Saturday, May 5, 2012

The Origins of Orthodoxy

I’ve been thinking a lot recently about the differences that flow from whether you have an income or a wealth perspective on economics.  In a nutshell, an income perspective is concerned primarily with the production of new goods and services, the incomes that are generated by that production, and the employment it requires.  Roughly speaking, we can call it Keynesian.  The wealth perspective is oriented toward the preservation and expansion of wealth: the protection of existing wealth against the threat of default or its confiscation by taxes or inflation, and the accumulation of additional wealth through sufficient returns on financial investment.  I identify this orientation with orthodoxy.  Each is rooted in particular social interests, and each has been elaborated in the form of economic theories and rhetorical motifs.

In fact, the origins of macroeconomics, at least in the English-speaking world, belong to orthodoxy.  Why is this?  My speculation is that the key institution that structured how thoughtful people looked at the economic system back then, and the lens through which many still see it today, is banking.  Banks are nodal points in the economic network, and the banking system spans the economic system as a whole.  Banks are in a position to gage the economic health of a community, and the decisions made by bankers profoundly affect this health.  Before the advent of publicly collected economic statistics, not to mention the emergence of economics as a profession, banking was, along with tax collection, the only feasible basis for thinking about economic processes on a large scale.  Even today, it is one of the best.

Banks are in the business of wealth preservation and expansion.  It is not an aspect of what they do; it is everything.  To look at the economy through the eyes of a bank is to observe the impact of events and policies on wealth; it means being orthodox.  From a bank’s point of view, how could Argentina and Iceland, who have defaulted on debt obligations, possibly be regarded as more worthy than Brazil and Ireland, who have not?  national income data, which point to the benefits of default for future growth, would be an afterthought, perhaps off the radar entirely.

The irony is that a banker’s eye-view of the economy is indispensable.  It really is essential to see an economy as made up of interconnected balance sheets.  The best economic analysis from Keynes onward has been cognizant of this.  The problem is how to take this practical insight without being derailed by the banker’s attachment to wealth at the expense of incomes when the policies that promote them diverge.


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