the spirit of capitalism

What Is the Stock Market For?

Elon Musk’s pending purchase of Twitter is an occasion for thinking, again, about what function stock markets perform in modern capitalism.

The original form of wealth in a capitalist society is control over some production process. If you become a wealthy capitalist, what this means at the outset is that you have authority over people engaged in some particular form of productive activity. Let’s say a group of people want to get together to make steel, or write some computer code, or serve a meal, or put on a play: The armed authority of the state says they cannot do it without your ok.

That property rights are fundamentally a legally enforceable veto over the activity of others is one of the first points you get from legal analysis of property. “The essence of private property is always the right to exclude.” What makes capitalist property distinct is that it is a right to exclude people specifically from carrying out some productive activity, and is linked in some way to the concrete means of production employed.

As a capitalist, you are attached to the production process you have property rights over.¹ Now, you may be happy with this situation. You are a human person as well as a holder of property rights, and you may feel various kinds of personal affinity with this particular process. You may have some knowledge, or social ties, or other property claims that make this process a particularly suitable form for your wealth; or you may simply regard this as a more promising source of money income than the alternatives.

Then again, you may not be happy; you may not want to be attached to this particular process. There are risks associated with both an enterprise as a social organism, and with the kind of activity it is engaged in. (The steel mill may burn down, or be taken over by the workers; steel may be replaced by alternative materials or cheaper imports.) Ensuring that the process remains oriented both to its own particular ends and to producing an income for you requires active engagement on your part; you may be unsuited to carry this out, or just get tired of it. And even if your ownership rights generate a steady flow of income for you, the rights themselves cannot be easily converted into claims on some other part of the social product or process. (You can’t eat steel.) So you may wish to convert your claim on this particular production process into a claim on social production in general.

In the US context, this is especially likely at the point where the owner dies or retires. For Schumpeter, the ultimate ambition of business owners was “the foundation of an industrial dynasty”, “the most glamorous of .. bourgeois aims”. But in the US, at least, the glamor seems to have faded.² Heirs may not be interested in running the business, or competent to do so. There may be several of them, or none. And a curiously persistent monarchical principle generally precludes looking outside the immediate family for a successor.

At some point, in any case, the holder of ownership rights over an enterprise will no longer be in a position to exercise them. At this point, the business might shut down. Before the modern corporation, this was the normal outcome: In early-modern England, “The death of the master baker … ordinarily meant the end of the bakery.” This will often still happen in the case of small businesses, where the value of the enterprise is tightly linked to the activity of the owner themself. This is fine when the productive capacity of the economy is widely dispersed in the brains of the individuals carrying out, and in tools that can be owned by them. But once production involves large organizations with an extensive division of labor, and means of production that are too lumpy for personal ownership, some means has to be found for the organization to continue existing when the individual who has held ownership rights over it is no longer willing or able to.

The stock market exists in order to allow ownership rights over particular production process to be converted into rights to the social product in general.

This is true historically. In the great wave of mergers in the 1890s that established the publicly-owned corporation as the dominant legal form for large industrial enterprises in the US, raising funds for investment was not a factor. As Naomi Lamoreaux notes, in a passage I’ve quoted before, “access to capital is not mentioned” in contemporary accounts of the merger wave. And in the hearings by the U.S. Industrial Commission on the mergers, “None of the manufacturers mentioned access to capital markets as a reason for consolidation.” The firms involved in the first mergers were normally ones where the founder had died or retired, leaving it to heirs “who often were interested only in receiving income.” The problem the creation of the publicly-traded corporation was meant to solve was not how to turn widely dispersed claims not he social product in general into claims on means of production to be used in this particular enterprise, but just the opposite: How to turn claims on these particular means of production into claims on the social product in general.

The same goes for today. We already have institutions that allow claims on the social product to be exercised by entrepreneurs on the basis of their plans for generating profits in the future. These include banks and, in favored sectors, venture capitalist funds, but not the stock market. The stock market isn’t there for the enterprise, but those with ownership claims on it.

The purpose of a stock offering is to allow those who already hold claims against the enterprise (early investors, and perhaps also favored employees) to swap them out for general financial wealth. This is why IPO “pops” — immediate price rises from the offering price — are considered a good thing, even though, logically, they mean the company raised less money than it could have. The pop makes the stock more attractive to the investors who will be buying out the insiders’ stakes down the road. The IPO is for the owners, not for the company. Or as Matt Levine puts it, “the price of the IPO is less important than the insiders’ ability to sell stock at good prices in the future.”

As I’ve argued before, converting the surplus generated within the firm into claims on the social product in general is fundamental to the capitalist process as production itself. It’s also an integral part of capitalist common sense. As any guide for budding entrepreneurs will remind you, “It’s not enough to build a business worth a fortune. You also need a way to get your money back.”

Now, in principle this goal could be achieved in other ways. Money itself is a claim on general social product — that is one definition of it. When Antonio’s ships are safely come to road, his venture is concluded and his whole estate is available to meet his obligations. This is sufficient for merchant capital in early-modern Venice – its self-liquidating character means that no additional mechanisms are needed to turn claims on concrete commodities back into money.

