I began this series of Diaries with a number of assertions (Here) and attempted to elaborate on those assertions through two more Diaries (Here). The intention in this current Dairy is to address my underlying criticism of Economic Theory today, that it is what it leaves out and not what it includes that may be the problem. Among the many things left out of these idealized systems, is that in the real real world markets are manipulatable. The basic drive to avoid competition by gaming and controlling either supply, demand or the markets themselves appear to be downplayed ignored or treated as impossibilities.
Let me begin by repeating the insightful quote of H.M. Keynes:
Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all. - JM Keynes
I think we all for the most part agree with his observation ((I would, however, substitute Classical (or Neoclassical) Economic Theory for Capitalism)). Most Economic Theory appears to ignore the reality that these nasty men won't work for a common benefit and perhaps more inconveniently some of them may actively work against it and by doing so unduly effect the course of economic events in a way that results in adversely affecting the rest of us. Many economists appear to approach this problem in one or more of the following ways:
- They wring their hands and call for political intervention (Keynesians, etc.).
- They ignore it claiming it could never happen (Neoclassical economists).
- They consider it an externality along with the host of other externalities that are outside of the scope of their discipline (All).
- They think it is a good thing (Neoclassical again and others).
To some extent they are all right that this and other supposed defects are external to the discipline. Such things like ethics, fraud, the commons and so on are beyond the tools of their profession.
Looked at another way however, these so called "externalities" represent almost everything that is important and necessary in life and in society. Nevertheless, these panjandrums of industry, academia and government are asked to advise us and even to act on our behalf on such things as jobs, education, food supplies and even our national interest, all of which are fundamentally determined by these same ethics, fraud, the commons and a host of other so called externalities. Unless these externalities, especially the thirst for power, are brought into a comprehensive sociological system, the discipline will remain both defective and dangerous.
Market Domination.
A recent article in WIRED discusses the seemingly inevitable domination of goods and services by the uncontrolled few and examines its genesis.
It is the cycle of capitalism. The story of industrial revolutions, after all, is a story of battles over control. A technology is invented, it spreads, a thousand flowers bloom, and then someone finds a way to own it, locking out others. It happens every time.
Take railroads. Uniform and open gauge standards helped the industry boom and created an explosion of competitors — in 1920, there were 186 major railroads in the US. But eventually the strongest of them rolled up the others, and today there are just seven — a regulated oligopoly. Or telephones. The invention of the switchboard was another open standard that allowed networks to interconnect. After telephone patents held by AT&T’s parent company expired in 1894, more than 6,000 independent phone companies sprouted up. But by 1939, AT&T controlled nearly all of the US’s long-distance lines and some four-fifths of its telephones. Or electricity. In the early 1900s, after the standardization to alternating current distribution, hundreds of small electric utilities were consolidated into huge holding companies. By the late 1920s, the 16 largest of those commanded more than 75 percent of the electricity generated in the US.
Indeed, there has hardly ever been a fortune created without a monopoly of some sort, or at least an oligopoly. This is the natural path of industrialization: invention, propagation, adoption, control.
Now it’s the Web’s turn to face the pressure for profits and the walled gardens that bring them. Openness is a wonderful thing in the non monetary economy of peer production. But eventually our tolerance for the delirious chaos of infinite competition finds its limits. Much as we love freedom and choice, we also love things that just work, reliably and seamlessly. And if we have to pay for what we love, well, that increasingly seems OK. Have you looked at your cell phone or cable bill lately?
The writer then identifies a rule describing this tendency:
Monopolies are actually even more likely in highly networked markets like the online world. The dark side of network effects is that rich nodes get richer. Metcalfe’s law, which states that the value of a network increases in proportion to the square of connections, creates winner-take-all markets, where the gap between the number one and number two players is typically large and growing.
To me it seems that an explanation of this dolorous progression, - invention, propagation, adoption and control - as well as some version of Metcalfe's law are vital to a valid description of the economic process. But, in the public debates and analysis of economists on the current state of our society, I rarely observe any recognition that this problem even exists.
