Phlogiston Economics: The Need to Dispel the Free Hand and Create Jobs Instead

Sunday 05 December 2010

by: Ellen Dannin, t r u t h o u t | Op-Ed

Phlogiston Economics: The Need to Dispel the Free Hand and Create Jobs Instead
(Photo: Ramón Peco)

We can laugh now at phlogiston theory – the 17th century idea that all materials that could be burnt contained phlogiston, an odorless, colorless substance. The concept seemed sound, because it was based in an elegant idea – handed down from the Greeks – that everything is created from four elements: earth, air, fire and water.

In fact, so sound was the elegant concept that there was no need to test it. However, an experiment by Robert Boyle in 1753 demonstrated that it was false.

Phlogiston is good for a laugh today, but economic ideas that control current decision-making are based not on tested experiments but on elegant theories. Economics' equivalent of phlogiston appeared 23 years after Boyle's experiment, in Adam Smith's 1776 book, "The Wealth of Nations." Its phlogiston equivalent was the self-regulating market, described as an "invisible hand." The invisible hand's efficient market was created by individual self-interest; interference with the market through regulation risked economic catastrophe.

Today's economics have embellished those basic ideas through concepts such as supply and demand, rationality, market clearing and marginal utility. Today's mainstream economics is a Gothic cathedral constructed from elaborate mathematical analyses – with almost no experiments to test the validity of the theories.

Phlogiston economics theorizes that employees and employers bargain freely about wages and working conditions. Elaborate justifications have been made for why employees have chosen to be at-will employees – meaning they can be fired for any reason – rather than have just-cause employment – meaning they can only be fired if there is cause, such as misconduct or business needs.

When Washington University law professor Pauline Kim tested those theories, she found that roughly 80-90 percent of employees thought that their employers could only fire them for cause. Of course, nothing could be farther from the truth. In almost all states, by law, the default is at-will employment, and it is almost impossible to bargain out of at-will because most employees do not have enough bargaining power, let alone the information to change the default.

In recent years, economic theories have been tested through experiments that, in some cases, have cast doubt on the basic underpinnings of economics, including the roles of rationality, self-interest and information in shaping decisions. At best, the experiments have been inconclusive. These results mean that continuing to rely on textbook theory to craft policy is unwarranted, if not unforgivable.

Yet, despite these results, classical economic theories continue to control important decisions.

The most important of these today revolve around how to handle the effects of the economic recession. Theory now advanced and popular with the right is that cutting taxes, getting rid of regulations and paying down debt are the only way out. On the other hand, we have some natural experiments, in particular from the Great Depression, that demonstrate that those actions made the situation worse in the years just after the 1929 stock market crash, and again in 1937, when President Roosevelt instituted policies based on those theories.

We face complex problems that require serious, thoughtful solutions – not phlogiston economics, even when it is built on elegant constructs.

The natural experiment from the Great Depression showed that creating jobs led to a growing economy as new workers spent their incomes and created the need for more jobs. The evidence supports a jobs policy to get people back to work and to fill the enormous needs we have for workers to build and repair infrastructure and provide important services, such as promoting better education and health. Those newly employed workers, especially those who have been unemployed for months, will spend money on long-deferred needs and pay taxes that will reduce the deficit – actions that have been shown to create new jobs in past recessions.

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Comments

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@Hickey, 8:13 am — Leave

Sun, 12/05/2010 - 13:39 — Faceless (not verified)

@Hickey, 8:13 am — Leave it to a killjoy-alpha (on Facebook, no less!!) to tweak an übercorrection over a detail that is quite *utterly* irrelevant to what *the article is talking about!* Yeesh.

THE CONSTITUTION WAS

Sun, 12/05/2010 - 15:52 — cheyennebode (not verified)

THE CONSTITUTION WAS SUPPOSED TO BE A HEDGE AGAINST ANARCHY...SO HOW DID THE ECONOMY..THE GOVERNMENT..THE MILITARY..IMMIGRATION POLICY...GEORGE BUSH AND HIS SHADOW..GET SO TAINTED IN ANARCHY..HONORED LAWS WERE CAST ASIDE FOR EXPEDIENCY EG.WAR MAKING LAWS..ECONOMIC REGULATIONS....IMMGRATION LAWS.ETC...MILTON FRIEDMANS FANASY WORLD AT ITS BASE IS ANARCHY..ANARCHY AND ORDER ARE ALWAYS IN A TUSSLE...THE SCOFFLAW MENTALITY HAS RAN ITS COURSE..NOW MATURITY HAS TO REIGN..THAT MEANS WISDOM NOT PARTY IDEOLOGY..WILL BE THE GREAT DECIDER..AND THE HIGHEST FORM OF WISDOM..IS REVEALED KNOWLEDGE..

Phlogiston? Is that a Bush

Sun, 12/05/2010 - 15:56 — Vic Anderson (not verified)

Phlogiston? Is that a Bush Haitian translation for VOODOO in this Obama republic? Maybe the only spell to exorcise our Baby Barack and banish the Bushists (Poppy, W, Cheney, et al) and him to Paraguay, Qatar and Kenya/Indonesia, respectively!

This article made me think

Sun, 12/05/2010 - 16:32 — Mammon Theory (not verified)

This article made me think of asbestos. (That miracle material didn't burn, but even the Greeks new of it's deadly health effects.)

