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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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Ifaohungermapf any group of concerned citizens would gather to discuss economic problems, it would seem natural to begin with the problem of feeding the hungry. Strangely enough, one would not encounter this problem within a standard course of study of economic theory at any of the leading universities throughout the world. This is due to two major mistakes made in the formulation of conventional economic theories currently being taught and practised throughout the globe. The first mistake is the idea that the goal of an economic system is the production of wealth, broadly defined. For example, Adam Smith takes the fundamental economic problem to be the production of wealth. The maximisation of GNP per capita currently forms the core of economic growth theory. The value of human life can be evaluated in terms of how much wealth the human can produce. This also accounts for the use of the degrading term ‘human resource’, which basically puts humans on a par with other resources, like factories and machines, as inputs to the production process.

A revolution in economic theory would result if we replace this completely mistaken idea with its opposite: the goal of an economic system is to increase human welfare. Wealth is important only to the extent that it can bring about increases in human welfare. In conjunction with wealth, many other types of invisible inputs, such as social capital, cultural norms and institutional structures also play an important role in determining human welfare, broadly understood in terms of all dimensions of life which contribute to our collective well-being. Wealth, industry and production of goods and services are resources to be used to help improve human lives. A central goal of economics should be the relation between resources, and their relative efficiency at contributing to human welfare. In particular, providing food to the hungry is clearly the single most important and universal invariant in production of human welfare. The fundamental economic problem is to study how to use a given amount of wealth to produce the maximum amount of welfare.

The second mistake, engendered by the first, is the idea that investment in physical capital is the main source of growth and development. Mahbubul Haq pioneered the replacement of GNP by the Human Development Index. Similarly, Amartya Sen in his book, Development As Freedom, argues that progress is about the development of human capabilities. The UN now defines development as the ability “to lead long and healthy lives, to be knowledgeable, to have access to the resources needed for a decent standard of living and to be able to participate in the life of the community”. Of course, food is the sine qua non of human development. Many factors not usually considered by economists also play an important role in improving quality of life. The elements of trust, cooperation, culture and communities are gradually gaining recognition as important contributors to welfare.

A revolution in planning for growth would result from taking seriously the idea that human beings have far more capabilities and potential than any kind of machine. History gives us many examples of human beings who have changed the world. Given the right environment and training, all children have the potential to achieve extraordinary genius. It is our collective task as a society to ensure that all children get the opportunity to develop this potential. The economic system is valuable only as a means to achieving this goal. This means that providing basic necessities like food, healthcare and education is actually the most valuable investment we can make. Unfortunately, conventional theories of growth, currently routinely being applied throughout the world, do not recognise this fact. As a result, these false economic theories lead us to invest in industry, instead of our children, who represent our greatest potential and our future.

The spectacular failure of conventional economic theories during the global financial crisis has strengthened and created several movements for reform of these theories, ranging from mild to radical and revolutionary. Many of these reforms are taking on board the idea that economic growth is a means to providing for the people. Our greatest treasure is our people and investing in them is the surest path to prosperity.

Published in The Express Tribune, March 23rd, 2015.

The perpetuation of inequality through clustering in neighborhoods is graphically depicted in: “Living in a poor neighborhood changes everything about your life” by Alvin Chang. Of course, this concept cannot even be formulated in conventional economic theory. I think we must move beyond the idea that neoclassical economic theory is “wrong” and come to the realization that neoclassical economist accomplishes perfectly what it is designed to do. It is designed to conceal those aspects of economic reality which could create unrest among the bottom 99%, as well as those aspects which enable the 1% to achieve extraordinary privilege and power at the expense of the rest. For instance,  “The Veil of Money” shows that QTM and standard monetary theory is designed to conceal how the mechanism of money creation provides enormous advantage to the wealthy. “The Fairy Tale of GNP” shows how standard economic theory measures of progress are designed to conceal inequality and distributional injustice. The standard DSGE model, with only one representative agent, is designed to conceal the presence of disadvantaged groups, minorities and laborers.

