physical attributes, or location, creates the basis for the economy to be established in the first place at all as well as for the creation of saleable assets in the form of land and property.  Capitalism as we have known it has required the regenerative and physically supporting aspects of ecosystems while at the same time constantly diminishing the extent of, degrading and/or destroying many of these ecosystems.
7)    Coordination/Leadership Dependency – The market system in capitalism is by its definition committed to sometimes arbitrary, unplanned decision-making by scattered independent decision-makers, contingent on potential profit, monetary savings, and emergence of new opportunities. In times of crisis or simply to produce a systematically organized outcome (for instance in road building or urban planning), where coordinated decision-making is required, capitalist systems require non-capitalist institutions like governments to lead and guide the process.  As high level managers of corporations, capitalists, and wealthy investors are often high-status individuals with a higher than average “will to power”, it is hard for many of them to accept that they require others or other institutions to lead society and coordinate decision-making on important issues.  Under conditions where there are very large monopolies or conglomerates, social leadership may be filtered through a oligopolistic or monopolistic informal or formal council that directs the actions of government in coordinating social activity, a form of oligarchy.  Capitalists such as Bloomberg or Berlusconi can occupy the role of political leaders in parts of their lives, but to function effectively in these roles they need to be able to temporarily put aside their perspective as market participants.

The portrait here, which according to my observation is realistic, is of the capitalist economic system positioned between and in constant interaction with multiple other social and natural systems that are non-capitalistic and with relationships often mediated by government.  Because of these multiple critical dependencies of capitalism, government, actually a fairly adaptable and multi-functional human institution, has become the agency to actively offer and deliver several different functions to keep the capitalist economy afloat, if not prospering.  Purely in terms of the mechanics of the system, most economic policy and government policy more generally is dealing with or addressing one or more of these dependencies that are not within the purview of market actors intent on gaining profits or income.

Obama and the Democrats’ Strategy has Reinforced the Delusion

A large portion of the Democratic party is caught up in neoliberal ideology, that, in common with the Tea Party Republicans, endorses the view that we ought to be using or inventing markets wherever possible.  This ideology also endorses the erroneous view that of the three great sectors of the economy (government, private sector, and rest of the world), the non-government (private sector and the “rest of the world) controls the US currency.  There are a small number of progressive Democrats who actively work against shrinking the government and sometimes suggest expanding it to provide more and better services to the population at large.

But a majority of Democratic politicians have been caught flat-footed in confrontations with Tea Party Republicans who spout the “pure” neoliberal creed of less government and more markets.  With a few exceptions, this majority of Democratic leaders are mostly for cautious, circumspect application of the same neoliberal principles and appear in their defenses of government to be unconvinced that they are truly “doing the right thing” in relationship to their passionate Republican counterparts demanding a more rapid implementation of this policy tendency.  They appear to be defending a government status quo vis-à-vis the Tea Party or to represent a more careful political style rather than a difference in content, an attitude which in a time of crisis has limited appeal to the general population.  Meanwhile the Tea Party Republican stance, as fanciful as it is, seems to call for a program of change, which to many who are dissatisfied, seems like the right general tendency (i.e. change) to pursue.

The donor class, for the most part, is comfortable with or actively endorses neoliberal ideas, so the common endorsement by both parties of neoliberal fantasies about capitalism and government is not accidental.  Both parties are attempting to raise funds from the wealthy and/or not provoke aggressive electoral challenges from those who have more active support of the donor class.  That neoliberal ideas are bad for real businesses and the ultimate size of the portfolios of the donor class is only understood by the economically most sophisticated and compassionate members of that group.

President Obama, the current leader of the Democratic Party, has been, for a Democrat, a particularly aggressive promoter of these delusions about the economy, that now ensconce the Republican Right.  Obama has pressed for a “Grand Bargain” that cuts government payments to individuals over the long-term, not recognizing, or not choosing to recognize, the financial dependence of private sector growth upon government spending.  He has claimed that the US government can run out or is “out of money” and has echoed some of the talking points of the various mouthpieces of Pete Peterson, the Wall Street billionaire intent on laming the effectiveness of government for the short-term profit of the financial sector.

