Two Books: Dangerous Currents, by Lester Thurow, and The Crisis of Vision in Modern Economic Thought, by Robert Heilbroner and William Milberg

One of the clichès of that brief moment of critical reflection that followed the financial crisis of 2008 was criticism of the economics profession--for its adherence to questionable ideas like the "Efficient Markets Hypothesis" (EMH), and the passing off of dubious financial products as safe through superficially rigorous but actually quite meaningless exercises in econometrics.

Another clichè was that "no one" knew better.

The latter was patently false, as I am regularly reminding looking at older works. Certainly this was the case when I read Lester Thurow's 1983 Dangerous Currents: The State of Economics, and Robert Heilbroner and William Milberg's 1995 The Crisis of Vision in Modern Economic Thought. It was not the case that economists, even well-known, respected economists capable of reaching a broader audience did not cry that the "emperor has no clothes." Rather it was that the mainstream of their profession was determined to ignore those cries, which is ultimately unsurprising--for reasons these authors themselves explain.

Each of these books looks at the demise of the Keynesian consensus (in large part, due to their apparent failure to anticipate, and inability to cope with, '70s-era stagflation). They also look at the assorted schools of economic thought which endeavored to become the base of a new consensus, particularly monetarism and rational expectations theory, and the failings which prevented their doing so.1 Each is also highly critical of the situation that followed, characterizing it as an intellectual crisis which has left policy without effective guidance in a period of economic crisis--these authors not cheerleaders for the course of the American or world economies in the 1980s and later.

As one might expect, there are substantive differences between these works. The most important of these is that Thurow criticizes the prevailing wisdom within the field--its fundamental methodology, its major schools of thought (particularly monetarism, supply-side economics and rational expectations)--principally from his perspective as an economist. Heilbroner and Milberg devote much more of their attention to the broader intellectual context shaping that field, what economists bring to their subject matter from outside it, contending that the "pre-analytical vision" is crucial (e.g. their views about the extent to which the field is scientific or political), and that this has been deeply problematic for the field in key ways. However, in their differing emphases I found their books complementary rather than clashing (indeed, Thurow's endorsement of Heilbroner and Milberg's book as "essential reading" appears on the back cover of my edition), and while each book will strike the general reader as demanding, remains hugely relevant to our situation today.

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Review: Dangerous Currents: The State of Economics, by Lester Thurow

New York: Random House, 1983, pp. 247.

The title of Lester Thurow's Dangerous Currents refers to the intellectual situation of the economics profession as he saw it at the time of writing in the 1980s. By that point, the Keynesian consensus that had emerged in the United States and Britain in the 1930s and 1940s was in a state of collapse, done in by the increasing doubt about the ability of policymakers to manage the economy in the late 1960s, and the experience of stagflation in the 1970s. However, no new consensus had replaced it, or seemed likely to replace it.

Thurow spends much of the book explaining why this is the case, devoting several chapters to the failings of Keynesianism's would-be successors--monetarism, supply-side economics, and rational expectations theory--debunking them on common sense and theoretical grounds.

Monetarism, which is generally opposed to government intervention in the marketplace, views government's principal function as exercising control over the money supply to keep inflation in check. Thurow argues that the theory's disregard of interest rates is a significant liability, and that the factors the theory does treat, it treats inadequately. He notes the economics profession's weak understanding of the velocity of money (as rendered in attempts to model it); that the mechanism through which the tightening of the money supply is supposed to reduce inflation is "black-boxed"; and that the theory is unclear on the length and severity of the application required to achieve its object--that is to say, how much and for how long the money supply would have to be tightened (and the side effects of this process, like economic recession, suffered) to bring inflation rates down.

