Uh Oh ... Boring 1

Buyer's Remorse

People buy things and regret it later; usually after the purchase cannot be undone. This is one aspect of economic behavior.

That will introduce another economic behavior, Bait and Switch, which is what I'll do right now. I take a detour in the true name of the economic discipline: "political economics." That's right, you cannot separate the "political" from the "economic," because everything in economics and politics is about choices made. Neither economic nor political decisions are usually enforced by natural laws; they are entirely conditional and species-specific.

Economic and political decisions are made within the context of the natural world, including our biology. Physics, chemistry and biology are constraints upon the subjects and objects of political economy. Only a very ignorant or foolish economist or politician would try to make decisions opposing the way our world works; e.g., "repealing" gravity.

So, in discussing political economy, one must discuss human behavior based on an understanding of human biology, sociology, history, etc, and an understanding of the world in which we live. Political economy can be a science, so far as its theories are based on empirical observation and experiment, just like the other sciences.

These remarks are intended to undermine the so-called "Chicago School" right at the starting line. Mathematical theories which don't "explain" the real world, and which require endless ad hoc fixes and adjustments in matching real world behavior, are useless in science. That is not to say that such theories are useless altogether, as some people understand them as "models" or possible patterns (outlines) of real behavior. There is, nonetheless, a difference between theories of "ideal" behavior, and studies or explanations of actual behavior. It's Sir Francis Bacon's difference: "modeling" how many teeth the horse has, or going out and counting them.

All those who fell for the stuff most economic professors "teach" in Eco 101 can now adjust their seatbelts, because, after this, it's irrelevant.

Galbraith's ART

I am a sometime follower of J. K. Galbraith, who I interpret to mean that political economy is a circumstantial study. It changes from time to time. What makes it a discipline is the record of the observations made, of the many different situations. All of that work has in common how people make a living: what they do to get by.

Political economy borders on sociology and political science, ecology, and the study of behavior of all living things. We can speak of the "economy" of the reefs, or a certain patch of forest. What we are talking about is the relationships creatures have to each other in making a living. It is not just humans that have an economy.

The birds and bees are very instructive on this point. So are ants, perhaps because they are closely related to bees. In those insect societies, every member has a defined set of characteristics which fit the job it must do. Sometimes one creature can be changed into another to meet social needs, as when a worker ant or bee can become a Queen or induce a larva to become a Queen when none is resident. The whole society works because of the relationship of its parts, because the parts are sufficient to preserve the workings of the society, and because there are enough individuals to do the work.

Bee and ant societies have probably changed very little in millions of years, maybe tens of millions of years. Those animals have struck upon a system which is extraordinarily stable and efficient in maintaining their body plans, their colonies and their lifestyles.

Birds, and most higher animals and plants, have changed all of their characteristics in fairly short times. There is some evidence, for example, that Darwin's Galapagos finches have undergone further evolution since his Origin was published. I noted several reports in the last few decades of evolution in South Pacific island-hopping species. Almost everyone has heard about bacteria developing resistance to antibiotics. Many insects have become resistant to pesticides fairly quickly, too. Adaptation goes on, and faster than most people realize.

If political economy is the study of how creatures get by, if it is an exercise in circumstantial behavior, clearly things are moving rapidly. How things are put together today is not what will happen tomorrow, even if many of the generalized "strategies" for coping are the same.

We should not expect economics to be static. There is not one model, or even a defined number of models, that will apply to every situation. So, when the Eco Prof grinds on from Adam Smith through Malthus and thence to Ricardo, it is helpful to one's emotional mental well-being to realize it is only temporary. Some important parts of economics are indeed dismal. Thankfully, it need not be that way.

The Bottom Line

What is the political economy of human societies all about, anyway?

We start with the Greek concept, oikonomos, "household manager." Households may be composed of several people of different ages, generations, skills, jobs and status. The object of managing the household is keeping everyone alive and going. Ants do this under control of chemicals, pheromones, and "by instinct." People do it "by instinct" as well, but require more complex instruction at least some of the time. In modern economies, complex and complicated instruction and organization is almost always required to get things done.

