ASSA 2020 – part one: inclusive economics

ASSA 2020 is the annual conference of the American Economics Association, which brings together all the various economics associations in America. This year’s conference in San Diego, California was attended by over 13,000 economists, lecturers and students not just from the US but all over the world.  It’s the biggest event in mainstream economics, but also includes heterodox and Marxist presentations.

You could tell the main themes of this year’s ASSA from the live webcasts transmitted over the three days.  So let’s start with those. One big meeting was organised by Economics for Inclusive Prosperity (EfIP), which is a new network of ‘progressive’ mainstream economists with some big names like Dani Rodrick or Gabriel Zucman. Their stated aim is show that “the tools of mainstream economists not only lend themselves to, but are critical to, the development of a policy framework for what we call “inclusive prosperity.” While prosperity is the traditional concern of economists, the “inclusive” modifier demands both that we consider the interest of all people, not simply the average person, and that we consider prosperity broadly, including non-pecuniary sources of well-being, from health to climate change to political rights.”

So economics and economic policy should be for all.  Sounds progressive, right?  Suresh Naidu of Columbia University told the audience that “Our societies confront serious challenges arising from uneven technological progress, globalization shocks, and climate change. We discuss the extent to which the contemporary practice of economics is conducive to generating solutions to these problems. We are cautiously optimistic that economics can be an ally of inclusive prosperity, but emphasize that economists must combine their analytical and empirical tools with institutional imagination and creativity.”

Samuel Bowles, from the Santa Fe Institute spoke.  Bowles used to consider himself a Marxist.  But those days are long gone.  In a recent article for Vox, he wrote on the legacy of Marx’s economic ideas in order to dismiss them.  In that article, he agreed with Keynes’ view that Capital is “an obsolete economic textbook [that is] not only scientifically erroneous but without interest or application to the modern world” (Keynes 1925). And he agreed with the judgement of 1960s mainstream economic guru, Paul Samuelson that “From the viewpoint of pure economic theory, Karl Marx can be regarded as a minor post-Ricardian…and who in turn was “the most overrated of economists” (Samuelson 1962).  Bowles reckons that mainstream economics, in particular neoclassical marginalism, went on to sort out Marx’s failures by replacing his value theory.  And this has also led to dropping the idea of social ownership of the means of production to replace the capitalist mode. “Modern public economics, mechanism design and public choice theory has also challenged the notion – common among many latter-day Marxists, though not originating with Marx himself – that economic governance without private property and markets could be a viable system of economic governance.”

Apparently, all that is left of Marx’s legacy is what Bowles calls “despotism in the workplace”, or the exploitive nature of capitalist production; which is not due to the exploitation of labour power for surplus value; but due to the ‘power structure’ where moguls and managers rule the roost over the worker serfs.

And Bowles presented this ‘power’ theme to the ASSA audience again.  You see, free market economics is at one pole and Keynesian-style government management economics is at the other – but we need a third way.  We should “explore the normative, modeling and policy challenges arising if we locate policies and institutions in a two-dimensional space by adding a third pole: community, based in important respects on social norms rather than state-imposed laws or contractual exchanges.”  For Bowles, inclusive economics means turning to the community….

Then came Luigi Zingales from the neo-classical heartland of the University of Chicago.  He showed that quite often economists come up with theory and policy that people don’t like and politicians won’t implement even though it may be right.  To overcome these political limits to the great ideas of mainstream economics, “Economists should help design a system that conforms to people’s preferences.”  The use of the neoclassical concept of consumer preference was telling.  Policy based on democratic planning for social need was not Zingales’ way. ThePoliticalLimitsOfEconomics_preview (2)

The second livestream meeting was on the future of capitalism.  Nobel prize winner and poverty expert, Angus Deaton from Princeton University introduced a galaxy of stars including Raghuram Rajan from the University of Chicago and former head Reserve Bank of India; and Kenneth Rogoff from Harvard. Rajan is famous for warning about the risk of ‘financial engineering’ causing a credit crunch at a meeting of central bankers in the early 2000s, where he was dismissed by the likes of Keynesian Larry Summers, former Treasury secretary under Clinton. Rajan also written a book with Zingales called Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity.

In that book, the authors reckon that the free market is the form of economic organization most beneficial to human society and for improving the human condition.  But free markets can flourish over the long run only when government plays a visible role in determining the rules that govern the market and supporting it with the proper infrastructure. Government, however, is subject to influence by organized private interests.  Incumbent private interests, therefore, may be able to leverage the power of governmental regulation to protect their own economic position at the expense of the public interest by repressing the same free market through which they originally achieved success. Thus, society must act to “save capitalism from the capitalists”—i.e. take appropriate steps to protect the free market from powerful private interests who would seek to impede the efficient function of free markets, entrench themselves, and thereby reduce the overall level of economic opportunity in society.

