Is Equal Unfair?

JDN 2457492

Much as you are officially a professional when people start paying you for what you do, I think you are officially a book reviewer when people start sending you books for free asking you to review them for publicity. This has now happened to me, with the book Equal Is Unfair by Don Watkins and Yaron Brook. This post is longer than usual, but in order to be fair to the book’s virtues as well as its flaws, I felt a need to explain quite thoroughly.

It’s a very frustrating book, because at times I find myself agreeing quite strongly with the first part of a paragraph, and then reaching the end of that same paragraph and wanting to press my forehead firmly into the desk in front of me. It makes some really good points, and for the most part uses economic statistics reasonably accurately—but then it rides gleefully down a slippery slope fallacy like a waterslide. But I guess that’s what I should have expected; it’s by leaders of the Ayn Rand Institute, and my experience with reading Ayn Rand is similar to that of Randall Monroe (I’m mainly referring to the alt-text, which uses slightly foul language).

As I kept being jostled between “That’s a very good point.”, “Hmm, that’s an interesting perspective.”, and “How can anyone as educated as you believe anything that stupid!?” I realized that there are actually three books here, interleaved:

1. A decent economics text on the downsides of taxation and regulation and the great success of technology and capitalism at raising the standard of living in the United States, which could have been written by just about any mainstream centrist neoclassical economist—I’d say it reads most like John Taylor or Ken Galbraith. My reactions to this book were things like “That’s a very good point.”, and “Sure, but any economist would agree with that.”

2. An interesting philosophical treatise on the meanings of “equality” and “opportunity” and their application to normative economic policy, as well as about the limitations of statistical data in making political and ethical judgments. It could have been written by Robert Nozick (actually I think much of it was based on Robert Nozick). Some of the arguments are convincing, others are not, and many of the conclusions are taken too far; but it’s well within the space of reasonable philosophical arguments. My reactions to this book were things like “Hmm, that’s an interesting perspective.” and “Your argument is valid, but I think I reject the second premise.”

3. A delusional rant of the sort that could only be penned by a True Believer in the One True Gospel of Ayn Rand, about how poor people are lazy moochers, billionaires are world-changing geniuses whose superior talent and great generosity we should all bow down before, and anyone who would dare suggest that perhaps Steve Jobs got lucky or owes something to the rest of society is an authoritarian Communist who hates all achievement and wants to destroy the American Dream. It was this book that gave me reactions like “How can anyone as educated as you believe anything that stupid!?” and “You clearly have no idea what poverty is like, do you?” and “[expletive] you, you narcissistic ingrate!”

Given that the two co-authors are Executive Director and a fellow of the Ayn Rand Institute, I suppose I should really be pleasantly surprised that books 1 and 2 exist, rather than disappointed by book 3.

As evidence of each of the three books interleaved, I offer the following quotations:

Book 1:

“All else being equal, taxes discourage production and prosperity.” (p. 30)

No reasonable economist would disagree. The key is all else being equal—it rarely is.

“For most of human history, our most pressing problem was getting enough food. Now food is abundant and affordable.” (p.84)

Correct! And worth pointing out, especially to anyone who thinks that economic progress is an illusion or we should go back to pre-industrial farming practices—and such people do exist.

“Wealth creation is first and foremost knowledge creation. And this is why you can add to the list of people who have created the modern world, great thinkers: people such as Euclid, Aristotle, Galileo, Newton, Darwin, Einstein, and a relative handful of others.” (p.90, emph. in orig.)

Absolutely right, though as I’ll get to below there’s something rather notable about that list.

“To be sure, there is competition in an economy, but it’s not a zero-sum game in which some have to lose so that others can win—not in the big picture.” (p. 97)

Yes! Precisely! I wish I could explain to more people—on both the Left and the Right, by the way—that economics is nonzero-sum, and that in the long run competitive markets improve the standard of living of society as a whole, not just the people who win that competition.

Book 2:

“Even opportunities that may come to us without effort on our part—affluent parents, valuable personal connections, a good education—require enormous effort to capitalize on.” (p. 66)

This is sometimes true, but clearly doesn’t apply to things like the Waltons’ inherited billions, for which all they had to do was be born in the right family and not waste their money too extravagantly.

“But life is not a game, and achieving equality of initial chances means forcing people to play by different rules.” (p. 79)

This is an interesting point, and one that I think we should acknowledge; we must treat those born rich differently from those born poor, because their unequal starting positions mean that treating them equally from this point forward would lead to a wildly unfair outcome. If my grandfather stole your grandfather’s wealth and passed it on to me, the fair thing to do is not to treat you and I equally from this point forward—it’s to force me to return what was stolen, insofar as that is possible. And even if we suppose that my grandfather earned far vaster wealth than yours, I think a more limited redistribution remains justified simply to put you and I on a level playing field and ensure fair competition and economic efficiency.

“The key error in this argument is that it totally mischaracterizes what it means to earn something. For the egalitarians, the results of our actions don’t merely have to be under our control, but entirely of our own making. […] But there is nothing like that in reality, and so what the egalitarians are ultimately doing is wiping out the very possibility of earning something.” (p. 193)

The way they use “egalitarian” as an insult is a bit grating, but there clearly are some actual egalitarian philosophers whose views are this extreme, such as G.A. Cohen, James Kwak and Peter Singer. I strongly agree that we need to make a principled distinction between gains that are earned and gains that are unearned, such that both sets are nonempty. Yet while Cohen would seem to make “earned” an empty set, Watkins and Brook very nearly make “unearned” empty—you get what you get, and you deserve it. The only exceptions they seem willing to make are outright theft and, what they consider equivalent, taxation. They have no concept of exploitation, excessive market power, or arbitrage—and while they claim they oppose fraud, they seem to think that only government is capable of it.

Book 3:

“What about government handouts (usually referred to as ‘transfer payments’)?” (p. 23)

Because Social Security is totally just a handout—it’s not like you pay into it your whole life or anything.

“No one cares whether the person who fixes his car or performs his brain surgery or applies for a job at his company is male or female, Indian or Pakistani—he wants to know whether they are competent.” (p.61)

Yes they do. We have direct experimental evidence of this.

“The notion that ‘spending drives the economy’ and that rich people spend less than others isn’t a view seriously entertained by economists,[…]” (p. 110)

The New Synthesis is Keynesian! This is what Milton Friedman was talking about when he said, “We’re all Keynesians now.”

“Because mobility statistics don’t distinguish between those who don’t rise and those who can’t, they are useless when it comes to assessing how healthy mobility is.” (p. 119)

So, if Black people have much lower odds of achieving high incomes even controlling for education, we can’t assume that they are disadvantaged or discriminated against; maybe Black people are just lazy or stupid? Is that what you’re saying here? (I think it might be.)

“Payroll taxes alone amount to 15.3 percent of your income; money that is taken from you and handed out to the elderly. This means that you have to spend more than a month and a half each year working without pay in order to fund other people’s retirement and medical care.” (p. 127)

That is not even close to how taxes work. Taxes are not “taken” from money you’d otherwise get—taxation changes prices and the monetary system depends upon taxation.