In reading obits to prepare  an article in memory of Muhammad Ali, I came across something to the effect that Muhammad Ali was a child prodigy. In any just society, given educational opportunities, he would have grown up to be a scholar, a philosopher, a statesman, or other kind of superstar. However, given the realities of discrimination, he could only become a boxer. The drastically different economic realities of heterogenous communities within societies are systematically concealed by economic theory. The article below, about Muhammad Ali, was published in Express Tribune on 13 June 2016, with the title: “Remembering an Icon

The Greatest 

The dramatic shifts of fortune experienced by Mohammad Ali, who died recently on 3rd June 2016, reflects the checkered fortunes of the minorities he represented. It requires effort for contemporary mindsets to visualize the Civil Rights era of the 1960’s where Black Americans were fighting not just for social, economic and political equality, but most fundamentally, the right to lead lives with human dignity. Mohammad Ali was among the most colorful champions of equality in a now nearly forgotten era of Black liberation. He came to prominence on the world stage after a surprise victory against reigning heavyweight Champion Sonny Liston, when 7 to 1 odds were given against Ali. He earned the anger and ire of white public when he publicly announced his conversion to Islam, and renounced his “slave name” of Cassius Clay.

Muhammad Ali’s status as world champion provided him with the platform to express and articulate the sentiments of the oppressed Black minority regarding the Vietnam War.  He refused to “drop bombs and bullets on brown people in Vietnam while so-called Negro people in Louisville are treated like dogs and denied simple human rights”. [ read more]

GNP[Clarification — this is not the followup post to Misconceived Project of Social Science — that will be posted a few days later — however, it is part of sequence showing the serious defects of modern economic theory]

Observations of the real world massively contradict trickle-down theories, so economists generally do not admit to believing this idea that further enrichment of the wealthy will lead to prosperity for all. Nonetheless, trickle down is built deeply into the foundations of modern economics. The greatest illusion fostered on the un-suspecting public is that GNP per capita is the best measure of economic growth. The use of GNP per capita as a measure of growth is equivalent to the assumption of a trickle-down effect. The “per capita” means that this statistic is calculated by dividing total national income produced equally among all the people in the country. Unfortunately, the reality is starkly different from this fairy tale statistic, which assumes equal distribution of income. Since the 1980’s, an increasing share of all the income produced in the world has been going to a small elite minority within the top 1%. The starkest demonstration of this inequality is furnished by the recent research which shows a fifteen year gap in life expectancy between the richest 1% and the poorest 1% in the USA. Similarly, Oxfam published statistics showing that the bottom half of the world lost a trillion dollars, while the top 62 people, who own more than half the planetary wealth, gained half a trillion. The statistics furnish strong evidence for a vacuum cleaner effect: a powerful suction of wealth from the bottom to the top. This vacuum cleaner effect means that the GNP per capita furnishes an excellent demonstration of the famous aphorism: “Lies, Damned Lies, and Statistics.” This statistic is not just misleading, it is deliberately deceptive, and directs attention away from issues which are essential to progress and development.  It is a brilliantly crafted piece of propaganda in that it misleads people by measuring a fairy tale number: what would happen if we took all the national income and divided it equally?

Famous economist Joan Robinson said that “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.” One the major weapons of mass deception in the arsenal of the economists is the GNP per capita measure. In the battle of ideas, achieving widespread acceptance of the idea that GNP per capita is the main measure economic progress has been a major victory for the wealthy. One cannot oppress the majority of the population without achieving their consent in some measure. False measures of progress are a key to victory. Today, governments all over the world are measured by their achievements in rate of growth. A thousand crimes are forgiven at the altar of growth, while tremendous accomplishments are ignored if growth is slow. Making GNP per capita the center of attention ensures that no one pays attention to where all this growth is going, which is in the coffers of the already wealthy.

