Economics: selling the truth, or telling the truth? | by Khadija Sharife

by Jun 1, 2012All Articles

The fundamental market theory of equilibrium, in economics, can be compared to notions of justice conceived in other disciplines, such as electoral democracy and politics. After centuries of trading trials and wars, we were told by leading governments (who may be called ‘geographies of power’) that the magic bullet for the greater common good could now be achieved. But whilst the Market is equated with self-evident truth, its routine consequences are characterised by inequality. The question then is whether these routines are naturalised through the system, or naturally occurring? Put simply, is the world’s large and increasingly impoverished population poor and dispossessed in spite of the market’s current architecture, or because of it?
The market phenomenon is propagated as existing for a purpose that is greater than technical global regulation structured to govern self-seeking economic actors and geographies of power. The metaphor thus exists that there is a higher moral currency to the market, a ‘fact-based’ value to the scheme of it, a logic to the design. Developing government intervention – such as generic medicines, subsidised agriculture, pro-poor taxation and the like, is perceived as disrupting an efficient pricing mechanism located within the broader structure of multilateral systems.
The design posits statements that economic efficiency (Pareto optimality) is a rational expectation, and consequence, of the Market, provided there is little or ideally no intervention; or alternately, as a system dynamically developing devising the best way forward.
Far from being just ‘theories’, general equilibrium (GE) models such as Arrow and Debreu’s ‘Existence of an Equilibrium for a Competitive Economy’ 1954 are cited as unquestionable proof that such logic generates viability and efficiency via a self-adjusting system.
Nobel prizes by the Bank of Sweden were doled out. Stanford University’s Professor Peter Hammond rightly called it the basis of ‘almost standard assumptions’. It was lauded as a major advance in economic theory, and considered proof of rational engagements with ‘commodities’ – unbundled and precisely quantifiable goods – mediated by markets (existing for every time and place), relative also to microeconomics. Conventionally, it includes markets like human resources, with labor presented as a temporary state until the economy functioned efficiently.
Socializing risks, privatizing profits
But this logic, of zero tolerance for intervention, clearly does not apply to geographies of power, peddling such economic medicine: entities like Bear Stearns, the US’s fifth largest investment firm, received over $30 billion, in public funds, from the US Fed to guarantee the company’s riskier investments. Here, we see risk socialized and profits privatized.
And not for good reason: About 75% or more of the company’s ‘investments’ were conducted in secrecy jurisdictions such as the Cayman Islands, via the Walker Group. Others, like Bank of America, would claim $2 trillion. Far from being isolated incidents, over 80% of hedge funds globally, and 39% of foreign direct investment (FDI), operate through commercialized sovereignties, like the Caymans, that peddle secrecy to corner the market in immobile and mobile capital. And from these secrecy jurisdictions operating on the quiet and sly, island ‘offshore’ economies are usually satellite offices to the major ‘onshore’ secrecy havens. For instance, over 50% of the world’s secrecy havens are controlled by the UK.
What does this mean for developing nations? A significant cornerstone underpinning the political muscle of state sovereignty is regulation of property rights, and relations. The GE model facilitated an unbundling and re-conceptualisation of sovereignties, relative to the right of authority and approaches to propertisation.  This notion has necessitated the cultivation of markets in every aspect of life, expanding now to the commons – ecologies which are neither public nor private, but commonly shared, such as the air. Such commodifiable resources, transformed into marketable goods, must ideally be propertised and financialised in order to be quantifiable. For, if a market is to be free, it must not only be barren of all potential constraints, but also, capable of making markets everywhere.
The GE model was cause for celebration in its timing: in 1954, the Soviet Union was gathering steam, appealing to be part of Europe’s NATO. This was rejected by Western powers, like the US (generating 27% of global GDP at the time), who cited incompatibility with economic and political aspects of democracy. At the heart of this ideological engagement – mispresented and manipulated by both sides – was the contested notion of property and human rights, with the West positing the individual as sacred, specifically as regards political and civil rights: first generation. And the Soviet Union promoting the collective good, through economic and social rights: second generation.
For its time, ushering the forthcoming logic of the ‘free’ market under the US, the GE model was usefully evident that if self-seeking agent (man as homo economicus) interacted with society through the market, social welfare could be best achieved. Adam Smith said of this, “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
