Good Economics for Hard Times, by Abhijit Banerjee and Esther Duflo

A frustrating book. One minute, it’ll be knee-deep in the blinders and false-assumptions of economics, the next it’ll flip and call out economists for being too focused on GDP and not enough on human dignity.

That kind of whiplash makes me not trust anything the authors say. They’re too inconsistent for me to be able to piece together a coherent approach or worldview for them.

Or argue with their takes. I mean, how do you approach someone who believes the B.S. that Silicon Valley has been spouting for decades about being “disruptive” (instead of the truth: they’re VC funds chasing the bubble-high returns of monopoly) but also admits that increasing automation can displace people who should be helped?

Or a team that argues that GDP should not be used to measure growth anymore — and even that growth is not that important — but also uses GDP growth in their arguments for other policies (for example, that immigration does not hurt the societies that accept immigrants)?

It’s all over the place.

If anything, this book further convinces me of the limits of current economic thinking. So many times, the authors posit a problem (“why don’t people move around more?”) that has obvious answers as soon as your take your head out of the economic sand.

I mean, so many of the things that make it hard for them to “explain” why humans act the way they do are fundamental ideas in economics that have been debunked.

Amazon isn’t profitable because of its size. Amazon was a business failure for decades, that Bezos kept afloat through his access to capital. Only in the last few years, when it’s become an illegal monopoly and so can flood the moat around its market, has Amazon turned a profit.

The authors swallow the Amazon line because they’re still beholden to the economic idea that bigger means more efficient. But anyone that’s ever worked in a large org knows that bigger organizations are less efficient than smaller ones. They just wield more economic power, and so can remain large.

And they find it hard to explain why people don’t move around more (from poorer places to wealthier ones) only because they rely on the economic model of human behavior, which posits that people always act to increase their wealth, and do so efficiently.

Which is obvious bunk to anyone who has, you know, spent time around actual people.

The authors whiff on basically every issue they address. They find it hard to calculate the costs or benefits of social media, when Facebook’s balance sheet is publicly available (proving social media is big business). They advocate for helping immigrants find their way in a new society, without pointing out that the policies they recommend — job matching, housing, child care — would benefit everyone if implemented universally, not just the displaced (and so be more politically viable).

In the end, I think they themselves sum up the book’s “insights” best:

Economics is too important to be left to economists.

Well said.

Free Markets vs Capitalism

The other day, I friend of mine tweeted something about Rage Against the Machine that tripped my political-philosophy sensors:

real talk, the Rage Against the Machine ticket pricing is unfortunate for many of their fans (esp fans in demographics their songs are about). but they’ve been on a Sony imprint since the early 90s. their per-show guarantee is easily in the six figures. they’re capitalists.

It’s that last part that bothered me. RATM are well-known advocates of socialism; are they really so hypocritical as to be capitalists?

After thinking things over for a while, I don’t believe they are. Wealthy, perhaps. Well-paid, certainly. But capitalists? I don’t think so.

Don’t get me wrong, I’m not trying to call my friend out here. But his tweet made me realize there’s a lot of misconceptions in the US about the differences between socialism, capitalism, and free markets. And the case of RATM makes a good jumping-off point to discuss the real relationships between those three concepts.

Because wanting to make money from their music, and specifically from their performance of music, does not make RATM capitalists.

F– the G Ride, I Want the Machines That are Making’ ‘Em

First let’s clarify something: Socialism doesn’t mean the end of money, of private property, or getting compensated for work.

Socialism, strictly construed, only requires one thing: the common ownership of the means of production.

What does this mean? Let’s break it down, going from back to front.

The means of production is just a fancy way of saying how things are made. It can be a factory churning out cars, or a recording studio putting out records.

Common ownership means there’s no one person (or CEO-controlled corporation) that controls a thing. Sometimes this can mean government control — like our public schools — and sometimes this can be a co-op or community organization, like the urban gardens that have sprung up in some cities.

Putting these two together, it means in a socialist economy, no one person controls how things are made. Meaning they can’t force you to pay for access to how things are made.

In other words: Socialists can’t make money by being gatekeepers of some valuable resource, like time in the studio or the use of a 3-D printer.

But they can — and must, since it’s the only way to make money in a socialist economy — make money from their labor, and from the fruits of their labor.

