Truth Challenged Economics

Michael Brenner for VT

Economists claim their discipline is a science. If so, it is an odd one. For the deeper you probe its foundations, the shakier its superstructure looks.

Modern day economics is built on two convenient untruths. The first is the rationality of markets that, as modeled in the Equilibrium Market Theory (EMT), which has been dominant for a generation, presumes a systemic logic that precludes sharp breaks or excesses. The second, interlocking premise is that humans are utility maximizing animals who act in accordance with a calculated self-interest, which ensures those stable, rational markets. Both premises are at variance with observed reality. This incongruity has not prevented professional economists, almost unanimously, to promote fanciful theories that became ensconced in the thinking and behavior of central banks, regulatory agencies and Wall Street – as well as the AEA. So well ensconced that they survived the rude encounter with truth in the crisis of 2008 – 2009. That phenomenon reminds us that the age of dogmatic faith is not over. It is the objects of faith that have changed.

The predilection for single dimensional constructs of mono causal explanations is incompatible with truth seeking. There is no aspect of man in society that is otherwise. Neo-liberal economists are sociological monophysites. That is the heart of the matter. They believe that humans, and therefore society, has only one, unitary nature – that of calculating, narrowly self-interested economic man. Observation of the world around us tells us that this is untrue. Man and society have multiple natures. That is what makes them human.

Neo-liberal economists’ faith in their dubious premises leads them down a path that skirts reality. That is manifest in a doctrinal approach to crucial economic phenomena central to interpretations of real world conditions  – and, equally, to policies they guide.

Productivity is one of those subjects that bring out the worst in economists. They rely on statistics whose validity and value depends on the accuracy and completeness of the data fed into their models. Those models are suited to handle only ‘hard’ data; thus, either the relevant universe of data is kept methodology friendly or numerals are given to ‘soft’ data – based on assumptions. Those assumptions are often misleading or downright wrong.

Hence economists’ intellectual tergiversations in trying to prove the deductively derived ‘truth’ that the United States has the highest productivity in the OECD world, despite empirical evidence to the contrary. The question’s importance is accentuated by productivity being advertised as the linchpin of superior overall US performance relative to most of Western Europe – as exemplified by its canonical ‘super-flexible’ labor market. Alan Greenspan, a few years back in testimony before Congress, found himself in the awkward position of speculating that it had to do with the huge investment in information technology – even though he knew of no way to demonstrate that.  Thus, a crucial element of performance analysis was secreted in a high-tech mystery cult.  The most telling anomaly has been the US economy’s low productivity relative to several other industrial economies. Figures that measure it on an hourly or daily basis, in those very European economies whose performance is derided, point to markedly higher productivity over there. Finland and France are at the top of the table (yes, the self-indulgent, sybaritic French). This has been a sty in the eye of orthodox neo-liberals. So it was predictable that a theoretical ‘corrective’ would emerge to set the economic planets back into the preconceived alignment.

A purported answer to the puzzle was announced by apostles of orthodoxy whose doctrinal authority is threatened by the anomaly. Adversity is the mother of invention, so social psychology – of all things, is called in to resolve a dilemma of economic analysis. We are told that the discrepancy is due to generational differences in the make-up of the workforce.

The US economy employs more workers in their 20s and more over 55.  These workers, it is claimed, are less productive than those between the ages of 30 and 55. Voila – puzzle solved. Salvation for neo-liberalism. Except, do we know that the positive age/productivity correlations aren’t spurious? There is no reliable data on this. Understandably so. What methodology could allow us to track and calibrate how the net work output of one individual in an office or sales floor or consulting room or nursing station or fruit orchard compares to that of another with different age attributes? What methodology could include the effect on group output in those increasingly common settings where widget making is not the activity? This is not an analytical breakthrough. It is the most ingenious attempt to reconcile a dogmatic theory with inconvenient data since the Ptolemy devotees drew elaborate filigreed ellipses to account for Kepler’s empirical observation of the movements of celestial bodies.

One can offer an alternative hypothesis, just as credible on the evidence, that the US economy benefits from a workforce that includes comparatively large numbers of the energetic, enterprising young and the experienced, seasoned old. Looked at that way, real American productivity, adjusted to workforce demographics, does not rise to the high level of the overachieving economies, e.g. France. Rather it falls to the level of Greece and Portugal – upsetting numerous doctrinal apple carts along the way.

So what are we left with? Maybe the productivity rise in the US, unexceptional as it is, owes to the strong trend toward uncompensated overtime – whether among technical staff, clerical staff, middle managers, nurses, software writers, produce pickers or UPS deliverymen. This method of raising productivity has precedents.  The record of Pharonic pyramid builders was terrific; so too was Stalin’s during the forced industrialization of the Soviet Union in the 1930s. But unpaid extra time escapes standard statistical methodologies, so it is ignored as lacking economic validity. In addition, harping on exploitation is just not done in polite economic circles.

A Parable

Additional questions about the way economists appraise productivity jump to mind. One, where nominal productivity is increased by transferring non-quantified costs onto the consumer, how is this figured in the equation?; and two, why is ‘remedial’ economic activity that meets needs created by the failure of economic performance added, rather than subtracted from GDP?

Consider this.

