The Marxist Origins of Income Redistribution

After my series of articles on the role of government under, respectively, Keynesian and Austrian economic theory, it has been claimed that I am downplaying the analytical ties between Keynesian theory and arguments for redistribution of income. 

I always welcome critique, even when, as in this case, it is unfounded (for reasons that my article on a Keynesian, libertarian government explains). But since the issue was brought up, let me explain where to find the true origins of arguments for income redistribution: in Marxist economics.

Marxist theory is built around the so called labor theory of value. A product earns its value not through a market evaluation of what buyers are willing to pay for it – also known as the equilibrium price – but through the labor that workers put into making the product. Here is how it works, in a nutshell:

The Corruption of Scientific Inquiry

Many years ago, when I was a freshly baked Ph.D. with an internationally published dissertation and my first peer-reviewed article on the resume, I was asked to review an article for a journal. It is common practice to use published authors as double-blind referees in that author's field of expertise, so I happily accepted. The article was about the possibility of applying the Scandinavian welfare state to the Chinese economy, a topic that I found intriguing back then and I still think is interesting today (though for very different reasons than I did some 15 years ago). 

To my disappointment, the article was poorly written, the research behind it was spotty and there were significant factual errors and unsubstantiated conclusions in it. I pointed this out to the editor of the journal and expected the usual cordial "thank you for your effort". 

Instead, I got an e-mail lambasting me for having reached the wrong conclusion. Not only did this editor think the paper was of adequate scholarly quality, but it deserved to be published and maybe even lead the next issue of the journal. 

Needless to say, I was never invited to referee papers for said journal again.  

Fast forward a dozen years, namely to 2014.

Austrian Economics and Big Government

In my recent articles I explained that there are two theories on how the economic system operates:

One theory says that the system is inherently stable, prices are perfectly flexible and if left alone, the economy will always operate at full utilization of available resources;

Another theory says that economic agents prefer so called sticky prices to flexible prices - namely prices that only change a couple of times per year - and that even if left alone, the economy is not at all guaranteed to operate at full capacity utilization.

The first theory serves as the foundation for mainstream neoclassical economics as well as Austrian theory. The second theory is the microeconomic foundation for Keynesian economics.

On Econometrics and Forecasting

After a series of articles on Keynesian economics, libertarian philosophy and the role of  government in our society, it is time to shift gear. There are so many important issues to talk about in modern economics, political economy and the practice of economic theory. One issue that often pops up is the role of econometrics in economics. Here is an article I wrote in 2014 on a now-defunct blog. Enjoy!

A Keynesian, Libertarian Government

Finally... we have arrived at the actual answer to the question: what does government look like under the combination of libertarian moral principles and Keynesian economic analysis?

To summarize the theoretical foundation for this question:

• Libertarianism implies a minimal government, focused entirely on the protection of life, liberty and property. It is the government that Robert Nozick refers to as "minimal", distinguishing it from the ultra-minimal state in that the minimal state also has a monopoly on the use of force. 
• Keynesianism implies a government that has one and only one role in the economy, namely to address and minimize macroeconomic - or fundamental - uncertainty. 

In order to build any political theory on the role of government, we need both a theory of political philosophy and an economic theory.

Government and Macroeconomic Uncertainty

Economics is probably both the most over-rated and the most under-rated science at the same time. It is under-rated because when done right, it holds the answers to how we can eradicate poverty, protect liberty and build prosperity. 

On the other hand, when done wrong economics quickly becomes a vastly over-rated science. Economists have a penchant - verging on mass hypnosis - for getting lost in seemingly sophisticated mathematical analyses. Mainstream economics journals today are inundated with "rigorous" problems and narrow applications of carefully selected deductive methods. Mathematics classes are not only mandatory, but revered among economics graduate students and the faculty teaching them. 

Yet the applicability of their technically slanted methodology is inversely related to its mathematical sophistication. The more complex the mathematical reasoning becomes, the narrower the problem they can define.

On the Proper Role of Government

One of the most persistent myths about Keynes is that he was some kind of statist, even a socialist. Nothing could be further from the truth. Ideologically, Keynes dwelled somewhere in the free-market main stream of the 1920s and 1930s. Scholarly, his work was solidly planted in free-market capitalism, a system that he studied and analyzed at great length and with increasing sophistication throughout his career.

What sets Keynes apart from other economists of his time - and frankly from most modern-day economists - is that he had an unrelenting interest in understanding the limitations of the free-market system. Working part of his career inside the realm of politics and public policy, Keynes had a pragmatic understanding of how the economy actually worked, and his research aimed to provide an economic theory that had real-life applicability in a way that was not the case with dominant economic theory of that time (during and between the two depressions in the Intebellum years).