Today’s ‘doctrine of choice’ assures adults that they are competent to make serious personal decisions about healthcare, education and retirement plans. At the same time, most people are convinced that they are so ignorant of economics that they are not capable of holding an informed opinion, and that economic issues must be left to experts. The so-called experts of the mainstream economics profession claim to have profound, inaccessible knowledge; in fact they understand little and obscure almost everything.
Understanding the economy is not simple, but it is no more complicated than understanding the political system sufficiently to cast a vote. In straightforward language, John F. Weeks exposes the myths of mainstream economics and explains why current economic policies fail to serve the vast majority of people in the United States, Europe and elsewhere. He demonstrates that austerity policies have little theoretical basis and achieve nothing but inequality and misery. He goes on to explain how the current deficit and debt ‘crises’ in the United States and Europe are ideologically manufactured, unnecessary and simple to overcome. Drawing on examples from around the world, this book provides a bold alternative to the economics of the 1%. Their failure to serve the interests of the many results from their devoted service to the few.
About the Author
John F. Weeks is professor emeritus of economics at SOAS, University of London, and has advised numerous governments and international organizations over the past forty years.
Read an Excerpt
Economics of the 1%
How Mainstream Economics Serves the Rich, Obscures Reality and Distorts Policy
By John F. Weeks
Wimbledon Publishing CompanyCopyright © 2014 John F. Weeks
All rights reserved.
FAKECONOMICS AND ECONOMICS
This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics.
Do not be alarmed by simplification, complexity is often a device for claiming sophistication, or for evading simple truths.
(John Kenneth Galbraith)
Idolatry of Competition
From tiny acorns great oaks grow. In a case of dogma imitating nature, from low and banal theory mainstream economists ascend to extreme ideological heights. With superficial and simplistic propositions the economics mainstream constructs a great and complex ideological edifice from which it issues oracle-like judgments over the affairs of humankind (see Box: The Construction of Nonsense). The employment, inflation and antigovernment parables of the current mainstream derive from a shortlist of putatively incontestable propositions which can be found in almost all introductory, and many advanced, textbooks:
1. Desires and preferences are unique to each person;
2. on the basis of these desires and preferences people enter into exchanges of their free will, seeking to satisfy themselves through market exchanges with other people;
3. these market activities, including the exchange of a person's capacity to work, are to obtain the income to buy the goods and services dictated by the person's desires and preferences;
4. many people seeking simultaneously to buy and sell generates competition; and this competition ensures that people buy and sell at prices that are socially beneficial;
5. action by any collective or individual authority, private or public, that restricts the potential for people to buy and sell reduces the social benefits generated by markets;
6. in the private sector monopolies (sellers) and monopsonies (buyers) reduce welfare. Much more pernicious are the welfare-reducing actions of governments, which proclaim good intentions while restricting freedom. These restrictions include all forms of taxation, which reduce people's incomes, alter market prices of goods and services, and lower the incentive to work below its "natural" level (that is, its market level). Many government expenditures have the same effect, such as unemployment compensation reducing the incentive to work, and subsidies to public schools that distort individual choice among potential providers.
I can summarize this shortlist of antisocial generalities briefly. People have a desire for goods and services beyond their current earning capacity, requiring them to make choices. Choice occurs when they allocate their incomes among their wants in the manner that will best fulfill those wants. For all people added together, wants are unlimited and the resources to satisfy them are finite. Economics is the study of the allocation of scarce resources among unlimited wants to maximize individual welfare. Government actions restrict, limit and distort the ability of people to make their choices. Its role should be strictly limited, in order to minimize those restrictions, limits and distortions.
This is the central narrative of mainstream economists, that markets are efficient organizers of economic life. Winston Churchill famously defended political democracy by arguing that "democracy is the worst form of government except all those other forms that have been tried." The mainstream economics profession accepts no such ironic minimalism in its defense of markets.
