Politics vs. Economics

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Mark of New Jersey

Mark is a Founding Editor of The League of Ordinary Gentlemen, the predecessor of Ordinary Times.

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10 Responses

  1. Avatar Koz says:

    That’s a very interesting subject about which lots can be said. Maybe here, maybe elsewhere.

    As it should be clear from some other comments I’ve made, I agree with FLG to the extent that progressive economic policy is bound to fail. But, the idea that economics is necessarily superior to politics is a bit problematic. I think both are downstream from culture, which puts an important asymmetry on FLG’s argument.

    Ie, the idea progressive economic policy is necessarily futile is only half the picture, in that you can’t have Left politics set economic policy and actually accomplish Leftist societal goals. The political process doesn’t control enough of reality to do that. But, it does control enough of reality to destroy the accomplishments of apolitical society. In fact, politics has done that quite often and continues to do it now.

    Therefore, it’s something of a mistake to say that financial forces ultimately win out. The capital base can be destroyed. It’s the culture which eventually wins.Report

  2. Avatar Fear and Loathing in Georgetown says:

    Kos:

    My point was more positive than normative. That economics is more powerful than politics, not that it’s better.

    Getting to a later point you made, and one related to the first part of my response. “it’s something of a mistake to say that financial forces ultimately win out. The capital base can be destroyed. It’s the culture which eventually wins.”

    That’s true, but politics destroying the capital base only proves that it is concerned about the short-term. No rational person destroys their capital base if they’re worried about the future. Further, the lack of production capacity is only going to make economic supply and demand a even greater motivator for human actions within the polity.

    I think the big flaw in the theory is not so much what you pointed out, but rather how we all understand policies and government. The market is always there. Policies and governments change. However, we never go without government. So, in some way it’s a false dichotomy. Although, as I wrote in the post, the market has a dynamism built-in. Governments and government policies are largely intended to be enduring, or at least somewhat persistent and static.

    Not sure that cleared anything up…Report

    • Avatar Koz says:

      I think your time-horizons points has some merit, but it probably needs to be fleshed out a little more concretely. Maybe it’s best to say that the macro financial situation governs the long term environment the political culture operates in.

      Even so, I stand by my assertion that both politics and finance are downstream from culture. That should be clear as we take a look at the levels of economic development across the nations.

      And, I’m not getting your false dichotomy point. The political culture is the place where we attempt to assert direct collective control over the nation’s resources (meant in the broadest sense). That’s pretty distinct from the nation as a whole.Report

  3. Avatar nadezhda says:

    I’m sorry. This is market fundamentalism at its over-simplifying worst.

    FLG’s initial occasion for outlining a “politics vs markets” theory, if I followed his post correctly, was his discussion of capital controls and why he’s opposed to the walk-back by international monetary theorists (including some inside the IMF and World Bank) of the absolutist position against capital controls. Serious economists are starting to acknowledge that an open capital account may not be, in all cases, the optimum policy, especially for emerging markets, which are often victims of the whipsaws of hot money flows. FLG sets up an artificial “economics” vs “politics” opposition, when we’re dealing with an asset (currency) which is created and backed by governments and the value of which is dependent on fiscal and monetary policies of said governments. There ain’t no such a thing as a “free market” in currencies that doesn’t involve government policies and politics. And the global capital markets have a time horizon measured in nano-seconds. So the short-term vs long-term distinction isn’t particularly helpful either.

    Now it’s true that attempts to defend an exchange rate that’s likely to depreciate are, in the not-so-long-run almost certain to be costly failures. So to that extent, yes, attempts to cushion fluctuations are eventually going to be overwhelmed by economic “fundamentals”. But what the relaxation of opposition by economists against capital controls is reflecting is the realization that there’s no particularly good reason to exclude any and all capital controls from the toolkit of macro-policy management. So the discussion among economists has moved to what types, in what circumstances, and how do they interact with the other macro tools. Personally, I think they should be limited to a stable regime of Tobinesque “sand in the wheels” controls for small open-economy emerging markets — Chile ran a reasonably successful system for some years that raised the cost, in a predictable fashion, of short-term capital inflows, and which provided some insulation for their exchange rate and interest rate policies. But regardless of where one comes out on the specifics, this is a discussion which is, IMHO, long overdue. The absolutist position so dominated the economics profession for the past few decades that anyone who even modestly questioned the consensus was engaged in a career-limiting gesture.

    But FLG didn’t stop with capital controls in applying his sweeping observations re “anti-market” and “pro-government” “progressive” politics versus the long-run truth of economics. He claims that attempts to interfere with the magic of price formation in the miracle of supply and demand meeting in the free markets are simply doomed to failure (and apparently short-term successes at moderating “fluctuations” will make matters worse in the long-run, though I’m not sure if he’s a pure Austrian liquidationist). Implicit in this formulation is the assumption that prices in asset markets reflect some sort of fundamental “value” that will eventually be reached at some sort of essentialist equilibrium price.

