Economics as Morality (A Response to “In the Long Run, Keynes is Dead”)

By: Park MacDougald

In a recent article for “Georgia Political Review,” entitled “In the Long Run, Keynes is Dead,” my colleague Rob Oldham spoke with Dr. Jeffrey Dorfman, a professor of Agricultural and Applied Economics at the University of Georgia and a frequent contributor to Forbes and RealClearMarkets. The gist of the article, like many of Dorfman’s personal writings, is clear: Keynesianism is a bunk, discredited theory; government spending cannot improve economic performance; and, in fact, government should do “nothing” to help its citizens, except for (perhaps) job-training in industries with labor shortages. The policy upshot is also clear – severe cuts in government spending, elimination of the welfare state, privatization of Social Security, and de-regulation, including in sectors related to the environment.

The analytic value of Dorfman’s assertions is a matter for debate. Most of what he asserts as basic fact is highly contested within the field of economics. For example, “Government has created the misconception that if they do not spend money, it would not get spent at all.”[1] This statement may be true or false – and we could probably line up all the Austrians, neo-classicals, Keynesians, neo-Keynesians, post-Keynesians, Marxians, and post-Marxians currently employed in UGA’s various departments into a circular firing squad to debate its merits. But here it is simply asserted ex cathedra as if no rational person could contest it, never mind the fact that this is precisely the fallacy that Keynes was originally attempting to debunk in the 1930s when he argued that in depressions, if governments do not spend money, nobody will. Of course, Keynes’ critique itself can be critiqued, and has been – by both left and right alike – but Dorfman proceeds as if Keynes had never even made his critique in the first place – ideas to the contrary are the result of government propaganda, not a rational reaction to the breakdown of the classical paradigm following the Great Depression.

Beyond questions of aggregate demand, Dorfman’s evidence for the failure of the stimulus – pointing to the coincidence of high unemployment, falling income, and increased poverty with increased spending – is such an elementary confusion of correlation with causation that the only two explanations appear to be an inability to understand or a deliberate desire to mislead. And given that Dorfman has a Ph.D in economics, the former seems unlikely. While I don’t want to turn this article into economic argumentation (or a long-winded defense of John Maynard Keynes), the point here is that the continued presence of unemployment or slow growth is not in itself a refutation of the effectiveness of the stimulus – things may not be good, but they could have been much worse if the government had not acted. If unemployment could have hit 12 percent, 7 percent unemployment is not a demonstration of failure. Again, the CBO report or the Blinder and Zandi paper can be legitimately critiqued. But Dorfman seems less interested in good faith argumentation than in providing boilerplate zingers for the already converted. His “argument” is less a serious engagement than something akin to saying that if one carries an umbrella out into the rain and still gets his shoes wet, the umbrella was a failure.

However, the real point here is not (only) to take Dr. Dorfman to task for his economic analysis. These economic arguments almost inevitably devolve into competing appeals to authority, as different economic traditions almost all claim to have, at one point or another, “refuted” the central tenets of their rivals. Hence Keynesians and Marxists rest assured that their respective gurus have decisively refuted Say’s Law, while the acolytes of Hayek consider their master to have performed precisely the opposite operation. Rather, what interests me here is how neo-classical, marginalist economics, despite its pretensions as a descriptive (as opposed to normative) social science, actually contains within it an entire ideological worldview, not only about how the world does function, but how it should function – a worldview that tends to eliminate politics as we typically understand it.

This is not a new assertion. After all, the early theorists of the free market Adam Smith, Thomas Malthus, and John Stuart Mill recognized that the questions of economics[2] – dealing as they did with the distribution of resources and surplus among the separate classes of society (capitalists, laborers, landowners) – were eminently moral and political. Who owns what, and how did they get it? How is surplus distributed, and why, and how should surplus be distributed, and why?

In time, this type of analysis – perhaps because of the difficult questions it posed – fell out of favor in academic economics. As the discipline took on a more mathematical and formalized character in an effort to establish its scientific bona fides, it sought to bracket questions of the moral and political. What chemist, after all, asks “is it right for Hydrogen to bond to Oxygen?” Modern neo-classical economics, at least in its introductory form, tends to omit these questions altogether. For example, in textbook form, economics applies to itself the banal description of “the study of how society manages its scarce resources” – a clinical, positivistic formulation, no conflict necessary. Politics and morals, in this reading, are not alien to economics – they can be added at the personal discretion of individual economists – but they are also not an inherent part of it. Central to this assumption is the conceit that the capitalist market can be cleanly separated as an object of study, without reference to its social and historical conditions of possibility, or the relations between individuals and communities in which it is embedded. It’s an idea that is in some sense compelling, especially in our current historical moment. With all the partisan bickering, misinformation, and nastiness that characterize domestic politics, there is an undeniable appeal of that which can claim to cut out the BS and deal, like Mr. Gradgrind from Hard Times, with “nothing but Facts.”

