The Autistic Intelligence of “Free-Market” Economics

28 12 2010

Autism: a disorder of neural development characterized by impaired social interaction and communication, and by restricted and repetitive behavior.  – Wikipedia.

Autistic Economics: a situation where one theory, that illuminates a few facets of its domain rather well, wants to suppress other theories that would illuminate some of the many facets that it leaves in the dark. – Post-Autistic Economics Network

The Problem: Markets are Incomplete as a Steering Mechanism

The received economic theory and embodied socio-biological system by which humanity lives today will not solve the larger ecological issue of our time, which is how do we live sustainably on this finite biophysical planet. A pricing system of ‘free markets’ coupled with an ideology of hyper individualism will now begin to extinguish not only human civilization, but much of the biosphere as well.

Such a system, so conceived, has led to unprecedented material welfare the world over, there is no doubt. Yet, it has been clear for some time that money-based free-market pricing is adaptive only moderately and in constrained situations. As recent economists such as Joseph Stiglitz and Nicholas Georgescu Roegen have demonstrated – for at least 50 years now – there is never a genuine, inter-generationally neutral valuation of resources, human time, merchandise, services etc that arises from money based prices. Even with some attempt to deliberately take into account buyer-seller asymmetry of information, cross subsidies, externalities, and monopolistic pricing and production – the four failures of markets to which the received economic theory admits – all prices and values are arbitrary. Georgescu Roegen calls prices “parochial.” The pricing system is not a reliable steering mechanism.

Individualism is a False God

More pernicious and troublesome to our human predicament today, however, is our collective, neurotic belief in individualism. I am talking in particular about American culture, where the individualist psychology creates a culture of predatory capitalism where exploitation of children, sick people, elderly, animals and the environment is considered routine and acceptable business practice. Historically, America has been the land of opportunity. People from all over the world have immigrated to it in order to leave the oftentimes oppressive, unfree and impoverished homelands of their ancestors; and to seek and build their own fortunes in this open, resource rich and “pro-business” nation state. What has transpired here over several generations, and now amplified by its apparent “triumph over communism,” is a self-perpetuating belief of constitutional libertarianism, that lives psychologically in practically every man, woman and child who grows up here.

This psychology, while in the past it may have served some “developmental” purpose, it is now completely at odds with the survival of our and other species of beings. In a nutshell, the nugget of American free market individualism, to which academic economists give lip service, is the lonely person whose view of life is strictly of self and self interest. His or her emotional, affective world is reduced to ego and egoistic advantage. His entire universe of feeling is reduced to, in the words of psychiatrist Trigant Burrow, “social adaptation in the light of personal and social gain.” All relationships, even intimate ones, are opportunities for self gain. In America today, pursuing one’s livelihood, engaging with others and with society is a solitary game of manipulation and exploitation.

Furthermore, as Burrow also identified, “in this artificial gauge of conduct measured by standards of personal advantage there has established in the individual a criterion of life that rests upon an unwarranted assumption of personal supremacy and absolute privilege.” “Each of us is an unconscious overlord striving to secure the supremacy of his own personality.” (p. 24…29?, Social Basis of Consciousness, Burrow) Through this neurotic distortion of life abetted by the American cultural belief in libertarianism there becomes this inflexible assumption of personal absolutism and autocracy. Every adult American is a petty tyrant. Each person is utterly self centered and autocratic.

It would be merely ironic, if it were not now catastrophic, that this orientation is emblazoned in a philosophy of political economy called “Neo-liberal” and “neo-classical” theory. This theory, espoused by such folks as Milton Friedman, Ronald Reagan, Alan Greenspan, Chicago economist and Nobel Laureate, Robert Lucas, the Bush/Cheney/Gerstner syndicate, even domestic terrorist Timothy McVeigh considers money and markets, coupled with extremely self-centered, sociopathic individuals to be a steering mechanism for society as a whole. It is social Darwinism dressed up as moral norm. Dog eat dog, trust is for fools, he who has the most toys wins, government is the problem, he who has the gold sets the rules, might makes right. What started with Reagan’s famous comment in 1980, “government is the problem,” climaxed in 2006 when Vice President Dick Cheney sneered, “So?!” when ABC correspondent, Martha Radditz pointed out that most Americans were against the war that his administration started.

