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posted on 20 December 2015

Barter Thinking In A Money Economy: Part 1

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This essay was goaded by Terry Burnham's, All the Signs That Economics Is a Lost Field (evolutionary economics).

Burnham bemoans the abundant evidence that mainstream economic modeling -- and the resultant economic policymaking -- has lost its bearings vis a vis empirically visible economic reality.

By reviewing some of the 'facts' at the foundation of modern mainstream economic models and theories, we will see where the conventional wisdom is mal-informed, why it expects outcomes that do not happen, and why it is blind to catastrophic events that are building up in front of its ideologically blinkered eyes.

Ideology vs. Empiricism

With his Discourse on Method (1637), Rene Descartes convinced the intellectual gatekeepers at the Sorbonne to allow publication of his Meditations on First Philosophy (1641). In the Discourse, describing what would become known as the "scientific" method of pursuing reliably "true" knowledge, Descartes observed that despite centuries of the best minds working at solving the riddles of reality, disparate philosophical opinion was failing to converge upon "the truth" of any matter at all. Indeed, Descartes reported,

"there is nothing so strange and unbelievable as it has not been upheld by some philosopher."

In the absence of empirically based correction of philosophy from actual reality, we get strange and unbelievable "facts" serving as foundational pillars of the conceptual models that are accepted as "reality" by conventional wisdom.

Diverse premises yield divergent logical implications. Premises are observations or assumptions or beliefs about the nature and workings of reality. If you believe your premises are "true-to-reality", and if you are confident that your logic is sound, then you will rationally expect the logical consequences that follow from those conceptual starting points (premises) to unfold in actual reality.

Your premises and their logical implications become your conceptual model of reality: your understanding of what the world is made of and how it works. You cannot empirically "see" the future. Your expectation of future events is predicated on your rational understanding.

Postulate Science

Scientific premises are informed and corrected by empirical evidence; and their rational expectations are tested against and corrected by empirical outcomes. Empirical evidence is our experience of what actually happens in the real world. The scientific method starts by "believing in" observable reality, then works toward building up true understanding of how and why things happen in the real empirically visible world.

Science begins and ends in our real-world experience of actual reality. Scientific inquiry tries to understand "how reality works", in order to build technologies that incorporate true understanding into making those technologies perform as we expect them to.

Ideological Formulations

The ideological method works in the opposite direction. It begins with an image of a world that works as the ideology "wants it to work", then thinks up a set of starting points ("facts") and logical pathways that would produce that kind of world. Because it believes its conceptual model is "real", it believes its facts and their causal implications are real too. Ideological inquiry tries to understand "how the conceptual model works", in order to build policy recommendations that incorporate ideological understanding that expects the real world to perform as modeled.

Science vs. Ideology

Science begins with reality and works forward, trying to build a conceptual model of reality whose starting points and logical pathways "match" the empirically experienced unfolding of actual reality. Ideology begins with a conceptual model that it calls reality, then works backward: conjures up facts and cobbles together causal pathways that support its belief in the reality of its conceptual model.

When monetary, fiscal or economic policy fails to produce the predicted outcomes, the world is blamed for "working wrong". Or policymakers are blamed for "not doing it right". The truth of the foundational assumptions of the conceptual models is never doubted.

Economics, an Ideological Discipline

Despite the ready availability of empirical evidence to inform its conceptual models, economics remains largely a moralistic and faith-based discipline, rather than becoming a true social science. Economics blends disparate ideas about how the world "should" be, with observations of how the world "is". Moral opinions and mythical histories are presented as economic "facts", in describing how the world "is". The logic proceeds accordingly, from diverse "facts" down divergent logical paths.

Schools form around the various economic belief systems: the conceptual models that are held forth as economic reality. One or another of the schools gains the weight of authoritative opinion. Its premises and logic inform the conventional wisdom of the mainstream. Tentative belief in the truth of premises hardens into ideological certainty in the reality of "facts".

Time and familiarity lull the mainstream into seeing their models not merely as tentatively true, but as real. In the minds of economists, their models "are" the real world. Reality is then interpreted to conform to the model's logical expectations -- the world is accused of "not working as it should" -- rather than using the evidence of reality to correct the conceptual model.

In defense of that strategy, there is a normative aspect to social theories like economics. People reason and behave according to what they believe to be true about human nature, human society, individual and social purposes, and how human and social realities "work". "Leaders" try to get their people to believe in a better world: because if the people believe it, they will act better, and their actions will really make their world better.

As a moral and political exercise this strategy may be legitimate; as long as we don't confuse it with a truth-seeking social science that observes and describes the world as it "is", rather than describing the world as somebody thinks it "ought" to be.

But that is exactly what has happened.

Problem: There is Not Agreement What "Better" Actually Looks Like.

There is diametric disagreement among humans about basic values that define human purposes. "Humanity" pulls in every diverse direction toward every kind of strange and unbelievable purpose. Authoritative consensus produces a powerful incentive to conform one's mind with the consensus opinions. But at the bottom, we are individuals who make up our own minds about "my" beliefs, values and purposes, and we act accordingly.

