Guiding Innovation’s Hand: Industrial Policy Against Inequality

This is the second post in our series discussing The Meritocracy Trap by Daniel Markovits. Click here to read all posts in the series. 

Jeff Gordon – 

Most of the critical attention directed at Daniel Markovits’s The Meritocracy Trap has focused on its claim that well-off parents launder inequality through schooling. While Markovits brings masterfully comprehensive reams of data to bear on the concept of the “meritocratic inheritance,” the most original and provocative part of the book comes later, when Markovits offers his explanation of why educational sorting has come to matter so much: elite schooling leads to top jobs, and “[t]he top jobs pay so well because a raft of new technologies has fundamentally transformed work to make exceptional skills enormously more productive than they were at mid-century and ordinary skills relatively less productive.” This is provocative because it contradicts the pervasive myth that technological change is natural, self-directing, or inevitable. Few reviewers have remarked on this part of the book or reflected on what it suggests: that industrial policy will be vital to building a more equal economy.

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Liberate the Meritocrats—From Their Bosses

This week, we share two posts discussing The Meritocracy Trap by Professor Daniel Markovits. In his 2019 book, Professor Markovits argues that meritocracy is a straightforward mechanism of class reproduction and wealth concentration—and that it is making life worse for everyone, elites included. The Meritocracy Trap has generated productive conversations about the causes and implications of wealth inequality, and what this means about potential movements to upend the present hierarchy. Because the book centers the gap between elite and nonelite labor as today’s most salient class division, critics have been quick to push back. In particular, some have challenged the book’s downplaying of the role of capital in its class analysis, as well as its optimism about elite cooperation in any project aiming for economic justice. While these are crucial parts of the debate around the book, we want to avoid rehearsing those arguments here.

By examining the social and political valences of a seemingly neutral quantitative system, The Meritocracy Trap touches on several questions at the core of law and political economy. Today on the blog, Marshall Steinbaum and Andrew Hart argue that Professor Markovits omits capitalists from the story in part by relying too heavily on the flawed theory of human capital. Tomorrow, Jeff Gordon turns our attention to the book’s argument that industrial policy contributed to the technological innovations that over-reward elite workers at the expense of the poor and working class, and that industrial policy will be essential to build a fairer economy.


This is the first post in our series discussing The Meritocracy Trap by Daniel Markovits. Click here to read all posts in the series. 

Andrew Hart and Marshall Steinbaum

There’s a big difference between the first Gilded Age and the second. Historically, rich people earned income from their capital and everyone else earned income from their labor, under the direction and control of the capitalists. This time around, the rich don’t just own capital; they also work. Daniel Markovits’s book The Meritocracy Trap is about just how hard they work, and what it says about them.

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Promises All the Way Down: A Primer on the Money View

This post is part of a symposium on the Methods of Political Economy.

Elham Saeidinezhad

It has long been tempting for economists to imagine “the economy” as a giant machine for producing and distributing “value.” Finance, on this view, is just the part of the device that takes the output that is not consumed by end-users (the “savings”) and redirects it back to the productive parts of the machine (as “investment”). Our financial system is an ornate series of mechanisms to collect the value we’ve saved up and invest it into producing yet more value. Financial products of all sorts—including money itself—are just the form that value takes when it is in the transition from savings to investment. What matters is the “real” economy—where the money is the veil, and the things of value are produced and distributed.

What if this were exactly backwards? What if money and finance were understood not as the residuum of past economic activity—as a thing among other things—but rather as the way humans manage ongoing relationships between each other in a world of fundamental uncertainty? These are the sorts of questions asked by the economist Perry Mehrling (and Hyman Minsky before him). These inquiries provided a framework that has allowed him to answer many of the issues that mystify neoclassical economics.

On Mehrling’s “Money View,” every (natural or artificial) person engaged in economic activity is understood in terms of her financial position, that is, in terms of the obligations she owes others (her “liabilities”) and the obligations owed to her (her “assets”). In modern economies, obligations primarily take the form of money and credit instruments. Every actor must manage the inflow and outflow of obligations (called “cash flow management”) such that she can settle up with others when her obligations to them come due. If she can, she is a “going concern” that continues to operate normally. If she cannot, she must scramble to avoid some form of financial failure—bankruptcy being the most common. After all, as Mehrling argues, “liquidity kills you quick.” This “survival constraint” binds not only today but also at every moment in the future. Thus, generally, the problem of satisfying the survival constraint is a problem of matching up the time pattern of assets (obligations owed to an actor) with the time pattern of liabilities (obligations an actor owed to others). The central question is whether, at any moment in time, there is enough cash inflow to pay for the cash flows.

