Freedom from dogmas

Economics needs to throw some ideas into the dustbin of history
Time to read a different textbook

Time to read a different textbook

I have already ranted before about how I feel the meaning of democracy has been lost in the modern era but I feel even more needs to get off my chest. For the past three decades we have lived in a world that has essentially bastardized the idea that government is “for the people” and that it involves the “rule of the many”. Much of it has to do with the economization of politics; in other words, policies that result in economically efficient outcomes or that promote freedom of choice are necessarily those that deepen democracy. Even at the height of the financial crisis in 2008, George W. Bush summarized this belief best: “If you seek economic growth, if you seek opportunity, if you seek social justice and human dignity, the free market system is the way to go.” How deep this belief was ingrained in mainstream thought that one of his advisers and also one of the most cited economists of our day, Gregory Mankiw, echoed these sentiments almost to the letter: “Free markets remain the best way to promote growth, create good jobs, and ensure rising living standards”.

For those of us who fortunately did not get brainwashed by free market fundamentalism, the unraveling of the Reagan-Thatcher consensus after the 2008-09 crisis has become an intellectual vindication served on a silver platter. Unfortunately, despite the overwhelming evidence that macroeconomic policymaking since the 1980s has been counterproductive to growth, we’re still far away from obtaining a consensus in believing that it has also fundamentally destroyed the way that democratic societies function. Why? Because too much of the population and too much of academia still believes in certain nonsense dogmas that have been passed on through generations of teachers and students, mentors and apprentices. Like a religion, there is an overwhelming sense of guilt at abandoning these dogmas; not least because in a society that frowns upon error (especially in academia), admitting you’ve been wrong all along is a one-way ticket to professional disgrace.

To be fair, I do not think that we will manage to get rid of these nonsense dogmas from one day to the next. After all 40% of Americans believe in creationism, and a good share of ideologues and loons (many of them libertarians, by far the most idiotically obstinate of them all) believe these economic dogmas with a near religious zeal. But I do think one day in the next century or two we will look back and realize just how utterly idiotic some of these were, and feel how stupid we were as a species for believing them.

Here are a few of the most notorious ones:

Self-regulation

This was probably the most blisteringly stupid of them all. How on Earth a significant segment of the population actually believes that economic agents, be them individuals or companies, actually self-regulate makes me lose all faith in the idea that we are an intelligent species. This is essentially saying that, for example, a football match would be better if there were no refs. After all, are the players not smart enough to realize that a descent into anarchy would drive fans away and make them lose millions in revenue? In reality we all know what would happen. Countless fouls outside the box. Countless fake fouls inside it. Endless offside plays. Would there never be an incentive to cheat to get ahead if there was no one to punish you for it? I doubt it.

Yet for some reason policymakers naively believed that companies and banks would behave in this perfect idealistic way. That competition would drive them to behave. Problem was, in many sectors there really isn’t that much competition as we’ve been made to believe, and this is particularly the case in sectors where competition is not technology-based. Do we need to regulate smartphone production? Of course not, because the competition between Apple, Samsung, LG, HTC et al is so cutthroat that the consumer almost always benefits from better and cheaper devices as long as they keep going at each other. But this level of competition is nowhere near as deep in banking where most banks comfortably sit on a pile of trillions of worldwide assets, have virtually no need for reinvestment, and know that somewhere out there is a sucker who will need an interest rate swap or an oil future. In these sectors, companies are little more than cartels (the Libor scandal is a case in point) and asking them to self-regulate is like asking a pack of hyenas to turn vegan in front of a herd of gazelles.

In any case, self-regulation proved to be the biggest unmitigated disaster of economic policymaking of the past three decades, and the single most important cause of the financial crisis. So much that its most ardent champion, former US Fed Chairman Alan Greenspan, was forced to make a full admission of guilt: “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.” Yet look at the reaction of any right-wing government or think tank today, and you’d think we’re still in 2004. The Institute of Economic Affairs and the Adam Smith Institute both believe that the UK rental market should not be regulated despite being completely dysfunctional. Right-wing hacks like Niall Ferguson (brilliant historian, shit economist) continue to see big government as suffocating the economy. And of course, Bob Diamond himself riled against banking regulation in his 2010 Davos speech. This from the man that proved his social responsibility by rigging the single most important interest rate in the world

