The mystery of why orthodox economists continue to insist on policies that only aggravate economic crisis ceases to be a mystery once we realize that it is ideology, not science. Orthodox, or “neoclassical,” economics is dominated by Chicago School thinking because its adherents’ motivation is to justify extreme inequality, accounting for the steadfastness of its adherents in the face of massive contrary evidence.
One of the Chicago School’s most significant leaders, Frank Knight, once wrote in an academic economics journal that professors should “inculcate” in their students that these theories are not debatable hypotheses, but rather are “sacred feature[s] of the system.” Yes, we must simply believe. But in case you don’t, mathematical formulae are deployed that purports to describe economic activity — this is a system that stresses individuality but in which human beings are missing. Economic activity is treated as a simple exchange of freely acting, mutually benefiting, equal firms and households in a market that automatically, through an “invisible hand,” self-adjusts and self-regulates to equilibrium.
Among the most widely read defenders of this system is N. Gregory Mankiw, a former chair of the council of economic advisers under former U.S. President George W. Bush. Professor Mankiw, currently the head of the economics department at Harvard University, recently wrote a paper straightforwardly titled, “Defending the One Percent.” Defending them, and the system that enables those at the top of the pyramid to acquire vast sums of wealth, is the job of economists like Professor Mankiw.
He is, by any reasonable standard, one of the most intellectually able defenders of the status quo; sophisticated enough to have on occasion said nice words about John Maynard Keynes, ordinarily a big no-no among conservative economists. (Professor Keynes was no radical but rather was clear-headed enough to know that capitalism is unstable and in need of government assistance to maintain itself, but so much as implying there could possibly be anything wrong with their magical system and the “invisible hand” that guides it is ordinarily beyond the pale.)
But although it is only fair to acknowledge that Professor Mankiw is more intellectually honest than most of his brethren, when we read his paper all the biases, absurd assumptions and turgid ideology that underlies orthodox economics is in plain sight. “Defending the One Percent” is a work of ideology — he argues that the wealthy are wealthy because they are more valuable than the rest of us.
He read it in a book, so it must be true
Professor Mankiw argues that inequality results from a technological-driven increase in demand for skilled labor that is not matched by a corresponding increase in the education of workers:
“[W]hen the pace of educational advance slows down, as it did in the 1970s, the increasing demand for skilled labor will naturally cause inequality to rise. The story of rising inequality, therefore, is not primarily about politics and rent-seeking but rather about supply and demand.” [page 4]
He offers no proof for this, merely saying that books he likes say it is so, therefore it is so. But research by the the Economic Policy Institute found that the rate of the increase in unemployment since the economic crisis began is higher among those with some college or a college degree than those with high school or less. Moreover, the rate of long-term unemployment has more than doubled during the past six years, a result following from the ratio of unemployed workers to job openings having been 3-to-1 or greater since September 2008.
Professor Mankiw attempts to argue his way around this by writing that astronomically high salaries are granted because the recipients are deserving:
“Those who work in commercial banks, investment banks, hedge funds and other financial firms are in charge of allocating capital and risk, as well as providing liquidity. They decide, in a decentralized and competitive way, which firms and industries need to shrink and which will be encouraged to grow. It makes sense that a nation would allocate many of its most talented and thus highly compensated individuals to this activity.” [page 6]
Huh? Since when are people anointed to work in the financial industry? People self-select themselves to work there because they are extremely greedy and don’t care who or how many people they screw over as they extract wealth from all aspects of human activity. Goldman Sachs Chairman Lloyd Blankfein may believe he is doing “God’s work,” but that doesn’t mean we have to believe the fairy tales of the one percent. That above passage is another reminder that orthodox economics rests on unexamined theoretical musings rather than on real life.
In orthodox theory, the “market,” in the human form of financiers, dispassionately allocates capital to where it is needed, but in reality the overwhelming majority of financial trading — the value of which dwarfs the value of the real economy — is speculation, mostly conducted in milliseconds by computer programs. Yearly profits estimated as high as US$21 billion are grabbed by large financial houses through computerized trading. It takes only 11 business days for financial speculators trade instruments and contracts valued at more than all the products and services produced by the entire world in one year. This is gambling with other people’s money, not dispassionate capital allocation.
Maintaining these fictions require straw men, and Professor Mankiw does not disappoint. (Don’t be put off by the academic jargon in the next quotation — it’s nowhere near as impressive as it might sound.) He claims that any “social planner”
“would require more productive individuals to work more. Thus, in the utilitarian first-best allocation, the more productive members of society would work more and consume the same as everyone else. In other words, in the allocation that maximizes society’s total utility, the less productive individuals would enjoy a higher utility than the more productive.” [page 14]
He is claiming that critics of inequality advocate that “more productive” workers be forced to work more than “less productive” workers. If you have never heard of such a thing, you are not alone. He then follows up with a still more absurd straw man, with this imagined “statement” that is supposed to summarize the thinking of inequality critics:
“ ‘[W]e should take some of their income away and give it to less productive members of society. While this policy would cause the most productive members to work less, shrinking the size of the economic pie, that is a cost we should bear, to some degree, to increase utility for society’s less productive citizens.’ ” [page 15]
Invent what your opponents didn’t say and attack it
Nobody argues that it is unfair that more productive workers earn more than less productive workers. It is just the opposite — inequality resides in the fact that wages and compensation bear little or no relation to productivity. Chief executive officers carry a large weight of responsibility but it is quite impossible that any CEO works 340 times harder than the average employee! It is gross inequality that effectively shrinks the economic pie, because if we don’t have money due to declining wages, we buy less, skipping on luxuries then stinting on necessities.
People at the top of the economic pyramid pour so much money into speculation because there aren’t enough investment opportunities, and because, during bubbles, speculation is more profitable than production. And as unemployment grows under the impact of shrinking demand, more workers begin to lose their skills. Hundreds of millions are out of work around the world at the same time that countless factories and offices sit idle; wages decline as industrialists continually move production to the places with the lowest wages, depressing wages and creating more unemployment. Top executives, and financiers, enjoy astronomical compensation because “markets” reward these behaviors — the “market” is nothing more than the aggregate interests of the largest industrialists and financiers.
They reap gigantic rewards because they extract wealth from everybody else and distribute it among themselves, not because, as Professor Mankiw argues, “the value of a good CEO is extraordinarily high.” [page 18] Profits are directly derived from surplus value — the large difference between what an employee produces and what an employee is paid.
Falling real wages have been quantified in separate articles in the International Productivity Monitor that found that wages have grown at a minuscule percentage of labor productivity in Canada and the United States. Although not as extreme, similar patterns have been found in Britain, France, Germany, Italy and Japan by other researchers.
The Marxist economist Fred Moseley, in a detailed dismantling of Professor Mankiw’s body of work published in Real-World Economics Review, wrote:
“[Mankiw’s] marginal productivity theory is not able to explain why the real wage of production workers has remained stagnant in recent decades, in spite of continuing and significant increases in their productivity. In other words, this theory cannot explain why production workers are no better off today than they were a generation ago.”
It can’t because its ideological function is to obfuscate, not explain. In the real world, the race to the bottom — corporate globalization, multi-national monopolization, the erosion of progressive taxation, rising capital gains from ownership of property and financial instruments, and the weakening of trade unions — has led to rising inequality around the world. We might as well believe we lost our house because the big bad wolf blew it down rather than the bank foreclosing.