Bush economist defends the 1% so you don’t have to

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.

Global distribution of wealthAmong 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.

21 comments on “Bush economist defends the 1% so you don’t have to

  1. Alcuin says:

    I recently learned that Vincent Ostrom, the husband of Elinor Ostrom, who won the Nobel Prize in Economics in 2009 for her work on the subject of the Commons, was influenced by Frank Knight, as well as von Hayek and von Mises. Interesting. I’ve also learned that the phrase “invisible hand” appears exactly twice in The Wealth of Nations, which is over 900 pages long. Adam Smith lived in the era of mercantilism, not capitalism, so it is obvious that the neo-liberals are just cherry-picking to support their arguments. Rothbard stole the word “libertarian” from the anarchists, so why should we be surprised to learn about Mankiw’s attempts at justification, also? He can get away with it because so many people are so woefully ignorant of Marx’s work. I recently read Jane Whittle’s The Development of Agrarian Capitalism, which engages with the Brenner Debate and was most interesting. Now, I’m reading E.P. Thompson’s, Customs in Common and have learned about the “moral economy”, which, in a roundabout way, is touched on by Mary P. Ryan in her book, Civil Wars: Democracy and Public Life in the American City During the Nineteenth Century. In that book, among other things, she claims that laissez-faire economics works against the creation (or re-creation) of a moral economy. I may be wrong here, because I’m going on the basis of a book review – I haven’t actually read her book yet. All of this is leading in the direction of the subject of unequal exchange, which, if I understand correctly, places all attempts at harvesting surplus value in the same bin. That would include slavery, merchant trading (as was occurring in Adam Smith’s time), banking, feudalism, and capitalism. ‘Tis an interesting journey …

    • Adherents and promoters of the Austria and Chicago schools, and neoliberal apologists in general, indeed cherry-pick from Adam Smith’s writings. As I’ve noted before, David McNally’s Against the Market: Political Economy, Market Socialism and the Marxist Critique is a superb analysis of Smith and the misuse of Smith’s overall body of work.

      Adam Smith wrote at the dawn of the capitalist era, before he could know what the outcome of his theories would be or how reliable those theories would be when put to the test. More than 200 years later, it is plainly obvious that his assumptions are wrong. That capitalists still use his works as their most basic holy book speaks volumes about the ideological function Wealth of Nations fulfills. Economics is the “dismal science” for a reason — is there any other field of study in which the foundational text was written in the 18th century and is so obviously at variance with modern reality?

      • Alcuin says:

        I recently got library privileges at the library of the university that I graduated from. I’ll request McNally’s book – it’s at another campus. Thanks for the suggestion! I’ll likely end up reading The Wealth of Nations, but only after getting some background on mercantilism. I could say something about Marx and the ideological function of his work, too, but I won’t. Louis Proyect comes to mind …

        • James Steuart, a contemporary of Adam Smith, was a significant mercantilist economist. You might want to read a bit of background on him and/or read a bit of his writings. An idea of Steuart’s thinking is this quote, in which ancient Sparta is upheld as his model society:

          “The whole republic was continually gathered together in bodies, and their studies, their occupations and their amusements, were the same. One taste was universal; and the young and the old being constantly together, the first under the immediate inspection and authority of the latter, the same sentiments were transmitted from generation to generation. The Spartans were so pleased, and so satisfied with their situation, that they despised the manners of every other nation. If this does not transmit an idea of happiness, I am at a loss to form one. Security, ease, and happiness, therefore, are not inseparable concomitants of trade and industry.”

          [James Steuart, An Inquiry into the Principles of Political Economy, book II, chapter XIV (“Security, Ease and Happiness, No Inseparable Concomitants of Trade and Industry”), posted on the Marxist Archives web site (originally written in 1767)]

          • Jeff says:

            “Support for population growth climaxed with the rise of Mercantilism which made the presence of a large population the key to the prosperity and power of a nation. Mercantilism has often been dismissed by mainstream economists as a crude system of thought because of its assumption that the wealth of nations is proportional to the quantity of laborers and money available to them. The brutal means which the mercantilists applied in order to force people to work, in their hunger for labor, have contributed to their disrepute, as most economists wish to maintain the illusion that capitalism fosters freedom rather than coercion. It was the mercantilist class that invented the work-houses, hunted down vagabonds, ‘transported’ criminals to the American colonies, and invested in the slave trade, all the while asserting the ‘utility of poverty’ and declaring ‘idleness’ a social plague. Thus, it has not been recognized that in the mercantilist’s theory and practice we find the most direct expression of the requirements of primitive accumulation and the first capitalist policy explicitly addressing the problem of the reproduction of the work-force.” – Federici, Caliban and the Witch, p. 87

            • I have read Silvia Federici’s Caliban and the Witch twice, and I highly recommend it for her ability to integrate feminism, Marxism, historical analysis and scholarship into a most interesting study of the brutality inherent in the development of capitalism with a stress on the ordinarily under-reported repression of women as central to the process of primitive accumulation.