“People are poor, in the end, because they have not created enough wealth to make themselves prosperous.” (p. 144)

This sentence was so awful that when I showed it to my boyfriend, he assumed it must be out of context. When I showed him the context, he started swearing the most I’ve heard him swear in a long time, because the context was even worse than it sounds. Yes, this book is literally arguing that the reason people are poor is that they’re just too lazy and stupid to work their way out of poverty.

“No society has fully implemented the egalitarian doctrine, but one came as close as any society can come: Cambodia’s Khmer Rouge.” (p. 207)

Because obviously the problem with the Khmer Rouge was their capital gains taxes. They were just too darn fair, and if they’d been more selfish they would never have committed genocide. (The authors literally appear to believe this.)

 

So there are my extensive quotations, to show that this really is what the book is saying. Now, a little more summary of the good, the bad, and the ugly.

One good thing is that the authors really do seem to understand fairly well the arguments of their opponents. They quote their opponents extensively, and only a few times did it feel meaningfully out of context. Their use of economic statistics is also fairly good, though occasionally they present misleading numbers or compare two obviously incomparable measures.

One of the core points in Equal is Unfair is quite weak: They argue against the “shared-pie assumption”, which is that we create wealth as a society, and thus the rest of society is owed some portion of the fruits of our efforts. They maintain that this is fundamentally authoritarian and immoral; essentially they believe a totalizing false dichotomy between either absolute laissez-faire or Stalinist Communism.

But the “shared-pie assumption” is not false; we do create wealth as a society. Human cognition is fundamentally social cognition; they said themselves that we depend upon the discoveries of people like Newton and Einstein for our way of life. But it should be obvious we can never pay Einstein back; so instead we must pay forward, to help some child born in the ghetto to rise to become the next Einstein. I agree that we must build a society where opportunity is maximized—and that means, necessarily, redistributing wealth from its current state of absurd and immoral inequality.

I do however agree with another core point, which is that most discussions of inequality rely upon a tacit assumption which is false: They call it the “fixed-pie assumption”.

When you talk about the share of income going to different groups in a population, you have to be careful about the fact that there is not a fixed amount of wealth in a society to be distributed—not a “fixed pie” that we are cutting up and giving around. If it were really true that the rising income share of the top 1% were necessary to maximize the absolute benefits of the bottom 99%, we probably should tolerate that, because the alternative means harming everyone. (In arguing this they quote John Rawls several times with disapprobation, which is baffling because that is exactly what Rawls says.)

Even if that’s true, there is still a case to be made against inequality, because too much wealth in the hands of a few people will give them more power—and unequal power can be dangerous even if wealth is earned, exchanges are uncoerced, and the distribution is optimally efficient. (Watkins and Brook dismiss this contention out of hand, essentially defining beneficent exploitation out of existence.)

Of course, in the real world, there’s no reason to think that the ballooning income share of the top 0.01% in the US is actually associated with improved standard of living for everyone else.

I’ve shown these graphs before, but they bear repeating:

Income shares for the top 1% and especially the top 0.1% and 0.01% have risen dramatically in the last 30 years.

top_income_shares_adjusted

But real median income has only slightly increased during the same period.

US_median_household_income

Thus, mean income has risen much faster than median income.

median_mean

While theoretically it could be that the nature of our productivity technology has shifted in such a way that it suddenly became necessary to heap more and more wealth on the top 1% in order to continue increasing national output, there is actually very little evidence of this. On the contrary, as Joseph Stiglitz (Nobel Laureate, you may recall) has documented, the leading cause of our rising inequality appears to be a dramatic increase in rent-seeking, which is to say corruption, exploitation, and monopoly power. (This probably has something to do with why I found in my master’s thesis that rising top income shares correlate quite strongly with rising levels of corruption.)

Now to be fair, the authors of Equal is Unfair do say that they are opposed to rent-seeking, and would like to see it removed. But they have a very odd concept of what rent-seeking entails, and it basically seems to amount to saying that whatever the government does is rent-seeking, whatever corporations do is fair free-market competition. On page 38 they warn us not to assume that government is good and corporations are bad—but actually it’s much more that they assume that government is bad and corporations are good. (The mainstream opinion appears to be actually that both are bad, and we should replace them both with… er… something.)

They do make some other good points I wish more leftists would appreciate, such as the point that while colonialism and imperialism can damage countries that suffer them and make them poorer, they generally do not benefit the countries that commit them and make them richer. The notion that Europe is rich because of imperialism is simply wrong; Europe is rich because of education, technology, and good governance. Indeed, the greatest surge in Europe’s economic growth occurred as the period of imperialism was winding down—when Europeans realized that they would be better off trying to actually invent and produce things rather than stealing them from others.

Likewise, they rightfully demolish notions of primitivism and anti-globalization that I often see bouncing around from folks like Naomi Klein. But these are book 1 messages; any economist would agree that primitivism is a terrible idea, and very few are opposed to globalization per se.

The end of Equal is Unfair gives a five-part plan for unleashing opportunity in America:

1. Abolish all forms of corporate welfare so that no business can gain unfair advantage.

2. Abolish government barriers to work so that every individual can enjoy the dignity of earned success.

3. Phase out the welfare state so that America can once again become the land of self-reliance.

4. Unleash the power of innovation in education by ending the government monopoly on schooling.

5. Liberate innovators from the regulatory shackles that are strangling them.

Number 1 is hard to disagree with, except that they include literally everything the government does that benefits a corporation as corporate welfare, including things like subsidies for solar power that the world desperately needs (or millions of people will die).

Number 2 sounds really great until you realize that they are including all labor standards, environmental standards and safety regulations as “barriers to work”; because it’s such a barrier for children to not be able to work in a factory where your arm can get cut off, and such a barrier that we’ve eliminated lead from gasoline emissions and thereby cut crime in half.

Number 3 could mean a lot of things; if it means replacing the existing system with a basic income I’m all for it. But in fact it seems to mean removing all social insurance whatsoever. Indeed, Watkins and Brook do not appear to believe in social insurance at all. The whole concept of “less fortunate”, “there but for the grace of God go I” seems to elude them. They have no sense that being fortunate in their own lives gives them some duty to help others who were not; they feel no pang of moral obligation whatsoever to help anyone else who needs help. Indeed, they literally mock the idea that human beings are “all in this together”.

They also don’t even seem to believe in public goods, or somehow imagine that rational self-interest could lead people to pay for public goods without any enforcement whatsoever despite the overwhelming incentives to free-ride. (What if you allow people to freely enter a contract that provides such enforcement mechanisms? Oh, you mean like social democracy?)

Regarding number 4, I’d first like to point out that private schools exist. Moreover, so do charter schools in most states, and in states without charter schools there are usually vouchers parents can use to offset the cost of private schools. So while the government has a monopoly in the market share sense—the vast majority of education in the US is public—it does not actually appear to be enforcing a monopoly in the anti-competitive sense—you can go to private school, it’s just too expensive or not as good. Why, it’s almost as if education is a public good or a natural monopoly.

Number 5 also sounds all right, until you see that they actually seem most opposed to antitrust laws of all things. Why would antitrust laws be the ones that bother you? They are designed to increase competition and lower barriers, and largely succeed in doing so (when they are actually enforced, which is rare of late). If you really want to end barriers to innovation and government-granted monopolies, why is it not patents that draw your ire?