The author doesn't mention that greed makes important decisions, The ruling class isn't affected by any recession, they are doing fine. They aren't particularly conconcerned about unemployment either. I don't give credit to theory, or elaborate complex mathematics - politicians neither have the ability or job description. The war effort matters more then most other things, that's not quaint academia. that's brutality.

'Phlogiston economics'. I

Sun, 12/05/2010 - 17:23 — Dylan Nickelson (not verified)

'Phlogiston economics'. I like the term, but 'aether economics' is more poetic.

The beginning of the last

Sun, 12/05/2010 - 17:43 — Dr. Bill Bushing (not verified)

The beginning of the last paragraph states "The natural experiment from the Great Depression showed that creating jobs led to a growing economy as new workers spent their incomes and created the need for more jobs."

Unfortunately the perspective taken in the analysis appears to take a strictly nationalistic focus. In the "global economy" this is still true. The only problem is that the jobs may be created in other countries and the growing markets for products as well.

What has been the impact of all this on the US? The loss of a healthy middle class that formerly took the jobs and bought the products. Now those job holders and purchasers are in China, India and other countries.

Sun, 12/05/2010 - 18:08 — Dr. Bill Bushing (not verified)

This article on Scientific

Sun, 12/05/2010 - 18:30 — Bob B (not verified)

This article on Scientific American's website
http://www.scientificamerican.com/article.cfm?id=brother-can-you-spare-me-a-planet
shows how intellectually bankrupt mainstream economics is.

In the 1800's, physicists developed mathematical theories to explain part of the world around the. Economists copied these equations and changed the letters to represent economic variables. (No, I am not making this up.) Today, academic economic journals are filled with elaborate equations that have nothing to with the real world. Yet, for some reason, politicians still listen to economists. (Maybe that's because mainstream economic ideology just happens to be the view shared by the rich and powerful.

"Theory now advanced and

Sun, 12/05/2010 - 18:40 — Erich Von Freemason (not verified)

"Theory now advanced and popular with the right is that cutting taxes, getting rid of regulations and paying down debt are the only way out. On the other hand, we have some natural experiments, in particular from the Great Depression, that demonstrate that those actions made the situation worse in the years just after the 1929 stock market crash, and again in 1937, when President Roosevelt instituted policies based on those theories."

Actually, the Great Depression demonstrated absolutely that "stimulus" spending does nothing more than re-inflate the bubble, and as soon as the stimulus spending is stopped (as in 1937), the crash resumes right where it left off. Compare the crash of 1929 with the crash of 1920. Compare the crash of 1920 in the US with the same crash in Japan (the US government contracted, the Japanese expanded... we had no depression and Japan had a major banking collapse). Compare the crash of 1929 in the US with the same crash in Canada (the Canadian government did less, and their recovery was quicker). History shows, without exception, that the quickest, least painful path to recovery is for government to cut spending and taxes during recessions.

Free-market economics posits

Sun, 12/05/2010 - 18:52 — Max Entropy (not verified)

Free-market economics posits that demand and supply for goods and services always seeks equilibrium. But apparently, the supply of and demand for labor is not bound to obey this law. The same economists somehow claim that a surplus of labor must generally exist for the system to work optimally. But if a balance of goods and services is desirable, why isn't a balance of workers and jobs? "Full employment" is statistically defined as almost full, and up to 5% unemployment is called "normal." And now that U.S. employment keeps getting farther and farther from being almost full, where is the invisible hand that would correct this disequilibrium?

Fact is that capitalism is

Sun, 12/05/2010 - 21:18 — Anonymous (not verified)

Fact is that capitalism is broken. If it could be fundamentally reformed, it would have been by now (after 500 years). Ever larger corporations and cartels become so powerful they own governments. They then prevent regulation of themselves and cancel policies that benefit workers.

If we are going to have a society fit for most people to live in and save the planet, we have to go to a completely new social structure. Check out the case for democratic socialism at socialism.com.

"Yet, despite these results,

Mon, 12/06/2010 - 00:15 — Anonymous (not verified)

"Yet, despite these results, classical economic theories continue to control important decisions."

I'm sorry. But much of the postwar economic regulation was based on classical economic theories that were "deregulated" during the Reagan, Bush I, Clinton and Bush II administrations.

So, no. Current economic decisions are not based on economic theories anymore. But solely on its first outdated concept, Adam Smith's invisible hand that relies on assumptions that cannot be met in today's modern economies.

Deregulation is defenitely not classical economics. It's a return to pre-industrial revolution thinking.

I think economic decisions are currently done through special interests fiat, i.e.: according to who can pay for them.

Absolutely nothing to do with classical economic theories which were constructed through the many problems and crisis economies went through during the last three centuries.

Adam Smith’s claim the

Mon, 12/06/2010 - 02:28 — JLGraham (not verified)

Adam Smith’s claim the public good can be secondarily advanced by the pursuit of private interest is partly true, but only partly. The trick has always been to set up the rules in ways that maximize mutual gain from the pursuit of otherwise liberated self interest. If you bake bread and I make butter, let’s trade and we both profit. But when you start to scale up, things get more complicated. When Chinese entrepreneurs used a melamine adulterant to mask dilution of their milk, dozens of people died and thousands were sickened. Yet that was an example of the pursuit of pure, sociopathic self interest. It’s preposterous to assume that an "invisible hand"can make business automatically benevolent, and Smith did not fully believe it either.