For those who buy into fairy tale about how markets operate independently of
political power, and state’s instruments of violence (the police and the military), I have a
nice piece of oceanfront property in Arizona.
Chicago neoclassical economics school is a well known pseudo-science school,
one of the pillars of EconomicLysenkoism (along with Supply Side
Economics). This is an economic cult, an ideology of financial oligarchy.
So it is more proper to this school not neoclassical,
but as aptly suggested by Bill Black “theoclassical” or Chicago Ponzinomics. It is a neoliberal phenomenon, not neoclassical. High level of
support by financial oligarchy was crucial for it break into mainstream and even
(despite compete absurdness of its postulates) make it dominant during
1980-2000.
Like
in Lysenkoism, and high demand sects anybody who strays from the cult is in
danger of being ostracized. As Mark Thoma observed:
Some years ago, when I first presented an empirical paper questioning some
of the conventional views on trade to a high profile economics conference, a
member of the audience (a very prominent economist and a former co-author of
mine) shocked me with the question "why are you doing this?"
There is a useful part of neoclassical economy related to thinking about an aggregate
social phenomena in terms of costs and benefits of individual participants, and
that can be sometimes (but not always) as a useful supplementary approach. Bastartized version of
this notion which tries to imply cost-benefit motives in all human interactions is called
Freakonomics. Still you can view some choices people make
as tradeoffs between desired goals and social constraints (which can interpreted
as costs).
Still neoclassical economics as practiced by Chicago school is driven by
ideology and financed by financial oligarchy.
And like Trofim Lysenko and his followers those people are as close to criminals
as one can get. Like Rabbies and Catholic Priests can be criminals, the same
is true about people in academic mantles. Corruption of academics is nothing new,
but corruption of economists is a very dangerous mass form of white-collar crime as close to Madoff and his associates as one can get. This is the way we should look at the
Chicago schools: kind of incarnation of Lysenko henchmen or, if you wish, Chicago
mafia in a university environment. Actually similar way of thinking can be applied to Harvard (see
Harvard Mafia, Andrei Shleifer and the economic rape of Russia ).
Is neoclassical economics a mafia? Sort of, says Christopher Hayes in a very
well-written and very interesting
piece in The Nation. He
says orthodox economists are a close-knit group and are quick to penalize those
among them or from outside who overstep the boundaries. Here is an excerpt:
So extreme is the marginalization of heterodox economists, most people don't
even know they exist. Despite the fact that as many as one in five professional
economists belongs to a professional association that might be described as
heterodox, the phrase "heterodox economics" has appeared exactly once in the
New York Times since 1981. During that same period "intelligent design,"
a theory endorsed by not a single published, peer-reviewed piece of scholarship,
has appeared 367 times.
It doesn't take much to call forth an impressive amount of bile from heterodox
economists toward their mainstream brethren. John Tiemstra, president of the
Association for Social Economics and a professor at Calvin College, summed up
his feelings this way: "I go to the cocktail parties for my old schools, MIT
and Oberlin, and people are all excited about Freakonomics. I kind
of wince and go off to another corner or have another drink." After the EPI
gathering, Peter Dorman, an economist at Evergreen State College with a gentle,
bearded air, related an e-mail exchange he once had with Hal Varian, a well-respected
Berkeley economist who's moderately liberal but firmly committed to the neoclassical
approach. Varian wrote to Dorman that there was no point in presenting "both
sides" of the debate about trade, because one side--the view that benefits from
unfettered trade are absolute--was like astronomy, while any other view was
like astrology. "So I told him I didn't buy the traditional trade theory," Dorman
said. "'Was I an astrologer?' And he said yes!"
Please note that some of the most close to Lysenkoism figures at Chicago, such
as Cochrane and Fama, are in the business school rather than the econ department.
And they were key enablers of Goldman Sacks and Co. looters. Deregulation
wave was promoted by right wing extremists who recruited corrupted academicians
like Milton Friedman to perform specific role of Trojan horse to undermine New Deal.
He managed to made the "invisible hand" a prefect pocket picker! And the method of spreading
influence was essentially borrowed from the Lysenko book: control the economic department
and those who went to college and studied those theories in the 70’s and 80’s would
then go to Wall St and Government and enact them. Control the key academic magazines
and conferences and any aspiring economists need either to conform or leave the
field.
Here is one telling comment about corruption of those modern day Lysenkoists
in the blog
Crooked Timber
ogmb 09.18.09 at 12:01 pm
...Cochrane is the AQR Capital Management Professor of Finance
at the University of Chicago Booth [formerly Graduate] School of Business. Which
incidentally also makes his whining that Krugman ‘accuses us
literally of adopting ideas for pay,
selling out for “sabbaticals at the Hoover institution”
and fat “Wall street paychecks”’ a bit malnourished in the introspection
department, coming from someone who holds a chair sponsored by a quantitative
trading firm at a school sponsored by the founder of an EMH investment
firm. (Nevermind that Krugman never, literally or otherwise, accused Cochrane
and his peers of selling out to Wall Street…)
In this ideologyMilton Friedman
has playied the role of false prophet. Surrounded by "lesser giants" of neoclassical economics, producing continued stream
of detached from reality papers and speeches. It also includes several clown who
as Krugman noted have some qualities of irritable adolescents, but actually are proper
heirs of Academician Trofim Lysenko:
And that same adolescent quality was evident in the reactions to the Obama administration’s
attempts to deal with the crisis — as Brad DeLong points out, people like Robert
Lucas and John Cochrane (not to mention Richard Posner, who isn’t a macroeconomist
but gets his take from his colleagues) didn’t say that when serious scholars
like Christina Romer based policy recommendations on Keynesian economics, they
were wrong; the freshwater crowd declared that anyone with Keynesian views was,
by definition, either a fool or intellectually dishonest. So the freshwater
outrage over finding their own point of view criticized is, you might think,
a classic case of people who can dish it out but can’t take it.
But it’s actually even worse than that.
When freshwater macro came in, there was an active
purge of competing views: students were not exposed, at all,
to any alternatives. People like Prescott boasted that Keynes was never mentioned
in their graduate programs. And what has become clear in the recent debate —
for example, in the assertion that Ricardian equivalence rules out any effect
from government spending changes, which is just wrong — is that
the freshwater side not only turned Keynes into
an unperson, but systematically ignored the work being done in the New Keynesian
vein. Nobody who had read, say,
Obstfeld and Rogoff would have
been as clueless about the logic of temporary fiscal expansion as these guys
have been. Freshwater macro became totally insular.And hence the most surprising
thing in the debate over fiscal stimulus: the raw
ignorance that has characterized so many of the freshwater comments.
Above all, we’ve seen the phenomenon of well-known economists “rediscovering”
Say’s Law and the Treasury view (the view that government cannot affect the
overall level of demand), not because they’ve transcended the Keynesian refutation
of these views, but because they were unaware that there had ever been such
a debate.It’s a sad story. And the even sadder thing is that it’s very unlikely
that anything will change: freshwater macro will get even more insular, and
its devotees will wonder why nobody in the real world of policy and action pays
any attention to what they say.
The proper label for neo-classical economics might be "theological voluntarism",
the term which has some academic aura... There are several issues here:
Excessive dependence or even open prostitution to the financial oligarchy.
It's deplorable but probably unavoidable as the grip of financial community of economic
profession does not requires any additional commentary. Also there are always exceptions
to the rule.
Mathematical masturbation instead of science (Mathiness). When, for example, a
paper that propose even a linear equation (or God forbid differential equation)
does not provide any estimate of errors of input data such a paper in a narrow sense
can be called mathematical masturbation. Classic example here would be any paper
that has inflation as an input variable. In a more broad sense this occurs when
research paper contains results or mathematical model which rely on idealised, with
little connections to reality postulates about the structure of economic activities.
Many supply/demand models belong to this category as they rely on existence of equilibrium
between supply and demand and/or are ignoring Minsky instability hypothesis. Most
neo-classical economics can be called a theory in a desperate search for suitable
reality.
Relying on discredited and openly anti-scientific assumptions or hypothesis.
Examples include, but not limited to "supply side voodoo", "monetarism", "Taylor
rule", "permanent equilibrium fallacy", "invisible hand" (both as a postulate about
absence of manipulation of the markets and the idea that "free markets lead to efficient
outcomes" disregarding the role of government and almost permanent government intervention
as well as issues of economic rent and taxation of participants to support an aristocracy
or oligarchy).
the search for a macroeconomic theory founded on (roughly) neoclassical
micro, which has been the main direction of macro research for 40 years
or so, was a wrong turning, forcing us to retrace our steps and look for
another route.
Think Lucas and Prescott as Mirror-Moses, leading gullible Macroites further
and further from the Promised Land, themselves evermore unable to ask for directions.*
Couldn't have said it better, or with so few expletives, myself. But then, that's
why he has a book contract.
Don’t try to legislate on the market; it is stronger than our puny laws.
It is omnipotent
Don’ try to regulate outcomes, the market with input from all of its participants
always knows best. It is omniscient
Do the right things and the market will reward you, the wrong things and
you’ll be punished. It is beneficent
Omnipotence, omniscience and beneficence are the attributes of a god, not
a mere device for buying, selling and exchanging. - A strange deity that abhors
morality and where even the most atheistic libertarians have been suckered into
believing in the market’s "invisible hands" like multiple Holy Ghosts.
The "Chicago School" is perhaps one of the better known American "schools"
of economics. In its strictest sense, the "Chicago School"
refers to the approach of the members of the Department of Economics at the
University of Chicago over the past century. In a looser sense, the term
"Chicago School" is associated with a particular brand of economics which adheres
strictly to Neoclassical
price theory in its economic analysis, "free market" libertarianism in much
of its policy work and a methodology which is relatively averse to too much
mathematical formalism and willing to forego careful general equilibrium reasoning
in favor of more results-oriented partial equilibrium analysis. In recent
years, the "Chicago School" has been associated with "economic imperialism",
i.e. the application of economic reasoning to areas traditionally considered
the prerogative of other fields such as political science, legal theory, history
and sociology.
The "Chicago School" has had various phases with quite different characteristics.
Nonetheless, the main consistent factor seems to be that it has always held
a unique,distinct and influential place in the realm of economics at any time.
In the modern day, under the "Chicago School" umbrella, we can count various
further schools of thought which are discussed in more detail elsewhere:
e.g. Monetarism
in the 1960s,
New Classical/Real
Business Cycle macroeconomics from the 1970s until today, and more recently,
the
New Institutionalism,
New
Economic History and
Law-and-Economics
movements.
The University of Chicago was founded in 1892 by oil magnate John D. Rockefeller.
Its initial economics department, under the leadership of the American
apologist,
J. Laurence
Laughlin, counted radical American
Institutionalists
such as Thorstein
Veblen,
Wesley Mitchell
and John Maurice
Clark
among its faculty. In this period, the department was like any other in
the United States.
The "Chicago School" really began in the 1920s with the diumvurate of Frank
H. Knight
and Jacob Viner.
They were, for the most part, theoreticians (Knight more in the
Jevonian-Austrian
tradition, Viner leaning towards the
Marshallian).
In an age when empiricism ruled most of American economics, Knight and Viner
set up the economics department at Chicago as a bastion of counter-institutionalism
and, as such, the department soon acquired something of a "siege" mentality.
Also at Chicago during this time were the "Mathematical Trio" --
Oskar Lange,
Henry Schultz
and Paul H.
Douglas
-- economists with a particular bent for the theoretical approach of the
Lausanne School.
Younger faculty included monetary theorists Henry C.
Simons and Lloyd
Mints.
The characteristics of the early Chicago School of 1920-1950 differ considerably
from the later Chicago School. They were highly suspicious of "positivistic"
economic methodology and denounced economic imperialism, arguing for a confined
role for economic analysis (esp. Knight). They were suspicious of the
efficiency claims of laissez-faire economics, arguing for it only on
a "non-consequential" basis. They welcomed active government policies
to cure recessions (esp. Viner's recommendations on "reinflating" the economy,
and Simons's "Chicago
Plan" for counter-cyclical monetary policy), and counted a fully-fledged
socialist in their ranks (Lange). Furthermore, most of the faculty
was not averse to rigorous, theoretical general equilibrium reasoning,
but were leading practitioners of the art (Lange, Schultz, Douglas).
However, like the later Chicago School, the early Chicago School
was hostile to "alternative" economic paradigms. For the most part, they
did not welcome the
Keynesian
Revolution in macroeconomics and denounced the
Monopolistic
Competition approach in microeconomic theory. To a good extent, the
issues these "alternative" paradigms purported to solve, they felt could be
handled reasonably well within the confines of Neoclassical theory.
The economics department underwent an upheaval during the 1940s. Schultz
died with tragic suddenness, Viner left for Princeton, Lange left for political
life in Poland and Douglas became a U.S. Senator. Knight, whose interests
were moving away from economic theory, went into semi-retirement, handing the
reigns of the department over to Simons, Mints and Director.
There was a new injection of blood during this period as the department tried
to regain its bearings. The first lurch was towards
Walrasian
economics. Several students associated with the departed Lange and Schultz
remained -- such as
Yntema
and Mosak
-- and Chicago went on to welcome Jacob
Marschak,
Tjalling
Koopmans and the the
Cowles Commission
right next door. The Walrasian period lasted until 1955, when it moved
(was hounded off?) to Yale.
The 1940s also saw the appointment of development theorists H.
Gregg Lewis
and Bert F.
Hoselitz.
These appointments were accompanied by a group of agricultural economists, Theodore
W. Schultz,
D. Gale Johnson
and Walter Nicholls, who had been left Iowa State in protest over one of the
most famous violations of academic freedom. Apparently, the powers-that-be of
Iowa, home of the American dairy industry, had pressured the university to force
a young economist to recant a study in which he had concluded that margarine
was no less nutritious than butter.
