Bernard Harcourt’s Realist Political Economy

Frank Pasquale

It's becoming clearer that classic Keynesian stimulus---ranging from Obama's minimalist jobs program to the robust visions of a Krugman or Delong---won't be enough to get us out of the Great Recession/Lesser Depression. The exhaustion of conventional macroeconomic thought (chronicled in outlets like the Real World Economics Review) has cleared some space for more imaginative thinkers. As John Kay observes:

Economics is not a technique in search of problems but a set of problems in need of solution. Such problems are varied and the solutions will inevitably be eclectic. Such pragmatic thinking requires not just deductive logic but an understanding of the processes of belief formation, of anthropology, psychology and organisational behaviour, and meticulous observation of what people, businesses and governments do.

In this post, I want to briefly highlight Balkinization co-blogger Bernard Harcourt's work in crossing disciplinary boundaries to engage in the synthesis necessary to truly understand our plight.

Consider the following paradoxes or contradictions, which will also be highlighted at a conference that Harcourt is keynoting:

1) Dahlia Lithwick argues that GOP frontrunner Rick Perry "is skeptical of everything the government does—except when it executes people." (And that privacy is on the rise for companies, but not for individuals.)

2) There is political passion for slashing government, except in criminal and military functions where its effectiveness is highly doubted.

3) Dana Priest and Bill Arkin have uncovered evidence that domestic intelligence agents are closely monitoring Tea Party groups. But the monitoring has stirred very little protest among such groups.

4) Banking law experts tell us that the Volcker Rule is trivial and counterproductive, because it would not have stopped the last crisis. They also tell us that rules that would have stopped the last crisis are trivial and counterproductive, because genius financiers have already cooked up new methods that can't be touched by those "fighting the last war."

Harcourt's work puts all these positions in a larger intellectual perspective, helping us explain (if not forgive) them.

I highlighted Harcourt's Illusion of Free Markets last year, and I'm pleased to see it reviewed on the History News Network. The reviewer, Eric Laursen, connects Harcourt's work to current controversies over banking regulation:

Last December, Wall Street's leading banks were fighting tooth-and-nail to keep federal regulators from setting rules governing the vast market in financial derivatives contracts – the market that helped turn the 2008 mortgage-backed securities meltdown into a global catastrophe. . . . Then an article appeared in the New York Times that seemed to blur the outline of this reform scenario. Titled “A Secretive Banking Elite Rules Derivatives Trading,” the article, by Louise Story, detailed how nine big banks had virtually captured the new regulatory regime before it even got started. One of Dodd-Frank's provisions called for most derivatives to be traded via clearinghouses, putting buyers and sellers in closer touch with each other and cutting out middlemen.

According to Story, nine big banks, including such familiar names as JP Morgan Chase, Morgan Stanley, Goldman Sachs, and Citigroup, had already checkmated this plan by setting up their own, secretive clearinghouse to trade credit default swaps, and cut a deal with the Chicago Mercantile Exchange that gave them effective control of another new clearinghouse. Result: nine elite banks, operating out of public view, have cemented even tighter control of the derivatives market than they had before. If anything, Dodd-Frank has helped them to do it.

Now comes The Illusion of Free Markets, a dense, groundbreaking book that explains why such things happen: why the supposedly freewheeling capitalists of the post-New Deal decades can get away with operating a tightly controlled system geared primarily to generate profits for a small group of big players. “At the end of the day, the notion of a 'free market' is a fiction. There is simply no such thing as an unregulated market." . . .

Harcourt calls The Illusion of Free Markets a “prolegomenon” – a first step in creating a new analysis that asks who benefits from the supposedly “free” economic system that's been built to regulate us. The next step, of course, is to figure out what we want instead. By exposing the flawed ideological roots of what's taken for “expert” social and economic thinking today, Harcourt's book may help us avoid the pitfalls in getting there.

