Rationally Speaking #51 - Joseph Heath on Economics Without Illusions
Rationally Speaking Podcast- 923 views
- 1 Jan 2012
Guest Joseph Heath, author of “Economics Without Illusions: Debunking the Myths of Modern Capitalism,” joins us as we turn our skeptical eyes toward the treacherous dual terrain of economics and politics. We discuss the ways in which, with his book, he attempts to raise our economic literacy and empower us with new ideas. In it, he draws on everyday examples to skewer the six favorite economic fallacies of the right, followed by impaling the six favorite fallacies of the left. Heath leaves no sacred cows untipped as he breaks down complex arguments and shows how the world really works. Joseph Heath is the Director of the Centre for Ethics and Professor of Philosophy and Public Policy at the University of Toronto. In addition to his academic publications, he is the author of other popular books, among them, "The Rebel Sell : Why the Culture Can't Be Jammed" and "Efficient Society: Why Canada is as Close to Utopia as It Gets"
Rationally speaking, is a presentation of New York City skeptics dedicated to promoting critical thinking, skeptical inquiry and science education. For more information, please visit us at NYC Skeptic's Doug. Welcome to Rationalise, speaking the podcast where we explore the borderlands between reason and nonsense. I'm your host, Massimo Luchi, and with me, as always, is my co-host, Julia Gillard. Julia, what are we going to talk about today?
Masimo, we have a special guest coming in via Skype from Toronto. I am pleased to welcome Professor Joseph Heath. He's a professor in the Department of Philosophy and also the School of Public Policy and Governance at the University of Toronto. And he's the director of the Centre for Ethics at the University of Toronto. Joseph Heath has published several academic books and many papers and also some great popular books, including The Rebel Cell, co-authored with Andrew Potter The Efficient Society.
And most recently in the book that we're going to focus on today, filthy lucre, economics for People Who Hate Capitalism.
Now, that's the Canadian title of the book.
The title, as it was repackaged for Americans is Economics Without Illusions Debunking the Myths of Modern Capitalism, which is a somewhat different slant than the Canadian title.
I know you can take Random House for that. You can thank Random House and Borders for that.
How do you know it's a lot. I'm just curious. What was the logic behind? Yes, they were happy to go with filthy lucre, but the subtitle Economics for People Who Hate Capitalism in Canada, that's a very large market segment.
Yeah, this is my home and Random House thought, fuck, you know, maybe the capitalism haters were too small a market segment in the United States. So I was resigned to the subtitle Being Dead in the Water.
They said they were just sold the Filthy Lucre titled books in like San Francisco, Berkeley, you know, Cambridge and Well and Portland.
They were totally happy with filthy lucre. They dumped the coverlet, done the artwork. They'd done everything, absolutely everything. And then they were talking to someone in sales, was talking to the buyer for Borders and the buyer for Borders said, what does Lucara mean? Oh, that's another problem.
I guess we Americans are scared of you Canadians. We don't know how many broke out.
Panic broke out in the halls of random. I know had to be redone because the buyer for Borders didn't know it lookaround. And I said, you know, like filthy lucre, like in the Bible. Aren't you like a biblical age?
And we haven't actually read it. We just believe that's the difference.
I actually I wrote them a big, long memo about how they could, you know, how filthy lucre is commonly used, especially in the Bible. But the they termed it so bago economics without allusions.
I think so. It's a great book. I'm actually not done with that. I'm only in the middle of it.
But I would you would you say that it is more critical? I mean, it debunks myths both from the right and from the left.
Would you say that it was actually intended more as a a critique for for an audience of of left wing readers?
Yeah. So I feel like I'm halfway through it. So you read the critique of right wing policies and the left wing policy?
Well, no, I don't read linearly. Don't worry. OK, I think that's good that I know it is intended for for people who hate capitalism. It's not necessarily written by some. It's written by somebody who used to hate capitalism and but it is for a left wing audience. And the the the people I want to reach are people sort of like myself who maybe have some interest in economics. But we're so turned off, by the way, that it's typically taught that they didn't sort of pursue the matter.
And so, like, I had the experience of going to an economics class. And when you first learn about the they introduce a few assumptions. Everybody, self-interested corporations seek profits and everything about that is OK. I just sort of instinctively thought, well, this is just right wing ideology and I don't have to pay attention to it. So, you know, I went to a couple of classes and then that was it.
So how did the economics of you dropped? Well, hell yeah. I, I, I think I can go back to class because I didn't really like it, but it was just a multiple choice test. So I read the book on my own and, and I after test, that's what I keep telling most of my students and they can do that.