The authors offer the following recommendations: Reduce incumbent capitalists’ incentives to oppose markets, especially by limiting the concentration of ownership of productive assets. Provide a social safety net for the economically distressed to help maintain broad political support for free markets. Keep the borders of the economy open to support free trade and maintain a high level of competitive pressure on incumbent firms. Educate the public regarding the benefits of free markets to build political support for free market policies, or more specifically, oppose governmental interventions in the market designed to protect incumbents at the expense of overall economic opportunity.  This was broadly what Rajan told the ASSA audience.

Such was the progressive wing of mainstream economics at ASSA. It aims at ‘inclusive economics’, based on the assumption that market and capitalism are best, but require management and the involvement of people, so that they can recognise the expertise of economists in solving social problems.

Of course, added to these presentations were many on the inequality of wealth and income in modern capitalist economies and what to do about it.  There was a session on how GDP is no proper measure of social welfare and how to revise it with economic and social indicators that would make national output more ‘inclusive’.  And in another session, Gabriel Zucman and Emmanuel Saez presented the results of the latest measures of wealth inequality in the US, as published in their recent book.

Their main message is that progressive taxation and a wealth tax could make real inroads on inequality.  But as I said in my review of their book, these excellent progressive economists are seeking to redress unequal distributions created by capitalist exploitation and financial power with tax measures.  There is no policy for removing the ‘market’ causes of inequality.

Even those who profess to be more heterodox and radical than the mainstream progressives look only at tax and redistribution measures to reduce inequality.  In giving the David Gordon Memorial Lecture at ASSA, Heather Boushey reckoned that  “economic inequality—in all its forms—is obstructing, subverting, and distorting the pathways to strong, stable, and broadly shared growth”.  It’s just inequality that’s in the way of making capitalism work.

The problem is that the innovative power of capitalism has been distorted by monopoly.  This was the message from progressive Nobel prize winner Angus Deaton that “we should especially pay attention when makers of public benefit (innovators etc.) become rich and turn from makers into destroyers of public benefit (via politics etc)”  This was a reference to the rise of the big tech and online firms that have turned into super star companies that dominate their markets and the economy.

But is inequality the product of monopoly market power distorting competition?  Top economist mainstream John Van Reenen in a presentation claimed that it was.  His empirical work “shows that across-firm inequality has increased in line with rising concentration levels within all industries (even sectors) as well as higher aggregate markups in US since 1980s.”  But another group of economists saw it differently: For while “growth has fallen in the U.S., and firm concentration and profits have risen and labor’s share of national income is down, this is due to accelerating IT advances. the most efficient firms (with higher markups) spread into new markets, thereby generating a temporary burst of growth. Because their efficiency is difficult to imitate, less efficient firms find markets more difficult to enter profitably and therefore innovate less. Eventually, due to greater competition from efficient firms, within-firm markups actually fall. Despite the increase in the aggregate markup and rents, firm incentives to innovate decline—lowering the long run growth rate.”

So profit ‘mark-ups’ are really due to more efficient firms gaining advantage over less efficient.  Another paper argued that it was both technological competition and market power that led to higher mark-ups.  “Both technological change and a change in market structure are necessary to explain the observed change in markups between 1980 and 2016. We find that 2016 welfare would be 19% higher with 1980 market power.”

Is inequality of income and wealth rising because AI and robots are replacing workers? One group of economists reckon that: “AI-related invention is far more pervasive than previous analyses have suggested.  We find that AI-related innovations are positively associated with firm growth as firms with AI-related innovations have 25% faster employment growth and 40% faster revenue growth than a comparative set of firms.  We also find evidence that AI-related innovations appear to raise output per worker and increase within-firm wage inequality.” This sounds very much like Marx’s view of technological competition driving down overall profitability and eventually bringing a stop to growth in investment. Indeed has the labour share in national income fallen across the globe? BoE’s Sophie Piton argued that correcting for housing + self-employment, labour’s share was stable in all major economies bar the US.

Inclusive economics aims to make modern capitalist economies less unequal, but it is the very process of accumulation and investment in technological competition and the concentration of economic power in a few firms that is creating inequality.  So making capitalism much fairer through redistribution of taxation is a pipe dream.

In part two on ASSA 2020, I’ll cover the big mainstream issues of why the major economies are stuck in a low growth, low interest rate state and what to do about it if another recession should rear its head.  And in part three, I’ll cover the issues discussed by more radical economists.