When economists lose the plot entirely and show their colours

When I started studying economics at University, I had a lecturer in microeconomics who, thankfully, was an antagonist of the mainstream micro mantra about perfect markets and their capacity to deliver optimal, efficient outcomes for all. She is no longer with us but her early teachings have stayed with me (thanks Kaye!). She used to say that the market was like a voting system where the votes were cast in dollars. The rich have more votes and can sway the outcome in their favour. At the extreme, they can deprive the poor of the essentials of life, yet mainstream economists, who recite the mantra in those textbooks, would claim that outcome was optimal and efficient because supply and demand interacted to determine a ‘market-clearing’ price. For those who resisted the socio-pathological tendencies that arise from a complete undergraduate program in mainstream (neo-liberal) economics, it was obvious that the narrative was a fantasy. The real world is nothing like the requirements that the textbooks specify before ‘markets’ deliver optimal outcomes. Deeper study, not usually, taught in standard, mainstream economics programs also allowed one to understand that when the ‘market’ is not as specified in the textbook (read the real world) attempting to engineer ad hoc shifts towards that ‘idealisation’ probably resulted in even worse outcomes. At any rate, application of ‘perfectly competitive’ theory is fraught. And that is before we invoke basic morality and human valuation. Unfortunately, events like Hurricane Harvey, bring out economists who think it is smart to apply these ridiculous textbook models and claim authority over the rest of the citizenry. All they achieve is that they utter venal garbage and shame on the media outlets who give them oxygen.

In the wake of Hurricane Harvey, which has devastated significant parts of Texas including the large city of Houston. When the hurricane was doing its work, I was thinking about how people, who have already experienced a massive decline in their economic fortunes over the last three decades in that area would cope.

I recalled a report published last year by the Kinder Institute for Urban Research at Rice University – Disparate City: Understanding Rising Levels of Concentrated Poverty and Affluence in Greater Houston – which showed that:

The poverty rate of Harris County, which surrounds Houston, rose from 10 percent in 1980 to 17 percent in 2014. That alone is a troubling trend, but equally concerning is the increasing tendency in the Houston area for that poverty to be highly concentrated …

It concludes that economic segregation is tightening its grip on Harris County and that the area’s neighborhoods are increasingly economically polarized. There is a declining number of middle-class neighborhoods in the region, and Greater Houston is experiencing an increasingly stark division between the “haves” and “have nots.”

The research found that:

1. “From 1980 to 2010, the percentage of high poverty census tracts in Harris County more than quadrupled to 39 percent.”

2. “Harris County’s percentage of high poverty census tracts is nearly double the national rate of 20 percent.”

3. “These high poverty areas largely supplanted areas that were considered middle class in 1980.”

4. “Nearly a third of Harris County’s census tracts transitioned from having low poverty rates to high poverty rates from 1980 to 2010.”

5. “income diversity is most likely to be found in areas of high poverty rather than in wealthier neighborhoods.”

Their results are supported by numerous studies of increasing poverty and income diversity following the GFC. The pattern they uncover is replicated on a national level in the US, although the increase in high-poverty census tracts in Houston is much higher than is occurring nationwide.

They showed that while poverty in Houston used to be an inner-city (black) problem, over the last three decades (particularly the last decade), the problem has spread out and once middle-class suburbs are now considered to be high-poverty neighbourhoods.

The problem is not necessarily due to the GFC because, Houston overall has been a growing economy. The problem, which is nationwide, is that the benefits of growth have been captured disproportionately by high income earners at the expense of other workers who have endured flat income growth for some years and increasing costs.

So, in that context, how would these increasingly impoverished neighbourhoods cope?

I also recall reading a ridiculous Op Ed published (to their shame) by the Australian Broadcasting Commission on January 24, 2014 – It’s not just the rich who benefit from free markets.

It was written by a member of the Institute of Public Affairs, which is one of those right-wing think tanks in Australia that publishes propaganda in support of government deregulation and privatisation to help capital increase its share of the national income.

I say ‘to their shame’ because the Op Ed was base propaganda and should not have been published by our national broadcaster as if it was educative material.