Don't bother coming to class. And I don't tell you, I actually stuck out my hand in class and I said to the professor when he said it was really a multiple choice test generated by software that came with the with the book, that it was a study that came with the book. And I said, does that mean that nothing you say in class that's not in the book could be on the test? That he was like, that's right. I said, OK, I'm out of here.
But I guess the most important thing was that I never took anything beyond Economics 101. And so I never learned the more sophisticated and nuanced models that you get taught in upper year economics. And so what happened was just like very, very much later in life, I came around to the realization that there was a lot more going on there and that it actually, you know, economists have all kinds of interesting insights and useful ways of thinking about the world.
So I want to kind of self self teaching a lot of economics and the idea. But I was sort of driven by a set of moral and social justice concerns. And what I found was that economics actually addresses all of these concerns. Eventually you just have to stick with it.
I'm not the one on one level. You mean at one level? Yes, but I do. This particular book with the moral concerns were front and center. Those get addressed directly. And but what I first wanted to do was sort of convince of my sort of broadly liberal audience that economics is not just right wing ideology. So the point of starting with with six favorite economic policies of the right is to show that it does actually cut both ways, like it's a neutral framework, and that while it does undermine some sort of treasured left wing views, it also undermines a lot of right wing arguments.
So, for example, I sort of make hay with the idea that tax cuts can stimulate the economy, which strictly speaking, is not the case. And it doesn't take very sophisticated economic reasoning to see why that why they can't. So the idea is to sort of go through some sacred cows of of the right at first in order to kind of, you know, persuade the audience that this is worth paying attention to.
And what is an example of the second half of a myth or an assumption that is typically made by the left that you think it's it's actually not valid? Yeah. Pick the most important one for you.
Oh, yeah. A long time since I wrote this book, I would say, you know, what was really. And it comes up in Canada where, you know, we have active left wing parties who actually get elected to to the opposition at least. But for example, one of the things I try to persuade people is that the left has this very strong impulse to want to fiddle with prices as a way of trying to achieve social justice objectives.
And so in the particular I mean, in the book, I criticize the fact that in Canada, governments often subsidize electricity and that the left is is sort of the major proponent of this. And then in the last federal election of our provincially, the NDP, which is our sort of Social Democratic Left Party in Canada, is really, really keen on giving people tax exemptions, VAT exemptions on home heating and so heating oil, electricity and that kind of stuff, while simultaneously endorsing all kinds of environmental plans to motivate people to get geothermal heating and stuff like that.
They also want to reduce the cost of using fossil fuel to heat your home. And if you ask people why they want to do it, the answer is always, oh, because the poor, because they can't afford their heat. And so, you know, that's the kind of thing that you can fairly easily pick apart where you can show that look cheap. Fiddling with the price is one way of addressing the problem that the poor have. Another way would be to keep the prices the same and to give the poor income supplements, which would allow them to pay them or give them a voucher or do whatever.
Right. But let the prices reflect the social cost of the good in question. And I mean, it's a kind of simple exercise, but it kind of say, look, I mean, it's actually run the numbers on electricity. And I show how much a poor household in Canada, on average consumers of electricity and how much a wealthy household in Canada consumes for electricity. The problem with subsidized electricity to try to help the poor is that you help the rich.
Do you give everybody cheap electricity? And in fact, the average rich family gets, you know, three dollars for every one dollar that the poor gets with electrical subsidies. And it encourages overconsumption, which is destructive for environmental reasons. So it's not rocket science. It's a terrible, terrible policy to want to promote social justice in the kind of distributive justice sense by giving people a power or subsidizing their home heating oil or that kind of thing. But it's a very, very powerful impulse on the left.
Right.
But so the example you just described, I think, makes particularly clear something that I often have a hard time getting through when I'm involved in discussions about economics and and ethics, which is that, you know, economics is about it's fundamentally about how to achieve certain goals. And the goals are in part at least set not just by the economic realities, not just by the number crunching and so on and so forth, but also by whatever it is that the values that you want to do, you want to promote.
That is there is there has to be a symbiosis that has to be a relationship between. So the factual analysis, the the OK, this is going to work or this is not going to work. And whatever values are going to inform what it is that you want to achieve through economic means. Right. So but too often people seem to think that the two are completely, in fact, decoupled, that there is something intrinsic about the way, you know, about economics that is essentially value free.
Or if you I probably if you ask a right wing person and that is inherently supportive of their own values, that is simply not the case. You could come up with very different economic solutions to a particular problem, depending on whether you give a priority to a particular kind of value or another that. Is that correct?
Yeah, actually, in my my first popular book, The Official Society, I actually sort of dissect that a lot because in particular I look at the the goal of efficiency and which is which is typically retrade. I mean, less so now. But when I was young in this famous economics class that I attended a couple of lectures of my I caught my undergraduate textbook from back in the 80s that explicitly said that economists are concerned about efficiency by which they meant Parado efficiency.
