Hello all

Welcome to my 900th post!

And because it’s my 900th post, I wanted to share an idea/question that I’ve been thinking about for a while now (on my morning runs). I’m going to jump right in and start with some background:

Microeconomics and Macroeconomics Do Not Talk To Each Other Nicely

When people harp on about “microeconomics”, what they’re talking about are the economic incentives and actions of individuals and firms.

When people go on about “macroeconomics”, what they’re talking about is the workings of the large mass of individuals and firms (and the governments thereof) that make up an economy.

The trouble is: we haven’t really worked out is how the economic actions of individuals and firms lead to the workings of the economy.

As in:

1. We can pretty much predict how individuals will act in most situations (they’ll try and maximise their happiness, or wealth, or whatever);
2. We can pretty much predict how firms will act in most situations (they’ll almost always aim to maximise profits);
3. But we can’t really predict how the economy will react in most situations. Oh – there are rules of thumb. We can say “Generally, lowering interest rates will be stimulative.” Except when it isn’t. Or “Generally, lower unemployment will result in some inflation.” Except when it doesn’t. And we suspect that there is some issue of feedback loops. And Keynes’ likes to talk about “Animal Spirits”. We also mustn’t forget the banking sector and finance. Or foreign trade. And et cetera.

 
The quick summary: we don’t have a unified theory* for how economies work.
*Not that I’m necessarily a believer in unified theories. But it doesn’t have to be a neat one. Even if it’s “orderly chaos in the centre, total chaos everywhere else” – at least that’s a starting point.

So economists just sort of trundle along and issue predictions. And they’re right about as often as a chimpanzee flipping coins, and less right that “crude extrapolations” of history (just ask Philip E. Tetlock, and his 28,000 prediction study…).

So that’s a problem, and we ought to do better.

And that’s the background. So now I’d like to suggest something; but before I get to that, I’d like to slip off into a tangent for a bit (bear with me – it’ll work out, I think).

A Tangent: Common Sense, Dan Carlin, and the New Style of Trade Accord

Dan Carlin is a podcaster with two famous podcasts: Hardcore History and Common Sense:

• Hardcore History episodes are like mini audio books (4 hour long episodes released every 8 months or so), and they’re usually the contemporary re-telling of some famous historical event (the most recent series has been on World War I).
• Common Sense episodes are a monthly hour-long affair, where you get the historian’s perspective on the big current issues (although he does tend to treat American issues as global issues – which isn’t necessarily a bad thing, but there it is).

 
The most recent episode of Common Sense, from last Saturday, is titled “The Illusion of Control”. And Dan is very concerned about two sets of trade negotiations:

1. The Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU; and
2. The Trans Pacific Partnership (TPP) between the US, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

 
Here are some maps to keep things in perspective:

The part of the story that has everyone all hot under the collar:

1. Both sets of negotiations are taking place in secret.
2. It’s not just the citizens that are being kept in the dark.
3. Even elected officials aren’t allowed to know what’s going on.
4. And what’s more, even after the deals are signed, their content (as in, the actual clauses and rules) won’t be allowed to be public for years afterwards (the limitations range from 4 years to 30 years after the agreements have been signed).
5. The only reason we know about the negotiations is Wikileaks.
6. But a lot of the heads of big business (Big Banks, Big Oil, Big Pharma, etc) have all been consulted and have all had their input and many of their former employees sit on the negotiating committees.

 
It may sound far-fetched – but basically, over the years, many governments have gradually handed over trade deal negotiation power to their executive branches. It’s a practical thing, as I understand it. And if you’re interested in the mechanics, you should listen to the podcast (here’s the link: The Illusion of Control).

Anyway, now that we’ve gotten to see some of the negotiated drafts thanks to Wikileaks, there is lots of outcry. Here are some quotes from John Hilary, the Executive Director of War on Want, a London-based anti-poverty charity, and Professor at the University of Nottingham:

As officials from both sides acknowledge, the primary aim of TTIP is not to stimulate trade through removing tariffs between the EU and USA, as these are already at minimal levels. The main goal of TTIP is, by their own admission, to remove regulatory ‘barriers’ which restrict the potential profits to be made by transnational corporations on both sides of the Atlantic. Yet these ‘barriers’ are in reality some of our most prized social standards and environmental regulations, such as labour rights, food safety rules (including restrictions on GMOs), regulations on the use of toxic chemicals, digital privacy laws and even new banking safeguards introduced to prevent a repeat of the 2008 financial crisis.