Ongoing enterprises cannot be liquidated so easily. And money is liable to delink from productive economy over longer periods – what one wants is something with the safety, liquidity and non-need for management of money, but which maintains a proportionate claim on the overall surplus. Government bonds are an obvious choice here. They offer a claim on productive activity in general, or at least that part of it which is subject to taxation.

This possibility is worth pausing over. Historically, this was one of the most important ways for holders of claims against particular production processes to turn them into claims against society in general. The “rent” in rentier refers originally to the interest on a government bond. Government bonds as alternative to stock ownership also calls attention to the fundamentally political character of this transaction. For the capitalist to be able to give up their direct control over a production process in return for a proportionate share of the overall social product, someone else needs to oversee the collection of the surplus. And that someone needs to be accountable to wealth owners in general. There is an important affinity between finance and the state here.

Alternatively, partnership structures allow for the human owners to turn over while ownership as such remains tied to the particular enterprise. ³ Universal owners are another route. If Morningstar or Blackstone owns all the corporations, it’s redundant for them to do so in the form of stock. They could just own them directly. Many startups today have their liquidity moment not by issuing stock but being bought by a larger competitor. One could imagine a world where a startup that is successful enough is bought up by a universal index-slash-private equity fund, without the intermediate step of issuing stock.

Another possibility, of course, would be for the founder to give up their ownership rights and the company then just not to have owners. Wikipedia is a thing that exists; Twitter could, in principle, have a similar structure. I admit, I can’t think of many similar examples. When Keynes talked about corporations “socializing themselves”, this didn’t entail a change in legal structure; the shareholders continued to exist, but just were increasingly irrelevant. Plenty of rich people do leave some fraction of their wealth to self-governing charities of one sort or another, but this is their financial wealth, not the businesses themselves. The closest one gets, I suppose, is when someone leaves real estate to a conservation or community land trust.

Back in the real world, these other models of transition out of personal ownership are either nonexistent, or else confined to narrow niches. What we have is the stock market. Fundamentally, this is a way for owners of claims against production processes to pool them — to trade in their full ownership of a particular enterprise for a proportionate share of ownership in a broad group of enterprises. This was more transparent in the trust structures that preceded the development of publicly traded corporations, which were explicitly structured as a trade of direct ownership of a business for a share in a trust that would own all the participating businesses.⁴ But the logic of the public corporation is the same.

This is why shareholder protections are so critical. They’re often framed as protections for small retail investors. But the real problem they are addressing is mutual trust among owners. The pooling of claims works only if their holders can be reasonably confident that they’ll continue receiving their income even as they surrender control over production.

You’ll have noted that I keep using obtuse terms like “holders of property claims against the corporation” instead of the more straightforward “owners”. This is necessary when we are discussing shareholders. It is not the case, as more familiar language might imply, that shareholders “own” the corporation. One of my favorite discussions of this is an article by David Ciepley, which observes that many of the features of the corporation are impossible to create on the basis of private contracts. Limited liability, for example — there is no private contract a group of property owners can sign among themselves that will eliminate their liability to third parties for misuse of their property.

If we take a step back, it is obvious that the relationship of shareholders to the corporation is something other than ownership. Just think about the familiar phrase, separation of ownership from control — it is an oxymoron. What, after all, is ownership? The old books will tell you that it is a set of control rights — jus utendi, jus disponendi, and so on. Ownership without control is ownership without ownership.

The vacuity of shareholder “ownership” can be glossed over most of the time, but becomes salient in takeovers and governance questions in general.⁵ Dividends and other payments can be subdivided arbitrarily, but decisions are discrete and control over them is unitary. Either Elon Musk buys Twitter, or he does not. Yes, there are votes, but someone still sets the terms of the vote, and 51% is as good as 100%.⁶ This is the contradiction that shareholder protections are meant to paper over. The publicly owned corporation allows business owners to pool their claims on the income of their respective companies. But it is not possible to share control over the businesses themselves. So the board – which actually does controls them — is instructed to act “as if” the shareholders did.

All of this is visible by contrast in Elon Musk’s purchase of Twitter, which reverses the usual logic of shareholding. He is trading in a claim on the general social product (or on Tesla, but it has to be cashed in first) into a claim on the specific activity organized via Twitter. He wants Twitter itself, not the stream of income it generates. He wants to turn his share of Twitter’s (so far nonexistent) profits into control over the substantive production process it is engaged in. Twitter for him is a source of use-value, not exchange-value. In this specific transaction, he is acting not as a capitalist but as a feudal lord. (Italics for a reason. One of the many mistakes we can make on these tricky questions is to treat terms like “capitalist” as if they described the essential nature of a person or organization, something that one either is or isn’t. Whereas they are ways of organizing human activity, which one can participate in in one context but not in another.)