In the ideological myopia of big money and its economic priests, markets are not only more efficient than alternative methods of allocation and distribution, they are the only efficient method. Even more, markets are efficient if and only if they are not regulated in any manner. "Controlled" economies (socialist and communist) are by far the worst, but regulated markets in capitalist countries are almost as destructive of individual welfare.
Economic life organized through free markets is not merely the best, it is the only "good." Irrefutable evidence for this assertion is demonstrated in the fact that markets cannot be eliminated even in the most draconian communist state; they can only be "suppressed." As a result, attempts at the regulation of markets, even more the banning of them, does no more than to drive them underground ("black markets"), distorting the natural tendency of people to "truck, barter and exchange" (Adam Smith). Human activity is market driven: There Is No Alternative, the most fundamental of the many TINA principles so commonly found in the public pronouncements of mainstream economists.
The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.
(J. M. Keynes)
Many people would disagree with and even be disgusted by the political and policy conclusions of mainstream economics (e.g., all unemployment is voluntary). However, the same people who disagree with the conclusions might reluctantly accept the premises of the argument. These premises should not be accepted. They are wrong – no more than ideological pretenses.
First, market choices by people are not the result of preferences and desires arising at the individual level. An individual has choices in markets as a result of living in a society with a division of labor that has organized its production and distribution in a specific historical manner. The existence of markets is a social phenomenon. Second, whatever the source of people's wants and needs, whether or not they enter into exchanges "willingly" is a matter of definition. For example, no one is forced through physical coercion to forego medical treatment because it is too expensive. Nonetheless it is a choice many people make in most countries, and a choice that would not be presented to a person in a humane society. Third, because preferences arise from a person's social interaction, and many choices are forced upon us, the collective actions of people to improve their society by government intervention cannot be condemned in general as restricting freedom.
Opponents and critical supporters of markets have made these arguments many times. They never "stick." As with cooking utensils made of Teflon, the ideology of the mainstream can be wiped clean of criticism with astounding ease. No appeal to justice or decency has a long-term or fundamental impact on the hegemony of mainstream economic ideology. It should be obvious that this ideology serves the interest of wealth and power. That has been true for 200 years, though the current, absurd version of economics was not always hegemonic. Why now? Before that question can even be asked, I must demonstrate the absurdity of this hegemonic mumbo jumbo.
The ideology preaches that "the market," omniscient and omnipresent, is both tyrannical and benevolent, like one of the ancient gods of the Greeks and Romans. It manifests its tyranny in its relentless control over production, distribution and allocation of the necessities of human life. Its benevolence is sublime, through the boundless pleasure it can deliver in personal consumption of the commodities it distributes. Like all gods it demands disciplined obedience to its fundamental laws. It rewards the obedient with riches and punishes the rebellious with misery in a myriad of forms (e.g., unemployment) that all result from vainglorious attempts to challenge its will.
Like gods, it issues pronouncements – "judgment of markets" – which are accepted in reverent passivity (see below for obvious examples). Be they about executive salaries or the price of heating oil, all the judgments carry the same divine authority: "You can't argue with supply and demand." These are universal laws of human interaction that can no more be altered than water can be prevented from running down hill.
We know that these laws are universal and inexorable because their operation has been theoretically explained and that explanation empirically verified by the science of the market, "economics." At the root of the current triumphant return of the nineteenth-century antisocial arguments for "the market" is the ingrained belief, even among most progressives, of the logical power, technical strength and empirical validity of mainstream economic theory. As much as we may criticize the reactionary views of economists, at the end of the day "you just can't deny market fundamentals."
That is wrong. There are no "market fundamentals" in the sense that the mainstream has coined the phrase. Mainstream, "neoclassical" economics is not logically powerful, technically strong or empirically valid. On the contrary, its logic is contradictory, its techniques sloppy, and the real world economy refutes its generalizations with startling regularity. Concrete examples of the illogic abound, as I shall demonstrate.
