Fixing Modern Economics

[NOTE TO READERS: In order to maximize its exposure, the principal post below appears on both this blog and on Daily Kos. Some earlier posts of mine also have appeared exclusively or jointly on Daily Kos. In order to facilitate access to them, I’ve added links in the lists of my posts, linked in normal boldface type below. The symbol [DK] in the post-title list denotes a Daily Kos post and, if separately linked, leads to the Daily Kos version.]

For the principal post, click here. For brief descriptions of and links to recent posts back to Thanksgiving 2018, click here. For an inverse-chronological list with links to all posts after January 23, 2017, click here. For a subject-matter index to posts before that date, click here.

Two Rays of Pandemic Hope

In two respects, I may have been wrong—too pessimistic—in my analysis of the five strategic stages of our war with Covid-19. News reported on PBS within the last week or so, but not yet (to my knowledge) picked up by the print media, suggests two new ways in which to fight the war more effectively. 1. A belated all-out push for active-virus testing. My own analysis suggested that the United States already has missed the boat on this sort of testing with its late, slow and incompetent start, so that massive active-virus testing is no longer of general strategic value. But two very smart and well-qualified experts, Paul Romer and Rajiv Shah, believe the contrary. They propose that, for an investment of $100 billion per year (a fraction of what we’ve already spent on stimulus), we could jump-start active-virus testing and use it as a safe and effective means to open parts of our society, and maybe eventually all of it, back up for business. They suggest doing this even before we try doing something similar with antibody testing in search for acquired immunity (what I call “Stage Three” in our war). So far, our federal management of testing in general has revealed all the earmarks of extreme incompetence at the highest level. In active-virus (infection) testing, the FDA and CDC were classic “control freaks,” refusing to authorize anyone else to develop tests until it was too late to contain severe initial outbreaks all over our nation. With respect to antibody-testing—a second-line defense—the regulatory agencies adopted exactly the opposite approach. They allowed some 90 different companies, many in China, to sell tests in the US without any verification of their accuracy, and many of them simply didn’t work. This oscillation from one ineffective extreme to the other is a classic symptom of leadership that doesn’t know what it’s doing. But with better leadership, perhaps from the private or philanthropic sector, the Romer-Shah plan might still work. 2. Spurring “innate” immunity. The second ray of hope is the use of a common vaccine, already in wide use, to spur a type of temporary immunity, called “innate” immunity, that can be provoked before infected patients can develop antibodies (which typically takes two to several weeks). Science initially discovered in Russia suggests that a common oral polio vaccine can trigger this sort of immunity against influenza—another coronavirus. No less an authority than Dr. Robert Gallo, co-discoverer of HIV, the AIDS virus, thinks this same approach might work with Covid-19. The approach would be simple and cheap to test. “Innate” immunity is thought to be temporary, lasting an unknown time, perhaps a month or so, while patients’ bodies develop antibodies and longer-lasting acquired immunity. Beyond that, not much is known about innate immunity, including whether it can be repeated in the same patient. So it’s not a panacea, even if it works against SARS-CoV-2, the Covid-19 virus. But it could have three possible uses. It could help: (1) immunize people temporarily for such high-risk activities as (a) moving to another city or state, (b) temporary high-risk front-line work for medical personnel, or (c) other time-limited, high-risk work such as disinfecting a physical complex, cleaning out a heavily infected nursing home, slum or apartment complex, etc.; (2) immunize people temporarily while a vaccine under test let them build up longer-lasting antibodies; or (3) perhaps even serve to ameliorate the disease after accidental or deliberate exposure, for example, in “challenge” testing of a candidate for a vaccine. It remains to be seen whether our Keystone Kops society, in which neglect, wishful thinking, indecision, useless ideology and general incompetence have become ways of life, can effectively exploit these rays of hope. But at least we have them. Both appear worth trying. Thanks to Christiane Amanpour on PBS for bringing them to light.

1. We live in “the best of all possible worlds”
2.“Unrestrained free trade makes everybody better off”
3. “Free trade is good because it exploits everyone’s comparative advantage”
4. “Maximizing profit is the purpose of business, and it makes everything more efficient.”
5.“Low prices make for happy consumers”
Conclusion

The secret of “life, the universe and everything” is “42.” — Output of “Deep Thought,” humanity’s greatest supercomputer, after 7.5 million years of calculation, in Doug Adams’ masterpiece of science-fiction humor, Hitchhiker’s Guide to the Galaxy.