At that moment, the Vice President of the United States needed no longer hide his contempt for democracy. His personal victory and ideological triumph were complete. His game plan was right in line with the hyper individualism, Social Darwinistic doctrine of our day: Get “elected” to office, pillage the public sector. When self interest is everything and public interest is a laughable nothing, then attaining absolute power and exploiting people by the millions is simply rational. By Cheney’s thinking, you would be stupid if you did not do this.[1] By the end of his term, 2008, the country was in ruins – overextended by adventurist war to the tune of trillions of dollars (to future taxpayers) per year, and freefalling into a financial collapse from which will probably take a century to recover. Needless to say, the reforms that will resolve this climax of the doctrine of self interest are beyond Cheney’s comprehension.

Not only is the external system of markets and money-calibrated exchange and investment incomplete, but the internal psychology of individualism is misguided, delusionary, and dangerous.

Markets Do Not Determine Right Scale

The free-market pricing system is not a generic problem-solving device that allows human culture to find a ‘natural dwelling’ in balance with the rest of the earth. Its ability to adapt human needs and physical options is adequate only in narrowly proscribed situations. It works in some places, but despite its widespread popularity among American economists and the American people in general, it is not going to solve our ecological problem of scale. Finding “right scale” – how big the human “footprint” should be – will not be achieved through the free-market system alone. Other forms of human communication and deliberation must be used as well (more here about this:   ) At best, the market as an economic mechanism is incomplete.

The classical/neoclassical theory of markets and prices, which has been operative since Adam Smith, has also been wrong about social inequality and poverty. But, as many have pointed out (such as Herman Daly), with steady economic – physical – growth over the past couple of centuries, the errors of the theory around inequality were mitigated. As long as everyone’s boats floated higher, it didn’t matter so much that inequality kept growing.

Now we are reaching the upper limits of physical impact that the human species can have on the earth. Over the next 40 years, if the human population doubles as demographers expect (see Exhibit 1), and these beings intend to attain a material standard of living equivalent to the USA (see Exhibit 2), there is no way this earth will sustain such a move without catastrophic alteration of itself. Nonetheless, with our free-market-pricing logic, we are driving headlong into this future.

Exhibit 1 Exhibit 2
Source: Angus Madison

CHARTS TO COME

By our conventional economic wisdom, particularly the free-market, money-calibrated pricing system, we will deplete all non renewable resources like oil and coal, and along the way, we will extinguish many if not most animal and plant species (so called “renewable resources”). A pricing system figures into this in only, as economist Nicholas Georgescu-Roegen would say, a “parochial” way.  No matter how scarce and therefore high priced these dwindling animate and inanimate things become, the simple fact of large numbers of human mouths will wipe them out. And, as an artifact of the money and market-priced system, ever-widening personal income disparities will generate some persons and corporate entities who CAN afford to purchase these very highly priced items.

To be clear, the intelligent and needed schemes, such as cap-and-trade systems or intergenerational equity schemes, are not strictly market systems, even though they may use markets for key parts of their process. In these systems, the upper limit of resource use, i.e. the right scale, is determined prior to the market process – by political debate and scientific consensus. The “cap” level is not a money-auction result. The cap quantity is, for example, the total amount of carbon to be allowed into the atmosphere; it is the total number of fish to be taken in one season; etc. These upper quantities are determined by stakeholders in deliberation. Rights to produce within that determined quantity is allocated by a market auction, but not the level itself. Strictly speaking, the process for managing resources with these schemes is outside of the so-called autonomous system of prices and interconnected markets. Thus, our “steering system” has extra-market devices and they are other than market competition.

The neo-liberal vision does not want to recognize this. It wants everything to be market driven.