The tension between the social production processes over which property claims are exercised, and the specific people who exercise them and the means by which they do so, is easy to lose sight of. It’s natural to abstract from these questions when you’re focused on other questions, like the conflict between capital — whoever exactly that may be — and the human beings who more directly embody labor. In Volume 1 of Capital, the capitalist is simply the personification of capital, and there are good exposition reasons for this.⁷

It’s in Volume 3 — truly the essential reading on this topic — that Marx directly takes on the conflation of social relations with concrete things. In a blistering passage in chapter 48 he attacks the identification of the real conditions of production with the incomes that are received from them, as if for example land — the natural world — existed only insofar as it is a source of rent for the landlord. This is “the complete mystification of the capitalist mode of production, the conversion of social relations into things, … It is an enchanted, perverted, topsy-turvy world, in which Monsieur le Capital and Madame la Terre do their ghost-walking as social characters and at the same time directly as mere things.” This mystification is alive and well in modern discussions of economics, where ownership of claims against a thing are constantly confused with being the thing. The ubiquitous language of payments to capital (or factor payments) is an obvious example, in which a payoffs to whatever private rights-holder you need permission from to use a machine, are imagined as payments to the machine itself.

This is not just a matter of verbal ambiguity. It leads to completely wrong conclusions when transactions involving ownership claims on something are confused with transactions involving the use of the thing. For example, you sometimes hear housing activists say that investor purchases will drive up the cost of housing. This sounds reasonable – but only because the word “housing” is being used in two different senses. Ownership of a house, and living in a house, are not competing uses, they exist on entirely separate levels. We may object for various reasons to ownership of homes by large investors rather than owner-occupiers or small landlords (or we may not). But this shift in ownership claims has no effect on the amount of space available for people to live in.

Coming back to the stock market, the confusion comes from mixing up transactions and institutions intended to shift ownership rights over the enterprise with solutions to the financing needs of the enterprise itself. The terms of the twitter deal seem to be: The bankers will get $2 billion per year, half from Musk, half from Twitter. Current Twitter shareholders get a one-time payment of $54 per share, which they may or may not be happy with.⁸ Twitter as an enterprise — and its employees and users — get nothing from the transaction at all. The company ends up owing $13 billion in additional debt, which finances nothing.

On one level, this is just what the stock market, and finance more generally, do: They change asset and liability positions around, without necessarily implying any changes in the substantive activities that those positions give rights over and which generate the incomes that go with them. As Perry Mehrling likes to point out, the biggest single transaction for most families is the purchase of a home, which doesn’t even show up in the national income and product accounts. But on another level, again, in the specific trade here — away from liquidity and general financial claims toward a more direct relationship with a particular production process — is the opposite of what the stock market usually facilities. Musks’s purchase of Twitter is, precisely, a form of de-financialization.

On some level I suppose all this is obvious. Everyone understands that this a transaction between various groups of holders of financial claims against Twitter — Musk, the board on behalf of the existing shareholders, the banks— to which Twitter-the-enterprise is not a party at all. But coverage tends to treat this as a problem only insofar as Twitter is special, the “digital town square”. In weighing the deal, the Times sniffs, the board “might as well have been talking about a tool-and-die manufacturer.” Any conflict between relations of production and relations of ownership is, evidently, only a problem when what is being produced are 280-character messages.

At this point, I suppose, I should denounce Elon Musk’s purchase of Twitter. But honestly, I’m not convinced it will make much difference one way or another.

For me personally, Twitter has been a good outlet. It connects me with journalists, political people, potential students, and other folks I want to communicate with more effectively than any other platform. It’s a gratifyingly horizontal — anyone who has something to say is on the same level. I’d be sorry if it no longer existed in its current form. But I’m not sure any of its good qualities come from who exactly exercises a claim on whatever profits it may generate.

Do you think that any of Twitter’s positive qualities emanate from the particular individuals who’ve owned it, or “owned” it? Jack Dorsey seems like kind of a nut; if the platform works, it’s in spite of him, not because of him. The current gaggle of suits on the board don’t see to have much hands-on involvement one way or another. The people who do the actual work of maintaining the platform obviously take their jobs seriously. I have no idea who exactly they are, but I have a lot of respect for them. I expect they’ll continue doing their job, whoever is appropriating the surplus.

To say that having Elon Musk own a company is a central, transformative fact about it – for good or for ill — is to buy into the narcissistic worldview of the masters of the universe. I would rather not do that. Indeed, the idea that who owns a business and how it operates are inseparable, is more or less exactly the position I’m arguing against in this post.

The question of who owns a company is a distinct question from what it does or how it is run. Not entirely unrelated, to be sure — but to think about how they are connected, we first have to recognize that they are not the same.

At Age of Economics: How Should an Economist Be?

The website Age of Economics has been carrying out a series of interviews with economists about what the purpose of the discipline it is, and what its relationship is to capitalism as a historical social system. I believe there will be 52 of these interviews, one each week over the course of 2021. Earlier this spring, they interviewed Arjun Jayadev and myself. You can watch video of the interview here. I’ve pasted the transcript below.

