The horizon is not so far as we can see, but as far as we can imagine

How Economic Decisions Are Made

Image by TW Collins

Let’s talk money. Everyone’s favorite subject, perhaps after sex.

Money does a lot of things, but one of the most important things it does is signal “Do this, do that, don’t do that.” It says, “We need more of this, we need less of that.”

As a result money moves people around. It compels them to do things. Or, if you prefer, “profit” does. How much you can make doing something. You have to at least break even, and the more profit you make, the more you should do of something.

This is completely vanilla economic theory. This is how capitalism is supposed to work.

Right now, we have a situation where there are things we need to do, but the price/profit/wage signals are saying, “Build super yachts. Optimize selling ads. Build more weapons. Play financial games instead of building things, because financial games make more money.”

That’s the reality. That’s what money is saying, and people are responding to it.

So we have a vast explosion–not of nurses, but of health administrators. We aren’t sinking carbon to prevent climate change, because there’s no money in it. We are creating palliative medicines rather than cures, and monetizing medicines like insulin ($300).

People are doing what money tells them to do. It’s that simple.

But, as I’ve said before, money is a social construction, and price signals are not given by God and nature: They are choices. Political choices. That isn’t to deny some physical reality behind what they signal as “worth,” but that reality has obviously been elided, when, in America, the life spans of some demographic groups are dropping while super-yachts and luxury condos are hot to trot.

All systems have to do only one thing: Whatever is required to keep the system in power.

That’s all they have to do. Whether or not human welfare is advanced, whether or not we care about animals or nature is irrelevant to the raw calculus of power and staying in power. Until it effects staying in power.

If the hoi polloi can be kept from revolting or demanding (remember demands are based on “or else,” they are not requests) well then, the powerful will not do anything that does not increase their power or money. They will only care about human welfare outside of their own group if they feel they must, or if, as happens occasionally, they see their group as being something other than the elite group.

Right now, elites don’t care about other humans enough to reshape the money and political systems (the same thing, ultimately) to prioritize human welfare, avoid a great-die-off, or stop climate change. This is clear. It is not arguable, it is a fact, based simply on their actions.

If money isn’t saying, “Do the right thing,” then money is failing. The argument of capitalism was simple: “Markets will do the right thing, if we mostly get out of the way and let them operate.”

That’s just not true. Markets only do the right thing if they are properly managed. That management may look light at times, but it actually has to be ferocious because the first thing that anyone who wins a market fight does is try to stop the market operating properly; they don’t want price signals that would take away what they’ve won.

In 2007/2008 those price signals were given. They said: “The entire banking and shadow banking system has allocated resources to the wrong things. All of their money and power needs to be taken away from them. They need to go bankrupt and that power and money needs to go to other people.”

We ignored that signal. We pretended that ignoring that signal was the right thing to do by propping up failures and incompetents–who had not only massively mis-allocated resources, but engaged in mass fraud.

It wasn’t the right thing to do. Capitalism requires both outside management and an insistence on market discipline. It is most important that market discipline is exercised on the large actors, not the small ones, because the large ones set the market terms and make most of the allocative decision. When you offer people too-cheap loans, they will take them. YOU are the one offering them; YOU are the one in the wrong.

Price signals must encourage doing the right thing. When those with market power either misbehave or mis-allocate money, they must lose their power to do so.

This is fundamental, and no society which relies on money to determine allocative decisions will prosper if it is not managed properly.


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12 Comments

  1. “…they are choices. Political choices. “

    No. They are money choices. Politicians make choices based on where the money is. They do not make choices based on idealism, or idealogy, or spiritual values. They make choices based on what their financial donors want them to do. Politicians do what they are paid to do.

  2. Herman

    Planning has to make a comeback. I am dismayed that even most people on the Left don’t seem to want to discuss the Soviet and related systems outside of some Marxist-Leninists who are usually dismissed as tankies. Instead the Left keeps promoting vague ideas like “economic democracy.” The huge problems that we will face in the future will probably require some form of planning in order to manage the transition to a more sustainable lifestyle. As flawed as the USSR was it did manage to produce a decent basic standard of living for its population. Non-socialist examples of planning should also be studied, including the World War II wartime economies of the democracies and even some of the immediate post-war economies in Western Europe.

  3. Hugh

    The economy exists to serve us first building and maintaining the society we want and second providing the wherewithal for our private lives. This is why social/political consciousness is so important. Everyone needs to be aware of what the social contract, the commitments we have made to each other, is. Because this determines what the economy is and what it does. It is not about growth or GDP. It is about serving us and honoring the contract. If it doesn’t and it is easy to see everywhere around us, it doesn’t. We say no. And the contract, our consciousness of the contract and our commitments to each other, is what gives force and meaning to that no.

    Other things we have been saying for years:

    There is no such thing as a free market. Markets are all about who controls them for whose benefit. If they are not building and maintaining the society we want, then they have no right to exist.

    A lot is said about profits and efficiency, but in a perfectly efficient market, the profit margin is zero. The greater the profit, the more inefficient the market.

  4. True “free market” is by definition anarchy: no rules, regulations or requirements. I use that often to derail a reichwinger conversation. Like understanding the subtle differences twixt “socialism” and fascism, they are so conditioned to rules, regulations and requirements to their favor they cannot conceive of, cannot wrap their grubby little fingers around, a world without them, the fundamentals of “free market” capitalism. Rules, regulations and requirements. Conditioned, of course, Pavlovianly (yes, dogs; or monkeys, mice): with treats. “Throw the dog a bone” was how, if I recall correctly, Zinn described T Roosevelt’s progressivism: give the rubes just enough bread and circuses, enough beer and football, to play by the rules, regulations and requirements, and keep the corporate profits rolling in. Yet another of one of the more successful gaslightings down through history: they simply do not know. Can not conceive differently.