The article was attacking an Oxfam Report – Working for the Few – that had documented well, the way in which the wealthy in the World had captured a disproportionate share of the growth over the last 30 years and the consequent rise in inequality.

Oxfam had conjectured that:

This massive concentration of economic resources in the hands of fewer people presents a real threat to inclusive political and economic systems, and compounds other inequalities – such as those between women and men. Left unchecked, political institutions are undermined and governments overwhelmingly serve the interests of economic elites – to the detriment of ordinary people.

The IPA retort (published by the ABC) was that:

Free market reforms haven’t just made the rich richer – they have also spread economic opportunities and helped lift millions of people out of poverty.

The author claimed that if the Oxfam recommendations were ever implemented they “would be a recipe for continuing impoverishment of the many.”

The basic claim though was that:

In an unhampered, free-market economy, the distribution of income is wholly determined by the interplay of mutually beneficial market transactions between sellers and buyers.

Incomes are attained by selling goods and services to customers willing to pay for them, and suppliers who most closely meet the needs and desires of consumers are rewarded with revenues that more than cover production costs.

The resultant inequality, therefore, derives from the personal choices of the millions, or even billions, of participants in the market process.

Which is the sort of rubbish that appears in the microeconomic textbooks.

The presumption is that there is an “unhampered, free-market economy” or there should be. There is not and there never has been. That is a problem with this sort of narrative designed to hide behind ‘scientific logic’ but barely able to disguise its ideological intent.

I will come back to that.

With that background, I came across a Forbes article this week (August 27, 2017) – Hurricane Harvey Is When We Need Price Gouging, Not Laws Against It – written by one Tim Worstall.

In that article, we saw the mindless ‘free market’, immature undergraduate textbook narrative repeated at a time of massive human crisis. It was indecent to say the least. Moronic is too kinder a description.

British-born Worstall lists himself as a “Senior Fellow of the Adam Smith Institute” and his bio tells us that he stood as a candidate for UKIP (UK Independence Party) and has acted as its propagandist (“press officer”).

UKIP is a right-wing, socially conservative (homophobic etc) and racist (anti-immigrant) political party. Its political narrative came out of the right-wing elements of the Conservative Party and promotes the sort of damaging policies that Margaret Thatcher extolled. They are also into climate change denial,

So you know the mire that Worstall comes out of.

When I read the Forbes article I tweeted:

And children of poorer families to die of dehydration … among other social catastrophes. Idiocy by economists knows no bounds really …

This blog expands on that 132 characters.

Interestingly, if you click the original link to the article on the Forbes WWW site – https://www.forbes.com/sites/timworstall/2017/08/27/hurricane-harvey-is-when-we-need-price-gouging-not-laws-against-it/ – you will come up blank.

A search of the Forbes site for Worstall, lists all his articles to as far back as you want to go.

But the article in question is now gone! So who withdrew it and why?

The link I provided above came from the Google cache, which is beyond the control of Forbes. Was the deletion of the article from Forbes a reflection that even their lax editorial standards had found that the rantings of Worstall had gone too far and their corporate ‘brand’ was being threatened?

Just as the IPA article (cited above) intoned the ‘free market’ rhetoric, Worstall also tried to argue from the undergraduate textbook position that students are forced to rote learn even though they know that it is intrinsically a fairy tale (gone wrong).

His argument was rehearsed by several journalists who wanted the ban on price gouging lifted.

On his own blog, Worstall ran a heading in relation to responses he had received on his Forbes article “There’s an awful lot of people who don’t get economics you know” – he provided a link to the article just in case we had all missed it (that link is the original and finds a ‘dead’ page).

The point is not that we fail to understand microeconomic theory. We understand it very well.

The point is, rather, that what Worstall calls “economics” – and the ‘economic theory’ Worstall’s argument doesn’t relate to the real world at all.

To attempt to use the this undergraduate textbook theory as if it has anything to say about the real world and how we should deal with complex policy problems is intrinsically dishonest.

The ‘theory’ is a concoction designed to advance the ideological interests of the elites. It was formalised as an antidote to the growing attraction of Marxism in the C19th.