However accomplished, the very first goal of economy is getting enough to eat for the living. Without food, nothing else happens. After food, shelter and clothing are necessary protections against natural conditions. Then comes medical care, education and all the other services which support and allow household members to perform their functions efficiently and productively.

Modern economies have evolved from lesser examples over the millennia. The core economic activity is food gathering, and all the other activities are built on that. For this reason, like the software in this computer, economies are layered; they are like onions. In our world, there is not one economy or one theory of economy. There are economies built on economies.

On my view, everything starts with food production, whether hunting and gathering or modern agriculture. This is the most basic economy, even if it is much improved by modern science and technology. Getting food depends on natural conditions, such as rain, heat, snow and sleet, and the biology of what is eaten. Whether it is practical to store a food, or trade in food futures, depends entirely on the food. Even today, it is difficult to store animal parts for more than a few weeks or months without spoilage. So, there is a huge market in fresh meat, poultry and fish, while there is an even larger market in stored grains. How each of these food resources is handled is totally different, and cannot be standardized. How wheat and corn farms are capitalized is vastly different from practices in the beef, poultry and fishing industries. That is because each of these practices requires different people, different techniques, and different equipment applied over different periods of time with different intensities. In practice, for example, the complex of supporting institutions involved in each food industry is different and infrequently overlap.

Now, how does "traditional" capitalist economics handle this? The simple answer is: it doesn't. You may remember those lectures about the "division of labor," and other lectures about supply and demand. You may have forgotten those lectures were all based on factory settings; Adam Smith's pin factory, for example. They weren't about sheep farming in the North of England or Wyoming, or the corn in Kansas, Nebraska and Iowa. In fact, farm policy - upgraded to "agriculture" in the 20^th century - has been a mess for over 200 years since Adam Smith and the American Revolution.

The most recent denouement of failed agricultural policies is the return of subsidies. The Gingrich Republicans turned Federal agricultural policy upside down and inside out in the 1990s with the avowed purpose of ending all Federal regulation of agriculture. There were going to be one time payments to help farmers off corporate welfare, and then, that was that, forever. It was all based on market fundamentalism, "ultra-capitalism," so popular lately. But, the conservatives' program did not work. After all the one-time payments were paid, farms had a few good years and then things went back to bad all over again. Farmers wanted a return to the "good old days" of subsidies and crop controls, the failed program of yesterday's liberals.

Despite themselves, the Republicans have approved programs to do just that since 2000. Since farm policy is not concerned so much with what you eat, but whether you eat, farm policy failure threatens almost everyone. Of course, American politicians cannot accept blame for failure, especially not a huge failure, so the problems were papered over. Republicans quietly found excuses to back-peddle, abandoning their ideologically-driven policies.

The liberal policies had failed after being reasonably effective for about 40 years. Conservative policies failed in less than a decade. All of them, especially conservatives, tried to apply "modern" economic theories about markets to agriculture. The trouble is, all of those theories were intended to apply to factory industries, not farms.

An interesting hypocrisy is the WTO agreement that the First World will remove agricultural subsidies. The Europeans have tried every subterfuge to avoid that, and so have the Americans. The result is that Third World peasants are being undercut, and entire Third World economies are being destroyed. This is especially a problem in Africa and the poorest countries of Asia. The First World cannot afford to remove the subsidies, because they cannot afford to shut down their agriculture. So, here the theoretical concepts of the ultra-capitalists are in clear conflict with practice at every level. Nonetheless, G-7 emissaries, especially Americans, continue preaching "free market" economics to those same countries (victims) they are destroying.

The same problem arises in other natural resource industries, for instance, lumber, mining and oil. Making paper and 2x4s from logs is just not the same thing as producing cars, TVs or shoes. All natural resources involve something mostly immutable: the resource itself and its place in the world. No one knows how to "invent" another oil well; it's just there to be discovered. No one can predict the wheat crop for this year, which is why the futures market is a gambling game. This is true, despite advances in genetics and geology which have improved resource production.