Most importantly, Obama has lent credence to the ideas of the Republicans by continually holding up “bipartisanship” as the highest ideal of governing, rather than actually proposing and then arguing for policies that address the fundamental problems of the economy and society.  The content of the policies he has offered, often taken from the historical policy “playbook” of the Republicans, avoid where possible the direct provision of services by government.  His signature Affordable Care Act, avoided the obvious solution of extending Medicare to all Americans, and instead “dealt-in” the private health insurance industry.  This as well as his drive for bipartisanship, have been together an “across the aisle” endorsement of the delusional content of Republican ideas about how government works and how it is by its nature economically-inefficient.  As has been pointed out by some astute members of the media, Obama had wanted to “use” in 2011 the negotiations around the debt ceiling to cut social programs, showing in fact a unity of purpose with the Republicans and alarming members of his own party.

Obama, as he seems to have changed tactics, should not then be surprised if Republicans think they can extract concessions from him regarding the Affordable Care Act, as he had seemed ready to bargain with them about cutting social spending in the long-term and had joined them in whipping up deficit hysteria.  Furthermore, the Democrats in Congress should not be surprised if the Republicans think they can get concessions from them, as their final budget offer was in dollar terms, almost exactly the Ryan Budget, proposed by the right-wing Congressman Paul Ryan, and locked in the damages to the economy and to government operations from the so-called “sequester”.  There appear now to be signs that a likely outcome of the current government shutdown/debt ceiling crisis will be that in fact the Grand Bargain, what William Black has called the Great Betrayal, may be the “concession” that Obama offers under the “duress” of the current Republican assault.  In the chaos of the moment, Obama would then in fact get what he has seemed to have wanted for a long time:  replacing direct provision of government services with the “public-private” partnerships that are the policy orientation of moderate Right and “centrist” neoliberalism.

Lazy, “He Said, She Said”, Journalism Elevates the Delusion

The current mainstream American press is lazy with regard to checking facts or calling politicians out on false statements, so an organized collective delusional system shared by the powerful will pass by most American journalists without remark. The American press also has a tendency to desperately find a middle position between the two political parties and to see politics as a conflict of personalities or styles.  The combination of accepting politicians’ words at face-value and finding a “middle ground” has reinforced the notion that within the range of acceptable opinion it is simply a matter of political taste.  The most comfortable stance of the typical political reporter is to treat politics as an entertaining tableau of events and people rather than a clash of ideas.

While, as stated above, the Democrats are far from strong advocates of the position that government is an essential part of the economy and society, to put them on a par with the Republicans is a mistake, especially in this current crisis.  Democrats believe in government to some degree and also make more efforts to make truthful statements than Republicans.  While a good journalist would question both parties and find in many cases differentiated criticisms of both, those criticisms should not always be “balanced” by article or episode.

Ultimately, the Washington press corps seems to be afraid of criticizing the mendacious, extreme right-wing, which recognizes the respect being paid it and doubles down on its outrageousness.  The mainstream press has in its hands the ability to change political-economic discourse but at least for now it seems to prefer a public discourse that skirts the main critical issues of our time.

Academic Economics Sets a Place at the Table for Delusional Ideas

As noted above, the dominant neoclassical school of economics bears substantial responsibility for the current crisis in American governance.  Neoclassical economics creates an unrealistic picture of a market economy that apparently doesn’t need government structure and intervention: there is within it neither a rigorous, realistic definition of what markets are, nor a realistic description of the functions of non-market institutions like government.  Unfortunately (neoclassical) economics is probably the single most important influence on the content of government policy of any academic discipline.

Given economics’ real-world impacts and the abstractions with which it deals, it is difficult to communicate how far from the real world of real economies most academic economics hovers.  Strangely, as Steve Keen and others have pointed out, economics has no operative theory of money as integrated into the larger economy, treating money as a “veil over barter”.  Only a few economists in the post-Keynesian tradition actually view money as having its own dynamic that is distinct from the goods, services and assets, the value of which money is supposed to represent.   The now 20-year-old Modern Money School has the most complete theory of money and it is only now just starting to gain some influence in certain parts of the business and political media.

The substance of much academic economic discourse is based on abstract unrealistic assumptions from which then economists develop various mathematical models; rewards in the profession are offered for models that seem “rigorous” based the complexity or opacity of the mathematics applied, revolving always within the same world of unrealistic assumptions.   It appears to be a modern form of scholasticism, the increasingly complex ways that thinkers in the Middle Ages tried to harmonize the teaching of secular classical philosophy with the dogma of the Catholic Church.