…

Most worrying of all, TTIP seeks to grant foreign in- vestors a new right to sue sovereign governments in front of ad hoc arbitration tribunals for loss of profits resulting from public policy decisions. This ‘Investor-State dispute settlement’ mechanism effectively elevates transnational capital to a status equivalent to the nation-state itself, and threatens to undermine the most basic principles of democracy in the EU and USA alike.

Also this, to support the whole secrecy thing:

…chief EU negotiator Ignacio Garcia Bercero confirmed that the European Commission will block public access to all documents related to the negotiation or development of TTIP, and that those documents will remain closed to the public for up to 30 years.

So that’s the short-and-bitter Transatlantic saga.

On the Transpacific front, there is Senator Elizabeth Warren, writing awesome letters to the President’s office (full text here), complaining about similar lack of transparency on the TPP text. Here’s an increasingly famous paragraph:

I have heard the argument that transparency would undermine the Administration’s policy to complete the trade agreement because public opposition would be significant. This argument is exactly backwards. If transparency would lead to widespread public opposition to a trade agreement, then that trade agreement should not be the policy of the United States. I believe in transparency and democracy, and I think the U.S. Trade Representative should too.

So amongst the many issues that are brought up, the one that I’m most interested in is the “Investor-State Dispute Settlement” mechanism.

The Investor-State Dispute Settlement (ISDS) Mechanism

So what is it? Back to John Hilary again:

Perhaps the greatest threat posed by TTIP is that it seeks to grant transnational corporations the power to sue individual countries directly for losses suffered in their jurisdictions as a result of public policy decisions. This provision for ‘investor-State dispute settlement’ (ISDS) is unparalleled in its implications, in that it elevates transnational capital to a legal status equivalent to that of the nation State. Under TTIP, US and EU corporations would thus be granted the power to challenge democratic decisions made by sovereign States, and to claim compensation where those decisions have an adverse impact on their profits.

That is: if you allow corporations to sue governments for their policies, and seek compensation for their impact, then who is actually in control of government policy?

Or here’s another question (and I’m going to paraphrase Dan Carlin here): if you take a collection of 500 of the world’s largest corporations, would you say that they’re more powerful than Ecuador?

The answer is: “Absolutely.”

If that’s the case, then the next question is: at what point do they become more powerful than elected governments of supposed superpowers like the United States?

Here’s my idea then.

As I see it, economists are more utopian than they realise.

In microeconomic terms, here is an individual, busily making decisions:

And here is a microeconomic firm, busily making decisions:

And here is how we imagine that playing out in macroeconomic terms:

But firms are not microeconomic agents. Firms are macroeconomic agents, run by boards. And boards are mostly influenced by big A-type sociopathic individuals. And if they’re not natural sociopaths, then they’re sociopathic in practice*.
*If you have a look at the work of psychologists and economists much more informed than me, you’ll see that they talk about the disconnect between decision and outcome being at the heart (or lack thereof?) of wide-scale dishonesty and corruption. Mass-firings in a boardroom mean that the decision-maker never has to look at the fired workers in the eye. It’s an easy decision, because the outcome takes place while he’s attending to his corporate interests in the Caymans, or advising the US Trade Representative over drinks in Paris.

So in practice, economies look more like this:

And what we should really remember is that big firms are not democracies or “free market economies” – they’re monarchies and dictatorships and almost always centrally-planned.

So this:

Which is properly the problem. Because you have competing and conflicting economic and political systems – real systems – operating within a supposedly cohesive “economy”.

It’s a problem for free market policies – because they give free reign to already-powerful dictatorships (the large firms run by megalomaniacal CEOs) to tear through the confused and irrational masses.

It’s a problem for socialist policies and regulation – because they’re either written by the already-powerful dictatorships to be in their favour, or the masses (who are dependent on said dictatorships for their monthly paychecks and grocery shopping) get punished by mass firings and higher prices.

It’s the problem with the elevation “of transnational capital to a legal status equivalent to that of the nation State.”

But the hard truth is: most corporations are already nation-states in practice.

And I suspect that’s where economists lose their way. Because we’re not a society of equally-rational economic agents. We’re a society of:

• hyper-rational and extremely powerful mini-dictatorships;
• their sometimes-irrational-but-mostly-that’s-irrelevant subjects, who have freedom of choice but a somewhat bounded freedom of action; and
• elected officials who depend on the subjects for votes and the mini-dictatorships for funding.

 
And we need to stop separating the economics from the power play: as though there is no intersection. Because intersection is almost all there is.

And that’s my thought.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.