Signs of the Economic Apocalypse, 8-28-06

From Signs of the Times, 8-28-06:

Gold closed at 631.60 dollars an ounce on Friday, up 3.2% from $612.00 at the previous Friday’s close. The dollar closed at 0.7841 euros Friday, up 0.6% from 0.7797 for the week. The euro closed at 1.2753 dollars, compared to 1.2825 at the end of the previous week. Gold in euros, then, would be 495.37 euros an ounce, up 3.8% from 477.19 for the week. Oil closed at 72.51 dollars a barrel Friday, up 1.9% from $71.14 at the close of the previous Friday. Oil in euros would be 56.86 euros a barrel, up 2.5% from 55.47 for the week. The gold/oil ratio closed at 8.71 up 1.3% from 8.60 at the close of the previous week. In U.S. stocks, the Dow Jones Industrial Average closed at 11,284.05 Friday, down 0.9% from 11,381.47 at the end of the week before, and the NASDAQ closed at 2140.29, down 1.1% from 2163.95 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.79 on Friday, down six basis points from 4.85 at the end of the week before.

The downturn in the U.S. housing market has become undeniable recently, raising fears of a recession.

Housing weighs on the economy
by Chad Hudson

August 23, 2006

There was little surprise that the housing market remained weak in July. Existing homes sales fell 4% from June to an annual rate of 6.33 million in July. This was 12.5% lower than last year. This was the slowest rate of home sales since January 2004. The median price gained 0.9% from last year, the South was the only region to experience a year-over-year gain. The West had its second consecutive month of lower year-over-year prices. Sales in the West were 18% lower than last July. This was the seventh month of double-digit yearly decline for the West. Not only are fewer homes selling, but more are coming on the market. In July, the number of homes for sales jumped 118,000 to 3.856 million. Combined with slower sales, the number of months supply jumped to 7.3. This is two months longer than in January.

On Tuesday, Toll Brothers reported third quarter earnings of $1.07. This was slightly ahead of analysts estimates, but was 16% lower than a year ago. Similar to other homebuilders, Toll Brothers wrote off $23 million related to land. Excluding this charge earnings were down 9%. The homebuilder also revised its guidance for the full year to $4.41 to $4.63 from previous guidance of $4.69 to $5.16. Wall Street had already reduced its estimates to $4.40. The company didn’t provide earnings guidance for 2007, but said that revenue would fall due to a 10-19% drop in deliveries and a 7% drop in the average selling price. Part of the drop in average selling price will be due to a shift to smaller homes. In response to a question whether or not the company felt the market was starting to bottom, it said, “but I don’t see a turnaround in any of the markets specifically

Last week, Home Depot reported that the slowing housing market has adversely affected its outlook. On Monday, Lowe’s echoed similar comments. Lowe’s reported an 11% gain in second quarter earnings, which was inline with analysts’ estimates. Same stores sales increased 3.3%, driven by a 4% gain in the average ticket. It also mentioned that promotional activity increased during the quarter. It was interesting that Lowe’s noted that even as it saw evidence that customers cutback discretionary spending, it still had strong sales of high end items in some product lines. Similar to Home Depot last week, the home improvement retailer lowered its guidance for the second half of the year. Same store sales are expected to be flat to up 2% during the third quarter as “near-term pressures on the U.S. consumer have led to a more cautious outlook for the balance of the year.”

Also playing a role in the housing market is a shift in psychology Just a year ago the media was hyping the housing boom highlighting investors that had switched from investing in the stock market to investing in residential housing. Today, there are an abundance of stories highlighting the bursting bubble. This week, the Wall Street Journal ran two such stories. The first highlighted the problems of “stated income” loans. The article mentioned a study done for the Mortgage Bankers Association by the Mortgage Asset Research Institute found that 60% of a sampling of 100 loans from one lender had income overstated by more than 50%. On Wednesday, the Wall Street Journal highlighted one homeowner that placed her house on the market for its 2005 appraised values of $1.1 million. Long story short, she ended up selling it for $530,000. Over the weekend, Barron’s noted that only 1% of WaMu’s option ARMS were in negative amortization at the end of 2003. In 2004, it moved up to 21% and has jumped to 47% at the end of last year.

