Satyajit Das: Dead Hand of Economics

Posted: 20 Apr 2011 01:26 AM PDT

By Satyajit Das, the author of Extreme Money: The Masters of the Universe and the Cult of Risk (Forthcoming September 2011) and Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)
John Quiggin (2010) Zombie Economics: How Dead Ideas Still Walk Among Us; Princeton University Press, Princeton and Oxford
R. Christopher Whalen (2011) Inflated: How Money and Debt Built the American Dream, John Wiley, New Jersey
Michael E. Lewitt (2010) The Death of Capital: How Creative Policy Can Restore Policy, John Wiley, New Jersey
“Mortmain”, derived from medieval French meaning “dead hand”, refers to legal ownership of property in perpetuity. Jurisprudence, to varying degrees, has sought to prohibit the control of property by the “dead hand”. Unfortunately, economic thinking seems to be controlled by dead economists or as John Quiggin, himself an economist, argues – “living dead” economists.
In “Zombie Economics”, Professor Quiggin takes aim at a number of “dead” ideas – the Great Moderation; Efficient Markets Hypotheses; Dynamic Stochastic General Equilibrium; Trickle Down Economics; Privatisation. The central thesis underlying “Zombie Economics” is that the global financial crisis (”GFC”) exposed the weaknesses of these ideas, which underpin free market or neo-liberal economics. But as William Faulkner argued: “The past is never dead. It’s not even past.” Worried that these ideas continue to live on in the minds of economist and politicians influenced by them, Professor Quiggin wants to kill them off.
Clever titled, with a wonderful and very un-academic cartoon cover and written without excessive use of technical jargon, “Zombie Economics” provides an elegant critical introduction and analysis of some of the key ideas of modern economic thought. The arguments are generally thorough, though lack depth reflecting the brevity of the work (around 200 pages). Professor Quiggin’s personal sympathies, which are politically left of centre, are never hidden.
Two recent books – John Cassidy’s (2009) “How Markets Fail: The Logic of Economic Calamities” and Justin Fox’s (2009) “The Myth of the Rational Market: A History of Risk, Reward and Delusion on Wall Street” – cover similar territory. Professor Quiggin’s economics training makes “Zombie Economics” far less character or narrative driven and far more interesting in its understanding and criticism of the theory.
The most interesting thing about “Zombie Economics” is actually its lack of interest in why the weaknesses in the theory, much of which has been recognised for years, does not preclude its acceptance. The answer most likely lies in politicians and ultimately the electorate need for simple painless remedies and nostrums. For example, Professor Quiggin’s criticism of privatisation of infrastructure does not seem to recognise the obvious driver of this policy – political expediency of circumventing public finance constraints.
The interesting thing, of course, is that any “new” idea that takes the place of the “zombie” ideas is not likely to be an improvement. Perhaps homo economicus and homo politicus is like David St. Hubbins in the satiric film This is Spinal Tap: “Before I met Jeanine…my life was cosmologically a shambles. I would use bit and pieces of whatever Eastern philosophy would drift through my transom.”
Christopher Whalen’s “Inflated” deals with one aspect of zombie economics – inflation. Changes in price level are ambiguous at best. Even measuring it can present considerable challenges – some years ago, Argentina consciously decided to exclude items where the price rise was particularly high on the basis that no one could afford to buy such products, justifying their irrelevance to the measured inflation rate. Government everywhere, similarly, manipulate inflation measures.
The real issue about inflation, however measured, is its use as a policy tool. The popular economic narrative assumes that inflation is an outcome of economic activity. In reality, it is a key weapon in policy maker’s armoury. Throughout history, governments have used inflation to wipe out excessive debt, a practice that is now central to the policy of the Bernanke Fed to reduce systemic leverage.
Mr. Whalen, a former banker and co-founder of Institutional Risk Analytics, provides an interesting history of inflation in the US. His objective is to use the past to seek insights into the 2008 financial crisis.
Highly opinionated, “Inflated” uses a series of episodes of American economic history to outline the work’s central thesis – the US has traditionally financed its economic objectives through debt, governmental, corporate and personal, using periodic bouts of inflation to manage its leverage. A phenomenon that Mr. Whalen argues is driven by “a national agenda and standard of living that is beyond our current income” and one which is at odds with American’s self image as “reasonably prudent and sober people.”
The book is strongest in some of the earlier chapters when it covers debate about a national bank in the late 18th and early 19th centuries, the issuance of paper money to finance the Union effort during the Civil War and the panic of 1893 and 1907. The book is less successful in its coverage of modern times – from the stagflation of the 1970s and the period of banking and financial deregulation, leading up to the GFC. The coverage of recent events seems to be driven by the author’s personal repugnance of excessive government indebtedness and sloppy monetary management.
“Inflated” contributes to the important current debate on public finances. Mr. Whalen’s call to arms –the distinction between “real economic growth and the illusions of growth created by inflation and credit-driven speculation” – is central to any logical reappraisal of economic policy. Unfortunately, this reviewer and perhaps Mr. Whalen doubts whether it will take place. As William Faulkner remarked: “Facts and truth really don’t have much to do with each other.”
In “The Death of Capital”, Michael Lewitt, an investment professional and editor of the HCM Market Letter, explores the ultimate effect of “zombie economics”. Mr. Lewitt’s thesis focuses on the outcome of these economics, in particular, the rise of financialisation, debt and speculation and its effect on the real economy.
“The Death of Capital” is robust in its arguments, especially in it denunciation of Wall Street practices which he views as unproductive and morally reprehensible. The book makes the case that financialisation ultimately has the effect of undermining the fundamental role of capital in societies and financial markets as a mechanism for saving and channelling funds into real businesses. Drawing heavily on the work of Adam Smith, Karl Marx, Keynes and Hyman Minsky, Mr. Lewitt outlines his thesis clearly.
His solution seems curious, in the light of the trajectory of his critical argument – greater regulation, imposition of a tax on speculative transactions (in effect, a Tobin tax) and “principle based” reform. It is unclear why the proposed reforms can or will work, given that the very forces that propelled the financialisation that Mr. Lewitt criticises would be charged with implementing them. As Scottish philosopher David Hume knew: “All plans of government, which suppose great reformation in the manners of mankind, are plainly imaginary.”
The reality is that economics and economic relations are an adjunct to a larger process – the process of broad social control. Marx wrote about the fetishism of money, arguing that “the money-form of the world of commodities … actually conceals, instead of disclosing the social character of private labour, and the social relations between individual producers”. Human beings and societies are unable to see their own products and social relationships for what they are and become slaves to powerful forces.
French philosopher Michel Foucault identified a carceral continuum, the system of cruelty, power, supervision, surveillance and enforcement of acceptable behaviour affecting working and domestic lives. Economics and economic systems are part of this system of power. In Lewis Caroll’s Alice in Wonderland, Humpty Dumpty understood the issue: “The question is which is to be master – that’s all.”
Economics and economist have been always been part of the mechanism of social control and power. The rest is just noise.