Going back to RATM, when they perform, they are generating value — entertainment value — via their labor. And they own the end result of that labor (the music itself, and any recordings that are produced), which they then sell to people.

To a socialist, this is how things should be, everywhere. People work to create something, they own that thing, and then can sell that thing to others and make a living off of it.

Now I’m Rolling Down Rodeo With a Shotgun

So if charging money for their work doesn’t make RATM capitalists, what would?

Capitalists, in contrast to socialists, believe the means of production should be privately owned. This control over the means of production is what allows capitalists to exploit the labor of others. Because if you can own a factory, and claim ownership over every car produced there, then the only thing its workers can own is their labor, which they have to sell to you.

Do you see the difference? Capitalists don’t make money by creating things. They make money by owning things.

So the investor that funds construction of a new building, and then claims ownership over it, so they can start charging people rent, is a capitalist. They didn’t design it, they didn’t build it, they didn’t paint it or make any of the furniture that goes inside. But they still claim they have the sole right to make money off of it.

In Rage Against the Machine’s case, in order to become capitalists, they’d have to go from being music makers to record label execs. People that don’t make music themselves, but instead profit from the music that others create.

And more importantly, profiting because they claim ownership of the music (or at least, the recordings) that are wholly created by other people.

The Sisters are In, So Check the Front Lines

To make a more fully-fledged analogy: What would a music industry organized along socialist lines look like?

Well, the means of production would have to be held in common. So recording studios could not be owned by individuals or corporations. They could be government-run, they could be owned by a community association, or a co-op.

More likely, they’d be owned by artist collectives, who would rent space from a builder’s association that constructed a suitable building. The artists would pool their funds and procure the recording equipment, and any instruments they’d like to keep in the studio. They’d each then have access to the studio, without having to pay someone else.

Individual recordings would be owned by the artists who performed on them, and any sound engineers or producers that helped make the recording. Again, if you put your labor into something, you own a part of it.

Distribution would be handled either by the artists’ collective themselves, or by a co-op that specializes in distributing music (either online or via physical copies).

At no point would anyone that helped the album come into being be cut out of their partial ownership of said album. At no point would control over the album or the music be held by an entity that’s beholden to remote shareholders.

That’s not to say that everything would be free, or that any old album someone wanted to make would have to be recorded or distributed. Because the people behind and around the musicians — the engineers, the mixers, the producers, etc — wouldn’t want to contribute their labor (in other words, take partial ownership of) something they thought wouldn’t sell. Their ability to make a living would depend on the end product selling, after all; more sales means more for them via their cut, and fewer sales means less.

So people would be free to say no to projects, just as they’d be free to say yes. The knowledge that whatever they invest their time, their labor, their talent in, becomes theirs, makes them more responsible, not less. And that responsibility would itself become a market signal, as people flock together to make and distribute music that’s popular locally, and still work to make music that’s popular globally.

So a socialist music industry would actually be a freer market than a capitalist one. Free of the constraints of work-for-hire, of laboring on something and then seeing it enrich someone else. And free of the power wielded by single individuals at the top of corporate hierarchies.

Who Controls the Past Now, Controls the Future

By now, I’m sure you’ve guessed which side of the capitalist/socialist divide I’m on 🙂

But even if you think our capitalist system is better, my central point stands: Making money from the things you create doesn’t make you a capitalist. In fact, doing so is more compatible with socialism than the alternative.

So RATM aren’t capitalists. Just musicians looking to claim their just piece of the value they create.

Goliath, by Matt Stoller

We don’t really talk about the dangers of monopoly in the United States anymore.

We praise it, if we’re VCs investing in start-ups.

We acknowledge a history of it, safely confined to a long-gone Gilded Age.

But we don’t discuss how much it dominates our current economy, or how much damage it does.

Which is strange, because fighting monopoly should be one thing the Right and the Left can agree on.

The Right should fight monopoly because it leads to giant corporations that centralize control of the economy. And centralized control — whether in the form of an unelected Politburo, or an unelected Board of Directors — should be one of the Right’s worst fears.

The Left should fight monopoly because it concentrates power in the hands of owners and financial gamblers at the expense of workers. When the company you’re trying to unionize against doesn’t have any competitors, and controls billions of dollars of assets, it can afford to wait out any strike, or hire enough scabs to stay in business. And it’s harder to organize across not just multiple states, but multiple countries, to ensure a strike even gets off the ground.

