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Reconstructing Economics: Why nations fail, Part Two
“When the preferences of economic elites and the stands of organized interest groups are controlled for,
the preferences of the average American appear to have only a miniscule, near-zero, statistically nonsignificant impact upon public policy.” Martin Gilens and Benjamin Page [1]
It may appear presumptuous of me, an engineer, to recommend reconstructing economics but it is not
for two reasons. First of all, it is not my idea anyway but is as old at least as the publication of Fredrick
Soddy’s prescient Wealth, Virtual Wealth and Debt in 1926 and has a long tradition both within and
outside establishment economics. Second, regardless of how many good economists there are, the
most influential school of economic thought is Milton Friedman’s Chicago school of laissez fair free
market economists, who were best characterized [2] by economist Paul Samuelson as “empirically dead
wrong.” The destructiveness of their policies is well documented [3] and those policies are an important
contributor to the Great Contraction of 2008 [4]. Given the number of economists who failed to
forecast the 2008 economic contraction, economic models seem unable to predict even the obvious [5].
I have already described two essential improvements to economics which have been proposed by
scientists both within and outside the economics community. The first of these is the proposal to
include the physical reality of the hard sciences best described by the ecologist Charlie Hall, founder of
biophysical economics [6].
The second of these improvements is that suggested by the cognitive psychologist Daniel Kahneman,
founder of behavioral economics, to correctly model the behavior of the participants in the economy,
namely humans.
The second of the two improvements has been largely accepted by the economics community. In fact
Kahneman was awarded the Economics Nobel. However the first and more important improvement, to
include thermodynamics, has been rejected most likely because it forecasts the end of exponential
economic growth.
Virtually all of the coal on Earth was formed 300 million years ago during the Carboniferous over a
period of about 60 million years [7]. The geological conditions no longer exist for coal formation so
there is a limited amount. Most of the oil we burn was formed during two periods in the Mesozoic, 90
and 150 million years ago. While some is forming even today, conditions for large deposit formations
rarely exist. Production of conventional crude oil peaked in 2005 and we have been supplementing that
with more polluting sources such as shale oils, heavy oils, deep water oils and Canadian tar. And we are
releasing into the atmosphere millions of years of sequestered carbon every year, pretending there will
be no consequences.
The third aspect to understanding human economy is the study of human organization. This is the
purview of economic historians, who have produced some outstanding work. Human societies organize
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hierarchically with one or a few powerful and wealthy individuals owning nearly everything, a small class
of specialized professionals such as warriors, engineers, priests, sycophants, merchants and accountants
owning the rest, and everybody else existing in some form of bondage, i.e. serfdom or slavery, or
destitution. Democratic republics are rare, short lived and vulnerable to exploitation by concentrated
wealth and power. This state of affairs is described by the economists Daron Acemoglu and James
Robinson in their remarkable book Why Nations Fail.
This book covers the breadth and depth of human economic history. Their thesis is that successful
human societies are nurtured by inclusive institutions. Such institutions are democratic, communal and
progressive, which encourage or enable large segments of society to assimilate or participate. Nations
which fail are dominated by extractive institutions with limited democratic participation. Slavery is a
good example of an extractive institution. Unfortunately, such institutions are favored by wealthy and
powerful elites who benefit. The economist Dave Grusky observes [8] “The human condition has so far
been a fundamentally unequal one; indeed, all known societies have been characterized by inequalities
of some kind, with the most privileged individuals or families enjoying a disproportionate share of the
total wealth, power, and prestige.”
Acemoglu and Robinson note that the Soviet Union despite being an extractive society grew the
economy under Josef Stalin at a remarkable rate for a short time. This rate of growth scared the devil
out of capitalists while being embraced by socialists, to the embarrassment of both groups in hindsight.
Acemoglu and Robinson’s theory cannot by itself explain this growth but if we combine their theory with
biophysical economics an explanation falls out. While Stalinist Russia was totalitarian and extractive
compared to the Czarist Russia it was a breath of fresh air and it opened up Russia’s vast resources for
exploitation. Also while many people were murdered or exiled to Siberia, many more were also
educated. That it eventually failed may be due to the way people were exploited and to the inherent
failure of central planning. While it is certainly more complicated, my suggestion here is that a systems
approach to economics including many factors may be a better analytic tool than the ideological
methodology or instrumentalism favored by the Friedmanites. An holistic systems analysis is not absent
in Acemoglu and Robinson’s work, nor is it in other works of ecologists, economists and writers such as
Vaclav Smil, Charles Mann and Jared Diamond. These authors tend to be realistic both about human
behavior and resource limits.