Supply-side theory, like monetarism, favors minimal government (specifically emphasizing cuts in taxes, spending and regulation) and a tight monetary policy. Where it really differs is its comparative lack of theoretical rigor--its assumption that simply "getting government out of the way" will make an economy work as well as it possibly can. The result is that where monetarism might arguably be judged underdeveloped, supply-side theory looks like little more than an ideological statement (and was indeed a creation of right-wing political operatives like Arthur Laffer and Jude Wanniski, rather than conservative economists).

Rational expectations theory holds that economic actors' collective expectations, through their determination of those actors' behavior, do not merely create market outcomes, but accurately predict them. In the process they negate the effects of government intervention (actors' anticipation of this making them act in offsetting ways--for instance, altering their portfolios to avoid paying more in taxes in response to announced changes in the tax code), so that where monetarism and supply-side theories tend to see government action as pernicious, rational expectations holds it to simply be irrelevant. However, as Thurow notes, this reasoning assumes an accurate and unfailing rationality on the part of economic actors, taking no account of the role of habit in human behavior, or the tendency toward systematic mistake as human behavior adapts.

The intellectual limitations of these various theories aside, Thurow notes, the application of monetarism and supply-side theory in Britain and the U.S. in the late 1970s and early 1980s signally failed to achieve the promised results. Meanwhile, "rational expectations" flies in the face of the reality that governments can and do affect their economies--as the monetarist policies of the '80s cited above demonstrated by leading to recession, just as other economic theories predict.

Ultimately, however, Thurow contends that the problem is bigger than any one (or three) theories, pointing to the prevailing bias against macroeconomics, and complacency about the received microeconomics. He specifically holds that the problems of macroeconomics are actually an outgrowth of the flaws in our microeconomics--particularly the overly simplistic nature of the "equilibrium price-auction" view of human beings and society; and a disregard for anything not demonstrable through mathematical modeling and its "empirical analogue" econometrics (which has fallen far short of the hopes once held for it).

This leads Thurow to a wide-ranging examination of the methodological failings of contemporary economics. These problems range from its vagueness about many of its most basic terms (like "equilibrium"), to its silences on key issues (like what periods of disequilibrium in which markets adjust entail), to its disinterest in the findings of other social sciences (psychology, sociology) and the applicability of its models to the real world (like whether markets such as orthodox economics describes really exist, or actually clear in the manner it assumes), while the evidence economists generate tend to be "fuzzy" in nature, letting anyone "prove" anything.1 Moreover, he notes, the methodological problems have resulted in practical failure in the form of theories that fly in the face of the facts, as in their presumption of a "world of fixed tastes and static technology where the basic economic problem is one of exchange" (22), and their denial of the existence of genuine "involuntary" unemployment.

Thurow also goes some way to demonstrating an alternative approach, presenting elements of an alternative theory of the labor market in Chapter Seven, rooted in a recognition of the ways in which labor is not simply another "factor" of production. Unlike machinery, for instance, labor's performance is not "technically determined" (preference and motivation matters in a way it does not with a machine), and is not separable from its owner. As a practical matter this means that employers are highly reliant on the voluntary cooperation of employees (and therefore, their preferences and motivation), while human capital assets are illiquid and "risky" in a way that other assets are not. Moreover, the reality of on-the-job training means that potential employers do not bid on an independent supply of skills, but create those skills within their firm to an important degree (while job applicants are pursuing training opportunities as much as they are work); and the highly organized reality of modern economic life places the accent on team rather than individual productivity, and therefore the motivation of the team (among which interdependent preferences operate). All of this creates a labor market emphasizing team rather than individual output, and greatly reducing that wage flexibility that the equilibrium price-auction vision of the labor market so takes for granted.

Taken together all of this comprises an impressive round-up of the field's weaknesses, arguably validated in the years since by the failure of the economics profession to develop a new consensus--and indeed, the increasing divorce of the conservative economic policies that have continued to prevail from anything like a solid intellectual basis (as James K. Galbraith and Jonathan Chait have contended). Additionally, while Thurow's book falls short of presenting an alternative "school" of economic thought that would fill Keynesianism's old place (never a stated goal of his book, nor essential to validating his argument), he does demonstrate that there are other ways of approaching the field's questions with rigor--while, not incidentally, offering some intriguing arguments regarding the economics of the labor market.

