Stumbling and Mumbling

Why economists need history

Should economists pay more attention to intellectual history? I'm prompted to ask by Jan Eeckhout's book, The Profit Paradox.

His thesis is that, since the early 80s, many industries have become dominated by a handful of superstar companies whose increased market power allows them to enjoy higher profit margins. The result is higher prices than would otherwise be the case which in turn means lower output, lower demand for labour and lower real interest rates. It's not just workers who suffer from this but also smaller companies who face tougher competition from giant firms and higher costs from them too. We should read all this alongside Thomas Philippon's The Great Reversal and Lindsey and Teles' The Captured Economy, both of which also document how American capitalism has become less competitive and dynamic.

Whilst all this might be true of the US, I suspect it is much less so here in the UK. Of course, we have monopolies, but many of these are privatized rentiers rather than firms like Apple and Amazon that have won the competition for markets. The UK has very few superstar companies - and indeed not many that even reach the height of mediocrity. This much is evident in the fact that the share of GDP going to workers in the UK hasn't changed much since the late 80s yes, real wages have stagnated here for 15 years but this owes more to flatlining productivity than to firms' increased market power.

This, however, is not my beef with Eeckhout. Instead, my problem is that he gives us no historical context.

The idea that capitalism would see increased monopoly power is an old one. Marx wrote that:

The battle of competition is fought by cheapening of commodities. The cheapness of commodities demands, caeteris paribus, on the productiveness of labour, and this again on the scale of production. Therefore, the larger capitals beat the smaller. It will further be remembered that, with the development of the capitalist mode of production, there is an increase in the minimum amount of individual capital necessary to carry on a business under its normal conditions. The smaller capitals, therefore, crowd into spheres of production which Modern Industry has only sporadically or incompletely got hold of. Here competition rages in direct proportion to the number, and in inverse proportion to the magnitudes, of the antagonistic capitals. It always ends in the ruin of many small capitalists, whose capitals partly pass into the hands of their conquerors, partly vanish. Apart from this, with capitalist production an altogether new force comes into play — the credit system, which in its first stages furtively creeps in as the humble assistant of accumulation, drawing into the hands of individual or associated capitalists, by invisible threads, the money resources which lie scattered, over the surface of society, in larger or smaller amounts; but it soon becomes a new and terrible weapon in the battle of competition and is finally transformed into an enormous social mechanism for the centralisation of capitals.

And in 1966 Paul Baran and Paul Sweezy argued in Monopoly Capital (pdf) that American capitalism had become dominated by giant corporations with market power, with the result that the economy was stagnating. In essence, that's similar to Eeckhout's theory.

But Eeckhout mentions none of this.

Does this matter? I suspect so.

First, at least some of the monopolistic giants of Baran and Sweezy's time subsequently ceased to be so: think of General Motors, US Steel or Eastman Kodak. This tells us that monopolies are not always as longlasting as they seem. Instead, technical change, competition from unlikely sources, diseconomies of scale or management hubris and over-reach can eventually slay them.

Of course, maybe this time is different. Perhaps companies such as Apple, Alphabet and Microsoft have better economic moats than did 1960s monopolies. But Eeckhout never poses this question - perhaps because that absence of history means it didn't arise.

Eeckhout's omission here is not, however, a personal failing but a symptom of academia. The history of economic thought is not taught as much as it once was. And pressure to publish and to sell books have led to an over-valorization of "original" contributions and thus a failure to locate one's work in an intellectual tradition: the replicability crisis shows us that original work is often not good.

One effect of this is that economists sometimes need to reinvent the wheel. MMT, for example, is in essence the (welcome) rediscovery of functional finance. The result is not only a lack of intellectual progress as we fail to stand upon the shoulders of giants, but also an entrenchment of neoliberal individualism - the selling of research as individual output rather than collective tradition.

But there's something else. Such neglect of intellectual history - and especially the Marxian tradition - leads to naive politics. Eeckhout calls for the establishment of a powerful "Federal Competition Authority" to restrict mergers and promote competition.

But this begs the question: how is such change to be achieved? To paraphrase Marx, this is merely writing a recipe for a cook-shop of the future. Yes, it's valuable in showing that a better world is possible, but it leaves open the matter of how to achieve this world.

Again, this is not a personal failing of Eeckhout. His work reminds me of Case and Deaton's Deaths of Despair. Both skilfully document how capitalism is failing the American people but then assert that the system can be redeemed by technocratic fixes whilst showing little curiosity about systemic change: Eeckhout says that "only pro-market capitalism can attain healthy competition" without even considering market socialism. Both are remarkably optimistic about the potential to reform capitalism whilst unable to conceive of more radical alternatives to the system. 

In fairness, he's not wholly blind to the problem here. He acknowledges that such a call is "very idealistic" given that market power buys political power via paid lobbyists. But this misses the point that capital has many other sources of influence over government. There's simple deference; Gordon Brown's kowtowing to bosses was not motivated by personal greed. There's the belief (which as Eeckhout shows is sometimes dubious) that high profits are necessary to create jobs. There's simple ideology, which politicians have internalized. And of course, there is the influence of the media.

Reigning in monopoly power requires governments to overcome these forces. And that in turn requires the growth of either a threat to capitalism itself or at least a countervailing power to capital. It's no accident that capitalism was more equal (and productive) when there were strong trades unions and a threat of communism.