We humans have aggrandized ourselves with the title “homo sapiens, Latin for “wise man.” Yet what we really seek most is shiny objects, not wisdom.

Our language is necessarily a pile of abstractions, for our grapefruit-sized brains are infinitely smaller than our own planet, let alone our Universe. So we have no choice but to abstract if we hope to comprehend. But we have littered our species’ short history with vicious wars, economic catastrophes, and other gigantic blunders, all flowing from our propensity to take shiny abstractions as bits of absolute truth.

Religion, of course, is rife with this phenomenon. But modern economics, the “dismal science,” is no exception.

The best known recent example is the notion that free markets always correct their own errors and excesses. That shiny abstraction, in the mind of then Fed Chief Alan Greenspan, prevented him—or anyone else in a position of authority—from stopping the avalanche of liars’ loans for mortgages, financial derivatives based on them, and the resulting pile of defaults, for at least a year before the Crash of 2008.

The result was the worst financial and economic collapse since the Great Depression. Although Greenspan had forsaken anything resembling science for this particular shiny abstraction, he was an honest man. In testimony before Congress, he admitted his error and its disastrous effect. Unfortunately, his recanting came too late to do much good for the millions who suffered, or for our economy.

The irony is that economics purports to be a science. As every diligent junior-high-school student knows, science is the slow, rigorous, step-by-step, process of testing hypotheses against observation or experiment.

But not all “hypotheses” are capable of being tested. Some are too broad and general to admit of verification or refutation by scientific means. Those that include the concepts “always” or “most of the time” are of that untestable nature. They can’t ever be part of “science” because testing them rigorously, under all the myriad conditions to which they could apply, might take more than our species’ entire recorded history.

Recent economic history contains many more of these shiny abstractions. Some have had disastrous unintended consequences. The most recent consequences include: the collapse of globalization and globalized supply chains under the stress of Covid-19, the conversion of many democracies into authoritarian polities, and degeneration of modern economies into societies less egalitarian and more oppressive, in their own ways, than Genghis Khan’s or Ivan the Terrible’s.

This essay explores just a few of those shiny abstractions, and their effects when taken too seriously. Let’s analyze.

1. We live in “the best of all possible worlds.” This shiny gem was a belief held by the French aristocracy in the decades leading up to the French Revolution. We know it well today because Voltaire lampooned it in his hilarious satire, Candide ou l’Optimisme.

That book came out in 1759. The French Revolution began just forty years later. Today we know that revolution as one the most cruel and bloody in human history, surpassed, if at all, only by the Russian Revolution a century and a quarter later.

To readers today, the shiny abstraction that Voltaire satirized seems an obviously self-serving lie of the top dogs, justifying their oppression of the vast mass of French people. I include it in this list of modern shiny objects only because most modern ones, albeit more complicated and specific, tend toward the same end. They all justify and rationalize the economic elite’s top-doggery. Let’s analyze a few, beginning with the most general and moving on to the more specific.

2. “Unrestrained free trade makes everybody better off.” No, it doesn’t. Nothing demonstrates the falsity of this particular shiny object better than the rise of China and the fall of the United States and Western Europe, collectively “the West.”

Economists, including the eponymous magazine, tout trade’s role in elevating nearly a billion people out of extreme poverty, mostly in China. But there was also a cost, which free-trade boosters tend to elide. The cost included the transfer of technology, know-how, millions of jobs, and tens of thousands of factories from the West to China. It included plummeting Western wages, massive losses of manufacturing jobs, closed factories, dried-up factory towns, dashed standards of living, foreclosed homes, broken marriages and families, an epidemic of “deaths of despair,” and the dismal and unprecedented statistic of falling average longevity rates in the United States for three years in a row.

The indirect political costs included aggrieved workers’ election of Donald Trump, the worst president in our history, Brexit in Europe, and the inability of most of the West to supply itself with enough active-virus tests, masks and ventilators to resist the Covid-19 pandemic. It’s no coincidence that China, Singapore, South Korea and Taiwan—all beneficiaries of the decades-long transfer of manufacturing to Asia—had more and better manufactured tests and defenses against Covid-19, available earlier, than France, Italy, Spain or the United States.