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In Praise of Blindspots

This post is part of a symposium on the Methods of Political Economy.

Suresh Naidu–

The introductory essay to this symposium repeats several standard views about neoclassical economics that I think are some combination of dated, inaccurate, or irrelevant. I think what legal scholars (including those who do “economic analysis of the law”) perceive as economics is a tragic caricature of what currently happens inside economics departments, and the list of people to blame for that is long. But I’ve written about that elsewhere, and so I’ll take advantage of this space to defend one thing I think current economics shares with its neoliberal doppelganger. The most salient reason neoclassical economics became dominant in policy circles is that it was allied with a general revanchist business interest squeezed by late-60s/early 70s crisis. But we should not forget that it also presented the policymakers dealing that crisis something that more heterodox approaches did not: parsimony.

A recurring theme in the criticism of neoclassical economics is its constraining precision and abstraction. Even when freed from laissez-faire dogma, economic models maim reality, and the narrow style of quantitative empirical work in economics does a great deal of epistemic violence to details, compressing qualitative differences into quantitative measures. The result is a discipline that is insensitive to a lot of the cultural, psychological, and institutional details that sibling social sciences take seriously. The criticisms from heterodox economists and other more qualitative social sciences perpetually remind us of this. We use math that doesn’t actually capture reality; we quantitatively measure entities that are immeasurably different; and we insist on a crude logical positivism even as economics is deeply constitutive of institutional realities. But the virtue of all these vices is simplicity, well worth the cost of the notorious blindspots.

My claim here is not just the usual one that every discipline requires blindspots—that to model reality is to miss some of it—but also that a discipline can only be useful in guiding governance if it has such blindspots. Any social science that aims to inform (and perform) the function of a complex social organization, like a state or corporation, that enforces even somewhat impartial rules needs to ruthlessly abstract from particularities. In particular, it must use mathematics, for making incommensurable claims commensurable, for representing the workings of fantastically complex adaptive systems, and for complementarity with technologies of organizational administration, like spreadsheets.

Relatedly but distinctly, a social science that is useful for the legal needs of a large administrative state operating in a complex heterogeneous society must also be parsimonious. This social science ought to be cognitively lightweight and context-independent so that citizens and experts and bureaucrats and judges and lawyers can easily communicate new situations across a large population in a common idiom. Late 20th century neoclassical economics provided a primitive, ideology-laden language for doing this, for example by making market prices inviolable adjudicators of value inside the regulatory state (e.g. via cost-benefit analysis). But its successor will not be found in pendulous, wordy treatises penned by ethnographers and humanists; it will be instantiated in formal organizational protocols and algorithms that are the logic of some mathematical social science. It will remedy some of the blindspots of modern economics but will have its own. The question is what form that mathematical social science will take, what normative principles will it encode, and how will it be fit into an administrative apparatus that is as transparent and legitimate as possible. I suspect an updated economics will be a part, but only a part, of whatever post-neoliberal administrative epistemology we wind up inhabiting.

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Tracking Extraction

This post is part of a symposium on the Methods of Political Economy.

Angela Harris–

In a recent book, Raj Patel and Jason Moore argue that the genius of capitalism lies in its “violent extractions of extraeconomic life,” and that these extractions require not only technical innovations and market institutions, but also state power, culture, and ideology. If “law and political economy” examines the role of law in constituting and regulating marketcraft and statecraft, one way of “doing” LPE, I suggest, is to look for the role of law in managing the processes by which capitalists extract value from activity putatively outside “the economy.”

For Patel and Moore, as for LPE, “Capitalism is not just the sum of ‘economic’ transactions that turn money into commodities and back again; it’s inseparable from the modern state and from governments’ dominions and transformations of natures, human and otherwise.” Capitalism produces wealth in part by drawing human and nonhuman activities previously outside itself into its circuits of production, exchange and profit, without recognizing (let alone paying) the full social and ecological costs of their creation, maintenance, or extraction. Patel and Moore call this process making things “cheap,” and they illustrate their argument with seven “cheap things:” Nature, money, work, care, food, energy, and lives.

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The Constitutional Theory of the Business Enterprise: Toward a Monetary Theory of Production

This post is part of a series on the Methods of Political Economy.

Jamee K. Moudud

Neoclassical economists see-saw between the twin poles of perfect markets and “market failure” in either advocating laissez faire or state intervention.  And yet this dichotomy rests on a fundamental mischaracterization of the business enterprise, its role in society, and markets more generally. This essay draws out a heterodox theory of the firm and argues that real-world business behavior can only be understood in light of insights from the Law and Political Economy (LPE) tradition. I draw on the classical economists as well as the Oxford Economists’ Research Group (OERG), especially P.W.S. Andrews.  The constitutional theory of the business enterprise (“small-c constitutional” as used by Sabeel Rahman and Christine Desan) discussed here fuses this economics literature with the Legal Realist framework, thereby creating a bridge between microeconomics, macroeconomics, and law. Development of this theory and its implications ought to be central to LPE approaches to understanding how firms do and might operate.

