Monday, 27 April 2015

r > g
We hope that you choke

Capital in the 21st Century came out in 2013 and was thought of as a bit of a bombshell for economics, but not much has changed. Oh course a couple of years is not very long to turn the ship of economics around. If a physicist proved there was no dark matter in 2013, physicists would still be busy reproducing the results and studying them. I'm sure that's what's happening in many university economics departments right now.

We generally interact with scientific discoveries by using the technologies they enable, and technology is its own proof. The cell phone based on some theory of electromagnetics works doesn't stop working when the scientists figure out that the theory was wrong. Similarly, we interact with economics through public policy, which is its own proof, but public policy isn't actually good at proving itself right or wrong. If you can talk to your friend across town on a small handheld device then you know something about the cell phone is right. Historians can argue about whether our public policy was right a hundred years from now without finding any answer.

Economics isn't science. It's loosely based on reality, but its assertions are almost entirely made to be non-falsifiable. Of course non-falsifiability only goes so far. As science advances, our ability to test the reality of things advances. Non-testable common sense assertions like, demand drives prices up and supply drives them down, become testable when we gain a better ability to gather data.

This is where economics proves itself to be philosophy. Philosophers don't react well when their thought-to-be metaphysical assertions are physically tested and shown to  be false. Other things being equal, sometimes an increase in price means more units sold because people simply assume that a higher price must mean a better product. Sometimes an increase in supply means an increase in desirability as people begin to see other people having a thing. Basically the whole supply and demand thing is just not right.

Of course economists will deny this by retreating into abstraction. If psychology makes people want to buy things that are more expensive, then we have to factor that out when we talk about supply and demand laws. But economics is merely psychology without experiments, generalized. Factoring out psychology means that economics ceases to exist.

The laws of supply and demand sound pretty true, after all, I'm sure I do value things that are rarer or harder to acquire more than I value things that are abundant. But that is just one of many systems I use to place value on things. If the laws of supply and demand are merely the observation that one of the many ways of valuing things is thinking about their rarity then they are an observation worthy of six-year-olds playing with LEGO. But they are more than that, they are an unproven - and unstated - claim that rarity is the most or  one of the most significant factors in determining value. If that were true then the leaders of our nations would all be trans.

Capital in the 21st Century isn't really an economics text, it's a text about data which has no place in economics as the public experiences economics. The whole book has been boiled down to a three symbol expression by numerous reviewers: r > g. The rate of return on capital is greater than the rate of growth. That's not theory or a guess or even a law, it's just how things are. And if that's how things are, then those who support capitalism are doing one of three things:

1. Arguing that Piketty is simply wrong, in which case they better have some data of their own.

2. Arguing that g is so high under capitalism that it is the right system for the time being - but implicitly agreeing that we ought to be thinking about when to stop and what to do when we stop.

3. Saying that serfdom, the actual endgame of capitalism, is a good thing.

In university economics departments people are probably hashing out (1). In extremely esoteric philosophy discussions people are working on (2). But the majority of the economics thinking we deal with on a day to day basis is based firmly on (3).

Austerity, selling off public assets to pay down debt, tax cuts - these are the policies that hasten us towards serfdom. They are put in place by people who are convinced that they will be the lords rather than the serfs, and advocated by people who are convinced they will be among the well treated and trusted serfs.

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