Saturday, May 28, 2011

A Gaia Economist Slips into Error

Molly Scott Cato writes (28 May) on ‘Gaian Economics HERE

‘All other green campaigns become futile without tackling the economic system and its ideological defenders. Economics is only dismal because there are not enough of us making it our own. Read on and become empowered!’

‘Less Osborne More Hobsbawm’

Advocates of a market view of the economy and proponents of further and faster globalisation both tend to seek inspiration from the work of Adam Smith, who is taken to be the founding father of market economics. Smith's work The Wealth of Nations, was published in 1776, only on the cusp of the industrial revolution and before its technological advance had had the chance to impact widely on social and economic structures.

The economist who better represents the theory that has come to dominate our modern world is rather David Ricardo, whose most famous work Principles of Political Economy and Taxation was published in 1817, some 40 years after that of Smith, and whose work set the parameters for the world of laissez-faire capitalism and export-led growth that we inhabit today. Ricardo was attempting to theorise the economic reality of a world where labour and land were made subject to market forces, as they had been to only a limited extent in Smith's day.

In an excellent article in the New Statesman back in March, Robert Skidelsky made clear George Osborne's debt to Ricardo, whose economic theories he rather brutally summarised in the following phrase: 'It goes like this: the private sector creates wealth and the government squanders it. The smaller the government – the less it taxes and spends – the more the economy will thrive.' Moreover to a Ricardian there is no fundamental distinction between taxation and government borrowing: borrowing is merely deferred taxation.

This is an article of faith, unsupported by empirical evidence. …

… Economics is a complex system, where numerous variables interact in ways that can never be predictable. This is why jokes about one-armed economists are just foolish: there will always be a multitude of answers to every question and predicting the future is a mug's game. Hence the wise economist leaves his options open, and makes sure that the politicians he is advising do the same.’


Comment
A preliminary observation: Molly (the name by which she writes, so I am not being patronising) adopts the label of economics as the ‘dismal science, and “everyone knows that economics is the dismal science [and] almost everyone knows that it was given this description by Thomas Carlyle, who was inspired to coin the phrase by T. R. Malthus's gloomy prediction that population would always grow faster than food, dooming mankind to unending poverty and hardship.”

However, the facts are different and Molly ought to know the truth about the use of ‘the dismal science’ label, and I assume she does not know, otherwise if she did know she would be ashamed:

Carlyle's target was not Malthus, but economists such as John Stuart Mill, who argued that it was institutions, not race, that explained why some nations were rich and others poor. Carlyle attacked Mill, not for supporting Malthus's predictions about the dire consequences of population growth, but for supporting the emancipation of slaves. It was this fact—that economics assumed that people were basically all the same, and thus all entitled to liberty—that led Carlyle to label economics "the dismal science."

“Carlyle's target was not Malthus, but economists such as John Stuart Mill, who argued that it was institutions, not race, that explained why some nations were rich and others poor. Carlyle attacked Mill, not for supporting Malthus's predictions about the dire consequences of population growth, but for supporting the emancipation of slaves. It was this fact—that economics assumed that people were basically all the same, and thus all entitled to liberty—that led Carlyle to label economics "the dismal science.
" Quoted from: David M. Levy and Sandra J. Peart , 22 JANUARY 2001: “The Secret History of the Dismal Science. Part I. Economics, Religion and Race in the 19th Century” HERE:

Carlyle’s bitter attack on Mill came from disgraceful and scurrilous pamphlet entitled: "An Occasional discourse on the Negro Question" 1849 (which is the polite version – it was originally called ‘on the N----- Question’), and was written by the 'great' Thomas Carlyle.

This episode shows that liberal-minded people do not have a monopoly of the social virtues, which is also clear from today’s representatives, such as Molly, or, indeed, the distinguished historian, Professor Eric Hobsbawm in her title.

On the substance of Molly’s article, I am not in total support of her side-blast at David Ricardo, or more pointedly, I have more fundamental disagreements over Ricardo’s influence on economics than an alleged error of George Osborne, the British Chancellor.

Smith’s criticized the consequences of the discovery by government that it could add to its capacity for extracting revenue from taxation from some of its citizens (always unpopular) by borrowing, which was less painful politically, governments soon realized. In fact, because they often needed to borrow to fund their dynastic wars, governments displaced loan repayments and their interest costs to the future, which caused yet more borrowing and interest burdens to future taxpayers.

It is not clear to me the significance of Professor Skidelski’s or Rucardo’s point about Taxation and Borrowing. I do know that the habit of medieval Kings who simply expropriated their lenders when it was expedient to do so is not available to modern governments under the rule of law and that defaulting on debts likewise has downsides, including morally too.

However, Ricardo’s main malign error concerned his analytical devices, which when taken up by the neo-classical economists from the 1870s, especially the mathematically obsessed, has been quite damaging. In order to get determinate ‘solutions’ the assumption of decreasing returns from agricultural examples lead to uni-dimensional economics, which produced fine equations, wonderful graphs, and, eventually, an absence of people from economics, perhaps the most significant loss to unreality, yet attempted by its practitioners. In the extreme, the triumph of ‘general equilibrium’, seen as the pinnacle of economics as a science, is actually a minor triumph of analysis that does not conform (i.e., explain) social reality.

Disequilibrium rules. Equilibrium is at best partial – never general as the persistence of temporary relapses into recessions and depressions, followed by temporary booms, shows. Whether this is ‘good’ or ‘bad’ thing is less important than the recognition that it happens. The question is whether societies can live with these events, with the subsequent question of whether- and more particularly ‘which’ - political interventions to ‘correct’ these events makes things ‘better’ or ‘worse’.

Adam Smith made (very) few predictions. His almost entire approach was historical – how did we get to where we are – and not predictive. If anything he remained sceptical of predictions and of the likelihood that political elites would choose the appropriate policies to remove existing anomalies –they were, more often, the cause, not the cure, of errors in economic management (mercantile political economy). I confess, not to having much faith in ‘gaia economics’, or other would be salvation (New Economics Foundation, etc.,).

But I mean no malice. I will read what Molly writes, and wait and see.

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