It is very worthwhile studying the propaganda tactics used by economics textbooks to get innocent students to believe in absolutely incredible myths about how the economy works. In the entering class of graduate students in the Ph.D. Economics program at Stanford, most of us were motivated to study economics in order to solve the major economic problems we could see around the globe. We wanted to help solve problems of poverty, and create better lives and prosperity. During the course of our studies, we were taught to believe that free markets solve all economic problems automatically, and the main economic problem is do-gooders (like us) and governments, who wish to help. If everyone would pursue their self-interest, it would automatically lead to the best economic outcomes for all. The ideals of serving humanity were washed out of us, and replaced by the pursuit of personal ambitions. Julie Nelson has beautifully captured this brainwashing process in a paper entitled “Poisoning the Well: How Economic Theory Damages the Moral Imagination.” She states people would act in socially responsible ways, but are pushed by the economic theory of self-interested utility maximization to believe that it is permissible to be irresponsible, opportunistic, and selfish in when participating in markets. She describes the large number of ways that economic theory counters natural moral instincts, and the tremendous harm that has resulted to societies as a result of this immorality taught by economics.

Among the propaganda tactics used for this brainwashing, one of the most powerful ones is the creation of a single minded focus on GNP per capita as the primary goal of economics.  Every effort is made to ensure that economics students do not pay attention to distribution, so that the rapid and increasing income inequality, and the vacuum cleaner effect created by blind pursuit of growth, does not come to their attention. For example, Nobel Laureate Robert Lucas writes that: “of the tendencies that are harmful to sound economics, the most seductive, and in my opinion, the most poisonous, is to focus on questions of distribution.” Students can go through entire courses with the deceptive titles relating to Income Distribution, Inequality and Poverty. These courses go through a lot of mathematical material on how to measure inequality, and descriptive empirical material, but implicitly teach students to regard these as natural features of an economy. There is underlying message of indifference: inequality does not matter, and the best way to combat poverty is through economic growth. The use of the GNP per capita measure helps sustain these myths. The rapid transfer of trillions from the bottom billion to the top 100 people will not show up in the GNP per capita statistics.

It would be a critical victory for the bottom billions if we could shift the focus of the debate from GNP per capita to measures of poverty and employment. Before the well was poisoned by economic theories, it was clearly understood by all that it is our collective social responsibility to provide for education, health, jobs and social welfare needs of all members of society. If these statistics made the headlines, and governments were held responsible for improvements in the incomes earned by the bottom 25%, instead of the top 1%, there would be a significant change in policies. However, such changes will be strongly resisted by the wealthy, who benefit from widespread poverty in many different ways. This creates a wide pool of labor available for ready purchase to those who have the money. It is this money of the wealthy which drives think-tanks, research organizations, and universities to produce tons of research supporting the use of GNP per capita as the primary target of economic policies. Many have recently raised voices against the numerous deficiencies of this measure, most notably the Stiglitz-Sen-Fitoussi report which includes two Nobel Laureates among its authors. Deficiencies include neglect of damage to the environment, society, and many other issues which directly affect well-being of all members of the society. Unfortunately, while the gears of the statistical machinery are well-adapted to measuring GNP per capita, they have not been designed to measure the things which matter. One can only get shoddy and incomplete data on measures of inequality, unemployment, education and health which are of critical importance in assessing the welfare of nation. This is actually important to conceal the realities which would lead to revolt against the exceedingly unfair system. For instance, recently  researchers stumbled across an amazing statistic related to white US Middle class. In contrast with nearly every other social group, the life expectancy of this group has been rapidly decreasing. Why? It seems that the primary cause is suicide, either direct, or indirect by means of alcohol and drugs. As somebody remarked it is depressing and sad statistic. The question, why was this discovery accidental? A good set of statistical indicators would have picked it up right away, so that steps could be taken to cure the problem The answer is that inequality, misery, poverty are actually beneficial to a small number, who have learned to enjoy the benefits of creating crises which leave millions homeless while the financial elites reap trillions from the catastrophe. For them to create the consensus necessary to implement these cruel policies requires projecting certain types of statistics while hiding others from common view. Angus Deaton remarked that all statistics are political. Simply a display of the statistics related to social welfare of the public would be remarkably useful in the battle for justice. But it hard to prevail against status quo and ignorance.