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The Sociology of Markets: an Alternative Political Economy

This post is part of a series on the Methods of Political Economy.

Neil Fligstein – 

For the past 35 years (and certainly before that), scholars across disciplines have offered critiques of neoclassical theory and its variants of political economy. As a result, there is a great deal of theoretical work done on issues of the linkages between states and markets, the comparative study of capitalism across countries, and on understanding how markets are the product of social interactions between market actors—an approach known as the sociology of markets. All of these perspectives share the view that the economy is embedded in political, social, and cultural processes. The upshot of these perspectives is to counter neoclassical political economy’s claim that there is one best or “efficient” way to arrange markets. Instead, markets reflect the relative power of governments, firms, and workers to structure the production of goods and services. The outcome of these interactions produces stability for incumbent firms, a stability that reflects a resolution of these political conflicts. This perspective exposes theoretical arguments that assume efficiency as both incomplete and misleading. Such arguments miss that because there are multiple ways in which these arrangements can be negotiated, there are multiple paths to create stable markets.

These perspectives have been used to understand many empirical contexts including the rise of shareholder value capitalism in the U.S., the rise of finance in the U.S. and around the globe, and the implications of all of this for increasing income and wealth inequality. This literature is well known in political science, sociology, and business studies but less well known in the rest of the academy, particularly in parts of legal studies. My goal here is to introduce the perspective I have contributed by explaining a few of the key ideas and a couple of insights based on using those ideas to make sense of important features of markets.

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Privatizing Sovereignty, Socializing Property: What Economics Doesn’t Teach You About the Corporation

This post is part of a series on the Methods of Political Economy.

David Ciepley – 

We imagine we live in a bourgeois capitalist economy, in which the means of production are owned by natural persons, the “capitalists” of capitalism.  On this, the Marxist economist, the liberal economist, and the neoliberal economist agree.  But we do not.  Ours is a corporate economy.  Overwhelmingly, the means of production are owned, not by natural persons, but by abstract legal entities—corporations.  Marx was thus right in predicting that the fetters of bourgeois, individually-owned property would be burst asunder to be replaced by socialized property.  But it is not at the level of the state that productive property has been socialized.  It is at the level of the corporation.  It is, notes Paddy Ireland, “capitalism without the capitalist.”  The implications of this are manifold and take us outside the confines of what conventional economics can illuminate.

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Stocking the Toolshed: A Symposium on Methods of Political Economy

This is the introductory post in a series on the Methods of Political Economy.

Luke Herrine–

In their Law & Economics textbook, Robert Cooter and Thomas Ulen ask: “Why has the economic analysis of law succeeded?” Their answer: “Economics provide[s] a scientific theory to predict the effects of legal sanctions on behavior….This theory surpasses intuition, just as science surpasses common sense.” Moreover, “economics provides a useful normative standard for evaluating law and policy….Efficiency [that standard] is always relevant to policymaking, because it is always better to achieve any given policy at lower cost than at higher cost.”

This is, to quote a wag, pure ideology.

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After Money Bail: Lifting the Veil on Pretrial Detention

Click here to read all posts in our Money Bail series, including the introductory post presenting an LPE perspective on pretrial detention.

Sandra G. Mayson —

Ending money bail will not itself produce an effective and just pretrial system. The wonderful prior posts in this series have explored several reasons why this is so. I would like to add one more: Ending money bail will not itself produce justice because we have been using money bail, and the detention it produces, to meet a host of social needs. Forsaking it will require us to find better ways to meet them.

The purported function of money bail is release. It is supposed to balance our competing interests in liberty, security, and the effective administration of justice by ensuring that people at liberty show up for court. In fact, though, money bail also operates as a mechanism of detention. And we have been using it that way: to detain those who seem dangerous, to inflict punishment, to encourage guilty pleas, and to impose short-term restraint on disruptive people. Sometimes we have done these things intentionally. Sometimes we have done them inadvertently. What we have not done is admit what we are doing. The apparent rationality of a financial incentive mechanism has obscured the functions that money bail actually serves. It has enabled us to use jails as a first-line response to social problems without deliberation, accountability, or acknowledgement.

Ending money bail will eliminate a profound source of inequality in the criminal legal system. But it will also expose the difficult social, political and legal questions that money bail has obscured. At risk of oversimplification, here are a few of them. Continue reading