That it was mathematical theorem rather than a political statement, weighed heavily. While various versions and tweaks would follow, the basis of Arrow-Debreu remained generally unscrutinised in its methodology.
To what extent is the GE model blatantly incompatible with its own logic? In real-world terms, it largely elides reality – from innovation to intra-company trading (comprising 60% of global trade). It proceeds on the gross assumption that trade of resources is fair at its source; ie: control, access, distribution, transformation. It presumes that markets are purely economistic, eliding the role of power and politics. It considers that there is a perfect market structure already in existence for every good, or alternately, that markets must be made to represent anything of value. Consequently, if it has no market (capital) value attached to it, it has no value at all.
Patents and interests
The very notion of market sovereignty has now achieved primacy of position in immobile and mobile as well as fiscal and legal terrains, above and beyond sovereign governments, whose intervention is descried by global powers, even if it is the social good that is prioritised.
Patents, for instance, grant monopolies representing the public good – such as vaccines – to private interests. Now, in order for this to be realised, political approval is required as a mandatory legitimising force. Is this the spirit that provided the foundations of great nations?
Thomas Jefferson is celebrated in US history as a visionary and principled leader. But less his words on the monopolization of knowledge, when he rightly claimed, “Society may give an exclusive right to the profits arising from [inventions], as an encouragement to men to pursue ideas which may produce utility, but this may or may not be done, according to the will and convenience of the society, without claim or complaint from anybody.  In some other countries it is sometimes done, in a great case, and by a special and personal act, but, generally speaking, other nations have thought that these monopolies produce more embarrassment than advantage to society.”
Despite this, when leading intellectuals such as Professor Thomas Pogge – considered revolutionary voices in their field, discuss the issue of intellectual property, particularly in the context of pharmaceutical industries, we find that the deliberately exclusionary nature of patents is elided, and even justified, by Pogge, while new publicly-funded ‘Health Funds’ are designed to alleviate systemic flaws. That is, reward systems and incentives must be created to convince companies to act a little more kindly toward the suffering. The social good must be additionally financialised. The idea of stripping the right of monopoly is not even considered.
Said Pogge et al in their paper, ‘Incentives for Global Public Health: Patent Law and Access to Essential Medicines’, “With medicines, the fixed cost of developing a new product is extremely high for two reasons. It is very expensive to research and refine a new medicine and then to take it through elaborate clinical trials and national approval processes. Moreover, most promising research ideas fail somewhere along the way and thus never lead to a marketable product. Both reasons combine to raise the research and development (R&D) cost per new marketable medicine to somewhere around half a billion dollars or more.”
In reality, as public health specialists like Harvard University’s Marcia Angell reveal, the bulk of R&D for new innovation medicines (priority + NME) is publicly funded (and this at a cost that is just 10% of similar corporate developments); more than half the cost is capitalized (compared to profits that may have been generated on Wall Street), tax incentives and subsidies finance almost 40%; etc. Overall, as these articles show, almost 90% of the corporate costs of developing new drugs is mispriced and manipulated. Is Pogge, a highly intelligent and deeply concerned man, correct to protect the concept of patents, in the hopes of walking the ‘political feasibility’ line? At what point must we draw the line between reforming a bad system by obtaining a seat at the table – as Pogge has respectably done, or calling a rotten system for what it is: lethal and genocidal?
Sovereignty and markets
But, we know, were these States to deprive private corporate persons the right to proceed, the nature of intangible could easily shift borders and hide claims in a legal, though illicit, form. Secrecy jurisdictions like the Netherlands, the US’s Delaware, Ireland and others, seek to capture just such tangible and intangible capital-movers. Take Google: The company managed to reduce the overseas tax rate by $1 billion annually, circulating intellectual property through a series of ring-fenced opacity economies offering tricks like passive holding vehicles remitting ‘royalties’ to a series of shell companies. Locations included respectable Netherlands, Ireland, and Bermuda. Such prostitution is old hat: During the apartheid era, South Africa’s pariah corporations – like SAB Miller, one of the world’s largest beverage companies – used secrecy jurisdictions to eliminate taxes and elide sanctions.