And that is an entirely technical and value free notion. Right. Whereas the other people are concerned about distributive justice and that because it's where Luise is, is is a value and therefore it's subjective and is outside the province of economics. And that if you look at actually.
Sorry, can you just explain what Parado efficiency is for people? Right.
So the I mean, and actually one of the things I do in the study is kind of try to explain how that economic concept of efficiency, greater efficiency is different from like, you know, how efficient your washing machine is, because even how efficient your washing machine is not to totally value free notion, but prio efficiency is explicitly more less moral. What it says is that from the standpoint of society, if you could improve one person's condition without worsening anyone else's condition, then from the standpoint of society that arrangement is better.
So it's a kind of like no harm principle which says that, you know, if you can change things in such a way that nobody is hurt, then that's good. You should do it. So there's the efficiency standard and that's really central to the market. And to the various proofs about the desirability of markets is that they show that they're efficient in that process and sort of go back into the darker ages of economics, it was thought that that was purely technical.
I actually checked back at my undergraduate economics textbook 10 years later and they actually changed that section. And it was kind of interesting and heartening example of the influence of John Rawls, where they kind of said, you know, it used to be thought that there was this huge difference between efficiency and fairness, whereas John Rawls has shown that a theory of justice could incorporate distributive considerations. And it's actually true. I mean, Rawls actually did have a significant effect in making people realize that that principle of efficiency was a principle of justice as well, and that distributive justice was not so exotic when compared to efficiency that you could use a lot of the same apparatus to think about fairness the same way you think about, you know, how to improve people's welfare.
How much I actually would like to think this is changing a little bit, that people are becoming more aware of the fact that there are these explicitly moral commitments underlying a lot of welfare economics.
So how much of disagreements between, for example, the right and the left over what the ideal economic arrangement, economic policies would be? How much of that do you think is due to people just having different ideas about what the facts are and how much of it comes down to just values, what kind of society they prefer? Like if every if everyone were made to have a completely clear and accurate understanding of what the facts actually are, how much disagreement you think would be left, right?
Actually, I think that the United States is significantly different from Canada in that respect. I lived in the state for five years and I believe I actually think that the United States, there are something much more close to or more closely resembling genuine disagreements over values, particularly the way in which Americans privilege liberty. So if you take a document like libertarianism and sort the view that the way you should be thinking about economic relations is in terms of individual's liberty and their property rights and so forth, I mean, a lot of people have done some, you know, dabbled a little bit with the libertarian stuff, but also done some economics have this view that says that not only is it best for individuals to have these totally autonomous property rights and so forth, but also in a market economy, if everybody does this and everybody respects property rights, that everybody is going to be happier.
Right. But if you run a thought experiment where you so you have a kind of welfare commitment that this is going to make everybody happy and then you have a more sort of principled rights based commitment that says this is also the best system of individual liberty. But then everybody imagines that those two are going to, for the most part, be compatible. But if you imaginably kind of separate them to say, OK, well, what happens in these cases where you could make everyone happier by violating some rights here and there?
When you introduce that break, most Canadian quote, libertarians will cave because really they're just concerned about welfare. They're not they're not bona fide libertarians. And, you know, push comes to shove. They'll violate property rights or whatever if they think it's going to promote general welfare. Whereas actually, I think in the United States, there are a substantial population of Jedidiah libertarians who would actually be willing to sort of, you know, have everybody suffer in order to make sure that individual freedoms and rights are respected.
So I sort of came to that view when I was I live in the States during the year when Bill Clinton was first elected and during the debates over the Clinton attempts to reform health care. And at the time, he was a much more kind of open debate because people hadn't been through it all the time. And a lot of I was always pay attention to when Canada would come up in Canada, single payer model of health insurance would come up.
And I just was listening to NPR program where everybody was on the program, agreed that, yes, single payer would be best. But then someone said, but fundamentally, Americans will not wait in line for health care. And then everybody on the program kind of just came. They were like, you're right, you just you can't do it here. And I thought, wow, that's that's really different than in Canada. So I actually, you know, and part of the reason that my book, The Official Society, was kind of about Canada and it was arguing that a lot of the reason that things work in Canada is a kind of pragmatism about how you implement things and an overarching commitment to efficiency.
But that's actually not a good characterisation of the states where I think there is actually a genuine commitment to liberty. And so the disagreements that exist in the states are not just over over factual facts or over means, but there are different, you know, real values at stake.
