Economics and Power by Norbert Haring

I rather liked the fact that this talk was given as a seminar to the British House of Lords. Imagine it being given the US Senate? There would be a lot of heart attacks especially as it starts by quoting Karl Marx….aaarrrgggghhhhh…

Norbert Häring‘s presentation for the seminar “Economics and Power” on 23 March 2015, House of Lords, London:

Ladies and Gentlemen, To pay tribute to the Marxist jargon, in which Lord Skidelsky has phrased the title of my subject, I would like to start with a quote from Karl Marx: “The ideas of the ruling class are in every epoch the ruling ideas. … The ruling ideas are nothing more than the ideal expression of the dominant material relationships, … the relationships which make the one class the ruling one, therefore, the ideas of its dominance.” In my own words, that says that not all economic ideas are created equal. Some ideas make it into the leading academic journals, others can hardly be published. Some ideas make those who develop them successful in academics or even famous and influential. Other ideas sentence those who develop them to a life at the margin at best.

Ideally, this would all be a function of how convincing the idea is and how good the academic is at developing the idea, writing it down and marketing it. But we all know, that excellence by itself does not get you very far. Another important ingredient for a successful career is how convenient your subject of study and your results are for powerful interests in society.

Economics, like all social sciences, is a product of the prevailing economic and political conditions and has a role to fulfil. If the interests of the powerful change, so does economics.

I want to give you some examples of how the mainstream conception of economics conforms to the interests of the powerful groups in society and how it changes with these interests.


Pulling up the Ladder: From Mercantilism to the Free-Trade-Doctrine

My first example is the switch from mercantilism to the free-trade doctrine of David Hume, Adam Smith and David Ricardo that happened in the 18th century.

Before British economists discovered free trade, the nation had been following a protectionist industrialization policy. Starting with Henry VII in 1485, this strategy turned Britain from a poor exporter of raw materials to a leading exporter of cloth. Henry levied export taxes on wool and gave privileges to wool manufacturers.  As British capacity to manufacture wool increased, he and his successors raised export duties on wool. Finally, Queen Elizabeth banned wool exports altogether.

This is how Britain became the leading producer and exporter of manufactured goods. Only after Britain’s predominance was firmly established, did British economists start preaching free trade to the world. Many fell for it, but others, like Friedrich List in Germany orAlexander Hamilton in the US took this new Gospel as what it was: as an attempt to pull up the ladder on which the British manufacturing industry had climbed up to world leadership.

The same would happen again in the US. Starting with Alexander Hamilton, the country pursued a protectionist industrialization strategy and was very successful with it. Only after the US had had become the industrial leader, did its economists start to preach the gospel of unconditional free trade.


Neoclassical Labor Market Theory as an Antidote to Marxism

As a second example, I would like to point you to the emergence of the neoclassical doctrine around the middle of the 19. Century. This was the time then Karl Marx told workers, that they were being exploited and the threat of revolution was rife everywhere.

Classical economics was not a good antidote to Marxism. Adam Smith would not have disagreed too much with Marx on exploitation, as you can gather from the following (slightly abbreviated) quote:

What are the common wages of labour depends everywhere upon the contract usually made between those two parties… It is not difficult to foresee which of the two parties must have the advantage in the dispute, and force the other into a compliance with their terms. The masters can hold out much longer… Though they did not employ a single workman, (they) could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week.”

This was not an admissible attitude for an economist any more, once workmen were threatening to use force to end exploitation. Economists who wanted to preserve capitalism needed to overcome the classical economists’ analysis of wages that are a product of negotiating power.

The following is how neoclassical pioneer John Bates Clark formulated the challenge:

Workmen, it is said, are regularly robbed of what they produce. This is done by the natural working of competition. If this charge were proved, every right-minded man should become a socialist.”

With the marginal productivity theory that Clark and others developed he rose to the challenge of disproving the charge of exploitation. His theory claimed that at the margin, every factor of production, including labor, was remunerated exactly with what it contributed to the final product.