Nonetheless, though some person's purposes might be either altruistic or self-serving, their understanding of the world guides their rational behavior in pursuit of those purposes. If their understanding is wrong, they will pursue paths that do not lead to where they want to be. Without judging the vice or virtue of the purposes, objective observation that informs scientific understanding can see "how" to get from here where you are, to there where you want to be. And it can see where malinformed choices are leading down paths you do not want to follow.

Though we exist as individuals, in important ways we live and act as societies. A rough political consensus -- or at least a battle and a victory by one side or another -- among social leaders decides which direction the society "should" strive toward.

Social sciences like economics are supposed to inform economic policymakers of the "means" of achieving their "goals". But if the authoritative economic consensus forms around ideological "facts" rather than around empirical realities, then the "experts" render themselves blind guides who live inside false models and can't see the real world destinations toward which they are guiding the economic policymakers.

Economic "Schools" of Thought

There is no consensus among economists, so they form into conceptual "schools" built around disparate sets of fundamental assumptions about what economies are made of and how they work. Almost all of the schools are confused because, since Adam Smith, mainstream economics has been modeling a utopian barter (trading) economy, rather than describing the real world buy-sell money economy that we actually live in; and that Smith actually lived in.

{In fairness to Smith, the modern image of Smith's free market village is a grossly oversimplified caricature of what Smith actually wrote. I am critiquing the present day beliefs and images that inform the caricature. So forgive me if I call the modern caricature "Smith's" barter economy.}

Adam Smith vs. Corporate Monopoly

Smith -- who saw himself not as an economist nor even as a political economist but as a moral philosopher -- envisioned his free market utopia as an ideal alternative to the actual political economy of 1776 Britain, which was State-corporate mercantilism, against which Smith makes a damning indictment in his opus.

Large seafaring (and conquering and colonizing) mercantile corporations like the British East India Company lobbied for and were granted monopolies by the British Crown -- the "councils of princes, nobles, and country gentlemen" who comprised the government and who shared in the booty by charging fees for corporate charters and collecting fines from unauthorized monopolists (mainly trade guilds). Lobbying is an ancient art.

From The Wealth of Nations, Book IV, Chapter I: Principle of the Mercantile System:

"Such as they were, however, those arguments convinced the people to whom they were addressed. They were addressed by merchants to parliaments, and to the councils of princes, to nobles, and to country gentlemen; by those who were supposed to understand trade, to those who were conscious to themselves that they knew nothing about the matter. That foreign trade enriched the country, experience demonstrated to the nobles and country gentlemen, as well as to the merchants; but how, or in what manner, none of them well knew. The merchants knew perfectly in what manner it enriched themselves. It was their business to know it. But to know in what manner it enriched the country, was no part of their business. This subject never came into their consideration, but when they had occasion to apply to their country for some change in the laws relating to foreign trade. It then became necessary to say something about the beneficial effects of foreign trade, and the manner in which those effects were obstructed by the laws as they then stood."

The purpose of monopoly, of course, is to gain market power and lock in profitability by eliminating price competition in the supply of essential and desirable goods and services. From The Wealth of Nations, Book I, Chapter X, Part II: Political Inequalities:

"It is to prevent this reduction of price, and consequently of wages and profit, by restraining that free competition which would most certainly occasion it, that all corporations, and the greater part of corporation laws, have been established."

In the last paragraph of Book IV, Chapter VIII: Conclusion of the Mercantile System, Smith writes:

"It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interests have been entirely neglected; but the producers, whose interest has been so carefully attended to; and among this latter class our merchants and manufacturers have been by far the principal architects. In the mercantile regulations, which have been taken notice of in this chapter, the interest of our manufacturers has been most particularly attended to; and the interest, not so much of the consumers, as that of some other sets of producers, has been sacrificed to it."

Adam Smith Forward to the Global Economy

It is the interests of domestic producers -- independent, entrepreneurial, scantly capitalized, owner/operated small and medium businesses -- that are sacrificed to the interests of capital intensive technologically sophisticated manufacturers, and large transnational corporate enterprises.

Domestic producers pay out the national earned income as their money costs. Importers bring in foreign-produced goods and export domestically earned money to pay for them. The national income gets spent out of the national economy paying for imports that monetarily enrich foreign producers and their income-earning workers. Importer nations get temporarily rich in foreign-produced consumer goods, but eventually become poor in money and productive capacity.

"Mercantilism" is the opposite strategy: the policy of exporting the nation's real economic output, to earn the income-money that was paid out by foreign producers.

It is not the exporting "nation" that earns the money. It is the exporting corporations that earn the money.

Mercantile lobbyists convince the government that the national interest is identical with the corporate interest. It is in "the national interest" that the real economic wealth produced by the resources and workers of the nation be exported, so that transnational corporations can get richer in foreigners' money.