But I wanted to go back, however, to a broader perspective, which you actually start the book. You make an interesting claim, according to my notes, at least at the beginning of the book, which is that after a period of experimenting with different, radically different ideas about what kind of society we might want to implement, we now got to the point where we pretty much seem to agree that there is only one thing that is going to work, and that's some version of the social Democratic controlled capitalistic society, that there are no other big ideas at play at the moment.
Would you elaborate on that?
Yeah, I actually. I have some sympathy for Francis Fukuyama. I think that people people were unfairly mean to him because, you know, the way he defended himself, you know, again, so he declares the end of history. He said capitalism and, you know, social democracy or not even social, but just kind of liberal democracy is the end of history. We run out of ideas. And I mean, of course, notoriously, Daniel Bell declared the same thing in the late 50s with the end of ideology, like just before the most intensely ideological period of America.
So, you know, it's bad timing is easy to to to achieve in these areas. But so to close the end of history on the grounds that people have run out of ideas and then everybody, you know, got upset about that and they said, oh, no, look at this. There are all these people. Look at these, you know, like, you know, Muslim theocrats and all this kind of stuff. And one of the ways in which he defended himself was by saying, yeah, but look, you know, of all the people who criticize my book, pointing to these alternatives to liberal democracy, not one of those people actually endorsed the alternative model.
Right. They're all bad ideas.
And that's I mean, everyone said, oh, look, but look at these people over here. Look at Pakistan. They're doing it totally differently. But nobody was endorsing that model. And he did sort of have a point that if you went back to the 70s and looked at, you know, there were lots of domestic critics of liberal democracy and capitalism, lots of Marxists all over the place who reportedly criticize the end of history thesis would be actively endorsing some other model of how to organize society.
So I think that it's not actually crazy what he said and the people who sort of run out of ideas at one point that kind of provocatively said or to explain what the differences between what Fukuyama called the end of history and what you're going to have almost called the exhaustion of utopian energies. And I mean, how put it in a kind of, you know, bleaker tone. Right. But he's describing the same phenomenon, which is that people have run out of ideas about how to radically transform society in such a way as to improve it.
No. I mean, yes, I do think convergence on the issue of markets from broadcasters, it doesn't mean that. And with democracy, it doesn't mean you can't change lots of things about the system, but you're not going to change improve things by changing the overall architecture.
Right. But so what that does imply, however, is because you're saying we're not about to change the big architecture. We're just about to do this. There is a lot of room within that architecture for change, but the architecture itself seems to be, at least at this point, fairly fixed. I notice that you made a reference to the Fabian Society at some point saying that while Fabians now and this was very funny to me because I ran into the Fabian Society just a few days ago, because I'm reading a fictionalized biography of H.G. Wells, who was, of course, one of the major exponents of the Cuban society.
So now the Fabians who still exist, they are still very active in England.
And it's a society that started out with socialist ideas pretty much. Right. And but but their principle, their principle from the beginning was exactly what you're saying. That is we're not going to we're not going to tear down the system and replace it with something completely new. We can achieve progress by changing things little by little and tweaking with the system. That was the whole philosophy, right?
Yeah. And actually, there's a kind of interesting story to be told someday that hopefully someone will tell about the influence of feminism in Canada, because up until recently, the the sort of elite in this country were all educated in England because of Kabira scholarships and so forth. And so there was an entire generation of political leadership of Canada came out of the sort of Oxford or Cambridge sort of mill, and many were exposed to and attracted to Fabian ideas. And so a lot of sort of Western socialism in Canada, the kind of thing that gave us health care and so forth, was actually motivated by people with explicitly Fabián commitments.
I looked up actually that the Fabian Society exists in several other countries, but not in the United States. Apparently, there is no American chapter of the Fabian Society that I find, which I suppose makes sense.
The whole story about the missing left in the states is complicated and interesting, right?
Yeah. So I'd be curious to hear what some of the major ways that your views have changed as you learned more about economics or recently. I don't know if you've used change recently. Yeah, I have to say, I read a paper on this recently about sort of changing an important change that after the 20th century and the way people thought about the invisible hand of the market and the old fashioned way of presenting the art, the central argument for the market, sort of Arrowsmith's way of doing it, is to present the market as being important because it sort of allows us to economize on our moral commitment.
But it's basically a it's a basically a motivational argument for the market. So Aristo says, you know, it's not from the benevolence of the butcher and the baker that I get my bread, but rather from the self-interest. It is that what's good about the market is that before you have a market economy, people, as it were, had to be kind of socialised into sharing a set of common values and being committed enough to the community that they're willing to bake bread for you or to butcher even somewhat.
So the market comes along and all of a sudden you don't need as much of that fellow feeling because you can get by with self-interest. So it's basically a motivational argument. And then at the same time, it's coupled with a model which is based upon psychological assumptions that are obviously unrealistic and that completely overstate how selfish, how self-interested people are. And so within that sort of sniffin classical framework, I think about the market, it's easy to regard the whole thing as being completely mistaken.