I think the very first thing an economic theory must do is describe and explain how we manage to make a living. It has to start with stuff like growing wheat, mining coal and pumping oil. We're talking about our households, separately and collectively. They all need those resources to survive.

The Middle Line

The standard capitalist theories seem most applicable to small businesses in the industrial world, or, at least, that's what I think.

Adam Smith theories describe small operations which behave according to simple laws. These entities cannot control demand, and have a limited ability to change supply. Even if the market as a whole is elastic, the small businesses are mostly inelastic. Thus, they are created and destroyed in the evolution of the market; it is Shumpeter's "creative destruction." The micro-economics commonly taught in Eco 101 is about this portion of the economy.

The assumptions of (neo-)classical economics are well known. There is easy entry and exit from markets. There are buyers and sellers who make independent decisions about products. There is no limit to demand; we are insatiable. There is no bottom to the market; we can do without whatever we do not want. (Market objects are optional, not like food, which we must have.)

In this world - the world imagined by today's Libertarians, yesterday's liberals - the government is umpire, never a player. Markets are always efficient, and employment is always as full as possible. Everything is "Newtonian" (which is where I think Adam Smith got his inspiration). This is the world of the Main Street Mom-and-Pop of American imagination.

Neo-classical economics describes the world of the petty-bourgeoisie (sorry, a useful Marxist term) in certain businesses in old-fashioned small towns and cities passably. It doesn't explain why or how those "acts of god," recessions and depressions, occur. It doesn't explain how people survive by eating nothing, unless one also accepts Malthusian ideas.

In short, classical economics best fits the small towns of the early modern world, or the villages of pre-modern times. There, as Hobbes put it, life was 'nasty, foul, brutish, and short.' What Adam Smith explains, and David Ricardo mathematized, is a sort of law of the jungle, what happens in a free for all. It doesn't matter what happens to the individuals; this story is only about their interactions. I would have you consider that the same Darwinian struggle for survival controls the behavior of African Chimps and gorillas, as well as early homo sapiens. There is no doubt that Adam Smith's genius was his insight into one aspect of "adaptation," and to have many of the same ideas which Darwin later concocted for biology. (Why, then, are so many conservatives opposed to Darwin?)

Despite partial successes, (neo-)classical economics does not consider the role of government in village and small town life sufficiently. In fact, landlords, aristocrats, the nobility and Kings all interfered with Smith's yeoman entrepreneur. The petty bourgeoisie were taxed by government, frequently at the behest of the greater bourgeoisie. In Bourbon France, the Parisian bourgeois serving the Court became connected to the Court, and thence rose to even higher offices. The King required their services, as the nobility were generally neither trained nor skilled in bureaucracy. The bourgeois were even more oppressive toward their backwater (provincial) compatriots than the nobility, as they had to impose themselves on the provincials in addition to, and after, the nobility.

It was the eventually desperate condition of the lower classes and peasants which led to convening the Estates General. Those who ultimately paid the taxes ands fees were broke, and France was insolvent. Adam Smith's economics does not explain those events, even though he wrote as they were developing, and even though the economic condition of France was one of the greatest reasons for the French Revolution. [Maybe I am too hard: how many of us would have foreseen the French Revolution in 1776? How many foresaw the collapse of the Soviet Union in 1980? even 1984, 1988?]

So, neo-classicism has lots of problems, even in the scenarios it best fits. Adam Smith's followers refuse to this day to recognize the real-world effects of "other forces" on the entrepreneur. To the extent that such effects occur, it is their doctrinal position that they are illegitimate. That is, rather than talk about the relations between business and government, neo-classicists and market fundamentalists simply deny the relevance of government and declare it (should be) abolished or minimized. The beast doesn't fit their theories, so kill it.

The Top Line

Conservatives try to use Eco 101 in all phases of the economy. The capitalist theories don't work for the core of the economy. I say they do not work at the top - the outer layers of the onion - even if they are somewhat useful in describing the middle layers.