The importance of the work of Acemoglu and Robinson is the identification of the role inclusive
institutions play is fostering healthy societies. Inclusive institutions include free public education, free
public libraries and other access to knowledge, public parks and recreation areas, broadly participatory
democratic elections, progressive taxation, limited corporate size, corporate regulation, labor and
consumer unions, minimum wage laws, guarantees of free speech and the rule of law and protection of
limited private property rights. These are much the same institutions which already existed or were
enabled at the beginning of the twentieth century by America’s progressive movement.
At the end of their book, Acemoglu and Robinson forecast possible future outcomes for several
countries including China but ignore the United States. I’ve asked Acemoglu if he had any prognosis for
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our country. He was kind enough to send me a paper which he and Robinson had written with a note
that he probably should have included it in his book [9]. It sees a ray of hope in the Occupy Wall Street
movement and compares it to the great progressive movement at the beginning of the twentieth
century. The paper highlights the differences both in the movements themselves and in the social
organization in which they operated. Unfortunately, since they wrote that paper the Occupy Wall Street
movement has failed.
Economists Martin Gilens and Benjamin Page have recently published a paper, from which I extracted
my introductory quote, which quantifies the idea that democracy is already dead or dysfunctional in the
United States. Hedrick Smith traces its demise to the late 1970’s and early 1980’s in his revealing book
Who Killed the American Dream. As he describes, this is when our plutocrats and corporations
organized to run our country for their personal benefit. They were aided by sycophants and
Georgewillian logicians like Milton Friedman. This is when we let our democracy get away from us.
The ecologist Garrett Hardin describes three ways we think [10]. We are all literate, even those of us
who cannot read and write think and communicate with words. We are vulnerable to stories and
misinformation. It is possible but more difficult to lie with data. Referring to Figure 1, note that right
around 1980 is when median family incomes stagnated while productivity continued to increase, a
logical outcome of our evolution to a plutocracy. The economic elites seized wealth and power. The
second figure shows rather dramatically that they don’t know what they are doing any more than the
economists who advise them. Total credit market debt is accelerating much faster than the creation of
wealth. Last quarter GDP was -1% while debt increased by $484 Billion [11]. This same thing happened
during the twenties leading up to the Great Crash and Depression.
Figure 1: U.S. productivity growth and median family income. Source: economists Atif Mian and Amir
Sufi, http://houseofdebt.org/2014/03/18/the-most-important-economic-chart.html
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Figure 2: Gross domestic product and all sectors, total credit market debt for the United States.
http://research.stlouisfed.org/fred2/series/TCMDO/
[1] Martin Gilens and Benjamin I. Page, Testing Theories of American Politics: Elites, Interest Groups, and
Average Citizens, forthcoming Fall 2014 in Perspectives on Politics, April 9, 2014.
http://www.princeton.edu/~mgilens/Gilens%20homepage%20materials/Gilens%20and%20Page/Gilens
%20and%20Page%202014-Testing%20Theories%203-7-14.pdf
[2] Tony Noerpel, The Con in Economics, Blue Ridge Leader, March 5, 2013,
http://brleader.com/?p=10734
[3] Naomi Klein, Shock Doctrine, the rise of disaster capitalism, Metropolitan Books, 2007, and Kenneth
Davidson, Reality Ignored, How Milton Friedman and Chicago Economics undermined American
institutions and endangered the global economy, 2011.
[4] Tony Noerpel, Pungent Curry, Blue Ridge Leader, April 9, 2014, http://brleader.com/?p=13243
[5] http://www.forbes.com/2009/11/18/behavorial-economics-indicators-entrepreneurs-financewharton.html and http://www.ifw-members.ifw-kiel.de/publications/the-financial-crisis-and-thesystemic-failure-of-academic-economics/KWP_1489_ColanderetalFinancial%20Crisis.pdf
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[6] Charles Hall and Kent Klitgaard, Energy and the Wealth of Nations, Springer, 2012.
[7] Ugo Bardi, Extraction, How the quest for mineral wealth is plundering the Planet, Chelsea Green,
2014.
[8] David Grusky The Contours of Social Stratification, Social Stratification: Class, Race, and Gender in
Sociological Perspective, 3rd Edition, edited by David B. Grusky, Manwai C. Ku, and Szonja Szelényi.
2008. Boulder: Westview Press. http://sociology.stanford.edu/people/dgrusky/index.html
[9] Daron Acemoglu and James A. Robinson, Is This Time Different? Capture and Anti-Capture of US
Politics, December 2011. Available on their website.
[10] Garrett Hardin, Filters Against Folly, How to survive despite the economists, ecologists, and the
merely eloquent, Penguin, 1985.
[11] http://www.federalreserve.gov/releases/Z1/current/accessible/l1.htm