They also seem to have trouble with the difference between handicapping and redistribution—they seem to think that the only way to make outcomes more equal is to bring the top down and leave the bottom where it is, and they often use ridiculous examples like “Should we ban reading to your children, because some people don’t?” But of course no serious egalitarian would suggest such a thing. Education isn’t fungible, so it can’t be redistributed. You can take it away (and sometimes you can add it, e.g. public education, which Watkins and Brooks adamantly oppose); but you can’t simply transfer it from one person to another. Money on the other hand, is by definition fungible—that’s kind of what makes it money, really. So when we take a dollar from a rich person and give it to a poor person, the poor person now has an extra dollar. We’ve not simply lowered; we’ve also raised. (In practice it’s a bit more complicated than that, as redistribution can introduce inefficiencies. So realistically maybe we take $1.00 and give $0.90; that’s still worth doing in a lot of cases.)

If attributes like intelligence were fungible, I think we’d have a very serious moral question on our hands! It is not obvious to me that the world is better off with its current range of intelligence, compared to a world where geniuses had their excess IQ somehow sucked out and transferred to mentally disabled people. Or if you think that the marginal utility of intelligence is increasing, then maybe we should redistribute IQ upward—take it from some mentally disabled children who aren’t really using it for much and add it onto some geniuses to make them super-geniuses. Of course, the whole notion is ridiculous; you can’t do that. But whereas Watkins and Brook seem to think it’s obvious that we shouldn’t even if we could, I don’t find that obvious at all. You didn’t earn your IQ (for the most part); you don’t seem to deserve it in any deep sense; so why should you get to keep it, if the world would be much better off if you didn’t? Why should other people barely be able to feed themselves so I can be good at calculus? At best, maybe I’m free to keep it—but given the stakes, I’m not even sure that would be justifiable. Peter Singer is right about one thing: You’re not free to let a child drown in a lake just to keep your suit from getting wet.

Ultimately, if you really want to understand what’s going on with Equal is Unfair, consider the following sentence, which I find deeply revealing as to the true objectives of these Objectivists:

“Today, meanwhile, although we have far more liberty than our feudal ancestors, there are countless ways in which the government restricts our freedom to produce and trade including minimum wage laws, rent control, occupational licensing laws, tariffs, union shop laws, antitrust laws, government monopolies such as those granted to the post office and education system, subsidies for industries such as agriculture or wind and solar power, eminent domain laws, wealth redistribution via the welfare state, and the progressive income tax.” (p. 114)

Some of these are things no serious economist would disagree with: We should stop subsidizing agriculture and tariffs should be reduced or removed. Many occupational licenses are clearly unnecessary (though this has a very small impact on inequality in real terms—licensing may stop you from becoming a barber, but it’s not what stops you from becoming a CEO). Others are legitimately controversial: Economists are currently quite divided over whether minimum wage is beneficial or harmful (I lean toward beneficial, but I’d prefer a better solution), as well as how to properly regulate unions so that they give workers much-needed bargaining power without giving unions too much power. But a couple of these are totally backward, exactly contrary to what any mainstream economist would say: Antitrust laws need to be enforced more, not eliminated (don’t take it from me; take it from that well-known Marxist rag The Economist). Subsidies for wind and solar power make the economy more efficient, not less—and suspiciously Watkins and Brook omitted the competing subsidies that actually are harmful, namely those to coal and oil.

Moreover, I think it’s very revealing that they included the word progressive when talking about taxation. In what sense does making a tax progressive undermine our freedom? None, so far as I can tell. The presence of a tax undermines freedom—your freedom to spend that money some other way. Making the tax higher undermines freedom—it’s more money you lose control over. But making the tax progressive increases freedom for some and decreases it for others—and since rich people have lower marginal utility of wealth and are generally more free in substantive terms in general, it really makes the most sense that, holding revenue constant, making a tax progressive generally makes your people more free.

But there’s one thing that making taxes progressive does do: It benefits poor people and hurts rich people. And thus the true agenda of Equal is Unfair becomes clear: They aren’t actually interested in maximizing freedom—if they were, they wouldn’t be complaining about occupational licensing and progressive taxation, they’d be outraged by forced labor, mass incarceration, indefinite detention, and the very real loss of substantive freedom that comes from being born into poverty. They wouldn’t want less redistribution, they’d want more efficient and transparent redistribution—a shift from the current hodgepodge welfare state to a basic income system. They would be less concerned about the “freedom” to pollute the air and water with impunity, and more concerned about the freedom to breathe clean air and drink clean water.

No, what they really believe is rich people are better. They believe that billionaires attained their status not by luck or circumstance, not by corruption or ruthlessness, but by the sheer force of their genius. (This is essentially the entire subject of chapter 6, “The Money-Makers and the Money-Appropriators”, and it’s nauseating.) They describe our financial industry as “fundamentally moral and productive” (p.156)—the industry that you may recall stole millions of homes and laundered money for terrorists. They assert that no sane person could believe that Steve Wozniack got lucky—I maintain no sane person could think otherwise. Yes, he was brilliant; yes, he invented good things. But he had to be at the right place at the right time, in a society that supported and educated him and provided him with customers and employees. You didn’t build that.

Indeed, perhaps most baffling is that they themselves seem to admit that the really great innovators, such as Newton, Einstein, and Darwin, were scientists—but scientists are almost never billionaires. Even the common counterexample, Thomas Edison, is largely false; he mainly plagiarized from Nikola Tesla and appropriated the ideas of his employees. Newton, Einstein and Darwin were all at least upper-middle class (as was Tesla, by the way—he did not die poor as is sometimes portrayed), but they weren’t spectacularly mind-bogglingly rich the way that Steve Jobs and Andrew Carnegie were and Bill Gates and Jeff Bezos are.

Some people clearly have more talent than others, and some people clearly work harder than others, and some people clearly produce more than others. But I just can’t wrap my head around the idea that a single man can work so hard, be so talented, produce so much that he can deserve to have as much wealth as a nation of millions of people produces in a year. Yet, Mark Zuckerberg has that much wealth. Remind me again what he did? Did he cure a disease that was killing millions? Did he colonize another planet? Did he discover a fundamental law of nature? Oh yes, he made a piece of software that’s particularly convenient for talking to your friends. Clearly that is worth the GDP of Latvia. Not that silly Darwin fellow, who only uncovered the fundamental laws of life itself.

In the grand tradition of reducing complex systems to simple numerical values, I give book 1 a 7/10, book 2 a 5/10, and book 3 a 2/10. Equal is Unfair is about 25% book 1, 25% book 2, and 50% book 3, so altogether their final score is, drumroll please: 4/10. Maybe read the first half, I guess? That’s where most of the good stuff is.

Free trade, fair trade, or what?

JDN 2457271 EDT 11:34.

As I mentioned in an earlier post, almost all economists are opposed to protectionism. In a survey of 264 AEA economists, 87% opposed tariffs to protect US workers against foreign competition.

(By the way, 58% said they usually vote Democrat and only 23% said they usually vote Republican. Given that economists are overwhelmingly middle-age rich White males—only 12% of tenured faculty economists are women and the median income of economists is over $90,000—that’s saying something. Dare I suggest it’s saying that Democrat economic policy is usually better?)