Notice I didn’t say anything about consumers. It turns out our obsession with consumer rights (and low prices) has crippled our ability to talk about the rights of producers, of the workers and small-businesspeople that should rightfully be the backbone of our economy. It’s left us defenseless against the new monopolies in our midst, that charge less not because of some “economy of scale” but because they have access to enough capital to underbid everyone else.

Think of Amazon, and how it spent decades without turning any kind of profit, all while its stock rose and rose. Would any normal business have been allowed to do that? Any sane business? No. Amazon was allowed to pursue its monopoly, and won it.

But I didn’t see any of this until after reading Matt Stoller’s book.

I felt some of it, sure. In the way Silicon Valley companies chased advertising dollars instead of solving real problems. In how Uber and Amazon set their prices artificially low, specifically to drive their competitors out of the market, and got praised for it.

And in the way I’ve come to look at running my own business as some kind of crazy dream, instead of the normal out-growth of a career spent in engineering.

Stoller’s given me a framework, and a history, to understand all of this. How we used to enforce anti-trust laws that would have stopped Facebook from buying out all of its competition, or Amazon from driving local bookstores out of business. How the financial markets used to exist to enable small businesses to get off the ground, not pour money into multinational behemoths that crushed them.

And how it all funnels money and power up the food chain, leading to today’s rampant inequality and distorted economy.

If you have any interest in economic justice, whether as a devoted capitalist or a socialist or just a plain liberal, I’d recommend reading Goliath. Stoller’s book restores the lost history of American anti-trust, placing us back in a historical context of the long fight between centralized control and distributed power.

It’s the one book I’ve read about recent events that’s given me hope.

Because we cut down the Goliaths once. We can do so again.

Seven Bad Ideas by Jeff Madrick

Comprehensive. Explains 7 of the biggest ideas underlying the dominant economic model of the world, then demolishes them. One by one, each is shown to be based on false assumptions and a complete lack of evidence.

Ties everything together by showing how policy shaped by these ideas has damaged the world economy.

Three of the many things I learned:

  • The modern concept of using defense contracts to spur industrial innovation was invented in the US, in the 1800s.
  • For Adam Smith, prosperity came from increased productivity (usually from a better division of labor), not from the Invisible Hand, which was a guide to where to invest, not the engine of growth itself.
  • Multiple Acts of Congress (notably the Humphrey-Hawkins Act of 1978) direct the Federal Reserve system to pursue policies of full employment and low inflation. For the past thirty years, the employment mandate has been ignored.

Owning Our Future by Marjorie Kelly

Uneven. The company profiles are interesting, if sometimes sparse on details, and present views into a more democratic form of corporation.

They’re constantly broken up by vague premonitions of disaster, though, a new kind of Malthusian faith that we’re stretching the Earth to its limits.

No evidence is marshaled in support of this belief, and the effect is to weaken the author’s otherwise well-made argument: that the current way of organizing corporations is not the only way, and some of the alternatives are better.

Despite the hand-wavy references to mysticism and quantum physics, I learned:

  • The John Lewis Partnership in the UK is its largest department store chain, and is entirely employee-owned, with an elected employees’ council that governs the company alongside the Board of Directors
  • The Bank of North Dakota is state-owned (!), the only one in the US
  • Elinor Ostrom won the Nobel Prize in Economics for her work proving that the “tragedy of the commons” is not inevitable, and can be avoided while preserving the commons as community property.

Trekonomics by Manu Saadia

Disappointing. Starts out strong, with several good chapters covering how the replicator enables Star Trek’s cashless society, and what could motivate competition and work in such a society.

Starting with the middle of the book, though, the author indulges in multiple digressions, ranging from a chapter covering how Isaac Asimov’s work influenced Star Trek (true, but way off-topic) to one listing all the ways the Ferengi represent 20th-century humanity (also true, but obvious). 

Ends with a chapter claiming that interstellar travel is an economic dead-end, a fantasy, and the only way to get there will be to enable a Star Trek-like society beforehand. Not exactly a perspective to inspire exploration and discovery.

