Wednesday, July 12, 2017

Missing the Point on Economics and Government

Thanks to the magic of the internet, I got to read a piece in the London Guardian about "How Economic Became a Religion" by John Rapley.

The article is a promo for Rapley's book just out, Twilight of the Money Gods: Economics as a Religion and How it all Went Wrong. I think that Rapley, at least in the Guardian's "long read" article, misses the point completely.

Rapley writes about how
Economics offers a comprehensive doctrine with a moral code promising adherents salvation in this world; an ideology so compelling that the faithful remake whole societies to conform to its demands. It has its gnostics, mystics and magicians who conjure money out of thin air, using spells such as “derivative” or “structured investment vehicle”. And, like the old religions it has displaced, it has its prophets, reformists, moralists and above all, its high priests who uphold orthodoxy in the face of heresy.
Well, yes. But there is a tendency for all doctrines to elevate themselves above mere practical utility and attempt to penetrate the empyrean. For one thing, it helps in fending off pretenders to knowledge who have no business challenging the high priests of the temple.

But the point about economics is that its practitioners are very useful to politicians, because economists advertise that they can help to keep the ship of state from foundering on hidden economic reefs.

It is one step from merely using economists as cooks in the kitchen of economic policymaking to elevating them to the status of priests and shamans versed in the mysteries of economic divination, in order to represent ordinary political power plays and routine political looting as the divine rulings of the immortal gods rather than shabby efforts to use the economy as a piggy bank to reward the supporters of the ruling class, in accordance with my dictum:
Government is an armed minority occupying territory and taxing the inhabitants thereof to reward its supporters.
Now in the dim and distant past, before the advent of modern economics, rulers frequently got into a bit of a jam when it came to funding their wars and rewarding their supporters. To my recollection, Edward III ruined a few Italian bankers in his efforts to fund the First Hundred Years War against France and to set up the Black Prince as a prince among men. Henry VIII, he of the multiple wives, had several financial crises during his reign, which included debasing the currency. He had it harder than Edward III because his policy of disarming the nobles meant that he needed to fund the entire national security budget through taxes and with credits from the merchants of London rather than in the old feudal way of Shakespeare's Wars of the Roses plays when each nobleman talked about bringing "our powers" to the battle.

But then the Dutch invented central banking in their war of liberation against the empire of Spain, and when they invaded Britain in 1688 they brought their financial technology with them. The result was that the Brits won the Second Hundred Years War against the French even though they had cranked up their National Debt to 250 percent of GDP by 1815 and the decisive Battle of Waterloo. France lost the war because it was cursed with financial twerps like John Law that ruined French finances (he was treated as a demi-god until it turned out he had feet of clay).

In the middle of all this, enter the classical economists with their notion of the division of labor and their two-pronged value theory: use value and exchange value -- plus comparative advantage, free trade and all that. All this was pretty magical, but nobody thought to sell it to the people as magic. Not yet.

It was Karl Marx who elevated economics to the status of a religion. That's because Marxism is a secular religion promising heaven on earth if only we follow the prophet Marx and his precepts, which were a dog's breakfast of classical economics, a mashup of use value, exchange value, surplus value, and the obvious point that, in a competitive market, all the profit gets squeezed out and everybody gets poorer and poorer as they fight for market share on diminishing profit margins. Marx had the brilliant insight that you could dress up your political ideas as "science" and promise to save the world from a fate worse than death.

Of course, Marx finished his Capital in the early 1860s and published Volume 1 in 1866-67, just before the marginal value revolution of 1870 that made nonsense of his economics. Hey, that happens, but you will read Marxist writers in vain to discover any attempt to revise Marx's prophecy in light of the new science. So they had to elevate his prophesies into Holy Writ.

Up until Bismarck's social insurance politics of the 1880s government's only interest in economics was in funding its wars, and this could be done using the precepts of central banking developed by the Dutch and brilliantly executed in the US by folks like Alexander Hamilton.