Now, I think one of the big things that happens in the 20th century in economics that Hayek is ultimately responsible for. But actually, I mean, while not changing my mind in a significant way, not by really Hayek, but the kind of repercussions of this argument is a move away from this focus on motivation, towards a focus on information. And this is also something that came out of the difficulties experienced in the Soviet Union. And the whole communist experiment with doing away with the market is that when it comes to seem really important about the market, an invisible hand is not the fact that it motivates people to, you know, be productive and so forth, but rather it's that the price system reveals information about the relative scarcity of resources, the relative, you know, demand, the relative need and so forth.
And it allows you to kind of communicate that information between consumers and producers in a fully decentralized way. And if you were to try to replace the market or get rid of the market and this is, of course, what was discovered in the, you know, former communist bloc, was that you can't do without prices. And so even if you want to plan an economy, you have to have a number that in effect, it reflects the relative scarcity relative to supply and demand.
And so you need to have a system of prices. And so in the Soviet Union, they used to try to you know, they used to calculate prices. And of course, they calculate you start calculating prices manually. You start discovering how amazing the market is and how difficult it is to reproduce its central function. So that's a real game changer. That really changes the way in which you think about the markets entirely when you something entirely in terms of like providing information.
And if you're not getting that information to the market, where else are you going to get it? And that's what's actually over the course of the 20th century, changed a lot of people's mind about the necessity and desirability of the market. I mean, that's what lost his mind and lots of other people. I want to bring you to your second chapter where you talk about incentives and you seem to make a case for the idea that, yes, incentives may be important for for changing human behavior, but but they may be overestimated, especially in certain political quarters.
They're not they're not all that they're cracked up to be.
What is what is that based on science that actually touches a little bit on my academic work to make my my more academic work is actually trying to figure out how you can model a real following within a formal model of actions and how you can modify an economic model of action to incorporate rules, and that that chapter is kind of just a gloss on it. But I mean, it's just as crushingly obvious feature of human motivation, which is that, you know, people follow rules, you know, sometimes out of laziness, but I mean, because they can't be bothered to calculate the consequences of their actions, but often because they have a commitment to the rules and in particular moral roles.
So they don't want to live or don't want to cheat and so forth, is what I say. That's why there's no such thing as a rational choice criminologist, because it's and there are actually are rational choice criminologists. But if you look at their models, they're not actually rational choice models, because if people actually reasoned the way economists say people reason or think, people should reason that nobody would ever respect the law because there's tons of profitable opportunities to violate the law right, left and center.
That's why actually the one area where economists have actually thought about legal, the law is in the area of tax compliance. And again, the economic models are absolutely useless because if you look at tax compliance, there's no reason why the overwhelming majority of the population should comply with tax law. So the people follow rules and even when they could easily get away with breaking them. And that's sometimes economically significant, sometimes not. One of the characteristics of markets is that we explicitly designate them as sort of competitive environments where you're not expected to behave in a prosocial way because we want to elicit competition from people.
So we've kind of patterned the interaction as one where you're not supposed to follow rules. And so, of course, in those situations, you can you can find more self-interested behavior. But that's because, like we you know, in a football game, you can find self-interested behavior on the part of one team. Right. On the one hand, incentives are incredibly important, but they're not everything. And so any kind of economic model, the things you can ignore, morality or rule following is going to be, you know, inadequate.
And yet at the same time, so you can't take it and say, aha, therefore economists are wrong. Therefore we can avoid incentives because, you know, that will definitely come back and bite you. The fact is, people follow rules, but they have an eye on opportunities for defection. And even if a lot of people will spontaneously break rules when they see other people breaking rules, then they'll start to break the law. That's why, you know, people started looting and stuff like that.
And it can kind of snowball because when you see other people not respecting the rule that everybody that gives you license to break it yourself. So you definitely ignore incentives at your peril. Peril.
But that doesn't mean that you know everything that's very well put.
I was wondering about your position on the on the the rules of government and the market in terms of providing goods and services, whether there are certain things that you think that the market is much better equipped than the government to provide and vice versa. I mean, I know there's some standard answers to this, but if there are things that you think don't get enough of a hearing, I'd be curious to know why. Yeah, yeah.
I real idealistic about insurance and some of it to the book itself, some other work. But I actually think insurance is really, really important. And in fact, there is a sort of common view of the welfare state on the left that I think is mistaken, which is that people tend to think of the welfare state as being primarily redistributive in its function. And so they have a picture like if you think of, you know, kind of Rausing framework, we have two principles of justice efficiency, which is sort of how much we should produce and then equality, which says who should get what right.
