Friday, January 28, 2011

Is Liberalism Done Yet?

I don't have much to add to Mike Konczal's respectful but thorough rebuttal of the idea that the passage of health care reform marks the end of the liberal project; Yglesias is so clearly wrong, for so many reasons. Most immediately, the health care bill as passed will leave 8 percent of the population uninsured, so even if universal health insurance is the finish line, we haven't crossed it yet. More generally, there are clear areas where expansion of public provision and regulation is almost inevitable, whenever the political climate turns favorable. Most obvious is childraising (and caring labor more generally), where our current system of uncompensated household labor is being steadily eroded by the acid of the market, even while the demands on it increase. In a few years, universal childcare will be seen by liberals as essential to a civilized society, just as universal health coverage is now.

More broadly, I'm reminded of Stephen Resnick's story of his fellow MIT grad student Stephen Hymer going in to Robert Paul Samuelson’s office (this would be the early ‘60s) and asking him if there was anything important in Marxism that you couldn’t talk about using conventional economics. Samuelson’s answer: “Class struggle.”

Liberals and radicals do disagree over ultimate ends - more stuff, more equitably distributed, for them; the full and free development of human capacities, for us. But the more salient disagreement, at least in the current conjuncture, is over means. Liberals believe that the political process is ultimately a form of rational debate, in which the objectively best ideas win out and are then executed by a neutral administrative mechanism. Political engagement means situating yourself within shouting distance of the seat of power, and then making the case that your preferred policy is in the best interests of everyone. Who you are doesn't matter, just the merits of your views. Carl Schmitt, interestingly enough, gives one of the clearest statements of this conception of politics:
All specifically parliamentary arrangements and norms receive their meaning first through discussion and openness. This is especially true of the fundamental principle that the representative is independent of his constituents and party... The characteristic of all representative constitutions ... is that laws arise out of a conflict of opinions, not out of a struggle of interests. ... Conduct that is not concerned with discovering what is rationally correct, but with calculating particular interests and the chances of winning and with carrying these through according to one's own interests is ... not discussion in the specific sense.
Schmitt, the anti-liberal, saw better than liberals that this mode of politics is specific to the particular institutional context of parliamentarianism. A context that remains very important, of course, outside of the formal political domain as well as within it. [1] But it's not universal, and in particular it can't be the last word in a society that is divided by fundamentally conflicting interests.

Radicals, by contrast, see the conflict of interests as fundamental. Or rather, we see it as inescapable in politics as long as it exists in economic life and society generally. From this point of view, arguments are won in parliament only thanks to the rioters, literal or figurative, in the streets outside. And liberalism as a concrete political project is a compromise between opposing interests, one that's always open to renegotiation when the balance of forces changes. So unlike in science (liberalism's implicit ideal), progress is always reversible, so no political struggle is ever definitely finished. Any given compromise is only sustainable to the extent that there are social forces striving for a horizon beyond it.

[1] For example, I'm current serving on a university hiring committee, and the norm that discussions must be conducted only in terms of differing opinions, never opposing interests, is very strongly felt.

Sunday, January 23, 2011

What's Going On With Inventories?

One of the weirdly under-discussed features of the current macroeconomic situation is the huge role of inventories in the recovery. I read a lot of economics blogs -- there are a lot more I don't read -- and at least sporadically the business press, and I've hardly seen this discussed at all. But check it out:

The orange line is the change in GDP, the blue line is the contribution of inventory changes. (Sorry it's fuzzy. I'm technologically hopeless.) Since the end of the recession, 62 percent of GDP growth has been accounted for by inventories. Inventories have accounted for the majority of GDP growth in four of the five post-recession quarters; in the fifth, they were 48 percent. There's really no precedent for this. It's not unusual for inventories to be the main source of growth in one post-recession quarter, but never in the past 50 years have they accounted for half of GDP growth for two quarters in a row, let alone for five. [1]

The question then is, what's it mean. Honestly? I don't know.

