Tag Archives: economics

The Butcher, the Baker, and Bain?

The Invisible Hand (courtesy of jeff-for-progress.blogspot.com)

The Invisible Hand (courtesy of jeff-for-progress.blogspot.com)

. Old adages die hard. Just consider the longevity of Adam’s Smith characterization of the self-regulating market as an invisible hand in his classic work, The Wealth of Nations. As Smith opined, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

This sentiment, a persistent trope reverberating from one generation to the next, has become a center-piece of the American ethos as well as a mainstay of the Republican party. Nowhere is this more evident than in the on-going Republican electoral campaign. Thus, it is only by invoking the mantra of the invisible hand that Romney can criticize President Obama’s economic strategy, and get away with it, without having to lay out a strategy of his own. He claims to have the magic formula! So, instead of policy ideas, we hear the old refrain, “what’s good for business is good for the country,” or as updated by Romney, “What’s good for Bain is good for the economy.”

The Tooth Fairy  (courtesy of zazzle.com)

The Tooth Fairy (courtesy of zazzle.com)

Call me a skeptic, but having faith in the invisible hand today seems no different to me than believing in the Tooth Fairy. After all, no one can seriously claim that bankers, investors, and equity firms, such as Bain, were not pursuing their own interests when the economy went belly up. How else to explain that big business magnates increased their wealth dramatically in the wake of the 2008 recession, while those lower on the rung experienced calamitous losses. But this begs the question: if businesses were doing what they are wont to do, why then did the market fail to regulate itself? Might this be black magic?

Perhaps is is time to forego the rhetoric of the Republican Party and take a hard look at Smith’s long-standing dictum. To date, neo-classical economists offer little hope in this regard: Try as they might, they have yet to explain how individual actions at the level of the butcher or the baker translate into macro level outcomes, whether good or bad. Fortunately, some nontraditional economists, viewing the economy from evolutionary and complexity perspectives, have provided some promising new insights.

Robert H. Frank, in his book The Darwin Economy: Liberty, Competition, and the Common Good, addresses the issue of the invisible hand head on. As he contends, Darwin’s evolutionary theory, especially as it relates to the role of competition, is far more accurate about the nature of economic life than Adam Smith’s account’s in The Wealth of Nations. In Frank’s words:

When the ability to achieve important goals depends on relative consumption, as it clearly does in a host of domains, all bets regarding the efficacy of Adam Smith’s invisible hand are off. Notwithstanding the uncritically enthusiastic pronouncements of many of Smith’s modern disciples, unbridled market forces often fail to channel the behavior of self-interested individuals for the common good. On the contrary, as the pioneering naturalist Charles Darwin saw clearly, individual incentives often lead to wasteful arms races.

Combining the wisdom of evolutionary and complexity thinking, economist, Erik Beinhocker points out that the equilibrium outcomes, associated with the invisible hand, are entirely unrealistic. As he notes in his pathbreaking book, The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics, the economy is not a static phenomena, but rather a dynamic, complex adaptive system, which is subject to oscillations, power laws, and phase transitions. Moreover, outcomes, as traditional economists would have us believe, are not the product of predictable linear processes; instead, they emerge from the bottom up as the result of the constant interactions and adaptations that take place at all levels of the system. Hence, policy interventions–be they Republican or Democratic–may play a role in determining outcomes, but they are only one factor in a myriad of influences on the economic system.

rough_seas (courtesy of adpulp.com)

rough_seas (courtesy of adpulp.com)

When the economy is conceived in complex, evolutionary terms, the present economic crisis makes a certain amount of sense, unpleasant though it may be. However, what makes no sense at all, given the complexity of the economy, is to blame Obama for the present state of affairs, as Romney so flagrantly does. To the contrary, in times such as these, when the seas are rough and the future uncertain, what’s needed is not someone like Romney, who flips and flops floundering with the waves in the hope that equilibrium will naturally follow, but rather a captain, such as Obama, who will be steady at the helm and stay the course.

The Longue Durée (The Long Time Span)

The former Chairman of the Federal Reserve, Alan Greenspan has had a long and distinguished career in public service, providing economic guidance to both Republican and Democratic Administrations alike.

Nevertheless, this explanation makes me question Greenspan’s–as well as his cohorts’–naiveté. 

And surely, his shock at the economic situation as well as his explanation as to why he failed to anticipate the problems with the market resonated with many other key decision makers: the economy had continued to perform well for forty years. Nevertheless, this explanation makes me question Greenspan’s–as well as his cohorts’– naivete.

Unfortunately, Greenspan’s lack of foresight reveals a major lack of hindsight. Forty years is but a blink of the eye in the course of time. Had Greenspan and others looked at the performance of the economy from the perspective of the longue durée— an approach advocated by the great French historian Fernand Braudel in his book On History (University of Chicago Press, 1980)– he certainly could have fathomed the market crash, even if he were unable to predict it.

