By James H. Nolt
I borrow the title of today’s blog from the ancient Chinese philosopher Confucius, though I use the term differently. For Confucius, rectification of names (zhèngmíng in Chinese) meant that people’s titles and offices should correspond to their actual behavior. It is what the American people mean today when they wish presidential candidates would act presidential.
I am not an ardent admirer of Confucius, whose conservative world view is sympathetic with feudalism. He supposes each person should behave according to their “appropriate” social station. He is an idealist, like the Greek philosopher Plato, though Plato is more radical in elevating the state and social needs above the individual and family. Regarding Chinese philosophy, I am more sympathetic with dynamic and polarized Taoism than I am with static and stratified Confucianism.
However, I am very concerned with the “rectification of names” in a broader sense. Both effective communication and, more fundamentally, clear thinking require words to have precise meanings when we try to convey how the world works. Confusing speech and poor wording are often signposts of conceptual confusion. This is certainly true of most contemporary economics and business textbooks. Many people struggle with textbook concepts, not because the ideas are so profound, but because they are so nonsensical.
Many people, including many professionals, use words and concepts in notoriously inaccurate ways. Without a rectification of names, concepts of all sorts are thrown around as if we know what they signify; however, often deeper, dare I say philosophical, investigation indicates confusion and deception.
A simple example is the way the term “commodity” is used in all sorts of inappropriate ways. You hear things such as, “Hope is a scarce commodity.” This makes it seem as though economic terms and relationships are more universal than they are. A more important example of this kind is the overuse of the term “market” for all sorts of non-market transactions. This verbal deception makes it easier to convince people that markets are ubiquitous, so that free market explanations for human behavior appear universal, when in fact they explain little.
Why is unclear speech and confusing writing so common? Because powerful people do not value clarity of public expression. Exercising social power over others requires consistent and frequent obfuscation. Many false and misleading concepts persist not just because people make mistakes or are ignorant, but also because these are valuable tools for maintaining power over others. “Error” is not random. Examining the concepts of a society like an anthropologist might is a way to understand how power is exercised and why people acquiesce. People may say they prefer facts, yet emotionally satisfying lies often trump uncomfortable truths.
Another of my favorite Chinese thinkers, Sun Tzu, says in The Art of War that all warfare is based on deception. The famous Western strategist, Prussian Carl von Clausewitz, wrote, “Rather than comparing [war] to art we could more accurately compare it to commerce . . . and it is still closer to politics, which in turn may be considered as a kind of commerce on a larger scale.” He continues, “Many intelligence reports in war are contradictory; even more are false, and most are uncertain.” Sun Tzu and Clausewitz agree that the exercise of power in war is rife with deception and confusion. Clausewitz adds that war is not so different in this regard from business and politics. So true!
Much of political speech is designed to arouse the emotions while short-circuiting critical thinking. This week’s debate between the U.S. presidential candidates is an excellent case in point. Much of the talk about social life, including political economy, is designed more to satisfy or arouse emotions than to inform people about cause and effect. If people really understood the means by which power is exercised in our world, if power were transparent, it would be challenged more readily.
Textbook economics, as I contend in my book, International Political Economy: The Business of War and Peace, rests on what I call the “Three Golden Pillars.” Mainstream economics privileges models and theories that claim the economy is stable, efficient, and fair. These results are not discovered empirically. In fact, even simple empirical investigations show they are false, but they are built into the assumptions of economic models. Assumptions that will not yield these results are routinely sidelined or ignored despite being more realistic. The excuse is usually mathematical simplicity, but this hardly justifies ideological conclusions against overwhelming evidence. Assuming the conclusion is not good science. Nevertheless, “proving” that “market” economies are stable, efficient, and fair often makes for reassuring propaganda. What is emotionally satisfying is often quite different from what is true.
The principle of market equilibrium is the means by which economists attempt to demonstrate that markets are stable. Without getting into the complexities of the math, this assumption is also convenient because many terms in a system of equations become zero and thus can be ignored. Equilibrium prices always balance between how much consumers want to buy and how much producers want to sell. If prices were too high, excess unsold merchandise would accumulate. If prices were too low, products would sell out too quickly, leaving potential buyers frustrated. Only equilibrium prices will balance supply and demand in exact measures. Prices in equilibrium are among the necessary conditions for the other two contentions: that market economies are efficient and fair.
In fact, supply and demand can be in equilibrium only accidently. In most markets, there is excess supply (goods being produced faster than they are being sold) or excess demand (goods being sold faster than they are being produced). There are accidental reasons why supply and demand are out of whack. Business people who make production decisions do not have perfect information about how much demand there will be at the chosen price. Furthermore, conditions change between the time production decisions are made and when final purchases occur.
If this were the only reason supply and demand might fall out of equilibrium, perhaps the equilibrium assumption would be, as textbooks often argue, a reasonable approximation of a more messy reality. More importantly, there are systematic reasons why powerful interests avoid equilibrium. Effective strategic behavior by capitalists and others requires departing from the idealized world of economists. What economists argue is optimal behavior for capitalists is in reality ineffective for their purposes, which often include defying equilibrium. Economists are poor strategists.
I will demonstrate with a simple example this week and move on to more profound ones next week. Concert tickets are typically sold below equilibrium prices, resulting in excess demand. Therefore, for almost any successful concert there is a secondary market, created by scalpers, who buy at the official price and resell at higher prices to those unable to purchase tickets initially because of excess demand. This is in the interest of concert promoters because they get a reputation among popular musicians for filling every seat in every venue, which adds to a popular star’s mystique. If instead they aimed at exactly the equilibrium price, sometimes they would accidently choose a price too high and leave too many embarrassing empty seats. Better too low than too high. High finance is similar. Investment bankers play a similar game with credit, as we shall explore next week.
James H. Nolt is a senior fellow at World Policy Institute and an adjunct associate professor at New York University.
[Photo Courtesy of Kevinsmithnyc]