Executive pay

Another no-brainer. There is absolutely NO relationship between astronomical salaries and improved company performance. In 2012, the average salary of the CEOs of the FTSE 100 in the UK increased by no less than 12%, compared to just a 1% rise in their employee’s pay, and a 5% fall in the FTSE 100! For companies that seem to reward short-term performance above all other things, this is a complete contradiction. Ultimately, can it be argued that US or British companies (which best exemplify the stratospheric rise in executive pay) are better than those in other countries? Clearly not. Are German or Japanese CEOs and top execs flocking to the US or UK for higher wages? Far from it. Would US-UK companies suddenly lose talent by slashing wages at the top? Doubtful. Where else would these greedy scumbags go, France? Au revoir motherfuckers. One day, we will also look back and think how only a deluded self-important moron would think that something like a golden parachute is a good idea. Paying millions to a CEO that cost a company billions? Sheer lunacy.

Shall we give ourselves seven or eight digits?

Shall we give ourselves seven or eight digits?

Of course, the main problem as I mentioned in my previous post on inequality, is that the people who set CEO salaries are CEOs themselves sitting on other companies’ boards; yet another brilliant example of why self-regulation is so wrong. It is hardly surprising that those countries that have seen executive pay skyrocket are those where there are no checks to their wage packages, mostly because union power is practically non-existent nor are there any legal rights for employees to sit on company boards or to elect their members. True, you are increasingly seeing “activist” shareholders rebelling against these pay packages but these revolts are too few to really matter and even the much vaunted new regulations like the Frank-Dodd Act are far too tepid in this sense. In fact, for the most part they are not binding, as the most recent case with fashion label Burberry’s new head honcho illustrates.

Unfortunately, the consensus in the Anglo-Saxon world is that concepts such as employee representation are – gasp – outright communist. How can a liberal, freedom-loving democratic society accept something so radical as employees having a say on how their company is managed, never mind that this is the standard in other parts of the world that have some pretty darn efficient companies? Sadly, these notions are all to frequently ingrained in a country’s psyche. Witness the recent vote by Volkswagen employees in its Chattanooga plant to NOT unionize despite there being no opposition by the company itself (the main opposition actually being Kentucky Republicans). An example like this just shows how medieval labor relations in the Anglo-Saxon world remain in this supposedly enlightened age.

Choice

Here’s the biggest syllogism in economics: 1) Freedom is good. 2) Choice involves freedom. 3) Therefore choice must be good. WRONG. Pause here, while the libertarians recover from the mini heart-attack they just suffered from reading such free market heresy. How can choice NOT be good? Aren’t people smart enough to make the best, most rational decisions for themselves? And even if they’re not smart enough, isn’t that their fault? Why should big government step in to take the decisions from them? First and foremost, as the misanthropic nihilist that I am, I will begin by stating that it is my belief that people, as a collective, are inherently stupid. We make stupid decisions all the time, like World War I, the holocaust, and New Coke. But it’s not these big, bad decisions that we should worry about most, rather it’s the little ones that affect our day to day wellbeing. Take our pension pots for example. Most studies have shown that people underestimate the amount of money they will need once they retire and consequently save too little. Is everyone simply that bad with numbers or are some decisions just too complicated to expect most people to get right most of the time?

Behavioral economics has, for the most part, attempted to highlight those cases where humans make irrational decisions that go against what the ardent supporters of rational choice theory have led us to believe. Unfortunately we have been fed the dogma that choice is ALWAYS good, because anything that promotes the freedom of individuals to choose for themselves is inherently the more democratic (and economically efficient) outcome. It’s not without reason that Milton Friedman named his seminal TV show at the height of the Reagan era Free to Choose and claimed that “a major source of objection to a free economy is precisely that it gives people what they want instead of what a particular group thinks they ought to want.” But is this really the optimal outcome? Can greater choice actually be bad? The behavioral sciences certainly seem to think so. Psychologist Barry Schwartz, author of The Paradox of Choice, gives us this nugget of wisdom:

“When people have no choice, life is almost unbearable. As the number of available choices increases, as it has in our consumer culture, the autonomy, control, and liberation this variety brings are powerful and positive. But as the number of choices keeps growing, negative aspects of having a multitude of options begin to appear. As the number of choices grows further, the negatives escalate until we become overloaded. At this point, choice no longer liberates, but debilitates. It might even be said to tyrannize.”

