The Great Transformation: Mainstream Economics and an Introduction to a New Series
I’m on the road, but fortunately finished with the If this is Tuesday it must be Brussels part, so back to my usual posting.
Joseph Stiglitz has written several books on inequality recently, The Great Divide: Unequal Societies and What We Can Do About Them, Rewriting the Rules of the American Economy: An Agenda for Growth and Shared Prosperity (available at www.rewritetherules.org), and Creating a Learning Society: A New Approach to Growth, Development, and Social Progress. James Surowiecki reviews these in the New York Review of Books. He is the economics writer at the New Yorker, and as far as I can tell from reading his columns, he is fairly liberal on economic issues. Therefore, the review is a good example of the hidden assumptions of liberal economics and liberal economics reporting.
Surowiecki agrees that inequality has increased in the US, to the point that even Jeb Bush has raised it in a campaign speech. He agrees that the very top incomes are dramatically greater than 50 years ago. He says Stiglitz focuses on two issues, rent-seeking by the rich, and poor corporate governance. Rent-seeking is the practice of rigging the laws and institutions of the market to jack up the profitability of a business. One recent example is Martin Shkreli, who uses monopoly power to suck money from sick people and their insurance companies. Poor corporate governance is shorthand for sycophantic boards of directors who pay unreasonable compensation to top management.
Suroweicki focuses, as Stiglitz does, on income inequality. Stiglitz says that inequality is not only a social problem, it is bad for economic growth. Surowiecki explains his thinking: inequality
… hurts demand, because rich people consume less of their incomes. It leads to excessive debt, because people feel the need to borrow to make up for their stagnant incomes and keep up with the Joneses. And it promotes financial instability, as central banks try to make up for stagnant incomes by inflating bubbles, which eventually burst.
Surowiecki has several objections to Stiglitz’ diagnosis of the problems of the economy. First, like Stiglitz, he isn’t going to address wealth inequality, because “…the rise of high-end incomes in the US is still largely about labor income rather than capital income.“ As to the impact of inequality on economic growth, he says the evidence is weak, though fixing it couldn’t hurt. And he disagrees that poor corporate governance is the cause of bloated C-Suite pay.
Of course, incomes at the bloated level of the top .01% aren’t about labor at all. They are either a sort of golden handshake by which the richest invite new members to the rich club, or a simple money grab. There is no evidence of a connection between the pay and the competence of the work done or its value, which Suroweicki acknowledges.
Suroweicki has a different explanation for the rise in top incomes. Asset managers and financial people generally make more because more money is under management. Other CEOs make more not because of special competence or better results, but because of “… the rise of ideological assumptions about the indispensability of CEOs, and changes in social norms that made it seem like executives should take whatever they could get.”
On the issue of the impact of growth, both Surowiecki and Stiglitz seem to accept the idea that growth will help solve the problem of inequality. This is a form of an argument liberals often make to conservatives: See, the thing we prefer is also good for you. But Surowiecki begins his review with the statement that all growth is going to the top of the income distribution, and the vast majority of workers aren’t getting any of it. Stiglitz knows this also. Why bother with this argument, then, since they know that the thing rich people want, namely growth, is of no value to the vast majority? And that’s besides the question of the possibility of unlimited growth, or the areas in which growth occurs. If health care sector grows because of increased pollution, why is that a good thing?
Both Suroweicki and Stiglitz recommend the usual array of solutions, but Suroweicki is less confident that they will work. They might affect some people at the margins, but that’s apparently all anyone can reasonably expect, and getting those changes is unimaginable in this sour political atmosphere. I agree with both that just because the solutions seem familiar to the point of boredom, we shouldn’t give up on pushing for them.
It all seems so distressing. I think in part that’s because it doesn’t seem to get at the reasons things are as they are. It simply accepts that the way things are is the only way things could be and we just need to try to work with that system. That won’t work. The rich have too much control. And the problem seems deeper than just a few tweaks. Suroweicki hints at the real problem when he says that we are missing the changes in social norms that make it seem natural that the C-Suite Class grab all the money, without mentioning the abandonment by that class of any pretense of interest in their employees or the wider society. I spent most of the first part of this year looking at whether mainstream economics made sense. It doesn’t, even if it enabled Krugman to get some things right. So now I want to look at a different way of imagining the entire subject area.
The main text for this series will be The Great Transformation by Karl Polanyi, published in 1944. As I get deeper into the book, I will be looking at other early economists, including at least Adam Smith (I trust commenter Alan will correct the errors I will doubtless make), and Marx, including this in particular. For those interested, here’s a discussion of Polanyi’s book that offers a starting place.
He said that to understand pivotal historical events, including the breakup of the Gold Standard and the breakdown of international relations during the first half of the twentieth century, we have to consider the role of economic thought accumulated over centuries which influenced how those events took place and were understood.
We did not become a neoliberal society by accident. For a brief treatment, see this article, particularly Part 1.C, at p. 444. We will not emerge from neoliberalism without a massive struggle. And we will never emerge from neoliberalism until we have a more compelling world view.
(Minor edits for spelling, grammar and clarity.)
I suspect few who consider themselves members of the discipline of economics read The Great Transformation but it’s an important text for anthropologists (see, for example, Market and Society). That’s no surprise as Karl Polanyi drew on the work of anthropologists. At some point, maybe with Polanyi, economics bifurcated into two camps and there appears to be little cross-discussion. Economists mostly ignore anthropology. Anthropologists often throw bricks at neoclassical economic theory.
