The Slack Wire

Why Do We Need Heterodox Economics Departments?

A comrade writes:

Economics is too important to leave it to the mainstream. Economic ideas and economists are very powerful at shaping and influencing the societies in which we live. We, heterodox economists, are a minority and we need our voice be heard. I’m afraid that the radicalism of “I don’t care the mainstream, I do my own thing” is the most conservative strategy. It leaves us as college professors teaching mainstream stuff with a heterodox twist but without any significant influence in the real world. Please, don’t take this wrong. I respect and admire those who like teaching at colleges as a way of life. I’m just saying that as a collective output is a suicide. Our battle is at research universities, central banks, finance ministries, international institutions and think tanks, where the presence of mainstream economist is overwhelming. We need to challenge and persuade them and for that we need to know their theories and methods.

I disagree.

Of course we don”t want to be cloistered. But there are many possible channels by which our work can reach public policy, social movements and the larger world. Shifting the mainstream of economics is only one possible channel and not, in my judgment, the strongest or most reliable one.

To take a personal example: I recently agreed to do some research work for a couple of state-level minimum-wage campaigns,giving them numbers on the distribution of workers who would be covered by the bills by industry and firm size and the profitability of the major low-wage sectors in those states. The people organizing the campaigns are now using those numbers for position papers, talking points for canvassing, op-eds, etc. I even went down to Maryland a couple weeks ago to testify before the legislature.

Of course you need some basic knowledge of econometrics and the relevant literature to do this kind of work. But do you need the kind of knowledge you’d need to be a cutting-edge labor economist? No, obviously not; I’m not a labor economist of any sort. And yet, I would argue, this kind of direct work with practical political campaigns/organizations is at least as likely — more likely, IMO — to produce concrete policy changes and to shift the public debate, than an effort to master the techniques of mainstream labor economics, publish sufficiently on the minimum wage to move the consensus of the profession, and then count on the “official” representatives of the profession to pass the message on to policymakers. Fundamentally, I don’t agree that our battle is at research universities, central banks, etc. Our jobs may be at those places. But our battle is with people engaged in practical political work and organizing. This isn’t (just) a moral stand; I think the implicit assumption that the consensus of the economics profession is first shaped by the quality of the arguments made on various sides, and then transmitted to politics, is not applicable to the real world. If you want to contribute to political change, you need to be part of a political project; winning debates within the economics profession doesn’t help. The recent history of macroeconomics shows that clearly, no?

There’s a second point. The idea that we should be orienting our training around learning to persuade the mainstream assumes that “we” already know what we want to persuade them of. But that’s not the case. On most of the big questions, we don’t have any consensus on what the right answers are, even if we’re confident they’re not what’s taught in most programs. And the project of developing an alternative economics is very different from the project of persuading people of an alternative economics. The second would require talking — and having the tools to talk — with others. But the first requires primarily talking among ourselves. And the first has to come first. Economics is hard! And Marxist, post-Keynesian, feminist, institutionalist economics is just as hard as mainstream economics. (Albeit in different ways — less math, more fieldwork & history.) Unless we — meaning we heterodox/radical economists — are systematically building on each others’ work, there will never be an alternative view to persuade the mainstream of. Which means there needs to be spaces for conversations within radical economics, where we can critique and develop our own approaches, and for getting the training necessary to take part in those conversations.

All of us tend to exaggerate our own intellectual autonomy. (It’s a legacy of the Enlightenment.) We think we’re rational beings, who know what we want and choose the best tools to get it. But , means and ends don’t always separate so cleanly. You say you want a prestigious position only in order to have a better platform from which to advance progressive ideas, but soon enough the means becomes the ends. (I’ve seen it happen!) There can’t be left ideas without a sociological left — without a group of people who feel some objective connection with each other, have shared experiences and interests, share a common identity. Because ideas will accomodate to the situation of the person who holds them. (Erst kommt das Fressen, dann die Moral.) We all think, no not me, but yes us too. If there aren’t at least a few settings in which specifically radical economics is professionally rewarded, we shouldn’t take it for granted that it will continue to exist.

On Other Blogs, Other Wonders

… or at least some interesting posts.

1. What Kind of Science Would Economics Be If It Really Were a Science?

Peter Dorman is one of those people who I agree with on the big questions but find myself strenuously disagreeing with on many particulars. So it’s nice to wholeheartedly approve this piece on economics and the physical sciences.