Now forget about the psychological impact of an excess of choice. Indeed we in this modern society seem to stress out from all the possible partners we could date, of all the cities (and increasingly, countries) which we could find our dream job, and all the possible destinations we should spend our summer vacations in. However, many other decisions lead to clearly bad economic outcomes as well, and costly ones to society in the long run. Pensions and savings are without a doubt the most obvious for the above mentioned reasons. But there’s also education and health, where arguments over greater choice of schools and hospitals run against the evidence that people necessarily end up better off. Even something as common sense as regulating junk food falls upon a cascade of criticism from libertarians outraged over the idea that people can’t self-regulate their appetites and their cravings for a burger with large fries. There are plenty of other examples in the medical field, such as the growing trend in the US to have patients suggest to their doctors what treatment they want, as if they had eight years of medical training too. Not surprisingly most patients feel worse at not having their doctors be the ones to take the lead.

Fortunately, even some advocates of the free market have come to realize that sometimes it is better for the government to give us all a little nudge in the right direction. Some of these, like Richard Thaler and Cass Sunstein call themselves “libertarian paternalists”. At the very least, this is something that all governments should be doing, although I find it hard to imagine that at some point, outright curtailment of excessive choice isn’t simply the best outcome. True, it’s usually good to have more than one thing to choose from; this is not Soviet Russia after all. But do we need 24 varieties of jam? Clearly not. So let’s not raise a stink when we get six instead.

Inequality

Lastly, there’s the issue of inequality. I will not write much about this because thankfully, it is finally a topic that is getting mainstream attention and one which I expect (and hope) will be one of the drivers of economic thought among academics and policymakers going forward. The West, at least in the Anglo-Saxon world, is finding it difficult to reconcile such extreme levels of inequality (which in the US is rapidly approaching Latin American levels) with the democratic standards they claim to uphold. This is mainly because inequality is eroding the standard of living of the fundamental pillar upon which democracy rests: the middle class. Now, I am sufficiently pessimistic that I don’t think we’re close to anything resembling a middle class revolution against the powers that be. People are far too conformist for this, and to a certain extent, the erosion of standard of living is in some ways offset by an ever growing capacity for mass consumption. It’s less traumatic to know that a three-bedroom house in certain cities like New York, London and Melbourne is now unaffordable to anyone without a seven-digit income but at least we can bitch about it on our iPhone while on a cheap holiday in south of Spain. Compared to the soldiers and peasants of 1917 Russia, or the paupers and vagrants living in the ancien regime in 1789, our underclasses (which increasingly include a a lot of highly capable, college-educated young people) have it pretty damn well.

But that still does not mean that there can’t be consequences, even serious ones. You don’t need revolutions to still have unrest (the London riots of 2011, for example, could become more frequent). The loss of faith in the political class, which is increasingly seen by many as aligned with the interests of the elite, can also give rise to radicalism, which rather than help address inequality could well exacerbate it. Take Britain’s UKIP. Most people see it as the party that wants to end immigration and see the UK leave the EU. Yet its less publicized policies that are arguably more frightening, such as the elimination of mandatory paid holidays, maternity leave, permanent contracts and practically every other labor right imaginable so that businesses can be “competitive”. Hard to imagine policies more likely to keep widening the rift between the rich and everyone else. Even the mainstream parties have gotten more radical: compare today’s Republican Party in the US, the one hijacked by the Tea Party and other assorted nutcases, to that of the Eisenhower or Nixon eras. Only radical parties can provide the necessary ideological support for radical inequality even if at their core, they are simply vehicles for the elite to promote populist policies that benefit only themselves.

In the end, we end up truly living in a world of haves and have-nots, and end up pursuing policies which can only benefit one side because it’s a zero sum game: at such extremes of inequality, any policy to help the less well off comes at an unacceptable cost to the elites, and governments simply won’t allow it because they stopped serving the have-nots a long time ago.

Hayek got it wrong. This, ultimately, is the real road to serfdom.

P.S., this post inspired by a very good conversation with fellow friends Ewan McGaugehy and Savas Manoussakis. We need more like this!

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