More generally, I find the idea expressed by Friedman – that the economy will tend toward a stable, long term equilibrium, perhaps oscillating in the short term – is often used by economists, but is rarely fully justified. It is merely assumed that the economy will behave this way, and any erratic behaviour – such as money illusion, and sticky wages/prices – can be dismissed as short term ‘noise’. However, seems to me that such an idea can only be sustained by sweeping potential problems under the rug. Indeed, this supposed ‘noise’ (a) could be more relevant to understanding the system than the equilibrium and (b) could have a permanent impact on the economy and therefore equilibrium itself.Unlearning Economics
The Myth of Neutral Money
Economic equilibrium is based on the assumption of near perfect markets in which imperfections are minor enough to be disregarded "in the long run," so that distortions are merely short terms phenomena that are correct by the operation of "natural laws."
Reality is characterized by imperfections that are far greater than assumed, and some those imperfections introduce a level of uncertainty that makes ergodic modeling idealistic rather than realistic.
There is nothing inherently "wrong" with idealistic modeling, which can be useful in understanding system by comparing and contrasting the behavior of different systems based on different assumptions and data. The mistake arises when idealistic models are confused with realistic ones.
For example, in the world imagined in idealistic economics based on equilibrium of perfect markets, efficiency and effectiveness are equated. That is to say the objective is efficiency, since economic efficiency is assumed to be most effective.
This is seldom the case in the actual world however, where individual, social, political and economic considerations are involved and economic considerations are not necessarily paramount, other than to vested interests. Then, it may be to the advantage of vested interests to conflate economic efficiency with general effectiveness, to the disadvantage of other interests.
I wouldn't say they're "imperfections". They're just an inherent part of a market economy.
ReplyDeleteThat's why the assumption of a (nearly) perfect market is unrealistic. Neoclassical and Austrians think that markets are close enough to perfect to be treated as such. Thus, the market state in which in efficiency = effectiveness. Even if that were true wrt to economics, it does not necessarily follow socially and politically, which is assuming or claiming a natural connection of economic liberalism based on market fundamentalism is disproved in practice, as shown by the requirement for a power structure to impose and maintain it through force if necessary. From this follows the rationale for regime change to replace "socialism" with economic liberalism in the name of democracy even when socialistic governments were elected democratically.
ReplyDeleteCredit money is NOT created ethically so it is by no means NEUTRAL.
ReplyDeleteNor, as George Soros points out in his "Theory of Reflexivity", is purchasing power creation via credit even STABLE since positive feedback exists for both credit creation and credit destruction.
F,
ReplyDeleteIt would BE stable if govt was making sure that it was provisioning the system appropriately for the net liability cohort to service the debts... there is nothing 'unethical' about this...
Of course this is hard to accomplish if your govt people think they are "out of money" and 'borrowing from the Chinese"..
rsp,
It would BE stable if govt was making sure that it was provisioning the system appropriately for the net liability cohort to service the debts... Franko
ReplyDeleteSure, during the bust. But how does one control price inflation during the boom without stifling genuine growth? Raising interest rates is a VERY blunt instrument. It kills or wounds both the tares AND the wheat. Wise taxation to destroy purchasing power selectivity is a possibility, I concede, but why not avoid the ill-creation of purchasing power to begin with? That's where ethics comes in as an indispensable component of proper purchasing power creation.
I agree with some commenters that the idea that real world 'imperfections' are somehow to blame for the economy being ideal is conceding too much ground to neoclassical economics. It's quite possible that all the interesting features of capitalism are absracted away by perfect competition: inventions, disequilbrium, etc etc.
ReplyDeleteInstitutions and culture are not 'barriers' to the economy functioning effectively: they define the economy, and there is no perfect ideal by which to judge how it 'should' be. The functioning of the economy is a political choice, and we can choose to have it fit our culture and history, and benefit everyone, or we can choose to impose rigid, unsuitable dogmas on it. Ideas like Friedman's are obviously in the latter category.
@ Unlearning
ReplyDeleteExactly. Market fundamentalism based on extremely reductionistic assumptions presuming methodological individualism excludes social relationship including cultural and institutional effects that shape human action in social groups.
Neoliberalism as a political theory of the market society is based on the assumption that methodological individualism is actually ontological individualism. So "it's every man for himself," expressed as individuals "rationally" pursuing maximum utility iaw a calculus of utility as the basis of econ.
From the POV, economic and political success is therefore grounded in individual's free choices, which are presumed to be coordinated by "the invisible hand." That is a theological assumption reminiscent of 18th century Deism, just as the economic concepts of "law" and "natural" are derived from 18th and 19th century physics.
This is bad philosophy and false "science." The idealized models don't work wrt to econ and result in havoc when used to formulate policy. It's secular religion, not science, and some religious fundamentalists try to connect their concept of theology with market fundamentalism through ontological individualism through the notion that God create men as free agents in all respect but His law.
Then the next step in the sleight of hand is concocting arguments showing that inviolable private property and the inviolable right to accumulate as much of it as one can is the fundamental of "natural law," reminiscent of medieval scholastic arguments showing how reason is in accord with revelation.
This is simply a repetition of past errors that hindered the progress of humanity due to ignorance and narrow self-interest.