The post is based on this 2008 paper that argues that there is no reason that economics cannot be scientific in the same rigorous sense as geology, biology, etc., but only if economists learn to (1) emphasize mechanisms rather than equilibrium and (2) strictly avoid Type I error, even at the cost of Type II error. Type I error is accepting a false claim, Type II is failing to accept a true one. Which is not the same as rejecting it — one can simply be uncertain. Science’s progressive character comes from its rigorous refusal to accept any proposition until every possible effort to disprove it has failed. Of course this means that on many questions, science can take no position at all (an important distinction from policy and other forms of practical activity, where we often have to act one way or another without any very definite knowledge). It sounds funny to say that ignorance is the heart of the practice of science, but I think it’s right. Unfortunately, says Dorman, rather than seeing science as the systematic effort to limit our knowledge claims to things we can know with (near-)certainty, “economists have been seduced by a different vision … that the foundation of science rests on … deduction from top-level theory.”

The mechanisms vs. equilibria point is, if anything, even more important, since it has positive content for how we do economics. Rather than focusing our energy on elucidating theoretical equilibria, we should be thinking about concrete processes of change over time. For example:

Consider the standard supply-and-demand diagram. The professor draws this on the chalkboard, identifies the equilibrium point, and asks for questions. One student asks, are there really supply and demand curves? … Yes, in principle these curves exist, but they are not directly observed in nature. …

there is another way the answer might proceed. … we can use them to identify two other things that are real, excess supply and excess demand. We can measure them directly in the form of unsold goods or consumers who are frustrated in their attempts to make a purchase. And not only can we measure these things, we can observe the actions that buyers and sellers take under conditions of surplus or shortage.

One of the best brief discussions of economics methodology I’ve read.

2. Beware the Predatory Pro Se Borrower!

In general, I assume that anyone here interested in Yves Smith is already reading her, so there’s no point in a post pointing to a post there. But this one really must be read.

It’s a presentation from a law firm representing mortgage servicers, with the Dickensian name LockeLordBissell, meant for servicers conducting foreclosures that meet with legal challenges. That someone would even choose to go to court to avoid being thrown out of their house needs special explanation; it must be a result of “negative press surrounding mortgage lenders” and outside agitators on the Internet. People even think they can assert their rights without a lawyer; they “do not want to pay for representation,” it being inconceivable that someone facing foreclosure might, say, have lost their job and not be able to afford a lawyer. “Predatory borrowers” are “unrealistic and unreasonable borrowers who are trying to capitalize on the current industry turmoil and are willing to employ any tactic to obtain a free home,” including demands to see the note, claims of lack of standing by the servicer, and “other Internet-based machinations.” What’s the world coming to when any random loser has access to the courts? And imagine, someone willing to employ tactics like asking for proof that the company trying to take their home has a legal right to it! What’s more, these stupid peasants “are emotionally tied to their cases [not to mention their houses]; the more a case progresses, the less reasonable the plaintiff becomes.” Worst of all, “pro se cases are expensive to defend because the plaintiff’s lack of familiarity with the legal process often creates more work for the defendant.”

If you want an illustration of how our masters think of us, you couldn’t ask for a clearer example. Our stubborn idea that we have rights or interests of our own is just an annoying interference with their prerogatives.

Everyone knows about bucket lists. At the bar last weekend, someone suggested we should keep bat lists — the people whose heads you’d take a Louisville slugger to, if you knew you just had a few months to live. This being the Left Forum, my friend had “that class traitor Andy Stern” at the top of his list. But I’m putting the partners at LockeLordBissell high up on mine.

3. Palin and Playing by the Rules

Jonathan Bernstein, on why Sarah Palin isn’t going to be the Republican nominee:

For all one hears about efforts to market candidates to mass electorates (that’s what things like the “authenticity” debate are all about), the bulk of nomination politics is retail, not wholesale — and the customers candidates are trying to reach are a relatively small group of party elites…. That’s what Mitt Romney and Tim Pawlenty have been doing for the last two-plus years… It’s what, by every report I’ve seen since November 2008, Sarah Palin has just not done.

Are you telling me that [Republican Jewish Committee] board members are going to be so peeved that Sarah Palin booked her Israel trip with some other organization that they’re [going to] turn it into a presidential nomination preference, regardless of how Palin or any other candidate actually stands on issues of public policy?

Yup. And even more: I’ll tell you that it’s not petty. They’re correct to do so. … if you’re a party leader, what can you do? Sure, you can collect position papers, but you know how meaningless those are going to be…. Much better, even if still risky, is assessing the personal commitment the candidates have to your group. What’s the rapport like? Who has the candidate hired on her staff that has a history of working with you? Will her White House take your calls? …

It’s how presidential nominees are really chosen. … Candidates do have to demonstrate at least some ability to appeal to mass electorates, but first and foremost they need to win the support of the most active portions of the party.