Yet, in spite of the recessionary signs, analysts still worry about inflation due to higher energy costs: a classic 1970s-style stagflation, a central bankers nightmare:

Global economic braintrust divided on Fed policy

Tim Ahmann and Ros Krasny
August 27, 2006

Central bankers and top academics departed here on Sunday after two days of discussions on how the global economic landscape is shifting.

But they said goodbye still divided on what is perhaps the biggest question hanging over the outlook -- whether an unfolding slowdown in the U.S. economy will curb U.S. inflation without further interest-rate rises from the Federal Reserve.

While Fed policy was not a primary focus of the formal discussions at the Kansas City Federal Reserve Bank's annual Jackson Hole retreat, it was a hot topic on the sidelines.

"I think this is a time of a fair amount of uncertainty, because certainly there seems to be a shifting in the United States," IMF chief economist Raghuram Rajan said. "We're not quite sure if inflationary pressures are contained ... and we are also not sure how far and how quickly housing will slow."

After two years of steadily pushing benchmark borrowing costs higher, the U.S. central bank stepped to the sidelines at its last meeting on August 8, preferring to wait for more data shedding light on the outlook for growth and inflation.

A downturn in the U.S. housing market is seen cutting the wherewithal of U.S. consumers, who have been able to tap the equity fast rising home prices had provided to maintain their free-spending ways.

Former Brazilian central bank chief Arminio Fraga fretted that a slowdown in the United States, for years an engine supporting growth around the globe, could exact a big toll on economies elsewhere.

"Can the world make up for what is likely to be a slowdown in (U.S.) growth, maybe even a bigger slowdown than one expects at this point -- certainly a deeper slowdown than markets are pricing in?" Fraga asked conference participants.

DONE YET?

Financial markets are largely convinced the Fed is finished raising interest rates and look for U.S. policy-makers to lower credit costs next year.

Former White House economic adviser Glenn Hubbard, dean of Columbia University's Graduate School of Business, suggested it might be wiser for the Fed to resume its credit-tightening course.

"It is a very difficult moment for the Fed to achieve both the desired fall in inflation and the soft landing in the real economy at the same time. It's easy to do one or the other; it's a little more difficult to do both," he said.

A similar debate appears to be unfolding at the Fed.

Richmond Federal Reserve Bank President Jeffrey Lacker voted against the majority of policy-makers at the central bank's August meeting, preferring to bump borrowing costs up another notch.

Analysts are keenly awaiting minutes of that session, which will be released on Tuesday, to see if his concerns were more widely shared.

TAKING A RISK

While oil prices have given a big boost to overall U.S. inflation, the Fed has kept its sights firmly set on ensuring other prices stay under wraps.

If they do, the energy-led rise in inflation should prove a one-off phenomenon.

"When your faced with a terms of trade shock, such as an oil shock, there's logic to allow inflation to rise above target," Harvard University professor and and former IMF chief economists Kenneth Rogoff said in what amounted to a defense of the Fed strategy.

In response, Bank of England chief economist Charles Bean said such an approach risked denting the central bank's inflation-fighting credibility, and urged erring on the side of caution.

"To me, the most important issue is not whether there is a theoretical case for such accommodation. Rather it is whether there are likely to be any adverse effects on inflation expectations and credibility from doing so," he said.former IMF chief economists Kenneth Rogoff said in what amounted to a defense of the Fed strategy.

The experts are uncertain, but more data will be on the way this week:

Wall Street preps for more economic data
By Joe Bel Bruno, AP Business Writer

Wall Street will finally get the data it has craved to help get a better handle on the economy and whether it has pulled back further than policy-makers wanted. In the next five days, some two dozen economic reports will be released — including consumer confidence, job growth and manufacturing figures. Investors might even get a better clue about what Federal Reserve Chairman Ben Bernanke thinks of interest rates when minutes from the last Fed meeting are released.