In the 1960s, the department began to congeal into a new shape, led by George
J. Stigler
and Milton
Friedman.
This is what became the "Second" Chicago School, which is perhaps the most famous
and polemical one. Stigler and Friedman were avowed
Marshallians,
and eschewed the methodology of the now-departed Walrasians of the Cowles Commission.
As the contemporary ditty went:
"I read my Marshall completely through
From beginning to end and backward too
I read my Marshall so carefully
That now I am Professor at U of C".
The Stigler-Friedman period was characterized by faithful adherence to Neoclassical
economics and maintained itself dead against the concept of market failures,
reinforcing the Chicago School stance against
imperfect
competition and
Keynesian
economics. Through their influential journals -- notably, the
Journal of Political
Economy and the
Journal of Law and
Economics -- the research programme of the Chicago School was advanced
and diffused. It was the Second Chicago School that is often accused of
being the modern version of
Manchester
School liberalism (or, as some maintain, the more conservative tradition
of
American apologism).
In microeconomics, led by George
Stigler,
the guiding maxim in the Chicago approach was to preserve the Neoclassical paradigm
whenever possible, never to doubt it. When there is no obvious solution to a
particular problem, the recommended course was to extend the Neoclassical paradigm
by incorporating new concepts into it that would make the subject matter amenable
to economic analysis. Examples of extensions to the Neoclassical paradigm conceived
by Chicago economists are search theory (due to George
Stigler),
human capital theory (due to Gary
Becker
and T.W.
Schultz) and property rights/transaction cost theory (due to Ronald H.
Coase).
The Chicago School's impulse for extension of Neoclassical price theory is
largely responsible for the "imperialist" character of which it is often accused.
Business
and finance, previously the prerogative of practitioners and business schools,
were brought into the economic spotlight by Chicago economists such as A.W.
Wallis,
Harry Markowitz,
Merton H. Miller
and Eugene F.
Fama. Further afield, political science and institutional theory were
brought into Neoclassical economics by Chicago School economists such as G.J.
Stigler,
R.H. Coase,
James Buchanan,
Armen Alchian
and Harold
Demsetz. Economic history were given a Neoclassical reading by Robert
W. Fogel
and Douglas C.
North,
while the Chicago Law School (esp. Richard
Posner
and William M.
Landes)
used economics to rethink swathes of legal theory. Perhaps most famously,
sociological issues like addiction, family and even marriage were given a thoroughly
economic interpretation in the hands of Gary S.
Becker
and Jacob Mincer.
[Naturally, not all the "Chicago School" economists are at the University
of Chicago, e.g. Alchian, Mincer, North, etc., but it is not unreasonable to
argue that they are part of that school of thought.]
[George P. Shultz, better known as the Secretary of Labor and subsequently
of the Treasury under Richard Nixon and later Secretary of State under Ronald
Reagan, Shultz was also professor of industrial relations and later dean of
the Business School at Chicago during the 1960s.]
[It is revealing that the adamantly anti-imperialist Friedrich A.
von Hayek,
who was at Chicago during the 1950s, was confined to an appointment on an interdisciplinary
"Committee on Social Thought", rather than the economics department proper.
Walrasian theory, which has tended to be of more limited scope, has also had
very little presence at Chicago over the past half-century: the only theorist
to have successfully infiltrated the Chicago citadel was Hugo
Sonnenschein,
but then he came as president of the university. With the exception of
the work of Lester
Telser,
the "alternative" paradigm of
game theory
has also been conspicuously absent until recently.]
In macroeconomics, the most renowned phase of the Chicago School has been
that of "Monetarism"
under the leadership of Milton
Friedman,
its best-known advocate. For the longest time, Chicago was the only school in
America not swept by the
Keynesian
Revolution (the presence of Lloyd A.
Metzler
for a brief period on the faculty was exceptional). This does not mean that
the old Chicago School was opposed to government intervention - indeed, Viner's
policy conclusions are at times hard to distinguish from
Keynes's.
But in Friedman'sMonetarism, it found a theoretical and empirical means by which to begin rolling
back the Keynesian revolution. Although prominent in the 1960s, Friedman has
always claimed that the main tenets of Monetarism can be found in the work of
early Chicago School economists such as Henry
Simons.
(see our
survey of Monetarism).
Monetarism has since given way to the more mathematically rigorous
"New Classical"
economics of Robert E.
Lucas in
the 1970s and 1980s. The quantitatively-oriented "Walrasian" flavor of
New Classicism meant that the appointments of Robert
Lucas, Thomas
Sargent,
Michael Woodford and Robert
Townsend
at Chicago met with quite some opposition from the older hands. Nonetheless,
in its policy conclusions and rigorous adherence to Neoclassical theory, the
New Classical school remains by most accounts the natural inheritor of the Chicago
School mantle in modern macroeconomics.
Despite, or perhaps as a result of, its mischievous but always unique perspective,
the University of Chicago has taken in a lion's share of
Nobel Prizes
in economics: Milton
Friedman,
T.W. Schultz,
G.J.Stigler,
R.H. Coase,
G.S. Becker,
M.H. Miller,
R.W. Fogel
and R.E.Lucas
were all on the Chicago faculty when they received their awards. If we
were to add Chicago-trained economists, the list of Nobelists would expand
to include Hebert
Simon, James
Buchanan,
Harry Markowitz
and Myron
Scholes.
"The Influence of Dumping on Monopoly Price", 1928, JPE
A Mathematical Refomulation of the General Theory of International
Trade, 1932.
Student of
Schultz
whose dissertation (1932) proved instrumental to the theory of international
trade, subsequently taking an appointment as professor of statistics
at Chicago Business School. Director of the
Cowles
Commission from 1937 to 1943. In 1949, he joined the finance department
at Ford Motor Corp.
One of the first deans of Chicago's Graduate School of Business,
later Chancellor of the University of Rochester and presently the eminence
grise at the American Enterprise Institute.
Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers
ability to create money.
"Simons envisioned banks that would have a choice of two types of holdings: long-term
bonds and cash. Simultaneously, they would hold increased reserves, up to 100%. Simons saw
this as beneficial in that its ultimate consequences would be the prevention of
"bank-financed inflation of securities and real estate" through the leveraged creation of
secondary forms of money."
Bankers do need to ensure the money they lend out gets paid back to balance their
books.
Banking requires prudent lending.
If someone can't repay a loan, they need to repossess that asset and sell it to recoup
that money.
If they use bank loans to inflate asset prices they get into a world of trouble when
those asset prices collapse.
As the real estate and stock market collapsed the banks became insolvent as their assets
didn't cover their liabilities.
They could no longer repossess and sell those assets to cover the outstanding loans and
they do need to get the money they lend out back again to balance their books.
The banks become insolvent and collapsed, along with the US economy.
When banks have been lending to inflate asset prices the financial system is in a
precarious state and can easily collapse.
Cont ......
Sound of the Suburbs 2 hours ago
That was the 1920s.
What was the ponzi scheme of inflated asset prices that collapsed in Japan in 1991?
Japanese real estate.
They avoided a Great Depression by saving the banks.
They killed growth for the next 30 years by leaving the debt in place.
Japan could study the Great Depression to avoid this fate.
What was the ponzi scheme of inflated asset prices that collapsed in 2008?
"It's nearly $14 trillion pyramid of super leveraged toxic assets was built on the back
of $1.4 trillion of US sub-prime loans, and dispersed throughout the world" All the
Presidents Bankers, Nomi Prins.
We avoided a Great Depression by saving the banks.
We left Western economies struggling by leaving the debt in place, just like Japan.
It's not as bad as Japan as we didn't let asset prices crash in the West, but it is this
problem has made our economies so sluggish since 2008.
We, in turn, seem to have learnt something from Japan, as they did let asset prices
crash.
The banking system and the markets are still closely coupled.
Any significant fall in asset prices will feed back into the banking system.
We are trapped, and the only way to keep things from collapsing is to keep pumping in
more and more liquidity.
It's a choice
Let the assets bubbles collapse, and watch this feed back into the financial
system.
Keep the whole thing afloat, but make things worse in the long run as the bubbles
just get bigger and bigger.
We've gone for option two.
That's why the FED get so jittery when the markets start to fall.
During the coronavirus lockdowns there was no way the markets could be allowed to
reflect what was going on in the real economy.
The banking system would go down.
Sound of the Suburbs 1 hour ago remove link
They learnt from the mistakes of the 1920s and put regulations in place to ensure this
didn't happen again.
Financial stability arrived in the Keynesian era and was locked into the regulations of
the time.
"This Time is Different" by Reinhart and Rogoff has a graph showing the same thing
(Figure 13.1 - The proportion of countries with banking crises, 1900-2008).
Neoclassical economics came back and so did the financial crises.
The neoliberals removed the regulations that created financial stability in the
Keynesian era and put independent central banks in charge of financial stability.
Why does it go so wrong?
Richard Vague had noticed real estate lending balloon from 5 trillion to 10 trillion
from 2001 – 2007 and knew there was going to be a financial crisis.
Richard Vague has looked at the data for financial crises going back 200 years and found
the cause was nearly always runaway bank lending.
We put central bankers in charge of financial stability, but they use an economics that
ignores the main cause of financial crises, private debt.
Most of the problems are coming from private debt.
The technocrats use an economics that ignores private debt.
The poor old technocrats never really stood a chance.
The globalists found just the economics they were looking for.
The USP of neoclassical economics – It concentrates wealth.
Let's use it for globalisation.
Mariner Eccles, FED chair 1934 – 48, observed what the capital accumulation of
neoclassical economics did to the US economy in the 1920s. "a giant suction pump had by 1929 to 1930 drawn into a few hands an increasing proportion
of currently produced wealth. This served then as capital accumulations. But by taking
purchasing power out of the hands of mass consumers, the savers denied themselves the kind of
effective demand for their products which would justify reinvestment of the capital
accumulation in new plants. In consequence as in a poker game where the chips were
concentrated in fewer and fewer hands, the other fellows could stay in the game only by
borrowing. When the credit ran out, the game stopped"
This is what it's supposed to be like.
A few people have all the money and everyone else gets by on debt.
I've been following her work for several months now and think her premises much sounder
than Matthew Ehret's, who are actually on the same Canadian team. Generally, the three of us
are working on exposing the rise and spread of what's now known as Neoliberalism. And of
course, there's Dr. Hudson who's ahead of us all.
The line of investigation initiated by Upton Sinclair into the shared Board memberships at
key elite universities within the USA that erased the traditional teaching of
political-economy and replaced it with the mathematical economics which lie at the root of
Neoliberalism's Junk Economics
I see as very promising as they're also prominent bankers and Old Money with social
connections to England's Royalty and Nobility--the primary members of Europe's Rentier
Class . When I look over the comments, many have forgotten just what Class owns the
Duopoly and controls the federal government. Trump was never allowed into their circle but
was used by some of its members in the pursuit of interests that are still shrouded in fog.
My working hypothesis there is they were quite worried that too much industrial capacity had
been foreclosed and moved such that it caused a real threat to national security; thus the
need for MAGA.
With the rise of the Eurasian Bloc, the "threat" isn't military; it's economic. As I wrote
earlier today, an economy based on consumerism will collapse when the consumers can no longer
consume. Hudson's 100% correct that debt's that can't be repaid won't. The current degree of
economic polarization is miniscule compared to what might ensue if the Bidenites don't
forestall it--200 Million people bankrupt while 100 Million have good paying jobs and can
afford their debts--the remaining 40-50 Million are mostly impoverished children. This time
the part of the public that gets shafted as in 2009 under Obama isn't going to sit still, and
what happened in DC will be repeated elsewhere with meaning this time. A genuine MAGA Fascist
wanting control will need to disarm the Rentier Class and the Swamp thus ousting the
current "Friendly Fascist" regime--and that would require a paramilitary since that's
basically what composes the Swamp--Civil War between two Factions of Reaction that would also
split the military. Wonder what barflies think of all that?
Earlier in the week I linked to the latest Renegade Inc program which had Dr.
Hudson as one of the guests. That show's
transcript is now available. Here's an excerpt with Ross Ashcroft asking a question:
"Ross: What do you think are the megatrends that we should be looking at in 2021? What do
you think is the direction of travel, if you like, for so-called developed economies?
"Michael Hudson: Well, the big trend in any economy is the growth of debt, because the
debt grows exponentially. The economy has painted itself into a debt corner. We can see that
in real estate. We can see that for small business. There's also almost no way to recover.
The Federal Reserve has been printing quantitative easing to keep stock and bonds high. But
for the real economy, the trend is polarization and lower employment.
"The trend also is that state and local finances are broke, especially in the biggest
cities, New York City, San Francisco and Los Angeles. They're not getting income tax revenue
from the unemployed or closed businesses. They're not getting the real estate tax with so
many defaults and mortgage arrears. In New York City there's talk of cutting back the subways
by 70 percent. People will be afraid to take the subways when they're overcrowded with people
with the virus. So you're having a breakdown not only in state and local finances, but of
public services that are state run – public transportation services, health services,
education is being downsized. Everything that is funded out of state and local budgets is
going to suffer.
"And living standards are going to be very sharply downward as people realize how many
services they got are dependent on public infrastructure."
And this one I must also include:
"Ross: What is the one thing that has really surprised you in 2020? What have you laughed
at? What has given you a chuckle?
"Michael Hudson: The surprise – that I really shouldn't have been surprised at
– is how naive Bernie Sanders supporters were in thinking that they were going to get a
fair deal and that the elections were going to be fair. The illusion is that people were
actually going to have a fair election when the last thing the vested interests wanted was
Bernie Sanders or Elizabeth Warren or any kind of reformer. So what happened to Sanders is
what happened to Corbyn in Britain and the Labour Party's neoliberal leadership.