I will do my best to add to any discussion involving Smith. I don’t claim to be an expert but I have been working on developing my understanding of his works. My initial interest arose because I’m Scottish and I thought I should have a better understanding of Scottish Enlightenment thought than I had. The more I poked around the more I realized that much of what is written about Smith, not least by economists, is complete nonsense. Although my background is in social and cultural anthropology, I can’t say anthropologists have been particularly kind to Smith either. They tend to accept the version of Smith that’s commonly promoted by the economics profession and for that reason mostly ignore him or use him as a straw man.
For those interested in a guide that walks the reader through Wealth section by section I highly recommend Jerry Evensky’s Adam Smith’s Wealth of Nations: A Reader’s Guide. Sam Fleischacker’s
On Adam Smith’s “Wealth of Nations”: A Philosophical Companion is also good. Both should be read with the Glasgow Edition.
Sorry, the last link in my post above is broken. Here it is again: Glasgow Edition.
I’m looking forward to you and Alan on Smith. Maybe I will get educated.
thanks ed.. nice overview.. i am motivated to get one of the books you mention at the beginning..
One way to begin recalibrating the risk/reward equation is to outlaw employment agreements. Everyone, including those at the top, should be employees-at-will, their employment terminable at any time without cause.
An essay on what Polanyi get’s right and wrong:
Hejeebu, S., McCloskey, D. 2000. The Reproving of Karl Polanyi, Critical Review, 13 (4). Also see Polanyi and the History of Capitalism: Rejoinder to Blyth.
The argument that top incomes for money managers are so much higher because they manage more money is as firm as week old celery. Nakedcapitalismdotcom’s coverage of private equity fund managers’ double and triple dipping arrangements on fees is a primer on why that is. Suroweicki’s flaccid argument also ignores outright fraud and the obvious, intentional consequences of rigging the regulatory system through lobbying – often legalized bribery and itself a good example of rigging the system – to enable that fraud to pass without financial or criminal liability.
Mr. Suroweicki should get out more, or stop reading David Brooks, if he thinks inequality:
“… hurts demand, because rich people consume less of their incomes. It leads to excessive debt, because people feel the need to borrow to make up for their stagnant incomes and keep up with the Joneses. And it promotes financial instability, as central banks try to make up for stagnant incomes by inflating bubbles, which eventually burst.”
People with low or declining incomes don’t borrow because they “feel the need”. They borrow because it’s the only recourse open to them to make ends meet and to give their children a fighting chance. That’s especially so as largely Republican-controlled legislatures cut social spending on education, jobs, health care, libraries and public services. And as those same legislatures and their business sponsors continuously attack public sector unions – one of the last bastions of secure jobs in America. People don’t work two or three jobs or take on second mortgages to keep up with the Joneses.
Then, too, it is the private financial markets that generate and profit from bubbles. Central bankers’ role is to bail them out when they inevitably burst. That makes bubbles more profitable and more likely to recur more often.
CEOs are incentivized to promote value extraction over value creation.
See William Lazonick Profits Without Prosperity, Harvard Business Review, September 2014.
Also see Feast for investors sells workers short: As US companies spend billions repurchasing shares, employees and economy may pay the price
Mirowski on Stiglitz:
Thanks Alan for your links to McCloskey. Do you have a link to Blyth, who is the object of her second piece?
McCloskey is right about Polanyi’s economic history being based on a few-liberal- sources such as the Hammonds and Webb but the conclusions he draws about the prevalance of market relations before the nineteenth century are more accurate than those of Walt Rostow who, incredibly, McCloskey cites as a reliable historian of the British economy.
The truth is that while there was certainly a market in land in England from at least the C14th. And while this was a very active market at times. It is absolutely true to say, as Polanyi does, that the vast majority of the population were not much involved in markets. Wages were not set by markets but by a variety of other factors. Furthermore wages constituted only a small part of the remuneration afforded to labourers and artisans alike. The classic case being the remuneration of servants in husbandry and domestic servants the greater part of which consisted of board, lodging, clothing and ‘conditions’. There is a world of difference between such remuneration-in which the annual salary served, ideally, as a sum to be put aside for marriage etc- and the weekly pay packet.
Economic historians, since 1944, have been at pains to insist upon the timelessness of the relationships in capitalist society, to which There Is No Alternative. Polanyi knew better and he would have known better yet had he-in the few years which he spent in England, mostly with University Extensions such as the WEA- gone back beyond critics like Webbs and Hammonds, who were themselves brought up in the utilitarian tradition and read the great contemporary critics of the Market economy consensus. Critics of whom William Cobbett was by far the most serious and consistent.
In detail much of Polanyi is mistaken, as he was aware long before his old age in Toronto, but his appreciation of the nature and extent of the transformation that took place in British society, which accelerated from about 1760 until by the 1830s it was complete, was and remains extraordinarily true.
Here’s the link to Blyth.
McCloskey is also good on Polanyi’s take on Smith. Another critique that attempts to reposition Smith is Chris Gregory’s “On Money Debt and Morality: Some Reflections on the Contribution of Economic Anthropology.” Social Anthropology 20, 4 (November 1, 2012): 380–96.
He goes on to counter the misappropriation of Smith by Polanyi as well as others (Bentham, Jevons, at al.).
Smith, he writes is “the father of Ricardian economics and the grandfather of Marxian economics”–not marginal utility theory–“and economic anthropology is the bastard offspring of this unacknowledged father”. This same material is also covered in a lecture available here: On Money, Debt and Morality: Before Smith, Smith, After Smith. The discussion of Smith starts around 33.40 and runs until around the 50 minute mark.
(Note that Gregory was trained as an economist and then converted to social anthropology. He authored what many cite as the key text in modern economic anthropology, Gifts and Commodities. It has recently been republished. A free online version is available here.)