These readings might help give Wall Street the guidance it has been clamoring for, especially after last week's lackluster performance. But the real question is, how many people will be around to trade on the news — this is, after all, the last week of August.

"I looked up the word doldrums in the dictionary, and there's no coincidence it comes from the word dull," David Darst, chief investment strategist of Morgan Stanley's global wealth management group, said Friday. "You might see some kind of fluctuation next week with these reports, but people will come back to work after Labor Day and sort through everything that's gone on. That's when you'll see volume go up."

Indeed, this past week's volume was lethargic, and traders say expect to see more of the same in the coming days. Looking back to last August, the NYSE reported consolidated volume for the month of 43.33 billion shares — while it popped up to 46.37 billion in September and 51.37 billion in October.

Last week, the Dow ended down 0.86 percent, Nasdaq fell 1.09 percent, and the S&P 500 dropped 0.55 percent.

Stocks fell on concerns that the Fed might have gone too far by raising rates 17 straight times before pausing at its August meeting. While this means Bernanke is unlikely to initiate another hike, it also troubles Wall Street that the economy might have moderated too quickly.

The biggest fear is that consumer spending is eroding, and that could translate into lower corporate profits. Oil prices, which rose steadily last week, also are a major contributor to how much people spend.

ECONOMIC DATA

On Tuesday, investors hope to get some clues as the direction of consumer spending from the Conference Board's August consumer confidence index, and analysts are calling for a modest decline. The Federal Reserve minutes also come out that day.

On Wednesday, Wall Street will be reading the preliminary second-quarter gross domestic product numbers with interest to see if personal spending has slowed, and how business investment and government spending fared.
Consumers will also be in focus Wednesday, when the Commerce Department releases its personal income and personal spending reports for July. Also that day, the department will release its factory orders report for last month.

Perhaps the most important report this week comes out Friday, when the Labor Department releases its nonfarm payroll data for August. In July, the report showed slowing momentum and volatility in payroll growth, which is expected to continue.

The pace of business spending will also be measured on Friday when the Institute for Supply Management releases its survey of activity in the manufacturing sector, covering new orders, production, employment and inventories.

EARNINGS

Wall Street will have to get most of its direction from economic data since there is little in the way of corporate earnings reports. On Wednesday, TiVo Inc. kicks off the week with its second-quarter results, which are expected to come in at a 14 cent per share loss. It has traded between $4.56 and $9.49 over the past 52 weeks, closing Friday up 17 cents, or 2.2 percent, at $7.85.

On Thursday, tax preparation company H&R Block Inc. is expected to report a loss of 19 cents per share. It has traded between $19.80 and $27.94 over the past 52 weeks, closing Friday down $1.98, or 8.7 percent, at $20.81.

Also Thursday, food company H.J. Heinz Co. reports its results. Heinz closed up Friday 5 cents at $41.35, and has traded within a 52-week range of $33.35 and $44.15. And luxury jeweler Tiffany & Co., reports the same day, giving an inkling of how the well-heeled consumer is holding up. Shares were unchanged Friday at $30.80, near the bottom of its 52-week range of $29.63 and $43.80.

Last week we wrote about the strange dominance of neo-classical economics and its dependence on an impoverished model of human beings. We also pointed to Andrew Lobaczewski’s work, Political Ponerology, in which he argues that systems based on impoverished views of human nature become more susceptible to takeover by psychopaths. In a similar vein, a movement in economics, begun in France at the turn of the millennium, has referred to neo-classical economics as “autistic economics.” Like Lobaczewski, they choose to focus on the psychopathology of modes of thought that we take for granted, yet which contribute to the bad situation the world is in. These economists have argued for a ‘post-autistic economics’, one with a more fuller and more accurate view of human beings:

A Brief History of the Post-Autistic Economics Movement

Theories, scientific and otherwise, do not represent the world as it is but rather by highlighting certain aspects of it while leaving others in the dark. It may be the case that two theories highlight the same aspects of some corner of reality but offer different conclusions. In the last century, this type of situation preoccupied the philosophy of science. Post-Autistic Economics, however, addresses a different kind of situation: one where one theory, that illuminates a few facets of its domain rather well, wants to suppress other theories that would illuminate some of the many facets that it leaves in the dark. This theory is neoclassical economics. Because it has been so successful at sidelining other approaches, it also is called “mainstream economics”.