Economy is a Communication Process and Markets Serve Only One Kind of Communication

The deliberation required to set and design the right scale of our human habitat is not widely recognized as categorically separate from the market process. Until this is recognized, and until the dynamics of that deliberative process are better understood and integrated with market activity, our world civilization will not have a generalized steering device concerning its economic actions. Indeed, the steering process we believe ourselves to possess – individualistic, self-serving action mitigated by competition – will make things worse. Prices and markets do perform adaptive functions here and there. But it is wrong to consider the pricing system as sufficient unto itself. Given the mandate to steer us collectively to right balance with the earth, the economic theory of free-market prices is glaringly inadequate. It won’t get us there.

Now, one of the virtues of the received neoclassical theory of economics (what I’ve been also calling the ‘traditional theory’ and ‘conventional wisdom’) is that it conceives itself as a communication system. This is true. Frederick Hayek wrote a wonderfully lucid piece in 1945 about how an economy of prices and free markets enables a society to manage its limited materials in the most adaptive and responsive way. Hayek’s statement as to how knowledge is used by and is distributed throughout society by thousands of independent budgetary decisions informed by market prices – a wholly decentralized process – is essentially a recapitulation of Adam Smith’s insight of the “invisible hand.”

Prices and markets perform an information processing function. What I am going to put forth in this essay is that markets are a specific instance and kind of communication, “information processing” device. Not only do we need other kinds of devices, but we need to articulate a broader, more general conception of communication in order to see new possibilities of a general steering device for spaceship earth and species being of homo sapien.

Communication and information processing is the solution to our ecological and social problems, to be sure. It is just not only with prices and markets. There is a more comprehensive manner of communication that will be the solution. In this essay, I attempt to articulate this more general conception of economy as a communication process.

Economics – both from theoretical and practical knowledge interests – needs a more comprehensive view of communication beyond the market and pricing system. This broader conception, as I will attempt to demonstrate, shows up most conspicuously (from the standpoint of traditional economics) as two new domains: the domain of intersubjective knowing among people (including science, deliberation of many kinds, culture, education, enterprise management, and so forth) and the domain of intrasubjective knowing – individual consciousness aka self consciousness, self actualization, etc. – as constituted in conversation.

Making this expansion of economics as communication requires an epistemological shift out of Cartesian duality toward what is being called a participatory epistemology. The characteristic of participatory knowing is that the awareness, whether individual or group, is part of a process of unfoldment. Objective detachment and rationality of the knower is never completely possible. There is always a quotient or component of indeterminacy, uncertainty, unconsciousness, and ambiguity. The individual person is sentiently dealing with a whole field of dynamically changing relationships with other persons and things. There is never an all knowing “God’s eye view” for the individual nor group. Any rational objective assessment that does happen, is more of a snap shot in time. Rational behavior in either markets or the broader economic process is not only “bounded” (as Nobel economist Herbert Simon suggests) but is only a stepwise, punctuated static fractal image, so to speak, of a much bigger chaotic, indeterminate and overdetermined process. How the human should “be” in this – including his or her action – will never be adequately conceived by a theory that subscribes to the Cartesian duality of subject-object. Cartesian duality, while valuable in many ways, is ultimately blind as a critical guidance of action in and engagement with the world. Another mode of awareness, complementary to the Cartesian mode, is needed. It is characterized as lucidity, intuitiveness, participation-in-process, non-duality.

The Solution: Conscious Economics

How we understand economy, at individual and collective levels, and in theory and practice, is what is critical for our finding our appropriate ecological footprint on the earth. Consciousness needs to be put squarely into it. Two critical aspects of consciousness here are the personal, which amounts to self observation and emotional maturity, and group, which amounts to cultivating a public receptiveness to pluralism, empathy and compassion.

The field of behavioral economics, although explicitly psychological, is not “conscious economics.” Too often, its unexamined intentions are how to get more productivity out of people; how to more cleverly market consumer goods to people; how to harvest capital gains in asset markets ruled by mob psychology; and so forth.

A conscious economics, stemming from a non-dual, participatory epistemology will lead to a completely reconstructed economy-ecology because it explicitly incorporates human intersubjective dimension (including how one shows up in conversation with others) as well as mindfulness of the individual, observing his or her own internal narratives and conversations. Once these interior depths and transpersonally emerged identifications are accepted into economy, then a much greater adaptability, power, and grace is possible.