"So what's for laughs? I guess, Tulsi Gabbard's takedown of Kamala Harris was absolutely
wonderful. Everybody just broke out laughing, cheering for her. And of course, that's why she
was marginalized, and now we have Kamala Harris as the senior vice president."
Of course, none of the dire economic news is being reported with the focus instead on Wall
Street's markets, with much of the public just as brainwashed about it as Trump. The last
third focuses on politics, which is what most barflies want to read about. So, click the link
and read what Dr. Hudson sees in the tea leaves.
In a sense the USA is a theocratic society with neoliberal religion as the state religion. Not that different from the
USSR whioch also was a theocratic society with some perversion of Marxism as the state religion.
I capitulate. Ron you are correct, we are post peak.
Post Peak
OK, now what?
It is so strange to be post-peak and not have high prices for crude,
and food.
I guess that will be coming.
note- biofuels should not be counted in liquids tally. It is a different animal, with the
source being dependent on farming and soil, not drilling and geology. Just because ethanol is
used for propulsion shouldn't matter- electrons and batteries aren't counted either, and
rightly so. Those belong in a different category- transportation energy.
I have argued for several years that peak oil is a low price phenomenon, not a high priced
phenomenon.
The most overrated law in economics is that of supply and demand. This law suffers from
what Richard Feynman called "vagueness" (see https://www.youtube.com/watch?v=EYPapE-3FRw
). The problem is that it is always satisfied and hence gives absolutely no information about
prices.
Another problem with market theory (beyond vagueness) is that it lacks a time axis.
The theory states that the relationship between price and supply moves along the demand
curve, but doesn't say how fast, just that "in the long run" the system will reach
equilibrium. Being in equilibrium means being somewhere on the demand curve.
So for example, if prices go up, the demand quantity is expected to go down. The question
is when.
Where does this go wrong? In classical market theory, for example, unemployment is
impossible, because if labor supply outstrips demand prices (wages) should fall until until
equilibrium is attained. This has been observed to be false on many occasions, including
right now.
As Feymann states in the video, "If it disagrees with experiment, it's WRONG! That's all
there is to it." Classical economics isn't just too vague, it is wrong.
Keynes joked about this that in the long term we'll all be dead. He meant equilibrium will
never be reached, so we are never on the demand curve. He argued that "sticky prices",
meaning the unwillingness to accept pay cuts, kept labor markets permanently out of
equilibrium.
It's worth pondering whether oil prices are "sticky" as well. Saying yes is saying the law
of supply and demand doesn't apply (in the short term). This year we have seen that both
OPEC's politicking and panicky traders can cause wild swings in price unrelated to supply and
demand.
Where market theory is vague is the shape of the demand curve. For example, if oil supply
can't meet demand in the near future, as some here have posited, how high will prices go?
Some claim it will go over $200, as people get desperate for it. Some claim that higher
prices would increase efforts to find and drill more, putting a lid on prices. Some claim the
shortage would crash the world economy, depressing prices. Some claim that faced with oil
shortages, the world would simply switch to EVs, or stop wasting the gunk on poorly designed
transportation systems, so prices would stay more or less the same.
Who is right? Nobody knows. So we don't know the shape of the demand curve. The theory is
hopelessly vague.
I have argued for several years that peak oil is a low price phenomenon, not a high
priced phenomenon.
Schinzy,
The price of crude oil is only part of the Peakoil phenomenon. How much is left in the
ground counts, however more important is at which velocity the remaining Gb can be
extracted. I am not a geologist, but common sense says that when an oilfield is well depleted
(50-70%) the most of the remaining barrels will be extracted at a much lower speed, even at
very high oilprices. With secondary and tertiary EOR technology most conventional oilfields
will not produce the same or close to the same amount of barrels/day as before for many more
years. That's also my conclusion from what I have read more than a decade ago.
Of course with high oilprices new, relatively small, oil fields will come online and (more
advanced) EOR will start in other fields, but no matter how you look at it: depletion never
stops. With most oilfields in the world past-peak, only a tremendous amount of money (needed
to develop EOR) can prevent world crude oilproduction from falling like a rock. And all those
EOR technologies will deplete oilfields faster. Big gains in the beginning, more
disappointments later.
Will there be significant amount of shale oil developed in the future in other countries than
the U.S. ? If so, is that wise, regarding an already existing runaway climate change ?
I capitulate. Ron you are correct, we are post peak.
Post Peak
OK, now what?
It is so strange to be post-peak and not have high prices for crude,
and food.
I guess that will be coming.
NOTE:
biofuels should not be counted in liquids tally. It is a different animal, with the
source being dependent on farming and soil, not drilling and geology.
Just because ethanol is
used for propulsion shouldn't matter -- electrons and batteries aren't counted either, and
rightly so. Those belong in a different category- transportation energy.
I have argued for several years that peak oil is a low price phenomenon, not a high priced
phenomenon.
The most overrated law in economics is that of supply and demand. This law suffers from
what Richard Feynman called "vagueness" (see https://www.youtube.com/watch?v=EYPapE-3FRw
). The problem is that it is always satisfied and hence gives absolutely no information about
prices.
Another problem with market theory (beyond vagueness) is that it lacks a time axis. The theory states that the relationship between price and supply moves along the demand
curve, but doesn't say how fast, just that "in the long run" the system will reach
equilibrium. Being in equilibrium means being somewhere on the demand curve.
So for example, if prices go up, the demand quantity is expected to go down. The question
is when.
Where does this go wrong? In classical market theory, for example, unemployment is
impossible, because if labor supply outstrips demand prices (wages) should fall until until
equilibrium is attained. This has been observed to be false on many occasions, including
right now.
As Feymann states in the video, "If it disagrees with experiment, it's WRONG! That's all
there is to it." Classical economics isn't just too vague, it is wrong.
Keynes joked about this that in the long term we'll all be dead. He meant equilibrium will
never be reached, so we are never on the demand curve. He argued that "sticky prices",
meaning the unwillingness to accept pay cuts, kept labor markets permanently out of
equilibrium.
It's worth pondering whether oil prices are "sticky" as well. Saying yes is saying the law
of supply and demand doesn't apply (in the short term). This year we have seen that both
OPEC's politicking and panicky traders can cause wild swings in price unrelated to supply and
demand.
Where market theory is vague is the shape of the demand curve. For example, if oil supply
can't meet demand in the near future, as some here have posited, how high will prices go?
Some claim it will go over $200, as people get desperate for it. Some claim that higher
prices would increase efforts to find and drill more, putting a lid on prices. Some claim the
shortage would crash the world economy, depressing prices. Some claim that faced with oil
shortages, the world would simply switch to EVs, or stop wasting the gunk on poorly designed
transportation systems, so prices would stay more or less the same.
Who is right? Nobody knows. So we don't know the shape of the demand curve. The theory is
hopelessly vague.
I have argued for several years that peak oil is a low price phenomenon, not a high
priced phenomenon.
Schinzy,
The price of crude oil is only part of the Peakoil phenomenon.
How much is left in the
ground counts, however more important is at which velocity the remaining Gb can be
extracted. I am not a geologist, but common sense says that when an oilfield is well depleted
(50-70%) the most of the remaining barrels will be extracted at a much lower speed, even at
very high oilprices.
With secondary and tertiary EOR technology most conventional oilfields
will not produce the same or close to the same amount of barrels/day as before for many more
years. That's also my conclusion from what I have read more than a decade ago.
Of course with high oilprices new, relatively small, oil fields will come online and (more
advanced) EOR will start in other fields, but no matter how you look at it: depletion never
stops.
With most oilfields in the world past-peak, only a tremendous amount of money (needed
to develop EOR) can prevent world crude oil production from falling like a rock. And all those
EOR technologies will deplete oilfields faster.
Big gains in the beginning, more
disappointments later.
Will there be significant amount of shale oil developed in the future in other countries than
the U.S. ? If so, is that wise, regarding an already existing runaway climate change ?
@ThreeCranes trol -- China had already agreed to play ball, but was still gathering the
infrastructure. S. Korea and a few other nations took the work in the meantime.
Meantime, as Sam Francis (RIP) noted in the early nineties, Main Street USA turned into
dollar stores and flea markets and retail dumps and fast food pits.
Yes, nations that make things control the future. They also develop consumer economies.
Thus in a few more years stuff made in China be beyond the price range of the average
American.
A strange mixture of Black nationalism with Black Bolshevism is a very interesting and pretty alarming phenomenon. It proved to
be a pretty toxic mix. But it is far from being new. We saw how the Eugène Pottier famous song
International lines "We have been naught we
shall be all." and "Servile masses arise, arise." unfolded before under Stalinism in Soviet Russia.
We also saw Lysenkoism in Academia before, and it was not a pretty picture. Some Russian/Soviet scientists such as Academician Vavilov
paid with their life for the sin of not being politically correct. From this letter it is clear that the some departments
already reached the stage tragically close to that situation.
Lysenkoism was "politically correct" (a term invented by Lenin) because it was consistent with the broader Marxist doctrine.
Marxists wanted to believe that heredity had a limited role even among humans, and that human characteristics changed by living
under socialism would be inherited by subsequent generations of humans. Thus would be created the selfless new Soviet man
"Lysenko was consequently embraced and lionized by the Soviet media propaganda machine. Scientists who promoted Lysenkoism with
faked data and destroyed counterevidence were favored with government funding and official recognition and award. Lysenko and his
followers and media acolytes responded to critics by impugning their motives, and denouncing them as bourgeois fascists resisting
the advance of the new modern Marxism."
The Disgraceful Episode Of Lysenkoism Brings Us Global Warming Theory
Notable quotes:
"... In the extended links and resources you provided, I could not find a single instance of substantial counter-argument or alternative narrative to explain the under-representation of black individuals in academia or their over-representation in the criminal justice system. ..."
"... any cogent objections to this thesis have been raised by sober voices, including from within the black community itself, such as Thomas Sowell and Wilfred Reilly. These people are not racists or 'Uncle Toms'. They are intelligent scholars who reject a narrative that strips black people of agency and systematically externalizes the problems of the black community onto outsiders . Their view is entirely absent from the departmental and UCB-wide communiques. ..."
"... The claim that the difficulties that the black community faces are entirely causally explained by exogenous factors in the form of white systemic racism, white supremacy, and other forms of white discrimination remains a problematic hypothesis that should be vigorously challenged by historians ..."
"... Would we characterize criminal justice as a systemically misandrist conspiracy against innocent American men? I hope you see that this type of reasoning is flawed, and requires a significant suspension of our rational faculties. Black people are not incarcerated at higher rates than their involvement in violent crime would predict . This fact has been demonstrated multiple times across multiple jurisdictions in multiple countries. ..."
"... If we claim that the criminal justice system is white-supremacist, why is it that Asian Americans, Indian Americans, and Nigerian Americans are incarcerated at vastly lower rates than white Americans? ..."
"... Increasingly, we are being called upon to comply and subscribe to BLM's problematic view of history , and the department is being presented as unified on the matter. In particular, ethnic minorities are being aggressively marshaled into a single position. Any apparent unity is surely a function of the fact that dissent could almost certainly lead to expulsion or cancellation for those of us in a precarious position , which is no small number. ..."
"... The vast majority of violence visited on the black community is committed by black people . There are virtually no marches for these invisible victims, no public silences, no heartfelt letters from the UC regents, deans, and departmental heads. The message is clear: Black lives only matter when whites take them. Black violence is expected and insoluble, while white violence requires explanation and demands solution. Please look into your hearts and see how monstrously bigoted this formulation truly is. ..."
"... The claim that black intraracial violence is the product of redlining, slavery, and other injustices is a largely historical claim. It is for historians, therefore, to explain why Japanese internment or the massacre of European Jewry hasn't led to equivalent rates of dysfunction and low SES performance among Japanese and Jewish Americans respectively. ..."
"... Arab Americans have been viciously demonized since 9/11, as have Chinese Americans more recently. However, both groups outperform white Americans on nearly all SES indices - as do Nigerian Americans , who incidentally have black skin. It is for historians to point out and discuss these anomalies. However, no real discussion is possible in the current climate at our department . The explanation is provided to us, disagreement with it is racist, and the job of historians is to further explore additional ways in which the explanation is additionally correct. This is a mockery of the historical profession. ..."
"... Donating to BLM today is to indirectly donate to Joe Biden's 2020 campaign. This is grotesque given the fact that the American cities with the worst rates of black-on-black violence and police-on-black violence are overwhelmingly Democrat-run. Minneapolis itself has been entirely in the hands of Democrats for over five decades ; the 'systemic racism' there was built by successive Democrat administrations. ..."
"... The total alliance of major corporations involved in human exploitation with BLM should be a warning flag to us, and yet this damning evidence goes unnoticed, purposefully ignored, or perversely celebrated. We are the useful idiots of the wealthiest classes , carrying water for Jeff Bezos and other actual, real, modern-day slavers. Starbucks, an organisation using literal black slaves in its coffee plantation suppliers, is in favor of BLM. Sony, an organisation using cobalt mined by yet more literal black slaves, many of whom are children, is in favor of BLM. And so, apparently, are we. The absence of counter-narrative enables this obscenity. Fiat lux, indeed. ..."
"... MLK would likely be called an Uncle Tom if he spoke on our campus today . We are training leaders who intend, explicitly, to destroy one of the only truly successful ethnically diverse societies in modern history. As the PRC, an ethnonationalist and aggressively racially chauvinist national polity with null immigration and no concept of jus solis increasingly presents itself as the global political alternative to the US, I ask you: Is this wise? Are we really doing the right thing? ..."
I am one of your colleagues at the University of California, Berkeley. I have met you both personally but do not know you closely,
and am contacting you anonymously, with apologies. I am worried that writing this email publicly might lead to me losing my job,
and likely all future jobs in my field.
In your recent departmental emails you mentioned our pledge to diversity, but I am increasingly alarmed by the absence of diversity
of opinion on the topic of the recent protests and our community response to them.