The first place capitalism breaks down is in the management of supply and demand. Neo-classical theory presupposes every purchase is a vote, an independent judgement, about a product. Money flow indicates approval, and the weighted money flow allocates resources efficiently.

In reality, our most conservative corporate and government executives throw the market fundamentalism they preach out the window: that's slop for the masses. No one in charge of Fortune 500 or 1000 corporations depends on "demand" to allocate supply; that would be to throw oneself over the cliff (minus parachute) and hope for a miracle. Demand does not just happen; it has to be "managed." What sensible managers depend on is Madison Ave, focus groups and market research. Every car concept is tested for years before it becomes a product. The advertising people are deeply involved in this process. The goal is not satisfying some inchoate demand; rather, it is determining what the customers can be sold and how many they can be sold. In other words, demand is managed; a concept discovered in the 1920s by the auto makers and others.

Demand management is at the core of almost all mass markets, including political ones. No large industry can survive huge swings of demand; the sort of thing that happens in depressions. Huge factories embodying the 'efficiencies of scale' (meaning large scale) are inefficient when there is no scale. If a factory is designed to build a million TV sets annually, capital is unused when it runs at, say, 50% capacity. Investors lose when the share value declines, interest charges go on, maintenance fees have to be paid and the pricing point cannot be attained when too few units are built. The company is threatened with losing market share if the price is set too high, or going bankrupt if it cannot sell enough units.

The secret life of demand stimulation (Keynesian "pump-priming") is that capitalists require it. Maybe a facility can be operated at 70% capacity for a year or two, but usually not indefinitely. Sooner or later, either the facility must be sold, closed or ramped up. Thus the pressure for governmental intervention in the economy.

If you read newspapers, or watch TV, to learn what is happening in this world, surely you know there have been endless government programs to get the economy out of recessions. Labor demands something be done whenever capacity (jobs) is cut, and management demands something be done when its pocket book (shares, options, bonuses, etc) is cut. The fact is there are no pro-recession special interests, possibly excepting certain prophets preaching the end of the world.

Most of what we read, hear and see about the business world concerns really big businesses, mega-business. These are the International Fortune 500 or 1000. They are in every country. It matters little what country they are from. Daimler-Benz is not just Mercedes; it is also Chrysler and Mitsubishi and many other companies. Chevron-Texaco is not just Californian and Texan combined; it is everywhere oil is - even in places as different as remotest Siberia, Alaska and Africa. These companies have the same interests everywhere, and pursue those interests within and without the world's governments.

Every major global corporation is involved in the production, distribution and sale of the major necessities of life. That includes food, fuel, clothes, commodities, commercial buildings, warehouses and factories, medical care, and all phases of transportation and communication. It is odd that residential housing is still largely a local, or sometimes national, business. Almost everything else we buy and use is the product of an international corporation.

In many countries, especially the poorest ones, these same corporations are more powerful than the government. Whole cities in Africa and elsewhere are company towns. We used to have "banana republics" south of the border. It is not clear they ever really went away. When large corporations, like Wal-Mart, move in on Main Street, they quickly reduce small towns into subservient vassals. Today, it is no different in North America than it is south of the border or elsewhere.

In the mega-corporate world, there is no effective government regulation. There is self-regulation in the self-interest of the corporate giants. Sometimes this helps ordinary people, sometimes not; but that is not how the success of policies are judged.

In this world, the world of Wall St and the inner circles of Washington, Adam Smith is a convenient propaganda tool. If you believe Eco 101, they have some shoes and shirts and soft drinks they want to sell you, and maybe a bridge or two as well, if you can afford them.

Summary

Neo-classical economics best applies to the small-town petty bourgeoisie. That was the sort of business Adam Smith had in mind in England, just before or at the beginning of the Industrial Revolution. It doesn't apply to much else.

This raises the questions: what does an economic theory have to explain, and how might it be structured? Is there just one economic theory, or are there many?

Moreover, there are the inevitable political questions. Are you being conned or scammed based on your naive belief in Eco 101?