By Goodwin Ginger
A couple of days back we weighed in on the BCE trust tax boondoggle. The point of our intervention was to cast doubt on the certainty of the law like connection that is drawn between decreased taxes and increased investment and thereby productivity gains. The Pencils got in an uproar: “read an introductory microecon text” the school boys pronounced. To which we replied “we have read that book” (they are all interchangeable; if ever there was a scam it is the new edition of this years micro/macro textbook racket/market). The problem is that in the real world capitalists make strategic decisions in an attempt to further different goals over different time horizons only a few of which are given by the neoclassical theory of the firm. Moreover, as prices and environments change, the initial calculations upon which the most rational of plans are drawn up shifts, sometimes in the right direction, but sometimes much further than any theory could have anticipated in the wrong direction. It should be noted that the law of Large Numbers does not ensure that the two sides of the ledger net out. For the Pencils out there that is what Keynes meant by uncertainty (you can read about it in a fourth year seminar).

The story of how capitalism works gets even worse when one tries to tell a macroeconomic narrative via the aggregation of the neoclassical firm. Moroever, bad public policy will also arise whenever the stylized representative firm is the basis upon which public policy is constructed. This is necessarily the case because in reality firms have bastardized utility functions owing to the fact that they are created over a shifting time horizon and a shifting environment in the context of uncertainty.  Public policy based on the representative firm is simply too daft to capture this essential aspect of reality.

The same can be said about the theory of comparative advantage built as it is on a stylized representative nation. Brad Delong, one of the leading neoliberals of our time (an honest man too; in so far as he really truly did /does believe in those fairy tales he retails from his lectern), seems to be having a crisis of faith. Why does Mexico not follow the developmental trajectory that neoliberal theory predicted it would have? Brad poses his intellectual conundrum thus:

Intellectually, this is a great puzzle: we believe in market forces, and in the benefits of trade, specialization, and the international division of labor. We see the enormous increase in Mexican exports to the US over the past decade. We see great strengths in the Mexican economy – a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on.

Yet successful neo-liberal policies have not delivered the rapid increases in productivity and working-class wages that neo-liberals like me would have confidently predicted had we been told back in 1995 that Mexican exports would multiply five-fold in the next twelve years.


We neo-liberals point out that NAFTA did not cause poor infrastructure, high crime, and official corruption. We thus implicitly suggest that Mexicans would be far worse off today without NAFTA and its effects weighing in on the positive side of the scale.

That neo-liberal story may be true. But it is an excuse. It may not be true. Having witnessed Mexico’s slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one.

The last sentence is painstakingly telling: not even Brad believes his pitiful counter factual that perhaps ‘Mexico would have been even worse off today had it not been for NAFTA.’

To figure out why it has not gone according to plan Brad has two options. On the one hand, he could take the preferred path of neoconservatives: “The best laid plans of mice and men and all that jazz.” Or, on the other hand, he could do the honest thing and think like a political economist and ask: Where did the money go? Answering the most basic question “who won and who lost” will take one much closer answering the “why” question than hand wringing over a doomed ontology of capitalism. Here is to keeping your stick on the ice.