It’s not a brilliant or especially original point, but it’s a very important one. My first-hand experience of electoral politics is limited to state and local races, but I’ve worked on quite a few of those, and Bernstein’s descriptions fits them exactly. I don’t see any reason to think national races are different.

It’s part of the narcissism of intellectuals to imagine politics as a kind of debating society, with the public granting authority to whoever makes the best arguments — what intellectuals specialize in. And it’s natural that people whose only engagement with politics comes through the mass media to suppose that what happens in the media is very important, or even all there is. But Bernstein is right: That stuff is secondary, and the public comes in as object, not subject.

Not always, of course — there are moments when the people does become an active political subject, and those are the most important political moments there are. But they’re very rare. That’s why someone like Luciano Canfora makes a sharp distinction between the institutions and electoral procedures conventionally referred to as democracy, on the one hand, and genuine democracy, on the other — those relatively brief moments of “ascendancy of the demos,” which “may assert itself within the most diverse political-constitutional forms.” For Canfora, democracy can’t be institutionalized through elections; it’s inherently “an unstable phenomenon: the temporary ascendancy of the poorer classes in the course of an endless struggle for equality—a concept which itself widens with time to include ever newer, and ever more strongly challenged, ‘rights’“. (Interestingly, a liberal like Brad DeLong would presumably agree that elections have nothing to do with democracy, but are a mechanism for the circulation of elites.)

I don’t know how far Bernstein would go with Canfora, but he’s taken the essential first step; it would be a good thing for discussions of electoral politics if more people followed him.

EDIT: Just to be clear, Bernstein’s point is a bit more specific than the broad only-elites-matter argument. What candidates are selling to elites isn’t so much a basket of policy positions or desirable personal qualities, but relationships based on trust. It’s interesting, I think it’s true; it doesn’t contradict my gloss, but it does go beyond it.

Who Paid for the Paper?

Yglesias weighs in on the New York Times paywall:

It’s always worth emphasizing in these discussions that the widespread view among journalists that readers have traditionally paid for journalism is a mistake. Readers have traditionally paid for paper, ink, and distribution of physical media. The price goal of subscriptions is to cover costs so that you can maximize subscribers without going bankrupt. Then you make money by selling ads.

True that. There’s this idea that what’s killing journalism is that people won’t pay for it now that they have access to free online news sources. But that’s wrong. Circulation revenue is holding up ok for newspapers. What’s collapsed is advertising revenue.

Newspaper Revenue by Source, 1956-2009 ($ Millions)

Source: Newspaper Association of America

The problem isn’t that the public aren’t willing to pay for journalism; it’s that advertisers aren’t. Over the past decade, newspaper subscription revenues are down 5 percent. But display ad revenues are down by a third, and classified ads are down by two-thirds. No doubt it’s emotionally satisfying for newspaper executives to frame the question as whether journalism is worth paying for. But from an economic standpoint the paywall strategy is exactly backwards; it can only accelerate the collapse of advertising revenue that is the real cause of the crisis.

classified advertising … was for years the secret weapon of the newspaper business. Classifieds are not the most glamorous aspect of the newspaper trade… What they are, however, is fabulously lucrative. For decades, whole sections of the newspaper industry were kept afloat by the classifieds. … In the US, the importance of advertising was even greater: a fact which remains true, to a startling extent, when you look at the data which show the balance between revenue earned via sales and advertising. In the UK, which is roughly in the middle of the OECD range, the balance is 50-50. (The global average is 57-43 in favour of advertising.) In the US, the balance is 87 per cent advertising, 13 per cent sales.
I’m not sure where Lanchester gets this exact number; the NAA gives around 80% advertising, before the collapse of the past few years. But the bigger problem with the piece is the suggestion that the problem is finding a new business model for journalism. The whole point is that journalism as such never had a business model, it was only ever a loss leader for the classifieds. That is, it was cross-subsidized by the network rents from connecting buyers and sellers in thin markets. Now those rents are cross-subsidizing Internet search, free email, social networking, for that matter this humble blog. I’d be the last to say the trade was entirely for the better. But no one with a gmail account should say it was entirely for the worse.
Cross subsidies from monopolies are an important and underappreciated form of public good provision in modern capitalism. An interesting aspect of this is the subsidy by its nature is never the result of any straightforward optimization, in the way business decisions are supposed to be. It needs a sociological link with the source of the subsidy. Whether it’s “All the news that’s fit to print” or “Don’t be evil,” the principle only performs its function of legitimating the underlying monopoly if it is, on some level, sincerely held.
All of which is to say that saving newspaper journalism can’t be a matter of restoring its status as a profitable commodity, because it never was.

