Archive for February, 2011

“A Modest Proposal”

Scott Walker just spoke in response to the uprising in Madison, WI. He chose a bad turn of phrase to describe his plan to strip workers of collective bargaining and cripple unions- “a modest proposal.” It’s actually not a bad metaphor for this idea. In Jonathon Swift’s satirical work, it was proposed that weak members of society be further weakened (i.e. killed and eaten) so the rest of society can flourish. That’s pretty much Walker’s argument- let’s weaken labor, so that Wisconsin can remain “open for business.” Let’s ignore that new tax cuts created a state budget deficit, and instead brazenly transfer wealth from labor to capital with a euphemism of belt-tightening.

Walker’s proposal is not modest- it’s a brazen transfer of power. In the long term, it will weaken the state government, which is exactly what the Republicans want. State democrats, union members, and concerned activists have called Walker’s bluff, and now he is doubling down. However, because this proposal is not modest, these protests will only get bigger before they get smaller. It simply won’t stand, I hope, that the Wisconsin budget is balanced on the backs of workers.

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“Unions aren’t to blame”

Ezra nails it on the situation in Wisconsin:

In English: The governor signed two business tax breaks and a conservative health-care policy experiment that lowers overall tax revenues. The new legislation was not offset, and it turned a surplus into a deficit. As Brian Beutler writes, “public workers are being asked to pick up the tab for this agenda.”

But even that’s not the full story here. Public employees aren’t being asked to make a one-time payment into the state’s coffers. Rather, Walker is proposing to sharply curtail their right to bargain collectively. A cyclical downturn that isn’t their fault, plus an unexpected reversal in Wisconsin’s budget picture that wasn’t their doing, is being used to permanently end their ability to sit across the table from their employer and negotiate what their health insurance should look like.

That’s how you keep a crisis from going to waste: You take a complicated problem that requires the apparent need for bold action and use it to achieve a longtime ideological objective. In this case, permanently weakening public-employee unions, a group much-loathed by Republicans in general and by the Republican legislators who have to battle them in elections in particular.

This crisis has not restored the balance between labor and capital, which isn’t surprising, because the theoretical pendulum swing has not been operational for three decades. Batting back these attacks on unions is a huge test for the long-term viability of the labor movement in the US. If labor can’t win a battle on such a cut-and-dry issue, what can it win?


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The Geography of Capital

I’ve written a lot about Marxian accounts of the crisis, in which wage stagnation from class dynamics leads to underconsumption and over-indebtedness. However, David Harvey takes a bit of a different tack in explaining capitalist crises in general in his book, The Enigma of Capital, from Oxford UP. Harvey is a self-labelled economic geographer. He studies the internal dynamics of capitalism, but also focuses on the extensive margin, how capital comes to imperialize the economic space (importantly, it does so by necessity).

In the London Review of Books, Benjamin Kunkel does an excellent job unpacking a key model behind Harvey’s work, which is essentially straight out of Marx’s Capital.

A capitalist, in order to produce, must purchase both means of production (Marx’s ‘constant capital’) and wage-labour (or ‘variable capital’). After this outlay – C+V in Marx’s formulation – the capitalist naturally hopes to possess a commodity capable of being sold for more than was spent on its production. The difference between cost of production and price at sale permits the realisation of surplus value…

Production of the total supply of commodities exceeds the monetarily effective demand in the system. As Harvey explains in The Limits to Capital, effective demand ‘is at any one point equal to C+V, whereas the value of the total output is C+V+S. Under conditions of equilibrium, this still leaves us with the problem of where the demand for S, the surplus value produced but not yet realised through exchange, comes from.’

“Fictitious capital,” allowed by monetary exchange, can paper over this issue, but ultimately, as Harvey writes, “The necessary geographical expansion of capitalism is … to be interpreted as capital in search for surplus value.”

Kunkel rightly states that Harvey goes from this account to a multi-faceted explanation of crises, with a common theme:

What unites the strands is the fundamental antagonism between capital and labour, with their opposing pursuits of profits and wages…[which] nevertheless prevents such a balance from being struck except occasionally and by accident, to be immediately upset by any advantage gained by labour or more likely by capital.

