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.

Comments

[Ben]

I remember reading a study on successfull bosses and proved it was due to luck. Needless to say this was quickly burried.

[aragon]

We all need History, if only to reflect on the failures since the oil shocks of the seventies. Neoliberalism has increased inequality, due partly the sale of public assets and outsourcing/globalising.

Saying that Finance is Britains most sucessful industry, is like boasting that you have the most agressive brain tumour on the Cancer ward. Finance just transfers wealth from the poor to the richand reinforces inequality.

There is a challenge to capitalism, or at least democracy. Russia and the monster the elite, in their greed, created China.

Globalisation is dead, at least according to the founder of TSMC.

https://interconnected.blog/globalization-is-dead-and-no-one-is-listening/

"Globalization is almost dead. Free trade is almost dead. And a lot of people still wish they would come back, but I really don’t think they will be back for a while." Morris Chang.

https://www.scientificamerican.com/article/the-american-economy-is-rigged/

"This is not only because of the shift to a service-sector economy—it is because of the rigged rules of the game, rules set in a political system that is itself rigged through gerrymandering, voter suppression and the influence of money. A vicious spiral has formed: economic inequality translates into political inequality, which leads to rules that favor the wealthy, which in turn reinforces economic inequality.""

[...]

"Inequality in the extremes observed in the U.S. and in the manner generated there actually damages the economy. The exploitation of market power and the variety of other distortions I have described, for instance, makes markets less efficient, leading to underproduction of valuable goods such as basic research and overproduction of others, such as exploitative financial products."

[ltr]

"There is a challenge to capitalism, or at least democracy. Russia and the monster the elite, in their greed, created China."

This is false and racist; false and malicious.

Try learning just a very, very little about 5,000 years of Chinese history. Then learn just a very, very little about China now.

https://fred.stlouisfed.org/graph/?g=T3lH

August 4, 2014

Real per capita Gross Domestic Product for China and United Kingdom, 1977-2021

(Percent change)

https://fred.stlouisfed.org/graph/?g=T3lJ

August 4, 2014

Real per capita Gross Domestic Product for China and United Kingdom, 1977-2021

(Indexed to 1977)

[rsm]

《It's no accident that capitalism was more equal (and productive) when there were strong trades unions and a threat of communism.》

Did our blogger conveniently forget the history of redlining and associated racial inequality during that time?

[Blissex]

While I very much agree with our blogger about the huge losses from the (deliberate) extirpation of both economic history and history of economic thought from the discipline of political economy, as to this:

«He acknowledges that such a call is "very idealistic" given that market power buys political power [...] 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 seems to me quite ironic as invoking "a collective effort" seems to me not much more realistic than a technocratic tweak. The biggest problems I reckon to be these:

* On the "positive" side, "careers": because "end of history" ideology serves well the ruling classes, career rewards are lavished on those who acknowledge that rule by finance and rentiers is the final step. Not so much on others.

* On the "negative" side, "budget": something happens only when there is a "budget" for it, and who is willing to pay good money, endure much adversity and lose many lives to change power structures so "end of history" is no longer the dominant ideology?

Unfortunately most of the incumbent "intellectual" class are rather smugly counting their enormous property profits and looking forward to a luxurious retirement.

Let's look at history for sad reflections: there was a time when the "intellectual" class more or less went into the church, as abbots, theologians, vicars, bishops, ... and were rewarded with comfortable "benefices" for preaching that “The rich man in his castle, / The poor man at his gate, / God made them high and lowly, / And ordered their estate.” That system lasted for a thousand years. Those who did not conform often ended up at the stake.

The message that most of the incumbent "intellectual" class is preaching nowadays is pretty much the same, but for replacing the word "God" with "The Markets", and they get rewarded with "benefices", even if somewhat different. This system has already lasted 200 years.

If I were into historical materialism, I would be sceptical of endogenous triggers for change, and would expect that exogenous material conditions need to change before the current system is replaced by a new one. But I hope that's just too pessimistic. As that wild-hair guy wrote, "the pessimism of reason, the optimism of the will".

[rsm]

@ aragon

《The term “redlining” originates with actual red lines on maps that identified predominantly-Black neighborhoods as “hazardous.” Starting in the 1930s, the government-sponsored Home Owners' Loan Corporation and the Federal Home Loan Bank Board used these maps to deny lending and investment services to Black Americans.》

Did unchecked financialization before the 2008 panic lead to greater minority home ownership (assuming an ownership society is really what you want), and has the insurance piece on real estate loans been fixed, surviving comparable or greater defaults in 2020 without itself sparking panic?

[Steven Evans]

Economists should pay attention to actual history as well as intellectual history.

For example, you might go and read about the deliberate starvation of 40 million people during the Great Leap Forward when Marxist ideas were actually implemented.

The "recipe" has in fact been tried in a "cook-shop" and it poisoned everybody to death.