So yes, I think we do need intellectual (and social and economic) history - because it teaches us that meaningful improvements in economic policy must be a collective effort and not merely clever people proposing technocratic tweaks.

It's not about the money

One common mistake non-economists make when thinking about economics is that they think about money when money is often not the issue.

I suspect people appreciate this implicitly in their everyday life. The £50 you spend in a record shop matters because it is £50 you then don't have to spend on dinner with your partner. What you are giving up when you buy those records is something real - a date night.

It's in this context that higher energy bills are so nasty. The higher cost of gas means that even those of us who are quite well off must forgo something real, something nice - nights out, books or music. That hurts. And not just us personally. What's going on is a transfer of resources from dynamic, entrepreneurial sectors of the economy towards rentiers. As David Ricardo pointed out 200 years ago, that's the sort of thing that can push an economy into long-term stagnation.

Money, then, is in many contexts not the point. What matters are real resources and opportunities - the good things we must sacrifice to get other things. Money is just one measure of such sacrifices. But it is just that - a measure.

And not the only one. As I approached retirement, I thought of big-ticket items in terms of how much longer I'd have to work if I bought them: a car was a year's work, a holiday a month's work and so on. A labour theory of value makes sense because labour - leisure foregone - is a measure of what we must give up to get stuff.

All this might seem obvious, but it is often forgotten in politics.

For example, Mark Harper says it is "unaffordable" to give public sector workers pay rises that match inflation. "I do not have a bottomless pit of taxpayers’ money" he said.

But money is not the issue: governments can print limitless amounts of the stuff. What Harper should have said is that higher gas prices mean that the UK has become poorer: as a nation, our real income has fallen. Which poses the question: why should public sector workers not share in this fall?

Of course, you might well have a good answer to this: many have suffered years of falling real incomes, and there are others who should bear the cost instead.

And that's the point. Harper was using a nonsense claim about money to disguise what is a profoundly political choice, of who should suffer from our country's impoverishment.

It's not just Tories who talk of money when they should speak instead of real resources. Lisa Nandy has said that "the big problem is that there isn't enough money."

She is of course wrong to say there isn't enough money. But she is bang right to say there is a big problem. We lack real resources. Anyone wanting a big increase in public spending must answer the question not "where will the money come from?" but "where will the workers come from?" We are closer to full employment than we have been for many years, and there are certainly very few unemployed doctors or nurses. The government can print money, but it cannot print workers.

This is a big reason why the Truss-Kwarteng budget was such a disaster. The gilt market feared that tax cuts at a time of near-full employment would lead not so much to higher employment and output but simply to higher inflation.

It's in this context that Sunak and Johnson's health and social care levy made sense. We don't need higher NICs to finance public spending; printing money can do that. We need them to release labour that is otherwise unavailable when employment is so high. We need to reduce consumer spending so that retail and hospitality workers lose their jobs and become care workers instead.

Which poses a problem for the left. If we want more builders, home insulators, solar panel makers, care workers and NHS staff where will we find them?

Immigration, of course, must be part of the answer. Another part of the answer is that Labour might well take office when unemployment is higher than it is now, and so these workers can be taken from dole queues without raising inflation.

But what if these answers are insufficient? Then we might need higher taxes to force capital and labour to move from parts of the private sector to healthcare, greening the economy and building houses.

Not all taxes, however, would do this. Wealth and windfall taxes could in principle raise billions. But if these billions would otherwise be merely hoarded in bank accounts real economic activity does not decline and so there will be no release of capital or labour and thus no more potential housebuilders or nurses. The nasty fact is that if we want more health workers or more people working to decarbonize the economy then we need the sort of taxes that depress economic activity elsewhere - that is, taxes that don't just fall upon the mega-rich. The left needs to be honest here.

There's another sense in which some on the left are ducking a tough question - nationalization.

They are, of course, correct to say that money is no obstacle to this: it's quite sensible to borrow at a real interest rate of around 1% to buy a higher-yielding asset. But my question arises again: how does nationalization affect real resources? There's no question that the railways and Royal Mail are atrociously managed. But will nationalization change this? Yes, if bad management is due to bad incentives which public ownership could correct. But it does not if the problem is simply a lack of management ability. Nationalization is not an end in itself, but a means to an end. And we need to think more about those means and those ends.

My point here should also shape how we think about fiscal rules. High government borrowing becomes a problem when it deprives the private sector of real resources - either by creating a tight labour market or by raising real interest rates.

Clearly, neither is a problem at times of deficient demand of the sort we saw after the financial crisis. So fiscal rules should not constrain borrowing then. But when should they?

The answer depends in part upon the extent to which government borrowing raises interest rates, and also upon how much those higher rates depress healthy investment. If they deter firms from making emissions savings or productivity enhancements then government borrowing should be reduced. If instead they deter crypto-mining or property speculation, then high government borrowing is not so troubling. Personally, I don't think we can generalize on this point.

But there's another issue here: what sort of economy do we want? Do we want private affluence and public squalor (to use Galbraith's phrase) or something closer to the opposite? This is fundamentally and unavoidably a political choice. Talk of fiscal rules often effaces this fact in favour of arid technocracy.

And that's the point. We must think of economic policy in terms of real resources, not money. Whilst the question of how many unemployed resources there are must be a purely empirical one uncoloured by ideology or wishful thinking, the question of how we want to employ those resources - in healthcare, housebuilding, decarbonizing or in private consumption - must always be a political one. Talk of money and finance can sometimes be a technocratic trick to distract us from this fact.