I would like to emphasize however, that the early neoclassical economists were quite open to redistribution. Since they saw marginal utility decline with income, they considered redistribution from rich to poor to be a welfare-increasing policy. At that particular time, this attitude was not against the interest of enlightened rulers. This was the time when Bismarck introduced social security in Germany to appease workers and fend off the threat of revolution. The rich needed to be convinced, with the help of a convenient economic theory, that some limited redistribution of income was to their own advantage, since it helped preserve the status quo.


Defining away distributional concerns to discredit redistribution

This takes us to the third change in doctrine which I would like to highlight: By the 1930s, the main threat for the wealthy had shifted from revolution to redistribution enforced by the democratic majority. This was also a time of preparation for war. Thus, priorities of the rich and the rulers had shifted to discrediting redistribution and towards making the best use of national resources.

As a first step, Lionel Robbins and others banned interpersonal utility comparisons.  Robbins redefined economics to be,

“the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

This dogmatic change had the effect of pushing distributional concerns outside the realm of economic reason. Economic efficiency became the sole target. As, on efficiency grounds, it could be argued that redistribution was bad, economic reason became associated with as little redistribution as possible.


Cold-War-Economics: Anti-collectivist and Efficiency-oriented

The fourth example of a shift in economic doctrine suiting the interests of the powerful is a continuation of the third. It is the emergence and eventual predominance of methodological individualism and of the anti-collectivist schools of thought, called rational choice and public choice.

It was the time of the cold war, economists were enlisted in the ideological battle to win the minds and hearts of the people for capitalism. The aim was to focus attention on the strong point of capitalism – efficiency of allocation –  and to discredit what socialism claimed as its strong points –  planning, collaboration and fairness of distribution.

Ken Arrow ostensibly proved that it was impossible to come to rational collective decisions. Anthony Downs, Mancur Olson and James Buchanan built on this and portrayed the government and trade unions as the enemies of liberty. The more government did, the bigger was the threat to liberty.


The Taboos

There are some ideas, which the powerful do not like to be discussed at all.

Power is one such thing.

The powerful have a need to legitimize their power. If that is not viable, they like their power to be downplayed as much as possible to the point of becoming invisible. This is what mainstream economics is doing. Look in the index of a random economics textbook for  “power” and chances are that the entry will not be where.

Power is tantamount to the absence of competition. The opposite is also true: perfect competition, the darling of mainstream economics, is tantamount to the absence of power. This is why treating the economy as if something close to perfect competition was the rule has a very important political implication. It negates the presence and importance of power.

If you pretend that workers routinely have a next-best alternative to their current job, which is only marginally less attractive, there is no power of the employer. There is no justification for unions, for layoff-protection or for unemployment benefits. If you pretend that market-power is the exception, instead of the rule, you cannot tax companies without doing a lot of harm. You cannot ask for higher wages, without losing employment. If you pretend that there is a well-functioning market for top managers, CEOs will have no real power and will need to be rewarded very handsomely for any value that they help to create.

Such assumptions which define power away almost always yield results which are very much in the interest of the powerful.


Money is Power

Money is Power, goes the saying.  Thus, another subject that the powerful, don’t like to be discussed is money. And mainstream economists are abiding. Banks putting out profit targets of 25 percent and achieving these were not considered excessively powerful by economists. They were declared efficient and successful.  Financial institutions which individually control the flow of billions of dollars do not have any power that is worth analyzing for mainstream economics.

Even money itself has been deemphasized to the point of disappearing. Some of the most famous economists have declared that money is just a veil over what is going on in the real economy. JP Morgan and Goldman Sachs are utterly powerless in such a setting. The leading macroeconomic models– even thosae used by central banks – do not have a meaningful role for money.

The following is what Claudio Borio of the Bank of International Settlements says about the importance of money:

Modeling the financial cycle correctly requires recognizing the fundamental monetary nature of our economies: the financial system does not just allocate, but also generates, purchasing power, and has very much a life of its own.”

A financial system that creates purchasing power is very powerful.