There's a tendency to want to map those two principles onto the two institutions and to think that the market, therefore, is in the business of promoting efficiency. And then but the problem is it makes really unequal outcomes. And so the state comes in and just redistributes and that those are the two complementary roles of the market in the state. I think that's really, really mistaken that for the most part, the states involved in the same efficiency promoting exercise as the market, it's just that a lot of the efficiency promoting public goods that the state provides look like they're redistributive because in fact, their insurance products.
And so the classic example would be Social Security, which often gets classified in discussions as a redistributive social program. And often political philosophers that I work with will try to justify it on egalitarian grounds. Right. But it's really not about redistributing as witnessed by the fact that it's not particularly progressive like. The pension component of it, really what it is, is a collectively provided life annuity, which is essentially an insurance product, right. So, I mean, you can go and buy life annuities privately, so you plunk down a thousand dollars.
And in return, you get this promise that from, say, age 65 until you die, you'll get a certain amount of money per month. Right. So that's an annuity. If you try to go and buy those privately as an individual, you'll get a really bad price. And if you go as a woman and try to buy it, you'll get a really high price because women are more likely to live longer. So there's a typical sort of failure of insurance markets called adverse selection is that only people who think they're going to live for a long time are going to buy these things.
And so they're going to be priced to reflect that. Right. So there's always advantages to be had from from purchasing these things as groups. You can get a better price, which is why often employees or employers will provide a defined benefit pension scheme, which is basically collectively purchased life annuity. But the Social Security system in the United States is basically a gigantically collectively purchased life annuity scheme. So it redistributes, but only because it's an insurance scheme. And if you look at the redistribution that goes on with any of these kinds of schemes, the people who really benefit other people who live to be 100, the redistribution actually, rather, from people who die young, the people who die old right now from from rich to poor.
Yes. Lakeridge, the poor and well, only accidentally and so far as to deliver the poor. Exactly.
And so if anything was actually in fact, one of the things that makes Social Security that the pension benefit less progressive is the fact that the poor tend to die younger and therefore subsidize the life of the rich. But all of these annuities, the reason you buy an annuity is that you're worried about outliving your savings. And so what you do is, of course, you don't know exactly how long you're going to live, but if you get together and pool your savings with 10 friends, chances are you'll be closer to the mean.
Some people die and some people die old, those who don't effectively pay for those who die old. So an annuity is an insurance arrangement whereby you essentially pool your retirement savings to transfer rather therefore from the people who die young to people who die old. And that's really the major function of Social Security, is to protect people from outliving their savings. And that's that's the way the redistribution works. But that redistribution follows an insurance logic. It doesn't follow an egalitarian or a kind of social justice.
You logic. Yeah, it's interesting, right. But the mere fact that money is going in the same way, like car insurance is redistributive. Right. Redistributes for people who are unlucky and have. Ah, yeah. Sorry. It means there are some people who are lucky and don't have accidents to people who are unlucky and do have accidents. That's right. But that's so. But that's an insurance logic. Health care is the same way now.
A number of months ago I had this somewhat bizarre experience. After a panel discussion, I found myself at dinner. I wrote about this in the rationally speaking blog.
I found myself surrounded by Marxists, real Marxists, people who really think that Marxism is still a very viable option.
I have an emeritus colleague who is bless his soul. He's a member of the Communist Party of Canada and has been since, you know, whatever before I was born. And the other day I was walking across campus and I saw him sitting at one of those tables handing out newspapers. I was like, wow.
Yeah, well, that's a communist.
So thinking about that experience, you know, sort of brought me to I believe it's the third chapter in the second part of your book where you say, you know, the one titled Capitalism is Doomed, Why the System is Unlikely to Collapse. This is one of the myths on the left or at least on some segments of the left, because, for instance, I consider myself on the left of the spectrum, but certainly not to the, um, to the point of those masses that I was talking about earlier.
But there is a certain number of people on the left, especially the more extreme left, that is absolutely convinced still that, in fact, capitalism is just about around the corner from, you know, collapsing and that the new world order, whatever that is going to be, it's going to it's around the corner. You don't think that that is the case? Why? Yeah, no, I don't.
Although capitalism certainly does. A good guy puts on a good show of looking like it's collapsing from its quasi collapsing from time to time.
Yes.
I actually you know, I wrote most of the book before the 2008 financial crisis. And so I had a bunch of stuff in there that was like, oh, like capitalism is fine, nothing's going to happen. And then, you know, all hell breaks loose. And I actually got the drafts back for final review. About two weeks after Lehman Brothers collapsed, the entire global financial system was on the brink. And so I had a chance to revise it.
