Economists today, in my opinion add little or nothing constructive to the debate the existence of or the solution to any of the crises we are facing in our nation. But oh how they fill up the media with their ever conflicting interminable debate about their theories. (I have discussed my jaundiced view of the profession in other Diaries and in my Blog. See also Justin Fox, "The Myth of the Rational Market")
Warren Buffett, before he became ridiculously wealthy and wise,when he obviously was younger, not so rich but equally wise engaged in a famous debate regarding the rational market theory. In his folksy way, he used a story, admittedly not quite on point, to demonstrate the essential absurdity of the theory.
He described a flip of a coin. In the long run there would be an even balance between the coin turning up heads or tales. Now and then some individuals would experience a run of the coin flip coming down on the same side but, like the rational market those anomalies would even out.
Buffet then pointed that if everyone in the world flipped a coin, winner taking the losers coin, sooner rather than later perhaps only about 250 multi millionaires would remain. No 'invisible hand' or any other mechanism of the rational market could correct this imbalance.
Although it was not the point he was attempting to make, what Buffett describes is a fundamental acquisitive mechanism to acquire at the expense of others, that the theory bound economists fail to account for.
Unfortunately Buffett's empirical insights, gained primarily from his mentor, Benjamin Graham only energized a few vigorous and practical individuals who used them to also become wealthy like he did. (This story is taken, in part, from Justin Fox's book cited above)
On the other hand Milton Friedman, more famously pronounced that when economic theory and empirical evidence collide, theory must prevail. This allowed him to go on to torture the meaning of words like freedom out of all contextual sensibility. His assertion proved to be much more marketable and as a result more powerful than Buffett's home spun wisdom, because it allowed a lot of people not so vigorous and practical to make a good living as economists.
Friedman and others claimed the rational market theory was a theory of almost everything really important and that therefore it should be saved at all costs, even in the face of conflicting evidence.
In my opinion, this is not science even with the modifier "social" attached, but is an intellectual exercise much closer to religion than science. In Science, after all, a physical theory that is logically consistent may be considered truth only until falsified. Unfortunately much of what is considered economics today is a frequently logically inconsistent sociological theory that often is considered true even when falsified.
Capitalism, like Friedman's misuse of the word freedom, is variously defined, usually to fit one's conclusions about it. Whatever is however, it is not the production of wealth through the mechanism of the market regulated by competition. Capitalism or a righteous capitalist, ultimately seeks only the control of supply and the manipulation of demand with the market and competition merely temporary impediments along the way. Or to put it another way, organisms whether biological or social seek to maximize the accumulation of energy no matter its impact on other organisms or even their own survival.
As I have admittedly snarkily written in another context:
When… [humanity] first dropped from… [the] protective trees and trembling stood upright so that they were able see above the grasses of the veldt, they looked about for four things, predators, prey, sex and someone to do the dirty work or to take the fall.
Imagine if you will, a small band of proto-humans are set upon by a ravenous saber-toothed tiger. One of the men guarding the tribe turns to the one next to him and says, “Quick Smith run over there and punch that thing in the nose.”
Smith in his manly exuberance does so.
“Oh-oh” says the first man. “Too bad for Smith, brave of him though. Well, lets push on while the cat is busy with him.” He turns to the rest of the tribe as they prepare to run away and shouts, “We shall remember Smith’s sacrifice for all eternity.”
Speaking of Smith, in this case Adam Smith, who erroneously is sometimes claimed to be the progenitor of the rational market theory, he clearly did not buy into it when he pointed out:
“People of the same trade seldom meet together, even for their own merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” [Adam Smith, "The Wealth of Nations," Book I, Chapter X, Part 1, p. 148]
OK you may say, I agree with you most modern economic theory is bunk created when the political-economic elite realized how the rational market theory benefited their interests. So what? We have heard things like this before. It really doesn't matter one way or another the big get bigger until in their greed they consume all the resources and collapse. At least the economists, rational market theory or the invisible hand or whatever, wrong though in may be, promises something. You seem to be suggesting a deterministic mechanism that leads inevitably to one or two people ending up with all the pennies and nothing to spend it on. One way or another it is deterministic.
Well, no just because something is deterministic does not mean it is determined. The assumptions or initial conditions upon which a determined result is based may be changed. I hope to discuss this in my next post.
But let me leave this post with something I found written by Peter Dormanthat to me seems to depressingly describe the nature of the quandary we find ourselves in:
"We are not living through an epoch of intellectual failure, but one in which there is no available mechanism to oust a political-economic elite whose interests have become incompatible with ours.
This is not some sudden development, much less a coup d’etat as is sometimes claimed. No, the accretion of power by the rentiers has been systematic, structural and the outcome of a decades-long process. It is deeply rooted in modern capitalist economies due to the transformation of corporations into tradable, recombinant portfolios of assets, increasing concentration of and returns to ownership, and the failure of regulation to keep pace with technology and transnational scale. Those who sit at the pinnacle of wealth for the most part no longer think about production, nor do they worry very much about who the ultimate consumers will be; they take financial positions and demand policies that will see to it that these positions are profitable.
The rapid and robust global restoration of profits post-2008 was not an accident. Public funds were used to bail out exposed creditors and shore up asset values, while the crisis was used to suppress wages and postpone meaningful regulatory reform. Indeed, I can predict with some confidence that many of the profits, particularly in the financial sector, that have been reported in official filings and blessed by the accounting firms will later be found to be illusory—but not before those who have claims on the revenues have cashed in to their own personal advantage. The institutions will be decimated, but those who owned, lent to or bet on them will be rich. This is not a failure, at least not for them.
As long as there are even a few economists who proclaim the virtues of austerity and deregulation, however, their views will dominate. They haven’t won a battle of ideas; they are simply the ones who have been handed the microphone.
The real problem is political, and it is profound. Unless we can unseat the class that sees the world only through its portfolios, they may well take us all the way down. Unfortunately, no one seems to have a clue how such a revolution can be engineered in a modern, complex, transnational economy."
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As with most essential freedoms, preventing those who wish to curtail the fundamental rights of others is a more important role of government than encouraging the exercise of those rights. Exercising our rights are our individual jobs, protecting us from those who would abridge our rights is the duty we collectively give to government. If government is not the guarantor of Freedom then it is a tyranny.
Trenz Pruca