Posts on Diverse Topics:My author page on LinkedIn. Writings & Talks Index.  Academic writings on SSRN.

 

 

 

 

 

A near perfect graphical illustration of the power of economic theory is provided by the following graph; copied from RWER Blog

The impact of the roaring 20’s can be seen clearly as the shares of the bottom 90% drop steadily from 20% to around 13%, while the shares of the top 0.1% shoot up. The Great Depression led to a slew of regulations on banking, and also eventually the development and implementation of Keynesian ideas, which provide an economic rationale for government interventions to reduce unemployment. From 1930 to 1980, we see the rise of populist ideas, implementation of Keynesian theories, and the eclipse of Hayek and the Chicago School. After reaching a nadir in 1978, we see an upswing in the fortunes of the top 0.1%. The stagflation of the early 1970’s sets the stage for a rejection of Keynesian theories and a resurgence of the Chicago School. The Reagan-Thatcher era translates these theories into policies. When I was going to graduate school in the 70’s, the Chicago School was still an outcast, but they were plotting a triumphant re-entry, as documented by Sabina Alkire & Angus Ritchie in Winning Ideas: Lessons from Free-Market Economics. Among the many important lessons from this well worth reading paper, I note here only their first. Free market economists attempted to seize the higher moral grounds – they argued for FREEDOM as an ideal, a vision for a great society (and not on rational grounds). These lessons are worth studying for those who (like me) would like to reverse the tide. The inexorable upward march of the fortunes of the top 0.1% from the 80’s is matched by the rise to ascendancy of the Chicago School. Among the many indicators of the change is the exceedingly large number of Nobel Prizes bestowed upon its members. Foucault’s Power/Knowledge thesis is so well borne out by this graph, where the wealth of the extremely wealthy marches upwards in perfect tune with the Chicagoization of Economics and corresponding decline of heterodox schools, as well as the previous Keynesian orthodoxy. The global story of this correspondence between the Chicago School and fortunes of the wealthy has been extremely well documented by Naomi Klein in her fantastic book: The Shock Doctrine. She has put together the pieces of a huge jigsaw puzzle; I believe that no one can claim to understand twentieth century economics without reading this book.

The last point that I want to make in connection with reading the graph above is a bit depressing. I think the Great Depression took everyone by surprise and there was a huge popular uprising which led to strict regulations of the financial sector, and the corresponding fifty year decline in their fortunes. However, this time, the Global Financial Crisis did not take the extremely rich by surprise. To the contrary, they precipitated the crisis and very smoothly managed the aftermath so as to prevent a repeat of what had happened after the Great Depression. For example, they carefully manipulated public opinion to block the natural solution – bailout of the distressed mortgagors (see my blog post Deception and Democracy). All legislation proposed to address problems which had led to the crisis was effectively blocked in Congress (unlike what happened after the Great Depression). For example, there was only an eight year gap between the repeal of the Glass-Steagall Act and the Global Financial Crisis. The Falsehood Fabrication industry has tried its best to hide the link between the two, but the following graphic is enough as refutation: (taken from Too Big Has Failed – Let’s reform Wall Street for good)

Although the Dodd-Frank act was passed as a replacement, it is a 300 page monstrosity full of loopholes, unlike the short and crisp 30 page Glass-Steagall act which effectively prevented banks from gambling. Similarly, Gram-Leach-Bliley Financial Services Modernization act of 1999 unleashed the power of derivatives – which are pure gambles – to allow the finance industry to buy up the rest of us – the bottom 90% that is. At the time of the global financial crisis, the value of derivatives was estimated at TEN times the global GNP. Since the crisis, all attempts to regulate derivatives have been blocked, and some laws which were passed in the heat of the moment have been quietly repealed. We used to talk about regulatory capture; the regulated industry captures the regulators. The problem we face now is of Government capture – the body which makes the rules has been captured by big finance.