The natural theory is that it's supply chain risk and credit risk. When you're not confident you're regular suppliers will still be in business a few months from now, you want to keep a stash of whatever inputs you depend on them for on hand. And as transactions move toward a cash-on-the-barrelhead basis, everyone has to hold more goods in stock (along with more cash, but that's happening too.)

But I suspect there are better answers, if one understood the concrete realities underlying the BEA statistics. Any of you hypothetical readers have ideas?

[1] The first post-war recovery in 1947-48 saw inventories play a similarly large role. I doubt the reasons were the same.

Thursday, January 20, 2011

Are Microfoundations Necessary?

A typically thoughtful piece by Cosma Shalizi, says Arjun.

And it is thoughtful, for sure, and smart, and interesting. But I think it concedes too much to really existing economics. In particular:
Obviously, macroeconomic phenomena are the aggregated (or, if you like, the emergent) consequences of microeconomic interactions.
No, that isn't obvious at all. Two arguments.

First, for the moment, lets grant that macroeconomics, as a theory of aggregate behavior, needs some kind of micro foundations in a theory of individual behavior. Does it need specifically microeconomic foundations? I don't think so. Macroeconomics studies the dynamics of aggregate output and price level, distribution and growth. Microeconomics studies the the dynamics of allocation and the formation of relative prices. It's not at all clear -- it certainly shouldn't be assumed -- that the former are emergent phenomena of the latter. Of course, even if not, one could say that means we have the wrong microeconomics. (Shalizi sort of gestures in that direction.) But if we're going to use the term microeconomics the way that it's used, then it's not at all obvious at all that, even modified and extended, it's the right microfoundation for macroeconomics. Even if valid in its own terms, it may not be studying the domains of individual behavior from which the important macro behavior is aggregated.

Second, more broadly, does macroeconomics need microfoundations at all? In other words,do we really know a priori that since macroeconomics is a theory of aggregate behavior, it must be a special case of a related but more general theory of individual behavior?

We're used to a model of science where simpler, more general, finer-scale sciences are aggregated up to progressively coarser, more particular and more contingent sciences. Physics -> chemistry -> geology; physics -> chemistry -> biology -> psychology. (I guess many people would put economics at the end of that second chain.) And this model certainly works well in many contexts. The higher-scale sciences deal with emergent phenomena and have their own particular techniques and domain-specific theories, but they are understood to be, at the end of the day, approximations to the dynamics of the more precise and universal theories microfounding them.

It's not an epistemological given, though, that domains of knowledge will always be nested in this logical way. It is perfectly possible, especially when we're talking societies of rational beings, for the regular to emerge from the contingent, rather than vice versa. I would argue, somewhat tentatively, that economics is, with law, the prime example of this -- in effect, a locally law-like system, i.e. one that can be studied scientifically within certain bounds but whose regularities become less lawlike rather than more lawlike as they are generalized.

Let me give a more concrete example: chess. Chess exhibits many lawlike regularities and has given rise to a substantial body of theory. Since this theory deals with the entire game, the board and all the pieces considered together, does it "obviously" follow that it must be founded in a microtheory of chess, studying the behavior of individual pieces or individual squares on the board? No, that's silly, no such microtheory is possible. Individual chess pieces, qua chess pieces, don't exist outside the context of the game. Chess theory does ultimately have microfoundations in the relevant branches of math. But if you want to want to understand the origins of the specific rules of chess as a game, there's no way to derive them from a disaggregated theory of individual chess pieces. Rather, you'd have to look at the historical process by which the game as a whole evolved into its current form. And unlike the case in the physical sciences, where we expect the emergent phenomena to have a greater share of contingent, particular elements than the underlying phenomenon (just ask anyone who's studied organic chemistry!) here the emergent phenomenon -- chess with its rules -- is much simpler and more regular than the more general phenomenon it's grounded in.