From the 1960s onward, neoclassical economists have increasingly managed to block the employment of non-neoclassical economists in university economics departments and to deny them opportunities to publish in professional journals.

Note: this is what Lobaczewski would call the process of ponerization (a systematic yet subtle takover of an institution by evil forces).

They also have narrowed the economics curriculum that universities offer students. At the same time they have increasingly formalized their theory, making it progressively irrelevant to understanding economic reality. And now they are even banishing economic history and the history of economic thought from the curriculum, these being places where the student might be exposed to non-neoclassical ideas. Why has this tragedy happened?

Many factors have contributed, but three especially. First, neoclassical economists have as a group deluded themselves into believing that all you need for an exact science is mathematics, and never mind about whether the symbols used refer quantitatively to the real world. What began as an indulgence became an addiction, leading to a collective fantasy of scientific achievement where in most cases none exists. To preserve their illusions, neoclassical economists have found it increasingly necessary to isolate themselves from non-believers.

Second, as Joseph Stiglitz has observed, economics has suffered “a triumph of ideology over science”. Instead of regarding their theory as a tool in the pursuit of knowledge, neoclassical economists have made it the required viewpoint from which, at all times and in all places, to look at all economic phenomena. This is the position of neoliberalism.

Third, today’s economies, including the societies in which they are embedded, are very different from those of the 19th century for which neoclassical economics was invented to describe. These differences become more pronounced every decade as new aspects of economic reality emerge, for example, consumer societies, corporate globalization, economic induced environmental disasters and impending ecological ones, the accelerating gap between the rich and poor, and the movement for equal-opportunity economies. Consequently neoclassical economics sheds light on an ever-smaller proportion of economic reality, leaving more and more of it in the dark for students permitted only the neoclassical viewpoint. This makes the neoclassical monopoly more outrageous and costly every year, requiring of it ever more desperate measures of defense, like eliminating economic history and history of economics from the curriculum.

But eventually reality overtakes time-warp worlds like mainstream economics and the Soviet Union. The moment and place of the tipping point, however, nearly always takes people by surprise. In June 2000, a few economics students in Paris circulated a petition calling for the reform of their economics curriculum. One doubts that any of those students in their wildest dreams anticipated the effect their initiative would have. Their petition was short, modest and restrained. Its first part, “We wish to escape from imaginary worlds”, summarizes what they were protesting against.

Most of us have chosen to study economics so as to acquire a deep understanding of the economic phenomena with which the citizens of today are confronted. But the teaching that is offered, that is to say for the most part neoclassical theory or approaches derived from it, does not generally answer this expectation. Indeed, even when the theory legitimately detaches itself from contingencies in the first instance, it rarely carries out the necessary return to the facts. The empirical side (historical facts, functioning of institutions, study of the behaviors and strategies of the agents . . .) is almost nonexistent. Furthermore, this gap in the teaching, this disregard for concrete realities, poses an enormous problem for those who would like to render themselves useful to economic and social actors.

The students asked instead for a broad spectrum of analytical viewpoints.

Too often the lectures leave no place for reflection. Out of all the approaches to economic questions that exist, generally only one is presented to us. This approach is supposed to explain everything by means of a purely axiomatic process, as if this were THE economic truth. We do not accept this dogmatism. We want a pluralism of approaches, adapted to the complexity of the objects and to the uncertainty surrounding most of the big questions in economics (unemployment, inequalities, the place of financial markets, the advantages and disadvantages of free-trade, globalization, economic development, etc.)