But this is not an admissible conclusion. The power to create money is not to be seriously discussed. Therefore, almost all major economics textbooks are telling students the lie that banks are mere interamediaries, who are just channeling the money from savers to investors. The fact that banks produce the money which they lend out, is hidden behind a nonsensical money multiplier mechanism. The way this mechanism is presented, it works exclusively with cash that is being deposited, lent out and redesposited multiple times. In this mechanism, it is not visible how individual banks create purchasing power. It just happens by some magic of the system.

There is a good reason for this obfuscation. Many people still feel like President Andrew Jackson did about money creation by private businesses. They would consider it an aberration, an abuse of power. If you tell these people, how banks really create legal tender, they will either call you a conspiracy theorist, or, if they believe you, they will be outraged.

It is this popular attitude that makes it so important for banks to have economists camouflage the process of money creation.

The consequence of the taboo to treat money and debt seriously is occasional policy failure. As long as economists observe the taboo, they will remain unable to understand a monetary economy. They will be unable to learn from past mistakes and avoid them in the future.

Thank you.

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Conflict Humor: The New Republican View of the Chain of Command


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Iranian Nuclear Weapon Capability Negotiations and its BATNA

Whatever the difficulties or failings in the attempts of the President Obama administration to negotiate an end to Iranian moves towards nuclear weapons, the recent letter to Iran by 47 Republican Senators seems to me like an act of ill thought through madness.

But setting that to oneside, there is the key question when anyone criticizes a negotiation strategy: what is your alternative strategy? I haven’t really heard one, and when I raise this issue with Republican critics of the President’s strategy on line, they tend to fall silent or talk about endless much tougher sanctions and they are equally silent when I ask what their alternative to a negotiated agreement is: their BATNA in technical negotiation analysis: the Best Alternative to a Negotiated Agreement which is your walk away option, what you will do if you can’t make a good agreement and what you can do unilaterally.

I thought it might be interesting to reflect on this issue as a way to critique the critiques of the negotiating strategy and give some thoughts on the factors at play:

  • The US has not traded with Iran since 1979, with the exception of President Reagan who broke his own countries sanctions to trade arms for hostage releases in the Lebanon as part of the Iran Contragate scandal
  • The US is therefore not really in any position to increase or continue damaging sanctions on Iran, without the support of other countries most critically the EU, China and Russia who did or do trade with Iran.
  • So any negotiating strategy based on sanctions needs international support, whether the Republican Party leaders or its base like it or not. That is the reality.
  • So far the sanctions currently in place with international support seem to be working to force the Iranians to negotiate. What and how we negotiate is harder to know.
  • But clearly agreement would need to include strong provisions to prevent current Iranian nuclear capacity leading to its possession of nuclear weapons and for onsite inspection to monitor and verify this. This is not easy work.
  • For those who argue against any negotiations at all, or who are trying to sabotage the current multi-nation negotiations, I would ask what their BATNA is, their Best Alternative to a Negotiated Agreement is? In the context of these other realities:
  • Iranian nuclear facilities are widely distributed, and unless the Iranians have only half a brain, built underground in long tunnels that make  it hard even with bunker buster bomb strikes for them to succeed. They must have been expecting air strikes on these facilities for a decade or more.
  • Moreover, Iranian air defenses are not 1980s Soviet era Iraq level defenses, but 2000s era Russian defenses: mobile best in the world air to ground S-300s etc, mobile radars which are protected by hundreds of decoys rendering HARM anti radar missiles useless.
  • So air strikes will likely be both useless in eroding the nuclear capability and costly
  • A ground invasion is a deeply forbidding project, requiring huge numbers of ground troops, $ trillions and based on the Iraq invasion, would take maybe 6-12 months to prepare for, more than enough time for Iran to actually build the damn bombs and deploy them against an invasion, use them on Israel or whatever suicidal acts the opponents of negotiation attribute to them
  • To me, watching Iran over the last 30 years or so, their leaders seem deeply strategic, cautious and patient. They are difficult people to negotiate against for these reasons. Fanatical and stupid they don’t seem to be, whatever terrifying things they occasionally say to distract their people from domestic discontents, and much as I might dislike what they stand for.
  • So I don’t actually see a military BATNA, a military solution that makes sense, though you might want to leave it as a sort of hinted at unspecified option, it doesn’t seem to me a credible one. And for negotiationg power BATNAs have to be credible or you just look foolish.
  • So we are left with the President’s strategy:
  • Negotiate with international support backed by international sanctions to achieve a no nuclear weapons agreement on Iran with appropriate verification
  • Recognize that the only real BATNA is indefinite continuation of sanctions
  • In the event we opt for long term sanctions without an agreement, I don’t see the incentive for Iran to not just go ahead and develop a bomb, knowing it has the sanctions with or without developing a bomb.
  • Not a negotiation place I would like to be in.
  • Or of course, we could move away from focus on the nuclear weapon issue to try to achieve a grand bargain to sort out the middle east once and for all. Good luck with the US leading that when the Republican opposition only includes a few grown ups any more. This is not President Eisenhower or even Reagan’s Republican Party.

