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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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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What Role for Global Finance in a Course on International Trade Law?

David Singh Grewal –

Most years, I teach an introductory course on International Trade Law. And every year since I began I’ve included a session on the international financial architecture, on the view that this architecture is intimately bound up with the functioning of the trade regime.

Euro Dollar The European Union United States

I begin the course predictably enough with a series of sessions on the history and political economy of international trade before we get into what I call the “guts of the GATT.” Here, we study the key articles of the General Agreement on Tariffs and Trade (GATT) and the main disputes that have arisen concerning their interpretation, both before and after the establishment of the World Trade Organization (WTO). Any course on international trade law would have to introduce core elements such as “most favored nation” status (Art. I), “national treatment” (Art. III), key exceptions (for example, as elaborated in Article XX), and the main “annex agreements” of the WTO (such as the TRIPS agreement, which Amy Kapczynski has discussed on this blog), as well as the various remedies and safeguards available to states facing disruptions from international trade. But toward the end of the course, I bring my friend and colleague, Robert Hockett, to discuss the international financial architecture underpinning economic globalization as a whole.

I suspect few international trade law courses address international finance as an integral part of an introduction to trade liberalization. Given the evolution of international economic law, this choice is probably unsurprising. Neither in the treaty text of the GATT (nor in the other “annex agreements” that make up the WTO) is financial architecture explicitly regulated. By contrast with international trade law, international financial law is elaborated through a different set of governing texts, institutions, and international monetary practices—prominently, the IMF Articles of Agreement, the IMF itself, and the practices that have developed among affiliated national central banks and finance ministries. Trade law scholars may be understandably wary of bringing such complex or seemingly extraneous considerations into a course that will already be full enough.

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Reconstructing the Administrative State

Blake Emerson –

In the early weeks of the Trump presidency, Steve Bannon declared that one of its principal tasks would be the “deconstruction of the administrative state.” Though Bannon has since left the White House, this project has so far proved one of its most enduring preoccupations. Administrative bodies such as the Environmental Protection Agency, Departments of Health and Human Services, Justice, and Education, and Federal Communications Commission have reversed course on key progressive initiatives such as reductions in carbon emissions, healthcare insurance enrollment, police reform, redress of campus sexual harassment and assault, and net neutrality.

agencies

The tenured civil service is being sidelined, or even targeted by opposition research firms hired by their own departments. The recently enacted tax bill promises to starve the government of the resources to sustain the remaining pillars of the welfare state, namely Medicare, Medicaid and Social Security. And the appointment of Justice Gorsuch to the Supreme Court casts doubt on the future of a core principle of administrative law—that courts should defer to agencies’ reasonable interpretations of statutory ambiguities.

This effort to rein-in the regulatory state has been at the center of the conservative agenda since the 1930s, and ascendant since Reagan. It overlaps with a broader neoliberal policy framework that many centrist Democrats share, which remains skeptical of the public provision of goods and services, and “command-and-control” regulation. Bill Clinton’s bipartisan mantra that “the era of big government is over” has steadily eroded regulatory and welfare institutions, and fulfilled its own prophecy that bureaucrats are incapable of promoting the public good.

As we near the pinnacle of this era of governance, Bannon’s declaration throws into relief a constituent feature of any viable counter-movement. If we are to develop a political program capable of rescuing the American polity from private domination, economic inequality, and caste hierarchy, we must think through what kind of administrative apparatus could carry that program into action. One that sees its role primarily as correcting market failures, “nudging” individuals to make decisions the expert deems wise, and maximizing aggregate social welfare, is likely to simply reproduce the logic of private enterprise within government.

The hegemonic framework for policy reasoning today—cost-benefit analysis—attempts to approximate market pricing where it does not exist, asking, for example, how much people are “willing to pay” to avoid certain kinds of harms. Such methods can be useful in ensuring that decision-makers fully take into account the economic effects of proposed courses of action. But they instill a regulatory ideology where the model of formally free, reciprocal, and competitive exchange predominates over the practice of joint action motivated by a common aim. We come to approach even political rights and obligations as priced commodities rather than as products of either reasoned agreement or social struggle. Instead of a cost-benefit state, we need a state that simulates an egalitarian society and stimulates a democratic politics.

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Law, Political Economy, and the Legal Realist Tradition Revisited

K. Sabeel Rahman — 

As David, Amy, and Jed note in their opening post, the economic, social, political, and ecological crises of the current moment are helping fuel an exciting wave of legal scholarship. This emerging trend, the “law and political economy” (LPE) approach, interrogates the relationships between law, politics, and economics, exploring issues of power, inequality, democracy, and social change. As we explore what this approach might mean and what its implications might be, it is important to situate these inquiries in a larger history of legal scholarship and reform politics. This is not the first time that a similar moment of crisis has helped spur creative new thinking about the relationships between law, capitalism, and democracy—and it won’t be the last. In this post, I want to sketch a particular aspect of this trajectory: the long legacy of legal realism and its relationship to our current debates around law and political economy.

This legacy is important for two reasons. First, now, as then, we face a similar period of socioeconomic upheaval and political conflict, prompting us to rethink our legal structures. As a result, the substantive insights of legal realism remain valuable for an LPE approach today. Second, recalling the trajectory of legal realism and its successor intellectual movements is helpful in highlighting the kinds of tensions and questions that an LPE approach will have to continue to address.

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Law & Neoliberalism

David Singh Grewal and Jedediah Purdy –

Neoliberalism is an indispensable term for making sense of the legal, political, and ideological conflicts of the moment, and also one of the most maligned. Liberals who feel criticized by it have insisted so often and so loudly on its uselessness that even those on the left who use it often seem compelled to apologize as they do so, to distance themselves from all its other uses and users. People thus use the term in the very conditions it should work to criticize: isolated, idiosyncratic, mutually mistrustful, and “entrepreneurial.”

The term matters because it names key strategies in one of the major conflicts of the time: the struggle between democratic claims on economic life, usually on behalf of the security and autonomy of workers and other “ordinary” people, and the claims of capital and management: for higher profit, greater capital mobility, the subjection of non-market practices to market logic (from childrearing to universities to the professions), and “freedom to manage” through “labor flexibility.” To use the term, in the early twenty-first century, is generally to acknowledge the lines of this conflict, and often to take sides. For this reason, it is often discomforting to anyone whose view of the social and legal worlds is fundamentally conciliatory – Make the pie bigger through overall efficiency! – or organized by a different division, such as good Democrats versus wicked Republicans, or responsible conservatives versus heedless liberals.

If you are looking to identify neoliberal forms of argument, look first for four overlapping kinds of claims. The first and simplest is an efficiency-based view, sometimes called (by its critics) “market fundamentalism,” holding that strong property rights and private contracting are the best means to increase overall welfare, and that law should promote these except when it intervenes to “correct market failures.” Second is a more explicitly moral line of argument (though of course promoting overall welfare is an intensely moral project) that property and markets best protect the freedom and dignity of individuals, so a market society is the most decent social order possible. The third line of argument adopts a tragic register to deny that democratic politics and public institutions can ever successfully discipline and shape economic life. This pessimistic position tends to serve as a backstop when it is clear that market arrangements are failing to deliver overall welfare – because of intermittent crises and runaway inequality, let us say. “That may be so,” the neoliberal argument now runs, “but the alternatives are always worse – corruption, abuse of power, utopian tyrannies.” The last line of argument is the subtlest, often implicit, and also often the most important: the exclusion of certain kinds of ideas and proposals from any place at the table. Continue reading