In the Forbes article, Worstall wrote:

Hurricane Harvey has hit Texas and is doing a great deal of damage to both life and property. Which is exactly when we need, positively desire, there to be price gouging, instead of the laws we have against it. The basic underlying economics being that we want whatever scarce resources there are to be applied to their most valuable uses. Further, we want to encourage the provision of more supply of them–both of these being the things which the price system manages for us. That is, allowing prices to rise in the aftermath of a disaster does exactly what we want to happen.

He then railed against laws in Texas that prevented ‘price gouging’ of items in short supply. He said that we should “thank” the
“price gougers … for the good work they’re doing”.

According to Worstall the “economics of this is really terribly, terribly, simple”. If a product is in short-supply, for whatever reason, then “rationing by price is always the efficient way of doing this”.

He used the example of how the Hurricane had knocked “out the municipal water supply, leaving people needing bottled water” and thus favoured suppliers of such water gouging the market by hiking the price to as high as the consumer would go to get hold of the water.

We die without water. Hence my tweet!

He considered the price gouging would then lead to companies “trucking bottled water from Louisiana to Texas” in search of the higher profits and so supply would increase.

He consider this market response would also work because:

We want people to use less of the scarce resource …

That is, Worstall was advocating a situation where there was less clean, safe drinking water available to sustain life to those who were unable to pay the higher prices.

That is “really terribly, terribly, simple” isn’t it.

And he thought laws against allowing this sort of price gouging to occur was:

… going much too far toward that equity and against that efficiency.

I checked his twitter feed and he had obviously been getting flack for his ridiculous stance.

The following image shows that he gave up arguing, resorting to attacking the questions for being loaded.

Typical.

A professor told me once when, as a student, I was pushing him on the real world consequences of the economic theory he was sprouting (as if it was knowledge) and its obvious disconnect with the data. that “when there is a conflict between the theory and the data, the data is wrong” (quote more or less).

These neo-liberal types also avoid scrutiny using the “do you beat your wife” defense. When cornered, they respond by saying ‘the question, sir, is loaded and assumes I was advocating beating my wife’.

No, the questions addressed to Worstall were different. Specifically, my tweet demanded to know whether he thought it was okay (“efficient”) for young children of poor families to be deprived safe drinking water because their parents did not have enough income to purchase it at the gouged prices.

By avoiding these actual, real world type issues, Worstall can just assert the immature undergraduate textbook conclusions as if they are some authority about the real world.

How do we deal with that view? Easy.

There is no such thing as a ‘free market’.

All these ‘markets’ that use prices to allocate resources are underpinned by highly unequal sets of endowments (the rich have more votes!) and a complexity of regulations, laws, and other constraints that work to reflect societal values.

There is nothing efficient about a person with a high income or stored wealth being able to corner the market for drinking water and then gouging consumers desperate for hydration.

High income earners or those with stored wealth always distort market outcomes because they have more ‘votes’. We would not tolerate an electoral system which openly (rather than implicitly) advocated giving votes out on the basis of income – a vote per dollar of wealth, say!

Why should a person with higher voting power in the market because of say inherited wealth (that is, they have done nothing themselves) be able to hydrate themselves and their children while poorer people with no voting power in the market are forced to do without?

This demonstrates that the concept of efficiency is loaded. What it means in the textbook version is that the allocation of resources via the price mechanism only generates so-called ‘normal’ profits, which are the return on capital that is just required to maintain the capital in that use.

Super-normal profits are not part of the efficiency story.

So what does Mr Worstall know about the structure of the water delivery market in the Houston and wider area? Are there any firms earning profits in excess of what is required to keep them in the water supply business?

Is there any capacity of firms to set prices in the Houston consumer market?

Do prices truly reflect the full cost of production – that is, do they fully include all external costs such as environmental costs?

If these (and more that I don’t have time to list) factors are not present, then what does Mr Worstall have to say about the second-best consequences of the Houston consumer markets?

In this blog – Defunct but still dominant and dangerous – I introduced the work of the late Kelvin Lancaster, who was an Australian economist who like many of my profession ventured to the US to graduate school because that was increasingly thought to be where it was at! Cultural and ideological cringe mostly.