There are a large number of published research papers showing large positive effects of free trade agreements, such as this paper, and this paper, and this paper, and this paper. It’s hard to find any good papers showing any significant negative effects. This is probably why the consensus is so strong; the empirical evidence is overwhelming.

Yet protectionism is very popular among the general public. The majority of both Democrat and Republican voters believe that free trade agreements have harmed the United States. For decades, protectionism has always been the politically popular answer.

To be fair, it’s actually possible to think that free trade harms the US but still support free trade; actually there are some economists who argue that free trade has harmed the US, but has benefited other countries like China and India so much more that it is worth it, making free trade an act of global altruism and good will (for the opposite view, here’s a pretty good article about how “free trade” in principle is often mercantilism in practice, and by no means altruistic). As Krugman talks about, there is some evidence that income inequality in the First World has been exacerbated by globalization—but it’s clearly not the primary reason for rising inequality.

What’s going on here? Are economists ignoring the negative impacts of free trade because it doesn’t fit their elegant mathematical models? Is the general public ignorant of how trade actually works? Does the way free trade works, or its interaction with human psychology, inherently obscure its benefits while emphasizing its harms?

Yes. All of the above.

One of the central mistakes of neoclassical economics is the tendency to over-aggregate. Instead of looking at the impact on individuals, it’s much easier to look at the impact on aggregated abstractions like trade flows and GDP. To some extent this is inevitable—there are simply too many people in the world to keep track of them all. But we need to be aware of what welose when we aggregate, and we need to test the robustness of our theories by applying different models of aggregation (such as comparing “how does this affect Americans” with “how does this affect the First World middle class”).

It is absolutely unambiguous that free trade increases trade flows and GDP, and for small countries these benefits can be mind-bogglingly huge. A key part of the amazing success story of economic development that is Korea is that they dramatically increased their openness to global trade.

The reason for this is absolutely fundamental to economics, and in grasping it in 1776 Adam Smith basically founded the field: Voluntary trade benefits both parties.

As most economists would put it today, comparative advantage leads to Pareto-improving gains from trade. Or as I’d tend to put it, more succinctly yet just as thoroughly based in modern game theory: Trade is nonzero-sum.

When you sell a product to someone, it is because the money they’re offering you is worth more to you than the product—and because the product is worth more to them than the money. You each lose something you value less and gain something you value more—so you are both better off.

This mutual benefit occurs whether you are individuals, corporations, or nations. It’s a fundamental principle of economics that underlies the operation of markets at every scale.

This is what I think most people don’t understand when they say they want to “stop sending jobs overseas”. If by that all you mean is ensuring that there aren’t incentives to offshore and outsource, that’s quite reasonable. Even some degree of incentive to keep businesses in the US might make sense, to avoid a race-to-the-bottom in global wages. But I get the sense that it is more than this, that people have a general notion that jobs are zero-sum and if we hire a million people in China that means a million people must lose their jobs in the US. This is not simply wrong, it is fundamentally wrong; it misses the entire point of economics. If there is one core principle that defines economics, I think it would be that the universe is nonzero-sum; gains for some can also be gains for others. There is not a fixed amount of stuff in the world that we distribute; we can make more stuff. Handled properly, a trade that results in a million people hired in China can mean an extra million people hired in the US.

Once you introduce a competitive market, things get more complicated, because there aren’t just winners—there are also losers. When you have competitors, someone can buy from them instead of you, and the two of them benefit, but you are harmed. By the standard methods of calculating benefits and harms (which admittedly leave much to be desired), we can show quite clearly that in general, on average, the benefits outweigh the harms.

But of course we don’t live “in general, on average”. Despite the overwhelming, unambiguous benefit to the economy as a whole, there is some evidence that free trade can produce a good deal of harm to specific individuals.

Suppose you live in the US and your job is to assemble iPads. You’re good at it, you like it, it pays pretty well. But now Apple says that they want to “reduce labor costs” (they are in fact doing nothing of the sort; to really reduce labor costs in a deep economic sense you’d have to make work easier, more productive, or more fun—the wage and the cost are fundamentally different things), so they outsource production to Foxconn in China, who pay wages 1/30 of what you were being paid.

The net result of this change to the economy as a whole is almost certainly positive—the price of iPads goes down, we all get to have iPads. (There’s a meme going around claiming that the price of an iPad would be almost $15,000 if it were made in the US; no, it would cost about $1000 even if our productivity were no higher and Apple could keep their current profit margin intact, both of which are clearly overestimates. But since it’s currently selling for about $500, that’s still a big difference.) Apple makes more profits, which is why they did it—and we do have to count that in our GDP. Most importantly, workers in China get employed in safe, high-skill jobs instead of working in coal mines, subsistence farming, or turning to drugs and prostitution. More stuff, more profits, better jobs for some of the world’s poorest workers. These are all good things, and overall they outweigh the harm of you losing your job.

Well, from a global perspective, anyway. I doubt they outweigh the harm from your perspective. You still lost a good job; you’re now unemployed, and may have skills so specific that they can’t be transferred to anything else. You’ll need to retrain, which means going back to school or else finding one of those rare far-sighted companies that actually trains their workers. Since the social welfare system in the US is such a quagmire of nonsensical programs, you may be ineligible for support, or eligible in theory and unable to actually get it in practice. (Recently I got a notice from Medicaid that I need to prove again that my income is sufficiently low. Apparently it’s because I got hired at a temporary web development gig, which paid me a whopping $700 over a few weeks—why, that’s almost the per-capita GDP of Ghana, so clearly I am a high-roller who doesn’t need help affording health insurance. I wonder how much they spend sending out these notices.)

If we had a basic income—I know I harp on this a lot, but seriously, it solves almost every economic problem you can think of—losing your job wouldn’t make you feel so desperate, and owning a share in GDP would mean that the rising tide actually would lift all boats. This might make free trade more popular.

But even with ideal policies (which we certainly do not have), the fact remains that human beings are loss-averse. We care more about losses than we do about gains. The pain you feel from losing $100 is about the same as the joy you feel from gaining $200. The pain you feel from losing your job is about twice as intense as the joy you feel from finding a new one.

Because of loss aversion, the constant churn of innovation and change, the “creative destruction” that Schumpeter considered the defining advantage of capitalism—well, it hurts. The constant change and uncertainty is painful, and we want to run away from it.

But the truth is, we can’t. There’s no way to stop the change in the global economy, and most of our attempts to insulate ourselves from it only end up hurting us more. This, I think, is the fundamental reason why protectionism is popular among the general public but not economists: The general public sees protectionism as a way of holding onto the past, while economists recognize that it is simply a way of damaging the future. That constant churning of people gaining and losing jobs isn’t a bug, it’s a feature—it’s the reason that capitalism is so efficient in the first place.

There are a few ways we can reduce the pain of this churning, but we need to focus on that—reducing the pain—rather than trying to stop the churning itself. We should provide social welfare programs that allow people to survive while they are unemployed. We should use active labor market policies to train new workers and match them with good jobs. We may even want to provide some sort of subsidy or incentive to companies that don’t outsource—a small one, to make sure they don’t do so needlessly, but not a large one, so they’ll still do it when it’s actually necessary.