In other words, mainstream economics is, as the British would say, rubbish; or, to be less polite, a real load of crap. The rest of this book verifies that hypothesis, beginning with considering how markets operate in reality, followed by an excursion into the Land Where Econfakers Dwell.
How Real Markets Operate
A few characteristics of markets, as obvious as they might appear, need to be made explicit before I can consider the putative scientific content of mainstream "neoclassical" economics. Most purchases and sales do not occur in markets in the literal sense. They occur in department stores, warehouses, online and by telephone, to name the most obvious. These purchases and sales occur at different times and under different conditions. The motor vehicle sector provides a good example, because it has various stages of production and distribution. When someone refers to the "market for automobiles," the word "market" is used in a descriptively loose sense to refer to all the purchases of automobiles in a specified area during a specific period of time; for example, "the market for new cars in the US in 2011."
This "market" can be divided into its component parts of production and distribution. On the basis of an estimate of sales for the market period, each automobile company hires the workers it requires and arranges for the delivery of the necessary raw materials and intermediate parts. Depending on the specific policies of each company, some or most of the workers will be on contracts longer than the time it takes to produce, deliver and sell the cars. This simplifies hiring while slightly limiting the discretion of management to change wages and working conditions. When production is occurring, the marketing outlets have in their showrooms automobiles produced in the previous period, so production and sale occur concurrently.
Many factors influence total automobile sales, with perhaps the most important being the general level of economic prosperity. If employment is high, households are likely to be in a buoyant mood and disposed to replace their old vehicles; if unemployment is rising, households will be more cautious. How many vehicles each company sells is more complicated to determine, influenced by consumer brand recognition, effectiveness of advertising, and the market power of each seller, among other things.
In this market the prices of automobiles will be set by the companies from recent market experience, judgments as to whether household demand will be strong or weak, and an assessment of the public impression of the advantages of each model compared to its competitors. If most companies are too optimistic, slow sales will result in accumulation of automobiles in showrooms or on the great holding lots by the factories. This accumulation is at no cost to buyers, who might benefit if retailers lower prices to reduce inventories. For the producers and retailers it represents a considerable problem, because the unsold vehicles embody costs that the company owners wish to recover.
If the companies predict sales too pessimistically, many retailers quickly empty their showrooms and make new, urgent orders to the factories. When such a shortage occurs in the automobile market, adjustment comes through several responses. Households can either place themselves on a waiting list, or shift to another model by the same company or a different company. The companies can attempt to reduce production and delivery delays through extra shifts in the factories.
The asymmetry of surpluses and shortages characterizes markets. The surpluses are easy for both buyers and sellers to observe, and carry a substantial explicit cost to sellers. If the commodity is perishable (as with supermarket merchandise) or sensitive to shifting preferences (as in the clothing industry), surpluses can mean a near-total loss of the value of the excess inventory. In contrast, a shortage of a commodity can go unobserved or be merely a matter of opinion. For the company a shortage means missed sales volume, but how much, even whether it is small or large, is speculative. It should be obvious that if offered a choice between certain losses from excessive inventory and notional losses of undeterminable amount from shortages, most companies would choose the latter.
This description of the automobile market, shamelessly realistic compared to the markets of mainstream economics, is extremely simplified. It does not include household access to borrowing, the influence of automobile durability, obsolescence or the role of advertising. Markets for other products would exhibit some of the characteristics described above as well as their own, depending on whether the item is for households or producers, if for households whether it is durable or nondurable, and if nondurable whether it is rapidly perishable.
In spite of this variety, a few generalizations are possible. First, except in unusual times market processes have a tendency to reduce the accumulation of surplus commodities and prevent extreme shortages. The first is achieved by direct observation: when the quantity of a product at the retail level exceeds what the companies consider appropriate, they reduce deliveries and reduce production. Extreme shortages are avoided in great part when buyers shift to similar, alternative commodities, though this is not as clear a signal to companies as the accumulation of unwanted inventories.