[aragon]

rms:

Well America had the Jim Crow laws.

However it seems currently race is used to obscure issues of class, poverty and inequality.

https://www.theguardian.com/media/2014/jul/15/bbc-racist-diversity-white-working-class-tory-mp

"Philip Davies said he considered recent proposals announced by BBC director general Tony Hall to boost the representation of black, Asian and minority ethnic people on- and off-screen to be racist, when the corporation should be aiming to be "colour blind"."
https://www.theatlantic.com/business/archive/2015/01/why-are-so-few-black-people-using-bitcoin/384268/

"Even a financial analyst as bullish on Bitcoin as Colas acknowledges these concerns should not be taken lightly. “Typically, lower-income households should primarily focus on trying, as best they can, to build up a small savings buffer,” he says. “That isn’t necessarily well-served by having it in Bitcoin because of the volatility of the currency.”

[...]

even a Bitcoin aficionado like Jackson believes there is another obstacle that needs to be surmounted before the currency becomes more widely adopted by African Americans: the obstacle of racial perception itself."

https://inews.co.uk/culture/television/how-to-crack-class-ceiling-bbc2-review-2011620

"The corporation’s media editor explored what it would take for a working-class graduate with the “wrong” (ie regional) accent to forge a career in such “elite” professions as finance, the civil service and the law."

Elite professions: Government, Finance and Law [and Media].

Racial rather than income or class perception.

Even Megan and Harry are victims!

[rsm]

@ aragon

Since redlining outlasted Jim Crow voting laws, may we observe that "the authoritarian left" in its zeal often enacts bad policies that end up hurting little people like me, at least as much as right-wing policies? And is the Left's answer all too frequently censorship and other forms of social marginalization?

[aragon]

https://asiatimes.com/2022/12/tsmc-outlay-helps-rebuild-us-chips-making-capacity/

"Nevertheless, TSMC will soon be making a significant contribution to semiconductor production in the United States, vindicating President Biden’s decision to push through the CHIPS Act. Along with Intel and Micron’s decisions to make large new investments in the US, this is reversing the Wall Street-driven exodus of capital-intensive semiconductor manufacturing.

This can be seen either as a capitulation to East Asian mercantilist industrial policy (if you can’t beat them, join them) or – after a 30-year indulgence in outsourcing and pandering to financial markets at the expense of jobs, manufacturing expertise and national security – as a return to the industrialization that made America great. Actually, it is both."

You see somebody gets it!

To labour the point...

"after a 30-year indulgence in outsourcing and pandering to financial markets at the expense of jobs, manufacturing expertise and national security"

[aragon]

I am not on the authoritarian left more the traditional (or I making this up) orthogonal or imaginary (as in imaginary numbers) on a different plane, left).

But no-one is perfect.

An example:

https://www.spiked-online.com/2022/12/16/the-reparations-trap/

"Rather than seeking to modernise developing countries, global grandees have opted for what they call ‘climate justice’ – that is, the idea that industrialised countries’ carbon emissions to date are a historical injustice for which they must now repent. Accordingly, the billionaires of Silicon Valley, London and Wall Street, as well as born-again eco-zealots like President Biden [Don't forget Ed], hope to pave the political way to a CO2-free utopia by paying ‘climate reparations’ to the Global South."

Also Big Bang 2 (misnamed), will lead to Big Crash (we've lost count), and Big Austerity which we have seen frequently before and don't like.

We need separation rather than ring fencing of retail deposits, but we don't even have the first anymore.

Intellectual pygmies, I tell you!

[Laban]

100% OT - and there was me thinking coal was yesterday's fuel. In the UK maybe, not in the rest of the world.

https://www.iea.org/news/the-world-s-coal-consumption-is-set-to-reach-a-new-high-in-2022-as-the-energy-crisis-shakes-markets

"Global coal use is set to rise by 1.2% in 2022, surpassing 8 billion tonnes in a single year for the first time and eclipsing the previous record set in 2013, according to Coal 2022, the IEA’s latest annual market report on the sector."

PS - you could mention that the energy price rises are due to UK and EU/NATO government policy - it's not like there's a shortage of Russian gas, even with the SBS blowing up NS2.

Our elites decided to use an "energy weapon" and we're paying the cost.

[ltr]

100% OT - and there was me thinking coal was yesterday's fuel. In the UK maybe, not in the rest of the world.

[ This point is directly related to the fine essay, in that history was completely ignored by policy makers in using an "energy weapon."

Laban'a example is most important and saddening. ]

[ltr]

As for willfully ignoring history, I am startled at just how far Labour's leaders have gone now that Jeremy Corbyn has been distanced from the Party. Labour has become no more than Tory-lite.

[Laban]

Aragon - "Intellectual pygmies, I tell you!"

Not at all. For wealthy elites (oligarchs?) things are all working out extremely well. The debt economy will continue to enrich elites and immiserate working people right up until the time when it doesn't.

