Nothing (meaningful) to say

Mainstream economics’ inability to explain domestic inequality and competition between nations

In a recent excellent article “War and International politics” (freely accessible) John Mearsheimer presents a succinct version of the realist theory of international relations, as applied to the current multipolar world. He focuses on the inevitable existence of war due to the way the international system is structured: it is an anarchy with no single country enjoying monopoly of power akin to what the state has in domestic politics, and thus with nobody to enforce the rules. He takes to task liberal thinkers for their naivete of believing (in the 1990s) that wars would end and great power politics become obsolete. (Similar naïve view was also ridiculed by Karl Polanyi in The Great Transformation.) Mearsheimer explains it in part by the fact that many liberal thinkers came intellectually of age during the unipolar moment when such dreams, with scant relation to historic realities, could be entertained.

In passing, Mearsheimer makes an observation that is extremely important for economists. He writes:

Mainstream economists can focus on facilitating economic competition within a fundamentally cooperative worldwide system because they pay hardly any attention to how states think about survival in international anarchy, in which war is always a possibility. Thus, concepts like security competition and the balance of power, which are fundamentally important for studying international politics, have no place in conventional economics...Moreover, economists tend to privilege a state’s absolute gains, not its relative gains, which is to say they largely ignore the balance of power.

The inability of economists to meaningfully discuss current international economic relations has become painfully obvious in their, at time pathetic, attempts to teach the US leadership of Economics 101 lessons while not realizing that the US leadership, under both Trump I and II and Biden, was not involved in a policy to improve the position of US consumers or workers but to slow the rise of China and to maintain American global hegemonic position. This inability to engage with reality springs from an extremely reductionist methodological position where one’s welfare is a function of one’s own absolute income only. With such an assumption it becomes entirely incomprehensible why somebody (in this case, a country: the United States) would get engaged into a tariff war and use other policies that reduce welfare of its own citizens (while at the same time also reducing welfare in China and in the rest of the world). A policy that not merely implies a negative-sum game but is designed to be a lose-lose policy, that is, to make both the originator and the target of the policy worse off in economic terms, makes absolutely no sense for such economists.

But it a real world, it does makes sense. Simplicist economists cannot comprehend it because their methodological toolkit is faulty and obsolete: it fails to take into account relativities, that is, the importance, pleasure or utility that we as individuals, and even more so countries and their ruling elites, derive from being richer or more powerful than others. If they were to add another argument in their utility functions, the relativity, whether of own income to another person’s or of own country vis-à-vis other country, they would have to say something meaningful. Instead, they are reduced to the endless repetition of trivialities. Power is not just that my welfare is great; power is that my welfare is greater than yours. My absolute income may be lower than in an alternative state of the world, but if the gap between our two incomes is greater (and to my advantage), I might prefer it to the alternative.

The lose-lose economic policy is exactly what the US government is pursuing. The national security requirement, as seen by the US political elite, is that the costs imposed on China (in terms of slower growth rate, delayed technological development etc.) be greater than the equivalent costs to the United States. A recent Foreign Affairs article by Stephen G. Brooks and Ben A. Vagle cites a number of scenarios conducted by the Center for Strategic and International Studies in Washington that find in almost all cases that the lose-lose policy is more damaging to China than to the United States. Similar conclusion was reached by a Beijing thinktank cited by the Wall Street Journal (“Beijing Braces for a Rematch of Trump vs. China”, WSJ, May 2, 2024, p. 8): the GDP loss to China would be three times as big as to the US.

Whether the policy will indeed produce such an outcome can be doubted. The legitimate discussion among economists and political scientists should thus focus on whether the lose-lose policy would improve US relative position or make it worse. One could, for example, argue the latter by observing that the US attempt to curtail the channels of transmission of high technology to China seem to have, perversely from the US point of view, led China to double-down on domestic sources of high-tech development, and thus to have not slowed, but accelerated Chinese catch-up. One could also say that China might, under pressure, diversify its sources of supply and become more resilient to shocks in the long-run; or that it might make more serious efforts to increase domestic consumption. These are legitimate and meaningful topics for discussion. But lose-lose policy has to be taken as a point de depart.

Biden and Trump are engaged In a policy that looked at externally, and by assessing it in the terms in which the policy is presented to the public (“improve the position of the American worker”, “bring back jobs to the United States”) is unlikely to bring the expected results. They defend the policy by claiming that it is driven by economic interest of some segments of US population because neither Biden nor Trump can frankly say that the policy is in reality totally indifferent to the interests of US workers and consumers—is even willing to sacrifice them—and is motivated principally by the desire to hurt China more than the US.

Commentators thus criticize something that is irrelevant, that is not the real goal of the policy and this makes them look silly. They believe that by dispensing elementary economics lessons they show how wrong-headed the governing elites are while in truth they simply reveal inadequacy of their own methodological apparatus.

This extremely reductionist approach of neoclassical and later neoliberal economics does not show its inadequacy in this case only. The reason why the inadequacy pointed out by Mearsheimer attracted my attention is because it parallels the inadequacy mainstream economists show in matters of understanding and studying inequality. The issue is the same: if you assume that the only argument in one’s utility function is his or her income level, and that relativities (that is, his position vis-à-vis others) do not matter, then inequality, which by definition deals with relativities, will be excluded from any serious study by economists or will be relegated, as it was in famous textbooks, to the footnotes and annexes. If economics, in addition, imagines that social classes do not exist, inequality will be doubly ignored. This willful ignorance was not, as I argued in Chapter VII of Visions of Inequality, an anomaly in neoclassical economics. It is deeply baked in the methodology and so long as mainstream economics is not pushed out of its reductionist view of human nature and class oblivion, it will have almost nothing meaningful to say about inequalities within societies, nor about international economics when great powers use economic tools to weaken each other.

Photo: Port of LA.