What Do Bosses Want?

The New York Times paywall is here. Felix Salmon has the details, and what looks like the definitive critique:

What does all this mean for the New York Times Company? I can’t see how it’s good. The paywall is certainly being set high enough that a lot of regular readers will not subscribe. These are readers who would normally link to the NYT from their blogs, who would tweet NYT articles, who would post those articles on Facebook, and so on. As a result, not only will traffic from these readers decline, but so will all their referral traffic, too. The NYT makes more than $300 million a year in digital ad revenue, so even a modest decline in pageviews, relative to what the site could have generated sans paywall, can mean many millions of dollars foregone. On top of that, the paywall itself cost somewhere over $40 million to develop.

Against all that, how much revenue will the paywall bring in?… extra revenues of $24 million per year.

$24 million is a minuscule amount for the New York Times company as a whole; it’s dwarfed not only by total revenues but even by those total digital advertising revenues of more than $300 million a year. … So by my back-of-the-envelope math, the paywall won’t even cover its own development costs for a good two years, and beyond that will never generate enough money to really make a difference to NYTCo revenues. … I just can’t see how this move makes any kind of financial sense for the NYT. The upside is limited; the downside is that it ceases to be the paper of record for the world. Who would take that bet?

(For the record, in the past couple weeks I devoted a few idle moments to considering just how much I would pay for digital access to the NYT, and decided that $15 a month was just about my upper limit. But in fact I won’t pay it, since top news stories will continue to be free on the iPhone.)

What makes this bad decision so interesting is how many other companies seem to make the same kind of bad decisions. And in particular, how completely they overlook the value of the kind of free marketing and brand development that Salmon describes in the first paragraph.

For instance, here’s an interesting new working paper by Yi Qian on the effect of counterfeit goods on clothing brands, which finds

heterogeneous effects of counterfeit entry on sales of authentic products of three quality tiers. In particular, counterfeits have both advertising effects for the brand and substitution effects for authentic products. The advertising effect dominates substitution effect for high-end authentic product sales, and the substitution effect outweighs advertising effect for low-end product sales.

In other words, when someone buys a rip-off pair of Manohlo Blahniks, they may be foregoing a purchase of an authentic pair. But maybe not. And either way, their visible endorsement of the brand increases its appeal to others in a way that the company would otherwise have to spend scarce advertising dollars to achieve. Not surprising, it’s the high-end brands that benefit on net from counterfeiters, since purchasers of counterfeit goods are less likely to be able to afford the real thing and the brand identity is more valuable. This is consistent with other research I’ve seen suggesting that in some cases, the advertising effect outweighs the substitution effect even at the level of the individual consumer — buying a counterfeit handbag (or illegally downloading a piece of music, or whatever) makes a person more likely to subsequently buy that item legally.

(Qian is also co-author of this fascinating survey of the economics of counterfeiting, which identifies a remarkably broad range of theoretical and empirical cases where laxer IP protections turn out to benefit sellers. For instance, there’s evidence that academic journals were able to charge higher prices as a result of the widespread availability of photocopiers starting in the 1980s, because the greater value of journals to subscribers who were now able to make copies of articles outweighed the loss of sales to people who read the copies.)

Sellers of branded goods can’t be unaware of this research, or at least of these general effects. Yet we see sellers of branded goods going to ridiculous lengths to strengthen IP proections, even sellers of high-end goods who are least likely to be harmed by infringement. In effect, these companies, like the New York Times, are going to great lengths to deprive themselves of free advertising. It’s almost like they put a higher value on controlling their brand, than on profiting from it.

Which they probably do.

It makes one think about the Marxist literature on the labor process, and the idea that for capitalists, maximizing the surplus they extract from workers is secondary to maintaining the conditions under which surplus can be extracted at all. This is Stephen Marglin’s argument in his classic article What Do Bosses Do? — that the factory system was not initially adopted because it was any more technically efficient than alternative forms of worker-controlled production, but because of the strategic leverage it gave the owner of capital. He quotes a contemporary article in The Spectator observing that worker-managed cooperatives were competitive with capitalist enterprises:

Associations of workmmen could manage shops, mills and all forms of industry with success, and the immensely improved the conditions of the men, but then they did not leave a clear place for the masters. That was a defect…

Similarly, bloggers and social media may successfully generate immense traffic for the Times, and counterfeiters may successfully build the value of the brands they rip off; but the owners of these properties may not be (only) confused when they object, since this uncontrolled activity has a less of a clear place for the masters.