The Parisian students’ complaint about the narrowness of their economics education and their desire for a broadband approach to economics teaching that would enable them to connect constructively and comprehensively with the complex economic realities of their time hit a chord with French news media. Major newspapers and magazines gave extensive coverage to the students’ struggle against the “autistic science”. Economics students from all over France rushed to sign the petition. Meanwhile a growing number of French economists dared to speak out in support and even to launch a parallel petition of their own. Finally the French government stepped in. The Minister of Education set up a high level commission to investigate the students’ complaints.

News of these events in France spread quickly via the Web and email around the world. The distinction drawn by the French students between what can be called narrowband and broadband approaches to economics, and their plea for the latter, found support from large numbers of economics students and economists in many countries. In June 2001, almost exactly a year after the French students had released their petition, 27 PhD candidates at Cambridge University in the UK launched their own, titled “Opening Up Economics”. Besides reiterating the French students’ call for a broadband approach to economics teaching, the Cambridge students also champion its application to economic research.

This debate is important because in our view the status quo is harmful in at least four respects. Firstly, it is harmful to students who are taught the 'tools' of mainstream economics without learning their domain of applicability. The source and evolution of these ideas is ignored, as is the existence and status of competing theories. Secondly, it disadvantages a society that ought to be benefiting from what economists can tell us about the world. Economics is a social science with enormous potential for making a difference through its impact on policy debates. In its present form its effectiveness in this arena is limited by the uncritical application of mainstream methods. Thirdly, progress towards a deeper understanding of many important aspects of economic life is being held back. By restricting research done in economics to that based on one approach only, the development of competing research programs is seriously hampered or prevented altogether. Fourth and finally, in the current situation an economist who does not do economics in the prescribed way finds it very difficult to get recognition for her research.

In August of the same year economics students from 17 countries who had gathered in the USA in Kansas City, released their International Open Letter to all economics departments calling on them to reform economics education and research by adopting the broadband approach. Their letter includes the following seven points.

1. A broader conception of human behavior. The definition of economic man as an autonomous rational optimizer is too narrow and does not allow for the roles of other determinants such as instinct, habit formation and gender, class and other social factors in shaping the economic psychology of social agents.

2. Recognition of culture. Economic activities, like all social phenomena, are necessarily embedded in culture, which includes all kinds of social, political and moral value-systems and institutions. These profoundly shape and guide human behavior by imposing obligations, enabling and disabling particular choices, and creating social or communal identities, all of which may impact on economic behavior.

3. Consideration of history. Economic reality is dynamic rather than static – and as economists we must investigate how and why things change over time and space. Realistic economic inquiry should focus on process rather than simply on ends.

4. A new theory of knowledge. The positive-vs.-normative dichotomy which has traditionally been used in the social sciences is problematic. The fact-value distinction can be transcended by the recognition that the investigator’s values are inescapably involved in scientific inquiry and in making scientific statements, whether consciously or not. This acknowledgement enables a more sophisticated assessment of knowledge claims.

5. Empirical grounding. More effort must be made to substantiate theoretical claims with empirical evidence. The tendency to privilege theoretical tenets in the teaching of economics without reference to empirical observation cultivates doubt about the realism
of such explanations.

6. Expanded methods. Procedures such as participant observation, case studies and discourse analysis should be recognized as legitimate means of acquiring and analyzing data alongside econometrics and formal modelling. Observation of phenomena from different vantage points using various data-gathering techniques may offer new insights into phenomena and enhance our understanding of them.

7. Interdisciplinary dialogue. Economists should be aware of diverse schools of thought within economics, and should be aware of developments in other disciplines, particularly the social sciences.

In March 2003 economics students at Harvard launched their own petition, demanding from its economics department an introductory course that would have “better balance and coverage of a broader spectrum of views” and that would “not only teach students the accepted modes of thinking, but also challenge students to think critically and deeply about conventional truths.”

Students have not been alone in mounting increasing pressure on the status quo. Thousands of economists from scores of countries have also in various forms taken up the cause for broadband economics under the banner “Post-Autistic Economics” and the slogan “sanity, humanity and science” The PAE movement is not about trying to replace neoclassical economics with another partial truth, but rather about reopening economics for free scientific inquiry, making it a pursuit where empiricism outranks a priorism and where critical thinking rules instead of ideology.