Market adjustments to shortages and surpluses are not perfect. A surplus of working men and women – unemployment – is endemic in market economies, occasionally catastrophically high, and the poverty created by unemployment is a shameful offence to civilized values. Nonetheless, market economies are considerably more flexible and effective in organizing production and distribution for both companies and households than the various administrative systems practiced in the Soviet Union, East and Central Europe, and China and Vietnam before the 1990s. On superficial inspection market economies seem more amenable to reform and regulation than administrative systems that have in every case been based on undemocratic regimes. We would certainly be justified in paraphrasing Churchill: "Markets are the worst from of economic organization except all those other forms that have been tried."
While mainstream economists may walk among the rest of us in supermarkets and department stores, that is not the world in which they dwell. They live in another land, where no shortages or surpluses occur, where unemployment is unknown and the past, present and future are the same. Just as every soul in heaven is virtuous, economists dwell in a land in which every market is perfect, and would (and do) say, "Markets are the perfect form of economic organization."
Where Econfakers Dwell
Buying and selling in individual markets appears to eliminate surpluses and shortages because the former are costly to sellers and the latter cannot be directly observed, only inferred from people's behavior. The operation of a market usually results in little or no surplus and with few people desperately pining for more. This makes markets useful but does not mean they are efficient in any sense other than avoiding excessive surpluses and shortages.
Excerpted from Economics of the 1% by John F. Weeks. Copyright © 2014 John F. Weeks. Excerpted by permission of Wimbledon Publishing Company.
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Table of Contents
Preface: Doctor Bob’s Third Law; Introduction: Economic Ignorance; Chapter 1: Fakeconomics and Economics; Chapter 2: Market Worship; Chapter 3: Finance and Criminality; Chapter 4: Selling Market Myths; Chapter 5: Riches, “Sovereignty” and “Free Trade”; Chapter 6: Lies about Government; Chapter 7: Deficit Disorders and Debt Delirium; Chapter 8: Governments Cause Inflation?; Chapter 9: Institutionalized Misery: Austerity in Practice; Chapter 10: Economics of the 99%
What People are Saying About This
“With barely concealed rage, excoriating analysis and unswerving clarity, Weeks dissects and exposes the myths and lies of the free-market propaganda upon which our current economic system is built. Eminently readable, ‘Economics of the 1%’ is a tour de force – a clarion call for a common-sense economics that serves us all, not just the rich and powerful.” —Caroline Lucas, British MP for Brighton Pavilion and Leader of the Green Party of England and Wales
“The recent crisis has exposed the weaknesses of not only the business models of the capitalist world but also the flaws in mainstream economic thought. John F. Weeks’ polemic on the ‘Economics of the 1%’ explores these intellectual blind alleys and takes no prisoners. Pointing out holes in the mainstream logic, Weeks aligns himself with the tradition(s) of Karl Marx, John Maynard Keynes and Thorstein Veblen, and with such contemporaries as James K. Galbraith, Ha-Joon Chang and Paul Krugman. And Weeks is right. We have to replace ‘fakeconomics’ with proper economic analysis to combat the social inequalities that have grown disproportionately and dangerously in recent decades.” —László Andor, Economist and Commissioner for Employment, Social Affairs and Inclusion, European Commission
“Why do economic policies seem so impenetrable and confusing to most? Weeks provides a clear explanation for how the layperson can decipher them. Every concerned voter should read this book to be economically literate.” —Peter Welch, US Congressman from Vermont and Chief Deputy Whip of the House of Representatives Democratic Caucus
“John F. Weeks has performed a big and important service. The economic dogma that sired the financial crash of 2008–9 and the longest recession for a century remains the dominant ideology, for lack of the coup de grace to consign it to oblivion. John F. Weeks sets about this task with a forthrightness and zeal akin to the biblical destruction of false prophets. This book should be read by all who seek the restoration of sanity in economics from the corrupting clutches of perhaps the biggest austerity hoax ever perpetrated.” —Michael Meacher, British Labour MP for Oldham West and Royton