Ideological Macroeconomics & Increasing Inequality

ideologyinequalityEven though very few people have more than a vague idea about them, macroeconomic theories deeply affect the lives of everybody on the planet. Writings of Piketty, Stiglitz and many others, as well as personal experience of the 1% — 99% divide, have created increasing awareness of the deep and increasing inequalities which characterize modern capitalist economies. However, the link between inequality and macroeconomic theory has not been pointed out clearly. The fact that since the 1970’s top corporate salaries have increased by 1000% while the average worker only earns 11% more is closely linked to the revolution in economic theory that occurred over the 70’s and 80’s. We will try to sketch some parts of the complex and coordinated efforts which led to the emergence of theories which provide the invisible foundations and the enabling environment for this inequality.

The oil crisis of the early 70’s destroyed the consensus on Keynesian macroeconomics, and created the opportunities for ideologies disguised as economic theories to emerge. Chicago school economist Robert Lucas attacked the dominant Keynesian theories which argued that governments must play an important role in eliminating unemployment. Guided by free market ideology, Lucas created macroeconomic theories which suggested that government interventions are always harmful. Some elements of the Lucasian methodology provided genuinely superior alternatives to defects in existing Keynesian models. However, other elements were bizarre. Even though unemployment is a painful reality to vast numbers of people, defender-of-free-markets Lucas argued that this was a free choice. According to Lucas, the Great Depression was really the Great Vacation, where vast numbers of people suddenly decided to stop working in order to enjoy leisure. This, and many other strange assumptions of the Lucasian alternative led famous economists like Robert Solow to say that to engage in a serious discussion with the Chicago school would be analogous to discussing technicalities of the Battle of Austerlitz with a madman who claimed to be Napoleon Bonaparte. For example, Solow wrote that “Bob Lucas and Tom Sargent like nothing better than to get drawn into technical discussions, because then attention is attracted away from the basic weakness of the whole story. Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous – that is, by laughing at it – so as not to fall into the trap of taking it seriously and passing on to matters of technique.”

Recent remarks of eminent economist Paul Romer, a student of Lucas, regarding the dramatic failures of contemporary macroeconomic models have generated shock waves which continue to reverberate among economists. Romer wistfully suggests that if Solow had engaged with the Chicago school, instead of subjecting them to sarcasm, contempt and ridicule, they might have been amenable to reason. Lucas, Sargent, and their followers responded to hostile attacks by closing ranks, ignoring all who disagreed with them, and giving up on basic scientific principles such as using evidence to evaluate models.  Even though Romer criticizes Solow for ridiculing Lucas, he also finds it difficult to take the macroeconomic theories of Lucas and Sargent seriously. Since these models remove essential real factors like money and unemployment from the picture, Romer writes that modern macroeconomic models are reduced to using mythical objects like phlogiston and gremlins to explain real world economic events. What is frightening about this is that these models, which have been blamed for their inability to see the looming global financial crisis, continue to be used by Central Banks for monetary policy decisions throughout the world.

The mystery of how ludicrous theories which invoke mythical objects and causes, came to dominate the scene is not easily resolved. One important element in the success of the Chicago School was their lack of scruples. Stigler, one of leaders of free market thought at the Chicago School, explained that “… new economic theories are introduced by the technique of the huckster” (a door-to-door peddler who sells fake items as if they were genuine}. He defended this intellectual fraud on the grounds that a warrior against ignorance must subordinate the lesser truths to his quest to spread the grand truth. The grand truth, or the ideological conviction, that governments must not intervene in free markets guided the development of modern macroeconomics at the hands of Lucas, Sargent and Prescott. Ideological convictions of the Chicago School are impervious to facts – they ignore the long lines of the unemployed at the soup kitchens, and the strong empirical evidence of correlations between tight monetary policies and high unemployment.

A second crucial element was the creation of an artificial Nobel Prize in economics. Private financiers and bankers who stood to gain massively from the spread of free market theories of the Chicago School decided to purchase respectability for them. The bankers donated funds to create a prize in Economics in 1968 which was deceptively and fraudulently named after Alfred Nobel: “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”. The conditions and methods for granting the prize were made to resemble the genuine Nobel prizes sufficiently to deceive the masses into thinking that this was one of the genuine Nobel prizes. After creating an imitation Nobel prize, the Swedish bank proceed to award about half of all of them to Chicago School economists, giving half to assorted others to maintain a semblance of objectivity. This has resulted in a tremendous rise in the prestige of Chicago school doctrines, catapulting them from an eccentric minority to the entrenched and dominant orthodoxy in economics.