However, Thurow's critique does have its limitations, the biggest of them its failure to satisfactorily address the issue of why Keynesianism's proponents failed to adapt their theory to the challenges of the '70s, and for that matter, why the ideas in the ascendant at this time all came from the political right.2 From the standpoint of three decades later, it offers little clue as to why these ideas have retained their influence through the economic doldrums of the 1980s, 1990s and 2000s, and even the crisis of 2008, which has seen laissez-faire remain the default mode of thinking in America, and right-wing prescriptions become even more aggressive in much of the world. For serious attempts at an explanation one has to turn elsewhere, to those economists most willing to venture beyond the narrow boundaries the orthodoxy imposes on the field, like John Galbraith and Robert Heilbroner, and writers from outside the world of economics, like Kevin Phillips, Thomas Frank and Chris Hedges.

1. Does the term "equilibrium" mean a situation in which one can make abnormal profits, or the existence of a situation in which a "non-equilibrium flow of factors . . . will alter the course of the economy" (14)?
2. Thurow notes that just as the U.S. went right politically, France went left with the election of Francois Mitterand, but does not develop this intriguing comparison.

Review: Business Civilization in Decline, by Robert Heilbroner

New York: Norton, 1976, pp. 127.

As has been the case with most large, loaded terms in our political vocabulary, "capitalism" has eluded tidy definition. In Business Civilization in Decline Robert Heilbroner offered as a minimum the existence of private ownership of economic assets; the use of market competition as the primary method of income distribution; and the "structure of privilege" that permits widely differing gains at the top.1

Robert Heilbroner expected that in the half century after the time at which he was writing (the mid-1970s), that system, and the "business civilization" founded upon it, would come to an end. This was not, however, a Cold War-era prediction of Soviet triumph in the realm of power politics such as some anticipated at the time. Nor was it a Marxist-style prediction about the radicalization of the working class. (Heilbroner contended instead that as workers increasingly became white collar, they also became bourgeois in attitude, even when they lacked bourgeois privileges.)

Rather his position was that efforts to save capitalism from its vulnerabilities, rather than destroy or replace it, would bring about its end. Three such vulnerabilities seemed crucial to him, namely the capitalist system's tendency toward developing generalized disorders (like depression and inflation); the threat to the system as a whole from localized disorders, such as the failure of a large bank (increasing as the "economic mechanism became more tightly knit"); and the looming collision between the expansionary tendency of capitalism, and ecological constraints.2

All of this would make the sustenance of economic growth not only more difficult, but put an end to growth itself. This would, he argued, eliminate a crucial safety valve for the social tensions capitalism generated. Heilbroner pointed, too, to the "hollowness" of commercial culture, in the attitudes it fosters toward such matters as work and consumption, and the cynicism-inducing character of advertising, which he linked with the problem of continuing dissatisfaction in a world of rising affluence, and which make business civilization that much more vulnerable to challenge. At the same time, "social fatalism" - the traditional passive acceptance of misery - was becoming a thing of the past, a change "characterized by the assertion of political mastery," while political institutions and imperatives were gaining ascendancy over private economic interests, the long-running trend an extension of "public responsibility for the working of the system."3

Heilbroner predicted that these stresses would be exacerbated in the "middle range" of twenty-five to fifty years by still other problems, like the increasing difficulty of procuring labor for certain tasks ("jobs people just won't do") in conditions of rising affluence; the struggle between the owners of capital and the "technostructures" controlling the dominant firms, and the problem of private bureaucratization more broadly; and the regulatory challenges emerging out of new developments in science and technology (like genetic engineering and new possibilities of behavioral control).