But the one thing we must not do is stop creating jobs overseas. And yes, that is what we are doing, creating jobs. We are not sending jobs that already exist, we are creating new ones. In the short run we also destroy some jobs here, but if we do it right we can replace them—and usually we do okay.

If we stop creating jobs in India and China and around the world, millions of people will starve.

Yes, it is as stark as that. Millions of lives depend upon continued open trade. We in the United States are a manufacturing, technological and agricultural superpower—we could wall ourselves off from the world and only see a few percentage points shaved off of GDP. But a country like Nicaragua or Ghana or Vietnam doesn’t have that option; if they cut off trade, people start dying.

This is actually the main reason why our trade agreements are often so unfair; we are in by far the stronger bargaining position, so we can make them cut their tariffs on textiles even as we maintain our subsidies on agriculture. We are Mr. Bumble dishing out gruel and they are Oliver Twist begging for another bite.

We can’t afford to stop free trade. We can’t even afford to significantly slow it down. A global economy is the best hope we have for global peace and global prosperity.

That is not to say that we should leave trade completely unregulated; trade policy can and should be used to enforce human rights standards. That enormous asymmetry in bargaining power doesn’t have to be used to maximize profits; it can be used to advance human rights.

This is not as simple as saying we should never trade with nations that have bad human rights records, by the way. First of all that would require we cut off Saudi Arabia and China, which is totally unrealistic and would impoverish millions of people; second it doesn’t actually solve the problem. Instead we should use sanctions, tariffs, and trade agreements to provide incentives to improve human rights, rewarding governments that do and punishing governments that don’t. We could have a sliding tariff that decreases every time you show improvement in human rights standards. Think of it like behavioral reinforcement; reward good behavior and you’ll get more of it.

We do need to have sweatshops—but as Krugman has come around to realizing, we can make sweatshops safer. We can put pressure on other countries to treat their workers better, pay them more—and actually make the global economy more efficient, because right now their wages are held down below the efficient level by the power that corporations wield over them. We should not demand that they pay the same they would here in the First World—that’s totally unrealistic, given the difference in productivity—but we should demand that they pay what their workers actually deserve.

Similar incentives should apply to individual corporations, which these days are as powerful as some governments. For example, as part of a zero-tolerance program against forced labor, any company caught using or outsourcing to forced labor should have its profits garnished for damages and the executives who made the decision imprisoned. Sometimes #Scandinaviaisnotbetter; IKEA was involved in such outsourcing during the Cold War, and it is currently being litigated just how much they knew and what they could have done about it. If they knew and did nothing, some IKEA executive should be going to prison. If that seems extreme, let me remind you what they did: They used slaves.

My standard for penalizing human rights violations, whether by corporations or governments, is basically like this: Follow the decision-making up the chain of command, stopping only when the next-higher executive can clearly show to the preponderance of evidence that they were kept out of the loop. If no executive can provide sufficient evidence, the highest-ranking executive at the time the crime was committed will be held responsible. If you don’t want to be held responsible for crimes committed by people who work for you, it’s your responsibility to bring them to justice. Negligence in oversight will not be exonerating because you didn’t know; it will be incriminating because you should have. When your bank is caught laundering money for terrorists and drug lords, it isn’t enough to have your chief of compliance resign; he should be imprisoned—and if his superiors knew about it, so should they.

In fact maybe the focus should be on corporations, because we have the legal authority to do that. When dealing with other countries, there are United Nations rules and simply the de facto power of large trade flows and national standing armies. With Saudi Arabia or China, there’s a very real chance that they’ll simply tell us where we can shove it; but if we get that same kind of response from HSBC or Goldman Sachs (which, actually, we did), we can start taking out handcuffs (that, we did not do—but I think we should have).

We can also use consumer pressure to change the behavior of corporations, such as Fair Trade. There’s some debate about just how effective these things are, but the comparison that is often made between Fair Trade and tariffs is ridiculous; this is a change in consumer behavior, not a change in government policy. There is absolutely no loss of freedom. Choosing not to buy something does not constitute coercion against someone else. Maybe there are more efficient ways to spend money (like donating it directly to the best global development charities), but if you start going down that road you quickly turn into Peter Singer and start saying that wearing nicer shoes means you’re committing murder. By all means, let’s empirically study different methods of fighting poverty and focus on the ones that work best; but there’s a perverse smugness to criticisms of Fair Trade that says to me this isn’t actually about that at all. Instead, I think most people who criticize Fair Trade don’t support the idea of altruism at all—they’re far-right Randian libertarians who honestly believe that selfishness is the highest form of human morality. (It is in fact the second-lowest, according to Kohlberg.) Maybe it will turn out that Fair Trade is actually ineffective at fighting poverty, but it’s clear that an unregulated free market isn’t good at that either. Those aren’t the only options, and the best way to find out which methods work is to give them a try. Consumer pressure clearly can work in some cases, and it’s a low-cost zero-regulation solution. They say the road to Hell is paved with good intentions—but would you rather we have bad intentions instead?

By these two methods we could send a clear message to multinational corporations that if they want to do business in the US—and trust me, they do—they have to meet certain standards of human rights. This in turn will make those corporations put pressure on their suppliers, all the way down the supply chain, to uphold the standards lest they lose their contracts. With some companies upholding labor standards in Third World countries, others will be forced to, as workers refuse to work for companies that don’t. This could make life better for many millions of people.

But this whole plan only works on one condition: We need to have trade.

 Who are the job creators?

JDN 2456956 PDT 11:30.

For about 20 years now, conservatives have opposed any economic measures that might redistribute wealth from the rich as hurting “job creators” and thereby damaging the economy. This has become so common that the phrase “job creator” has become a euphemism for “rich person”; indeed, when Paul Ryan was asked to define “rich” he stumbled over himself and ended up with “job creators”. A few years ago, John Boehner gave a speech saying that ‘the job creators are on strike’. During his presidential campaign, Mitt Romney said Obama was ‘waging war on job creators’.

If you get the impression that the “job creator” narrative is used more often now than ever, you’re not imagining things; the term was used almost as many times in a single month of Obama’s presidency than it was in George W. Bush’s entire second term.

This narrative is not just wrong; it’s utterly ludicrous. The vision seems to be something like this: Out there somewhere, beyond the view of ordinary mortals, there lives a race of beings known as Job Creators. Ours is not to judge them, not to influence them; ours is only to appease them so that they might look upon us with favor and bestow upon us our much-needed Jobs. Without these Jobs, we will surely die, and so all other concerns are secondary: We must appease the Job Creators.

Businesses don’t create jobs because they feel like it, or because they love us, or because we have gone through the appropriate appeasement rituals. They don’t create jobs because their taxes are low or because they have extra money lying around. They create jobs because they see profit in it. They create jobs because the marginal revenue of hiring an additional worker exceeds the marginal cost.