Q: Why does economics matter?

JWM: The most obvious way that economics matters is that it has an enormous prestige in our society. Economists have a level of respect and authority that no other social scientist, arguably no other academic discipline possesses. An enormous number of policy debates are conducted in the language of economics. There’s an ability of an economist to speak directly in policy settings, in political settings in a way that most academics simply can’t. And so Joan Robinson has that famous line that the reason you study economics is to avoid being fooled by economists.

And there’s some truth to that. Even if you think that the discipline is completely vacuous, it’s worth learning its language and techniques just in order to be able to at least criticize the arguments that other economists are making. But I would say we don’t think that economics is completely worthless and vacuous because we think it does bring some positive ways of thinking to the larger conversation. One thing that is defining of economics is the insistence on formalizing ideas, expressing your thoughts in some highly abstract way, either as a system of equations or a system of diagrams in a way where you’re explicitly stating all of the causal relationships that you think exist in the story that you’re trying to tell.

And that’s a useful habit of thinking that is not necessarily as widespread outside the economics profession. Sometimes you can learn new things just by writing down your assumptions and working through them. The whole debate in the heterodox field about wage led growth versus profit led growth, what are the circumstances where redistribution from profits to wages is likely to boost demand? And what are the situations where it’s likely to reduce demand? There are real insights that come out of trying to write down your vision of the economy as a system of equations.

The notion of balance of payments-constrained growth, where we think that maybe for a lot of countries, the thing that’s fundamentally driving the rate of growth that they can sustain is how responsive, how income-elastic, their exports are versus their imports is another set of ideas that comes out of writing down a formal model in the first case.

So this is a useful discipline that training as an economist gives you, that people with other kinds of backgrounds don’t have. This effort to make explicit the causal connections that you have in mind.

AJ: It’s also important to realize that economics has come up with some very useful concepts, to make sense of this world around us: concepts like GDP or employment. These are concepts which are well defined and measured, and help us to have an understanding of the system as a whole.

Admittedly, lots of economics education doesn’t pay as much attention to this side of economics as it should. And maybe the question was an implicit critique — when you ask why does economics matter, there are some people who feel that it doesn’t matter because of what’s happened to the discipline. Josh and I both like this particular quote by the economist Trygve Haavelmo. He said that the reason that you learn economics is to – I believe the phrase is – “to be a master of the happenings of real life”.

And that that’s why one should be doing economics, not as an exercise in and of itself, but to understand what’s happening in the world.

JWM: That’s right. The real secret to doing good economics is to start from somewhere other than economics. You may come into economics with a set of political commitments as Arjun and I both did, but you may also come in with a desire to make money in the business world and you’re associating with people who do that, or you come in because you’re focused on a particular set of public debates that you want to clarify your thinking about. If you come in with some other set of concerns that are going to guide you in terms of what’s important, what’s relevant, what’s reasonable, then you’ll find a lot of useful tools within economics.

The problem arises with people – and, unfortunately, this I’d say is the majority of professional economists – who don’t have any independent intellectual or personal base, their intellectual development is entirely within academic economics. And then it becomes very easy to lose sight of the happenings of real life that this field is supposed to be illuminating.

Q: What are the differences between economic science (academic economics) and economic engineering (policymaking)?

JWM: Today there’s a very wide gap between academic economics and what we might call policy economics, particularly in macro. If you’re a labor economist, maybe the terms that are used in academic studies and the terms that are used in policy debates might be might be closer to each other. But there’s a long standing divide between the questions that academic macroeconomists ask and the questions that come in policy debates which has gotten much wider since the crisis.

The unfortunate fact – and people are going to say this is not fair, but I can tell you, I’ve looked at qualifying exams, recent ones from graduate programs in macroeconomics, and this is a fair characterization, what I’m about to say – that the way academic macroeconomics trains people to think is to imagine a representative agent with perfect knowledge of the probabilities of all future events, who is then choosing the best possible outcome for them in terms of maximizing utility over infinite future time under a given set of constraints. That is literally what you are trained to think about if you are getting an academic training in macroeconomics. For people who are not economists listening to this, you have to study this stuff to understand how weird it is.

Unfortunately that aspect of the profession has not changed very much since the financial crisis of a decade ago. On the other hand, the public debate on macroeconomic questions has moved a lot. So there’s a much wider range of perspectives if you look at people in the policy world or the financial press or even in the business world. So in some ways the public debate has gotten much better over the past decade, but that’s widening the gap between the public debate and academic macroeconomics. I don’t know how exactly this will come about, but at some point we’re going to have to essentially throw out the existing graduate macroeconomics curriculum and start fresh, roll back the clock to 1979 or start from somewhere else, because it does seem like the dominant approach in academic macroeconomics is an intellectual dead end.

AJ: We have friends who are doing a lot of good work in labor economics. People like Arin Dube at UMass Amherst, which is one of these places which takes these things seriously, or my colleague Amit Basole where I am at Azim Premji University. And in some fields there is back and forth between the world that exists and policymaking and the craft of economics and academic economics.