    Surely the bubbles and collapses of asset markets in the past few years have demonstrated just how distant that model is from the way asset markets really work. You don’t need to adopt Soros’ quite interesting “reflexivity” model in its entirety to have realized that asset markets by their very nature not only overshoot (on both up and down side) — the very fact of their overshooting changes the “fundamentals” on which a hypothetical equilibrium would be based. Market bubbles and crashes aren’t just benign fluctuations. They are crises precisely because they have enormous, and distorting, effects on the real economy, which push the real economy off of any trends consistent with the longer-term “underlying financial and economic forces” on which FLG seems to pin his hopes.

    FLG also ignores the fact that asset markets are, by their very nature, in important ways nothing but a set of rules (what constitutes an asset, how is it traded and where and by whom, how is it ‘stored’, how is its value realized, etc.). Those rules aren’t all devised and enforced by governments, but a very substantial portion of them are, starting with laws governing contracts, negotiable instruments, creditor rights, corporate governance, bankruptcy, etc etc. Because the markets depend on the rule sets in order to function, changes in those rules (even a relatively minor court decision among private litigants in Delaware) will change the incentives for market participants, which in turn will affect the operations of the markets, which in turn will affect the real economy. Governments also license financial markets and institutions, which btw is as much for the benefit of market players as to protect those who merely use their services. In the absence of government licensing and regulation, we tend to see the formation of private sector guilds or cartels that perform many of the same (self)-regulatory functions, but with a lot of anti-competitive behavior, barriers to entry, etc. So it’s not as if eliminating government regulation of financial institutions would eliminate “anti-market” rules — it’s just that the rule-making and enforcement would typically benefit, even more than is now the case with government regulation, those institutions with the most economic power, while still leaving the public with a mess to clean up when the inevitable financial crisis occurs.

    As we’ve learned to our intense pain over the past several years, the rules that affect market instruments, market structure and market participation produce incentives for practices, for both good and ill, that have a huge impact on where real economic activity is focused as well as on volumes, prices and risks. And it’s not just government rules that can shape incentives in perverse or dangerous ways — those devised by the market participants themselves, such as access by high-frequency traders to exchanges or the standards for collateral for credit derivatives or the “don’t break the buck” practices of money-market fund sponsors — can add gigantic tail risk or push market volumes or prices, both short-term and long-term, far away from anything justifiable in terms of “fundamentals”.

    So pace FLG, “anti-market, pro-government, or pro-regulation” aren’t the same things at all. Nor is “pro-market” either “anti-regulation” or “anti-government”. Even the “freest” of markets embody regulation; they depend heavily on government; they can’t function without a set of highly-complex, widely shared rules.

    Since we have to have rules, the real issues concern what those rules should be and how and by whom they should be enforced, in order to encourage the financial markets (1) to do a better job at their core economic functions of forming and allocating capital and intermediating savings while (2) reducing the frequency/probability of bubbles and crashes and (3) ensuring that when the inevitable crashes happen, that we won’t once again privatize the profits and socialize the losses. We had a set of rules (both government and private, including both written rules and customs and practices) that demonstrably did a catastrophic job on each of those three objectives. Surely we’re not doomed, in the name of free markets and the holy invisible hand, to having to just suck it up and live with a dysfunctional financial system! That’s theology, not economics.Report

    • Avatar Koz says:

      It seems to me that FLG’s response to me is probably better addressed to you. Ie, we can say that, in the positive if not normative sense, that political attempts to control foreign investment in their economy, especially capital outflows, tend not to work. In particular, it’s a mistake to think that capital controls, or any other kind of government intervention for that matter.

      What they can do is keep the public’s capital away from the bubble. Which is why it’s important to differentiate the purpose of government action between ensuring a fair marketplace and trying to build a safety net for lower socio-economic classes (and others!).Report

  4. Avatar Fear and Loathing in Georgetown says:

    nadezhda:

    You are reading things into my post that simply aren’t there. I don’t say capital controls are bad.

    And wrote “anti-market, pro-government, OR pro-regulation” because they aren’t the same things.Report

  5. Avatar gregiank says:

    I think Nade. has a fair point regarding seeing the separation between market and politics as oversold and artificial. Markets only exist in the context of laws, courts and regulations. Whatever gov there is always part of and influenced by the market.

    I think you are hacking away at a bit of strawman regarding the goals of liberal econ. Liberal policies are focused on a social safety net to protect people from the worst effects of market swings, not to protect them. Outside of that regulations are focused not on controlling the market but on trying to create a fair open market or on basic safety kinds of issues. Whats left is basically things like health care where many of feel has failed and will never work. There is no liberal push to control the market, just to soften the worst effects, especially on the most vulnerable.

    I suppose this is also the place to note the observation that in the long term we all die.Report

    • Avatar Koz says:

      I don’t think you’re making very much sense here Greg. Most of nadezhda’s comment was about government’s role in protecting the integrity of the marketplace. There is also, especially among liberals, the desire to use government as a buffer to protect people suffering too much at the vicissitudes of the market.

      It’s important to note that these are not the same thing, and confusing them is bad because if we are unclear about a program’s purpose, it’s difficult to evaluate its success (or failure).Report

  6. Avatar Fear and Loathing in Georgetown says:

    I wrote a long response to Greg and Nade. Rather than filling up this, I just posted over at my place:
    http://fearandloathingingtown.blogspot.com/2010/12/reactions.htmlReport