From Ha-Joon Chang:

If even the IMF doesn’t approve, why is the UK government persisting with a policy that is clearly not working? Or, for that matter, why is the same policy pushed through across Europe? A certain dead economist would have said it is because the government is “in reality instituted for the defence of the rich against the poor“. Dead right.

The dead economist is Adam Smith, and as Chang points out, there was no mystery about it in Smith’s day: only the wealthy could vote, and they ran the government for their own benefit.

When universal suffrage came, they were terrified of redistribution– or even a more equitable distribution of newly generated wealth.  They can’t directly attack democracy in the First World, so they attack “politics” instead.  When they can, they insulate wealth from politics entirely– not hard to do when ordinary voters don’t understand the stakes.  Thus we get reasonable-sounding independent central banks, balanced budget rules, IMF oversight, attacks on inflation that doesn’t exist, and ‘technocratic’ governments imposed on Italy and Greece– that is, governments that will do what the European wealthy think is best for Germany.

The irony at the moment is that there’s been a change of heart over at the IMF.  They’ve withdrawn support for austerity, and are suggesting to Britain that maybe sending the country back into recession isn’t that great an idea.  The Treasury promises to fight back.

Why do the Very Serious People love austerity?  After all, they’d themselves be richer if the economy was back on track.  I don’t think this a great mystery either.  Ideologically, it’s congenial to them– it sounds like the tough stuff leaders are supposed to say.  But best of all, the toughness is all faced by other people.  Austerity is an opportunity to beat back the claims of the middle class and the poor: cut social programs, fight attempts to reduce the dominance of  the 1%, and divert attention from how the financial industry caused the recession in the first place.

If you read Smith, it’s striking how the same preference existed two hundred years ago.  The conservatives preferred “cheap years”… i.e. recessions, when labor was pleasantly low-priced.  They’re going to do fine in bad times, and they sense that there will be less pressure on them if everyone else is feeling pinched.  As has long been noted, a system is in the most danger of revolution not when things are getting worse but when living standards are improving.

While I’m touting economics links, here’s an interesting essay from Brad DeLong on why corporations work at all.  As he points out, their structure is Soviet: they’re autocratic, huge-scale, centrally directed enterprises.  The USSR stagnated, so why don’t they?

He offers several possible reasons:

  • Soviet industries could be propped up indefinitely; unprofitable corporations do slowly decline, go bankrupt, or get taken over.  So there is a mechanism for replacement, however slow.
  • Huge enterprises may simply be the best organization for producing certain goods– planes, for instance: there’s a high cost if, say, you have the engine ready but not the wings.
  • Stockholders will discipline an incompetent CEO.  Pause for laughter.  OK, DeLong quickly admits that the theoretical oversight is mostly a failure, but he suggests that the punishment mechanism isn’t so much the stockholders as the stock market.  A crashing stock price talks very loudly, and creates a mechanism for a hostile takeover.
  • Finally, corporations are intensely useful to government, and thus are favored by taxation and economic policy.  Corporations do most of the work of tax collection (income and sales), and they’re encouraged to provide a good deal of health insurance.

(I’d also add that beating the Soviets is a pretty low bar.  They were more concerned with destroying opposition than in improving their methods.)

Undoubtedly there’s something to all of these ideas.  But I think DeLong misses some more Marxian possibilities:

  • Inertia.  We now think monarchy was a terrible system, but it persisted for a thousand years.  Even if the Next Big Thing was here, competition between entire systems can go on a long, long time.  (A Martian observer might have concluded from the history of the 18th century that UK was onto something, but it would take nearly two centuries before the majority of countries adopted democracy and capitalism.)
  • A better way of organizing production would be unlikely to benefit those currently in charge… who will therefore resist it tooth and claw.  Suppose the Next Big Thing is something as simple as Valve’s no-manager, vote-with-your-desk system.  Is EA going to adopt it?  Obviously not; the people who run EA would lose power and probably money, even if the employees of EA on the whole benefited.  And it’s the people who run EA who get to decide.  It’s the same problem Chang is pointing out: the entrenched interests are happy with things as they are.

Besides, what would happen if a new style of governance became available?  DeLong (the piece was written in 1995) reviews one such case:

Fifteen years ago it was fashionable to hold up the Japanese corporation as an example, to say that its managers regarded shareholders as only one stakeholder interest among many, and to say that the Japanese corporation was a superior organization and the wave of the future. Now it is fashionable to praise the American form of organization, with an active market for corporate control and with strong pressure on managers to do whatever they can to boost stock prices now.

In other words, a new system becomes a new fad, and a lot of people get rich writing bestsellers about it.  But the magic of Japan Inc. wore off abruptly when Japan plunged into recession in the early ’90s.

On the other hand, as I’ve mentioned before, the fad for highly paid CEOs was entirely successful.  In the 1960s it was accepted that American CEOs should get about 50 times the pay of their base workers.  Now it’s 500 times.  Corporations aren’t better run or more productive or more stable or more competitive; the effect has simply been to shift wealth from the 99% to the 1%.  Why did this fad succeed when the fad for Japanese-style management didn’t?  Pretty obviously, because it doesn’t require much convincing to tell executives that they should help themselves to ten times the salary.  It’s not that it was a good idea; it’s that it appealed to the people who make the decisions.

When change happens, it’s likely to come from either a new region or a new industry, and be very ignorable for years or decades or centuries.

I have a suspicion that top-down command works better for creating  vast new project– whether it’s an oil refinement industry or a spaceship or a computer or an online mega-bookstore– than it does for running an ongoing business.  Capitalism recognizes this to some extent, in that older businesses have more and more dilute ownership.  But this also means that there’s a kind of ongoing bias in favor of autarchy.  New firms, like the big web firms of the ’90s, are likely to be started by visionary hotshots, and that reinforces the elite’s notion that all corporations should be run by autarchs– even if, as happened recently at JC Penney, the hotshots come in and ruin the company.

So a more democratic corporate structure might have to wait for the next big thing that doesn’t happen to be a megaproject.  I can see it happen, for instance, if we move from the service economy to an art economy, for instance.  (Which I don’t see as unlikely: creative work is very hard to delegate to robots.)