It requires also talking to people from outside the discipline to see how far academic economics and macroeconomics has drifted away from policymaking. And this is why I come back to the Haavalmo point. The reason for us to be doing many of the things we are doing is academic macroeconomist is to try to see if we can have an effect on the world, understand the world. And this distinction has become so sharp right now to make it dysfunctional.

Now, the additional problem that comes with it is that because this kind of theory is hard, it’s complex and it’s weird, people spend a lot of time invested in this activity. When I say this activity, I mean basically solving equations, but for some imaginary state. That’s not only limited to macro, but it’s the worst in macro. And as a result, it becomes very hard for people to pull away from that, and say that there’s something wrong. The emperor’s new clothes moment is extremely painful to face.

But it is interesting that one of the advantages of studying macroeconomics is there are always people who want to understand what’s happening in the world. And what you might call concrete policy macroeconomics has got much more open, much more interesting than in the past. There’s an economic science aspect in concrete policy macroeconomics. I wouldn’t want to separate them so sharply as you might have done in the question.

JWM: And to be fair, there are plenty of prominent mainstream macroeconomists who have a lot of interesting and insightful things to say about real economies. The thing is that when they’re talking about the real world, they ignore what they do in their scholarly work. They’re smart enough and they’ve got time and energy that they can they can follow both tracks at once, but they’re still two separate tracks.

But for most people, that’s not practical. And if you get sucked into the theory, then you stop thinking about the real questions. And the other thing, just to be fair, is that in the world of empirical macroeconomics, there’s more interesting work being done. The problem is that there isn’t a body of theory that the empirical work can link up with.

Q: What role does economics play in society? Does it serve the common good?

JWM: You can certainly criticize economists for being ideological. There are very specific assumptions about how the world works that are baked into the theory in a way that is not even visible to the people who are educated in that theory.

But it’s almost impossible to imagine a non-ideological economics. In principle we could study the economy scientifically in the way we study other areas of existence scientifically. But we can’t do it as long as we live in a capitalist economy because the questions are too close to the basic structures of authority and hierarchy of our society. They are too close to the ways that all the inequalities, all the sources of power in our society are legitimated.

They can’t just be scrutinised in a neutral way from the outside. So as long as we live under capitalism, we are never going to have an established scientific study of capitalism. That’s just not possible. In a way, you could even say that the function of a lot of academic economics is not so much to instill a particular ideological view of capitalism, but just to stop people from thinking about it systematically at all. It gives you something else to think about instead.

That doesn’t mean that on an individual level we should not aspire to be scientific in a broad sense in our approach. We should expose our ideas to critical scrutiny. We should systematically consider alternatives and formulate hypotheses and see if the world is giving us reason to think our hypotheses are right or wrong. we should follow that.

But we should also recognize that you’re going to be on the margins as you do this. That’s OK, because the life of a professional economist is pretty good. So the margins of the profession is still a perfectly fine place to be. But that’s where you’re going to be. Or occasionally in moments of deep crisis, when the survival of the system is at stake, then there will be periods where a more rational perspective on it is tolerated.

But the notion that we’re going to persuade people in the economics profession that we have a better set of ideas and we’re going to win out that way, it misses that there is a deep political reason why economics is the way it is. So again, as we were saying at the beginning, if you want to do good scientific work, you have to have a foot outside the profession to give you a base somewhere else.

Hayek is probably not somebody that neither of us agrees with on very much, but he has a nice line about this, he says, “no one can be a great economist who is only an economist.” And that’s very true.

AJ: The question reminds me of the famous story about Keynes when he finishes being the editor of the Economic Journal, where he raises a toast to the economists who are the trustees of the possibility of civilization. There’s a belief among economists that they are standing apart and guiding the forces of history.

Well, that sounds a little pompous. Keynes could get away with it. Nowadays we wouldn’t say that, but we’d say that we maximizing social welfare, which is in some ways the same thing. One of the things that you ask is, is it serving the common good? One of the things that economics does in its training is posit a common good. And that immediately takes you away from the space of politics. Because there are many situations in the economy in which there are conflicts of interest.

These are not just conflicts of opinions. It’s conflicts around things like the distribution of income and so on. And these questions become unavoidably political. It’s pulling away from that, which, by the way, the Classical economists never did, that allows you to talk about something abstract like social welfare. So I would say the economics can play a role in trying to understand what we would want to have from a democratic, open, egalitarian society. But positing something like the common good can sometimes obscure that.

Q: Economics provides answers to problems related to markets, efficiency, profits, consumption and economic growth. Does economics do a good job in addressing the other issues people care about: climate change and the wider environment, the role of technology in society, issues of race and class, pandemics, etc.?

JWM: We might turn this question around a little bit. Economics does best when it’s focused on urgent questions like climate change. We do better economics when we’re oriented towards towards real urgent live political questions like around race and class. This is what we’re saying: Economics when it’s focused on questions of markets and efficiency in the abstract, doesn’t contribute very much to the conversation. It quickly loses contact with the real phenomena that it’s supposed to be dealing with.

