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Archive for April 22nd, 2009

The NYT has an article today about Hime, an island off the coast of Japan, which has carved out a socialist niche for itself:

If Marxism had ever produced a functional, prosperous society, it might have looked something like this tiny southern Japanese island…

The 2,519 mostly graying islanders subsist on fishing and shrimp farming, and every summer hold a Shinto religious festival featuring dancers dressed as foxes…

it invented its own version of work-sharing four decades before the current economic crisis popularized the term.

Under Hime’s system, village employees earn about a third less pay than public servants elsewhere in Japan, though they work the same hours. This has allowed the village to create more jobs: it now directly or indirectly employs a fifth of all working islanders. Most of the rest are engaged in fishing, also government-subsidized. In fact, village officials say, there are few fully private-sector jobs on the island.

Islanders admit to the socialist parallels, even while proclaiming themselves political conservatives who vote for the governing right-wing Liberal Democratic Party. Some jokingly take the analogy a step further, comparing themselves to a much more repressive family-run regime in Japan’s geopolitical neighborhood.

“Hime Island is North Korea, just a livable version,” Naokazu Koiwa said with a laugh. Mr. Koiwa, 32, repairs fishing boats…

Now, with the current crisis causing a national questioning of American-style laissez-faire economics, and business leaders and unions seeking alternatives to widespread job cuts, Hime’s work-sharing scheme is suddenly being held up as a new model. Islanders call it ironic that the current crisis has made traditional values appear progressive, even utopian.

Nor does the island’s penchant for equality stop at work-sharing. At an annual village ceremony to mark the coming of age of 20-year-old islanders, women are forbidden to wear traditional kimonos for fear the differences in quality could reveal their households’ economic status.

No utopia is perfect:

the island decided to choose mayors by consensus, finding someone on whom everyone could agree beforehand. Last year, Mr. Fujimoto won his seventh straight four-year term, once again by default in an uncontested election.

“My job is to prevent elections by keeping everyone equal, and thus happy,” said Mr. Fujimoto, 65, sitting in a modest office in the village hall. His only visible sign of authority was a buzzer on his desk that he pushed to summon an assistant.

Mr. Fujimoto said he would resign immediately if a serious rival appeared in an election. “That would be a sign the village has lost confidence in me,” he said…

The island and its mayor also have outside critics. Keizo Nagai, the ombudsman for Oita prefecture, which includes Hime, calls the island the least transparent local government in the prefecture. He criticized it for refusing to make information like detailed budget records available to non-islanders, which he attributed to a closed local culture rather than to a cover-up of wrongdoing.

“Hime Island acts like an independent kingdom,” Mr. Nagai said.

Many islanders say they accept the status quo simply because life here is comfortable. They say rocking the boat would only ostracize them on an island where everyone knows one another…

“Everyone is basically satisfied,” said Shusaku Akaishi, 29, who works at his family’s gas station. “This is a conservative place.”

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John Kay, a Scottish economist who I had not heard of until tonight, has a great article in the Financial Times today (h/t Mark Thoma). In it, he criticizes economists who blindly seek a “theory of everything.” And, no, Kay is not a Johnny-come-lately. Back in 2003, he wrote another article with the following lede:

The last fifteen years has been one of the most remarkable periods in economic history. But the American model on which most economic thinking and policy making has been based is not only unattractive, it is inaccurate – both about human motivation and how socially embedded markets actually operate

There are some other money quotes (that’s two uses of that pun in 24 hours) in that article.