In the extended links and resources you provided, I could not find a single instance of substantial counter-argument or alternative
narrative to explain the under-representation of black individuals in academia or their over-representation in the criminal justice
system. The explanation provided in your documentation, to the near exclusion of all others, is univariate: the problems of
the black community are caused by whites, or, when whites are not physically present, by the infiltration of white supremacy and
white systemic racism into American brains, souls, and institutions.
Many cogent objections to this thesis have been raised by sober voices, including from within the black community itself,
such as Thomas Sowell and Wilfred Reilly. These people are not racists or 'Uncle Toms'. They are intelligent scholars who reject
a narrative that strips black people of agency and systematically externalizes the problems of the black community onto outsiders
. Their view is entirely absent from the departmental and UCB-wide communiques.
The claim that the difficulties that the black community faces are entirely causally explained by exogenous factors in the
form of white systemic racism, white supremacy, and other forms of white discrimination remains a problematic hypothesis that should
be vigorously challenged by historians . Instead, it is being treated as an axiomatic and actionable truth without serious consideration
of its profound flaws, or its worrying implication of total black impotence. This hypothesis is transforming our institution and
our culture, without any space for dissent outside of a tightly policed, narrow discourse.
A counternarrative exists. If you have time, please consider examining some of the documents I attach at the end of this email.
Overwhelmingly, the reasoning provided by BLM and allies is either primarily anecdotal (as in the case with the bulk of Ta-Nehisi
Coates' undeniably moving article) or it is transparently motivated. As an example of the latter problem, consider the proportion
of black incarcerated Americans. This proportion is often used to characterize the criminal justice system as anti-black. However,
if we use the precise same methodology, we would have to conclude that the criminal justice system is even more anti-male than it
is anti-black .
Would we characterize criminal justice as a systemically misandrist conspiracy against innocent American men? I hope you see
that this type of reasoning is flawed, and requires a significant suspension of our rational faculties. Black people are not incarcerated
at higher rates than their involvement in violent crime would predict . This fact has been demonstrated multiple times across multiple
jurisdictions in multiple countries.
And yet, I see my department uncritically reproducing a narrative that diminishes black agency in favor of a white-centric explanation
that appeals to the department's apparent desire to shoulder the 'white man's burden' and to promote a narrative of white guilt .
If we claim that the criminal justice system is white-supremacist, why is it that Asian Americans, Indian Americans, and Nigerian
Americans are incarcerated at vastly lower rates than white Americans? This is a funny sort of white supremacy. Even Jewish
Americans are incarcerated less than gentile whites. I think it's fair to say that your average white supremacist disapproves of
Jews. And yet, these alleged white supremacists incarcerate gentiles at vastly higher rates than Jews. None of this is addressed
in your literature. None of this is explained, beyond hand-waving and ad hominems. "Those are racist dogwhistles". "The model minority
myth is white supremacist". "Only fascists talk about black-on-black crime", ad nauseam.
These types of statements do not amount to counterarguments: they are simply arbitrary offensive classifications, intended to
silence and oppress discourse . Any serious historian will recognize these for the silencing orthodoxy tactics they are , common
to suppressive regimes, doctrines, and religions throughout time and space. They are intended to crush real diversity and permanently
exile the culture of robust criticism from our department.
Increasingly, we are being called upon to comply and subscribe to BLM's problematic view of history , and the department is
being presented as unified on the matter. In particular, ethnic minorities are being aggressively marshaled into a single position.
Any apparent unity is surely a function of the fact that dissent could almost certainly lead to expulsion or cancellation for those
of us in a precarious position , which is no small number.
I personally don't dare speak out against the BLM narrative , and with this barrage of alleged unity being mass-produced by the
administration, tenured professoriat, the UC administration, corporate America, and the media, the punishment for dissent is a clear
danger at a time of widespread economic vulnerability. I am certain that if my name were attached to this email, I would lose my
job and all future jobs, even though I believe in and can justify every word I type.
The vast majority of violence visited on the black community is committed by black people . There are virtually no marches
for these invisible victims, no public silences, no heartfelt letters from the UC regents, deans, and departmental heads. The message
is clear: Black lives only matter when whites take them. Black violence is expected and insoluble, while white violence requires
explanation and demands solution. Please look into your hearts and see how monstrously bigoted this formulation truly is.
No discussion is permitted for nonblack victims of black violence, who proportionally outnumber black victims of nonblack violence.
This is especially bitter in the Bay Area, where Asian victimization by black assailants has reached epidemic proportions, to the
point that the SF police chief has advised Asians to stop hanging good-luck charms on their doors, as this attracts the attention
of (overwhelmingly black) home invaders . Home invaders like George Floyd . For this actual, lived, physically experienced reality
of violence in the USA, there are no marches, no tearful emails from departmental heads, no support from McDonald's and Wal-Mart.
For the History department, our silence is not a mere abrogation of our duty to shed light on the truth: it is a rejection of it.
The claim that black intraracial violence is the product of redlining, slavery, and other injustices is a largely historical
claim. It is for historians, therefore, to explain why Japanese internment or the massacre of European Jewry hasn't led to equivalent
rates of dysfunction and low SES performance among Japanese and Jewish Americans respectively.
Arab Americans have been viciously demonized since 9/11, as have Chinese Americans more recently. However, both groups outperform
white Americans on nearly all SES indices - as do Nigerian Americans , who incidentally have black skin. It is for historians to
point out and discuss these anomalies. However, no real discussion is possible in the current climate at our department . The explanation
is provided to us, disagreement with it is racist, and the job of historians is to further explore additional ways in which the explanation
is additionally correct. This is a mockery of the historical profession.
Most troublingly, our department appears to have been entirely captured by the interests of the Democratic National Convention,
and the Democratic Party more broadly. To explain what I mean, consider what happens if you choose to donate to Black Lives Matter,
an organization UCB History has explicitly promoted in its recent mailers. All donations to the official BLM website are immediately
redirected to ActBlue Charities , an organization primarily concerned with bankrolling election campaigns for Democrat candidates.
Donating to BLM today is to indirectly donate to Joe Biden's 2020 campaign. This is grotesque given the fact that the American
cities with the worst rates of black-on-black violence and police-on-black violence are overwhelmingly Democrat-run. Minneapolis
itself has been entirely in the hands of Democrats for over five decades ; the 'systemic racism' there was built by successive Democrat
administrations.
The patronizing and condescending attitudes of Democrat leaders towards the black community, exemplified by nearly every Biden
statement on the black race, all but guarantee a perpetual state of misery, resentment, poverty, and the attendant grievance politics
which are simultaneously annihilating American political discourse and black lives. And yet, donating to BLM is bankrolling the election
campaigns of men like Mayor Frey, who saw their cities devolve into violence . This is a grotesque capture of a good-faith movement
for necessary police reform, and of our department, by a political party. Even worse, there are virtually no avenues for dissent
in academic circles . I refuse to serve the Party, and so should you.
The total alliance of major corporations involved in human exploitation with BLM should be a warning flag to us, and yet this
damning evidence goes unnoticed, purposefully ignored, or perversely celebrated. We are the useful idiots of the wealthiest classes
, carrying water for Jeff Bezos and other actual, real, modern-day slavers. Starbucks, an organisation using literal black slaves
in its coffee plantation suppliers, is in favor of BLM. Sony, an organisation using cobalt mined by yet more literal black slaves,
many of whom are children, is in favor of BLM. And so, apparently, are we. The absence of counter-narrative enables this obscenity.
Fiat lux, indeed.
There also exists a large constituency of what can only be called 'race hustlers': hucksters of all colors who benefit from stoking
the fires of racial conflict to secure administrative jobs, charity management positions, academic jobs and advancement, or personal
political entrepreneurship.
Given the direction our history department appears to be taking far from any commitment to truth , we can regard ourselves as
a formative training institution for this brand of snake-oil salespeople. Their activities are corrosive, demolishing any hope at
harmonious racial coexistence in our nation and colonizing our political and institutional life. Many of their voices are unironically
segregationist.
MLK would likely be called an Uncle Tom if he spoke on our campus today . We are training leaders who intend, explicitly,
to destroy one of the only truly successful ethnically diverse societies in modern history. As the PRC, an ethnonationalist and aggressively
racially chauvinist national polity with null immigration and no concept of jus solis increasingly presents itself as the global
political alternative to the US, I ask you: Is this wise? Are we really doing the right thing?
As a final point, our university and department has made multiple statements celebrating and eulogizing George Floyd. Floyd was
a multiple felon who once held a pregnant black woman at gunpoint. He broke into her home with a gang of men and pointed a gun at
her pregnant stomach. He terrorized the women in his community. He sired and abandoned multiple children , playing no part in their
support or upbringing, failing one of the most basic tests of decency for a human being. He was a drug-addict and sometime drug-dealer,
a swindler who preyed upon his honest and hard-working neighbors .
And yet, the regents of UC and the historians of the UCB History department are celebrating this violent criminal, elevating his
name to virtual sainthood . A man who hurt women. A man who hurt black women. With the full collaboration of the UCB history department,
corporate America, most mainstream media outlets, and some of the wealthiest and most privileged opinion-shaping elites of the USA,
he has become a culture hero, buried in a golden casket, his (recognized) family showered with gifts and praise . Americans are being
socially pressured into kneeling for this violent, abusive misogynist . A generation of black men are being coerced into identifying
with George Floyd, the absolute worst specimen of our race and species.
I'm ashamed of my department. I would say that I'm ashamed of both of you, but perhaps you agree with me, and are simply afraid,
as I am, of the backlash of speaking the truth. It's hard to know what kneeling means, when you have to kneel to keep your job.
It shouldn't affect the strength of my argument above, but for the record, I write as a person of color . My family have been
personally victimized by men like Floyd. We are aware of the condescending depredations of the Democrat party against our race. The
humiliating assumption that we are too stupid to do STEM , that we need special help and lower requirements to get ahead in life,
is richly familiar to us. I sometimes wonder if it wouldn't be easier to deal with open fascists, who at least would be straightforward
in calling me a subhuman, and who are unlikely to share my race.
The ever-present soft bigotry of low expectations and the permanent claim that the solutions to the plight of my people rest exclusively
on the goodwill of whites rather than on our own hard work is psychologically devastating . No other group in America is systematically
demoralized in this way by its alleged allies. A whole generation of black children are being taught that only by begging and weeping
and screaming will they get handouts from guilt-ridden whites.
No message will more surely devastate their futures, especially if whites run out of guilt, or indeed if America runs out of whites.
If this had been done to Japanese Americans, or Jewish Americans, or Chinese Americans, then Chinatown and Japantown would surely
be no different to the roughest parts of Baltimore and East St. Louis today. The History department of UCB is now an integral institutional
promulgator of a destructive and denigrating fallacy about the black race.
I hope you appreciate the frustration behind this message. I do not support BLM. I do not support the Democrat grievance agenda
and the Party's uncontested capture of our department. I do not support the Party co-opting my race, as Biden recently did in his
disturbing interview, claiming that voting Democrat and being black are isomorphic. I condemn the manner of George Floyd's death
and join you in calling for greater police accountability and police reform. However, I will not pretend that George Floyd was anything
other than a violent misogynist, a brutal man who met a predictably brutal end .
I also want to protect the practice of history. Cleo is no grovelling handmaiden to politicians and corporations. Like us, she
is free. play_arrow
Blacks will always be poor and fucked in life when 75% of black infants are born to single most likely welfare dependent mothers...
And the more amount of welfare monies spent to combat poverty the worse this problem will grow...
taketheredpill , 37 minutes ago
Anonymous....
1) Is he really a Professor at Berkeley?
2) Is he really a Professor anywhere?
3) Is he really Black?
4) Is he really a He?
LEEPERMAX , 44 minutes ago
BLM is an international organization. They solicit tax free charitable donations via ActBlue. ActBlue then funnels billions
of dollars to DNC campaigns. This is a violation of campaign finance law and allows foreign influence in American elections.
CRM114 , 44 minutes ago
I've pointed this out before:
In 2015, after the Freddie Gray death Officers were hung out to dry by the Mayor of Baltimore (yes, her, the Chair of the DNC
in 2016), active policing in Baltimore basically stopped. They just count the bodies now. The clearance rate for homicides has
dropped to, well, we don't know because the Police refuse to say, but it appears to be under 15%. The homicide rate jumped 50%
almost immediately and has stayed there. 95% of homicides are black on black.
The Baltimore Sun keeps excellent records, so you can check this all for yourself.
Looking at killings by cops; if we take the worst case and exclude all the ones where the victim was armed and independent
witnesses state fired first, and assume all the others were cop murders, then there's about 1 cop murder every 3 years, which
means that since has now stopped and the homicide rate's gone up...
For every black man now not murdered by a cop, 400 more black men are murdered by other black men.
taketheredpill , 46 minutes ago
"As an example of the latter problem, consider the proportion of black incarcerated Americans. This proportion is often used
to characterize the criminal justice system as anti-black. However, if we use the precise same methodology, we would have to conclude
that the criminal justice system is even more anti-male than it is anti-black ."
It is the RATIO of UNARMED BLACK MALES KILLED to UNARMED WHITE MALES KILLED in RELATION TO % OF POPULATION. RATIO.
RATIO. UNARMED.
BLACK % POPULATION 13% BLACK % UNARMED MEN KILLED 37%
WHITE % POPULATION 74% BLACK % UNARMED MEN KILLED 45%
Is there a trend of MORE Black people being killed by police?
No. But there is an underlying difference in the numbers that is bad.
>>>>> As of 2018, Unarmed Blacks made up 36% of all people UNARMED killed by police. But black people make up 13% of the (unarmed)
population.
There's a massive Silent Majority of Americans , including black Americans, that are fed up with this absurd nonsense.