And what focuses our attention is precisely that second set of questions that you raise. Those are the questions that create enough urgency to force people to adopt a more realistic economics. So in that sense, we do a better job talking about markets, we give a better, more useful definition of things like efficiency when we’re focused on concrete questions like climate change. There’s a good reason that modern macroeconomics begins with the Great Depression, because this is a moment when you do need to look at the economy as it is.

Today, it’s obvious that the existing models aren’t working, and there’s a political urgency to coming up with a better set of stories, a better set of tools. The climate crisis has a good chance to be a similar clarifying moment as the 1930s, more so than the financial crisis of a decade ago or whatever the next financial crisis is.

Climate change may force us to rethink some of our broader economic ideas in a more fundamental way. The truth is established economic theory does not give good answers in general to the problems of profits, economic growth and so on. And a focus on climate change can improve the field in that way.

The other thing you bring up is race, class, and gender. The problem here is that nobody has a God’s eye view of the world. Nobody can step out of their own skin and see things from a perfectly objective view. As a middle class white man in the United States, I have a particular way of looking at the world, which is in some ways a limiting one. Economics as a field would be better if we had more diversity, a broader range of backgrounds and perspectives.

AJ: I’d like to add, there is no reason why a particular set of tools that you use in one sphere should automatically be something that you can use in another sphere. The way that modern economics is set up is just a set of maximization problems, it allows people to seamlessly say that they are studying on the one hand buying oranges and apples, and on the other side solving the problems of climate change.

So there is an issue in the way that you posit, that it is using tools which it may be – I agree with Josh, it’s not very good at – but it may be better than its applications in other spheres. A famous example is the choice of discount rate for climate change. And that’s been such a long-standing disaster in the amount of time we’ve spent to think about this particular issue for which that analysis is completely inappropriate.

So, yes, there are places when it may be more appropriate, but maybe it’s not even very appropriate in those spheres. I would agree with Josh that this current moment and other moments of crisis – you mentioned 2008 – has opened up the space to think much more carefully about specific issues. And when you have a crisis that confronts you, it forces you to come up with a different economics or use other traditions of economics which have better answers than the ones that are there presently.

Q: As we live in an age of economics and economists – in which economic developments feature prominently in our lives and economists have major influence over a wide range of policy and people – should economists be held accountable for their advice?

JWM: As Arjun was saying earlier, this question is almost giving economics as a field too much credit, in the sense that it suggests that a lot of economic outcomes are directly dependent on the advice given by economists. Economics, as we’ve said, has an enormous prestige in terms of the presence of economists in all sorts of public debates. But a lot of times if you look at how views change, it’s not the economists who are leading the way. It’s the politicians or the broader public who’ve shifted. And then the economist come in to justify this after the fact.

There’s a certain sense, as a concrete example, where a lot of the development in macroeconomic theory over the past generation has been an after-the-fact effort to justify the policies that central banks were already following. Like a way of demonstrating that what central banks were already doing in terms of inflation target, using something like the Taylor Rule was the socially optimal thing. And that generalizes pretty widely.

So I’m not sure that we should be blaming or crediting economists for policy outcomes that they probably do more to legitimate or help with the execution of than to shift. The other reason I don’t personally see this as a particularly productive direction to go in is: who’s going to impose the accountability, who’s going to step in and say, all right, you were wrong and that had consequences and now you’re going to pay a penalty.

There’s no consensus position from which to do that. So we all just have to go on making our arguments the best we can and we’re not going to reach agreement. And so we try to shift the debate our way and somebody else shifts it their way, and there’s never going to be an impartial referee who’s going to come in and say that one side was right and the other was wrong.

AJ: Having been practicing economist for 10-15 years, broadly one has to realize that whatever you say and whatever you think and whatever you do, is strictly circumscribed by what the world is open to at that point of time. That’s something that’s sometimes hard for us to accept. There are many people who for years made the argument that we shouldn’t be so concerned about supply constraints, and it was only after 2012, 13, 14, 15- when the world started to move away from austerity or the costs of austerity became well known, that space was made for these arguments. And it’s always like that.

Spaces are there in some moments and not in other moments. And there are those people who for whatever reason in some universities, in some spaces, seem to capture elite opinion. They’re the ones who you see again and again and again. It doesn’t matter if they’re right or wrong, they’re the ones who are opinion makers.

I don’t think this is distinct from any other kind of marketing. There are always going to be a few people who are opinion and market leaders. Having said that, it would be good to have a list of when people were wrong. And sometimes it would be good to take people down a peg or two.

But again, I don’t think it’s an important thing. I don’t think that we should necessarily valorise economics and economists one way or the other.

6. Does economics explain Capitalism? How would you define Capitalism?

AJ: If you want to think about capitalism as a system, you need to go back to Karl Marx. You don’t have to call yourself a Marxist, but if you want to think about the questions like the ones that you just posed, you have to take him very seriously because his work is the foundation of many of the ways that we think about capitalism. Josh and I are working on a book and we take up this question about what capitalism means, and in our minds it has a clear definition. It has three elements, or three phases.

