Economists, stop talking like that for God’s sake!

10 Apr

Today, we publish a guest post by Ivan Manokha. Lecturer of international political economy at Sciences Po, Paris, and Vice Dean of the graduate school at Sciences Po, Manokha’s post unpicks the rarefied language with which economists speak of daily life and takes issue with the presumption of choice that is made in mainstream economic theory to explain people’s behaviour.

By Ivan Manokha

How is it that the unemployed are still able to consume? The answer is found on page 45 of Olivier Blanchard’s famous textbook on Macroeconomics. Their ‘consumption cycle’, argues Blanchard, carries on simply because in order to subsist they opt to ‘dissave’, i.e. spend the money that they have on their savings account. Saving in the good times thus nicely offsets dissaving in the bad times.

This kind of statement is symptomatic of a number of problems that characterize the science of Economics and which, I would argue, account in part for its failure to understand the current crisis and to come up with solutions to deal with it.

First, the statement of Blanchard is symptomatic of a total disconnect between the assumptions and models of economists and social reality. Indeed, in their world, rational individuals, even when they fall into the category of ‘liquidity constrained households’ (read:  the poor) always enjoy the liberty of arbitrating between employment and leisure. Unemployment is voluntary and those who do not have a job find themselves unemployed because they have arbitrated in favour of leisure (because, the argument of the Real Business Cycle theory goes, wages are currently not high enough and these rational individuals wait for the job market to become ‘tighter’ when they will accept to work). Well, I suggest they go and speak to all the existing jobless, whose number has increased dramatically since 2008, in order to find out why is it that they still choose leisure over employment.

Second, and even more importantly, there are no social antagonisms or conflicts in the dream world of Economics. Indeed, all Economics textbooks will tell you that there are people who have capital, there are those who have land, and there are those who do not have either of the two, but, don’t worry, they have … ‘human capital’. The inequality of possessions is thus rationalized away by the very categories used to describe social reality and is never itself explained. To be fair, the classical economists who came up with these assumptions felt that this state of affairs could not be left unexplained and tried to offer some justification. Adam Smith, for instance, stated that “more industrious and prudent persons, rather than spending the full produce of their labour, ‘saved’ part of it and gradually accumulated capital.” Out of these individual choices the social fabric of inequality was made. This was more fiction than fact but at least Smith was compelled to say something, an urge that is completely foreign to modern day Economics. Now, all these proprietors of different ‘factors of production’ – capital, land and ‘human capital’ – meet in the place of ‘freedom and opportunity’ and enter into an exchange relation from which they all benefit (they all ‘maximize their utility’). In other words, for lucky owners of ‘human capital’ there is no compulsion to look for employment in order to survive. They do so willingly because they will obtain a net gain from it.

There is one major obstacle to the functioning of the ‘invisible hand’ – the State. This structure does not act as economists might predict. Instead of simply providing for the security of private possessions of capital and land and concentrating on national defense,  it intervenes in the economy in order to ‘de-commodify’ certain things (e.g. health and education) and to establish certain rules for labour markets (minimum wage, conditions for making people redundant, etc.). There are also these damn unions because of which wages exceed ‘the market clearing wage’… As a result, we are told there is inefficiency and waste; state spending, given the fact that there is a limited amount of money in the economy, necessarily ‘crowds out’ private investment. We can guess that it is because of such ‘crowding out’ that big corporations like Apple are sitting on so much cash and are not investing it back into the economy… Fortunately for us, there is the current crisis which has exposed the fact that certain accounting identities are not in fact accounting identities at all. State spending in Greece went down 20% but did private investment go up by 20%?

It is time for Economists to realize that the absolute majority of the world’s population does not have a choice between leisure and work but is compelled to look for a job; that not all of those who do not find a job will be able to ‘dissave’; that when those lucky ones who are employed are told that they have to accept cuts in wages and benefits and that their contracts have to be changed to make their firing easier (that the labour market has to be made more ‘flexible’) there is a chance that they will go to the streets and rebel. The real world is not characterized by a harmony of interests but it is a world of inequality of possessions, of inequality of opportunity, of inequality of power. So long as our thinking continues to be dominated by the fiction of Economics, we will not be able to deal with the crisis.

6 Responses to “Economists, stop talking like that for God’s sake!”

  1. Annette Freyberg-Inan April 10, 2012 at 9:02 am #

    I couldn’t agree more. For scholarly background, a book which compellingly describes how the economist worldview achieved such a hold over our collective imagination is Michael McKinley’s Economic Globalisation as Religious War (Routledge 2007).

  2. loveinthetimeoffacebookyeah April 10, 2012 at 9:06 am #

    Brilliantly put, though I would add the refusal to include transaction costs to their models as one of their dumber assumptions that also leads to neo-liberal economists unable to comprehend a positive use for the state.

  3. Tom April 10, 2012 at 9:46 am #

    This reminds me of a panelist who asked me if I was not ashamed to study conflicts using game theory: “but wars are no games!”, he argued…

    Similarly here, just because the words used by economists are not politically correct does not make them wrong. Just one example: the author writes that ” the world’s population does not have a choice between leisure and work but is compelled to look for a job”. I disagree. Most people DO have a choice. It might be very unpleasant, as in “if you don’t look for a job, you will lose your house”, which I suspect is what the author means by being “compelled”. But this remains a choice, which would be represented in the model as a large marginal cost of leisure. Saying that the choice exists does not make the economist immoral, and even less mistaken.

    According to the author, however, it would better NOT to model these things, instead assuming that people below a certain poverty threshold (which one, please?) MUST look for a job. Sounds like a poor model to me.

    I agree that existing models are lacking. But please propose a decent (i.e., rigorous) alternative to existing models, one that does not make assumptions just because they are politically correct or match your political tastes.

    • Ivan Manokha April 10, 2012 at 12:01 pm #

      Thanks for the comment. What I meant by saying that most people do not really have a choice between leisure and work is that in capitalism most of us have to enter into a wage-labour relation in order to live. Of course you may say that, technically speaking, the choice is still there – indeed, if I were to say, for instance, that most people have no choice whether to eat or not in order to survive, you could say that some people may still choose not to, for whatever reason, and so the choice is still present. What I would like to emphasise is that not only this structural compulsion is totally absent from Economics, but it is in fact the contrary that is assumed (whether explicitly or implicitly) – that there is a harmony of interest and that we are all free to enter into the wage-labour relationship and to leave it whenever we feel like. In capitalism, however, most people must work for a wage, while there are some who do not have to because they have different forms of capital (land, money capital, real estate, etc.). That is to say, there is a fundamental inequality which exists in this society, but which is not only taken for granted in Economics textbooks but the world is in fact presented as being a realm of equality and opportunity for everyone to the same extent.

  4. Owen James Fellows April 10, 2012 at 8:14 pm #

    One has a choice even if threatened by a gun; one does not have a choice, even without the threat of a gun, if one does not have the education to know what the options are.

    • Jestbill April 13, 2012 at 6:04 pm #

      …and Captain Obvious reads the dictionary.
      Seems to me that the banks et. al. ought to “educate” all those people instead of foreclosing on their homes.

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