The notion that unrestrained free trade makes everyone better off is not too far from the “best of all possible worlds” philosophy that preceded the French Revolution. Its mere generality is self-evidently far too great to bear any relationship to science. But whom did belief in it benefit, at least in the West? The owners and oligarchs, of course: the people who owned the factories and got rich (and became our 0.1%) by moving their factories, technology and their workers’ jobs to China. They also profited through ownership in those now-Chinese factories as they sold cheap products back into the United States and worldwide.

3. “Free trade is good because it exploits everyone’s comparative advantage.” (The “law” of comparative advantage.) At first glance, this shiny object seems plausible. The idea is that some people do things better than others, and it’s good to have everyone make and trade things that they make best. Don’t the Germans and Japanese, with their excellent engineering, make better cars? Don’t clean air, unpolluted pastures and wide open spaces in Argentina and New Zealand make for tastier beef or lamb?

But recent history has debunked this “law” thoroughly. China proved there’s really no such thing as “comparative advantage,” at least besides consistently good weather for farming (as in California’s Central Valley, which produces one-quarter of US food) or the fortuitous presence of mineral deposits, oil or gas below a particular nation’s soil (as in Russia, Saudi Arabia and offshore Venezuela).

Before the massive transfer of the West’s technology and factories to China, that nation had no “comparative advantage” at all. All it had was large numbers of uneducated peasants willing to work for low wages and under appalling conditions that workers in the West would not accept. In exploiting that “advantage,” China first began making tennis shoes, clothing and lawn furniture. As it trained and educated its vast peasant workforce, China moved up. Later came hand tools, then machine tools, then cars and heavy equipment, and now robots, quantum computers and Covid-19 tests.

What China’s rapid rise proved is that—apart from weather and mineral wealth—there’s no such thing as an intrinsic or durable comparative advantage. If you’re smart enough to inveigle bosses in a manufacturing mecca to sell you their technology, know-how and factories, you can build your own comparative advantage and beat them at their own game.

That’s precisely what China’s leaders and capitalists have done to Western capitalists over the last forty years. In the process, they’ve proven beyond doubt that any people anywhere, with proper training and education, can learn to make high-quality products. This was something that Japan had proved earlier, but on a smaller scale.

Ironically, the whole notion of so-called “comparative advantage” originated in the West’s exploitation of something quite different: its own first-mover advantage. Over two centuries, beginning in England and moving to the European Continent, Western manufacturers maintained policies of “mercantilism” and high tariffs against imported manufactures. All this was a deliberate attempt to keep manufacturing (and jobs) to themselves and to enrich themselves by selling what they made to their subjugated foreign colonies in exchange for indigenous raw materials.

Viewed from an historical perspective, China’s inveigling Western capitalists to sell out their nations’ own manufacturing and jobs for thirty pieces of silver looks like a world-historic payback, a vast form of economic revenge. But neither China’s twentieth-century “revenge” nor the West’s two-century reign of mercantilism and tariffs before it had anything real to do with “comparative advantage.”

Analyzed cold-bloodedly, the shiny abstraction of “comparative advantage” never really had much practical effect at all, at least any effect that was unambiguously positive. In the beginning, it was a transparent Western fig leaf for mercantilism, colonialism and economic exploitation. In modern times it became a pretext for unfettered globalized trade, which made Western oligarchs obscenely rich at the cost of permitting China’s terrible revenge on the West and its workers.

4. “Maximizing profit is the purpose of business, and it makes everything more efficient.” This gross generalization depends on what you mean by “efficient.” Maximizing profit does tend to reduce unnecessary waste of resources. It focuses the mind on parsimonious use of valuable materials, land, labor, energy, “overhead” and other inputs. But because labor is a major cost of any business, maximizing profit also means stiffing workers, i.e., paying them as little as their subsistence and tolerance for suffering will allow.

The trouble is, there are a lot more workers than there are bosses. There always have been and probably always will be, at least until we invent and multiply truly intelligent androids to do our work. So to the extent maximizing profits requires minimizing wages and benefits—which it usually does—it also requires sacrificing the welfare of the many to secure the riches of the few. This is the iron law of profit-maximizing capitalism.

Does that sound like a proper goal of a society that purports to be democratic and egalitarian? The Business Roundtable belatedly recognized this point, acknowledging the interests of other “stakeholders,” besides those of shareholders in dividends and higher stock prices. Among those stakeholders are suppliers, customers, communities and (last but not least) employees.