And that's how I think of macroeconomics. It's not an aggregating-up of a more general theory of "how people make choices," as you're told in your first undergrad economics class. It is, rather, a theory about the operation of capitalism. And while capitalism is lawlike in much of its operations, those laws don't arise out of some more general laws of individual behavior. Rather they arose historically, as a whole, through a concrete, contingent process. Microeconomics is as likely to arise from macroeconomics as the reverse. The profit-maximizing behavior of firms, for example, is not, as it's often presented, a mere aggregating-up of utility maximizing behavior of individuals. [1] Rather, firms are profit maximizers because of the process of accumulation, whereby the survival or growth of the firm in later periods depends on the profits of the firm in earlier periods. There's no analogous sociological basis for maximization by individuals. [2] Utility-maximizing individuals aren't the basis of profit-maximizing firms, they're their warped reflection in the imagination of economists. Profit maximization by capitalist firms, on the other hand, is a very powerful generalization, explaining endless features of the social landscape. And yet the funny thing is, when you try to look behind it, and ask how it's maintained, you find yourself moving toward more particular, historically specific explanations. Profit maximization is a local peak of lawlikeness.

Descend from the peak, and you're in treacherous territory. But I just don't think there's any way to fit (macro)economics into the mold of positivism. And there's some comfort in knowing that Keynes seems to have thought along similar lines. Economics, he wrote, is a "moral rather than a pseudo-natural science, a branch of logic, a way of thinking ... in terms of models joined to the art of choosing models which are relevant to the contemporary world." It's purpose is "not to provide a machine or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organized and orderly way of thinking about our particular problems." (Quoted in Carabelli and Cedrini.)

[1] Economist readers will know that most mainstream macro models, including the "saltwater" ones, don't include firms at all, but conduct the whole analysis in terms of utility-maximizing households.

[2] This point is strangely neglected, even by radicals. I heard someone offer recently, as a critique of a paper, that it assumed that employers behaved "rationally," in the sense of maximizing some objective function, while workers did not. But as a Marxist that's exactly what one should expect.

EDIT: Just to amplify one point a bit:

I suggest in the post that universal laws founded in historical contingency is characteristic of (some) social phenomena, whereas in natural science particular cases always arise from more general laws. But there seems to be one glaring exception. As far as we know, the initial condition of the universe is the mother of all historical contingencies, in the sense that many features of the universe (in particular, the arrow of time) depend on it beginning in its lowest entropy (least probable) state, a brute fact for which there is not (yet) any further explanation. So if we imagine a graph with the coarse-grainness of phenomena on the x-axis and the generality of the laws governing them on the y-axis, we would mostly see the smoothly descending curve implied by the idea of microfoundations. But we would see an anomalous spike out toward the coarse-grained end corresponding to economics, and another, somewhat smaller one corresponding to law (which, despite the adherents of legal realism, natural law, law and economics, etc., remains an ungrounded island of order). And we would see a huge dip at the fine-grained end corresponding to the boundary conditions of the universe.

FURTHER EDIT: Daniel Davies agrees, so this has got to be right.

New Slacker in Town

As alert readers will notice, the post below isn't by me, but by my very smart friend Suresh, who's well-known to many readers of this blog. Hopefully, he'll be a regular contributor here in the future. But as they say on Wall Street, never predict anything, especially the future.

Redistributive Justice and Wonkery

There are murmurs on the intertubes about redistributive justice and related murmurs about the lack of seriously left-wing blogs relative to the left liberal policy wonk blogs. I think these complaints are related, probably because I have just finished reading G.A. Cohen's "Rescuing Justice and Equality", which is essentially a critique of Rawls from the left. The point is that the Rawlsian difference principle legitimizes a lot of inequality that runs counter to some of our ethical intuitions, in a way that speaks to contemporary liberal dilemmas about taxation and inequality. Rawls' argument allows talented people to hold back exercising their talents until they are compensated enough to use them in the interest of the worst off. Think of our banking oligarchs, who hold their scarce skills and industry-specific knowledge as hostages against asset expropriation or any restrictions on compensation. Lets hold back judgment on whether or not these folks are actually talented, and just allow that some of the inequality we see today does in fact accrue to talent and human capital.

