The Untruths Which Rule the World

There is quite a catalogue of actual and potential man-made disasters. They include the risk of Greece defaulting on its debts, followed by Portugal, Ireland and the collapse of the Eurozone, the hollowing out of real economy firms particularly in the UK and to a slightly lesser extent the US, the explosion in inequality of wealth and income symbolised by the obscenity of financial trader’s and bankers’ bonuses, the credit crunch, hedging and short selling, the size and power of financial sectors, the failure to distinguish between investment in real economic activity and purely speculative investment, growth of structural unemployment, the explosion of ‘hatred and contempt’ among ordinary people initially in Greece and Spain, poverty in sub-Saharan Africa, ideologically based policies of the IMF, WTO and the World Bank and the whole unsustainable enterprise destroying earth’s resources and climate, and even threatening human existence.

All these are the product of the orthodox economic wisdom that has become what Galbraith referred to as the ‘institutional truth’, ie the overarching lie to which, business people and politicians have to subscribe if their careers are to prosper. Keynes said the world is ruled by little else. Khurana showed how it is still promulgated in universities and business schools to future generations of ‘madmen in authority’. Ghoshal highlighted much of the damage it does to the way real firms are managed. And several postings on this site have referred to how the focus on maximising shareholder value has destroyed real firms and real jobs.

Adam Smith provided the germ of the idea which developed into the modern monstrosity of utility maximising economic man. He pointed out that it was to the self-interest of the butcher, brewer and baker that we owe our dinner, rather than their benevolence or humanity. So much was obvious common sense truth. Those artisans needed to earn sufficient for themselves and their dependents to live, so they needed to develop long lasting relations with their various stakeholders, including customers and suppliers etc.

But economists wanted a science not just common sense, so they deployed mathematics to describe the real world, even though the description was extremely unrealistic. Economists argued that it mattered little if the mathematical models were unrealistic, so long as they predicted outcomes satisfactorily. But they were not capable of doing that either, nor even of being tested. However, that was of no great concern to economists, since, as Marshall and others in the late nineteenth century had already pointed out, economics was already then hugely unrealistic.

The most fundamental change made by applying maths was the use of calculus and the consequently necessary adoption of maximisation vas the objective, initially profit maximisation. Maximisation necessarily implied the oversight and impoverishment of everything else. Moreover, since a pound today is worth more than a pound in a year’s time, the focus on maximisation was essentially immediate or extremely short term. Smith’s butcher and baker did not maximise their self-interest or profit; they were necessarily concerned with their life time survival and prosperity.
Later Friedman shifted attention from profit maximisation to shareholder wealth maximisation. That is the current institutional truth which continues its catastrophic progress, for example, causing millions in East Africa to be threatened with starvation while ‘Glencore and Others Are Screwing the World’ (posting 28.4.11) by exploiting ‘Food Insecurity: Another Big bubble in the Making’ (posting 27.2.11). The plain fact is that Friedman’s institutional truth lies at the root of all those situations listed in the opening paragraph above.

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