So I was sort of desperately revising the manuscript as events unfolded. But I was sort of. Most of the revisions were like, you know, you know, despite appearances to the contrary, capitalism will collapse. And, you know, I stick by that. I mean, there's sort of two to observations to be made about it. The first is that, you know, coming out of Marx, there's there's a mistaken argument what's called the overproduction fallacy, which suggests that, you know, capitalism contains fundamental, fundamental contradiction, which is eventually going to lead to its collapse and that the business cycle is just a kind of manifestation of or these periodic economic crises are a manifestation of a fundamental contradiction.
And the idea is that through the introduction of labor saving technology, capitalists try to increase their profits, but at the same time decrease total demand for products and so labor can buy back its product and so on. And as a result, you know, over time, you're going to wind up, you know, getting shortfalls of demand, capitalists increasingly desperate to sell their products. And therefore you'll get, you know, consumerism and all kinds of vast conspiracies to stimulate new demand and so forth.
All of this is based upon a fundamental fallacy, which is I think it's been clearly diagnosed by Keynes and throughout modern economics, but it still is really in place on the left. And I have to say the number of people after the financial crisis who are coming out of the woodwork who are saying, I told you so, but not just I told you so. They were trying to show they. So I mean, from David Harvey, who did like a really widely watched YouTube on this to my own colleague here, Richard, Florida all trying to show that this only had a superficial appearance of having been about banking and subprime mortgages and so on and so forth.
But really what it was about was labor saving technology in the factory, you know, as though somehow Fordism was the real cause of the 2008 financial crisis in the states. And it's an absolutely crazy story, like when you look at the kind of chain of dominoes that has to connect the two up. And anyhow, it's just a crazy story, the fact. But it's actually kind of extraordinary how many academics still believe it?
Well, someone who blame feminism so it can get crazier. Yeah. I mean, well, I mean, the Marxist thing was sort of a little more well developed than that in the sense that in the late 19th century, people were really groping for an explanation of the business cycle. And this didn't seem like a crazy explanation. But, you know, late 20s and early 21st century, it is a crazy explanation. But a lot of this is just, you know, people can come up through the ranks and become university professors without ever taking, like a serious course in economics and, you know, understanding what it means for for supply to create its own demand.
Right. I have a question I'd really love to get your take on.
I'm sure you've heard the accusation that economics and particularly macroeconomics, just is not at all reliable, that they, you know, they create these models.
They can't really do experiments, you know, so they sort of create these models based on the data they already have. But, you know, then they totally fail to predict what's going to happen in the future because they just, you know, overfit their models to the past past sample.
Given that given that there's so many complicated variables at work interacting with each other when we're talking at the level of societies of entire economies, and given that we have such limited data, how reliable can macroeconomics really hope to be, as you know, predictive science? Well, I guess it depends what you're talking about, a crisis of discipline. There's lots of people who who call themselves economists who do nothing but empirical work. And so, I mean, in macro, I have to say in the book, I kind of make a joke about, you know, I'm a philosophy professor.
Right. So who am I to complain about, you know, fitting your model to reality? So I kind of joke about philosophy being the Department of data free speculation and data and come to think of it as something we have in common with classical microeconomics. So economics is also a little bit like that, I have to say. I mean, I actually do find that there's something so philosophical about it, sort of that classic macroeconomics. I'm thinking Keynes and his immediate successors in the sense that what the models provide and I'm not talking about like, you know, contemporary models or whatever, but these sort of relatively classic models trying to figure out the origins of the business cycle and so forth.
What is a liquidity trap? All that. All only are is is is is an exercise, an extremely disciplined reflection about the world. That is you're just thinking through the consequences of something. So you see something happening out there, which is you have what looks like a shortfall of demand. Right. I mean, look at the states right now. I mean, there's an incredible amount of unused capacity. There's an incredible amount of labor sitting idle and, you know, and the US government can borrow at one percent or something like that.
Right. Sort. So, like, how is it possible that this that transactions that would be obviously mutually beneficial to everybody involved are just not happening? Right. There are always people sitting around. There's all these factories sitting idle, like, why isn't the United States economy producing at at at something closer to to, you know, maximum capacity? And there's a puzzle there. And a lot of classic is just thinking through and micro. It's just thinking through what a really, really disciplined way, what you know, how that could be happening.
And so the models to get introduced and in particular, you know, money is tricky. And I mean, ultimately, the story all hinges upon the role that money plays. And what's wrong with the classical Marxist analysis is that it doesn't understand money correctly. And Keynes has real insight is just to sort of fight harder and more consistently about the way money works. And so I find working through those models, I get something a lot like philosophical insight.