The great historian Fernand Braudel pointed out that a "capitalist" does not participate willingly in markets or specialize but instead he searches the world to find whatever it is that would give him control over supply. In other words the last thing they want is competition. ((Perhaps instead of capitalist (which like the word Capitalism) has become defined more by emotion, politics and private interest than any referent , we should call them by the name coined by Buckminster Fuller, "The Great Pirates".))
Although individuals may open shops and small businesses as alternatives to working for someone else, the Great Pirates seem to enter into an enterprise only if in fact there is sizable unmet demand that can be easily captured, or they perceive the potential for controlling the supply of some good or service. No other purpose makes any sense. To the Great Pirates competition is anathema.
Nor do the Great Pirates plan much beyond the next quarter or to counter immediate perceived threats to their own income and wealth. Nothing else appears to be of particular significance to them except to game whatever system is available for their own benefit (They hire consultants, economists, accountants and attorneys for everything else). As Stephen Herrington put it:
I've never met anyone that was that smart and that ruthless at the same time. Maybe I've just not met the man in charge. Bernie Madoff was not that smart, only ruthless. He, like our global finance system, adapted to conditions as they presented themselves. He had no plan other than the next paycheck… Madoff gamed the low interest rates arising from government policy of monetary easing necessitated by tax cuts. He promised higher returns and security where banks and stocks could not. He created a Ponzi scheme not too dissimilar too what global finance undertakes internationally right now. Global finance is loaning, secured by nation/state assets, on assets that will eventually run out and leave the countries loaned to in default and the banks failing because of defaults. They, like Madoff, do not have a plan.
Global finance now preys on government's obligations to meet the needs of peoples. They loan and government pays, never quite reaching the horizon in which the returns on Keynesian investments in national economies pays off. This has become a global socioeconomic hamster treadmill in which no one benefits except the brokers. Eventually the global economic decline this predicts will affect bankers too. They just refuse to see it coming, like Madoff. The Huffington Post, May 13 2010
These Great Pirates individually or in concert exert a significant influence in creating distortions in the so called market. Failure to account for their influence as sooner or later a given in every market, is a core defect in economic theory and if it is treated at all it is treated as an anomaly or denied as impossible.
The Evolution of Corporations.
Exacerbating this problem of market capture or dominance is that we are also currently experiencing a fundamental shift in the nature of the major institution providing the vehicle for this. The modern corporate legal structure used by most large commercial and industrial organizations today was originally developed by governments to engage in a specific manufacturing or trading purpose intended to benefit the state. The uncertainty of success and the potential magnitude of the loss were great. The debtor laws existing at the time placed the potential investor's entire estate at risk should the enterprise fail. Therefore for reasons of governmental policy it was necessary for the state to protect the investors estate in order to encourage their investment in these inherently risky ventures. So they struck upon the expedient of exempting these particular ventures from the normal risks associated with business investment by limiting the size of the loss to only the actual investment. In other words unless you were engaged in state business you and your wealth remained subject to all the risks and vagaries of the market.
This breach of the normal rules of risk in a market economy were supposed to be suspended temporally, only for as long as it took for the enterprise to achieved its goals. Then the enterprise was supposed to go out of existence and the market system returned with all its risks intact.
This governmental intrusion into the supposed normal workings of the market for a public purpose, has over the centuries at the urgings of the investment and industrial community (The Great Pirates again) evolved first into exempting them from any time limit on the existence of the enterprise except for organizational suicide or bankruptcy. The latter in most cases merely being a reorganization of their immortality. Then exempting the investors from all liabilities exceeding their investment. During this time these organizations were also freed from any significant obligation to carry out the goals of the sovereign.
Currently, these publicly granted exemptions from the basic risks upon which the entire edifice of classical economics is founded has been expanded to where these publicly chartered entities appear to be successfully grasping for the right to be treated as individual citizens under the Constitution but with fewer, if any, duties (including paying taxes should the corporate tax structure be shifted onto a consumption tax as these entities clearly desire).