This intellectual revolution, the displacement of Keynesian economics by the Chicago School, has been used to justify economic policies to enrich the wealthy, and caused massive damage to the general public. As policies based on free market theories have been enacted globally, wealth has concentrated in the hands of the top 1%, while the fortunes of the bottom 90% have been declining. Seeing that the economic system in place has led to reduction in job opportunities and incomes, and rising costs of necessities like education and health facilities, the bottom 90% have expressed their discontent and desire for radical change in the form of Brexit and Trump. However, fundamental change requires addressing the root cause of the problem, replacing defective ideology based macroeconomic theories with more empirical and evidence based theories.

Published Express Tribune, 9 Jan 2107. My author page on LinkedIn. Other works: Index .Related articles: Economic Theory Creates our World and our Worldview. The Fairy Tale of GNP per Capita.

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11 comments
  1. “What is frightening about this is that these models, which have been blamed for their inability to see the looming global financial crisis, continue to be used by Central Banks for monetary policy decisions throughout the world.”

    I did predict the Crash and ongoing Debt Crisis in my 2006 animated feature Money as Debt (online in 26 languages) and I provide an explanatory model based on FACTS, EVIDENCE and irrefutably simple arithmetic, which no one has been able to disprove, that the DESIGN of banking itself, and indeed our very concept of money, is the root problem.

    http://www.moneyasdebt.net

  2. Good analysis, Asad. I agree with it. And, Paul your analysis, and the cartoons are spot on. My solution for the problem is a bit different from yours, however. Since economics is so out of touch and so destructive of societies, I suggest getting rid of it all together. As a political ecologist friend says, “A trained, or even untrained monkey could do better than economists, bankers and current policy gurus at managing economic affairs, especially making the arrangements both more fair and just, and more effective in helping people make the necessary choices of resources and actions to live a comfortable and happy life.” I agree. Couldn’t we just get rid of all the “smart” economic professionals?

    • How does getting rid of economists accomplish anything when the PROBLEM is our MONOPOLY concept of money? The problem is EVERYONE’s “trained monkey” thinking that a nation supplies a QUANTITY of “national money” or that gold is money because it is scarce. There is no escape from within this limited paradigm. We need to EXPAND our concepts of money.

      http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/solution.htm

      • Don’t disagree with what you say. But economists have played a large, sometimes very large role in creating the situation you describe. Getting rid of them might at least remove one impediment to fixing it.

  3. Craig said:

    As Steve Keen has observed the economy is monetary not “a veil over barter” as neo-classical economic theory characterizes it. Money is actually one of the greatest and most useful inventions in history and for those reasons should not be abandoned. Money in fact is not the problem, but rather its virtual monopoly control by the business model of finance and its almost utter paradigmatic monopoly ideas of debt, loan and for production only by same.

    The major problems with “the neo-classical synthesis” are its failure/refusal to confront these monopoly paradigms leaving the business model of finance curiously dominant in what is alleged to be a free and free flowing market, and its abstract and largely unconscious understanding of time as a mere flow of clock time instead of a flow of moments, each moment of which the vast majority of individuals and most enterprise, i.e the system, must endure a scarcity ratio of total individual income to total costs/prices enforced by the cost accounting convention that all costs must go into price, the continually rising depreciation costs of fixed capital, the continually rising costs of wasted energy enforced by the laws of thermo-dynamics and the inexorable wedding of profit making systems, obtainable (labor) cost efficiencies and now the coup de gras of AI which is posed to eliminate aggregate individual demand at a rate far exceeding the rate by which innovation has ever and always eliminated it since the industrial revolution.

    And the way to eliminate these systemic problems including the dominance of the business model of finance is to wisely integrate a new paradigm/economic concept of monetary grace as in gifting into the debt based money system with strategically implemented policies specifically designed to rectify/invert the above scarcity ratio.

    • Gift extra money into the system and the rich will just end up with it, so you’ll have to gift more and more forever. Social Credit fails to address the imbalance of economic power. There is no escape from within our current concept of money as a limited supply of anything made valuable by its own scarcity. That is the fundamental problem.

      What I find is that people call for something “new” and out of the box” and as soon as something actually new and out of the box is presented to them they ignore it. My proposals are based on my analysis which is based on EVIDENCE that everyone else, including Steve Keen chooses to ignore despite being unable to refute any of my facts, logic or arithmetic. Read my report on my debate with Keen and the sovereign money advocates at this link.

      https://moneyasdebtblog.wordpress.com/sovereign-money-critique/

      After 2 weeks of back and forth argument, this is how the professor bowed out, with a clear admission of failure.

      Keen: “when I have some spare time I’ll take on your misconceptions in a genuine mathematical critique of your silly arithmetic… the only question for me is whether I can be bothered wasting the time to prove you wrong. At the moment, the answer to that question is no. When it’s yes, I’ll write a blog post on the topic. Until then I can’t be bothered reading any more emails from you.”