So far, so good. But the Business Roundtable’s “change of heart” was largely a public-relations ploy. Whether, when and how it produces a change in behavior and actual business plans will determine whether and when angry workers stop revolting and picking flawed champions like Donald Trump. If nothing else, the French Revolution teaches us that squeezing workers too hard can have unintended consequences, including the lopped-off heads of those who conceived and promulgated the shiny abstractions.

5. “Low prices make for happy consumers.” This one is not just misleading. It’s flat wrong. To the extent lower prices derive from lower wages, which they very often do, they portend a “race to the bottom.” Workers, in the guise of consumers, do get low prices at Wal Mart. But they have to shop there, and only there, because the low wages they receive to keep prices low don’t let them buy anything better or elsewhere.

As explained more fully in another post, Henry Ford understood and proved the exact opposite. Higher wages, even if they might produce higher prices, let workers buy the stuff they make and created a vibrant consumer society. You would think that especially today, when consumer spending supports 70% of economic activity, economists would understand this. (The rich don’t spend nearly as much of their earnings as working people; instead, they save, invest and hoard.)

If low prices come from moving factories abroad and closing those at home, the same reasoning applies. You cannot forge a thriving consumer society by throwing millions out of work, even if they eventually get jobs at much lower wages.

Again, understanding the fallacy of this shiny abstraction requires only thinking a little more deeply. It may be more “efficient,” in the abstract, to be able to buy the same thing for a lower price. But if doing so means depriving the people who make that thing of a decent living, or throwing them out of work entirely, is that really “efficient”? Not if you think more broadly and have any sense of humanity, empathy or a well-functioning society.

I call this canard the “Wal Mart” fallacy. The apotheosis of low prices leads to a restive society in which the vast majority of people (excluding the rich) can’t afford to buy much anywhere else. A society with no brick-and-mortar stores left standing but Wal Marts, it seems to me, would hardly be a culturally rich, broadly satisfying, or desirable one.

Conclusion. Let’s never forget that our capitalists moved nearly 60,000 US factories to China of their own free will. And that’s only from 2001 to 2015!. No one held a gun to their head and said, “Move your factories to China, or else!” They did it to exploit the Chinese “comparative advantage” of low wages and miserable (read “cheap”) working conditions. They did it for the shiny objects of “low prices” and “high profit.”

And they made out like bandits. In fact, the massive shift of factories and technology was a “win-win!” The Chinese lifted hundreds of millions of out extreme poverty. Our capitalists still own, or part-own, the once-American factories in China. So they got, and still get, a big piece of the action: a share of the profit on every sale of stuff, not only to the 1.3 billion Chinese, but (because of the globally low prices) to the United States and Europe, and all over the world.

The upper half of Americans—the ones who own stocks and bonds—also made out like bandits. The only losers were the American workers who didn’t own shares and lost good jobs by the millions. Then, when those workers got angry, rebelled against “politics as usual,” and elected Donald Trump, all of us Americans lost big time. We got the worst president in our history and a grossly corrupt, neglectful and incompetent government. Now, as a result of that catastrophe, every American is suffering unnecessarily in the Covid-19 pandemic, from a GOP-maimed, scatterbrained and responsibility-ducking federal government and a consequent inability to make, procure, or secure medical tests and personal protective equipment.

Does all this mean we should abandon capitalism? Should we go for socialism? No and no! “Capitalism” and “socialism,” too, are mere shiny abstractions. They’re abstractions of an even higher order. They’re so abstract and vague that intelligent people can and do argue for days about what they actually mean.

There have always been, and perhaps there always will be, people who put shiny abstractions on banners and flags and ask others to die, literally or figuratively, to move those flags and banners forward. That’s the nature of our species and the propensity of our limited brains, as we seek to understand a universe infinitely bigger, influenced by relentless propaganda put out by Fox, Sinclair and the Russians.

To make real progress, we have to get away from all that. We have to start talking in specifics and doing what science commands: making testable hypotheses involving specifics, and then actually testing them with observation or experiment.

I suggest two. First of all, let’s go with Joe Biden’s latest take on health care. Let’s lower Medicare’s age of eligibility from 65 to 60, and let’s provide a public option, not force Medicare on all.

Previously, I’ve hypothesized that a true public option will produce Medicare for all naturally and organically, in just a few years. Sooner or later, people seeking health insurance will realize how much fairer, simpler, more comprehensive, more cost-effective, and more portable the public option will be than anything that today’s grossly dysfunctional private health-insurance system can provide.