How does such a movement work in practice? Here’s a good example:

Neoclassical economics regards competition as a state rather than as a process. It defines perfect competition as a market with a large number of firms with identical products, costs structures, production techniques and market information. But in real life competition is a process by which firms continually seek to re-establish the conditions of their own profitability. To compete in a market requires firms to seek out and exploit differences between them in production, technology, distribution, access to information and awareness of trends in consumption. These differences are the essential dimensions in which competition takes place. Once the neoclassical conception of competition becomes imbedded in the student’s mind, appreciation of real-world competition, and hence the policies that might enhance it, becomes logically impossible.

Neoclassical economists love to talk about freedom of choice. But this is pure rhetoric, because they define rationality in a way that eliminates free choice from their conceptual space. By rationality they mean that an agent’s choices are in conformity with an ordering or scale of preferences. The “rational” agent chooses among the alternatives available that one which is highest on his ranking. Rational behaviour simply means behaviour in accordance with some ordering of alternatives in terms of relative desirability. In order for this approach to have any predictive power, it must be assumed that the preferences do not change over some period of time. So the basic condition of neoclassical rationality is that individuals must forego choice in favour of some past reckoning, thereafter acting as automata. This conceptual elimination of freedom of choice, in both its everyday and philosophical meanings, gives neoclassical theory the hypothetical determinacy that its Newtonian inspired metaphysics require. No indeterminacy; no choice. No determinacy; no neoclassical model. This is far from just an academic matter, because society needs an economics that is able to address questions regarding freedom of choice.

No terms in neoclassical economics are more sacrosanct than rational choice and rationality. Everyone identities with these words, because everyone wants to think of themselves as rational. But few people realize that economists give these words an ultra eccentric meaning.

Lobaczewski would call this a “conversive meaning.”

Neoclassical economics begins with an a priori conception of markets and economies as determinate systems that by the action of individual agents alone tend toward an efficient and market-clearing equilibrium. This requires that the individual agents, like the bodies in Newton’s system, behave in a prescribed manner. Neoclassicalists have deduced the particular pattern of behaviour that would make their imagined world logically possible, then named it “rational choice” or “rationality” and then declared that that is the way real people behave. But thankfully they don’t. Everyday economic actors do many things that by the neoclassical meaning of “rational” are “irrational”. Looking to the choices of other consumers as guides to what one might buy; buying a stock because you believe other people will be buying it and so increase its value, spending your money in a spirit of spontaneity rather than stopping to calculate the consequences and alternatives up to the limits of your cognitive powers; a taste for change, that is, buying something because you did not previously prefer it; these common consumer behaviours are all prohibited under the neoclassical notions of rational choice and rationality and so outside its scope of analysis.

These failings connect with another. Neoclassical economics is by its own axioms incapable of offering a coherent conceptualisation of the individual or economic agent. From where do the preferences that supposedly dictate the individual’s choice come from? Not from interpersonal relations, because if individual demands were interdependent, they would not be additive and thus the market demand function – neoclassicalism’s key analytical tool – would be undefined. And not from society, because neoclassicalism’s Newtonian atomism translates as methodological individualism, meaning that society is to be explained in terms of individuals and never the other way around.

This leaves an awful lot in the dark. In the main, despite the neoclassical axioms, we all categorise and classify according to prevailing cultural norms. Likewise our tastes and preferences for this and that reflect the social conventions and institutions with which we interact. Consequently individual choice is unavoidably and inextricably bound up with historically and geographically given social worlds. An economics that has nothing to say about the formation of economic tastes and preferences is silly and irresponsible, especially in an age of consumer societies and in a world now threatened with climate-change or worse.