Nor are they required to adhere to any standard of patriotism expected of the ordinary citizen other than that needed to sell their products (when has a corporation gone to war like the citizen solider is required to do?). As one of our founding fathers put it:
Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains. Thomas Jefferson
The Rise of a New Aristocracy?
Perhaps one of the most fundamental concepts imbedded in the United States Constitution is the objection to and prohibition of t he establishment of hereditary nobility controlling the resources and power in a nation. After 200 years or so the corporate entities created by we the people for a limited and comprehensible reason, now stand on the threshold of something the nobles of old could only dream about, immortal control of wealth and power.
The New Government?
Add to this creep to an enduring aristocracy of the cooperate elite is the evidence that these same entities originally created by us but now almost laws onto themselves have begun to take over (as did the nobles of old) the very functions of government that here in the United States were reserved by our Constitution to we the people.
Contractor officials and employees are involved in all aspects of governing and negotiating "over policy making, implementation, and enforcement," as one legal scholar has noted. Yet contractors' imperatives are not necessarily the same as the government's imperatives. Contractor companies are responsible for making a profit for their shareholders; government is supposedly answerable to the public and the nation in a democracy.
Amid this environment complicated by mixed motives, new institutional forms of governing have gathered force as government and contractor officials interact (or don't) in the course of projects; as chains of command among contractors and the agencies they supposedly work for have become ever-more convoluted; as contractors perform inherently governmental functions beyond the capacity of government to manage them; and, as contractors standing in for government are not subject to the same rules that apply to government officials. Wedel and Keenan, Shadow Elite The Huffington Post, August 26 2010.
So What?
One cannot have a market system where major players in the market are exempt from the risks inherent in the concept. Instead of focussing on returning capital to the rules of the market, many of the elite Economists seem to be obsessed with other thing things like breaking up community land holdings in order to bring them into the market market (See my prior Diary),
Despite the obviousness of it all and irrespective of the fact that these entities (The Great Pirates and the Multi-national Corporations) are major players on the economic stage, the Economists and the consultant community I expect will claim they could not have seen it coming.
Make no mistake about it, this is not Capitalism. Marx was wrong. He did not comprehend the sociology or psychology of it all. This lust for wealth, power and control is fundamental to humanity and the various so called economic systems (Capitalism, Feudalism, Mercantilism, yes and even Socialism and Communism) are merely the mechanism used to assure that the fruits of society are reserved for its most socially irresponsible members. Fraud is endemic to all these system and yet mostly ignored in their intellectual underpinnings.
As a result of this the basic concepts of supply and demand are ephemeral at best since both are almost infinitely manipulable (e.g. advertising manipulates demand and monopolization manipulates supply).
Transaction Costs.
Another thing missing in most economic discussions that I have read or listened to, is the impact that transition costs (fees, etc.) inherent in a market, as well as the effect of independent entities (brokers, etc) managing the transactions, have in distorting the ephemeral efficient market (ultimately it is the parasite who usually does the best).
Paradigm Shift or Trash Heap?
While many astute and responsible people call for a paradigm shift in the essential bases of economics (such as Krugman (New York Times September 2 2009)), they must be approached with caution since they themselves are practitioners of that very discipline that has been found so wanting. In Science a physical theory that is logically consistent may be considered to be the truth only until it is falsified. Once falsified the theory looses its status and should be thrown away.
The Economists wish their discipline to be considered the next best thing to a hard Science but they seem unable accept their theories may be added to the trash heap of history Not only is it lacking in its central concepts but almost without exception its practitioners work for the very interests that seek to preserve their hard won ascendency. Only a fool believes an attorney retained by his opponent when he tells him that is is looking out for your best interests. Why then do we believe the economists?
It we must choose a discipline with which to begin, I would much prefer sociology at least there the pretense of a panglossian world is muted. It also does not look back to a founding prophet (Adam Smith) from which all deviations can be described as evolution of the essential truth (whether or not referred to as paradigm shifts). That is a religion and not a science.
What I think is required now is to begin with the basic concept of the society that we wish to live in and the social science we call Economics today should be developed as a mechanism to describe how to get there, that is if we the people hire them before they go to work for those who would prefer we not get there.