[1] The Carlyle Group, Cheney and Bush’s investment firm, is one of the largest private equity firms in the world. Josh Kosman describes these firms as predatory. See “Private Equity: The Buy Out of America.”





The Insanity of Market “Efficiency” as Defined by Such Economists as Robert Lucas

29 07 2010

Bill Clinton based his impeachment defense on what he thought was a clever semantic argument. Whether he had sex with Monica Lewinsky all came down to how you defined the word “is.”

Some mainstream economists are also resorting to the “semantics” strategy in their defense of traditional ‘neo classical’ economics. Robert Lucas is a case in point.

In August of 2009, one year after the beginning of the US economic collapse, Nobel winning and Chicago economist, Robert Lucas defended economic theory in an invited article for the Economist magazine (August 6, 2009). In the article he was resolute that macroeconomic theory and in particular the efficient market hypothesis was well and good. Nothing was wrong — despite its utter failure in comprehending the collapse.

His was a spurious, quibbling argument and exposes the vacuousness and  impotence of mainstream economic thinking.

The thrust of his argument was that “we economists never claimed that we could predict when the market would turn. Therefore, we and our theory are off the hook.” Well, in fact, he and his kind of economists did claim that market changes were predictable. His whole life work was to make macro economic phenomena more mathematically analytical i.e. predictable. He even noted in the article how his colleague Mishkin was running models for the Fed in 2007 when the wheels were starting to come off the economy. What were they running mathematical models for if not prediction? Was it some kind of electronic game to idle away the hours of boring testimony from the various regional Fed-bank governors?

Lucas also defended the efficient market hypothesis of Eugene Fama (circa 1900) that

“the price of a financial asset reflects all relevant, generally available information.”

And he went on to say,

“The term “efficient” as used here means that individuals use information in their own private interest. It has nothing to do with socially desirable pricing; people often confuse the two.”

Lucas’ defense of the efficiency of the market – regardless of definition of efficiency – misses the point of the criticism of economics. The point of criticism is that the pricing mechanism is not sufficient by itself to efficiently allocate resources. Economists should know this. To simply defend economic theory by saying that prediction was never a promised component of the theory, is like an auto maker who makes a car without a steering wheel and then denies any responsibility for the inevitable injuries that result by saying that predicting when the car would crash was never part of the bargain.

An automobile manufactured without a steering wheel is categorically defective. The probability of crashing is 100%. To absolve oneself of blame because you cannot say when the car will crash, even though you know the answer with 100% certainty if it will, is pure deviousness.

The question was not when our economic system would crash, but if it would or not. It was clearly going to crash and it did. Lucas and economists of his ilk should have known this. Lucas seems to think that booms and bust, also called by economists, “the business cycle,” is just one of many sub-fields within economics, and one that he personally is not all that interested in. He seems to think that when everyone is making money, that the economy is simply “in equilibrium.” (for more on the fallacies of equilibrium-thinking and the efficient market hypothesis, see Eric Beinhocker’s excellent overview of a completely new direction in economics called complexity economics in “The Origin of Wealth.)

Lucas’ position is particularly galling when you further consider that his economic beliefs are of the positivist-mathematical school. His life work in economics has been the introduction of mathematical techniques and analysis in order to make economic phenomenon more predictable. By denouncing any culpability regarding the economic collapse and defending economic theory, by saying that prediction was never an objective of economic theory, is brazenly devious, incoherent and hypocritical. He at least has to admit that his mathematical and predictive bent in economics has been profoundly misguided and terribly wrong.

A few months prior to Lucas’ article, a bank in Southern California ordered the destruction of newly built tract homes. The homes weren’t selling and it was more “efficient” to the banks to destroy them than to try to find occupants.

These homes in part had patio covers, gazebos and fences made from old-growth redwood trees. “Old growth” trees are those that are older than 1000 years. Some trees are even 2000 years old. They were saplings at the time that Jesus walked on the earth.