Once the pathological system of thought, such as neoclassical economics, is seen for what it is, and the conversive terms interpreted correctly, new horizons open:

Mainstream economics, and in consequence most policy dialogue, conflates two very different meanings of economic growth that are in common usage and with GNP mistakenly taken to be a measure of both. There is quantitative growth meaning an increase in the quantity of production and consumption, and there is qualitative growth meaning an improvement in well-being. For example, an epidemic may lead to growth of medical expenditure and hence increase GNP but not well-being. Pollution and congestion lead to huge expenditures to escape them (e.g., commuting from the suburbs, double glazing, air filters, security measures), the creation of new industries and an ever larger GNP but they also decrease well-being. Quantitative growth that causes negative qualitative growth is also called uneconomic growth. It is both a reality and a concept with which policy makers must come to terms, the sooner the better.

Closely related to these new anti-neoclassical concepts is another one, sustainable development. This refers to the physical scale of the economy relative to the ecosystem. Ecological economists view the economy as an open subsystem of the larger ecosystem which is finite, non-growing and, except for solar energy, materially closed. This point of view compels asking questions regarding scale. How large is the economic subsystem relative to the earth’s ecosystem? What is its maximum possible size? What is its most desirable size in terms of human welfare? These questions, around which policy decisions will and must increasingly be made, are not found in standard economics textbooks. Neoclassical economics can not accommodate the concept of sustainable development because if adopted as a goal it requires that goods be valued in part by their contribution to that goal and not solely on their contribution to individual utility maximisation.

A look at the recent history of neoclassical economics and of the mathematical modes of analysis that underpin it, suggest that its hegemony today is no accident:

Following WWII, the United States increasingly came to determine (one might say dictate) the shape of economics worldwide, while within the United States the sources of influence became concentrated and circumscribed to an absurd degree. This state of affairs, which persists to the present day, was engineered in significant part by the US Department of Defense, especially its Navy and Air Force.3 Beginning in the 1950s it lavishly funded university research in mathematical economics. Military planners believed that game theory and linear programming had potential use for national defense. And although now it seems ridiculous, they held out the same hope for mathematical solutions of “general equilibrium”, the theoretical core of Neoclassical economics. In 1954 Kenneth Arrow and Gerard Debreu achieved for this mathematical puzzle a solution of sorts that has been the central show piece of academic economics ever since. Arrow’s early research had been partly, in his words, “carried on at the RAND Corporation, a project of the United States Air Force.”4 In the 1960s, official publications of the Department of Defense praised the Arrow-Debreu project for its “modeling of conflict and cooperation whether if be [for] combat or procurement contracts or exchange of information among dispersed decision nodes.” In 1965, RAND created a fellowship program for economics graduate students at the Universities of California, Harvard, Stanford, Yale, Chicago, Columbia and Princeton, and in addition provided postdoctoral funds for those who best fitted the mold. These seven economics departments along with MIT’s, an institution long regarded by many as a branch of the Pentagon, have come to dominate economics globally to an astonishing extent. Two examples will show what I mean.

The American Economic Review (AER), the Quarterly Journal of Economics (QJE), and the Journal of Political Economy (JPE), have long been regarded as the world’s three most prestigious economics journals, the ones in which a publication adds the most value to an economist’s CV and most helps an economics department’s ranking and research funding.

A study has been made of the affiliation of the authors of full-length articles appearing in these journals from 1973 through 1978.5 For the QJE it found that the eight departments with the most articles were the seven favoured through RAND by the US Department of Defense plus MIT, and that this Big Eight accounted for 77.3 percent of the articles published. In the JPE all of the RAND Seven were in the top ten and together with MIT accounted for 63.1 percent of the articles published. In the AER the top eight contributing departments were again the RAND Seven plus MIT, which together accounted for 59.3 percent of the articles published. Even within this Big Eight there was an astonishing concentration of success. In the QJE, which is controlled by Harvard, 33.3 percent of the articles were by Harvard-affiliated authors. In the JPE, controlled by Chicago, 20.7 percent of the articles were by Chicago-affiliated authors. In the AER, nearly half of whose editorial board during these years was from, in rank order, Chicago, MIT and Harvard, 14.0, 10.7 and 7.1 percent of the articles were by authors from these departments respectively. About 70% of the board members were from the Big Eight and nearly 60 percent of the members of the nominating committees for officers.