With the Covid-19 pandemic raging, that transition will come much sooner than even I expected. As of April 16, there were already some 22 million unemployed, most or all of whom had already lost their employer-based health insurance along with their jobs. If we offered them a low-cost, basic Medicare-type health plan, most or all of them would take their supplemental “Covid-19 bailout” income and stampede toward it. The trick would not be encouraging them to make the transition; it would be—as in “Obamacare’s” original rollout—constructing a website robust enough to handle the stampede.

All these things are concrete hypotheses we can test. All we have to do is elect Joe Biden president and flip the Senate, and we can test these hypotheses by experiment, aka actual practice, as good scientists should.

Second, let’s drop all this shiny, abstract mumbo-jumbo about “efficiency,” the unprovable universal benefits of unrestrained trade, and the allegedly universally salubrious consequences of ever-lower prices and ever-higher profits. Let’s go straight for the concrete things that make workers (the vast majority of us) happy and secure: living wages. Let’s adopt Bernie Sanders’ universal minimum wage of $15 per hour and see what happens.

I predict the economy will not collapse but will even grow. That was in fact the experience in Seattle.

Now that’s a testable hypothesis! Maybe hotel rooms and restaurant meals will cost a little more. But there’ll be a lot more people able to afford them. Maybe the workers in upscale restaurants will be able, on special occasions, to eat there themselves, just as Henry Ford’s workers, after his unilateral doubling of wages, could afford to buy the cars they made. Maybe hotel workers could, once a year, have a romantic hotel weekend getaway with their spouses, even in the places where they work.

Wouldn’t that be a wonderful sign of an egalitarian society and a vibrant economy? How could you even assess the rise in workers’ dignity, well-being and morale? Would these intangible but very real benefits show up in the shiny abstraction of GDP?

The private sector could go even further, and it probably should. With a stroke of his pen, Jeff Bezos could raise his warehouse workers’ wages from $15 to $20 per hour. For a working year of 40 hours in each of 50 weeks, with two for vacation, that’s $40,000 per year—a good middle-class wage. If a warehouse worker packed only 100 boxes in an eight-hour workday, her extra $40 of pay per day would add 40 cents to the delivered price of the average Amazon box. Think that would slow Amazon’s rise or impair its business? I hypothesize not, and that’s a testable hypothesis. (I know for certain the extra 40 cents per package wouldn’t affect my buying almost everything I buy from Amazon, especially during the pandemic.)

Maybe Bezos could become the twenty-first-century analog of Henry Ford. Maybe other industrialists would follow. Maybe we’d again have a robust consumer economy, without workers having to work two or three jobs just to raise a family. Maybe the American Dream would revive. All these points, except the last, which is too vague, are easily testable hypotheses.

Maybe we would have to impose some tariffs to relieve competition from low-wage factories in less fortunate countries. But these wouldn’t be generalized tariffs, like those Trump slapped on steel, cars and aluminum. They would go into effect only to protect specific American factories or other business projects, and then only to the extent of neutralizing the foreign-local wage differential. Build or plan a new American factory, and a specific, calibrated tariff could go into effect to give it a price umbrella. The economic effect of that plan would be easy to test.

Whatever the results of these straightforward experiments, one thing is certain. We will not make social or economic progress if we keep our eyes fixed on shiny abstractions like “efficiency,” “comparative advantage,” GDP, profit and prices. In recent history, these shiny abstractions have served as little more than oligarchs’ sleight of hand in a shell game that American workers and our nation as a whole have lost catastrophically.

If we focus on simple, concrete things that help the majority of our people live well, we might really make America great again. Doing that would require abandoning our shiny abstractions and providing practical things that really matter, like access to health care, sick days off, child care, and living wages for the vast majority of us who work for a living. Who knows? The “hangman’s noose” of the pandemic may yet compel us to do just that, as Britain and the “socialist” nations of Northern Europe already have done.

Footnote: You can’t even begin to have an intelligent discussion if you conflate today’s winner-take-all oligarch-driven “capitalism” with the highly regulated “capitalism” of FDR, once but no longer constrained by robust collective bargaining. The same applies if you equate the democratic socialism of Denmark—considered by many to be today’s happiest nation—with the mess that is Maduro’s Venezuela, or (an even farther stretch) with the failed and abandoned collectivized economies of the old Soviet Union, or of old “Red” China before Deng Xiaoping. Yet pols and pundits confuse us and themselves by using the very same abstractions to conflate and equate these vastly different things every day.

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