Real-World Economics Review Blog
Edward Ross Jan Wiklund
from Peter Radford - a critique of the absurdity of economics I finally read “The Accountability Machine”, the book by Dan Davies.  It’s worth the effort.  You can read it in a number of ways.  As a peon to cybernetics and Stafford Beer.  As a critique of the absurdity of economics.  As a summary of…
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Real-World Economics Review Blog
from Peter Radford

– a critique of the absurdity of economics

I finally read “The Accountability Machine”, the book by Dan Davies. It’s worth the effort. You can read it in a number of ways. As a peon to cybernetics and Stafford Beer. As a critique of the absurdity of economics. As a summary of the development of management theory. Or as a summary of the ills of neoliberalism. It’s a mash-up of all those. It also has the great virtue of being very readable.

Chapter Six will warm the hearts of all you who, like me, relish the opportunity to poke fun at economics as it exists in its more extreme expressions. A few quotations set the scene perfectly:

“Economists variously describe economics as a subject, a science, a discipline, and even a profession, but it’s really a commitment to certain ways of modeling the world.”

“Depending on political preferences and ideological commitments, they could then go back and make a new model, or declare that the distance [between reality and their model conclusions] represented a failure on the part of reality and suggest a policy to bring the world into line. It’s not hard to see why these people became influential advisors.”

“As a subject, economics seems to have a fear and disgust of thinking about philosophy and methodology that might be described as Freudian … The vast majority of economists literally don’t know what they’re doing.”

“Consequently, plenty of economists still think that making markets more competitive is a viable substitute for anti-discrimination laws. It works in the model, as long as you throw away any information that might be relevant to the actual problem.”

“Proving things ‘in the model’ and then acting as if they’re true in the real world is a terrible habit of economists.”

“… economists tend to deal with the problem of strategic uncertainty by pretending it doesn’t exist.”

“Considered as a cybernetic system, an economic model is one that has arbitrarily thrown away most of its information.”

“Getting an economist to change their mind is difficult; the profession has a justified reputation for insularity and lack of openness to outside ideas.”

“The real blind spot of modern economics is the economy.”

Enough. You get the picture.

There is a paradox here somewhere. Davies argues that economics has an undeserved and outsized role in modern society. This, I agree, is the case. The economics way of thinking, especially the absurd notion that everything can be reduced to individual behavior and then aggregated back into systemic behavior, along with a dogged commitment to cost-benefit analysis and the capstone of optimization, has infected decision making right across society. The market perspective has been applied in places it does not belong, and the valuing of everything in terms of exchange, along with the compression of time into its discounted present are examples of the imprint of economics and its influence on the way we run both businesses and governments.

That outsized presence, however, sits uneasily alongside the steadfast unwillingness on the part of economists to take into account the complexity of reality. Or, more precisely, to allow for the possibility that it is simply not possible to optimize anything in the real world.

In other words the huge influence and impact of economics in our real world has been purchased only by removing the discipline from that self-same real world.

And the shadow cast by its post-war turn, with its impact on society and its direct contribution to our current political polarization, is both long and dangerous.

According to Davies the real villain of this dangerous turn was Milton Friedman who proselytized an ideology and made popular a set of values that, when fully played out in the corporate world, led to an inversion of an established order that placed working people above the owners of capital. Davies reminds us of Levy’s articulation of the appropriate socio-economic order: capital owners exist to provide both goods and insurance to workers. Capitalists like to present themselves as absorbers of risk. They revel in being “risk-takers” and want to be rewarded as such. Society has agreed. The origins of the corporate form of business were an effort to encourage risk taking. Business owners were protected from massive downside losses by the invention of limited liability. In return for that risk mitigation they were expected to provide workers with insurance against the vicissitudes of the capitalist cycle, and to provide growth in society’s ability to satisfy it wants and needs.

The problem with this ordering of society is that risk falls in the first place on the owners of capital. Friedman provided an ideological method for escaping this conundrum. He argued that the purpose of corporate existence was to nurture returns to capital only. Everything else he denigrated. The consequence was the ‘great risk shift’ of the last few decades, a shift best described by Jacob Hacker in his work of that name. Workers were now the risk absorbers. Capital was protected. The ideology of optimization was mobilized as the rationale for this risk shift. Economics was used, in other words, to justify a re-invention of the social order with workers acting as the shock absorber whenever a crisis emerged. So the cyclicality of capitalism, with its periodic accelerations and retrenchments, became the cyclicality of fiscal insecurity experienced by workers. Rather than being risk-takers capitalists became risk-averse. Their share of national income grew accordingly. Inequality blossomed. Polarized politics arose. The connection is clearcut. With economics at its heart.

The deliberate nature of this inversion and its rejection of the post-war quasi social-democratic settlement between capital and labor is the story of neoliberalism. While Davies eschews giving much direct attention to neoliberalism as a body of thought — he argues it is too diffuse to be treated as such — he shines the light both on the intent and success of its advocates. This is a narrative that many contemporary analysts seem to be shy of telling. The telltale sign of such hesitancy is the use of quote marks around the word neoliberalism as if it isn’t quite a real thing. But when you read Davies that narrative becomes both clear and coherent. Sadly, mainstream economics leaned heavily into performative restructuring of society in favor of capital. Davies makes no mention of Milanovic, but he might easily have done so. Economics slipped too easily into use as a tool in the battles of the Cold War. Working Americans bore the brunt of the resultant victory.

Davies presents this story set within references to the information processing ability of society and business firms. His critique of economics is most telling when he reveals its handling of information. Optimization is, necessarily, the reduction of information to only that pertaining to the problem in hand. Other information is thrown away. This assumes, tragically, that the discarded information has no value, and that there is nothing within it that might alter the future. This limitation presumes a knowledge of the future that is preposterous and arrogant. It also assumes no change. And yet change is the very essence of a capitalist system. The incongruence is exquisite.

Even worse, economics which prides itself on its descriptions of the importance of information is utterly incapable of penetrating the ‘black box’ of organization and has thus surrendered vast economic territory to business management theorists. The inscrutability of decision making and our inability to pin responsibility on specific individuals within a complex system such as a business firm is what intrigues Davies most. He refers to such systems as ‘accountability sinks’ which serve to obscure, absorb, and diffuse information flows even as they act as information processors. Looking inside such a black box defies the toolkit of economics and renders such concepts as a ‘profit maximizing firm’ as fantasy rather than fact. But it is a fantasy that fits the ideological framework perpetuated by the likes of Friedman, so it persists.

So even as economics has reduced its practical relevance it pops up everywhere. Its ideological fingerprints are scattered across our socio-economic landscape regardless of whether it makes any sense.

Towards the end of his book Davies reminds us of the dread that AI researchers have of one of their creations becoming a mindless destructive force: set up to make paperclips efficiently it ultimately destroys the world by allocating every resource to its single-minded goal. It had no sense. It blindly pursued its single purpose. It was perfection in its limited setting. It unleashed armageddon in reality. Economics is such a creature. Blindly optimizing everything it ignores anything extraneous to that objective. Society pays the price. As Davies puts it:

“Any system which is set up to maximize a single objective has the potential to go bonkers.”

Enough said. Go read the book. It’s fun.