Saturday, May 5, 2012

The Origins of Orthodoxy

I’ve been thinking a lot recently about the differences that flow from whether you have an income or a wealth perspective on economics.  In a nutshell, an income perspective is concerned primarily with the production of new goods and services, the incomes that are generated by that production, and the employment it requires.  Roughly speaking, we can call it Keynesian.  The wealth perspective is oriented toward the preservation and expansion of wealth: the protection of existing wealth against the threat of default or its confiscation by taxes or inflation, and the accumulation of additional wealth through sufficient returns on financial investment.  I identify this orientation with orthodoxy.  Each is rooted in particular social interests, and each has been elaborated in the form of economic theories and rhetorical motifs.

In fact, the origins of macroeconomics, at least in the English-speaking world, belong to orthodoxy.  Why is this?  My speculation is that the key institution that structured how thoughtful people looked at the economic system back then, and the lens through which many still see it today, is banking.  Banks are nodal points in the economic network, and the banking system spans the economic system as a whole.  Banks are in a position to gage the economic health of a community, and the decisions made by bankers profoundly affect this health.  Before the advent of publicly collected economic statistics, not to mention the emergence of economics as a profession, banking was, along with tax collection, the only feasible basis for thinking about economic processes on a large scale.  Even today, it is one of the best.

Banks are in the business of wealth preservation and expansion.  It is not an aspect of what they do; it is everything.  To look at the economy through the eyes of a bank is to observe the impact of events and policies on wealth; it means being orthodox.  From a bank’s point of view, how could Argentina and Iceland, who have defaulted on debt obligations, possibly be regarded as more worthy than Brazil and Ireland, who have not?  national income data, which point to the benefits of default for future growth, would be an afterthought, perhaps off the radar entirely.

The irony is that a banker’s eye-view of the economy is indispensable.  It really is essential to see an economy as made up of interconnected balance sheets.  The best economic analysis from Keynes onward has been cognizant of this.  The problem is how to take this practical insight without being derailed by the banker’s attachment to wealth at the expense of incomes when the policies that promote them diverge.


Shag from Brookline said...

Out of curiosity on this:

"Banks are in a position to gage the economic health of a community, and the decisions made by bankers profoundly affect this health."

have there been detailed studies of how decisions made by bankers have a connection to FDIC, especially as the insured limits have increased over the years? Great wealth via multiple bank deposits can benefit from FDIC protections.

Bruce Webb said...

Peter it is not bankers as such, but the class they represent, which as you implicitly point out are property owners.

Orthodox economics had its origin in a time and place in which 'democracy' was quite literally a dirty word openly equated with 'mob rule' and where political participation was openly and constitutionally restricted to not just property owners but to certain rather arbitrary subsets of property owners. That time and place was of course Britain in the 18th and early 19th centuries.

After all even the Reform Act of 1832 did not transform Britain into a democracy nor even did the next two rounds of the Representation of the People Acts, in fact Britain did not obtain even manhood suffrage until 1918.

And orthodox economics just is a terrible fit with the utilitarianism 'greatest good' that underlies universal democracy. Yet since the roots of the former are in the classical 'liberal' and indeed enlightenment tradition they are forced to pay at least lip service to democratic liberty (except sociopaths like Caplan who would just eliminate democracy BECAUSE it is incompatible with classical economics).

The result is that, BC aside, the orthodox are forced into various forms of 'rising tide' arguments that hold that despite all actual evidence laissez-faire economics will deliver utilitarian greatest good outcomes. By magic. Until or unless renewed efforts to suppress ballot access succeed.

Not all capitalists are virulent racists, indeed by certain quirks in history investment bankers have been more the victims than the perps of systematic racism (hello Mr. Soros!). It is instead that our landed WASP aristocracy are in intellectual agreement with urban WASP industrialists and 'rootless cosmopolitans' alike that the biggest danger to society is in the end universal suffrage and political participation.

That is they are still in the mindset of Burke and 'Reflections on the Revolution in France', i.e. 'democracy' = 'tyranny'. Which I guess makes FDR Robespierre and Obama Bonaparte or something.

For example a lot of Ricardian arguments about Free Trade make perfect sense once you define 'national interest' and 'national wealth' in ways that explicitly discount majority 'rights' to zero. Because it all works out perfectly well for 'the people who matter'.

Peter Dorman said...

Bruce, you are largely right about British history. My take on ideology, however, is that there is a lot of interesting action between interest and belief. Between these two endpoints lies the realm of concept formation, theoretical elaboration, foregrounding and backgrounding, etc. In a loose way, I'm trying to sketch how orthodoxy traveled this route.

In the contemporary world I think it is also important to acknowledge that the fraction of the population more concerned with wealth than income includes many more than the rich. There is a popular base for this view among middle class retirees and even many mid-career well-off-but-not-rich who, rightly or wrongly, think their future prosperity depends more on their portfolio than their pay stubs. Of course, in political terms, the tiny population of truly rich carry more weight than this larger group; even so, it would be difficult for them to push their interests in somewhat democratic political system without a popular base.