To gain price advantage over the domestic producers in target nations, mercantilists suppressed their domestic costs of production. But it is the same pound or dollar that a company pays out as its "costs", that is the pound or dollar that is "earned" as "income" by domestic suppliers and workers. Mercantilism "redistributes" the national income, reducing the share that is earned by contributors to domestic production, in order to increase the share that is earned as corporate profits from foreign "trade".

Mercantilist Germany

Germany did this after the euro was implemented. The German government, industrialists and union leaders agreed to suppress German wages in order to become a goods-exporting, money-importing mercantilist powerhouse. By suppressing German wages, salaries and other producer costs, the mercantilist policy suppressed German consumers' earned incomes, which reduced the quantity of domestic and imported goods they could afford to buy with their suppressed incomes. Germans worked harder and earned less money, so they could buy less domestic and imported goods, so that German corporations could export "competitively priced" German economic outputs and get richer in foreigners' money.

But actually they were getting richer in "credit that is owed by debtors", not in "money". This is a distinction the catastrophic consequences of which we will see when we look at banking and the money system.

Smith championed the interests of competitive entrepreneurial small businesses and domestic producers for reasons like we have been discussing.

Human Enterprise

Human enterprise is resilient. Fiercely independent entrepreneurs do not want state support or state supervision of their economic activities. They are guided by their own lights, driven by their inner passions, willing to pay for and learn by their own mistakes, and staunchly resist "interference" in their affairs.

"Genius" -- like its close cousin madness -- exists inside the head of the single-minded genius, not in the concessions that become the consensus of a committee. Though entrepreneurs of course "want" to earn lots of money, they would rather be free and poor than controlled and rich.

And all the while talk has raged about "human enterprise" and "free markets", corporate power and state-corporate mercantilism were dominating real world "market economies".

Role of the Military

In the 1840s the British Royal Navy shelled Chinese cities to force their markets open to British opium dealers. Retired US Marine General Smedley Butler -- author of the 1935 pamphlet, War is a Racket -- characterized his long and illustrious career as, "high class muscle for Wall St; a gangster for capitalism."

It was not free market butchers, bakers and candlestick makers whose interests informed government foreign policy and who benefited from military conquest of foreign "markets". It was transnational corporations who lobbied for the policies and reaped the rewards.

The Great Moderation

During what economists called "The Great Moderation" beginning in the 1980s, the US government reduced or eliminated virtually all import tariffs and US transnationals moved US industrial production "offshore" to exploit cheap labor in producer countries and earn glamorous profits while selling low-cost, tariff-free, foreign-produced consumer goods to Americans at everyday low prices.

Unemployed Americans -- whose work had been offshored -- no longer earned incomes to pay for the cheap imports. So they piled up a mountain of mortgage and credit card debt to partake of the cheap consumer goods prices. But the 'great moderators' -- who model a competitive free market barter economy and have willfully blinded themselves to the arithmetically inescapable consequences of credit-debt imbalances -- saw nothing but blue skies and clear sailing in a future whose siren song was in reality beckoning toward bankruptcies and bailouts.

Now the transnationals are driving the TPP, TTIP and TISA through the legislative process, to elevate global corporate governance entirely beyond the reach of national legislators. Corporate tribunals will judge the validity of national laws, and levy punishing fines against any nation whose attempt at governing in the democratic interest of its citizens threatens to undermine expected future corporate profitability. This corporate coup is sold to the deluded nations as "free trade".

The Misinterpretation of Adam Smith

In 1776 Smith beheld the monopolistic corporate state and proposed a competitive free market as a "moral" improvement: a socially and economically "better way" to organize a national economy. Then, 65 years later, in 1841, Friedrich List published his National System of Political Economy, critiquing what he called "the popular school" that grew out of Adam Smith's Wealth of Nations. (Or rather, grew out of a misinterpretation of Smith.)

List begins with the observation that every nation that has historically developed its economy, has done so by explicit government policy and with overt government support for its nascent industries.

Immediately after the nation's founding in 1867, Canada's first Prime Minister, John A Macdonald, instituted a set of "National Policies" that supported the development of Central Canadian financial, commercial and manufacturing industries at the direct expense of US competitors and Canadian Prairie farmers and resource producers.

Smith harshly critiqued this kind of state-corporate collusion; but List celebrated it as the modus operandi of national economic development.

List described reality. Smith described a utopia of individual free enterprise and free exchange. The economics mainstream -- what has remained into our day "the popular school" -- models (a caricature of) Smith's utopia and teaches it as 'reality'.

State-chartered and State-sponsored corporate oligopolies remain dominant into our time: moreso now than ever. Commercial bank-issued credit and debt financially govern the economic world. But the economics mainstream and public opinion seem to believe the world once was really like Smith's utopian free market village, and essentially still is.

From these false assumptions flow a blood-dimmed tide* of false beliefs about what our economies are made of and how they work. We will visit that deluded worldview in the next installment.

(*Yeats, The Second Coming)

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