Readers who are familiar with Nozick's Anarchy, State and Utopia will recognize the figure of the utility monster, who gets so much happiness from repugnant acts that a utilitarian would have to condone those acts. Nozick uses this to argue for a rights based approach against utilitarianism. In parallel, Cohen's book suggests the superstar doctor monster, who has medical skills and talents that are very valuable to the poorest people, but demands so much compensation that the resulting inequality is horrific. Liberals have no criticism of the doctor, but socialists think the doctor is fundamentally an unethical jerk,a sentiment captured by Tom Lehrer: "There are people in this world who do not love their fellow human beings and I HATE people like that". Socialists can believe that the doctor's lack of solidarity, despite material abundance, depends on the presence of capitalist institutions that encourage rapacity, and criticize that kind of selfish behavior (see this paper in Nature by Sam Bowles for some evidence on endogenous preferences and redistribution).

At the core of Cohen's argument is this "trilemma", that it is impossible to have all three of efficiency, equality, and free allocation of labor. Basically any two of these precludes the third (Stalinist rule gets you the first two and Rawlsian justice gets you 1 and 3, and nobody really wants the homogeneously poor society entailed by dropping 1). In economics this is formalized in the Mirrlees optimal income taxation problem, where a planner needs to raise a fixed amount of revenue by taxing people's incomes, but because people can choose their labor supply, talented people should not be taxed, because they produce a large amount per hour worked. A lot of the knock-on early Mirrlees-derived literature had a zero top-tax rate at the optimum (but recent literature weakens this, basically because the income distribution is potentially unbounded above and has fat tails).

Rawls is ok with that kind of inequality. Indeed you can show the 0-tax-on-the-talented result even if the social planner is trying to maximize the welfare of the worst-off. So I don't think that Rawlsianism is a socialist principle of distributive justice. In fact it is the bedrock philosophy of left-liberal and social democratic interventions. What Cohen says is that Rawls is crippled by setting up the object of justice as the "basic structure of society" or "the state". Rawlsianism is also therefore the bedrock philosophy of the policy wonk, who thinks that social justice is a property of states alone and not a whole suite of institutions and behaviors. The resulting political involvement of intellectuals becomes reduced to "if only the right politician or bureaucrat sees my brilliant blog post/technical report, egalitarianism will obtain". So Rawls captures the essence of the left-liberal policy wonk; the state (and only the state) should reduce inequality subject to incentive-compatibility for the rich. Hence the endless key-punching on the details and consequences of this or that Democratic proposal, but little dialogue with social movements, political campaigns that are outside the government (like labor and tenant organizations), or radically non-neoclassical visions of the economy. Make no mistake, I enjoy and benefit from it, but I don't think its particularly agenda-setting for the left.

Cohen offers a way out of the trilemma by suggesting that we expand the domain of justice to include labor-supply decisions and preferences more generally. This is echoed by radical leftists who believe that there are severe constraints on the amount of stable equality that can be generated with policy instruments alone. Both people and politics need to be reconstituted in much more fundamental ways than admitted by the social democratic agenda if a complex egalitarianism is to be sustained and much more basic structural changes are required to get a society that is thriving and equal, without the pathologies of pervasive economic conflict.

Cohen thinks about egalitarianism as an ethic, not just as a property of government. He draws on feminist (and I would add anarchist) ideas that "the personal is political", that people's preferences and values are objects of justice, and that we can have a free allocation of labor that maintains distributive justice if people have ideals and ethics of conduct that sustain egalitarian distributions. So we should have grounds for criticizing the bankers and doctors for demanding so much money to do their jobs. I'm not just asking us to tax them (because of the potential inefficiencies in the trilemma); I think a complementary strategy is to organize for values and ethics (and deliberative politics that let us collectively construct and enforce these values and ethics across a variety of social sites) that sustain a society where anybody with talent would feel ashamed and ridiculous for demanding large amounts of compensation.