Harvey doesn’t really present solutions in the book. He does point out the ecological ramifications of overaccumulation and expansion of capital on the extensive margin. I think Kunkel nails it, though, that Harvey’s brand of Marxism “seems better prepared to interpret the world than to change it.” The book is certainly a worthwhile read during a time of crisis, but one doesn’t read Harvey and begin to think of micro-solutions, like worker ownership of the means of production. Instead, I came away with a visceral understanding of the roots of capital’s globalization, and a great uncertainty over what to do about it.

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Democracy in name only

In an excellent piece in the New York Times, Bob Herbert uses the revolution in Egypt to consider democracy in the United States [ht:cr].

His position is that “we’re in serious danger of becoming a democracy in name only” because power has become so concentrated in the top levels of financial and corporate America. Politicians no longer need to listen to anyone else. It is not a new argument, but it is hard to argue with:

The poor, who are suffering from an all-out depression, are never heard from. In terms of their clout, they might as well not exist. The Obama forces reportedly want to raise a billion dollars or more for the president’s re-election bid. Politicians in search of that kind of cash won’t be talking much about the wants and needs of the poor. They’ll be genuflecting before the very rich.

A politics oriented towards the poor would undoubtedly look very different from the public discourse of either the Republican or Democratic parties. It is important that people like Bob Herbert call attention to this issue in politics. However, the uncomfortable reality that Herbert touches on is that the political system will never achieve our democratic ideal while the economic system underpinning it is not democratic.

Mainstream economic theory advocates an undemocratic economy that condones the status quo. Only once mainstream economic theory is supplanted by a democratic economic theory will we be able to create a more democratic political discourse. A discourse that does indeed listen to the silent uproar of the poor over the wallets of the financial and corporate elites. This would be a society that is more than democracy in name only.

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Tim Harford had a great column in the FT last weekend in which he discussed some of the limits of what I’ll call micro-behavioural economics (in general I think micro/macro splits are problematic, but this branch is operating as such). Basically, Harford describes the Thaler-Sunstein policy nexus, wherein minor policies will have large impacts because humans behave in ways violating assumptions of neoclassical economics:

Behavioural economists point out cases in which our decisions don’t match neoclassical theory, and thus the “as if” defence fails…

Consider the human response to risk. Neoclassical economics says that we act as if considering all possible outcomes, figuring out the probability and utility of each outcome, multiplying the probabilities with the utilities, and maximising expected utility. Clearly we do not in fact do this – nor do we act as if we do.

Behavioural economics offers prospect theory instead, which gives more weight to losses than gains and provides a better fit for the choices observed in the laboratory…

But, say Berg and Gigerenzer, it is even more unrealistic as a description of the decision-making progress, because it still requires weighing up every possible outcome, but then deploys even harder sums to produce a decision. It may describe what we choose, but not how we choose…

This is tough on behavioural economists, because in order to be taken seriously by other economists they have had to play the optimising game. Switching to Gigerenzer’s rules would mean the end of economics as we know it.

Yet the critique is sobering. If behavioural economists do not really understand why we do what we do, there are surely limits and dangers to the project of nudging us to do it better.

Indeed, it’s unlikely if behavioral economics will ever get at the “why” (perhaps neuroeconomics will some day, but it’s hard to envision how that branch will unfold). The whole nudge policy nexus aims for low-hanging fruit- policies that, for a variety of reasons, will likely work in getting whatever goal is sought. However, this type of behavioral economics will not help us better model an economy, predict crises, et al. In part, it’s because decision-making is fluid, and changes in interaction with other agents in the world. And in part, it’s because decision-making doesn’t necessarily tend to maximize anything in particular.

Indeed, I think we’re better off looking in a direction that Daniel Little points to, wherein real, macro-level complexity reigns supreme.

Axelrod and Cohen make use of three high-level concepts to describe the development of complex adaptive systems: variation, interaction, and selection.  Variation is critical here, as it is in evolutionary biology, because it provides a source of potentially successful innovation — in strategies, in organizations, in rules of action.  The idea of adaptation is central to their analysis — in this case, adaptation and modification of strategies by agents in light of current and past success.  Interaction occurs when agents and organizations intersect in the application of their strategies — often producing unforeseen consequences.

It’s likely that models of the real-world economy with these characteristics will be unsolvable, because these features are difficult to turn into datapoints. Nevertheless, the more ambitious project of seeing how real, unpredictable behavior aggregates into a socially-embedded, uncertain economy, is far more interesting than 401(k) nudges.



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