While there's a Vocal Minority of Americans : including Democrats, the media, corporations and race hustlers, that wish to
continue to promulgate a FALSE NARRATIVE into perpetuity...because it's a lucrative industry.
Gaius Konstantine , 57 minutes ago
A short while ago I had an ex friend get into it with me about how Europeans (whites), were the most destructive race on the
planet, responsible for all the world's evil. I pointed out to him that Genghis Khan, an Asian, slaughtered millions at a time
when technology made this a remarkable feat. I reminded him the Japanese gleefully killed millions in China and that the American
Indian Empires ran 24/7 human sacrifices with some also practicing cannibalism. His poor libtard brain couldn't handle the fact
that evil is a human trait, not restricted to a particular race and we parted (good riddance)
But along with evil, there is accomplishment. Europeans created Empires and pursued science, The Asians also participated in
these pursuits and even the Aztec and Inca built marvelous cities and massive states spanning vast stretches of territory. The
only race that accomplished little save entering the stone age is the Africans. Are we supposed to give them a participation trophy
to make them feel better? Is this feeling of inferiority what is truly behind their constant rage?
Police in the US have been militarized for a long time now and kill many more unarmed whites than they do blacks, where is
the outrage? I'm getting the feeling that this isn't really about George, just an excuse to do what savages do.
lwilland1012 , 1 hour ago
"Truth is treason in an empire of lies."
George Orwell
You know that the reason he is anonymous is that Berkley would strip him of his teaching credentials and there would be multiple
attempts on his life...
Ignatius , 1 hour ago
" The vast majority of violence visited on the black community is committed by black people . There are virtually no marches
for these invisible victims, no public silences, no heartfelt letters from the UC regents, deans, and departmental heads. The
message is clear: Black lives only matter when whites take them. Black violence is expected and insoluble, while white violence
requires explanation and demands solution. Please look into your hearts and see how monstrously bigoted this formulation truly
is."
A former fed who trained the police in Buffalo believes the elderly protester who was hospitalized after a cop pushed him
to the ground "got away lightly" and "took a dive," according to a report.
The retired FBI agent, Gary DiLaura,
told The Sun
he thinks there's no chance Buffalo officers will be convicted of assault over the
now-viral video showing the
longtime
peace activist Martin Gugino fall and left bleeding on the ground.
" I can't believe that they didn't deck him. If that would have been a 40-year-old guy going up there, I guarantee you they'd
have been all over him, " DiLaura said.
" He absolutely got away lightly. He got a light push and in my humble opinion, he took a dive and the dive backfired because
he hit his head. Maybe it'll knock a little bit of sense into him, " added the former fed, who trained Buffalo police on firearms
and defensive tactics, according to the report...
It's a great brainwashing process, which goes very slow[ly] and is divided [into] four basic stages. The first one [is]
demoralization ; it takes from 15-20 years to demoralize a nation. Why that many years? Because this is the minimum number
of years which [is required] to educate one generation of students in the country of your enemy, exposed to the ideology of
the enemy. In other words, Marxist-Leninist ideology is being pumped into the soft heads of at least three generations of American
students, without being challenged, or counter-balanced by the basic values of Americanism (American patriotism).
The result? The result you can see. Most of the people who graduated in the sixties (drop-outs or half-baked intellectuals)
are now occupying the positions of power in the government, civil service, business, mass media, [and the] educational system.
You are stuck with them. You cannot get rid of them. T hey are contaminated; they are programmed to think and react to certain
stimuli in a certain pattern. You cannot change their mind[s], even if you expose them to authentic information, even if you
prove that white is white and black is black, you still cannot change the basic perception and the logic of behavior. In other
words, these people... the process of demoralization is complete and irreversible. To [rid] society of these people, you need
another twenty or fifteen years to educate a new generation of patriotically-minded and common sense people, who would be acting
in favor and in the interests of United States society.
Yuri Bezmenov
American Psycho , 16 minutes ago
This article was one of the most articulate and succinct rebuttals to the BLM political power grab. I too have been calling
these "allies" useful idiots and I am happy to hear this professor doing the same. Bravo professor!
Capitalism always prevails: everything else is either a prop up or an obstacle. An
obstacle is expected to be either ignored or destroyed. In this context, there's only so
much Asian hive mind culture (fascism) can do.
Oh, and wages are also at historical lows. The Phillips Curve is a farce, neoclassical
theory is a fraud
" i listened to about 3 mins of some bill gates ted talkish thing, wondering, will these dim
bulbs ever assume responsibility for anything?
all the msm talking heads have been revealed for what they are: state propagandists. not
one krugmanian friedmanite will ever say, "I didn't see this coming and I pimped myself out
for the last 40 years selling snake oil and getting nobel prizes for it and have revealed
myself to be unqualified to turn on a light switch no matter how much money I have made and
recognition I have received. Clearly I know nothing". why would anyone listen to an msm
personality that's been sold to them as some kind of "expert"?
Neoliberal v Neoclassical economics – what's the difference?
By Claire Connelly
Economics & Finance |
Bookmark to dashboard
Neoliberalism and neo-classical economics are often terms that are used
interchangeably by various economists and financial writers, but actually, there are important differences between
the two. We've had some requests from readers to make that distinction more obvious, so here goes
Neo-classical economic theory puts 'man' as a rational human being at the heart of the
economic system, extrapolating the functions of the economy based on optimised behaviour of rational, well-informed
individuals trading with one in another in what is effectively a barter system (which as I'm sure we all know by now,
never actually existed
).
It is based on the
general equilibrium model
pioneered by late 19th century economist
Leon Walras
, of the
Lausanne School. Ironically, neoclassical economics guarantees full employment because it models a system with no
frictions or inconveniences like trade unions, minimum wage laws or imperfect information. Also false.
It also guarantees that society will find an optimal allocation of resources on its
own, so long as markets are competitive, and there are no externalities, like pollution, which go unaccounted for.
Neoclassicists are concerned about monopoly power, neoliberals are not. Neoclassicists
believe it merits government intervention and regulation. Neoliberals, do not.
It is possible to be a neoclassical without being a neoliberal.
The most important thing to understand is that neoliberalism is a post-war political
movement that grew out of
the Mont Pelerin Society
, a
thought collective that formed a consensus not to put the market at the centre of the state, but to take it over
completely. Its entire objective is to co-opt economics and subvert the public interest to suit the needs of powerful
capitalist institutions and the politicians, economists, financiers, philosophers, bankers, think-tanks and media
organisations that support them.
Neoliberalism is associated with laissez-faire economic liberalism and was pioneered by
economist Milton Friedman & Friedrich Hayeck, but as the economic historian, Philip Mirowski points out, this is a
deliberate deception to trick people into thinking it is concerned about market equilibrium.
It is the doctrine by which white collar crime has been allowed to prosper unprosecuted
while governments of wealthy nations like the US and UK have abdicated their responsibility for employment, health
care, education and the general well-being of the populations they are supposedly elected to serve. In their minds,
government exists only to maintain property rights, defend capitalists and maintain price stability, (which
apparently doesn't count as intervention when it works in the favour of the wealthy).
Unlike neoclassicists and neoliberals, heterodox economists and other post-Keynesians, reject the notion of general
equilibrium. They believe the economy evolves through non-equilibrium states over time. Heterodox economists believe
governments need to introduce instability-thwarting mechanisms to stabilise the economy, maintain full employment,
and retain social equity.
"Free-market economists may want you to believe that the correct boundaries of the
market can be scientifically determined, but this is incorrect," writes institutional economist, Ha-Joon Chang, in
his book
23 Things They Don't
Tell You About Capitalism
.
https://www.youtube.com/embed/J7m9wfFnH6o
"If the boundaries of what you are studying cannot be scientifically determined, what
you are doing is not a science," writes the Cambridge University economist.
"Recognising that the boundaries of the market are ambiguous and cannot be
determined in an objective way lets us realise that economics is not a science like physics or chemistry, but a
political exercise."
In other words, a strong economy requires constant time, attention, assessment, and
when it is called for, intervention. The rules will not always be the same, nor the causes. But it helps to start
with an understanding
of the role and purpose of
government spending
and
taxation
.
Further Listening
Listen to this interview economic historian Philip Mirowski who delves into the further
nuances of these economic mindsets.
Claire Connelly
Claire Connelly is the lead writer of Renegade Inc. An award-winning freelance journalist, speaker, and
founder of subscription journalism experiment, Hello Humans.
Specialising in economics, technology and policy, Connelly is working on her first book due out in 2018.
With more than a decade of experience under her belt, Claire has written for leading publications
including The Australian Financial Review, The Saturday Paper, ABC, SBS, Crikey, New Matilda, VICE &
others. She is the co-host of The Week In Start-Ups Australia, and features regularly as a commentator on
TV and radio shows including Radio National's Download This Show, ABC's The Drum, Ten's The Project, and
more.
Latest posts by Claire Connelly
(
see
all
)
What were Hayek's contributions to capital theory? Just wondering. I have never
encountered a single person who speaks of "neoliberalism" (a term we ourselves never use to describe what we
believe) who has read a single word of Hayek's economic work. Or who even knows who Ludwig von Mises is.
(Whenever the two economists mentioned are Milton Friedman and F.A. Hayek, I know
I'm dealing with somebody who hasn't read anything.)
Reply
But of course you have read everything and know all, right Tom ? What
specifically is wrong with this account ? If you can't dispute anything within the piece why do you attempt
to dismiss it out of hand by implying without a shred of evidence what someone has or hasn't read ? How
could you possibly know what someone has read or hasn't ?
Reply
What actually is "capital theory", Tom. Why don't you use the term
'neoliberalism?
Why do you think Claire hasn't heard of Mises and why would it be important anyway? Mises and the Austrian
School are part of the problem that the article refers to.
Reply
Sorry. I just don't believe even smart people can manage markets. That's the
nature of markets: they are individual. If you haven't read Von Mises or Hayek, you're missing out on the
thinking of two very smart people. It is hard for me to embrace the idea that – because a market doesn't seem
to function as a person might want it to – persons should be given authority to govern those markets in a way
that suits them. That, in itself, distorts the market.
Reply
I am responding to an article by you in today's The Automatic Earth about the
vengeance of capitalism. I could not get the response area to work so that is why I am coming to you this way.
You write eloquently and I see the creation of increasing suffering due to a form
of capitalism and class privilege in America and globally. I have read and listened to Keen, Hudson and Kelton.
From my review they all approach the ability of a nation that controls their own currency as an ability to
create an unlimited amount of money to use to reduce human suffering with no discussion of the ultimate end
game if we continue to do so.
There is a lot of suffering now and because of climate change, increasing
usurping of jobs by technology and global resource depletion and more a lot more suffering may be coming our
way.
How much money are they (and you) thinking of creating?
What are the implications of creating money at a much more rapid pace than we
have been with no upper limits in sight?
What are the upper limits of money creation? How would we know?
Our present system of capitalism and privilege is like a drug. It feels good at
the start but kills us in the end,
I am fearful that an addiction to the unlimited or substantial and on going use
of money created from thin air will do the same.
What say you?
PS: Please accept with compassion all the typos that are probably in this note.
Reply
You keep forgetting that having the ability to create money also gives you the
ability to destroy that same money. What is collected in tax revenue is destroyed. More money is issued to
create infrastructure. The deficit in a country that can create it's own currency is really just a ratio of
what is collected(destroyed) and what is created(spent).
Now ask yourself what happens when you quit destroying money and keep right on creating it
Reply
The aim of distinguishing neoclassical and neolilberal is of merit. The interview
with Mirowski makes clear, however, that that are numerous strands of neoliberalism that overlap with each
other, with some drawing on neoclassical arguments, and others having a different starting point. But it is not
clear to me that all of them agree on the market fundamentalism, which is generally regarded as the defining
characteristic of neoliberalism. Was Joseph Schumpeter a neoliberal? His ideas about entrepreneurship have
probably done more to make monopoly respectable than the parallel work of von Mises. Schumpeter's thought has
entered the mainstream in the U.S. via Peter Drucker, who thought the modern corporation was the engine of all
forms of human progress. In Germany, Ordo-liberalism was another form of neoliberalism that called for a strong
state. Was this self-contradiction? What I find frustrating in most discussions on the Left of these thinkers
is the inability or unwillingness to recognize the ***partial*** validity of their ideas. On the particular
subject of government interference to protect against monopoly power, it was Gabriel Kolko, a socialist, who
first showed in 1962 that Progressives were responsible for the national monopolies that emerged around 1900.
Even now, progressives fail to comprehend the many ways in which regulation benefits big business and stifles
small business. Designing regulations that do more social and environmental good than harm is much harder than
most progressives seem to recognize. Analyzing the sociology and politics of neoliberal organizations, as
Mirowski does, gets us no closer to finding way to create effective government programs that do not
simultaneously feed the leviathan of an expansive state. I would very much like to know which heterodox
economists are actually addressing the tough problems we face rather than defining the boundaries between
neoclassical thought and their own domain..
Reply
There are a very large number of errors in this piece. Fundamentally, what is
described as "neoclassical economics" is actually just one model, Walras' circa 1870 general equilibrium model.
If one defines neoclassical economics as equivalent to that one model, then there has never been a single
neoclassical economist, as absolutely no one limits attention to that one model.
The body of research most actual economists would describe as "neoclassical
economics" encompasses an enormous body of work which posits that some social phenomena can be understood as
emergent results of individual, intentional behavior. That research includes literally thousands of papers
studying the phenomena the author wrongly believes are simply excluded by assumption, such as unemployment,
unions, minimum wage laws, and imperfect information. There is an entire field, Public Economics, devoted to
the study of "the role and purpose of government spending and taxation."
The idea that government can and should "introduce instability-thwarting
mechanisms to stabilize the economy, maintain full employment, and retain social equity" is also, contrary to
the article's assumptions, very much part of mainstream, neoclassical thought, and has been for almost a
century.