The idea that talented labor should demand a high wage is repugnant to socialist ethics; as Cohen eloquently states "labor, like love, should be freely given". As a scholar, the gift (and status) based economy of tenured academia is a lovely alternative allocation mechanism for human labor (and the reason I shouldn't start blogging for another 7 years), as are the collective whale hunts of the Llamelera in Indonesia, barn raising in rural Pennsylvania, or the dynamics of sharing in open-source networks. As Mike Konczal has brought up Walzer, let me suggest that this is also consistent with a Walzerian and Polanyi-esque view that the allocation of labor should not be the according to the whims of the market, but instead according to individually fulfilling, democratic and egalitarian norms.

Bringing this all back together, I think I want to make two points about Rawlsian social democracy: a) It is quite compatible with a large amount of inequality and this is partially because b) it restricts the domain of criticism to the wonk playground of state policy. The Cohen book has the seed of a criticism of social democratic bloggers; it is against both the amount of inequality that Rawlsian social democracy (the kind favored by Yglesias et al.) allows as well as the narrow spectrum of technocratic state-centered instruments by which any extra inequality is addressed, So I think Freddie deBoer's criticism of the left-liberal wonk blog stands, and is part of the general libertarian socialist critique of the social democratic left.

Tuesday, January 11, 2011

Western Capital to China: Please Keep Wages Down

In today's issue of the Financial Times, there's a remarkably blunt warning that "Rising wages will burst China's bubble." True, China has enjoyed strong growth while most of the rest of the world has endured deep depressions. But don't be fooled by such superficial measures. On the question that really counts, China is in trouble: "The Shanghai market is at less than half its all-time high, significantly underperforming the other three members of the Bric group."

Like Japan in the immediate postwar period, the piece argues, China has so far seen "workers flooding into the cities from the countryside, depressing wages and setting off a virtuous cycle of rising profitability and rising investment. In the mid-1950s, Japanese labour had taken 60 percent of total value added. in the miracle years, this ratio fell to 50 percent." Miraculous indeed -- but alas, it couldn't last. By 1980, the labor share "had soared to a plateau of 68 percent. These gains had to be fought for. In the 1970s, Japan's now dormant union movement was in its heyday. Profit margins were squeezed, and in real terms the stock market went nowhere for a decade." Oh noes! And despite seemingly abundant reserves of cheap labor, the same disaster could befall China. "Can workers grab a larger share of the economic pie before the urbanization process is complete? In Japan they did. ... If China were to follow Japan, the next stage would be labour strife and inflation. The best way to avoid that outcome would be a radical tightening of the current super-easy monetary policy. But that would risk a serious slowdown and probably necessitate a large revaluation of the renminbi."

So there it is. The important question about China's future is the value of financial assets. And the great threat to asset-owners is the likelihood of rising wages, which will come about through increasing organizing among Chinese workers. The only way to prevent that is pre-emptive tightening, even at the cost of slower growth. The case for austerity is seldom made that bluntly, certainly not for the rich countries, but I don't think the underlying motivation is much different. It's also noteworthy that big revaluation of the renminbi is presented here explicitly as part of a program to hold down Chinese wages. In other words, China faces a choice between higher wages and a higher currency. To China-competing firms and workers in the rest of the world, either would be just as welcome. But for masters of the universe with Chinese stocks in their portfolio, they look very different indeed.

(Incidentally, these questions -- the relationship between profitability, investment, demand, inflation and the politically-determined division of output between labor and capital -- are largely ignored by mainstream macro, saltwater as well as fresh, but are right at the center of structuralist, Marxist, post-Keynesian and other heterodox approaches to macroeconomics. If only there were some economics department interested in supporting those approaches.)

EDIT: There was a link on a Something Awful thread sometime around March 20 that's sending a lot of traffic to this post. Unfortunately, not being an SA member, I can't see the thread. Anyone want to tell me what it was, in comments?