There is a great Hale Stewart diary which is
also on bopnews.com. Hale has been pounding an issue for some time: the reactionary economic order doesn't work in practice. It doesn't achieve the results it is supposed to achieve, and it is racking up debt. He's absolutely right.
This diary is the other side of that same coin: reactionary economics isn't just bad practice, it is also bad theory.
You see, an economic order has two parts: one part which creates a surplus and the other side that distributes it. Since the Regan-Thatcher economic order was put in place, Reaganomics and Thatcherism, the claim of the right is that they generate the surplus, and therefore they are best at distributing it. Distributing the surplus is fun and profitable. However, we've reached the point where there is no surplus to distribute.
The left has the goods - not only a theory of how to redistribute surplus, but why our theory of what to do with the money also produces more good for everyone. Some of this goes back to the modern left of the 20th century, some of it is new.
The basis of the forward left's challenge to reactionary economics is from what can be termed mesoeconomics. It is a term that was first used in the 1980's, and has been floated repeatedly since then. My argument is that mesoeconomics is a unified formalism - that is it can do the numbers - and it shows how the left view of the economy is the correct one.
Let's start some basics: game theory. Game theory is the branch of mathematics that deals with actors or agents, and their choices. These choices don't have to be rational ones, in fact, one can structure games where the actors are irrational, or behaving randomly. A game, in its simplest form, has two players making a single choice, and getting a payoff from that choice. Games can be played once, or over a number of moves. Many games have different incentives depending on whether they are ending, and the players know it, or are going to go on for an indefinite period of time.
The intuition of game theory goes back far before the mathematics does, this is often the case: people sense something, and find a way of thinking about it. FDR and the New Deal often saw how individual incentives were leading people to make decisions that were not good for the whole. This would lead eventually to game theory which showed how actors doing what is best for themselves could create situations which were worse for everyone. The famous "prisoner's dilemma" is one. The prisoner's dilemma goes this way, imagine two people caught. The police say to each "If you talk, and your partner doesn't we will let you off, and he gets 5 years, and vice versa." Each one knows that if neither talks, then the police can lock them up for 1 year each. So if neither talks, the both get 1 year. If both talk, they both get 5 years. What happens? They both talk, they both get 5 years. Happens every time, because each player is always better off talking than not talking.
Another game which demonstrates how different incentives lead to different results is the investment game. In this game one player gets an income. He can keep any part of it, or give as much as he likes to the other player, who gets three times as much as he was given. The second player can give back some proportion of what he gained. The game is played over and over again.
What the Bopnews post shows is that a tax on the difference between the two players forces them to cooperate, it takes away the "prisoner's dilemma" to betray. That is, taxes can force higher output because they take away the incentive to try and get ahead by betraying, and instead, keep both players on the straight and narrow. They are still free to spend all of their profits as they like, but in the investing part of their lives, they have to keep everything "in the system".
There is a formal version of the charts presented, that covers all of the possible choices, and proves that there are two strategies for each that are maximal, and the other choices simply fall off in every direction - give or keep for the first player - split or betray for the second player. By taking away the value of keep and betray, a "windfall profits tax" forces both players to the optimal, rather than pessimal, position.
That's an example, now let's see what that means in political terms.
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In 1933 FDR ended the ability of people to hold gold rather than dollars, while it wasn't vigorously enforced, it was enforced enough. This was, effectively, a way of forcing people to follow the optimal strategy of keeping all their money in the system. The other part was to have an increasingly progressive tax system that had the effect that the sample game shows - reducing the benefit for betraying and keeping - or in political terms: profiteering and hoarding.
In the 1980's the reactionaries argued that these kind of taxes were bad, because they would reduce the incentive to give, and that was bad. They argued that allowing the first player to do what he liked would lead to higher gains. Instead, as the chart shows, it leads to the first player keeping more. Not just because he is greedy, but because cooperating is a risk for him - if the other player hoards, then he is worse off.
This is the basic strategy that created inflation in the 1980's - holders of assets started buying commodities rather than equities, that is they kept rather than invested, and people at the bottom, fearful that the spigot would be shut off, spent rather than saved. That is hoarded rather than returned. The converse is what we have now, the top of society can keep rather than invest, and does so, because they are relatively much better off.
By altering some of the parameters of this game, it is possible to produce all kinds of mesoeconomic arrangements, including "iron law of wages" situations where the rent player gives just enough to keep the capital/labor player alive.
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In the present this is breaking down because the capital/labor sector in many countries - including our own - is getting starved. The capital/labor player has to have a cooperating rent player to get anywhere, or they have to have the power to tax the rental player enough so that the rent player knows that there is no point in trying to starve the capital/labor player.
This is true internationally and nationally. Protectionism is simply an argument for the capital/labor player to hoard. The response, in almost any configuration of this game, is for the rent player to keep. Betrayers breed other betrayers. We see this in the current trade order - the rich rental players keep more, and the poor ones are keeping more. This is a natural and rational response to getting stiffed. It also makes everyone worse off.
The solution then, isn't to betray - while that may seem short term good - but to go back to forcing cooperation. How this plays out in energy costs is a case in point - if the US goes protectionist, the cost of oil will go up by enough to wipe out any gains from protectionism. Every job saved will be lost someplace else, with interest.
It isn't that labor standards aren't good and important, it isn't that taking care of the stakeholders isn't important - because within the big investment game it is possible to divided it up into smaller investment games, and in those, as well, the need to impose cooperation becomes obvious. But labor standards and environmental protections, in themselves, only force cooperation within a level of the game, take one step back, and they become invisible.
This means that to address the global trade imbalance that people like Jerome and Hale have been writing about here, and people like Soros have been warning the larger world about, one has to act at the layer of the game where the betrayl is going on. The way to do this is to change the way money works at the global level. More trade is good, but more trade is not, in itself, enough. Instead there must be more trade, within the incentive to cooperate.
Bush represents an American decision to betray smaller international players, and particularly labor/capital players in other countries, in order to keep as much rent as possible. Regardless of trade volumes, this means that the rent players will get richer, while others will get poorer. Those others include you and me.
Summary:
- The reactionary assertion that "tax cuts" are always good is incorrect.
- In the broad picture redistribution that is large enough to force cooperation is better than either no redistribution or high redistribution.
- Protectionism forces betrayl, which the rent player responds to by not cooperating.
- What this global economy needs is a money system that forces cooperation.
Conclusion: the current trade order is disintegrating because incentives to cooperate are gone, and so players betray, even if that pessimalizes total output. Some players will be much better off than in a cooperating game relative to the total, but over time, will be worse off absolutely. One can't force people to want to be better off absolutely rather than relative to other players, but one can take away the chance of being absolutely better off through rental advantages, and force cooperation.
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