Kratochwil contrasts traditional state roles with that of capital’s mobility: “While political systems are boundary-maintaining systems, markets – although dependent for their creation upon political power – are not.” The current system has split the idea of sovereignty between differing forms of authority: one for the masses of people that are fixed and immobile, and another for the mobile moneyed. Moreover, were any State to deny private authorities the right to access exclusive intangible capital monopolies, the key geographies of power would come crashing down – in the name of competitiveness, efficiency etc.
Market sovereignty therefore is most performative for those able to play the game. And in an age of financialisation and corporate self-regulation,  everything has been reduced to paper and fiction. This is how companies like Glencore (via MCM) in Zambia can export billions in copper while declaring no profits.
The market, by design, forbids society from speaking in a collective voice because large demographies as participatory agents change the nature of the game, politicising conditions. Yet, even were we to discard all undesirable realities external to the model, we’d still find astounding internal rot – namely that money – capital – is either dismissed or neutralised from such models (by Smith, Ricardo and others). Said Frank Hahn of Cambridge University, “The most serious challenge that the existence of money poses to the theorist is this: the best developed model for the economy cannot find room for it. The best developed model is, of course, the Arrow-Debreu model…”
Selling the truth or telling the truth?
In his article, ‘What If Equilibrium Never Existed’, Dr Alejandro Nadal questions the bricks that built the deified house (extending to Adam Smith’s invisible market hand). He goes on to describe how the Nobel winning model was found to be inconsistent and ‘devoid of economic sense’, by its own founder, Professor Kenneth Arrow, following a short debate with Nadal.[see footnote]
We’re lucky to have professors such as Nadal to spend decades probing and analytically dismantling self-evident truths. And unfortunately, it is not always easy to differentiate between those who tell the truth, and those who sell a truth. Particularly when its peddled by specialists who claim that such knowledge is too difficult for people to understand. More often than not, what appeals as right is not so much content of principles, which requires context and reflection, but whether the source of principles is identifiable to us, as inspiration, sympathy, rationality.
Belief in a certain person or system often suspends judgement. Suspended thought prevents debate, and more crucially, the possibility of other possibilities. Countries like Iran and Cuba may not have 100 different flavors of ice cream, but even with – sometimes severely- constrained political freedom, also suffering from decades of sanctions, these countries have found tremendous ways of educating their people by the mass – doctors, engineers, teachers, scholars, while doing their utmost to fulfill basic needs. Is free health care and education, economic or political? Arguably, there is no difference between the two, because the decision to provide or withhold the public good comes from the highest political mandate. Meanwhile, in the US, voting is a political right, but the right to develop your mind and abilities at a university, is not, and it unlikely that your voting will alter that. So, who is more free, politically and economically?
The question then extends to what if ‘economics’, as we know it is not ‘economic’ per se, but the product of socio-political arrangements between institutions of power and those conforming to such principles? Routine or repetition of certain actions and policies would therefore produce a ‘normality’ – whether inequality or not – that is calculative. Such calculations would be studied, pondered over, adjusted, in the annals of academia, research institutes, and NGOs – all cloaked in an atmosphere of tremendous respectability and high-level credentials. The value of those credentials as it relates to the mandate of those subjects is rarely queried. What stops the world from intervening is perhaps the reality that specialist languages, that provide the content of ‘economics’ is almost entirely illogical to ‘lay people’ – you and I, because it was designed to be exclusionary.
They simply don’t feel qualified enough to say, ‘Get lost, devil!’ The alternative? Hell and slums. In other words, the present.
Footnote
Writes Nadal, “In our paper.. we demonstrate that none of the mappings used in the various proofs of existence of a general equilibrium involving a fixed point theorem is a good representation of the law of supply and demand.”
Khadija Sharife is a journalist; visiting scholar at the Center for Civil Society (CCS) based in South Africa and contributor to the Tax Justice Network. She is the Southern Africa correspondent for The Africa Report magazine, Africa project fellow at the US-based World Policy Institute, assistant editor of the Harvard “World Poverty and Human Rights” journal, assistant Africa editor of “Capitalism, Nature, Socialism”, and author of Tax Us If You Can (Africa), among co-authored works.  Her writing has appeared in African Business, Forbes, The Economist, Al Jazeera, Foreign Policy, BBC, The Thinker, London Review of Books, African Banker, among others.
Source: The Africa Report – http://www.theafricareport.com
Share this article:

0 Comments

Latest issue

Amandla Issue #94