I would welcome critique of my analysis.

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Conflict Map: Iran’s nuclear sites

For those of you contemplating air strikes against Iran, here’s a useful map though it may conceal the fact that many of the sites include long tunnels to make it very difficult for air strikes to disable key systems. They are also near major population centers and sites of religious significance so bombing if it were successful may well release nuclear radiation on the Iranian population and enrage Shias world wide for religious reasons.


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Conflict Humor: Hungary’s Declaration of War on the USA in 1941

According to a widely circulated if apocryphal contemporary story, President Franklin D. Roosevelt asked an aide in the early months of World War II  if Hungary, which had just declared war against the United States, was a  kingdom or a republic. “A kingdom, Mr. President”, the aide replied.  This dialogue followed:

FDR: What’s the King’s name?
Aide: Hungary doesn’t have a King.
FDR: Then who runs the kingdom?
Aide: A Regent by the name of Admiral Miklós Horthy.
FDR: Admiral? Then Hungary must have a powerful navy.
Aide: Hungary has no navy; it doesn’t even have access to the sea.
FDR: Wars are often fought for religious reasons. What’s the main religion there?
Aide: Catholicism, Mr. President. But Admiral Horthy is Protestant.
FDR: Did this admiral declare war on us because of territorial claims then?
Aide: Hungary’s territorial claims are against Romania.
FDR: In that case, did Hungary declare war on Romania?
Aide: No, Hungary and Romania are allies.
FDR: Let me get this straight. Hungary is a  kingdom run by a Regent who’s an admiral without a navy, and it is  allied with Romania against which it has territorial claims but it has  declared war on the U.S. against which it doesn’t.
Aide: That’s right, Mr. President.”

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Why Other People Hurt Us so Damn Much and What to Do About It

I am often asked to provide counsel on the conflicts within families, between friends, and other situations, which are up close and personal, often in the case of families with deep roots in family history. Some seem almost impossible to untangle at which point the old Clash record: “Should I stay or should I go” seems to start playing in peoples’ heads. :)

But there is maybe one approach I have personally found helpful in such situations of inter-personal pain. It is, in a nutshell, to separate out what is driving the other people to behave in ways that cause us so much pain from the question of why their behavior causes us this pain.

There is much to recommend about the process of understanding other people, other people’s demons that drive them to cause us pain. It can allow us to predict their next attack. It can help us realize: hey it’s not about us but about their stuff. It may allow us to develop mental martial arts moves to counter or block their attacks. We can even (as readers of my blog may recall) use my favorite response to any conflict attack: a question like “why do you say that? What is driving your need to attack me? Is it your stuff?” This can stop people in their tracks sometimes. Though it can also make them quite angry as you are forcing them to confront their stuff, their demons. So use with care unless you are a battle hardened labor relations veteran like me with diminished pain sensitivity. :)

Or you can even use my wife’s great tactic when she thinks someone has put her down, she asks “Was that a put down?” If they say no: then she says: “Well it sure sounded like one. Maybe use different words?” and if they say yes it was, she says: “Why would you want to put me down? What’s your beef with me?”

