Monday, November 18, 2013

Socialism in Seattle and rotten economics elsewhere

by Michael Roberts

The victory of Kshama Sawant as a Socialist city councillor in Seattle (http://www.spokesman.com/stories/2013/nov/16/socialist-kshama-sawant-wins-seattle-city-council/) has taken an interesting turn on the economics front.  You see, Sawant is not only a socialist, she also has a Ph D in economics and teaches it at the local city college.  This news has outraged a columnist for the Forbes magazine.  Forbes magazine is owned by the ‘free market’ right-wing multi-millionaire Steve Forbes.  Forbes has stood as a presidential candidate in the past on a full ‘free market’ platform and was a big backer of Mitt Romney in the last election.  His influential magazine is committed to presenting the obvious advantages and success of ‘free market capitalism’.

So Forbes contributor, Alex Berezow launched into an attack on socialist economics and Sawant (http://www.forbes.com/sites/alexberezow/2013/11/11/why-is-seattle-socialist-kshama-sawant-allowed-to-teach-economics/).  Berezow said he was not an economist, but more important was a proper scientist (a micro-biologist).  For him economics was not a science as it “generates research and commentary that employs more voodoo than a witch doctor.”  I’ll return to that claim about economics and its failure to get anything right about the world, but first let’s consider Berezow’s main beef.

He reckons that the only proper contribution that economics makes is to confirm the “basic and obvious” fact of “human nature” i.e everybody is out for their own self-interest and the world only goes round and round economically if people can gain money or things for themselves.

“Unfortunately,” says our biologist scientist writer, “socialists never learned this lesson. In a socialist economy, incentives play little (if any) role. Therefore, as University of Michigan-Flint economist Mark J. Perry wrote, “By failing to emphasize incentives, socialism is a theory inconsistent with human nature and is therefore doomed to fail.”

But how scientific is that assertion? There are thousands of biological and social studies in both human and animal behaviour that show individuals are not just driven by individual greed or self-interest, even in most situations.  What about people fighting in wars (for the benefit of capital, or ‘the country’)? What about the giving to charities (mainly by poorer people to even poorer people); or voluntary work; or looking after their families and older parents, or jumping off bridges to rescue people from drowning etc?.

Human behaviour depends on the circumstances – and in economic behaviour too.  Tax evasion and fraud exist in all economies but it is rife in countries where people have no faith in the fairness or honesty of governments. The level differs accordingly.  And why are some countries wealthier and more productive than others, grow faster or slower or have greater inequality or less?  Is this all to be explained simply by levels of greed and ‘incentives’; or could it be due to social and cultural structures; uneven developments in economic history.  After all, the economic theory of ‘free markets’ refers to very recent phenomenon in human history, even if it is now the central ideology of ‘political economy’. It seems that our Forbes biologist knows little about his own branch of science, let alone economic behaviour.

Berezow cites Greg Mankiw’s book, Principles of Economics, to support his view that proper economics is about ‘self interest’.  This textbook is now the standard work for all economics students in mainstream economics departments globally. The irony is that a section of the privileged students of Harvard University where Mankiw teaches boycotted his lectures because he provided no alternative economics to compare with his brand of neoclassical theory – and there are plenty of alternative views to the ‘free market’, Ayn Rand approach (http://en.wikipedia.org/wiki/Ayn_Rand) presented by the Forbes columnist as the only ‘rational’ brand of economics.

And elsewhere there has been a revolt against mainstream economics as the best explanation of what is happening in economies. Recently some students in Manchester, UK set up a Post-Crash Economics Society who believe that neoclassical economic theory should no longer have a monopoly within economics courses. “At the moment an undergraduate, graduate or even a professional economist could easily go through their career without knowing anything substantive about other schools of thought, such as post-Keynesian, Austrian, institutional, Marxist, evolutionary, ecological or feminist economics. Such schools of thought are simply considered inferior or irrelevant for economic “science”. The current state of affairs is not good enough. Our classmates tell us that they are embarrassed when their family and friends ask them to explain the causes of the current crisis and they can’t. “

But Berezow ploughs on in his column. He says “shockingly, socialists can regularly be found on college campuses. Kshama Sawant, an economics teacher at Seattle Central Community College, openly endorses socialism….How on earth can somebody who rejects basic academic knowledge win a city council seat? Even more troublingly, how can somebody with her beliefs be allowed to teach an economics course? This would be analogous to allowing an AIDS denier to teach a medical microbiology course, or a creationist to teach an evolution course.”   Really?  Is socialist economics equivalent to AIDS denial or the denial of evolution!  More vindictively, our Forbes columnist wants to see an end to socialists in Seattle colleges: “why would Seattle Central Community College allow Dr. Sawant (yes, she actually has a Ph.D. in economics) anywhere near students?”  So no free market there then?

