By James Kwak
There was one moment, when I was finishing up the manuscript of Economism, that I thought someone had already said what I was trying to say in the book. This is what I read:
“The beauty and the simplicity of such a theory are so great that it is easy to forget that it follows not from the actual facts, but from an incomplete hypothesis introduced for the sake of simplicity. … The conclusion that individuals acting independently for their own advantage will produce the greatest aggregate of wealth, depends on a variety of unreal assumptions …
“Individualism and laissez-faire could not, in spite of their deep roots in the political and moral philosophies of the late eighteenth and early nineteenth centuries, have secured their lasting hold over the conduct of public affairs, if it had not been for their conformity with the needs and wishes of the business world of the day. …
“These many elements have contributed to the current intellectual bias, the mental make-up, the orthodoxy of the day.”
That’s from the third section of “The End of Laissez-Faire,” the published version of a lecture delivered by John Maynard Keynes in 1924 and 1926.
Keynes’s argument goes something like this:
- Beginning in the late eighteenth century, economic theory extended the political philosophy of democratic individualism (epitomized by John Locke), providing a supposedly scientific basis for “the idea of a divine harmony between private advantage and the public good.”
- That idea in its simple form, however, was not a correct statement of what leading economists actually believed. Instead, it was the work of “the popularisers and the vulgarisers”: “the dogma had got hold of the educational machine; it had become a copybook maxim.”
- Economists themselves understand that the world is considerably more complicated. However, “many of those who recognise that the simplified hypothesis does not accurately correspond to fact conclude nevertheless that it does represent what is ‘natural’ and therefore ideal.”
- The ubiquity of laissez-faire ideas is ultimately due to the interests that it serves: the business world. “To suggest social action for the public good to the City of London is like discussing the Origin of Species with a Bishop sixty years ago. The first reaction is not intellectual, but moral. An orthodoxy is in question, and the more persuasive the arguments the graver the offence.”
Although Keynes was writing in the 1920s, this also describes of the state of the intellectual and political world over the past few decades. The idea that market forces necessarily produce optimal outcomes, and that government should generally stay out of the way, has dominated public policy discourse since the late 1970s. This is obvious for Republicans, but consider also the deregulatory policies of Jimmy Carter, Bill Clinton proclaiming that “the era of big government is over,” the end to “welfare as we know it,” bipartisan financial deregulation, and Obamacare’s reliance on markets—indeed, the current Democratic orthodoxy that government should simply identify and correct for discrete market failures.
It is also widely claimed that the universal superiority of competitive markets is some fundamental law of economics—that the minimum wage necessarily increases unemployment (because it is a price floor), or that taxes on investment income necessarily reduce savings and investment (because they reduce the returns to saving). Yet, just as in the 1920s, few economists actually believe in such immutable laws, although some do think of them as some Platonic ideal for how the economy should behave. What happened is that a handful of simple economic concepts was picked up, vulgarized, and popularized by a network of foundations, think tanks, and media outlets. A few prominent economists played important roles in this process—notably Friedrich Hayek in The Road to Serfdom and Milton Friedman in Capitalism and Freedom and Free to Choose—but their ultimate influence depended on the reach of organizations such as the American Enterprise Institute, Heritage, and the op-ed page of The Wall Street Journal.
To take one example of how this works, consider the tens of millions of dollars that large company CEOs make, or the hundreds of millions of dollars that hedge fund and private equity fund managers take home. According to a simple Economics 101 model of the labor market, everyone’s compensation is exactly equal to her marginal product—the value of the work she does for her employer—and therefore those huge pay packages are both fair and necessary (or otherwise business superstars would choose to do something else with their time). Yet, as the Economist reminds us, academic economists have known for nearly half a century that information asymmetries undermine the textbook functioning of labor markets. (For a longer discussion of this topic, see chapter 4 of Economism).
The idea that pay equals marginal product is not economic truth, but ideology. Like any powerful ideology, it makes the interests of a class seem conterminous with the interests of society as a whole. As Marx wrote in The German Ideology, each ruling class “has to give its ideas the form of universality, and represent them as the only rational, universally valid ones.”
So when Ray Dalio says, “Society rewards those who give it what it wants. That is why how much people have earned is a rough measure of how much they gave society what it wanted,” he’s not speaking as someone who knows anything about economics. He’s speaking as a member of the ruling class—a billionaire hedge fund manager (and now Donald Trump cheerleader). If you’re a billionaire, it’s nice to think that your wealth simply reflects your contributions to society. It’s also useful for other people to think so, so they don’t raise your taxes. But that doesn’t make it true.
In the 1920s, Keynes thought the dominance of the laissez-faire ideology was coming to an end. “We do not even dance yet to a new tune,” he wrote. “But a change is in the air.” He was right. Increasing dissatisfaction with the unregulated capitalist system helped produce fascism in Germany and Italy and a much greater degree of government intervention in the United States, the United Kingdom, and France.
Could the same be true today? It is undeniable that the rapidly widening gap between the very rich and the middle class has undermined popular support for the economic status quo. Throughout the advanced, post-industrial democracies, there seems to be a brewing revolt against technocratic elites who appear insensitive to the plight of ordinary working people. In the United States, the Bernie Sanders insurgency demonstrated the tenuous hold of the Clinton-Obama-Hamilton Project-Center for American Progress coalition over the Democratic Party, while Donald Trump overthrew the Republican establishment.
While Trump has his own fascist, racist, and sexist tendencies, however, most of his actual policy proposals come straight out of the conservative playbook. This is not surprising, given that he is (probably) a billionaire, his most important backers are billionaires, and he shows few signs of intellectual curiosity, originality, or honesty. So in the short term, we are going to see four more years of economism triumphant—less regulation of businesses, particularly banks; lower taxes for corporations and the very rich; and a return of the bad old pre-Obamacare days, when people without employer health plans had to fend for themselves in an unregulated individual market. One thing we can be sure of is that a Trump presidency will do nothing to solve the economic problems facing the poor and the middle class, or narrow the widening gap between them and the 1%.
At the end of his essay, Keynes wrote:
“For the most part, I think that Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organisation which shall be as efficient as possible without offending our notions of a satisfactory way of life.”
That remains our challenge today. If we cannot solve it, the election of 2016 may turn out to be a harbinger of worse things to come.