And of course they’ll gladly destroy jobs for the exact same reasons; if they think the marginal cost exceeds the marginal revenue, out come the pink slips. If demand for the product has fallen, if the raw materials have become more expensive, or if new technology has allowed some of the labor to be cheaply automated, workers will be laid off in the interests of the company. In fact, sometimes it won’t even be in the interests of the company; corporate executives are lately in the habit of using layoffs and stock buybacks to artificially boost the value of their stock options so they can exercise them, pocket the money, and run away as the company comes crashing to the ground. Because of market deregulation and the ridiculous theory of “shareholder value” (as though shareholders are the only ones who matter!), our stock market has changed from a system of value creation to a system of value extraction.

What actually creates jobs? Demand. If the demand for their product exceeds the company’s capacity to produce it, they will hire more people in order to produce more of the product. The marginal revenue has to go up, or companies will have no reason to hire new workers. (The marginal cost could also go down, but then you get low-paying jobs, which isn’t really what we’re aiming for.) They will continue hiring more people up until the point at which it costs more to hire someone than they’d make from selling the products that person could make for them.

What if they don’t have enough money? They’ll borrow it. As long as they know they are going to make a profit from that worker, they will gladly borrow money in order to hire them. Indeed, corporations do this sort of thing all the time. If banks stop lending, that’s a big problem—it’s called a credit crunchand it’s a major part of just about any financial crisis. But that isn’t because rich people don’t have enough money, it’s because our banking system is fundamentally defective and corrupt. Yes, fixing the banking system would create jobs in a number of different ways. (The biggest three I can think of: There would be more credit for real businesses to fund investment, more credit for individuals to increase demand, and labor effort that is currently wasted on useless financial speculation would be once again returned to real production.) But that’s not what Paul Ryan and his ilk are talking about—indeed, Paul Ryan seems to think that we should undo the meager reforms we’ve already made. Unless we fundamentally change the financial system, the way to create jobs would be to create demand.

And what decides demand? Well, a lot of things I suppose; preferences, technologies, cultural norms, fads, advertising, and so on. But when you’re looking at short-run changes like the business cycle, the driving factor in most cases is actually quite simple: How much money does the middle class have to spend? The middle class is where most of the consumer spending comes from, and if the middle class has money to spend we will buy products. If we don’t have money to spend—we’re out of work, or we have too much debt to pay—then we won’t buy products. It’s not that we suddenly stopped wanting products; the utility value of those products to us is unchanged. The problem is that we simply can’t afford them anymore. This is what happens in a recession: After some sort of shock to the economy, the middle class stops being able to spend, which reduces demand. That causes corporations to lay off workers, which creates unemployment, which reduces demand even further. To correct for the lost demand, prices are supposed to go down (deflation); but this doesn’t actually work, for two reasons.

First, people absolutely hate seeing their wages go down; even if there is a legitimate economic reason, people still have a sense that they are being exploited by their employers (and sometimes they are). This is called downward nominal wage rigidity.

Second, when prices go down, the real value of debt doesn’t go down; it goes up. Your loans are denominated in dollars, not apples; so reducing the price of apples means that you actually owe more apples than you did before. Since debt is usually one of the big things holding back spending by the middle class in the first place, deflation doesn’t correct the imbalance; it makes it worse. This is called debt deflation. Maybe we shouldn’t call it that, since the problem isn’t the prices, it’s the debt. In 2008, the first thing that happened wasn’t that prices in general went down, which is what we normally mean by “deflation”; it was that housing prices went down, and so suddenly people owed vastly more on their mortgages than they had before, and many of them couldn’t afford to pay. It wasn’t a drop in prices so much as a rise in the real value of debt. (I actually think one of the reasons there is no successful comprehensive theory of the cause of business cycles is that there isn’t a single comprehensive cause of business cycles. It’s usually some form of financial crisis followed by debt deflation—and these are the ones to be worried about, 1929 and 2008—but that isn’t always what happens. In 2001, we actually had an unanticipated negative real economic shock—the 9/11 attacks. In 1973 we had a different kind of real economic shock when OPEC raised oil prices at the same time as the US hit peak oil. We should probably be distinguishing between financial recession and real recession.)

Notice how in this entire discussion of what drives aggregate demand, I have never mentioned rich people getting free money; I haven’t even mentioned tax rates. If you have the simplistic view “taxes are bad” (or the totally insane, yet still common, view “taxation is slavery”), then you’re going to look for excuses to lower taxes whenever you can. If you specifically love rich people more than poor people, you’re going to look for excuses to lower taxes on the rich and raise them on the poor (and there is really no other way to interpret Mitt Romney’s infamous “47%” comments). But none of this has anything to do with aggregate demand and job creation. It is pure ideology and has no basis in economics.

Indeed, there’s little reason to think that a tax on corporate profits or capital income would change hiring decisions at all. When we talk about the potential distortions of income taxes, we really have to be talking about labor income, because labor can actually be disincentivized. Say you’re making $15 an hour and not paying any taxes, but your tax rate is suddenly raised to 40%. You can see that after taxes your real wage is now only $9, and maybe you’ll decide that it’s just not worth it to work those hours. This is because you pay a real cost to work—it’s hard, it’s stressful, it’s frustrating, it takes up time.

Capital income can’t be disincentivized. You can have relative incentives, if you tax certain kinds of capital more than others. But if you tax all capital income at the same rate, the incentives remain exactly as they were before: Seek the highest return on investment. Your only costs were financial, and your only benefits are financial. Yes, you’ll be unhappy that your after-tax return on investment has gone down; but it won’t change your investment decisions. If you previously had the choice between investment A yielding 5% return and investment B yielding a 10% return, you’d choose B. Now you pay a 40% tax on capital income; you now have a choice between a 3% real return on A and a 6% real return on B—you’re still going to choose B. That’s probably why high marginal tax rates on income don’t reduce job growth—because most high incomes are capital incomes of one form or another; even when a CEO reports ordinary income it’s really a due to profits and stock options, it’s not like he was paid a wage for work he did.

To be fair, it does get more complicated when you include borrowing and interest rates (now you have the option of lending your money at interest or borrowing more from someone else, which may be taxed differently), and because it’s so easy to move money across borders you can have a relative incentive even when tax rates within a given nation are all the same. Don’t take this literally as saying that you can do whatever you want with taxes on capital income. But in fact you can do quite a lot, because you can change the real rate of return and have no incentive effect as long as you don’t change the relative rate of return. That’s different from wages, for which the real value of the wage can have a direct effect on employers and employees. (The only way to have the same effect on workers would be to somehow lower the real cost of working—make working easier or more fun—which actually sounds like a great idea if you can do it.) The people who are constantly telling us that workers need to tighten their belts but we mustn’t dare tax the “job creators” have the whole situation exactly backwards.

There’s something else I should bring up as well. In everything I’ve said above, I have taken as given the assumption that we need jobs. For many people, probably most Americans in fact, this is an unquestioned assumption, seemingly so obvious as to be self-evident; of course we need jobs, right? But no, actually, we don’t; what we need is production and distribution of wealth. We need to make food and clothing and houses—those are truly basic needs. We could even say we “need” (or at least want) to make televisions and computers and cars. As individuals and as a society we benefit from having these goods. And in our present capitalist economy, the way that we produce and distribute goods is through a system of jobs—you are paid to make goods, and then you can use that money to buy other goods. Don’t get me wrong; this system works pretty well, and for the most part I want to make small adjustments and reforms around the edges rather than throw the whole thing out. Thus far, other systems have not worked as well; when we have attempted to centrally plan production and distribution, the best-case scenario has been inefficiency and the worst-case scenario has been mass starvation.