Still, I did learn a few things:

  • Currency-less society wasn’t part of original Star Trek; the idea was introduced in Star Trek IV, and fleshed out in Star Trek: The Next Generation (and later series, like Deep Space 9)
  • President Reagan opened up GPS to the public because the Soviets shot down a Korean airliner in 1983
  • In the US, from 1970 to 2012, GDP per capita doubled, while energy use dropped from 2,700 gallons of gasoline (equivalent) to 2,500

Keynes Hayek: The Clash that Defined Modern Economics by Nicholas Wapshott

A remarkable book. Covers not just the development of Keynes’ and Hayek’s positions, but also how they developed in opposition to each other, then moves on to how their followers (both politicians and economists) have continued the argument over the past 70 years.

I’m not sure how balanced the book is. After reading it, my opinion of Keynes is much higher than it was before, and my opinion of Hayek is lower.

Hayek’s economic ideas come across as an obscure version of classical economics, neither very original or very influential. Hayek’s politics, the idea that any government intervention in the economy inevitably leads to fascism, has the whole of recorded history against it, with the last 70 years as a comprehensive refutation.

Keynes, on the other hand, invented the Bretton Woods system, and laid the foundation for the IMF and World Bank. His criticisms of the Paris Treaty that ended World War I led to the US policy of rebuilding Germany and Japan after World War II instead of trying to hold them down. Despite politician’s rhetoric, his economic and political ideas are the dominant ones in Western society, and have been since his death.

However, this interpretation of mine could be a result of my natural tendency toward Keynesian thinking, and not a result of any bias in the book. After all, followers of classical economics have been looking at exactly the same world as the Keynesians and coming to different conclusions for decades; perhaps from a Hayekian perspective this book proves just how prophetic he was?

In any case, it did show me the massive gaps in my understanding of the history of both men:

  • Keynes pioneered the now-conservative idea that decreasing taxes is the same as spending money to stimulate the economy. In the US, it was first proposed as policy by Kennedy in 1962 to overcome a mini-recession, and the economic data support Keynes.
  • Keynes invented the discipline of macroeconomics, which is partly to blame for why he and Hayek disagreed so violently: they were really working in different disciplines.
  • Milton Friedman, Hayek’s biggest supporter, actually first adopted Keynesian economics, only rejecting them after his study of the causes of the Great Depression in the US. It was Hayek’s politics, not his economics, that Friedman and the conservative establishment of the UK and US adopted.

CEOs and Surplus Value

CEOs in larger companies make more not necessarily because they’re better than the people running smaller companies, but because there’s more excess value being made by their employees for them to soak up.

The elimination of middle management in the 80s and 90s didn’t result in higher wages for employees because upper management ensured the excess funds went straight to their pockets.

Maybe if we capped the size of companies at 250 employees we wouldn’t need to cap executive salaries?

Another way of looking at it: things that are common but essential to life, like bread, are cheap. Luxuries, like sports cars and CEOs, are expensive. We can’t do without the bread. We can get by just fine without the CEO.

Companies succeed not because of their CEOs, but in spite of them. If we apply the 80/20 rule to CEOs, then most companies have to be run by bad managers. So how do they survive? It’s because their employees are not crap, and care about their jobs (they’re actually under threat) and drag the company kicking and screaming into profitability.

We can see this in action in companies that have removed management: Valve, Github, etc. All power passes back into the hands of the workers, who are highly paid. With large salaries and a lot of autonomy, they produce incredible products.

Company management, like government, succeeds best when it creates the infrastructure necessary for employees (a company’s citizens) to do well, then gets out of the way.

The Role of Government

Politicians that talk about their plan to grow the economy make me angry. It’s not the government’s place to grow the economy. That’s for businesses, founded and run by citizens and responding to the market, to do.

It’s the government’s job to help its citizens live the best lives they can. One method – among many – they can use to accomplish this goal is to set the foundation for growth, by investing in infrastructure, education, and a social safety net. But these things don’t grow the economy by themselves. You can build all the bridges you want, but if no one needs drives on it, it’s not going to contribute to the economy.

I know, I know: but what about the jobs created in building that bridge? A temporary bump, at best. Much better if they build a bridge, and then need to build gas stations and apartment blocks on the other side because of business picking up on both ends. Bridges to nowhere don’t help anyone except the owner of the construction company pocketing the profits.