You know, it's not the kind of thing where I turn around to look for verification of it. I mean, it's verified in the sense that I have a puzzle about the world, that now I have a plausible theory. Prior to that, I had no plausible theory to explain why it's happening. And now I have a theory that I actually find that kind of philosophical, though, in the sense that what he provides me with is just inside.
But really, I mean, you can't whether the insight is in fact true, you know, you might it. No, it's kind of explained her, but kind of like the gigantic way, I mean, I'm talking about the major achievements of of 20th century economics and cames in particular like having figured out the business cycle so that now you have an account of it, which is an account that makes sense, which prior to that, no one's ever been able to provide for.
I mean, I'm not talking about being able to predict the movement of prices here and there, you know, when this little bubble is going to pop up, what have you. Right. That kind of stuff there. Not a lot of people claim that economics is equipped to do that kind of thing or that it even tries to explain that. I was more like it's pretty all kinds of questions. But, you know, there have been like 30 recessions and nobody can figure out why they happen and why they stop when they do stop.
And now so finally, somebody has a theory that accounts for it. I mean, yeah, it's broadly verified as well. I mean, these are the big winner out of the last three years of how economics has been. Paul Krugman. Right. Because, like, pretty much everything he said has been right. So, yeah, I know someone's going to be wrong and people make predictions, but not to be too pessimistic.
I think Paul Krugman is very smart, just working off a model.
All right. And the people who are working off that model have been more consistently right than wrong. So he looks at the UK and says, you know, expansionary expansionary austerity is not going to work. Contractionary policies will be contractionary. And what do you know, two years later, you know, they're not expanding.
So all kinds of things. He's been sort of consistently right about them. And, you know, it's you can think of it as as vindicating a model. I'm more inclined to think of it as sort of vindicating a way of thinking about a way of thinking through economic problems.
OK, well, we are just over time for this section of the podcast, so why don't we wrap up and move on to the rationally speaking PEX.
Welcome back. Every episode, we pick a suggestion for our listeners that has called our rational fancy. This time we ask our guest, Joseph Heath, for your suggestions.
OK, and so here's my pick, and this is this is not a very fun pic, but I was I was going to think back over books that I read that I thought were really, really interesting and things that we've been talking about, economics and in particular economics for for the non-specialist. I wanted to recommend Yanase Cognize book called The Socialist System, which is an extremely gigantic book. And a lot of people have heard of it because he very famously introduces this concept of the hard budget constraint in this book.
But it's only about two pages of the book where he talks about the hard budget constraint and everybody always cites those two pages. But in fact, the whole book, I was really surprised at how enjoyable it was to read. And so it was. And it's not particularly technical. I mean, you have to know, I mean, it has a lot of economic concepts, but it does have a lot of math in it. I don't think there's any math in it, but it's just it's just a top to bottom description of of how the Soviet Union worked and what worked properly and what didn't work properly.
And there's actually very, very few books that explain that to the left, to the layperson, to the generally educated reader. And I think part of assessing the market, part of the problem is that we take it performances for granted. And so it's easy to imagine that a lot of things just happen naturally or spontaneously, that people just kind of do stuff when in fact it's the market doing it for us. And so to really assess capitalism and its virtues and vices, you have to really look seriously at attempts that have been made to do without capitalism.
And the Soviet Union was actually just an extraordinary experiment where like the depths of human ingenuity that were plumbed in order to develop alternatives to doing things with a market, which is extraordinary. And could I describe how it all works and what didn't work and what did work. And it's just it's incredibly fascinating reading. It's actually I mean, this was a kind of in many ways a sort of monument to human perseverance and labor. And it is a remarkable thing.
And it was a failure, but it was an extraordinary failure. So, you know, it's a good book. The Socialist System Biros Kurnai.
I like the idea of an extraordinary failure, right? Yeah, sounds great.
Rooting for failure and failure is important.
Well, thank you so much for being our guest tonight.
This is fascinating and really enjoyable and well, we'll post links to your most recent book in your earlier books and also your pick for today for our listeners benefit.
Great. Thanks. Great. Have a good night. Bye. All right.
And Masimo and I would like to remind all of our listeners that the fourth annual Northeast Conference on Science and Skepticism, also known as Nexus, is coming up.
It'll be on April 21st and 22nd of 2012. We encourage everyone to go to the website NextG.
That's an easy ASPHAUG for more information and to buy tickets.
This concludes another episode of rationally speaking. Join us next time for more explanations on the borderlands between reason and nonsense.
The rationally speaking podcast is presented by New York City skeptics for program notes, links, and to get involved in an online conversation about this and other episodes, please visit rationally speaking podcast Dog. This podcast is produced by Benny Pollack and recorded in the heart of Greenwich Village, New York. Our theme, Truth by Todd Rundgren, is used by permission. Thank you for listening.