Kamis, 12 April 2018

Export orientation, supply-side thinking, and the theodicy of markets

This blog has argued (hardly uniquely) that the focus of the German and Eurocrat policymaking establishment on exports and competitiveness is destructive for the Eurozone's economy. Today, I want to argue that there's an intellectual feedback loop between highlighting export-led growth and the belief that individual, company, or country merit determines economic success. This is very much work in progress, and I'd particularly welcome feedback.

Early in July, Angela Merkel's party, the CDU, held its "Economy Day." The head of the party's economic council began with an excerpt from the Treasury of Teutonic Stereotypes a pronouncement. "Economic success is no gift;" he said, "rather, it must be earned every day through hard work." 

I have a name for this kind of thinking: the "theodicy of markets."  In the study of religion, theodicy refers to the problem of reconciling the existence of evil with the presence of a god both omnipotent and benevolent (here's a moving example).  But Max Weber used the term more generally, to refer to a doctrine that explains and justifies good and bad fortune. He wrote:

The fortunate is seldom satisfied with the fact of being fortunate. Beyond this, he needs to know that he has a right to his good fortune. He wants to be convinced that he ‘deserves’ it, and above all, that he deserves it in comparison with others.

A theodicy, in Weber's sense, explains why people deserve what they get. A theodicy of markets argues that those who flourish in a market economy deserve to do so. The sentiment expressed above is an example: economic success is no gift--it's deserved, because it results from hard work.

Weber's argument--made in the context of religion--is that intellectuals work hard on their theodicies trying to make them logically coherent. The intellectual difficulties they confront drive the development of doctrine and thereby influence action.

In this light, it's worth investigating the intellectual challenges facing the theodicy of markets.
Mapping desert (or merit) onto market outcomes is at best a dicey business, because it implicitly involves endorsing the fairness of the multitude of bargaining situations determining relative prices. (Germany, for instance, is an exporter of luxury cars, demand for which probably has something to do with increased economic inequality in the countries beyond its borders.) To refer to "productivity" as justifying success is just to rename the problem, since productivity is measured with respect to output prices.

More generally, at a very high level of abstraction, success in any endeavour is a joint product of merit (skill and effort) and circumstances. To maintain a claim that success is deserved, prediction of and adaptation to circumstances can be defined as part of the relevant success-generating effort. However, this move requires a very particular conception of circumstances: they must be amenable to prediction and, hence, fairly resistant to change, including change through the vagaries of deliberate human action.  An actor's success under a given set of circumstances would otherwise have to be ascribed in part to some other actor's decision not to change those circumstances, downgrading the importance of desert.  

Now in talking about the concrete issue of economic success such a conception of circumstances is, of course, quite absurd. The circumstances under which economic success is pursued can and do change due to deliberate action. Even Mr Lauk, who told us economic success is no gift, concedes in another context that sanctions on Russia will damage the German economy. So prior economic success was, in part, a "gift" of good relations with Russia (not to mention the purchasing power gifted to Russian consumers by high oil prices). 

So how does one maintain a theodicy of markets in the face of the manifest role of manipulable circumstances?  Consider this remarkable July 2014 statement from Andreas Dombret, a member of the board of the Bundesbank:
[The] strong influence of international trade [on Germany's recovery] worried some observers. Many felt that Germany's reliance on exports was risky, as it exposed Germany to the ups and downs of the global economy. ... 
I have doubts that turning away from global markets would strengthen the German economy. Facing global competition ensures that German companies keep up with technological progress and retain their high productivity. This might come at the price of higher volatility, but to me this seems like a price worth paying.
The first thing to note is how very, very weak this is as a piece of economic argumentation.  To claim that policy of supporting domestic demand is equivalent to a policy of insulating firms from international competition is absurd--indeed, one of the arguments sometimes made against demand stimulus is that its effectiveness is limited when consumers prefer foreign to domestic products. 

Given the flimsy argument, maybe Dombret's statement is better understood as motivated reasoning emerging from an emotional commitment to the theodicy of markets. In particular, it resolves the problem of reconciling merit with the role of circumstances by
Partitioning circumstances under which economic success is pursued into the mutable (domestic demand) and the immutable ("the ups and downs of the global economy").  
Asserting that altering the mutable circumstances would undermine the promotion of merit ("productivity") and should thus be avoided.

One implication of [1] is that there ought to be a strong "elective affinity" between a commitment to the theodicy of markets and support for an export-led demand model. Export performance is the true test of economic merit, precisely because exports are directed into a "global economy" imagined as impermeable to policy manipulation. 

Imagined is the right word here, because of course "the ups and downs of the global economy" are strongly affected by policy decisions in individual nation-states. Or course, this problem could be avoided if every nation-state would accept the self-denying ordinance to ensure the triumph of merit by avoiding demand stimulus. Here's Bundesbank head Jens Weidmann throwing cold water on the idea that external circumstances should be changed in an interview with Le Monde (German, French) last month:

In general I am sceptically inclined to the idea that one can demand a contribution from others to one's own sustainable growth... Growth must instead come through one's own efforts. It is the responsibility not of the governments of neighbouring countries nor of the European Central Bank, but rather of each government to create a domestic environment that supports business innovation and employment.

And here he is in Spain in July:
At the time [of founding the Euro and agreeing the deficit-limiting Maastricht criteria], it was assumed that by constraining governments' ability to fiscally stimulate demand - and by shifting monetary policy to the European level - governments would have no choice but to implement structural reforms, improve their supply side, and strengthen their potential for sustainable growth.
Note the use of the word "sustainable" in both contexts, which seems to me to be another tactic of displacement, analogous to the rejection of demand stimulus, an implicit assertion that the market generates morally appropriate outcomes, at least in the long run (when, of course, we're all dead).

To sum up, then: to sustain the idea that "economic success is no gift" requires some substantial mental gymnastics with deeply destructive consequences for economic policy; in particular, it promotes an unrealistic reliance on export demand. I'd be very curious to hear from readers whether they found this convincing and/or of interest.