Vanguard News Network

By George Lenz

George Akerlof

Since the 1960s many Western institutions of political, economic and social life were deconstructioned. The institutions that were once close and helpful to the people suddenly became alien and hostile, even though they often look the same and were staffed by the good-meaning and hard- working White people. As the result, political, economic and social life seized to function effectively, and Western standards of living declined with no end at sight. The most terrible thing that happened to the people within those institutions were that no matter what they did and what policy they tried nothing seemed to work and only made things worse: they were helpless.

The feeling of general helplessness is one of the hallmarks of the successful deconstruction – it first reduces a whole to a mechanical sum of parts, and then replaces those that do not suit the deconstructionist (or “change agent” in democratically politically correct terms) purpose. In the process an institution – a living evolving social unit that is shaped by and is a part of culture – becomes a mechanical, and hence non-living, shallow of its former self. At first it may look unchanged to a populace it serves, but soon enough something alien and cold is felt at previously people-friendly institution, bursting with life. Its positive impact on local community deteriorates fast and then disappears, and nothing seem to improve it (no wonder since the institution in question as a cultural unit is already dead) The feeling of helplessness and anxiety people working at or served by a such institution is understandable: it is akin to the feeling of living man being in a hermetically closed coffin. This feeling is precisely the deconstructionist’s aim: while people are helpless and afraid, and thus unable to act, it gives a deconstructionist time to turn a now mechanical institution into a proxy for its aims, often inimical to those of community it serves, or establish and entrench a competitive institution, especially if mass media are under his control.

The deconstruction is not limited to institutions: it also happens to sciences, especially social sciences with similar results. The current object for such deconstruction is economics. The deconstructionists first started with finance, attempting to turn once robust art of balancing local traditions with sound business practices and community interests into a little more than a branch of mathematics, mechanically introducing now legalized usury into any kind of financial transactions. What they achieved is rending once unified field of finance in two: mathematized financial engineering and classical finance, each with separate methodologies, objects of study and often conclusions – and each taught separately. Each now more and more have a differing group of practitioners, and even differing groups of institutions where they are practiced: mathematized financial engineering is practiced by large multinational banks, while classical or as it is sometimes called European finance is practiced by small and medium-sized local community institutions, the gap between which is increasing. As a whole, financial institutions now offer less useful credit products at much higher interest rates, with little concern for the well-being of the borrower – and no wonder that borrowers are now worse-off and the number of defaults is rising exponentially, as well as the number of liquidated or insolvent financial institutions that served their masters’ purposes.

Not content with the decline, they wrought upon once prospering field of finance, the “change agents” now want to deconstruct economics, and they chose the annual meeting of the American Economic Association last Friday as the place to declare their intentions. George Akerlof, an establishment’s economist, with little original contributions to the economic theory and most works concentrated within consumer behavior theory and management science is attempting to destroy the foundations of economic science that kept it together more than 200 hundred years – the premise of rational economic agent, that is the notion that an individual or business behaves rationally, e.g. maximizes profits or economic surplus. Akerlof – educated at Yale and the Massachusetts Institute of Technology, and currently a professor at the University of California, Berkeley – is at the heart of the U. S. economic establishment. His wife, Janet Yellen, a top economist in the Clinton administration, is president of the Federal Reserve Bank of San Francisco. Their son, Robert, is a Ph.D. candidate in economics at Harvard.

The traditional way in economics has always been always assume rationality of behavior, and to build the initial economic model describing interrelationships of economic indicators based on this assumption. Then model’s constraints can be calibrated to approximate for existing economic inefficiencies, and the ways of overcoming these inefficiencies can be presented. Akerlof wants to change this foundation: take human behavior as it is, and to build economic models accommodating it, with no references to outcomes under rational behavior assumption, or suggestions for making economic agent’s behavior more rational. In short, this Akerlof’s proposal amounts to destruction of existing standards or yardsticks in economics, by which a particular economic agent’s behavior can be judged to be efficient or not. Why would he want to do that?

The answer is simple. During the last century economic science acquired vast amounts of knowledge: now we increasingly know why some societies and population groups are poor, and some are not – and how to help them to break the vicious circle of poverty and become successful and financially independent. The globalistic economic elites are unhappy about this challenge: they want most people to be poor and thus dependent on the will of the elites. Hence Akerlof, the obedient instrument of the elites, wants to deconstruction economics, by removing foundations of its success – the centuries-long standard in relation to which every economist determines what is wrong with the particular economic agent’s behavior an how it should be corrected – thus turning economics into a powerless shallow of itself, declining in relevance and effectiveness. He chose well the tactical aim of his attack – the works of Milton Friedman, a jewish economist, not especially popular with the establishment, who however successfully helped a few nations to find way out of poverty and dependence and fully earned his Noble Prize for strength and originality of his ideas – and he frames himself as a follower of Keynes, being devoid, however, of significant talent of the latter. “The early Keynesians got a great deal of the workings of the economic system right in ways that are now denied,” Akerlof said in a study newly posted on the Internet that closely tracks the text of his speech. “They based their models, as Keynes put it, on ‘our knowledge of human nature and from the detailed facts of experience”

Akerlof argues that the Friedman approach is based on false assumptions about human behavior. For example, he says, people don’t automatically insist on raises that keep their pay on par with inflation. They often are happy with smaller raises, considering them a compliment from the boss for valued work. That makes pressure for higher pay less inflationary than the Friedman approach would assume. What he does not mention, however, is that the empirical evidence of long-term consequences of wage inflationary pressures correspond rather to Friedman’s conclusions, than his own theories.

Would Akerlof succeed? I don’t think so: many schools of economic thought, including institutionalism, development economics, the Austrian school, monetarists etc. have already declared opposition to Akerlof’s proposal. What is likely to happen however, is the field of economics re-united by Friedman 40 years ago, is likely to be rent into the rivaling fractions, that would include followers of newly orthodox Akerlof’s dogma, at beast useless and at worst damaging in practice and the followers of sound classical economics, that can be called European. The damage to those most vulnerable and unfortunate, who would listen Akerlof’s proposal, both in terms of economic theory and economic policy, can easily foreseeing with near certainty.

George Lenz@2007