But the big-government state that Bismarck and the social reformers instantiated before and after World War I raised the stakes on government. Government began interfering with the workings of the price system and the economy in a number of ways, and so government needed technical experts to make sure that its usual blunders didn't pitch the economy into a big financial panic.

Just as natural science allows humans to build structures and engines and internets that would be impossible without the technology built upon a foundation of natural science, it is also true that government could not run the current mega-state with its myriad of taxes and privileges and subsidies without a technology to guide them.

Gee, funny how the first thing that happened after economists really got into the saddle was the mother of all financial crashes, the Great Depression of 1929-33.

Obviously, after a blunder like the Great Depression, government needed a miracle, and it got one, in the form of Keynesianism. Keynes taught a receptive audience that it was the height of progress and sophistication to spend borrowed money on the regime's supporters in the aftermath of a financial crisis. Obviously, governments could not say that the point of Keynesianism was to clean up the mess made by interventionist government. Instead they let it be known that their tame economists were geniuses that had completely reformed the old, classical economics that had got us into the Great Depression. Eventually, the government's tame economists decided that they had tamed the business cycle. Of course they did. That was in the 1960s, right before the inflation of the 1970s and the big recession of 1980-81.

With that sort of politics and its constant mumbling and bumbling, pretty soon you need to make economists into demi-gods, cunningly manipulating the economic world from Mt. Olympus, so that the politicians on the bridge can report to the people that they will navigate the ship of state out of financial trouble with a magical economic compass that only those initiated into the mysteries of the New Economics could read. It's the obvious thing to do. When practical knowledge fails, humans resort to magic.

And naturally, just as we tend to venerate Albert Einstein as a kind of demi-god for coming up with relativity, we tend to venerate the economists that walk on the death-defying tightrope of economic policy, trying to find cunning ways for the government to win elections and hand out free stuff without going full Venezuela.

Obviously it is best not to let the plebs see how this sausage gets made. It is better to distract them and rulers since the dawn of time have done that in a condominium with shamans, temple priests, and established churches. Or, as Rapley writes,
Over time, successive economists slid into the role we had removed from the churchmen: giving us guidance on how to reach a promised land of material abundance and endless contentment. 
Of course they did. The ordinary person doesn't understand economics. So the sensible thing for the ruling class to do is to cloister the right kind of economists in educational monasteries and treat their utterances as holy writ. As was the case with good old established churches, the politicians get to appoint the abbots and bishops of the economic monasteries and cathedrals and the abbots and bishops loyally maintain the fiction that their divinations come directly from God, er, science. Nothing to see here. It's the way it always works.

I see what Rapley's game is. You can see it from the blurb at Amazon.
Imagine one day you went to a cash-machine and found your money was gone. You rushed to your branch, where a teller said that overnight people had stopped believing in money, and it all vanished. Seem incredible? It happened, and it could happen again. Twilight of the Money Gods is the story of economics, told not as the science it strove to be...
Well, yes. The government's tame economist bishops and abbots are exactly what the established church abbots and bishops were: ruling class stooges. And when the music stops the bishops and the abbots won't be a bit of good to help you get money out of your local ATM.

When the music stops the key thing is for the government to step into its role of "lender of last resort." Walter Bagehot wrote the bible on that in Lombard Street. In the 2008 crash the government ended up doing a pretty good job of last-resort lender, after a brief panic when Ben Bernanke muffed on his priestly job of bailing out Lehman Brothers in September 2008. He said he didn't have the legal authority to bail them out. Oh please, Ben. The only job of the Federal Reserve is to be lender of last resort. Period. And you muffed it., and you made it worse. Of course, Ben Bernanke was an academic economist.

The whole lender-of-last-resort operation in 2008 added up to about $16 to 20 trillion in bailouts and (mostly) guarantees. See my for details. So in the end the priests and abbots of the global established church of economics did their job and applied extreme unction to the economy with the appropriate rites, incense, and laying on of hands. Whatever that means.

But don't forget the unforgettable Mrs. Proudie. There must be a role for her in the New Church of Economics. 

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