They have full spectrum dominance of media, advertising, even the trades unions.

An example - when did you read in any paper, from the Guardian across to the Telegraph, the idea that maybe ever-rising houses prices was a bad thing? It's always reported as a "booming housing market - even as the sleepers in shop doorways multiply.

When the price of bread doubles, the Guardian doesn't talk about the "booming bakery market".

There was a Guardian comment a few weeks back that illuminated (without meaning to) the housing and wages disaster. Our commenter was contrasting the Bad Old Days with today.

<>“I don’t believe when the only chance in life for most women was to have a bunch of children and take care of their house (that there) was more respect for women, sorry.”

She’s saying that in those Bad Old Days families could afford “a bunch of children”, and a mother at home caring for them!

We have gone in the UK from the 1970s days when a house cost 3 or 4 times the annual salary, to today where it’s 9 or 10 times. Only the benefit-funded or the wives of the wealthy can “take care of their house” now, everyone else needs two incomes just to keep a roof over their heads.

My wife works in a female dominated occupation and the stress the young working mothers, even those with reasonably well paid partners, are under is just awful.

None of this is improved by 1970s-style inflation caused by our sanctions on Russia.

As Nadhim Zarhawi almost said

“If you can pay your gas bill, Putin will have won”

[aragon]

@Laban

"For wealthy elites (oligarchs?) things are all working out extremely well. The debt economy will continue to enrich elites and immiserate working people right up until the time when it doesn't."

And when will that time come? When will we go from selling the Silver to burning the Furniture (Even in the Golden Triangle (London-Oxford-Cambridge).

I am sure ltr is aware there the geopolitical situation (potential crisis) with China, and British Volt (Batteries) won't be saving the manufacturing day, any time soon.

Public services including the NHS are in crisis, the next financial crash (is due soon).

The Eco-zealots are anti-technology (Nuclear) and want us all sitting in the cold and dark.
(Their is only one true God and it is Green, complete with Hair shirts and lentils and no industry).

When and what, will collapse the house of cards?

Or are we doomed to neo-feudalism and debt slavery?

[Laban]

"are we doomed to neo-feudalism and debt slavery?"

For thousands of years there was the elite and the rest. The post-war settlement is not the natural order of things, and as Scargill and Galloway rightly pointed out (I paraphrase) that once Communism as an alternative system (even with all its ills) disappeared, there was really very little to prevent a return to those days, especially when great efforts have been made to destroy the existing culture and social solidarity.

"Heh heh heh... you get gay marriage, and we get 'a flexible labour market'... heh heh heh"

https://www.brookings.edu/opinions/the-typical-male-u-s-worker-earned-less-in-2014-than-in-1973/

[aragon]

China's autocratic system offers and alternative system.

https://asiatimes.com/2022/12/the-economic-realities-we-face-at-the-end-of-2022/

"Increasing numbers of workers are unwilling to wait and see whether or not long-sluggish center-left and center-right governments and parties would do anything adequate to change the deepening inequalities, instabilities, and injustices of contemporary capitalism."

[...]

"Neoliberalism had undermined social democracy ideologically even as economic realities provoked socially divisive immigration, automation, and job exports. Much the same had happened in the United States to the center-left represented by the Democratic Party, thereby paving the way for Donald Trump.

China’s rise has challenged the declining US empire and provoked it to adopt increasingly desperate economic nationalism in response."

[rsm]

How long would I survive the authoritarian left in China, if I talked about how I was in Beijing when the Tiananmen Square incident happened? Why should I give up freedom for financial repression?

[aragon]

The whole point of autocracy is that you don't have a choice.
https://www.spiked-online.com/2022/12/21/when-did-it-become-a-crime-to-say-men-cant-be-lesbians/

But then try infringing copyright online, or sharing your Netflix password (criminal fraud),
or slander laws, or even stating a biological fact.

https://www.spiked-online.com/2022/12/21/when-did-it-become-a-crime-to-say-men-cant-be-lesbians/

"Gjevjon is being prosecuted under a law that criminalises speech that ‘promotes hate’, ‘threatens’ or even simply ‘insults’ someone on the basis of certain criteria, such as their religious beliefs or their ‘gender identity or gender expression’. Needless to say, ‘insult’ is in the eye of the beholder. One man’s fact is another man’s folly. Hate-speech laws that are based on whether someone feels offended can be used to criminalise almost anything."

In the west freedom of speech and action is under attack, socially and economically.

China's laws are extraterritorial, so you may already have breached them!

And China has ambitions to become the hegemonic power.

[aragon]

p.s.

You can be insulting in the UK, but that required an amendment to the law.

https://en.wikipedia.org/wiki/Hate_speech_laws_in_the_United_Kingdom

"In 2012, a campaign was launched by the Christian Institute to remove the word "insulting" from section 5 of the Public Order Act, saying that it constituted mere censorship."