However, as Mike Beggs and Seth Ackerman have convincingly argued in Jacobin (using conservative economist and UGA textbook author Greg Mankiw’s essay “Defending the One Percent” as an example), separating politics from economics is not as easy as simply declaring it so. Despite its positivistic pretensions, economics does, in a very real way, provide obvious prescriptions for how the world should work, given its assumptions. In the standard theory, economists assume a utopia — a perfect free market, with no distortions from government policy, collective bargaining, taxation, spending, etc. In this world, everyone earns the marginal product of his or her labor – what Mankiw calls “compensation congruent with their contributions.” As Beggs and Ackerman argue:

“This is where the neoclassicals derive their moral-philosophical vision of society: they posit a quasi-metaphysical thought experiment in which our real-life capitalist economy is held up as merely a messy, imperfect copy of the perfect benchmark. Then they stipulate that we can never really deem anything in our own economy unsatisfactory (‘suboptimal’) without first showing that it results from some specific divergence from the fictional utopia. The logic of this move is impeccable: since the pure-market model produces optimal results on paper, those who claim our own society falls short must identify the specific impurity at fault. The same goes for wages, which must be assumed equal to marginal productivity — ‘congruent to contribution’ — unless a specific ‘distortion’ or ‘imperfection’ can be documented.”

Of course, it should be evident (and perhaps has been to anyone who has taken a freshman economics class) that this theory has a distinct ring of the normative to it. From here, it is a very short leap from “everyone earns what they contribute to the production process” to “everyone earns what they deserve,” full stop. If the market tends to “optimally” distribute resources based on contribution, that certainly sounds like a theory of justice – everyone gets what they put in. And that is precisely what Mankiw attempts to argue in his essay. Implicit in this is that political acts that redistribute income or subsidize certain industries are in a certain sense arbitrary and illegitimate incursions into an otherwise perfectly functioning ecosystem. They are aberrant incursions by the political into the purely scientific, something like a Freudian return of the repressed; they rupture the perfect unity and efficiency of the market, they produce distortions; sub-optimize results. And, as this perfect ecosystem is a utopia – existing in the heads of economists, but nowhere in the world – it is also non-falsifiable.

It’s easy to see how this moral theory gets translated into a political philosophy, and Dr. Dorfman’s worldview provides a perfect example. In Dorfman’s view, is (government spending is economically inefficient; redistribution prevents money from going where it normally would based on “contribution”), quickly slides into ought (therefore the government should not spend; it should not redistribute). In his writings for Forbes, Dorfman’s tone more closely approximates the titanic, good vs. evil clashes of a Ayn Rand novel than the nominally scientific shades of grey that characterize much academic economic writing. Everything is presented in starkly moral terms — government spending on employment does not simply trade expected future jobs for current jobs – it “steals” them. Keynesian economics are “fantasies” advocating “counterfeiting and theft.” With this sort of tone, it’s a wonder Dorfman doesn’t advocate having his more center-left colleagues thrown in prison – they are, after all, thieving fantasists – and what is the function of government in a Dorfmanite utopia other than to protect private property and enforce contracts?[3]

Among the many problems with this analysis is that it has a tendency to eliminate politics – at least democratic politics – from the equation. This is evident in Dorfman’s visible contempt for politicians. Oldham’s claim that, without government spending, “[the money] would have [still] been spent. Only, the spenders would have been ‘Joe the Plumber’ instead of ‘Joe the freshman congressman looking to bring home the bacon and get re-elected,’” displays a remarkable cynicism towards representative democracy. Bracketing for the moment the fact that current government dysfunction is a product of a radical cadre of freshman congressmen attempting to slash government spending, rather than expand it, this account accords no legitimacy to the fact that congressman are democratically elected and accountable to their electorates. Now, residents of Paul Broun, Jr.’s congressional district probably don’t need to be reminded that politicians can be stupid, vicious, and corrupt – of course they can. However, in this account, a democratic polity expressing its will to have a more equitable distribution of wealth, or security for the elderly in old age, or state support for the poor, is little more than the work of venal, self-serving politicians attempting to bribe the masses in order to secure their short-term political loyalty. The idea that a democratically elected government might attempt to make the lives of its citizens better – at the behest of its citizens – is eliminated from consideration; its very legitimacy as an act is called into question. It is perhaps no surprise, then, that one of Dorfman’s intellectual heroes, Vilfredo Pareto,[4] embraced Mussolini’s fascism in the later years of his life as an antidote to parliamentary democracy’s tendency to distort economic rationality. This is not uncommon – F.A. Hayek, another intellectual titan of the free-market right repeatedly expressed preference for capitalist dictators, no matter how bloody, over democratic governments whose economic policy tended to impede the functioning of the market.

