My last post dug into the challenge of equilibrium in economics. It’s an analytical lens, inherited from physical scientist Isaac Newton. When an economist invokes equilibrium and then looks through that lens only, doing so may obscure other aspects of emerging problems in actual economies.
Laissez-faire economists were unable to cope with Great Depression problems of unemployment and unsold goods. Their “tool bag” did not allow visualization of government as a solution. These free-market ideologues held—and continue to harbor bias— that government always works at cross purposes with economic welfare.
To illustrate metaphorically, when one’s only tool is a hammer, an ideologue with hammer-in-hand will forever search for a “nail” they believe can be solved only with their unique tool. However, if the economic problem reveals itself instead, as a screw to be turned metaphorically rather than a nail to be hammered, then a myopic laissez-faire prescription offers little value. During the Great Depression, when laissez-faire was revealed as insufficient, its advocates doubled down on efforts to convince perceived ideological enemies, theirs was the only proper path. They stood by what they called Say’s Law.
As a contemporary of Adam Smith, French economist JB Say is associated with the institutionalization of Newtonian orderliness. The so-called law named after him is no empirical law at all, however. It’s nothing more than a restatement of Isaac Newton’s fixation on orderliness, with unlimited faith in instantaneous equilibrium.
Simplistically, Say’s Law declares that supply creates its own demand. It’s invocation codifies the belief that the business community’s production of goods, simultaneously generates a flow of income to workers sufficient to allow them to purchase those goods. It was revealed to be a Depression-era failure when the value of goods supplied by firms exceeded the value of household purchases. Unsold inventories and massive unemployment followed. Even so, laissez-faire economists stood their ground, and still do. They’re still swinging their metaphorical hammer in support of Say’s Law.
I call Say’s Law the First Glitch of economic doctrine, to distinguish it from an emergent second doctrinal glitch. For Joan Robinson, Cambridge University student of JM Keynes, the obscure name she chose for this Second Glitch of economic doctrine is the “profit lacuna.” That’s a fancy name for “void.” In the 1960’s Robinson pointed out that deep within the “bowels” of economic doctrine remains a rate-of-profit void so fundamental that eventually, it could rise up practically, then drag the economic profession—and actual economies with it—into unprecedented, destructive territory. In recent decades since Robinson’s death in 1983, this prophesy is being fulfilled.
Smithian capitalism is about rewarding entrepreneurs who undertake capital investment. Capitalist societies—especially in the United States—have offered special incentives to capitalist entrepreneurs, some in forms including tax cuts and regulatory relief. But what if would-be capitalists do “head fakes” in the direction of becoming legitimate capitalists, then segue instead into roles as riggers, gamers or rip-off artists, preying upon the American system?
I call such people pseudo-capitalists. The term describes those who take the low, easy path to riches. Instead of contributing productively, such as legitimate capitalists Warren Buffett or Elon Musk, pseudo-capitalists strategize instead to create fraud-producing schemes, either legal or illegal. Simplistically, a fraudulent scheme looks like a “bait and switch” operation in which the “sucker” is duped into accepting outcomes inconsistent with their best interest due to the salesmanship and deal-making trap into which they’ve fallen.
These schemes need to be better identified and exorcised, even as they are exploding within the ranks of American corporate capitalism. In my next post I’ll expand on the productivity-destroying morass that pseudo-capitalism creates, and strategies necessary to free our citizens from it. For now, think of some hypothetical pseudo-capitalist; some dealmaker who bends the rules to line their pockets, even while those who “take the bait” see their futures and their fortunes diminished. Think, for instance, of the man who claimed he was entering public office to “drain the swamp.” Consider the business empire of America’s President Donald Trump.
~ Jim Sawyer
Here is a link to the prior post on equilibrium in economics (ECON Errors 101)