  5. Joan

    In my family, the immigrant/WW1 generation lived into their 90s. The WW2 generation into their 80s, and of the Boomers, one has died in his 60s and another in her 50s due to a death of despair. We’ll see how long the other Boomers last. Definitely a decline in life expectancy.

    If reincarnation is real, and linear, then it makes sense to try to make it as far as you can in this life, so at least you’re weathering the crises ahead as an adult rather than a newly born child. I walked away from the American Dream, have stopped trying to “make it,” so maybe that will count for something. Though I’ve been through quite a bit of stress already in my life, and that ages you. We’ll see.

  6. Joe

    In Tom Alberta’s book American Carnage, Paula Ryan is quoted while selling the bailout to republicans. I don’t have the quote handy, but to paraphrase it: “If we don’t vote for this Bailout Bill, we are facing the New Deal on steroids!”

  7. Willy

    Economics is an unpopular science. Physics, for all its pocket protector nerdiness, is way cooler.

    Maybe it’s cooler because it has sexy poster children, like black holes and the higgs boson. Well, maybe the higgs boson is the hot chick who hasn’t discovered lasik and heels yet, so antimatter is probably better. Economics has Mr. Potter. Not very sexy. Plus a bunch of life insurance salesman posing as financial planners. Far more have heard of Einstein than they have Keynes. Can anybody here picture what Keynes even looked like?

    Yet economics seems like it’d be far more personal for the average Jack and Jill. Shouldn’t people care more about their economic prospects than they would some quasar billions of light years away? I’m thinking that maybe this is because the whole “science” of economics is a bit shady. Physicists subject themselves to rigorous peer review in their quest for truth, while economists still spout a bunch of controversial nonsense which is eventually disproved. It seems like one is professional football, with clear rules, the other professional poker, where one can legally cheat. Which activity has more fans?

    I never studied economics. But from my far-layman perspective it sure seems to ignore important things like human psychology, sociology, humanism, desired outcomes, proven treatments for various critical conditions… It seems like a buncha con artists on the take from some dishonest corporate entity. Economics seems a mix of scientists and grifters, and few observers seem to be caring about knowing the difference. Maybe that the PTB can control this “science” is part of the problem.

  8. Ten Bears

    The Axis of Evil: Usurers, Insurers, and Economists.

  9. Hugh

    “How Economic Decisions Are Made” I would note the use of the passive voice. When the passive is used in political or economic discussions without a specified agent, that usually means that it’s not you or I.

    Seguing into the BLS jobs report for August came out today. August is one of those months where little is happening in the private sector. Everyone who was going to be hired for the good weather summer months has been hired. Total nonfarm (public plus private) shows a moderate uptick as education at the local level starts to kick back in. So this August total nonfarm not seasonally adjusted (as in a better reflection of what actually happened in August) total nonfarm increased 348,000 (a respectable in range amount) while private sector hiring increased just 4,000 (light compared to last year’s 174,000 but essentially the same as 2015’s 3,000).

    The real story continues to be that 2019 is the worst year for job growth since my benchmark year 2014, a year of comparatively solid jobs growth and the best of the last six. If we look at net nonfarm job creation, the year to date (Jan-Aug) minus the previous end of the year drop off (Dec-Jan), 314,000 net jobs were created this year compared to 833,000 in 2014 (a difference of 519,000).

    It looks even worse when we look at the private sector by itself. Net job creation seasonally unadjusted so far in 2019 was 1.531 million. This compares to 2.218 million in 2014 (a difference of 687,000) and 1.696 million in 2016, another year of bad jobs growth. And it’s even worse when you consider that the working age population has increased since 2014.

  10. nihil obstet

    To paraphrase Juvenal, who will manage the managers? If we start from the precept that money decides, with management trailing along behind, I don’t see how we’ll get to a good society. Our neoliberal elites spend a lot of time nattering about aligning incentives with goals, mainly to justify their own excrescences. However, it’s simply corruption.

    We currently have an ideology that worships money, but we should be working back towards one that seats human worth and dignity in truth, kindness, and cooperation. It’s a fine line to try to write and speak — acknowledging how the society that we’ve built actually makes decisions while not supporting that process.

  11. anon y'mouse

    i am with nihil obstet: we have the problems that we do have because money (and status, and power that goes along with those) is the goal. and nothing can get done now without bribing those who already have those things, or want to keep those things.

    perhaps we need to change our system if we want other things to be ascendant.

    if there are greedbags who want the thrill of money, give them a simulation to play with. the rest of us can move on to actually providing the good things of life to each other.

  12. Ché Pasa

    perhaps we need to change our system if we want other things to be ascendant.

    Truer words and all that. And I like the idea of giving ‘them’ a simulation to play with if ‘money’ is so all important to them. Let them play till they drop (hey, rig the sim so they always Win Big) while the rest of us get on with what really matters. Save the guillotines and all that messy clean up, no?

    But I think it’s getting kind of late in the game. Pressure is building for a clean break. New systems, yes. But what? Has anyone thought through the days after the fall of our current set of overlords?

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