Given the predominance of models over data, it is only very occasionally that empirical data actually influence and change the modeling and theory of economics; the latter is insulated fairly effectively from the former.  Now, given the complexity of society and economies, as well as the ways in which the economic observer can influence the observed, it is partly understandable that economics would struggle with theory and use theory to simplify the complex reality of modern economies.   Furthermore, as in most social sciences, to control for variables by running experiments is impossible with real economic data; nothing can be “re-run”.  But the theory used in most economics departments is such a monoculture and so constrained by neoclassical dogma, that it is not possible within the precincts of establishment economics to compare the verisimilitude of various economic theories via testing them using real world economic data.

Economists, however, are “allowed” to have differences of opinion and within the neoclassical tradition, there have been attempts to integrate some Keynesian or Hicksian (pseudo-Keynesian) ideas into mainstream modeling.  This is sometimes called New Keynesianism as opposed to post-Keynesianism or neo-Keynesianism. While fundamental disputes about whether these models or hypotheses are “true” or “truer” than one another are left out of the discourse, economists are allowed to express their political preferences by including more or less of the insights of among others Keynes into a basically neoclassical model of a market without a fundamental relationship to government or other institutions.  These eclectic models are so eclectic and personalized that it is difficult to compare their efficacy or predictive power against each other.

Disputes in economic policy based on academic economics are conducted then around the varying degrees that an economist can express their own personal political/ethical preferences or level of human compassion and/or those of political patrons through mainstream neoclassical thinking.   The political dispute or war of tastes is grafted onto or floats on top of the delusional model of reality; differences of opinion or of analysis can be tied to an idiosyncratic mix of personality and political commitments that appear to come from a vague “somewhere else” rather than from the economic data and the analysis of the data.  Establishment economists can then be arrayed in a spectrum of political and ethical “tastes” but fundamental issues are left largely undiscussed within the central journals and most prestigious academic conferences.  Policymakers in turn are sent the message that they can adjust their economic policy to fit their political preferences, or conversely that economic policy should reflect the exact political constellation of opinion and not some underlying economic reality.

Thus academic economics treats with equal respect if not deference the delusional ideas that markets can and should float independently above and beyond the multiple systems upon which they have critical dependencies, like government and the natural environment.  So while some economists and political actors may attempt to layer into their economic discourse various Keynesian/Hicksian ideas, their discourse and their interventions can be dismissed by others as a product of personal idiosyncrasies rather than based on data-driven, rational analysis and contain binding constraints on economic policy.

Recognition of and Reckoning with Reality is Not a “Taste”

In our society, so much is virtualized and we are often interacting with representations of a real world rather than the original physical “emitter” or object of those representations.  It can seem in that world, that we have a choice to “take or leave” reality.  And certainly, if individuals have financial or real resources at their disposal, a reckoning with the constraints of the real world can be delayed or arranged in a more felicitous way according their wishes than for those with less resources.  However these delays are only temporary and eventually all of us must encounter a world that doesn’t easily conform to our wills and to which we must in one form or the other bend or reckon with. The achievement of our human cultures and civilizations is the artful encounter of the human will with these constraints and affordances.

Ultimately, many Democrats, the Washington establishment, many economists, and the media, have been entertaining the aggressive attempts by the radical Right Republicans to remake American government and society as if they are an expression of an optional “taste” in governing and economics, rather than a delusional system of economics and ideas about governing society as a whole.  Some of this enablement of the current madness is due to honest misunderstandings and uncertainties that some in the political-economic establishment have about the nature of capitalism and government.  People are not in the habit of thinking systemically about society and the economy in general and academic economics and social science more generally have often misled and/or confused.  Also, as the Modern Money School points out, there are deep misunderstandings about the way government and the macroeconomy are funded and the facts about this remain still at the margins of public discourse.

Most alarmingly, there exists the possibility that the more florid expressions of the Right about the fallibility of government and the optimality of the corporate sector will be used as cover by Obama, the GOP, and Democrats in Congress to further enshrine into a long-term budget plan delusional thinking about how government and the economy operates.  Obama may believe that he can impose his apparent taste for austerity upon a government and capitalist economy.  Yet these actions will ultimately shrink the economy and/or maldistribute income further, contrary to the delusional theory, thereby increasing already record levels of income inequality.  Within the bubble of wealth and or Washington group-think, this appears like an option but the costs are borne both immediately and in the longer term by the economic and ecological systems upon which we depend.  The result of taking this path is to turn capitalism into something else, perhaps a neofeudal oligarchy, which is less dynamic, less democratic, and still less equal.