The first is the conversion of all kinds of human activities and their products into commodities, this thing that you buy and sell, this alienated thing that is sold in markets. That’s the first. The second is the endless accumulation of money as an end to itself. That’s the drive of the system, which seems to be out of human control. And then finally, something which is very critical and which gives it some of its emotional heft, there is the hierarchy in the workplace where people work under the authority of the boss.

All three of these elements are there historically. But their fusion in this incredibly changeable system that we’ve had for 200 years, that has been unique. That’s the central aspect that we want to focus on, the combination of these three things. And it’s the fact that when combined it gives you this dynamism, this ability to transform society, in far reaching ways that seem out of human control. That’s what I would say capitalism is.

JWM: I agree, that’s the correct definition of capitalism as a system. The problem comes when you try to pull out one of those elements in isolation and think that’s what defines the system. It’s the fusion of the three of them.

The other piece, which maybe isn’t quite as defining but historically has been very important, is that the process of endless accumulation has this moment in the middle of it where money is tied up, locked up in long-lived means of production, that you’re not just buying commodity, working it up and then selling it again, but you’ve got machines, you’ve got buildings, you’ve got technology.

So there’s this long gap between the outlay and the final sale. And that’s one of the things that has made this a system that is dynamic and has transformed human productive capacities in ways that we would agree with Marx’s judgment that in the long run, expand the space for human freedom and possibilities because it’s broken up the old, local, simple ways of carrying out productive activity and allowed people to have a much more extensive division of labor, much wider scale cooperation and the development of all of these new ways of transforming the world through technology that didn’t exist before or that were much – let’s not say it didn’t exist, but developed much more slowly in limited ways before.

But this is also where a lot of the conflict comes up, because you build up a business and it exists for its own purposes, it has its own norms, it has its own internal logic. And then at some point, you have to turn the products of that back into money to keep the accumulation process going. And so a lot of the tensions around the system come from that.

The other part of your question is, can economics explain capitalism. From our point of view economics is part of the larger set of social phenomena that grow out of the generalisation of capitalism as a way of organizing human life and productive activity. In that sense, you can’t use the tools of economics to explain capitalism, because economics is within capitalism. The categories of economics are specific to capitalism. If you want to explain the origins of it, you need a different set of tools. It’s a historical question rather than one that you can answer with the tools of economics.

Q: Is Capitalism, or whatever we should call the current system, the best one to serve the needs of humanity, or can we imagine another one?

JWM: We don’t have to imagine other systems, they’re all around us. As Arjun was saying earlier, we all of us experience every day systems where productive activity is organized through some collective decision making process. An enormous amount of our productive work, our reproductive labor that keeps us going individually and collectively, is carried out in the family. Some families are more egalitarian, some families are more hierarchical, but no family is organized on the basis of the pursuit of profit – well, let’s not say none, but a trivially small fraction of them are.

So we all have firsthand experience that this is a way that we can organize our activity. We all know that within the workplace you personally don’t make decisions based on some profit maximizing criteria. And your immediate boss isn’t doing it that way either. Probably they’re just following orders and some bureaucratic system, or perhaps there’s an element of voluntary cooperation going on.

But either way, it’s a different way of organizing our activity than the notion of markets and the pursuit of profit. As academics, we’re fortunate enough to have a collective decision making process that covers a lot of the traditional roles of the capitalist employer. We collectively decide on hiring and we collectively organize our work schedules and so on.

Obviously, very few workers in the world are as fortunate as academics in that way. But the point is that this is a model that exists. It works. Certainly here in the United States, higher education is one of our big industrial success stories. And it’s organized as a bunch of little worker co-ops!

In any workplace, there are moments when people sit down to make a decision together, where people do stuff because that’s just what makes sense and what they’ve agreed to do, as opposed to somebody making a calculation of self-interest. This is what David Graeber in his wonderful book, Debt, talks about as “everyday communism.” Even in the most traditional workplace if somebody says pass me that hammer or can you do some little favor for me, people do it just as a way of cooperating and not because they’ve been ordered to or because they’re calculating that it will pay off for them.

And then we have a huge public sector in the world as well. We have public schools and public libraries and public transit and fire and police services and so on. So we already have an enormous amount of non-capitalist organization of production around us. We don’t have to imagine it.

The challenge intellectually is to generalize from this stuff, to recognize how these principles can be applied more broadly. We don’t have to create something new, but we do have to bring in general principles. For people on the left, or people who support individual public sector programs or individual non- capitalist ways of organizing particular activities, there’s often a tendency to make the argument in terms of that specific activity: well, here’s why we want public schools and we want better funding for our public schools. As opposed to trying to articulate what is the general principle that makes markets and the pursuit of profit a bad way to organize that. What is the general principle that says teachers should have autonomy?

We want less authority of the boss in the classroom. That’s why we have civil service protection, that’s why we have professions, because we want workers to have autonomy. But we need to be able to say why.