As Kalecki famously said,

“Discipline in the factories” and “political stability” are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound.

Profits come second to power. So when the results of productive labor aren’t appropriated as private property, the class instinct of the bosses of the information industries must tell them this is unsound, even if it’s more immediately profitable than the alternative. As Kalecki says in the same essay, “The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’ — unless you happen to have private means.” That, I suspect, is fundamentally why the Sulzbergers et al. object to free ice cream, even when they can make more money by giving it away than by selling it.

Just and Christian Arguments

In today’s Times, Bank of America explains why there can’t be any principal reductions for homeowners who aren’t already in default:

Bank of America executives said on Tuesday that the idea was unworkable and warned that it would be unfair to borrowers who had managed to stay current on their loans. “There’s a core problem that if you start to help certain people and don’t help other people, it’s going to be very hard to explain the difference,” said Brian T. Moynihan, the chief executive of Bank of America. “Our duty is to have a fair modification process.”

Of course. Bank of America isn’t interested in maximizing the payments it receives from homeowners, it’s just trying to be fair.

Even the most outspoken attorney general on the issue, Tom Miller of Iowa, acknowledged on Monday that too generous a program might encourage homeowners to walk away from properties where the value of the loan exceeded how much the underlying property was worth.

God forbid that homeowners be encouraged to act in their own financial self-interest!

“There may be as much as $1 trillion worth of mortgages that are underwater,” said Terry Laughlin, the Bank of America executive whose unit, Legacy Asset Servicing, handles mortgages that are delinquent or in default. “What do you do for those borrowers that have a job but have negative equity and have paid on time and honored their obligations?” “This is an unsolvable question,” he said. … The comments by Mr. Moynihan and Mr. Laughlin came at a daylong meeting with investors and analysts in New York, the first of its kind for Bank of America since 2007. … Writing down billions of principal now could actually retard the recovery by encouraging borrowers to default, they argue. “It’s not that we don’t want to help troubled borrowers,” Mr. Laughlin said. “It’s a moral hazard issue.”

One’s heart goes out to those Bank of America executives, tossing and turning all night as they wrestle with the unsolvable question of how to help borrowers without imperiling the recovery or creating “moral hazard”. The profound ethical dilemmas our betters must struggle with, as they try to do what’s best for everyone. Laughlin, Moynihan and their fellow Bank of America executives must hardly have time to think about the “$35 to $40 billion a year” of profits they’re expecting in coming years. Including — much to their dismay, no doubt — the payments from those homeowners whose principal they would love to write down, if only it weren’t for their strict regard for fairness and the good of the economy.

Where have I read about such scrupulously ethical creditors before? Oh, right, here:

Don Ramon … made no secret of the business he conducted. … The Mexican citizen, he explained, was free. Slavery was strictly forbidden and severely punished. No Mexican citizen, whether of Spanish, mestizo, or Indian descent, could be kept or sold as a slave.

But debt was not slavery. A man, any man, was as free to contract debt as not to contract it… Nobody compelled the Indian to get into debt, to drink, to set off fireworks in honor of the saints, or to buy his wife necklaces of glass beds and glittering earrings. There was no reason to call Mexico uncivilized because the dictatorship recognized debt and supported the creditor in exacting payments. He who has contracted a debt must pay it…

“And over and above all that, and however you look at it,” don Ramon went on, putting forward the just and Christian argument for his trade, “the monterias and coffee plantations must have labor if the prosperity of the country is to be maintained… It’s all aboveboard. There’s no compulsion. But all the same it is made clear that debts must be paid. Business depends on convincing the people that their debts must be paid.”

Fitch

I just learned that Bob Fitch has died. He broke his leg last month, and then a few days ago a blood clot went to his brain, causing a stroke that left him in a coma; he also suffered several heart attacks. He died yesterday.