But we should also be open to the possibility of other systems that are better than capitalism. We should be open to the possibility of a culture like, well, The Culture (and if you haven’t read any Iain Banks novels you should; I’d probably start with Player of Games), in which artificial intelligence and automation allows central planning to finally achieve efficient production and distribution. We should be open to the possibility of a culture like the Federation (and don’t tell me you haven’t seen Star Trek!), in which resources are so plentiful that anyone can have whatever they want, and people work not because they have to, but because they want to—it gives them meaning and purpose in their lives. Fanciful? Perhaps. But lightspeed worldwide communication and landing robots on other planets would have seemed pretty fanciful a century ago.
Capitalism is really an Industrial Era system. It was designed in, and for, a world in which the most important determinants of production are machines, raw materials, and labor hours. But we don’t live in that world anymore. The most important determinants of production are now ideas; software, research, patents, copyrights. Microsoft, Google, and Amazon don’t make things at all, they make ideas; Sony, IBM, Apple, and Toshiba make things, but those things are primarily for the production and dissemination of ideas. Ideas are just as valuable as things—if not more so—but they obey different rules.

Capitalism was designed for a world of rival, excludable goods with increasing marginal cost. Rival, meaning that if one person has it, someone else can’t have it anymore. We speak of piracy as “stealing”, but that’s totally wrong; if you steal something I have, I don’t have it anymore. If you pirate something I have, I still have it. If I gave you my computer, I wouldn’t have it anymore; but I can give you the ideas in this blog post and then we’ll both have them. Excludable, meaning that there is a way to prevent someone else from getting it if you don’t want them to. And increasing marginal cost, meaning that the more you make, the more it costs to make each one. Under these conditions, you get a very nice equilibrium that is efficient under competition.

But ideas are nonrival, they have nearly zero marginal cost, and we are increasingly finding that they aren’t even very excludable; DRM is astonishingly ineffective. Under these conditions, your nice efficient equilibrium completely evaporates. There can be many different equilibria, or no equilibrium at all; and the results are almost always inefficient. We have shoehorned capitalism onto an economy that it was not designed to deal with. Capitalism was designed for the Industrial Era; but we are now in the Information Era.

Indeed, you can see this in all our neoclassical growth models: K is physical capital—machines—and L is labor, and sometimes it is augmented with N—natural resources. But these typically only explain about 50% of the variation in economic output, so we add an extra term, A, which goes by many names: “productivity”, “efficiency”, “technology”; I think the most informative one is actually “the Solow residual”. It’s the residual; it’s the part we can’t explain, dare I say, the part capitalism isn’t designed to explain. It is, in short, made of ideas. One of my thesis papers is actually about this “total factor productivity”, and how a major component of it is made up of one class of ideas in particular: Corruption. Corruption isn’t a thing, some object in space. It’s a cultural norm, a systemic idea that permeates the thoughts and actions of the whole society. It affects what we do, whom we trust, how the rules are made, and how well we follow those rules. You can even think of capitalism as an idea, a system, a culture—and a good part of “productivity” can be accounted for by “market orientation”, which is to say how capitalist a nation is. I would like to see someday a new model that actually includes these factors as terms in the equation, instead of throwing them all together in the mysterious A that we don’t understand.

With this in mind, we should be asking ourselves whether we need jobs at all, because jobs are a system designed for the production of physical goods in the Industrial Era. Now that we live in the Information Era and most of our production is in the form of ideas, do we still need jobs? Does everyone need a job? If you’re trying to make cars for a million people, it may not take a million people to do it, but it’s going to take thousands. But if you’re trying to design a car for a million people, or make a computer game about cars for a million people to play, that can be done with a lot fewer people. Ideas can be made by a few and then disseminated to the world. General Motors has 200,000 employees (and used to have about twice as many in the 1970s); Blizzard Entertainment has less than 5,000. It’s not because they produce for fewer people; GM sells about 3 million cars a year, and Starcraft sold over 11 million copies. Starcraft came out in 1998, so I added up how many cars GM sold in the US since 1998: 61 million. That’s still 3.28 employees per thousand cars sold, but only 0.45 employees per thousand computer games sold.

Still, I don’t have a detailed account of what this new jobless economic system might look like. For now, it’s probably best if people have jobs. But if we really want to create jobs, we need to increase aggregate demand. That most likely means either reducing debt or giving more money to consumers. It certainly doesn’t have anything to do with tax cuts for the rich.

And really, this is pretty obvious; if you stop and think for a minute about why businesses create jobs, you realize that it has to do with demand for products, not how nice the government treats them or how much extra cash they have laying around. I actually have trouble believing that the people who say “job creators” unironically actually believe the words they are saying. Do they honestly think that rich people create jobs out of sheer brilliance and benevolence, but are constrained by how much money they have and “go on strike” if the government doesn’t kowtow to them?

The only way I can see that they could actually believe this sort of thing would be if they read so much Ayn Rand that it totally infested their brains and rendered them incapable of thinking outside that framework. Perhaps Krugman is right, and Rand Paul really does believe that he is John Galt. Maybe they really do honestly believe that this is how economics works—in which case it’s no wonder that our economy is in trouble. Indeed, the marvel is that it works at all.

Schools of Thought

If you’re at all familiar with the schools of thought in economics, you may wonder where I stand. Am I a Keynesian? Or perhaps a post-Keynesian? A New Keynesian? A neo-Keynesian (not to be confused)? A neo-paleo-Keynesian? Or am I a Monetarist? Or a Modern Monetary Theorist? Or perhaps something more heterodox, like an Austrian or a Sraffian or a Marxist?

No, I am none of those things. I guess if you insist on labeling, you could call me a “cognitivist”; and in terms of policy I tend to agree with the Keynesians, but I also like the Modern Monetary Theorists.

But really I think this sort of labeling of ‘schools of thought’ is exactly the problem. There shouldn’t be schools of thought; the universe only works one way. When you don’t know the answer, you should have the courage to admit you don’t know. And once we actually have enough evidence to know something, people need to stop disagreeing about it. If you continue to disagree with what the evidence has shown, you’re not a ‘school of thought’; you’re just wrong.

The whole notion of ‘schools of thought’ smacks of cultural relativism; asking what the ‘Keynesian’ answer to a question is (and if you take enough economics classes I guarantee you will be asked exactly that) is rather like asking what religious beliefs prevail in a particular part of the world. It might be worth asking for some historical reason, but it’s not a question about economics; it’s a question about economic beliefs. This is the difference between asking how people believe the universe was created, and actually being a cosmologist. True, schools of thought aren’t as geographically localized as religions; but they do say the words ‘saltwater’ and ‘freshwater’ for a reason. I’m not all that interested in the Shinto myths versus the Hindu myths; I want to be a cosmologist.

At best, schools of thought are a sign of a field that hasn’t fully matured. Perhaps there were Newtonians and Einsteinians in 1910; but by 1930 there were just Einsteinians and bad physicists. Are there ‘schools of thought’ in physics today? Well, there are string theorists. But string theory hasn’t been a glorious success of physics advancement; on the contrary, it’s been a dead end from which the field has somehow failed to extricate itself for almost 50 years.