Despite these humiliating fiascos, the ABM (American Business Model), somewhat bruised and battered, nevertheless continues to play the role in political economy that socialism enjoyed for so long. All political positions, even hostile ones, are defined by their relationship to it. Globalisation and privatisation have displaced capital and class as the terms of discourse. Through the twentieth century, the vocabulary of politics was determined by the left, but by its end the right had defined the language of political debate…
Economic motivations are complex, multi-faceted, and not necessarily consistent. The study of human behaviour should be an empirical subject. It cannot rely solely on introspection and a priori assumption. The best starting point is to expect that behaviour will be adaptive – people will behave in the way they are normally expected to in the circumstances in which they find themselves. This expectation will sometimes be false. The occasional falsification of that expectation is an essential dynamic of a market economy…

The complexity of the way in which market rewards are determined makes it impossible to argue that such rewards are necessarily just or efficient. Thoughtful conservatives do not make that claim: they assert instead that interference with the process that gives rise to them would be unjust, because it would involve illegitimate state coercion…

The ABM supposes that the market economy is defined and described by the activities of greedy people endowed with vigorously defended property rights, but otherwise free of restriction or regulation of their actions. The problem is not simply that this account is not true: it is that the attempt to make the world conform to the model has been deeply damaging, both to the effective functioning of the market economy and to its political legitimacy. By misunderstanding the nature of the American victory in the cold war, the ideologues of the ABM have undermined it…

The deep seated failure of the ABM is that it does not recognise the fundamental complexity of the social institutions of the market economy, and the degree to which these economic organisations are necessarily embedded in the society, politics and culture of productive economies. That embeddedness extends to every aspect of economic life…

Information in complex modern economies is necessarily incomplete and imperfect…Knowledge and information are key products in complex modern economies. They cannot be produced in competitive markets in which there are many buyers and sellers of each commodity…

Economists frequently describe the issues raised by asymmetric and imperfect information, coordination problems, and the inadequacies of risk markets as examples of ‘market failure’. But this phrase entirely misses the point. There are failures of a model of the market economy, not failures of the market economy itself. Much of the strength of modern economic institutions comes from the social mechanisms which have evolved to handle these issues: market economies function because, and only because, they are embedded in a social context. The intellectual paradox of the last two decades is that the legitimacy and efficiency of modern capitalism has been undermined by an account of how it works that is at once repulsive and false.

Kay does not exactly presage the crisis in this article, but he certainly chips away at a lot of the neoliberal dreams of many on the right. His argument from then was somewhat Polanyian: the utopian project to disembed the market from society is bound for failure.

Now, with the benefit of hindsight, let’s see what Kay has to say (read the whole thing, but I’ll quote at length):

The past two years have not enhanced the reputation of economists. Mostly they failed to point out fundamental weaknesses of financial markets and did not foresee the crisis…

Since the 1970s economists have been engaged in a grand project. The project’s objective is that macroeconomics should have microeconomic foundations…

Most economists would claim that the project has been a success. But the criteria are the self-referential criteria of modern academic life…

But policymakers and the public at large are, rightly, not interested in whether models are rigorous. They are interested in whether the models are useful and illuminating – and these rigorous models do not score well here…

Robert Lucas, one of its principal architects…argued that ordinary standards of statistical validity should not be applied to the project’s predictions. According to his colleague Thomas Sargent, Lucas was concerned that such tests rejected “too many really good models”.

Economists, like physicists, have been searching for a theory of everything. If there were to be such an economic theory, there is really only one candidate, based on extreme rationality and market efficiency…no one imagines that there could be a single theory of all human behaviour. Not quite no one: a few deranged practitioners of the project believe that their theory really does account for all human behaviour…

But these people discredit themselves by opening their mouths. That people respond rationally to incentives, and that market prices incorporate information about the world, are not terrible assumptions. But they are not universal truths either…

There is not, and never will be, an economic theory of everything. Physics may, or may not, be different. But the knowledge we can hope to have in economics is piecemeal and provisional, and different theories will illuminate different but particular situations.

Keynes went on to explain that economic understanding required an amalgam of logic and intuition and a wide knowledge of facts, most of which are not precise…On this, as on much else, Keynes was right.

I think reading these two article together gives a sense of two related undercurrents in the buildup to the crisis: on the one hand, a neoliberal dream in the business community of a true free market economy; and, on the other hand, an equally utopian quest for a grand model explaining the economy that, by necessity, could not incorporate any of the messy details that Kay talks about. A sort of symbiosis developed between policy-makers and academics, which has ultimately led to the completion, and also destruction, of this grand project.

A Polanyi moment, indeed.

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