I hadn’t seen Bob in several years, maybe not since 2005 or 2006. But there was a time when I used to see him regularly, meeting at the Barnes & Noble on Union Square or his studio apartment around the corner on 17th St. There was a Japanese screen dividing his bed from the rest of the tiny space, and a huge portrait of Stalin on the wall. We’d talk about whatever he was working on at the moment — the Nietzschean roots of the postmodern Left, his critique of Immanuel Wallerstein (two long, brilliant essays that as far as I know were never published), the status of the dollar, the politics of land use, the structural reasons for union corruption (the argument that eventually became Solidarity for Sale), the need for a new political party. “Let’s start a party, Josh,” he said to me on a couple occasions in that warm and yet somehow wheedling voice I can hear now so clearly in my head, that teasing tone he used in argument that always seemed to suggest that of course you already agreed with him and he was just humoring your perverse insistence on pretending that you didn’t. “Well, don’t you agree that…” he’d begin, socratically, when he realized you weren’t with him. That makes him sound dogmatic, which isn’t true at all; it’s just, I think, that he was so caught up in his ideas that he genuinely couldn’t understand it if you didn’t share his enthusiasm. Once I walked with him as he took his laundry to the laundromat down the street; it seemed a little sad, this original, brilliant, genuinely important writer, probably nearing 60 then, still living such a penurious bachelor lifestyle. Like something out of Dostoevsky.

Fitch knew something about founding parties. In Berkeley in the ’60s (Berkeley in the 60s!) he’d been friends with Bob Avakian, and helped him start the Revolutionary Union, which later became the Revolutionary Communist Party. Once, he recalled, the two of them were driving around Oakland and saw some police. “Let’s shoot these cops,” Avakian says. “They’ll think the blacks did it, and when they crack down it will start a riot. We could make the revolution happen, we’d be like Lenin and Trotsky.” “No,” Fitch said,” we’re not Lenin and Trotsky. We’re just Bob and Bob.” No cops were shot; I’m not sure how long after that Fitch left the RU/RCP. He was a bit older than most of those Berkeley radicals, and had gotten there a bit differently; he’d been in military intelligence in the 1950s or early ’60s, seconded, I only just learned, from the 82nd Airborne.

Not that that’s why we’d admired him. Around the Grey City Journal at the University of Chicago, we mostly agreed that two of the most important areas to be thinking about were labor, and cities. We all read Jane Jacobs’ Death and Life of American Cities and Mike Davis’ City of Quartz, but The Assassination of New York was the book that made the deepest impression. It didn’t just have an inspiring or dystopian vision of the city, it told a story, it had an explanation, a political theory for why New York had evolved the way it had.

Fitch was one of that small group of unaffiliated intellectuals who exist only in New York. (Or maybe I should write existed, since there doesn’t seem to be a next generation.) Fitch, Doug Henwood, Barbara Garson, Dan Lazare, Steve Fraser. None of them were academics (Fitch had a PhD and adjuncted, mostly at CUNY; he taught at some point at John Jay, and his last teaching gig was at Laguardia, where my wife Laura teaches, and where there is now an annual Robert Fitch lecture in his memory.) All of them occupied the same broad region of the non-sectarian Marxist (or Marx-influenced) left. New York has, or had, a unique set of institutions that make that kind of milieu possible — the Brecht Forum, the Socialist Scholars Conference (now the Left Forum); a handful of progressive, even radical, unions (Fitch worked for a while for CWA Local 1180; Arthur Cheliotes was impressed enough by The Assassination of New York to hire him to come up with an alternative economic development strategy for the city); and magazines like The Nation, Dissent and The Village Voice. Bob wrote a bunch of articles for the Voice, back when the Voice printed real political journalism and paid real money for it; Chris Lehmann also printed some of his op-eds when he was editing the opinion pages at Newsday.

He didn’t write that much, considering. An early book on Ghana; Assassination; and Solidarity for Sale. (I don’t know what he was working on when he died.) There was also the long series of articles he wrote with Mary Oppenheimer for Socialist Revolution (later Socialist Review, still later Radical Society) on “Who Rules the Corporations”. That should have been a book; it certainly had enough influence. David Kotz, well-known to most readers of this blog, was part of the radical political milieu in Berkeley at that point, making his living typing manuscripts. (A different world!) “Who Rules the Corporations” was one of the things he retyped; it inspired him to go to graduate school in economics, and his own dissertation, published as Bank Control of Large Corporations (a very good book) was essentially the working out of Fitch and Oppenheimer’s argument.

If there’s a theme that ran through his work, it’s political agency — an attention to the particular choices made by those with power. You could call it conspiracy theory, but in a positive sense, since after all the world contains real conspiracies, in the sense of decisions taken behind closed doors. There was a certain continuity from the question of how business was ruled by big banks, to how New York was ruled by the Rockefellers and their ilk, to how labor was ruled by … well, here’s where he lost me. “There are three great monopolies,” he used to say. “The monopoly of capital, the monopoly of land, and the monopoly of labor.” He’d written about the first in “Who Rules the Corporations,” the second in Assassination, the third in Solidarity for Sale. Me, I could never accept the parallel. “Monopoly of labor” applies maybe to a certain kind of job-control craft labor, but where does that exist now? in a few big-city segments of the building trades, and in Hollywood. And it’s under siege in both.