All this being said, I don’t mean to merely tut-tut Pareto & co. for insufficient respect for parliamentary democracy. It should not be a surprise, as, in a certain sense, as it is a logical extension of the political philosophy inherent in orthodox economics. This is not to say that this political philosophy tends towards dictatorship (it tends more towards technocracy) – dictatorship and violence only become necessary in specific historical conjunctures. But by taking as an analytical starting point a purely theoretical free market utopia, where everything would function perfectly[5] minus the meddling of politicians, the state, etc., it is only natural to want to eliminate this meddling so that the system can function as it should. For this same reason, some typical liberal arguments for redistribution – take John Rawls’ veil of ignorance, for example – tend to come across as, philosophically speaking, relatively thin gruel. If one accepts the basic tenets of the market system – private property, free exchange, etc. – as just, then why should we not accept its results, especially if it tends to fairly distribute surplus to people in proportion to what they deserve? Other standards of “fairness” seem, to a certain extent, arbitrary and capricious. Perhaps some things may be politically unacceptable – child labor, the elderly starving in the streets – but what entitles the government, or my fellow citizens, to what I have earned? Who gets to decide what is “fair” and what isn’t? Some bureaucrat?

For this reason, I think it’s crucial to re-introduce even a rudimentary version of Marx’s critique of capitalism into the mainstream conversation around justice, equity, and the role of the state and the market. This does not mean a demand for communism, the abolition of private property, or a dictatorship of the proletariat. But it does mean taking his ideas seriously, and that his criticisms, properly understood, remain as valid today as they were when initially formulated in the mid-19th century. There’s obviously not enough room in this article to give a full or fair articulation of his thought, but in relation to what has been discussed above, I do want to present one crucial idea of his in a very simplified form.

If marginalist economics tends to analyze capitalism in terms of a theoretical market (as Ayn Rand was fond of calling it, The Unknown Ideal), governed by absolute and universal rules, Marx takes, from the beginning, the opposite path. As Beggs and Ackerman note, with regards to Marx’s “critique” of political economy:

“Marx meant the word in the Kantian sense of exposing the conditions of its existence.[6] He set out to show that the relationships of economic variables in modern capitalist society were immovably grounded in underlying social relationships. They were not eternal or logical, but historically specific and inherently political.”

That is to say, capitalism is decidedly not something theoretical or immutable – it is something that exists in the world, assuming different forms contingent upon the societies in which it emerges. It is historical – there was a time before capitalism, and, if only because the Sun will eventually expand to terminate all life on Earth, there will be a time after capitalism. Moreover, it is a social relationship. It is a political creation of humanity, not something that exists outside of it. It does not spring into the world of its own volition; it is contingent on innumerable social and historic developments: the social division of labor; the emergence of surplus; the appearance of a medium of exchange (money) to facilitate trade; technological and infrastructural advancement sufficient for long distance transport of goods and people; private property rights, and political entities (usually nation states) with the power to enforce those rights; the society-wide extension of a system of wage labor (as opposed to working for one’s own consumption); an ideological belief system which legitimates this entire structure (think Protestant work ethic); and, since the 17th century, a hegemonic nation with control of the seas that can hold the international system together. Marx argued that our social relations tend to become “thingified”[7] to us – that is, we see them as things, existing objectively in the world outside of us, and outside of our control, when in reality they are our own creations – expressions of our relations to each other. The key is to recognize this. Things like economics, capitalism, and the free market – these can never exist outside of social, political, and moral relations, as they are themselves social, political, and moral relations.

What should be taken away from this is not that mainstream economics is “wrong” – it actually does do a pretty good job of explaining the functioning of the market, Black-Scholes notwithstanding. But, as a political philosophy, or a theory of justice, it is hopelessly out of its depth. To use an extreme example, take a poor, illiterate worker in need of a wage to feed himself. He may, due to his necessity, sign a contract – under his own free will – in order to perform some menial task under horrendous conditions for low pay. From an orthodox economic perspective, this is just. The worker is compensated exactly what he contributes to production process – in this case, due to his lack of skills, not very much. It’s also a voluntary exchange. Presumably, neither party would agree to it if the end result did not make them both better off. This is not “wrong,” but it tells us nothing. Why does the worker have no skills? How did the employer come to possess wealth sufficient to begin hiring others? What were the different social and economic conditions into which the two were born? What is the political entity that guarantees their contract, what is its history and how did it come into being? Why does the worker accept his condition? How does the employer accept that it is just? Why is there one class of people who works for other, and another class of people who own things, and hire other people to work for them?

This line of questioning may seem naïve, but it is not. After all, as Americans, we live in a political order that was made possible only by the genocide of the former residents of this continent and the expropriation of their land. In the South, if we have been here for long enough, many of us have ancestors who owned other human beings as property – or were themselves owned. Marx is not the only one to have ever formulated these questions, or attempted to answer them. One may reject his analysis and his prescriptions in their entirety. However, regardless of one’s personal politics, it should be recognized that these questions are political and moral questions, they are inherent to our society and our economic life, and they cannot be answered by supply-and-demand curves.