In 1956 two economists (Richard Lipsey and Kelvin Lancaster) came up with a very powerful new insight which was called the Theory of the Second Best.

This was, in fact, a devastating critique of mainstream welfare economics and the type of reasoning that Worstall deploys.

You won’t hear much about the theory any more because, like all the refutations of mainstream theory, it got swept under the dirty neoclassical carpet and economics lecturers using homogenised, ideologically-treated textbooks continue blithely as if nothing happened.

In English, the Theory of Second Best basically says that if all the assumptions of the mainstream theory do not hold in a particular situation, then trying to apply the results of the theory in that case is likely to make things worse not better.

So “if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the ones that are usually assumed to be optimal” (Source).

This is very applicable to the use of the model of perfect competition which requires several assumptions to be valid (for example, perfect information, perfect flexibility of prices, perfect foresight, no market power being wielded by firms, workers or anyone etc) for the main theoretical insights (results) to have validity.

Virtually none of the required assumptions apply in the real world.

So if they do not then it cannot be concluded that it is efficient to price gouge in a market where the essential characteristics of the textbook model are not fully present.

It is “really terribly, terribly, simple”.

Economists often say that governments should try to dismantle real world “rigidities” (as they call them), which would include laws that prevent price gouging, so that they can move the economy closer (but not to) perfect competition – because in their fantasy world textbooks this is the ideal state.

The Theory of Second Best tells us that if you do not have that “ideal state” and you dismantle one so-called “rigidity” but leave others then you can make things worse off.

The other point is that often it is “better” for governments to introduce new “rigidities” to confront existing departures from perfect competition.

The point is that the theory of second-best destroys the capacity of the mainstream economists to use “perfect competition” models, as in Worstall’s case, as an authority in the policy debate. The text book models have no legitimacy in the policy domain.

That is why you won’t read much about it in the newspapers or other media where economic policy is discussed.

So even before we invoke moral or other value type judgements, it is unlikely that it is efficient to allow price gouging in this situation.

It is also unlikely to be efficient to deprive a significant proportion of the population access to essential goods and services when society has invested so much in them by way of early health care, schooling, and other resources.

But, beyond those arguments, we note that the view that the economy is somehow separate from us and sacrosanct denies our essential humanity.

Research shows that humans intrinsically think it is better to have collective outcomes.

Think about sport. It is a major aspect of our collective lives. Millions of people watch it, play it and obsess about it every week.

We talk about competition – one team outcompeted another! That competitiveness is the secret to good sporting outcomes.

But that perception is fraught. We organise and regulate sport to suppress competition or at least harness it so as to elevate equity to ensure it remains interesting and exciting.

The ‘free market’ doesn’t exist in sport. We would not tolerate sporting competitions being distorted year after year by moneyed interests being able to deprive less moneyed clubs/teams of resources that would render the competition meaningless.

Even in the so-called heartland of market competition – the US – the US sporting teams revenue share to ensure there is evenness. Draft systems, salary caps, constraints on engine specifications, sizes of golf clubs etc are all designed to keep the playing field level – or at least interesting.

Our basic propensities appear to be collective and cooperative.

Please read my blog – Humans are intrinsically anti neo-liberal – for more discussion on this point.

So to bang on as if there is a ‘free market’ operating as in the textbook is quite obscene when you consider the real world consequences of his suggestions.

In Houston, where poverty has increased dramatically in the last three decades, and where drinking water is now being sold by private sellers at ridiculously high prices, the incentives are there for people without means to compromise their values and steal or else suffer dehydration and negative health consequences.

Young children dying of dehydration is not an efficient outcome for a society.

It would also be an indecent outcome and reflects a value system that had been distorted by a socio-pathological tendency.

Conclusion

It is no wonder Forbes withdrew the article. Even within the spectrum of lunatic articles they feel free to publish, Worstall went too far.

He disclosed the tendency of those trained in economics to engage in anti-people logic and deploy these textbook models as if they are reality and authorities.

Fortunately, society has a habit of winning out when the chips are down and these sociopaths should just get back in their dirty box and refrain from uttering their obscene but also non-authoritative garbage.

And that is from a person with a PhD in economics who understands it as well as anybody.

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.