One need only consider the insights of Eric Beinhocker, in his recent book, The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics. (Harvard Business School Press, 2006) Beinhocker’s evolutionary approach is consistent with Braudel’s notion of the longue durée insofar as he emphasizes the on-going cumulative processes that converge in the course of history to yield discernible patterns over time. Pointing to the collapse of the English economy in 1315, Beinhocker notes, for example:

Depressions, recessions, and inflation are not exclusively modern phenomena: they are patterns that have recurred since the beginning of recorded history. There are other patterns in economics that are equally old, including the long-run growth in wealth per person. . . and the distribution of wealth. . . For these patterns to be so old, they must be the result of causes that are deep in the workings of economics, cases that are independent of the technologies, government policies or business practices of a particular age. (p. 161)

As the market crash makes clear: the time for interdisciplinarity is here!

Today’s understanding of the present market crisis should not, therefore, be attributed solely to the failure of politicians to regulate the market so as to promote not just profits but also the public interest. Academia is also partially at fault. As Geoffry Hodgson has argued, in How Economics Forgot History: The Problem of Specification in Social Science (Routledge 2002), understanding the economy as it has evolved over the longue durée requires not just a dialogue among disciplines but also new theoretical approaches that build on a long view of history and, thereby, provides a more realistic, while at the same time more complex, level of analysis. As the market crash makes clear: the time for interdisciplinarity is here!

Economics 10#**=%#!

During my undergraduate days at Syracuse University, I was fortunate enough to have Dr. Jim Price as my economics professor. A fresh graduate from MIT, and a Keynesian, Dr. Price did not view economics as a dismal science. To the contrary, he saw economics as a mental construct that not only approximated reality, but also–and for that reason–could be used to improve upon it.

he saw economics as a mental construct that not only approximated reality, but also–and for that very reason–could be used to improve upon it.

Bloody Dismal Science (Courtesy of Sjamsu)

Bloody Dismal Science (Courtesy of Sjamsu)

This idea came as something of a surprise to us, his students. For, although we had grown up in the relatively prosperous post war period, our parents had continually admonished us for overspending, recalling how the roaring twenties had given way–without notice–to the dreadful and enduring days of the Depression. When we asked Dr. Price about depressions, and their likely probability, he told us that we need not worry. Depressions were a thing of the past, he said: Now we have the Phillips Curve!.

asked about depressions, and their likely probability, he told us that we need not worry. Now we have the Phillips Curve!

Over the next few years, my enthusiasm for economics waned, not, however, for lack of interest but rather for lack of math skills. As a result–and much to my regret at the time–I chose to study international relations. To be sure, the subject matter was equally interesting and demanding; but, as compared to economics, the discipline’s problem solving ability and methodological approach seemed to me, at least at the time, to be a little fuzzy.

it was not long after, however, that I began to appreciate the decision I had made. For, in the context of the recession of the seventies, and the subsequent oil shocks, the prescriptions that I had learned in Economics 101 no longer seemed to fit. Although the United States still made economic adjustments according to the mathematically proven Phillips Curve, the results were becoming increasingly problematic. The outcome was not greater stability, as economists had led us to expect. Instead the economy suffered persistent stagflation–that is to say, higher prices and fewer jobs. As the late Jane Jacobs characterized this state of affairs (Cities and the Wealth of Nations, 1984), the United States was suffering from underdevelopment. The answer, according to Jacobs, was to shift our focus away from equilibrium outcomes, and to center our thinking on the problem of wealth creation and growth. Jacobs insisted that understanding cities, and how they generate wealth, was the place to start. A non-economist, who employed the wealth of all the social sciences to make sense of the failing US economy–well, that was enough of an inspiration for me.

Faced with the prospects of an up-coming, serious depression, my students ask me what I think. Unlike Dr. Price, I don’t have recourse to an answer such as the Philips Curve. But perhaps this is fortunate. For although I cannot offer formulaic solutions–which may turn out to be wrong–I can provide something that was unavailable in my day–alternative ways of thinking about the economy. Thus, I can point my students to–among other things–Jochai Benkler’s discussions of cooperative growth strategies, which are designed not only to coordinate production but also to generate positive externalities (The Wealth of Networks: How Social Production Transforms Markets and Freedoms) Likewise, I might direct them to Beinhocker’s The Origin of Wealth (2006) for a discussion of the complexity and non-linearity associated with economic interactions. Alternatively, I might suggest that they take a look at Samuel Bowles, Microeconomics: Behavior, Institutions, and Evolution, (2004) for a far more nuanced perspective on economic behavior.

Thus, as I see it, the situation is far from dismal. In fact, we have a learning/ teaching opportunity here. Experience has shown us that prescribed economic solutions, no matter how elegant, are typically situation specific. They are vulnerable to changes in the larger environment. Thus, in teaching about the economy, we must provide our students, not so much with answers, but rather with a menu of perspectives from which they can draw, when faced with fast-moving, unpredictable change.