Lucas pointed out in his article that his use of the word “efficiency” has nothing to do with what is commonly understood to be efficiency. In fact, Lucas’ notion of efficiency is the opposite of what most people consider efficient. That is, to Lucas, “inefficiency” is the common way to describe the market process.

The inefficiency that Lucas champions is to cut down 2000-year-old redwood trees, build homes that nobody wants, and within a year or less of construction, demolish the homes and bury the wood in the ground.

Lucas’ cherished “market efficiency” starts here.

Two thousand year-old redwood tree cut down in order to make patio covers for tract homes, that subsequently are torn down and thrown in landfill. In Robert Lucas’ world, this is the “efficiency” of capitalism and should be celebrated.

Capital intensive logging is more efficient according to economics conventions. Watch the following video clip, which makes my stomach turn. The equipment operator here makes $15 per hour.

The most efficient way of cutting trees is clear cutting. The above photo shows what the forest looks like afterwards.

From here, the wood is cut to into lumber and sold to developers.

Here is a news excerpt about what happened next. Note the remnants of the redwood trees in the background.

Tuesday, May 05, 2009

VICTORVILLE, Calif. (KABC)    http://abclocal.go.com/kabc/story?section=news/local/inland_empire&id=6797624

A bank in San Bernardino County decides to scrap homes instead of selling them, giving new meaning to the housing crunch.

The area was supposed to have 16 new homes in Victorville off the 395 in Bear Valley Road, but the homes never sold in the midst of the housing crash.  The bank that repossessed the property said that clearing the rubble instead of putting more money into the homes that hadn’t been completed was the cheapest fix.  Victorville residents like Brooke Bollinger have watched for weeks as a 16-unit neighborhood was flattened. Four completed model homes, along with a dozen homes still under construction, have been bulldozed in the last three weeks.

We have to stop listening to economists like Robert Lucas.





The Social Construction of Markets

22 01 2010

“Make a law, make a business”  – Old New Jersey Saying, according to C.A. Fitts

Contrary to what the ‘free-market’ enthusiasts believe, markets are deliberately created by people. They do not simply exist in nature, as some natural feature of the world.

Human beings constitute market places by making laws, rules, promises, commitments, standards, rights, group norms, contractual and property rights, etc.  They define acceptable behavior. There is always a legal-regulatory component to marketplaces, and it always precedes market activity. Conservatives don’t want to believe this.

Market constituting activity is categorically different than competitive buy-sell activity. Only then can a market function effectively.

Without the institutional structures, exchange among humans becomes lawless, theft, war. (For more on this thread, click here [link not active].)

One example of this is the Bail Bonds industry.  An NPR story reports:

According to the Justice Department, two-thirds of the people in the nation’s jails are petty, nonviolent offenders who are there for only one reason: They can’t afford their bail.

The reason that they can’t afford bail is because the Bail Bond lobby does all it can to make it hard for petty offenders to have any alternative but use bail bonds outfits.

The story details how hard it is simply to pay your own bail with your own cash at the county courthouse.

Structuring the institutional frameworks for markets to create artificial scarcity is widespread in our system.  I am cataloging this here [link not open].





Paul Volcker, “Not one shred of evidence…”

10 01 2010

From The Times December 9, 2009

One of the most senior figures in the financial world surprised a conference of high-level bankers yesterday when he criticised them for failing to grasp the magnitude of the financial crisis and belittled their suggested reforms.

Paul Volcker, a former chairman of the US Federal Reserve, berated the bankers for their failure to acknowledge a problem with personal rewards and questioned their claims for financial innovation.

As bankers demanded that new regulation should not stifle innovation, a clearly irritated Mr Volcker said that the biggest innovation in the industry over the past 20 years had been the cash machine. He went on to attack the rise of complex products such as credit default swaps (CDS).

“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” said Mr Volcker, who ran the Fed from 1979 to 1987 and is now chairman of President Obama’s Economic Recovery Advisory Board.

He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: “Is that a reflection of your financial innovation, or just a reflection of what you’re paid?”

Mr Volcker’s broadside punctured a slightly cosy atmosphere among bankers and regulators, assembled in a Sussex country house hotel to consider reform measures, at the Future of Finance Initiative, a conference organised by The Wall Street Journal.