      • “[I]s there any other field of study in which the foundational text was written in the 18th century and is so obviously at variance with modern reality?”

        At the risk of changing the subject, I can’t help offering an answer to that question: U.S. constitutional law.

        But I may not be changing the subject all that much. The very same people who ram capitalist ideology down our throats are also the ones insisting that we run the country in accordance with the Constitution (though they may not understand exactly what that might mean). The framers have been re-made as proto-capitalists, and anyone wishing to take on the Sisyphean task of rolling the United States away from capitalism is also going to have deal with “the framing of the framing.”

        I struggle with that one myself. In the past, I have tended to emphasize the more egalitarian version of republicanism espoused by Madison and Jefferson. It was abundantly clear to them that power could not fairly be said to be derived from the people if it became concentrated in too few hands. We do not live in their republic, and those on the right seeking to define the framers as the apostles of today’s Social Darwinism have taken the Hamiltonian side of the originalist debate and then launched it into warp drive.

        That said, there can be no escaping the fact that adoption of the Constitution of 1787 was an explicitly elitist coup d’etat, permanently closing off the decentralized democratic potential of the Revolution itself. Somewhere in the American psyche, the spirit of the antifederalists lives on. How bitterly ironic that the Tea Party has channeled much of it in a direction that solidifies the new American aristocracy.

        • Or perhaps not so ironic given that the Tea Party is an elite corporate creation intended to divert people’s attention. The original organizers of the Tea Party are Americans for Prosperity Foundation, a tightly controlled pressure group founded by the Koch Brothers; FreedomWorks, a group of corporate lobbyists run by Republican hard-liner Dick Armey; and Rupert Murdoch’s Fox News.

          As to the U.S. Constitution, “strict constructionism” (i.e., judges and other right-wingers who read the minds of people who died 200 years ago) is an ideological creation that — surprise! — is used to maintain corporate and class dominance. No other country has a constitution that is so old, but I wouldn’t want to replace it right now (even with all its flaws and ability to be interpreted in bad ways) because the current U.S. political climate is so backward we’d likely get something even worse.

          A living document that can be updated for modern times would be more appropriate, but the task of writing a new constitution will have to await the day when the U.S. is a different, and better, country. And, to draw upon your opening parallel, there is a certain congruence that Wealth of Nations and the U.S. Declaration of Independence arose in the same year. But we sure aren’t in the 18th century anymore, no matter how much right-wingers might wish us to be.

        • Alcuin says:

          If you haven’t read Jerry Fresia’s Toward an American Revolution: Exposing the Constitution and Other Illusions, you ought to. Fresia demolishes the idea that the Constitution was written for “We the People”. Actually, it was. But “We” was the elite, not the commoner.

          • Thank you for that recommendation; that looks very interesting indeed. I’ve been trying to remember the name of a book that Arthur Silber suggested (on the betrayal of the Revolution in 1787); this might have been it.

            As I noted above, though, this insight into the framing complicates the task of national reform enormously. The Constitution is part of America’s civic religion; criticizing its fundamentals (as opposed to details like the electoral college) is considered blasphemy.

            I tend to agree with our host that the country is not up to the task of writing a new constitution. If we can’t follow Jefferson’s advice to write a new constitution every twenty years, at least we can try to fight the concentration of wealth he saw as inimical to republicanism. (Even if that sentiment was a tad hypocritical coming from a Virginia planter.)

            • Alcuin says:

              If more people could be persuaded to read books like that written by Jerry Fresia, we’d at least have a chance to re-structure the civic religion in this country. As long as people worship the military on Memorial Day and bow to the flag on the 4th of July, we’re not going anywhere. If people knew that the Bill of Rights was the price that was paid for the ratification of the Constitution, perhaps they’d start to question things. But there I go again … hallucinating.

  2. Jeff Nguyen says:

    I don’t need a living wage, anyway. I’d just spend it on beer, Funyuns and lottery tickets.