This disagreement probably contributed to my not seeing him these past five years. I was working for the Working Families Party; I believed that the union movement, for all its flaws, was the only substantial American institution not ruled by money. He thought it was hopelessly corrupt, and needed to be replaced, refounded from scratch. “You could just as easily clean up a garbage pile by spraying it with attar of roses,” he like to quote Debs, “as reform the AFL.” (But didn’t Debs spent years trying to arrange a merger of his own American Railway Union with the AFL-affiliated railroad brotherhoods?) Conspiracies, that was in a sense what his work was about. He sort of acknowledges this point in the preface to Assassination. “A focus on the [Rockefeller] family may annoy academic Marxists,” he wrote, “for whom the capitalist is only the personification of abstract capital and who believe, austerely, that any discussion of individuals in economic analysis represents a fatal concession to populism and empiricism. But New York is not capitalism in general…”

His journalism on labor corruption in New York, however much he may have (in my opinion) overgeneralized it into a critique of unions in general, was incredibly valuable. “Orgies,” I remember him excitedly whispering to me at one point, “orgies in the penthouse!” This was the top floor office of “Greedy” Gus Bevona, then-president of SEIU 32BJ, the giant NYC building-services local, whose corruption Fitch was one of the first people to expose. Soon enough Bevona was out and 32BJ became one of the best-led locals in the city, under the stewardship of Héctor Figueroa. That same penthouse became the public meeting space for all kinds of progressive groups. I’ve been there on various occasions, looking out over lower Manhattan; no little credit to Bob.

Maybe he was too smart for his own good. He always had some project; there was always some question which he, finally, had found the no-one-before-recognized answer to. “You realize how conventional that is,” he’d say to you, after you laid out what you thought was some original argument. Everyone read The Assassination of New York. Maybe it never established itself academically. But among radicals it was a touchstone. All of us have an angel on our shoulder; all of us, doing practical politics on the left, have an angel asking if we aren’t too ready to make compromises, if we aren’t too quick to sacrifice principle for getting something done. Probably for almost all of us that angel has a name. For me it’s Fitch. I learned as much sitting in that apartment as I ever did in a classroom. Maybe not concrete material — altho there was enough of that — as much as a sensibility. What it means to be an intellectual on the left. And what, more specifically, we need to demand from the labor movement. I hope I’ll never commit myself to any organization without asking at some point, what would Fitch think? Bob Fitch was a communist. He didn’t, I believe, believe in any organized religion. But here is the moment when we have to acknowledge that something of the person does outlast the person. “From the first inspiration down the windpipe to the last expiration out of it, all that a male or female does that is vigorous, and benevolent, and clean, is so much pure profit to him or her in the unshakable order of the universe, and throughout the whole scope of it forever.” What would Fitch have thought? I’m sorry I didn’t ask him.

UPDATE: It’s a real honor to have Jonathan Fitch and others use this space to share their memories of Bob. If you’re reading this, please do read the comments as well.

Post Keynesianism in Practice

From the FT the other day:

That Facebook is worth $50bn or Twitter $10bn, is recounted as fact. … But there are still precious few numbers to analyse and business models are no more proved than for dotcoms a decade ago.

To illustrate the ridiculousness of trying to value these things consider LinkedIn. Its S-1 registration statement (with US regulators) provides rudimentary financial statements from which to model the company. Revenues, operating costs, capital expenditure and depreciation and amortisation schedules are available for the past five years. It is then a hop to forecast earnings before interest, tax, depreciation and amortisation and, thus, future free cash flows. Discount these cash flows (made easier because there is no debt) and you’ve got a valuation.

But who on earth knows what forecasts to make? Private secondary markets supposedly value LinkedIn at $2.5bn-$3bn. To arrive at the bottom of that range requires sales to expand 60, 50 then 40 per cent over the next three years, before tailing off to a terminal growth rate of 3 per cent in 2019. Ebitda as a proportion of revenues has to double to 20 per cent and stay there. … If sales growth tapers off faster than expected or if systems spending becomes a bottomless pit, you can halve that valuation for starters. But what if LinkedIn’s platform easily copes with millions of new members? Double ebitda margins to 40 per cent and a $5bn company is easily within reach. Who knows? No wonder it’s easier to simply quote the same price tag as everyone else.