We want to move away from the model of proletarian labor where you’re completely under the authority of the boss. We do that in a lot of specific cases already. The intellectual challenge is to generalize that and see how we can apply it more broadly to the areas of society where it’s not not currently organized that way.

AJ: The question is nicely posed, because most people would broadly agree that capitalism generates a lot of good. But there’s been a sense right from the beginning that it may not be serving the needs of humanity. That the only word that describes this is a drive, an alien drive which sometimes intersects with the need of human beings and very often doesn’t.

When we think about what happens in farms, for example, and how so many people spend their entire lives working as drones, it’s very tragic history. Yes, people are richer and healthier as well. But capitalism, the way that it’s developed, has not served the needs of humanity.

We don’t have to look historically. Let’s look at what’s happening right now with vaccination. The belief that you needed intellectual property and you can only solve this by the genius of a few pharmaceutical companies when in fact, what happened in all of this innovation was that it was the public sector backing all of this, which made certainly some of the vaccines even viable in the first place. And so now you have this perverse situation where some people are prevented from access because we want to maintain whatever capitalist institutions that we’ve built up.

So it’s important to realize that capitalism, while it’s done many great things as Marx and others recognized, it’s never been a force which has very nicely dovetailed with human needs. But that what’s useful now to think about is, as Josh said, we don’t need to imagine an alternative – we have a model and a system that’s already there, that we’re going to replace it with.

This thing will happen incrementally. Maybe this is radical optimism, but we both believe that the domain organized around these arbitrary hierarchies – the market and so on, is shrinking. Maybe in the next few generations with the challenge of climate change, with more crises and with a truly global world, the responses to those will mean that the domain of collective freedom will be much greater in the future than now.

And the domain of capitalism will be smaller.

JWM: I want to amplify something Arjun just said — the vaccine is a perfect example of this dynamic. On the one hand, we have a urgent collective problem, this pandemic. And the solution is directed by the public. It’s a collective decision mediated by governments to devote our common resources to solving this problem.

And it’s incredibly effective when you want to solve this problem and you have a political decision to do it. You can work wonders. And it’s carried out by scientists who have a whole set of professional norms around the conduct of science, which is precisely in order to suppress market incentives. We don’t want scientists thinking about how to get rich. Now, we do get that because that’s ubiquitous in our society, but the reason we have a whole set of professional norms around science is precisely because we think that this is the activity that people carry out better when they’re insulated from market incentives.

And then we have a centralized public direction to mobilize their activity. But the problem is that the fruits of that still have to be squeezed into this box of private property. Somebody has to have a property right over all this collective labor and public resources in the form of a patent.

And that then limits the value of this work. It makes the success much less than it could have been. We already are seeing that conflict and we’re going to continue seeing it even more so as we deal with problems like the pandemic and climate change and so on.

When we urgently need to solve a problem, we find we do it by suppressing the logic of the market and making decisions collectively. But then as long as we still have this overarching insistence on organizing our claims on each other in the form of property rights, it creates a conflict, it gets in the way of that. And over time, again, just the necessity of solving our urgent problems is going to force us to move away from the private property model and away from the pursuit of profit, and towards more rational collective ways of dealing with the problems that face us.

A Most Violent Year

I just watched this movie.

Oscar Isaacs plays the owner of a fuel oil company in 1981, the peak year of violent crime in New York City. Needless to say, it’s an industry in which organized crime is salient, in real life and of course double in the movies. But he just wants to sell fuel oil. One way of looking at it, is it’s The Sopranos from the point of view of the people they preyed on. Another way, it’s the kind of movie Deirdre McCloskey used to call for, a celebration of bourgeois virtue. I don’t know if McCloskey would like the results in this particular case. What’s very clear here is how much bourgeois virtue depends on, or is constituted by, its dialectical relationship with the liberal order on the one hand, the rule of law; and on the other hand the personal loyalties of family and tribe. Your status as a business owner depends on your relationship to your wife, children, in-laws, on the one hand, and to the agents of the state on the other. The capitalist is always an embodied human being, never the pure personification of capital. (It’s worth noting that Isaacs’ key counterparties are a Hasidic clan and a grandfather-granddaughter operation.)

We also see the void at the heart of the capitalist ethic. Several times, other characters ask Isaacs why it’s so important to him that his business keep growing. His answers range from “Just because” to “I don’t understand the question.” These exchanges reminded me of a line from Nietzsche that Bob Fitch used to describe real estate speculators:

We must not ask the money-making banker the reason for his restless activity, it is foolish. The active roll as the stone rolls, according to the stupidity of mechanics.

Isaacs’ performance is quite affecting, and it’s clear that his character has real human connections to his family, his employees, and his business peers. That only makes it more effective when we see how much his concrete choices come down to “the stupidity of mechanics.”

The depiction of New York back in the day feels real. The dialogue is smart and the camerawork and sound are effective, in my uniformed judgement. It’s a good movie, I recommend it.