      I am still waiting for that “genuine mathematical critique”.

      • chdwr said:

        “Gift extra money into the system and the rich will just end up with it, so you’ll have to gift more and more forever. Social Credit fails to address the imbalance of economic power. There is no escape from within our current concept of money as a limited supply of anything made valuable by its own scarcity. That is the fundamental problem.”

        Inequality of income itself is not the problem, but rather compulsive systemic inequality. As the monopoly monetary distributive paradigms of only debt, only loan and for production only enable finance to enforce systemic monetary scarcity, monetary gifting is the new paradigm that forms a proper dualism to integrate that will break up that monopoly financial condition and with aligned policies will result in the thirdnesses of wisdom which are the classical values of individual prosperity, economic flow and systemic free flowingness.

        Barter is a fine concept on the individual level, I have no objection to it there, however it is systemically regressive or even never actually existed in a spatial-temporal sense if we look at David Graeber’s analysis. Hence it falls into systemic unworkability and inefficiency and becomes an object of obsessively contentious dualism which unfortunately characterizes almost everything theoretical these days including economics, politics, religion etc. So what we need is the thirdness of wisdom, a Wisdomics if you will, in order to extricate ourselves from both habitual dualism and the current lingering mess.

    • Money is created as debt to a bank on a schedule and then saved and replaced with new debt creating multiple principal debts of the same money BY DESIGN of the banking system (4:1 in the USA according to Fed stats) . Add in private debt outside the banks and you have a situation where everyone is trying to pay off (in the USA) as much as $10 in principal debt with only $1 dollar available. That is why the system never has enough money and is dependent on constant growth of debt to banks to avoid collapse.

      http://paulgrignon.netfirms.com/MoneyasDebt/MAD2016/economists_play.htm

      And money created as a promise of something specific from someone specific (Producer Credits) can potentially be exchanged between 3rd parties or used as savings just as effectively as conventional money. It’s not barter. It’s time limited credit money created as a pre-purchase of the goods and services we actually want and payable only in those goods and or services. Thus there is never a mismatch between production and the money available to purchase that production. The ratio is always 1:1 by DESIGN.

      http://paulgrignon.netfirms.com/MoneyasDebt/MAD2014/solution7.htm

      • Craig said:

        What about the ever increasing additional capital costs of depreciation etc. that must inevitably be computed and added to price? What about the disruptive force of AI that is poised to eliminate aggregate individual income at a rate 20-30 times greater than it ever has before? What about the inevitability of demand pull inflation because “the fundamental direction of capitalism is up.” ?

        “Producer credits” ignore and fail to provide the necessity of having a dual macro strategy of a dynamic way to increase demand and simultaneously decrease prices and are actually just misplaced dividends entrusted to enterprise who already have depreciation allowances to give them a stay of execution of additional costs while the individual languishes in ever increasing scarcity of demand.

        From previous interactions with you producer credits appear to be your answer to the libertarian irrational computation that government is ALWAYS bad…..even if, as in the case of Wisdomics, its mandated monetary and economic policies were directly focused on all of the actual problematic issues, and their effects were the accomplishment of individual economic freedom, greater freedom and likelihood of profit for enterprise, a dynamic systemic free flowingness…..and last but not least the only way that we will ever practically accomplish an integration of the best aspects of the agendas of both the left and right, namely abundant economic democracy and the elimination of then redundant and oppressive governmental bureaucracies.

        Fixed ideas inevitably become rigid and blinding orthodoxies. What economic theory requires is a guiding philosophical concept whose many wise aspects includes dynamic process as in consciousness of continual change.

      • chdwr said:

        I understand this…”Money is created as debt to a bank on a schedule”. Please give me specific examples of this….”saved and replaced with new debt creating multiple principal debts of the same money” .

  4. Why do Republicans, the Koch brothers, the US Chamber of Commerce focus so strongly on attacking regulation? They do it because regulators properly established and empowered stand outside of and above the interests or desires of any party or group, or even branch of the government. Regulators work only to balance the needs and desires of all the participants, and to look for a just and fair resolution of differences. This makes them no one’s friend and everyone’s pain the ass. The Kochs, etc. want to destroy or corrupt regulation and regulators. If you don’t understand regulation then think of “Gunsmoke,” the long-running western TV series. The central character there is “Matt Dillon,” who enforces the law with equity and fairness, even when it hurts him personally. If the Kochs, etc. succeed in eliminating such people and such actions, then the US truly has become a shooting gallery where all of us are potential targets. Some people never “do the right thing.” They are venal, pure and simple. But most of us try to “do the right thing.” Regulators help these people carry out their intentions, even when problems and uncertainties arise. And for the venal regulators try to ensure they don’t hurt people or the planet.

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