Post-Keynesian Observations

Understanding the Macroeconomy


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[NOTE: All of the other parts caution you to read them in order, but this one probably stands by itself. You’d get more from it if you read parts 1-7 first, but it’s not strictly necessary.]

I changed my mind on what this part would cover. One of my friends said the blog was depressing him and that made me realize I was painting an awfully grim picture. So I decided to stop the crisis story for a moment (which is necessarily negative) and take a quick look at the positives! But first, a little perspective…

The folks coming from my school of thought view the market as a tool. It is a means of addressing particular social problems in the same way that a hammer is a means of addressing certain carpentry problems. If what you need to do is to drive nails into a piece of wood, then a hammer is ideal. But if your job is to cut a large plank into smaller pieces, you’re better off with a saw. Carpenters don’t view the choice of whether or not to use the saw or the hammer as one fraught with philosophical, moral, and religious implications. They decide pragmatically which one accomplishes their goal with the least effort and I suspect that they lose very little sleep over it. They are also willing to experiment to determine which one works best.

It is thus incredible and just a little frightening to me and my colleagues that there are schools of thought in economics that practically worship the market as a gift from the gods while others see it as a manifestation of evil. That’s a little weird. What if there were carpentry guilds dedicated to “hammer principles” and who thought that those using saws were corrupting the natural order of carpentry (or who thought hammers were the work of the devil)? We’d probably lock them up. But, I was at graduation last year and the speaker (I can’t remember who it was–a state politician of some sort) made the statement, “And here in Texas, we still believe in the free market!” Not only did I sit there trying to figure out what in the hell that even meant or how it was relevant, but the whole stadium broke into spontaneous applause. I felt a bit like Indiana Jones in The Temple of Doom when he sees the worshipers at the altar! It was a little creepy.

What I make to make clear from all this is that economists from my perspective neither believe that markets are a natural and benevolent force allowing humans to be truly “free” (as do the Austrians, Libertarians, and, to a large extent, mainstream economics in general), or that capitalism is exploitative and in the process of self destructing (as do the Marxists). We take the pragmatic perspective that we have social goals and that some of those are addressed very effectively by using Adam Smith’s invisible hand, while others are not.

Having said all this, the market is a wonderfully effective tool for the creation of consumer goods and services. It allows budding entrepreneurs to try their hand at being restauranteurs, clothiers, cobblers, educators, etc., and it makes their success a function of whether or not the general public is willing to give up their cash in exchange for their goods and services. That works very well in terms of making sure that which consumers want gets produced (of course, firms also try to make us want their products with all kinds of slick advertising, but that’s a different story). One of my favorite things has always been how smoothly the system adjusts to change. If customers decide that they no longer want to eat seafood, seafood restaurants go bankrupt. You don’t need a new law to be passed, there are no forms to fill out, no five-year plans to adjust, no marketing surveys to conduct. It happens because the cash register till takes in less money than it costs to run the restaurant. And, whatever consumers now want instead of seafood is what becomes profitable, thereby allowing that industry to expand. The philosophy of pragmatism, you may have gathered from the above, encourages experimentation to find the best way to achieve a goal. With consumer goods and services, markets allow just that. It creates an avenue for people to be creative and it is conducive to social welfare.

The market isn’t terrible for investment goods (productive capacity) as it operates in a similar fashion as that described above for consumers, but it’s a little more complicated due to the animal spirits/uncertainty stuff I reviewed earlier. Still, if the consumer-goods market is working well, then those firms should be the ones with the profits that allow them to invest. It’s not quite that simple and of course I’m not arguing that capitalism is perfect, just better than the known alternatives.

So, as you are reading my commentary on what created the current crises do not assume that I am bashing markets in general. There are tasks at which it is quite good, just as there are carpentry jobs for which hammers are perfect. However, what the market doesn’t do is create a job for everyone who wants one, sometimes on a very large scale. It is prone to periodic, serious breakdowns. But, it can be fixed. Remember, it’s just a tool–we just need to take it back to the forge and reshape it!


Written by rommeldak

January 16, 2009 at 11:40 am

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  1. “Having said all this, the market is a wonderfully effective tool for the creation of consumer goods and services….”

    I’d like to query-comment on this post in general, and the above partially quoted paragraph in particular. Please excuse my probable naivety, or ignorance if it elbows its way through and obscures my ponderances. 😉

    First, an explication of my persepective. I am not a Marxist, in political or in social terms. I think Marxism is as dead wrong as we now know most of Freud(ianism) to have been. However, having learned the term in my Sociology courses, I do look at the world through a Marxist sociological perspective. That is my nature. So that will of course inform my views, opinions, and questions. Just thought you should know.

    Now, is not one of the most worrisome current problems, nationally and globally, a combination of factors wherein small entrepeneurs and the general consumer market are elbowed out not so much by a risky market and difficulty getting loans but by the extreme size and market dominance on some of the true coroprate monsters — your Coka Colas, Microsofts, etc.?

    By which I mean, it seems to me that when companies become that large they morph into something else. They become a sort of nation-state whose power and social influence is so great that they wield sufficient sociocultural control to sway entire populations, globally, through astronomical advertising campaigns, localized cultural influence (both implicit and explicit), and other factors and force the market — through social and poitical pressure — to do the corporation’s bidding. And in becoming so large do they not then have a sort of control over markets and global financial situations that supercedes the “normal” consumer market and its “normal” controls, constraints, and so forth?

    I guess what I’m trying to ponder here, in a rather messy way is, is it not the case that these superhuge corporations stand apart from the market and to some extent control and influence the world marketplace in a way that meets their corporate agenda?

    Lastly, wouldn’t it be better if we were educated to avoid debt, or at least avoid anything but the most piddling and manageable forms of debt and thereby force a slowdown on growth, maintaining some corporate sanity?

    It seems to me that the most important courses that don’t exist in any public of highschool would/should be Critical Thinking 101 and No More Debt 102.


    January 18, 2009 at 12:51 am

  2. Sic, on point one regarding the power held by megacorps, I don’t disagree that this is a serious issue. However, that does not, in itself, argue against the use of markets. The abuses you describe could just as easily be carried out by governments. Any entity with great power and few checks thereon may well use that power to oppress. I guess what I am arguing is that, just as we wouldn’t say that we shouldn’t have government because it’s possible for it to be exploitative, so we would not want to argue that with respect to markets, either. We must be on the look out for these problems and build in checks, balances, speed bumps, etc.

    With regard to debt, I would again say that there is nothing inherently wrong with it. In fact, it is absolutely vital to economic growth. But, you have to be sensitive to what happens if you leave us to our own devices! Safeguards can be built in that, if they don’t entirely avoid collapse, make it less severe and shorter. I promise I’ll get to all that, hopefully by the end of this week!


    January 20, 2009 at 12:45 am

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