the "volcker shock"

In 1979 President Carter appointed To the federal reserve Paul Volcker. At the time his appointment was seen as part and parcel with Carter's "austerity" program (austerity is generally seen as reducing spending, increasing taxes and being "less accommodating" to private enterprise. Increasing interest rates is what the third point generally means. I will return to this later). In the mainstream economics before the 1970's, a curve called the "Phillips curve" purported to explain that their was a determinate relationship between inflation and unemployment. That is, when the rate of inflation goes up, the rate of unemployment was supposed to go down a certain amount and vice versa. The "stagflation" (ie high levels of unemployment and inflation) of the 1970's completely exploded this view.

In it's place (whether merited or not) Milton Friedman came to prominence with "monetarism". His basic idea was that money is "neutral" in the long run ie it doesn't effect any real variables (like employment, distribution of output etc. see earlier post for a differing view). the basic equation monetarists use to explain this idea is MV=PQ. In this equation M is money (as in cash and bank deposits), V is velocity or how much money circulates in a given period of time, P is the level of prices and Q is the amount of output produced. Milton Friedman argued that velocity was basically constant and in the long run the economy tended towards full employment (the unemployment that did happen was caused by inefficient labor markets ie unemployment insurance and unions). Because of this, it was easy for him to draw the line of causation from money to prices. In other words growth in the "money supply" caused growth in the rate of price increases (look at this earlier post for a more detailed explanation and a reverse the causation argument).

Back to Volcker. He was largely seen as implementing Friedman's agenda. he was to lower, the rate of growth of prices by lowering the rate of growth of money. In practice, this meant a lot of volatility in interest rates (if you target interest rates, you have to accept the level of bank reserves and vice versa).Note also that Friedman declared that labor unions were making labor markets more inefficient and thus restricting output (and creating unemployment). Marxists (and other analysts) such as Doug Henwood argue that the “Volcker shock” was primarily aimed at breaking the power of labor. It's also notable that average people were not involved in this battle ideas. Workers were only a “problem” that needed to be solved.

Rationality as a justification of social inequality

Rational choice theory is a branch of thinking ever omnipresent in the social sciences. It is especially dominant in economics and many of the adherents in other disciplines have spilled over from economics (e.g Gary Becker, and Freakonomics co-author Steven Levitt). As could be noted by the use of the term “choice” it a theory of human action. The theorists are not attempting to explain the thoughts, feelings and emotions of People. They purport to explain why they do what they do (at least in the “economic” realm). In addition, their conception of rationality is more specific and different then average person’s definition Duncan Foley explains it like this in his piece Rationality and ideology:

Economists, however, have come to define rationality in a much narrower sense. The economist’s rational decision maker optimizes, that is, pursues not just any action that promotes a goal, but the action that best promotes the goal. The economist’s rational decision maker processes information according to the procedures of Bayesian statistics. Furthermore, the goals the economist’s rational decision maker pursues have to be reducible to the direct consumption of material goods and services. This is a “rationality of the belly” (which some people might reasonably regard as being rather irrational).

This may seem absurd on it's face; on a moment's reflection it is easy to recognize that people don't behave like this. The defense however, is easy (but strangely brilliant) and was made over half a century ago by Milton Friedman:

Let the apparent immediate determinant of business behaviour be anything at all—habitual reaction, random chance, or whatnot. Whenever this determinant happens to lead to behaviour consistent with rational and informed maximization of returns, the business will prosper and acquire resources with which to expand; whenever it does not, the business will tend to lose resources and can be kept in existence only by the addition of resources from outside.

What he is essentially saying is that people have no agency. Actors may have differing motivations but as soon as they start to deal with the problems of “scarcity” and the “economy” they will encounter competition and behave “as if” they are rational “utility maximizing” people. The “natural” processes of economies (Duncan Foley suggests that in Neoclassical economics these processes are determined in a Hobbesian/Lockean/Rawlsian “veil of ignorance”). Even when leaving work and production and entering the world of “leisure”, agents have no agency since their preferences are predetermined. Note that since rational, utility maximizing individuals require perfect information, complete markets and definite measurements of all elements of life that provide “utility”, any move away from Capitalism is rejected as almost perverse. Further, redistribution downwards is considered “inefficient” and “supoptimal” because it may result in less total utility being available (this is called pareto optimality). In this view, it is less efficient for a poor person to have 1 dollar then for Donald Trump to have 3. All that matters is that the better off **could** compensate the worse off, even if they never do. In it's purest form, Rational Choice theory is a full throated defense of capitalism that argues against even the mildest forms of redistribution.

Foley, Duncan. "Rationality and Ideology in Economics." World Political Economy Graduate Class. New School For Social Research, New York City. 27 Mar. 2012. Lecture.

Friedman, Milton. "The Methodology of Positive Economics." Essays in Positive Economics. Chicago, IL: University of Chicago, 1953. Print.