After having implicitly defined mainstream economics as solely the study of a
single 1870 model, the article then also misrepresents heterodox economics. Notably, the Marxian economist
(less than 1% of all economists) such as Chang do not "reject the notion of general equilibrium". Marxian
analysis is explicitly grounded in general equilibrium, both in Marx's work and in modern neo-Marxian form, and
can be expressed in the same analytical framework as the Walrasian model (see for example:
https://www.jstor.org/stable/1911113?seq=1#page_scan_tab_contents
).
The article is correct that neoliberalism is a strain of political thought, and
not economics at all: they're not even the same type of thing, much the same thing. That's all the article
ought to say -- it gets everything about what economists think, and what neoclassical economics is, really, really
wrong.
Chris Auld
Department of Economics
University of Victoria
Reply
Most though not all mainstream economics is neoclassical economics.
Neoclassical economics is based on marginalism, or optimising behaviour,
expected utility theory, and either implicit or explicit general equilibrium analysis. The economy, in the
absence of frictions, would behave like a stable equilibrium system. In a macroeconomic sense, this is the
basis of all versions of the neoclassical synthesis, including second generation dynamic stochastic general
equilibrium models.
These models all have Walrasian and Wicksellian roots. They all assume
optimising behaviour. They always adopt the ergodic hypothesis and these days adopt rational expectations
formation. Not only that, they have all been constructed in defiance of what we know about the history and
nature of money; they all ignore ontological uncertainty, in the Keynesian sense; they all exclude genuinely
endogenous financial instability and crisis; they are biased towards an essentially technological
explanation of income distribution; they all incorporate a natural or non-accelerating inflation rate of
unemployment; they all exhibit long run money neutrality; they all incorporate an efficient markets approach
to financial markets.
There are of course elements of what some would regard these days as
mainstream economics which don't fit under the neoclassical banner. However, for the most part, mainstream =
neoclassicism.
The greatest divide between neoclassical economics and genuine (i.e. not
'new') institutional economics, is the F-twist of Milton Friedman – the notion that unrealistic axiomatic
foundations in some sense don't matter, and neither does an approach which does not naturally incorporate
realistic institutions.
Of course, economists using a neoclassical frame have things to say about
unemployment, minimum wages, etc. But, as Hyman Minsky put it, "The game of policy making is rigged; the
theory used determines the questions that are asked and the options that are presented. The prince is
constrained by the theory of his intellectuals."
You accuse the author of errors, and I think you are ungenerous – and, more
importantly – incorrect. My advice to you is to read Steve Keen's best-seller 'Debunking Economics'. You
could even read my 'Economics for Sustainable Prosperity'. If you read these two books, you will be much
more aware of the limitations of neoclassical economics, and the rich insights available from the many
economists who have worked, and who are working today, outside the neoclassical frame.
Reply
Perhaps you will find them useful in understanding why it's questionable that
neoclassical economics has anything useful to say about financial stability.
Steve Payson, an US economics practictioner of long standing, will talk about his
book 'How Economics Professors Can Stop Failing us' which provides an eye-opening expose on economics
professors that will surely shock anyone who is not familiar with the topic, and even some of those who are
familiar with it. Ellen Quigley has recently completed her research into economics education in the UK and will
provide a perspective on our local profession.
Our mission is to explain how we reached this moment in history to prevent it from
repeating itself. Again. By considering options not previously considered, readers, creators, entrepreneurs, business
and community leaders can make better, more informed and empowered decisions, so we can all begin to think differently
about our personal and public financial stability.
"... Neoliberalism and its usual prescriptions – always more markets, always less government – are in fact a perversion of mainstream economics. ..."
"... The term is used as a catchall for anything that smacks of deregulation, liberalisation, privatisation or fiscal austerity. Today it is routinely reviled as a shorthand for the ideas and practices that have produced growing economic insecurity and inequality, led to the loss of our political values and ideals, and even precipitated our current populist backlash. ..."
"... The use of the term "neoliberal" exploded in the 1990s, when it became closely associated with two developments, neither of which Peters's article had mentioned. One of these was financial deregulation, which would culminate in the 2008 financial crash and in the still-lingering euro debacle . The second was economic globalisation, which accelerated thanks to free flows of finance and to a new, more ambitious type of trade agreement. Financialisation and globalisation have become the most overt manifestations of neoliberalism in today's world. ..."
"... That neoliberalism is a slippery, shifting concept, with no explicit lobby of defenders, does not mean that it is irrelevant or unreal. Who can deny that the world has experienced a decisive shift toward markets from the 1980s on? Or that centre-left politicians – Democrats in the US, socialists and social democrats in Europe – enthusiastically adopted some of the central creeds of Thatcherism and Reaganism, such as deregulation, privatisation, financial liberalisation and individual enterprise? Much of our contemporary policy discussion remains infused with principles supposedly grounded in the concept of homo economicus , the perfectly rational human being, found in many economic theories, who always pursues his own self-interest. ..."
Neoliberalism and its usual prescriptions – always more markets, always less government – are in fact a perversion of
mainstream economics.
As even its harshest critics concede, neoliberalism is hard to pin down. In broad terms, it
denotes a preference for markets over government, economic incentives over cultural norms, and
private entrepreneurship over collective action. It has been used to describe a wide range of
phenomena – from Augusto Pinochet to Margaret Thatcher and Ronald Reagan, from the
Clinton Democrats and the UK's New Labour to the economic opening in China and the reform of
the welfare state in Sweden.
The term is used as a catchall for anything that smacks of deregulation, liberalisation,
privatisation or fiscal austerity. Today it is routinely reviled as a shorthand for the ideas
and practices that have produced growing economic insecurity and inequality, led to the loss of
our political values and ideals, and even precipitated our current populist backlash.
We live in the age of neoliberalism, apparently. But who are neoliberalism's adherents and
disseminators – the neoliberals themselves? Oddly, you have to go back a long time to
find anyone explicitly embracing neoliberalism. In 1982, Charles Peters, the longtime editor of
the political magazine Washington Monthly, published an essay titled
A Neo-Liberal's Manifesto . It makes for interesting reading 35 years later, since the
neoliberalism it describes bears little resemblance to today's target of derision. The
politicians Peters names as exemplifying the movement are not the likes of Thatcher and Reagan,
but rather liberals – in the US sense of the word – who have become disillusioned
with unions and big government and dropped their prejudices against markets and the
military.
The use of the term "neoliberal" exploded in the 1990s, when it became closely associated
with two developments, neither of which Peters's article had mentioned. One of these was
financial deregulation, which would culminate in the 2008
financial crash and in the still-lingering euro debacle . The second was economic
globalisation, which accelerated thanks to free flows of finance and to a new, more ambitious
type of trade agreement. Financialisation and globalisation have become the most overt
manifestations of neoliberalism in today's world.
That neoliberalism is a slippery, shifting concept, with no explicit lobby of defenders,
does not mean that it is irrelevant or unreal. Who can deny that the world has experienced a
decisive shift toward markets from the 1980s on? Or that centre-left politicians –
Democrats in the US, socialists and social democrats in Europe – enthusiastically adopted
some of the central creeds of Thatcherism and Reaganism, such as deregulation, privatisation,
financial liberalisation and individual enterprise? Much of our contemporary policy discussion
remains infused with principles supposedly grounded in the concept of homo
economicus , the perfectly rational human being, found in many economic theories, who
always pursues his own self-interest.
But the looseness of the term neoliberalism also means that criticism of it often misses the
mark. There is nothing wrong with markets, private entrepreneurship or incentives – when
deployed appropriately. Their creative use lies behind the most significant economic
achievements of our time. As we heap scorn on neoliberalism, we risk throwing out some of
neoliberalism's useful ideas.
The real trouble is that mainstream economics shades too easily into ideology, constraining
the choices that we appear to have and providing cookie-cutter solutions. A proper
understanding of the economics that lie behind neoliberalism would allow us to identify –
and to reject – ideology when it masquerades as economic science. Most importantly, it
would help us to develop the institutional imagination we badly need to redesign capitalism for
the 21st century.
N eoliberalism is typically understood as being based on key tenets of mainstream economic
science. To see those tenets without the ideology, consider this thought experiment. A
well-known and highly regarded economist lands in a country he has never visited and knows
nothing about. He is brought to a meeting with the country's leading policymakers. "Our country
is in trouble," they tell him. "The economy is stagnant, investment is low, and there is no
growth in sight." They turn to him expectantly: "Please tell us what we should do to make our
economy grow."
The economist pleads ignorance and explains that he knows too little about the country to
make any recommendations. He would need to study the history of the economy, to analyse the
statistics, and to travel around the country before he could say anything.
Facebook
Twitter Pinterest Tony Blair and Bill Clinton: centre-left politicians who enthusiastically
adopted some of the central creeds of Thatcherism and Reaganism. Photograph: Reuters
But his hosts are insistent. "We understand your reticence, and we wish you had the time for
all that," they tell him. "But isn't economics a science, and aren't you one of its most
distinguished practitioners? Even though you do not know much about our economy, surely there
are some general theories and prescriptions you can share with us to guide our economic
policies and reforms."
The economist is now in a bind. He does not want to emulate those economic gurus he has long
criticised for peddling their favourite policy advice. But he feels challenged by the question.
Are there universal truths in economics? Can he say anything valid or useful?
So he begins. The efficiency with which an economy's resources are allocated is a critical
determinant of the economy's performance, he says. Efficiency, in turn, requires aligning the
incentives of households and businesses with social costs and benefits. The incentives faced by
entrepreneurs, investors and producers are particularly important when it comes to economic
growth. Growth needs a system of property rights and contract enforcement that will ensure
those who invest can retain the returns on their investments. And the economy must be open to
ideas and innovations from the rest of the world.
But economies can be derailed by macroeconomic instability, he goes on. Governments must
therefore pursue a sound
monetary policy , which means restricting the growth of liquidity to the increase in
nominal money demand at reasonable inflation. They must ensure fiscal sustainability, so that
the increase in public debt does not outpace national income. And they must carry out
prudential regulation of banks and other financial institutions to prevent the financial system
from taking excessive risk.
Now he is warming to his task. Economics is not just about efficiency and growth, he adds.
Economic principles also carry over to equity and social policy. Economics has little to say about how
much redistribution a society should seek. But it does tell us that the tax base should be as
broad as possible, and that social programmes should be designed in a way that does not
encourage workers to drop out of the labour market.
By the time the economist stops, it appears as if he has laid out a fully fledged neoliberal
agenda. A critic in the audience will have heard all the code words: efficiency, incentives,
property rights, sound money, fiscal prudence. And yet the universal principles that the
economist describes are in fact quite open-ended. They presume a capitalist economy – one
in which investment decisions are made by private individuals and firms – but not much
beyond that. They allow for – indeed, they require – a surprising variety of
institutional arrangements.
So has the economist just delivered a neoliberal screed? We would be mistaken to think so,
and our mistake would consist of associating each abstract term – incentives, property
rights, sound money – with a particular institutional counterpart. And therein lies the
central conceit, and the fatal flaw, of neoliberalism: the belief that first-order economic
principles map on to a unique set of policies, approximated by a Thatcher/Reagan-style
agenda.
Consider property rights. They matter insofar as they allocate returns on investments. An
optimal system would distribute property rights to those who would make the best use of an
asset, and afford protection against those most likely to expropriate the returns. Property
rights are good when they protect innovators from free riders, but they are bad when they
protect them from competition. Depending on the context, a legal regime that provides the
appropriate incentives can look quite different from the standard US-style regime of private
property rights.
This may seem like a semantic point with little practical import; but China's phenomenal
economic success is largely due to its orthodoxy-defying institutional tinkering. China turned
to markets, but did not copy western practices in property rights. Its reforms produced
market-based incentives through a series of unusual institutional arrangements that were better
adapted to the local context. Rather than move directly from state to private ownership, for
example, which would have been stymied by the weakness of the prevailing legal structures, the
country relied on mixed forms of ownership that provided more effective property rights for
entrepreneurs in practice. Township and Village Enterprises (TVEs), which spearheaded Chinese
economic growth during the 1980s, were collectives owned and controlled by local governments.
Even though TVEs were publicly owned, entrepreneurs received the protection they needed against
expropriation. Local governments had a direct stake in the profits of the firms, and hence did
not want to kill the goose that lays the golden eggs.
China relied on a range of such innovations, each delivering the economist's higher-order
economic principles in unfamiliar institutional arrangements. For instance, it shielded its
large state sector from global competition, establishing special economic zones where foreign
firms could operate with different rules than in the rest of the economy. In view of such
departures from orthodox blueprints, describing China's economic reforms as neoliberal –
as critics are inclined to do – distorts more than it reveals. If we are to call this
neoliberalism, we must surely look more kindly on the ideas behind the most dramatic
poverty reduction in history.
One might protest that China's institutional innovations were purely transitional. Perhaps
it will have to converge on western-style institutions to sustain its economic progress. But
this common line of thinking overlooks the diversity of capitalist arrangements that still
prevails among advanced economies, despite the considerable homogenisation of our policy
discourse.
What, after all, are western institutions? The size of the public sector in OECD countries
varies, from a third of the economy in Korea to nearly 60% in Finland. In Iceland, 86% of
workers are members of a trade union; the comparable number in Switzerland is just 16%. In the
US, firms can fire workers almost at will;
French labour laws have historically required employers to jump through many hoops first.
Stock markets have grown to a total value of nearly one-and-a-half times GDP in the US; in
Germany, they are only a third as large, equivalent to just 50% of GDP.
Facebook
Twitter Pinterest 'China turned to markets, but did not copy western practices ... '
Photograph: AFP/Getty
The idea that any one of these models of taxation, labour relations or financial
organisation is inherently superior to the others is belied by the varying economic fortunes
that each of these economies have experienced over recent decades. The US has gone through
successive periods of angst in which its economic institutions were judged inferior to those in
Germany, Japan, China, and now possibly Germany again. Certainly, comparable levels of wealth
and productivity can be produced under very different models of capitalism. We might even go a
step further: today's prevailing models probably come nowhere near exhausting the range of what
might be possible, and desirable, in the future.
