If You Decouple Accounting From All Allocation Concerns, You Are Not a Science

This is a relatively simple idea that can easily get lost in the shuffle of empirical work and variable correlations.

How we allocate real resources matters, not only in the total amount of "real resources", but also in relative allocations between industries and sectors. The broader historical trend has been people moving away from subsistence agriculture into a wide array of information services.

Establishment economics can be aware of these historical facts, and yet incredibly, completely fail to integrate them into meaningful analysis.  An economy that ran exclusively on entertainment advertising, and netflix shows, would not be a great one to live in.  Any necessities would be so commoditized so as to make our working lives meaningless, in the sense that we would have no impact on our own material well being, and we would be extremely dependent on benefits and transfers to ensure everyone could secure a basic lifestyle.

Economists love talking about output, growth, and trends, while completely glossing over larger allocation issues.  When they do address them, it is incredibly selectively.

The reason they do so is very straightforward, while neoliberal economists do not trust markets to manage the overall "balance" of the economy, so that we need either "stimulus" or "brakes", they almost universally completely defer to markets for issues of relative allocation and asset pricing.  Bubbles may be a problem, but not because they create massive capital misallocations into unproductive and socially negative activities, but rather because of the outward instability they cause in our bank account numbers.

If you can't see the issue with this level of thinking about the economy, it's really hard to trust you to deal with any real kind of crisis.  In a real crisis, we may have to shut down entertainment and advertising, mobilize massive amounts of people back into agriculture, manufacturing, or 

Talking about "slack", without talking about the proportion of the economy engaged in non-essentials, is a fools errand.  The irony is that the Covid economy is one in which we were supposed to keep essentials online, but essentials is precisely where and how we got supply chain crises.

And while we definitely do not want dictators, these are the kinds of issues that dictators can readily identify.  Often dictatorships end up being some kind of Elon Muskian horror show where it's about assuaging the petty ego of a megalomaniac who thinks they know everything, but at least if we assume a competent dictator, they wouldn't let people starve while half the economy worked on making blockbuster sitcoms.

We do not need a dictatorship to advocate for direct planning and coordination.  It does not even requiring suspending principles of market freedom and commercial autonomy.  You simply have to make the case for it, and allocate public resources to support that.

The underlying issue in contemporary economic thinking is what I call "abundance scarcity", ie, the paradox of thrift.  This is no paradox, but a simple case of economic gridlock caused by excessively fierce competition for an oversized pie.  This is not just on economists, because most of us tend to think about unemployment as a scarcity issue, not an issue of abundance, nevertheless, economists still often embrace "austerity", which really amounts to "passivity", despite whatever else they may be able to throw around in one liners about "lump of labor fallacy", "giffen goods", or the "lucas critique".

This is a common pattern in economics, instead of rethinking things from the ground up, they come up with a name for some tricky "exception", like they were training for the most boring game of trivia pursuit.  This leads to what I will now call the "summer's effect", where an economist hedges all possible outcomes as equally likely.

 If every rule is an exception, then what rule do you use to decide which exception to expect to overrule the previously accepted exemption?

At this point, you just aren't thinking about the problem clearly.

Markets are a process, not a magic wand

Markets don't automatically fix things, and there isn't some magical state for markets where they solve all problems.

Just like water works the same whether it's in a canal or a river, markets work the same whether they are regulated or a free for all. The process is just that, a process.  It can be guided, and yes, sometimes this guidance can have unintended consequences, but if you actually learn to talk about control theory and mathematical optimization, in the context of public value, then you basically never have to use the phrase "unintended consequences" again.

It would be interesting to satirize conventional economics with a board game, with  bad events such as "intertemporal budget constraints", or "unintended consequences" arbitrarily afflict the players.  Of course, monopoly was a satirical economic board game that has enjoyed amazing success, without really getting the message across.

 

Regardless, the one thing I will object to, is acting like empiricism is more scientific, because you use statistical techniques, which all they do is hide any real resource issues behind correlations.  Prices and aggregates serve to hide allocation issues, so you need a way to talk about allocation concerns more concretely than with strictly accounting variables like GDP, growth, interest, output etc. 

It is not too hard to go out and look directly at the economy.  This can be as simple as walking outside, and noting all economic activity and assets, or it can be as detailed as organizing economic activity by sectors and wealth by asset classes.  But this needs to be done with a critical eye, which is where the neoliberal economists tend to step back and just accept things at face value.  For example, it makes sense to criticize housing prices as being too high, or food prices as being too low.

Much of the "credit cost/interest rate" framework for managing aggregate economic activity, would make more sense if we still had old style banking and supply chains, where prices were local, shippers earned price arbitrage and not a service fee, and the financial system was not perpetually a propped up real estate ponzi scheme, then maybe lender of last resort would do something.

 

In the absence of the ability to use financial policy to manage price asymmetries and allocation concerns across sectors, the neoliberal economists may resort to policies like basic income.  Basic income has the benefit of allowing everyone to express their demand, but it unanchors the price level, because that income in unreciprocated.  This does not unconditionally imply inflation, but does make prices more sensitive to inflationary pressures.

I don't really buy the premise of controlling equilibrium rates, because I don't see economic problems as one of regulating "aggregate demand", but rather relative allocations.  If policy rates create some kind of equilibrium rate, then they are NOT effective, precisely because that leads to little distinction on where money should be allocated in the margin, except on the basis of financial returns.  Policy rates only make sense when you are extending credit to institutions on a discretionary basis, to stopgap rare liquidity crises.

 

Financial returns can be gained from intermediation that makes otherwise abundant and cheap resources scarce.  When these resources are also material essentials, this leads to working against ourselves.

Banking was never going to stay in the historical purgatory where as George Selgin calls it "competitive note issue".  Modern money is a stable system for domestic economies to engage in trade and commerce. We got here, we might as well enjoy the prosperity of a common currency.

Or we can keep hiking rates, pretending that a dollar isn't really a dollar, that the policy rate isn't just the interest we pay on the national debt, that banks and prices are still some kind of local trade system, and not a bunch of supply chains allocated toward specific goals.