Harcourt's work is a sustained reflection on the "two paradoxical tenets" that seem to rule contemporary politics: "of government incompetence when it comes to regulating the economy and government competence when it comes to policing and punishing." He doesn't try to separate out either trend as a dependent or independent variable, eschewing the trend toward "clean identification" in social science explanation. Rather, he adopts a more hermeneutical approach, examining how "neoliberal ideas were born — and remain today — joined at the hip with the Big Brother state."

His recent interview with Scott Horton reveals some of the problems arising out of the elective affinities between neoliberal economics and an increasingly harsh policing regime. President Reagan "tripled the debt, increasing it by $1.9 trillion, and . . . oversaw the prison buildup and the war on drugs." Bush fils further ballooned the debt, in even more costly foreign wars. Blocking tax increases on the wealthy to pay for these initiatives, they have left middle and lower class citizens more desperate and bereft of services.

That leaves a workforce willing to take any job to stay afloat. And when some scrambling workers use drugs like meth to keep themselves going, that just creates more work for the police apparatus. Can Hungarian-style labor camps for the unemployed be far behind? Forced evictions are also a tool of some multinational corporations, and are objectionable whether accomplished by paid mercenaries or bribed government officials. These trends reveal the invisible hand to be more than a little "iron fist," even when covered in velvet glove rhetoric of freedom and contract.

Harcourt's work also connects nicely with James Boyle's critical work on the rise of intellectual property and the shriveling of antitrust law:

We appear to have a kind of bipolar disorder in our view of the state. When it comes to breaking up high tech monopolies through antitrust, we are deep sceptics. We point out the unanticipated consequences and deadweight losses to state intervention. We say the state is a blundering second or third best to the genius of the market, its efforts to establish limits and quotas will create a mess that even the Invisible Hand cannot sweep clean.

But when it comes to setting up some of those same quotas, limits and monopolies in the first place - in this case, by overly broad intellectual property rights that clog the channels of competition and allow companies to leverage their existing property into a control over tied services - we are much more sanguine. This, after all, is property, not regulation. Here there seems to be an optimism about unintended consequences, a willingness to believe that vague state regulatory schemes have got it right - even when existing market leaders can twist them to prevent challenges to their position.

In one view, the state is a bumbling idiot, in the other a scalpel-wielding genius, carving just the right pound of flesh to satisfy our debts to creators without shedding a drop of the blood of competitors and future innovators. Can this be the same state we are talking about?

Given Harcourt's work, we should expect trends toward criminal enforcement of IP law to displace government sponsored efforts to subsidize (or compulsorily license) IP. DC elites roll their eyes at the idea of a government using its bargaining power to get a fairer deal for all here, but jump at the chance to police piracy.

Finally, I'm glad to see that Harcourt's next book may focus on national security. These words from James Madison remind me of Washington's and Eisenhower's Farewell Addresses. Even the founding fathers anticipated that a garrison state could become a banana republic:

Of all the enemies to public liberty war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes; and armies, and debts, and taxes are the known instruments for bringing the many under the domination of the few. In war, too, the discretionary power of the Executive is extended; its influence in dealing out offices, honors, and emoluments is multiplied; and all the means of seducing the minds, are added to those of subduing the force, of the people. The same malignant aspect in republicanism may be traced in the inequality of fortunes, and the opportunities of fraud, growing out of a state of war, and in the degeneracy of manners and of morals engendered by both. No nation could preserve its freedom in the midst of continual warfare. ("Political Observations" (1795))

And yet "continuous warfare" seems to be the foreign policy consensus. There are ways to channel that martial energy toward better purposes, ranging from William James's "Moral Equivalent of War" to "Mr. Y's" ideas about redirecting military expenditures toward projects that truly enhance national security. But, as Harcourt argues, there are also many connections between the growth of DOD and DHS and the cruel, cronified capitalism of leading firm/government combines.

X-Posted: Concurring Opinions.
Posted 10:06 AM by Frank Pasquale [link]