Neoclassical economics is ideal for the pathocrats, it gives us “consumers” the illusion of freedom while convincing us to behave in ways that make our behavior easier to model. It also reduces our awareness of political alternatives, as the following account by Deborah Campbell of a rebellion at Harvard against the introductory economics class there taught by Martin Feldstein shows:

Sitting in an overcrowded café near Harvard Square, talking over the din of full-volume Fleetwood Mac and espresso fueled chatter, Gabe Katsh describes his disillusionment with economics teaching at Harvard University. The red-haired 21-year-old makes it clear that not all of Harvard’s elite student body, who pay close to $40,000 a year, are the “rationally” self-interested beings that Harvard’s most influential economics course pegs them as.

“I was disgusted with the way ideas were being presented in this class and I saw it as hypocritical – given that Harvard values critical thinking and the free marketplace of ideas – that they were then having this course which was extremely doctrinaire,” says Katsh. “It only presented one side of the story when there are obviously others to be presented.”

For two decades, Harvard’s introductory economics class has been dominated by one man: Martin Feldstein. It was a New York Times article on Feldstein titled “Scholarly Mentor To Bush’s Team,” that lit the fire under the Harvard activist. Calling the Bush economic team a “Feldstein alumni club,” the article declared that he had “built an empire of influence that is probably unmatched in his field.” Not only that, but thousands of Harvard students “who have taken his, and only his, economics class during their Harvard years have gone on to become policy-makers and corporate executives,” the article noted. “I really like it; I’ve been doing it for 18 years,” Feldstein told the Times. “I think it changes the way they see the world.”

That’s exactly Katsh’s problem. As a freshman, he’d taken Ec 10, Feldstein’s course. “I don’t think I’m alone in thinking that Ec 10 presents itself as politically neutral, presents itself as a science, but really espouses a conservative political agenda and the ideas of this professor, who is a former Reagan advisor, and who is unabashedly Republican,” he says. “I don’t think I’m alone in wanting a class that presents a balanced viewpoint and is not trying to cover up its conservative political bias with economic jargon.”

In his first year at Harvard, Katsh joined a student campaign to bring a living wage to Harvard support staff. Fellow students were sympathetic, but many said they couldn’t support the campaign because, as they’d learned in Ec 10, raising wages would increase unemployment and hurt those it was designed to help. During a three-week sit-in at the Harvard president’s office, students succeeded in raising workers’ wages, though not to “living wage” standards.

After the living wage “victory,” Harvard activists from Students for a Humane and Responsible Economics (SHARE) decided to stage an intervention. This time, they went after the source, leafleting Ec 10 classes with alternative readings. For a lecture on corporations, they handed out articles on corporate fraud. For a free trade lecture, they dispensed critiques of the WTO and IMF. Later, they issued a manifesto reminiscent of the French post-autistic revolt, and petitioned for an alternative class. Armed with 800 signatures, they appealed for a critical alternative to Ec 10. Turned down flat, they succeeded in introducing the course outside the economics department.

… Harvard President Lawrence Summers illustrates the kind of thinking that emerges from neoclassical economics. Summers is the same former chief economist of the World Bank who sparked international outrage after his infamous memo advocating pollution trading was leaked in the early 1990s. “Just between you and me, shouldn’t the World Bank be encouraging MORE migration of the dirty industries to the LDCS [Less Developed Countries]?” the memo inquired. “I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.... I’ve always thought that under-populated countries in Africa are vastly UNDER-polluted....”

Brazil’s then-Secretary of the Environment, José Lutzenburger, replied: “Your reasoning is perfectly logical but totally insane.... Your thoughts [provide] a concrete example of the unbelievable alienation, reductionist thinking, social ruthlessness and the arrogant ignorance of many conventional ‘economists’ concerning the nature of the world we live in.”

Summers later claimed the memo was intended ironically, while reports suggested it was written by an aide. In any case, Summers devoted his 2003/2004 prayer address at Harvard to a “moral” defense of sweatshop labor, calling it the “best alternative” for workers in low-wage countries.