Phase 1: A trip to Washington and other cities is planned. Ms. E calls United Airlines; the call is forwarded – after normal delay – to outsource phone center in India, operator cannot find flights desired because she (and whatever database she is accessing) is ignorant of the fact that 2 airports serve D.C.; 2 subsequent calls (to India and the Philippines) are needed before a reservation is made. E’s time lost = 3/4 hour. Economic statistics register a gain in productivity for United thanks to its lower costs and savings through under-trained, lower-paid staff. Do they register an economic cost for her time lost?

Phase 2: Aircraft is regional jet, despite flight distance of 1,300 miles. Seating configuration makes it impossible to work. United gains – in productivity and profits – from operating small aircraft at full (physically) capacity and paying staff in this subsidiary company less than they earned as employees of United proper. E’s work time lost and productivity diminished?

Phase 3: Arrival at gate, disembarking delayed 20 minutes because operator of ramp is busy at another gate; questioning confirms that staff have been cut and workload increased. Wait on ramp for hand baggage that could not be accommodated by small aircraft, additional 20 minute delay because one slim woman baggage handler cannot handle 3-tier wheeled cart and push it onto hydraulic lift. Several passengers, including Ms E, miss connecting flights due to delays. United has registered a further productivity and profit gain. How is the lost time of passengers registered?

Phase 4: Frazzled, rescheduled passengers buy alcohol and/or aspirin in immoderate amounts. Boost to GDP.  Later visit to HMO to check out chest pain coincidental to the agonized trip adds to HMO staff productivity and, via her co-payment, profitability. Contribution of last 2 to economy in real terms = zero. Ms E’s time and suffering?

Phase 5: Due to income lost thanks to missed flight, Ms E decides to do home repair by herself to save money. Go to Home Depot; inordinate time spent trying to find staff, items needed, and explanation of use.  Return trip because under trained staff gave misinformation. Economic statistics register rise in productivity for Home Depot and US economy.  Ms E’s costs are, I suppose, ‘externalities’ compensated for the psychic gain of feeling superior to the Europeans who – due to inflexible labor costs, and retrograde performance in learning the science of mass marketing – have experienced lower productivity growth in the retail service sector.

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Economic science is not without its uncertainties – and its mysteries. Several stem from difficulties in rendering service sector activity in standard measurement categories, especially the calculation of value added.

Consider the following.

Harry ‘X’ is an independent commercial artist. He receives a fee of $1,000 from an advertising outfit for work done on a pharmaceutical company ‘A’ ad aimed at consumers/patients that touts the virtues of a new prescription drug.  (Transaction 1). Harry ‘X,’ approaching 65, pays a health care advisor $1,000 to help sort out the 70+ brochure offers he has received in the mail for accessing the prescription drug benefit.  (Transaction 2). The health care advisor pays a financial consultant $1,000 as initial payment on preparing an investment plan for retirement. (Transaction 3). The financial consultant pays $1,000 to a Medicare licensed provider of residential care services for his mother who is a Texas resident. (Transaction 4). The facility pays its administrative staff $1,000 to submit a claim (along with others) for a matching amount to an intermediate private company (company ‘Z’) that is contracted by the state of Texas to make such distributions. (Transaction 5). Company ‘Z’ pays its administrative staff $1,000 to submit a claim for reimbursement (along with others) from the state of Texas. (Transaction 6). The state of Texas pays $1,000 to a private company ‘Q’ to administer a student loan program for students enrolled at the state university campuses. (Transaction 7). Harlan J, senior partner in ‘Q’, pays $1,000 to a stockbroker for purchase of equity in pharmaceutical company ‘A’ (Transaction 8).

Each of these transactions registers as an addition to GDP – using conventional statistical measures. The aggregate is substantial. But what has been the actual increase in national wealth? What value has been added to the economy by them?; to the national welfare? Individuals have received some services, but what is the real value of that good? If the transaction amounts had been $2,000 instead of $1,000, would that mean we had added twice as much value to GDP?; twice as much benefit to purchasers of services? Or are we taking the velocity of money as an exact measure of economic activity? Let us consider the implications.

Implication 1. A service sector organized to maximize transactions would be registering greater economic growth than one that minimized them to serve the same ends.  Therefore, the more inefficient the system, the wealthier the country would appear to be.

Implication 2. A national economy where these services were privatized would register markedly greater growth than one that concentrated them in more rationally organized, lower total cost public agencies.

Implication 3. The American health provision ‘system’ spends 45% more than anyone else as a fraction of GDP, this although 50+ million are without any or have only minimal coverage. This correlates with uniquely high velocity of money involved in transactions in the health services sector. What is the connection, in real terms, between the monetary value of those transactions, conventionally measured, and the provision of actual services to those in medical need? How accurate is the statement of GDP in the first place since a large fraction of it is measured in terms of money velocity?

Lessons

• In today’s modern world there is a presumption that academics and those other professionals who employ their ideas are committed to finding objective truth. It ain’t necessarily so.

• Academics, like all persons, are prone to groupthink reinforced by peer pressure. It is all the more pronounced when underpinned by the conviction that a scientific truth has been discerned. The tenacity of dogma has an affinity with the natural dynamics of social solidarity

• An elite group will be especially reluctant to let go of valued ideas whose discovery by recondite means places them on a higher plane that their fellow citizens. In other words, professional thinkers are not immune to status considerations.

• Truth is situational and circumstantial – not because there is no such thing as objective truth, but rather due to the flaws and limitations of individuals who most often placed higher value on things other than pure truth.