Fundamental or Knightian uncertainty tends to get treated as something airy-fairy, as part of the philosophy-of penumbra rather than economics per se. But as this example shows, it’s unavoidable in plenty of practical questions. Mainstream models avoid dealing with the problem by assuming that the true probability distribution of all possible future events is always known. But in the real world of business people aren’t so silly. As the man says:

The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence. In fact, those who seriously attempt to make any such estimate are often so much in the minority that their behaviour does not govern the market. …

Investment based on genuine long-term expectation is so difficult to-day as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave… It needs more intelligence to defeat the forces of time and our ignorance of the future than to beat the gun.

Economists might not believe in Keynes any more. But business journalists certainly seem to!

Krugman vs. Persaud on China

Over on VoxEU, Avinash Persaud criticizes “otherwise respectable economists” (he doesn’t name names, but we know who he means) who blame China’s currency peg for contributing to the US current account deficit. “If you listen to the discourse in the US,” he writes, “you would believe that a country cannot run a trade surplus unless it manipulates its exchange rate.”

Krugman responds:

Avinash Persaud:

The current account includes “hot money” inflows that come under the exchange control restrictions and have ballooned since the China bashers created the belief that the renminbi is a one-way appreciation bet.

No, it doesn’t. The BEA explains:

The U.S. current-account deficit—the combined balances on trade in goods and services, income, and net unilateral current transfers …

I don’t mean to be a snob here, but a commentator who lectures us on “mumbo-jumbo” but can’t be bothered to learn the rudiments of balance-of-payments accounting doesn’t deserve a hearing.

On the narrow point, Krugman is clearly right. But the narrow point isn’t really the point. Whether you’re looking at the current account or at the trade balance, as Persaud prefers, there are plenty of countries with floating currencies that have imbalances as large (relative to GDP) and as persistent as China’s. It’s nice for Krugman, really, that Persaud screwed up on the current account definition, since it lets him avoid discussing what would otherwise be a serious problem for him.

So, from someone

Quote of the Day

The always interesting Steve Randy Waldman, in response to Tyler Cowen’s argument for a technologically-determined “Great Stagnation”:

Rather than a paucity of new technologies, we might be experiencing a breakdown of an older gizmo that economists refer to as “markets”. As our economy tilts away from sectors in which value (however defined) and financial revenue are reliably cojoined, our primary means of orienting our behavior towards valuable activity, individually and collectively, become less and less effective.

The whole piece is very smart. But the specific point that the link between productive activity and claims on the collective product is much more tenuous, and institutionally-determined, than mainstream theory assumes is a very good one that I’ve been struggling to articulate for a while.

Not, of course, that it’s a new one. What’s that old line? “The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions, by which they are fettered… The conditions of bourgeois society are too narrow to comprise the wealth created by them.”

EDIT: A couple addenda:

The scenario that Waldman has in mind is a systematic bias in innovations toward labor-saving technologies. In the absence of political-institutional changes that raise labor demand in the public sector, and wages across the board, this will lead to a secular rise in unemployment and decline in wages, which is both politically untenable (in a democracy, anyway) and leads to chronic shortfalls in demand.

But one can imagine this going the other way. If one thinks of the wage share as exogenous, then the same technological bias produces a falling profit rate — this is the famous Law of the Tendency of the Rate of Profit to Fall. Or from a more Schumpeterian angle [1] there’s the idea that the fixed costs associated with capital investments can only be recouped if producers have some monopoly power, which tends to diminish as innovations get diffused. So without major new innovations it’s hard for industries with large fixed-capital requirements to remain profitable. In this scenario (can we call it Smithian?), the danger is a secular redistribution of income away from profits, not toward them. (Of course this is quite compatible with increasing technological unemployment, with the winners being a labor aristocracy and the owners of scarce natural resources.) But the point about the very loose articulation between the social division of labor and the incomes produced by the market is the same.

Also, Waldman assumes that causality runs only one way, from the innovations drawn from a set of technological possibilities given by nature, to the demand for and status of labor. This is often a reasonable way to look at things. But not always. Schumpeter, again, for example — despite the misconception that he believed in cycles driven by the exogenous incidence of major innovations — thought that there was almost always a backlog of unexploited technologies,a nd that their realization as economic innovations depended on the sociological factors — the rise of “new men” and “new firms”. Within Marxist economics, there’s an important tradition that sees labor-saving and deskilling not as accidental consequences of technological progress, but as an active goal in a system based on antagonistic relations of production. A system that did not regard skilled labor as a cost — and even more importantly, that did not need to ensure that a disproportionate share of the surplus went to the owners of the means of production — might find itself drawing a very different mix of innovations.

[1] Schumpeter’s student Minsky picked up on this point, in a way I hope to return to in a future post.