Another chilling contribution came from Sir Deryck Maughan, a partner in Kohlberg Kravis Roberts, the private equity firm, who in the 1990s was head of Salomon Brothers, the investment bank.

He warned delegates that many of the flawed mathematical techniques that underpinned banks’ risk management approaches were still being used, saying that the industry had not “faced up to the intellectual failure of risk management systems, which are still hardwired into many banks and many trading floors”.

Sir Deryck also questioned whether it was right that taxpayers should continue to underwrite many of those risks: “There’s something wrong about large proprietary risks being taken at the risk of taxpayers. The asymmetry will not hold. I’m not sure we’ve thought about that.”

Earlier Baroness Vadera, adviser to the G20 — and an adviser to Gordon Brown during the banking crisis — had warned the world’s most senior bankers that continental lenders had yet to acknowledge the scale of their losses and bad debts. She said: “It’s not the UK banks that have to come clean, but some of the continental banks still have issues.”

She added that, contrary to City assumptions, the supposedly hardline French and German governments were more relaxed about leverage and liquidity constraints than Britain and America.

The former UBS banker said that she continued to have nightmares about how close the British banking system came to collapse last year.

She also warned bankers that the G20 process was “like herding cats” and that one of the main problems with the group of the world’s wealthiest nations was that they did not want to give up national sovereignty and co-ordinate their behaviour.

Meanwhile, George Soros argued that CDS should be banned. The billionaire investor likened the widely traded securities to buying life assurance and then giving someone a licence to shoot the insured person.

“They really are a toxic market,” he said. “Credit default swaps give you a chance to bear-raid bonds. And bear raids certainly can work.”





Alan Greenspan’s Mea Culpa

10 01 2010

On October 23, 2008, Alan Greenspan admits to Congress that his belief in free markets was mistaken.

Rep. HENRY WAXMAN (D), California: [October 23, 2008] You have been a staunch advocate for letting markets regulate themselves. And my question for you is simple. Were you wrong?

ALAN GREENSPAN: Yes. I found a flaw, but I’ve been very distressed by that fact.

Rep. HENRY WAXMAN: You found a flaw in the reality.

ALAN GREENSPAN: Flaw flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

Rep. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right.

ALAN GREENSPAN: Precisely. No, that’s precisely the reason I was shocked because I’ve been going for 40 years or more with very considerable evidence that it was working exceptionally well.

RON SUSKIND: You see Greenspan at the hearing table after the collapse, and you see a crushed man, really.

ROGER LOWENSTEIN: He said that the premise that you could trust the markets to regulate themselves was misplaced.

JOSEPH STIGLITZ: After almost two decades of public service, he realizes that the economic philosophy that he had pushed so hard, resisting regulation of derivatives he realized that there were some fundamental flaws in that whole philosophy.

JOE NOCERA: It was a pretty incredible moment that after a lifetime of faith in a certain way the world worked, that Greenspan would say, “I was wrong.”

ROGER LOWENSTEIN: It struck me as someone admitting that the core belief that had animated, you know, basically, a 20-year, 18-year career as Fed chief was wrong. It’s stunning, but it doesn’t undo the damage.

BARNEY FRANK:  That was a very important moment … comparable I think to [Secretary of Defense under Kennedy and Johnson] Robert McNamara’s confession of error with regard to the Vietnam War, because what Greenspan was saying was not simply that “I called that one wrong; this one I was off by X,” or “I miscalculated.” He was saying: “My fundamental approach was wrong. I thought that the market would be self-correcting. In my view, what happened was not supposed to be able to happen.” And that is very important, very profound, and will have a big effect, because as we go forward for the rest of this year, we are going to be adopting regulation now, which people like Alan Greenspan used to resist. Greenspan’s acknowledgement that the market is not as self-correcting as he thought is now going to be a very important piece of that argument. …

From the PBS Frontline documentary, The Warning:

TRANSCRIPT http://www.pbs.org/wgbh/pages/frontline/warning/etc/script.html

VIDEO HERE http://www.pbs.org/wgbh/pages/frontline/warning/cron/