So where does that put us in economics? Well, some of the schools of thought are clearly dead ends, every bit as unfounded as string theory but far worse because they have direct influences on policy. String theory hasn’t ever killed anyone; bad economics definitely has. (How, you ask? Exposure to hazardous chemicals that were deregulated; poverty and starvation due to cuts to social welfare programs; and of course the Second Depression. I could go on.)

The worst offender is surely Austrian economics and its crazy cousin Randian libertarianism. Ayn Rand literally ruled a cult; Friedrich Hayek never took it quite that far, but there is certainly something cultish about Austrian economists. They insist that economics must be derived a priori, without recourse to empirical evidence (or at least that’s what they say when you point out that all the empirical evidence is against them). They are fond of ridiculous hyperbole about an inevitable slippery slope between raising taxes on capital gains and turning into Stalin’s Soviet Union, as well as rhetorical questions I find myself answering opposite to how they want (like “For are taxes not simply another form of robbery?” and “Once we allow the government to regulate what man can do, will they not continue until they control all aspects of our lives?”). They even co-opt and distort cognitivist concepts like herd instinct and asymmetric information; somehow Austrians think that asymmetric information is an argument for why markets are more efficient than government, even though Akerlof’s point was that asymmetric information is why we need regulations.

Marxists are on the opposite end of the political spectrum, but their ideas are equally nonsensical. (Marx himself was a bit more reasonable, but even he recognized they were going too far: “All I know is that I am not a Marxist.”) They have this whole “labor theory of value” thing where the value of something is the amount of work you have to put into it. This would mean that labor-saving innovations are pointless, because they devalue everything; it would also mean that putting an awful lot of work into something useless would nevertheless somehow make it enormously valuable. Really, it would never be worth doing much of anything, because the value you get out of something is exactly equal to the work you put in. Marxists also tend to think that what the world needs is a violent revolution to overthrow the bondage of capitalism; this is an absolutely terrible idea. During the transition it would be one of the bloodiest conflicts in history; afterward you’d probably get something like the Soviet Union or modern-day Venezuela. Even if you did somehow establish your glorious Communist utopia, you’d have destroyed so much productive capacity in the process that you’d make everyone poor. Socialist reforms make sense—and have worked well in Europe, particularly Scandinavia. But socialist revolution is a a good way to get millions of innocent people killed.

Sraffians are also quite silly; they have this bizarre notion that capital must be valued as “dated labor”, basically a formalized Marxism. I’ll admit, it’s weird how neoclassicists try to value labor as “human capital”; frankly it’s a bit disturbing how it echoes slavery. (And if you think slavery is dead, think again; it’s dead in the First World, but very much alive elsewhere.) But the solution to that problem is not to pretend that capital is a form of labor; it’s to recognize that capital and labor are different. Capital can be owned, sold, and redistributed; labor cannot. Labor is done by human beings, who have intrinsic value and rights; capital is made of inanimate matter, which does not. (This is what makes Citizens United so outrageous; “corporations are people” and “money is speech” are such fundamental distortions of democratic principles that they are literally Orwellian. We’re not that far from “freedom is slavery” and “war is peace”.)

Neoclassical economists do better, at least. They do respond to empirical data, albeit slowly. Their models are mathematically consistent. They rarely take account of human irrationality or asymmetric information, but when they do they rightfully recognize them as obstacles to efficient markets. But they still model people as infinite identical psychopaths, and they still divide themselves into schools of thought. Keynesians and Monetarists are particularly prominent, and Modern Monetary Theorists seem to be the next rising star. Each of these schools gets some things right and other things wrong, and that’s exactly why we shouldn’t make ourselves beholden to a particular tribe.

Monetarists follow Friedman, who said, “inflation is always and everywhere a monetary phenomenon.” This is wrong. You can definitely cause inflation without expanding your money supply; just ramp up government spending as in World War 2 or suffer a supply shock like we did when OPEC cut the oil supply. (In both cases, the US money supply was still tied to gold by the Bretton Woods system.) But they are right about one thing: To really have hyperinflation ala Weimar or Zimbabwe, you probably have to be printing money. If that were all there is to Monetarism, I can invert another Friedmanism: We’re all Monetarists now.

Keynesians are basically right about most things; in particular, they are the only branch of neoclassicists who understand recessions and know how to deal with them. The world’s most famous Keynesian is probably Krugman, who has the best track record of economic predictions in the popular media today. Keynesians much better appreciate the fact that humans are irrational; in fact, cognitivism can be partly traced to Keynes, who spoke often of the “animal spirits” that drive human behavior (Akerlof’s most recent book is called Animal Spirits). But even Keynesians have their sacred cows, like the Phillips Curve, the alleged inverse correlation between inflation and unemployment. This is fairly empirically accurate if you look just at First World economies after World War 2 and exclude major recessions. But Keynes himself said, “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” The Phillips Curve “shifts” sometimes, and it’s not always clear why—and empirically it’s not easy to tell the difference between a curve that shifts a lot and a relationship that just isn’t there. There is very little evidence for a “natural rate of unemployment”. Worst of all, it’s pretty clear that the original policy implications of the Phillips Curve are all wrong; you can’t get rid of unemployment just by ramping up inflation, and that way really does lie Zimbabwe.

Finally, Modern Monetary Theorists understand money better than everyone else. They recognize that a sovereign government doesn’t have to get its money “from somewhere”; it can create however much money it needs. The whole narrative that the US is “out of money” isn’t just wrong, it’s incoherent; if there is one entity in the world that can never be out of money, it’s the US government, who print the world’s reserve currency. The panicked fears of quantitative easing causing hyperinflation aren’t quite as crazy; if the economy were at full capacity, printing $4 trillion over 5 years (yes, we did that) would absolutely cause some inflation. Since that’s only about 6% of US GDP, we might be back to 8% or even 10% inflation like the 1970s, but we certainly would not be in Zimbabwe. Moreover, we aren’t at full capacity; we needed to expand the money supply that much just to maintain prices where they are. The Second Depression is the Red Queen: It took all the running we could do to stay in one place. Modern Monetary Theorists also have some very good ideas about taxation; they point out that since the government only takes out the same thing it puts in—its own currency—it doesn’t make sense to say they are “taking” something (let alone “confiscating” it as Austrians would have you believe). Instead, it’s more like they are pumping it, taking money in and forcing it back out continuously. And just as pumping doesn’t take away water but rather makes it flow, taxation and spending doesn’t remove money from the economy but rather maintains its circulation. Now that I’ve said what they get right, what do they get wrong? Basically they focus too much on money, ignoring the real economy. They like to use double-entry accounting models, perfectly sensible for money, but absolutely nonsensical for real value. The whole point of an economy is that you can get more value out than you put in. From the Homo erectus who pulls apples from the trees to the software developer who buys a mansion, the reason they do it is that the value they get out (the gatherer gets to eat, the programmer gets to live in a mansion) is higher than the value they put in (the effort to climb the tree, the skill to write the code). If, as Modern Monetary Theorists are wont to do, you calculated a value for the human capital of the gatherer and the programmer equal to the value of the goods they purchase, you’d be missing the entire point.