The visiting economist in our thought experiment knows all this, and recognises that the
principles he has enunciated need to be filled in with institutional detail before they become
operational. Property rights? Yes, but how? Sound money? Of course, but how? It would perhaps
be easier to criticise his list of principles for being vacuous than to denounce it as a
neoliberal screed.
Still, these principles are not entirely content-free. China, and indeed all countries that
managed to develop rapidly, demonstrate the utility of those principles once they are properly
adapted to local context. Conversely, too many economies have been driven to ruin courtesy of
political leaders who chose to violate them. We need look no further than
Latin American populists or eastern European communist regimes to appreciate the practical
significance of sound money, fiscal sustainability and private incentives.
O f course, economics goes beyond a list of abstract, largely common-sense principles. Much
of the work of economists consists of developing
stylised models of how economies work and then confronting those models with evidence.
Economists tend to think of what they do as progressively refining their understanding of the
world: their models are supposed to get better and better as they are tested and revised over
time. But progress in economics happens differently.
Economists study a social reality that is unlike the physical universe. It is completely
manmade, highly malleable and operates according to different rules across time and space.
Economics advances
not by settling on the right model or theory to answer such questions, but by improving our
understanding of the diversity of causal relationships. Neoliberalism and its customary
remedies – always more markets, always less government – are in fact a perversion
of mainstream economics. Good economists know that the correct answer to any question in
economics is: it depends.
Does an increase in the minimum wage depress employment? Yes, if the labour market is really
competitive and employers have no control over the wage they must pay to attract workers; but
not necessarily otherwise. Does trade liberalisation increase economic growth? Yes, if it
increases the profitability of industries where the bulk of investment and innovation takes
place; but not otherwise. Does more government spending increase employment? Yes, if there is
slack in the economy and wages do not rise; but not otherwise. Does monopoly harm innovation?
Yes and no, depending on a whole host of market circumstances.
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Twitter Pinterest 'Today [neoliberalism] is routinely reviled as a shorthand for the ideas
that have produced growing economic inequality and precipitated our current populist backlash'
Trump signing an order to take the US out of the TPP trade pact. Photograph: AFP/Getty
In economics, new models rarely supplant older models. The basic competitive-markets model
dating back to Adam Smith has been modified over time by the inclusion, in rough historical
order, of monopoly, externalities, scale economies, incomplete and asymmetric information,
irrational behaviour and many other real-world features. But the older models remain as useful
as ever. Understanding how real markets operate necessitates using different lenses at
different times.
Perhaps maps offer the best analogy. Just like economic models, maps are highly
stylised representations of reality . They are useful precisely because they abstract from
many real-world details that would get in the way. But abstraction also implies that we need a
different map depending on the nature of our journey. If we are travelling by bike, we need a
map of bike trails. If we are to go on foot, we need a map of footpaths. If a new subway is
constructed, we will need a subway map – but we wouldn't throw out the older maps.
Economists tend to be very good at making maps, but not good enough at choosing the one most
suited to the task at hand. When confronted with policy questions of the type our visiting
economist faces, too many of them resort to "benchmark" models that favour the
laissez-faire approach. Kneejerk solutions and hubris replace the richness and humility of
the discussion in the seminar room. John Maynard Keynes once defined economics as the "science
of thinking in terms of models, joined to the art of choosing models which are relevant".
Economists typically have trouble with the "art" part.
This, too, can be illustrated with a parable. A journalist calls an economics professor for
his view on whether free trade is a good idea. The professor responds enthusiastically in the
affirmative. The journalist then goes undercover as a student in the professor's advanced
graduate seminar on international trade. He poses the same question: is free trade good? This
time the professor is stymied. "What do you mean by 'good'?" he responds. "And good for whom?"
The professor then launches into an extensive exegesis that will ultimately culminate in a
heavily hedged statement: "So if the long list of conditions I have just described are
satisfied, and assuming we can tax the beneficiaries to compensate the losers, freer trade has
the potential to increase everyone's wellbeing." If he is in an expansive mood, the professor
might add that the effect of free trade on an economy's longterm growth rate is not clear
either, and would depend on an altogether different set of requirements.
This professor is rather different from the one the journalist encountered previously. On
the record, he exudes self-confidence, not reticence, about the appropriate policy. There is
one and only one model, at least as far as the public conversation is concerned, and there is a
single correct answer, regardless of context. Strangely, the professor deems the knowledge that
he imparts to his advanced students to be inappropriate (or dangerous) for the general public.
Why?
The roots of such behaviour lie deep in the culture of the economics profession. But one
important motive is the zeal to display the profession's crown jewels – market
efficiency, the invisible hand, comparative advantage – in untarnished form, and to
shield them from attack by self-interested barbarians, namely
the protectionists . Unfortunately, these economists typically ignore the barbarians on the
other side of the issue – financiers and multinational corporations whose motives are no
purer and who are all too ready to hijack these ideas for their own benefit.
As a result, economists' contributions to public debate are often biased in one direction,
in favour of more trade, more finance and less government. That is why economists have
developed a reputation as cheerleaders for neoliberalism, even if mainstream economics is very
far from a paean to laissez-faire. The economists who let their enthusiasm for free markets run
wild are in fact not being true to their own discipline.
H ow then should we think about globalisation in order to liberate it from the grip of
neoliberal practices? We must begin by understanding the positive potential of global markets.
Access to world markets in goods, technologies and capital has played an important role in
virtually all of the economic miracles of our time. China is the most recent and powerful
reminder of this historical truth, but it is not the only case. Before China, similar miracles
were performed by South Korea, Taiwan, Japan and a few non-Asian countries such as Mauritius
. All of these countries embraced globalisation rather than turn their backs on it, and they
benefited handsomely.
Defenders of the existing economic order will quickly point to these examples when
globalisation comes into question. What they will fail to say is that almost all of these
countries joined the world economy by violating neoliberal strictures. South Korea and Taiwan,
for instance, heavily subsidised their exporters, the former through the financial system and
the latter through tax incentives. All of them eventually removed most of their import
restrictions, long after economic growth had taken off.
But none, with the sole exception of Chile in the 1980s under Pinochet, followed the
neoliberal recommendation of a rapid opening-up to imports. Chile's
neoliberal experiment eventually produced the worst economic crisis in all of Latin
America. While the details differ across countries, in all cases governments played an active
role in restructuring the economy and buffering it against a volatile external environment.
Industrial policies, restrictions on capital flows and currency controls – all prohibited
in the neoliberal playbook – were rampant.
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Twitter Pinterest Protest against Nafta in Mexico City in 2008: since the reforms of the
mid-90s, the country's economy has underperformed. Photograph: EPA
By contrast, countries that stuck closest to the neoliberal model of globalisation were
sorely disappointed. Mexico provides a particularly sad example. Following a series of
macroeconomic crises in the mid-1990s, Mexico embraced macroeconomic orthodoxy, extensively
liberalised its economy, freed up the financial system, sharply reduced import restrictions and
signed the North American Free Trade Agreement (Nafta). These policies did produce
macroeconomic stability and a significant rise in foreign trade and internal investment. But
where it counts – in overall productivity and economic growth – the
experiment failed . Since undertaking the reforms, overall productivity in Mexico has
stagnated, and the economy has underperformed even by the undemanding standards of Latin
America.
These outcomes are not a surprise from the perspective of sound economics. They are yet
another manifestation of the need for economic policies to be attuned to the failures to which
markets are prone, and to be tailored to the specific circumstances of each country. No single
blueprint fits all.
A s Peters's 1982 manifesto attests, the meaning of neoliberalism has changed considerably
over time as the label has acquired harder-line connotations with respect to deregulation,
financialisation and globalisation. But there is one thread that connects all versions of
neoliberalism, and that is the
emphasis on economic growth . Peters wrote in 1982 that the emphasis was warranted because
growth is essential to all our social and political ends – community, democracy,
prosperity. Entrepreneurship, private investment and removing obstacles that stand in the way
(such as excessive regulation) were all instruments for achieving economic growth. If a similar
neoliberal manifesto were penned today, it would no doubt make the same point.
Critics often point out that this emphasis on economics debases and sacrifices other
important values such as equality, social inclusion, democratic deliberation and justice. Those
political and social objectives obviously matter enormously, and in some contexts they matter
the most. They cannot always, or even often, be achieved by means of technocratic economic
policies; politics must play a central role.
Still, neoliberals are not wrong when they argue that our most cherished ideals are more
likely to be attained when our economy is vibrant, strong and growing. Where they are wrong is
in believing that there is a unique and universal recipe for improving economic performance, to
which they have access. The fatal flaw of neoliberalism is that it does not even get the
economics right. It must be rejected on its own terms for the simple reason that it is bad
economics.
A version of this article first appeared in Boston
Review
"Last year, the faculty at Harvard's Kennedy School of Government voted to offer Mr.
Zucman, 33, a tenured position. But Harvard's president and provost nixed the offer, partly
over fears that Mr. Zucman's research could not support the arguments he was making in the
political arena, according to people involved in the process." NYT
He subsequently got a post at the University of California, Berkeley.
The tell tale sign; debt rises much faster than GDP in the US in the 1920s.
(Japan 1980s; US, UK and Euro-zone before 2008; China after 2008)
The bankers were inflating asset prices with bank credit.
Bank credit effectively brings future prosperity into today.
The 1920s boomed on borrowed money and the 1930s were impoverished as they made the
repayments.
In the 1930s, they pondered over where all that wealth had gone to in 1929 and realised
inflating asset prices doesn't create real wealth, they came up with the GDP measure to track
real wealth creation in the economy.
The transfer of existing assets, like stocks and real estate, doesn't create real wealth
and therefore does not add to GDP. The real wealth creation in the economy is measured by
GDP.
Inflated asset prices aren't real wealth, and this can disappear almost over-night, as it
did in 1929 and 2008.
Real wealth creation involves real work, producing new goods and services in the
economy.
Henry Simons was a founder member of the Chicago School of Economics and he had worked out
what was wrong with his beliefs in free markets in the 1930s.
Banks can inflate asset prices with the money they create from bank loans.
Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability
to create money.
"Simons envisioned banks that would have a choice of two types of holdings: long-term
bonds and cash. Simultaneously, they would hold increased reserves, up to 100%. Simons saw
this as beneficial in that its ultimate consequences would be the prevention of
"bank-financed inflation of securities and real estate" through the leveraged creation of
secondary forms of money."
"Stocks have reached what looks like a permanently high plateau." Irving Fisher
1929.
This 1920's neoclassical economist that believed in free markets knew this was a stable
equilibrium. He became a laughing stock, but worked out where he had gone wrong.
Banks can inflate asset prices with the money they create from bank loans, and he knew his
belief in free markets was dependent on the Chicago Plan, as he had worked out the cause of
his earlier mistake.
It was those bankers inflating the US stock market with margin lending.
It's not quite the same this time.
Let the bank's collapse for a Great Depression
Save the banks, but leave the debt in place for Japanification .
How did this old belief set come back again?
A new ideology, neoliberalism, was wrapped around 1920s neoclassical economics, to make it
look brand new.
The reckless bankers and robber barons had made a lot of money in the 1920s and they
rather liked the way things had been before, but after the reckless bankers and robber barons
had run riot in the US in the 1920s, beliefs in economic liberalism and the markets were in
short supply.
Just a few diehards, like Hayek, were left and they were hiding out at the LSE in the UK
in the 1930s. He was looking to put a new slant on those old ideas.
In the 1940s, Hayek put together his theories of the markets being a mechanism for
transmitting the collective wisdom of market participants around the world through pricing.
It was never going to get into the mainstream until nearly everyone had forgotten what
happened last time they believed in the markets.
At last, in the 1980s, the people were ready to believe in the markets again.
Before 1980 – banks lending into the right places that result in GDP growth
(business and industry, creating new products and services in the economy)
Debt grows with GDP
After 1980 – banks lending into the wrong places that don't result in GDP growth
(real estate and financial speculation)
Debt rises much faster than GDP
2008 – Minsky Moment
After 2008 – Balance sheet recession and the economy struggles as debt repayments to
banks destroy money. We are making the repayments on the debt we built up from 1980 –
2008.
What happened in 1979?
The UK eliminated corset controls on banking in 1979 and the banks invaded the mortgage
market and this is where the problem starts.
This is the UK, but everyone has made the same mistake.
One economics, one ideology.
Global groupthink.
At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
What Japan does in the 1980s; the US, the UK and Euro-zone do leading up to 2008 and China
has done more recently.
The tell tale sign of neoclassical economics; debt rises much faster than GDP
The PBoC saw the Chinese Minsky Moment coming and you can too by looking at the chart
above. The Chinese bankers had been loading their economy up with their debt products and it
was just about to crash.
Our experts look at public debt and consumer price inflation, but the problems develop in
private debt and asset price inflation so the "black swan" flies in under their radar.
Davos 2018 – The Chinese know financial crises come from the private debt-to-GDP
ratio and inflated asset prices
thatcher was a neoliberal. neoliberalism is both nationalism (for the long con game) and
globalist (the goal)
The Mont Pelerin Society's (Austria 1940's) favorite "economist" F. v Hayek proposed path
of "liberty" and "freedom" [only for the inbred 1% (Neoliberalism)] (Friedman, Buchanan,
"Chicago School", were later disciples)
1) Deregulate global financial markets - DONE
2) Deregulate global trade - DONE
3) Create the illusion and urgency of national bankruptcy with fake (fiat) debt (thereby
neuter a nation's capability to enforce laws - eliminate the people's ability to defend
against being overwhelmed and consumed by the 1%) - DONE
this manufactured illusion of bankruptcy is critical path for the inbred 1%'s agenda. the
"debt" is used to justify austerity measures for the people, and to tee up, the privatization
plan, which is about transforming the public debt, into private debt, where the 1% can
extract usury, ad infinitum.