Even worse for Berezow, Socialist economics professor Sawant has called for the nationalisation of Amazon and rent controls.  What an idiot!  Apparently, rent control has been proved by our very own Greg Mankiw in a paper to be ‘totally destructive’.  This is the Greg Mankiw who recently wrote a paper designed to prove that the increased inequality of wealth and income to the top 1% of American population was perfectly rational and indeed beneficial to the rest of us (see my post, http://thenextrecession.wordpress.com/2013/06/19/defending-the-indefensible/).

Well, Marxist economists may agree that rent controls are not an effective way of providing decent housing at reasonable cost to the majority of the population; they are more a defence against rampant exploitation by landowners.  But the proponents of ‘free markets’ in housing have dismally failed to show that leaving such an essential need for people (somewhere to sleep) to private landowners seeking rents and to building corporations seeking profit will deliver efficiently housing for all.  Supply is not meeting demand, even at exorbitant prices.  For example, in the UK right now, house building is an all-time low and rents in London have rocketed to all-time highs, driving average households out of the British capital and forcing them into areas with long commuting times or into overcrowded dwellings and young people back into their parents homes.  And those without work are now having their housing benefits reduced if they have ‘too many’ bedrooms in their flats.  The government reckons this will allocate housing resources more efficiently!  So much for free markets in housing.

Behind this lunacy lies the philosophy of greed and self-interest propounded by Ayn Rand, the main influence over such Tea Party followers like Ron Paul and Congressional finance leader, Paul Ryan.  Another follower of Rand is the erstwhile head of the US Federal Reserve bank, Alan Greenspan, who presided over the deregulated ‘free markets’ in financial and over the great credit binge of the early 2000s that led to the credit crunch, the banking crash and the subsequent Great Recession.

When the slump came, Greenspan was asked what had happened. “I am in a state of shocked disbelief.”, he replied, “because I have been going for 40 years or more with very considerable evidence that it (free markets) was working exceptionally well”.   Greenspan went on: “unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible. Assuaging the aftermath is all we can hope for.”   Nothing can be done about crises in free markets because of ‘human nature’.

Greed and incentives breed instability and crisis, not prosperity, it seems.

Modern mainstream economics failed to forecast the crisis because its explanation of how economies work is really ‘voodoo economics’,as the Forbes columnist stated his contribution (and see my paper, The causes of the Great Recession, The causes of the Great Recession). Take the forecasting skills of the leading mainstream economists in the US.  Many of these have prestigious posts as members of the current Federal Reserve Bank monetary policy committee that tries to guide the capitalist economy towards prosperity. Recently, the Wall Street Journal examined and scored on accuracy over 700 predictions made between 2009 and 2012 in speeches and congressional testimony by the current 14 Fed policymakers. The newspaper used the following benchmarks: gross domestic product for growth, the unemployment rate, and the change in Commerce Department’s personal consumption expenditure price index for inflation.

Janet Yellen, the woman the White House wants to be chair of the Federal Reserve, topped their chart.   Yet Yellen scored only 0.52 per cent overall, in other words her forecasts were only 52% close to right rather than wrong. Current Fed chairman Ben Bernanke came fifth, with just 0.29 as an overall score and Charles Plosser came in last, with an overall score of -0.01.  In other words, Plosser got all his forecasts wrong.  Maybe that makes him the best forecaster: just assume the opposite of whatever he says!  Of course, there is no opposite: if Plosser predicts the US economy will grow by 3% in real terms next year, we know he will be wrong, but we still don’t know what US growth will be.
Of course, predicting the future is not the only or even main criterion for good science, but contrary to some views, I reckon that it is part of it.  Einstein’s theory generated predictions about tiny movements in the orbits of the sun and moon, due to the effect of ‘bending’  gravity in space-time that had not been predicted before.  When scientists tested those predictions from data collected in eclipses, Einstein’s theory was confirmed.  This sort of prediction is more like the law of gravity being proved by the regular of fall of apples from a tree; or for that matter, the law of the tendency of the rate of profit to fall in Marxist crisis theory.  It is not predicting when the apple will fall or when the rate of profit will decline exactly; that is more difficult forecasting that is beyond economic science most of the time, although not impossible in my view.

The joke about economics is: why did God create economists?  So that weather experts would look a lot better at forecasting.  Even so, economics can be a science, even if the mainstream is corrupted and distorted by the ideology of a ruling class trying to preserve its right to reign and control resources.  But it will be more like a science if socialist (Marxist) economics were taught somewhere, including Seattle.

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