  3. Jeff Nguyen says:

    Sometimes conspiracy theories are real, perhaps. Interesting takes by Ralph Nader and Greg Palast. I’d be interested to know your thoughts, especially on the Palast memo…http://dandelionsalad.wordpress.com/2013/08/24/avaricious-brilliance-for-economic-disaster-by-ralph-nader/

    • I’m less enamored of Paul Volcker than is Ralph Nader, although otherwise the Nader commentary you linked to is spot on. Volcker was a prime architect of the neoliberal turn at the end of the 1970s. Although a Carter appointee, Volcker imposed harsh tight-money policies and sky-high interest rates as Carter’s presidency was ending and Reagan’s began, providing crucial opening shots for the Reagan onslaught the marked a definitive end to Keynesian policies and the triumph of Chicago School ideology.

      It is a sign that the country has gone ridiculously to the Right that Volcker is now seen as a moderate in financial matters. As to the memo dug up by Greg Palast, I have yet to see the text of it. But, although I highly value the outstanding work of Greg Palast, in reading his article about the memo it seems to me that he is focused too much on personalities and not system. People like Lawrence Summers are horrors, true, but they are the human material that fulfill the roles the capitalist system needs. If Summers weren’t there, someone else would be doing what he does.

      Replace a greedy banker, and someone else will take the job. The problem isn’t greedy bankers, it is the system that enables the greedy bankers. That doesn’t mean I disagree with the critiques of Summers & Co., nor do I disagree with the idea that punishment for what he has done is what he deserves, but we should be careful of placing too much emphasis on personalities. Having said that, I would be in better position to comment if I could actually read the memo.

        • Thanks for the link. It’s to our benefit that we see these details, even when we acknowledge that the chiefs of financial firms could not be expected to act any different. Capitalist competition mandates they do everything they can do increase profits, regardless of social cost.

          They pocket the profits and we are saddled with the social costs, the latter always an external cost for corporations. And that externalization is never more in force than it is for financiers, who skim surplus value extracted from others’ workers and thus are not at the point of production.

          The memo also amply demonstrates that, no matter how intensely oligarchic corporations compete among themselves for short-term profits, they quickly band together to defend the system that enables them to sit so arrogantly at the top of the pyramid. Amoral they are, but stupid they are not.

  4. […] SYSTEMIC DISORDER is a WordPress Blog which we read frequently. We recommend their post on the “Chicago School” of economists and its perversion of economic thought. Here we re-blog a teaser while urging that you read the article in full at https://systemicdisorder.wordpress.com/2013/08/21/mankiw-one-percent/ […]

  5. Sebastian says:

    Wages or prices are not directly related to visible effort. It’s much more complex and indirect than that. It has to do with available quantities. The cost, effort, whatever you want to call it, influences on the quantity, but it is the final market quantity which influences on the market prices. Effort is just one more factor. The barriers of entry, initial investment, etc,influences through quantity of offer, final prices too. That’s why a doctor receives more than a cleaning lady. It doesn’t have to do with who sweats more, but the quantity of doctors and the quantity of cleaning ladies. The effort needed to initiate the activity is completely different. Effort influences on the quantity, but not inmediately on prices. If I overload the market of medical doctors, then there is an slight, very minor possibility that they get the same wage as a cleaning lady.
    Also when someone decides to enter the market is basing on the future of demand and offer, not actual demand and offer. So you have to calculate what will be the future effort and probable earning taking care about how the quantities will be modified in next periods.
    Effort does influence, but not as much as Marx & Smith thought.

    • Although it is true that multiple factors account for differentials in pay scales, there are very specific decisions being made on what various jobs pay. Not any single decision nor any group of people sitting down, but rather through the collective interests of the most powerful. That is all the “market” is. Those whose job it is to make the ultra-wealthy more wealthy — corporate lawyers would be one example — are paid vastly disproportionate salaries, thus tilting the profession in that direction.

      Your example of a doctor versus an office cleaner is artificial, as the skill levels and education needed for the two are obviously vastly different. Intended or not, you are echoing the claim of economists like Professor Mankiw by claiming critics of capitalism believe everybody should make the same wage. Once again, the point is that everybody who works full time should make a living wage (yes, even officer cleaners because it is a necessary job) and that pay ought to have a relation to social worth and effort.

      I do not know anybody who disagrees with doctors making more money than office cleaners. I, and many others, do have a problem with people being unable to pay rent or even eat when they work a regular job. That is a moral issue, and an illustration that morality has no place in capitalism.

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