But, while this boxing ring stuff has some place, especially where the person concerned is oblivious to your tactics and continues on their merry way, or where there is a power differential against you, there is another angle. It is to use the pain they cause you to figure out why what they say causes this pain. And I am not talking about physical violence here, where you should call the police. But psychological attacks.

I suggest you notice where it hurts when they attack you, what part of your mind or body feels the pain. And find some quiet time to write about or think through what in your own history makes this so painful. It is a sort of conflict-triggered self therapy. And, of course, you might need professional help for this, or a steady friend, who is not going to judge you. I even jokingly tell people: note where the pain buttons are that those close to you push on a regular basis, mark them with a felt tip pen and run the uninstall program in your brain to get rid of them. This is a metaphor in case you take it literally: do not try this at home. :) (I also note that parents know where their children’s pain buttons are because they installed them; an insight I gave to a friend of mine about her mother’s effect on her, forgetting she had a daughter too and  she asked if I were suggesting she had done that to her daugher?)

So with this approach you now have a twin track method: understand those who inflict psychological pain on you and their reasons, and adopt appropriate measures to defend yourself or cut off from this crap. But use the pain they cause to good end to figure out why it hurts so damn much, so you can use the pain to better sit with and figure out your own demons. With the latter, I advocate inviting them in for tea and listen to them sympathetically….

Hope this helps. It is not easy, but neither is suffering the continuing pain others can inflict on you. And remember mostly: “It’s not about you!”, their actions.

And I have previously posted on Peter Kramer’s fine book “Should You Leave?” which is a good approach to relationship conflict. If you search for his name in the search box for this site you will see a few postings around his work.

Posted in Conflict Processes, Marital and Relationship Conflict, PERSONAL CONFLICT RESOLUTION: CREATIVE STRATEGIES, Philosophy of Conflict, The Conflict Model, Ways to handle conflict | Tagged , , , , | Leave a comment

I/Us/Them and Moral Tribes According to Joshua Greene

Joshua Greene’s fine book “Moral Tribes” that I have just read throws much light on the topic a friend of mine raised: why professors of ethical philosophy test no more moral in psychology experiments on everyday behavior than the rest of us, and sometimes worse.

Greene suggests we evolved in small face to face groups and we are largely on moral auto-pilot driven by the rules of our small group/co-religionists/tribe whatever by the instincts of what feels right, what makes us ashamed if we violate it. Hence attitudes to betrayal, to pork, to gay marriage to whatever: automatic disgust mechanisms as per Jon Haidt’s work I have previously posted on . This moral auto pilot helps “I” work with “Us”, makes us social beings like most primates.

But Greene thinks this is useless when we try to bridge not between “I” and “Us” but between “Us” and “Them”. Why? Because our moral auto pilots are not aligned with those of other groups. They are wired with local moral variants and indeed evolution drove a competitive struggle between groups as to what group binding mechanisms were most effective in competing with other groups. And groups have different moral bindings.

But we now live in a very connected world and in this world. Greene thinks we need to find moral and ethical ways to cooperate and coexist with groups with very different moral auto-pilots. Hence we need to use rational ethical ways to solve the political problems of inter-group conflict. This is where ethics professors come in. They are no different from the rest on day to day moral auto pilot but they can throw a lot of light on what we should do when moral auto pilot doesn’t work: when we are facing groups with different moral auto pilots.

Greene advocates utilitarianism: figuring out what is in our collective interests and this has to be data driven, has to include critical thinking and some override of our moral auto pilot that might say kill those not like us. Given my experience trying to persuade people to use systematic approaches to conflict as per this blog, this is hard. People prefer to deny conflict, to evade conflict, and then if forced to confront it often respond with murderous rage, preferring this to actually stepping back and handling the conflict systematically with some process discipline. 

Joshua Greene Professor of Psychology at Harvard University:

Posted in Academic Conflict, Conflict Book Reviews, Conflict Processes, Marital and Relationship Conflict, Neuro-science of conflict, PERSONAL CONFLICT RESOLUTION: CREATIVE STRATEGIES, Philosophy of Conflict, Religious Conflict, US Political Conflict, Ways to handle conflict | Tagged , , | Leave a comment