All of these things taken individually, and certainly taken together, suggested increasing public planning of the economy, which he predicted would extend beyond prices and wages to incomes and profits, though he also predicted broader and deeper cultural changes. He specifically anticipated a more "statist" culture, more "religious" in the sense of its "elevation of the collective and communal destiny of man to the forefront of public consciousness, and the absolute subordination of private interests to public requirements." Heilbroner also thought it plausible that the private prerogatives regarding property and enterprise would come to "appear as archaic as the claims of royalty or nobility in the face of a democratic revolution," and that business would thus be transformed into "the civil service of the nation-state."4

This was, of course, a bold prediction at the time, and today it seems downright astonishing that such a noted economist could possibly have made it within the last half-century. This was, after all, exactly the moment at which economic thought and practice started a dramatic rightward shift - with private profit and the claims of property and privilege ascendant over claims about the public good, and government's hands increasingly perceived as tied by footloose business.

How did Heilbroner get things so wrong? One reason, it seems, is that he overestimated the extent to which government acted independently of business's influence, and the extent to which it would maintain its credibility to do so. Certainly he did not anticipate the extent to which the Keynesian consensus of the middle part of the century would be displaced by conservative ideas, despite their failure to establish a new consensus (a situation Heilbroner himself analyzed in his later The Crisis of Vision in Modern Economic Thought). Nor did he anticipate other events that reinforced the process, like the collapse of the Soviet Union, the stagnation of Japan, and the disappointing economic performance of major European states like France and Germany in the 1990s and 2000s, which appeared to discredit statist economic approaches. He also underestimated the intensity of neoliberal globalization.5

Nonetheless, as the combination of recession/depression, ecologically-driven shocks to the prices of food and energy, and financial instability seen in the last several years demonstrates, there has been little progress toward ameliorating the problems central to his thesis, which continue to plague us today. The response Heilbroner anticipated from society to those problems may be far from ideal, or even unattractive (Heilbroner himself was ambivalent about it, worrying about the fate of individual freedom in such a world), but the sort of boldness and imagination he brought to these issues is a reminder of just how much poorer this dialogue has become since his time.

1. This definition, notably, does not require the kind of business environment seen in the "classical" capitalism of the early nineteenth century, in which the prevalent form of organization was the small, owner-managed firm powerless over the larger market; and certainly does not exclude a substantial role for government inside a capitalist economy, which as he points out has historically been substantial in even the United States, from the country's earliest beginnings.
2. Heilbroner was writing in the wake of the publication of The Limits to Growth, which is discussed here.
3. In the earliest phase of U.S. history, government acted as a stimulus to growth (as with Federal investments in infrastructure, like canal-building); to regulating markets in the Progressive Era (when anti-trust action appeared on the agenda); to the use of Federal powers to achieve acceptable levels of growth, employment and welfare (as happened with the New Deal). Moreover, Heilbroner is quite clear on the point that this expansion of government's role was motivated by the support of business, rather than social reform, citing Gabriel Kolko's The Triumph of Conservatism (discussed here) - though he does take the position that government has functioned as an independent force rather than the mere servant of business.
4. Of course, the increasing profile and power of multinational corporations was a hot topic at the time, raising concerns that found pop cultural expression in films like Rollerball and novels like The Matarese Circle. However, Heilbroner pointedly dismissed this as an "ancient condition" unlikely to change the essential direction. Heilbroner was equally unpersuaded by claims that a "post-industrial" outlook would present obstacles to this vision. Given its connection with that "end of social fatalism," he thought it might actually be a contributing factor to the transformation he described.
5. Heilbroner did, however, expect that many of the changes he described would pose problems for Soviet-style socialist states, these being issues of industrial society rather than just capitalist society (as with ecological "limits to growth"). He also suggested that Western capitalist and Eastern socialist states would bring different combinations of strength and weakness to those challenges, with the West having the benefit of greater economic development, and the socialist states already further along the road to that "assertion of political mastery" over economic life.