#AusterityIsCode4Looting - austerity measures are plain evidence, the system has already
been looted by generational globalist wealth.
then lastly, the kill shot:
4) Privatize Everything. recreate us ALL as permanent rent payers of even the most basic
necessities of life (Air, water, food, shelter, health care). the public debt of a ntion has
been effectively eliminated, transmuted into private debt; the service of which (usury) is
FOREVER- Almost COMPLETE
#PrivatizationIsTheft - privatization today is STRICTLY about prioritizing national
productivity (work) away from the commons and general welfare, extracting and transferring it
to the inbred 1% rent-seeking parasites (Extreme Redistribution of wealth from the people TO
the Billionaires, NOTHING for the people)
"People only accept change when they are faced with necessity, and only recognize
necessity when crisis is upon them."
Same old process...Problem, Reaction, Solution
They corrupt the current system and advance their agenda as far as they can (gaining
public support using the process above). When they detect growing resistance and distrust of
the system...they then encourage and use that trend to advance their agenda further using the
same Problem, Reaction, Solution process. The crash/destruction of the current status quo and
the fear and chaos that comes with it will be blamed on populism/nationalism. The people (in
chaos and fear) will seek safety and security...and will willingly accept the solutions
offered up to them. Rinse and repeat.
The bottom line is they know that acceptance of global centralization of power and
control...is a bottoms up process (the people must willing accept/demand it). It must be
accomplished in evolutionary stages through gradualism. However, when they have reach a
certain point and want to take the next major step, they undermine the peoples trust in the
current system and encourage and use the people's blow-back. Blow-back will be blamed for all
the chaos and fear.
"... Yet it took until 1860 for the UK to fully embrace free trade, and even then the unpalatable historical record is that during this 'golden age', the British: Destroyed the Indian textile industry to benefit their own cloth manufacturers; Started the Opium Wars to balance UK-China trade by selling China addictive drugs; Ignored the Irish Potato Famine and continued to allow Irish wheat exports; Forced Siam (Thailand) to open up its economy to trade with gunboats (as the US did with Japan); and Colonized much of Africa and Asia. ..."
"... Regardless, the first flowering of free trade collapsed back into nationalism and protectionism - bloodily so in 1914. Free trade was tried again from 1919 - but burned-out even more bloodily in the 1930s and 1940s. After WW2, most developed countries had moderately free trade - but most developing countries did not. We only started to re-embrace global free trade from the 1990s onwards when the Cold War ended – and here it is under stress again. In short, only around 100 years in a total of 5,000 years of civilization has seen real global free trade, it has failed twice already, and it is once again coming under pressure. ..."
"... Of course, this doesn't mean liked-minded groups of countries with similar-enough or sympathetic-enough economies and politics should avoid free trade: clearly for some states it can work out nicely - even if within the EU one could argue there are also underlying strains. However, it is a huge stretch to assume a one-size-fits-all free trade policy will always work best for all countries, as some would have it. That is a fairy tale. History shows it wasn't the case; national security concerns show it can never always be the case; and Ricardo argues this logically won't be the case. ..."
"When I used to read fairy tales, I fancied that kind of thing never happened, and now here I am in the middle of one!" (Alice
in Wonderland, Chapter 4, The Rabbit Sends in a Little Bill)
Submitted by Michael Every of Rabobank
2020 starts with markets feeling optimistic due to a US-China trade deal and a reworked NAFTA in the form of the USMCA. However,
the tide towards protectionism may still be coming in, not going out.
The intellectual appeal of the basis for free trade, Ricardo's theory of comparative advantage, where Portugal specializes in
wine, and the UK in cloth, is still clearly there. Moreover, trade has always been a beneficial and enriching part of human culture.
Yet the fact is that for the majority of the last 5,000 years global trade has been highly-politicized and heavily-regulated . Indeed,
global free-trade only began following the abolition of the UK Corn Laws in 1846, which reduced British agricultural tariffs, brought
in European wheat and corn, and allowed the UK to maximize its comparative advantage in industry.
Yet it took until 1860 for the UK to fully embrace free trade, and even then the unpalatable historical record is that during
this 'golden age', the British:
Destroyed the Indian textile industry to benefit their own cloth manufacturers;
Started the Opium Wars to balance UK-China trade by selling China addictive drugs;
Ignored the Irish Potato Famine and continued to allow Irish wheat exports;
Forced Siam (Thailand) to open up its economy to trade with gunboats (as the US did with Japan); and
Colonized much of Africa and Asia.
As we showed back in '
Currency
and Wars ', after an initial embrace of free trade, the major European powers and Japan saw that their relative comparative advantage
meant they remained at the bottom of the development ladder as agricultural producers, an area where prices were also being depressed
by huge US output; meanwhile, the UK sold industrial goods, ran a huge trade surplus, and ruled the waves militarily. This was politically
unsustainable even though the UK vigorously backed the intellectual concept of free trade given it was such a winner from it.
Regardless, the first flowering of free trade collapsed back into nationalism and protectionism - bloodily so in 1914. Free
trade was tried again from 1919 - but burned-out even more bloodily in the 1930s and 1940s. After WW2, most developed countries had
moderately free trade - but most developing countries did not. We only started to re-embrace global free trade from the 1990s onwards
when the Cold War ended – and here it is under stress again. In short, only around 100 years in a total of 5,000 years of civilization
has seen real global free trade, it has failed twice already, and it is once again coming under pressure.
What are we getting wrong? Perhaps that Ricardo's theory has major flaws that don't get included in our textbooks, as summarized
in this overlooked quote
"It would undoubtedly be advantageous to the capitalists of England [that] the wine and cloth should both be made in Portugal
[and that] the capital and labour of England employed in making cloth should be removed to Portugal for that purpose." Which is pretty
much what happens today! However, Ricardo adds that this won't happen because "Most men of property [will be] satisfied with a low
rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations," which
is simply not true at all! In other words, his premise is flawed in that:
It is atemporal in assuming countries move to their comparative advantage painlessly and instantly;
It assumes full employment when if there is unemployment a country is better off producing at home to reduce it, regardless
of higher cost;
It assumes capital between countries is immobile , i.e., investors don't shift money and technology abroad. (Which Adam Smith's
'Wealth of Nations', Book IV, Chapter II also assumes doesn't happen, as an "invisible hand" keeps money invested in one's home
country's industry and not abroad: we don't read him correctly either.);
It assumes trade balances under free trade - but since when has this been true? Rather we see large deficits and inverse capital
flows, and so debts steadily increasing in deficit countries;
It assumes all goods are equal as in Ricardo's example, cloth produced in the UK and wine produced in Portugal are equivalent.
Yet some sectors provide well-paid and others badly-paid employment: why only produce the latter?
As Ricardo's theory requires key conditions that are not met in reality most of the time, why are we surprised that most of reality
fails to produce idealised free trade most of the time? Several past US presidents before Donald Trump made exactly that point. Munroe
(1817-25) argued: " The conditions necessary for Free Trade's success - reciprocity and international peace - have never occurred
and cannot be expected ". Grant (1869-77) noted "Within 200 years, when America has gotten out of protection all that it can offer,
it too will adopt free trade".
Yet arguably we are better, not worse, off regardless of these sentiments – so hooray! How so? Well, did you know that Adam Smith,
who we equate with free markets, and who created the term "mercantile system" to describe the national-protectionist policies opposed
to it, argued the US should remain an agricultural producer and buy its industrial goods from the UK? It was Founding Father Alexander
Hamilton who rejected this approach, and his "infant industry" policy of industrialization and infrastructure spending saw the US
emerge as the world's leading economy instead. That was the same development model that, with tweaks, was then adopted by pre-WW1
Japan, France, and Germany to successfully rival the UK; and then post-WW2 by Japan (again) and South Korea; and then more recently
by China, that key global growth driver. Would we really be better off if the US was still mainly growing cotton and wheat, China
rice and apples, and the UK was making most of the world's consumer goods? Thank the lack of free trade if you think otherwise!
Yet look at the examples above and there is a further argument for more protectionism ahead. Ricardo assumes a benign global political
environment for free trade . Yet what if the UK and Portugal are rivals or enemies? What if the choice is between steel and wine?
You can't invade neighbours armed with wine as you can with steel! A large part of the trade tension between China and the US, just
as between pre-WW1 Germany and the UK, is not about trade per se: for both sides, it is about who produces key inputs with national
security implications - and hence is about relative power . This is why we hear US hawks underlining that they don't want to export
their highest technology to China, or to specialize only in agricultural exports to it as China moves up the value-chain. It also
helps underline why for most of the past 5,000 years trade has not been free. Indeed, this argument also holds true for the other
claimed benefit of free trade: the cross-flow of ideas and technology. That is great for friends, but not for those less trusted.
Of course, this doesn't mean liked-minded groups of countries with similar-enough or sympathetic-enough economies and politics
should avoid free trade: clearly for some states it can work out nicely - even if within the EU one could argue there are also underlying
strains. However, it is a huge stretch to assume a one-size-fits-all free trade policy will always work best for all countries, as
some would have it. That is a fairy tale. History shows it wasn't the case; national security concerns show it can never always be
the case; and Ricardo argues this logically won't be the case.
Yet we need not despair. The track record also shows that global growth can continue even despite protectionism, and in some cases
can benefit from it. That being said, should the US resort to more Hamiltonian policies versus everyone, not just China, then we
are in for real financial market turbulence ahead given the role the US Dollar plays today compared to the role gold played for Smith
and Ricardo! But that is a whole different fairy tale...
In my golden days, I did manufacturing throughput analysis, cost modeled parts, and
reviewed component and transportation distribution. I am curious. Forget all that
neoliberal stuff . . .
Ohh, those golden days
Measurement has its place and is the cornerstone of science, but it is not equal to
pattern recognition. And when applied to social phenomena with their complexity it is
more often a trap, rather then an insight.
You need to understand that.
Deification of questionable metrics is an objective phenomenon that we observe under
neoliberalism.
A classic example of deification of a questionable metric under neoliberalism is the
"cult of GDP" ("If the GDP Is Up, Why Is America Down?") See , for example
For example, many people discuss stagnation of GDP growth in Japan not understanding
here we are talking about the country with shrinking population. And adjusted for this
factor I am not sure that it not higher then in the USA (were it is grossly distorted by
the cancerous growth of FIRE sector).
So while comparing different years for a single country might make some limited sense,
those who blindly compare GDP of different countries (even with PPP adjustment) IMHO
belong to a modern category of economic charlatans. Kind of Lysenkoism, if you wish
That tells you something about primitivism and pseudo-scientific nature of neoliberal
economics.
We also need to remember the "performance reviews travesty" which is such a clear
illustration of "cult of measurement" abuses that it does not it even requires
commentary. Google has abolished numerical ratings in April 2014.
Recently I come across an interesting record of early application of it in AT&T at
Brian W Kernighan book UNIX: A History and a Memoir at late 60th, early as 70th.
Imbecilization is a normal historical process where intellectual declines follows the
economic decline of a given empire. There's growing evidence the West is going through the
same process.
A with any composite, complex historical process, imbecilization doesn't happen in a
uniform and linear way. Economics was the first science that descended into pseudo-science in
the capitalist world (after Marx dismantled Classic Economics). Philosophy followed. Erudite
art degenerated after the fall of Modernism somewhere in the 1950s. Human sciences in general
became fragmented and little more than a constelation of esoterism and pseudo-sciences - a
condition they still enjoy today (e.g. the dismembering of History into Sociology, Behavioral
Economics and others).
Meanwhile, the so-called STEM or "Hard Sciences" continued to prosper for some decades,
until they also hit a ceiling in the 1990s. The fall of the profitability of the capitalist
world led it to resort to "financialization" to keep the system going, which resulted in the
most brilliant capitalist mathematicians to be hosed to Wall Street instead to the likes of
NASA. Those MIT mathematicians and rocket scientists created the algorithms Wall Street still
uses today, but they did not stop the 2008 meltdown.
Nowadays, those brilliant STEM minds are nothing more than fraudsters who keep their
careers going by creating meaningless experiments (because they need the funding) only to
publish articles and keep their production quotas or self-censuring bootlickers for Wall
Street and Big Pharma. When they get to work for a big corporation, they are mere architects
of planned obsolescence or patent renewing. There's a new book I strongly recommend all of
you to read:
Does productivity explain income? I asked this question in a
previous
post
. My answer was a bombastic
no
. In this post, I'll dig deeper into the reasons that
productivity doesn't explain income. I'll focus on wages.
The Evidence
Let's start with the evidence trumpeted as proof that productivity explains wages. Looking across firms, we
find that sales per worker correlates with average wages. Figure 1 shows this correlation for about 50,000 US
firms over the years 1950 to 2015.
Mainstream economists take this correlation as evidence that productivity explains wages. Sales, they say,
measure firms' output. So sales per worker indicates firms' labor productivity. Thus the evidence in Figure 1
indicates that productivity explains (much of) workers' income. Case closed.
The Problem
Yes, sales per worker correlates with average wages. No one disputes this fact. What I dispute is that this
correlation says anything about productivity. The problem is simple. Sales per worker
doesn't measure
productivity
.
To understand the problem, let's do some basic accounting. A firm's sales equal the unit price of the firm's
product times the quantity of this product:
Sales = Unit Price × Unit Quantity
Dividing both sides by the number of workers gives:
Sales per Worker = Unit Price × Unit Quantity per Worker
Let's unpack this equation. The 'unit quantity per worker' measures labor productivity. It tells us the
firm's output per worker. For instance, a farm might grow 10 tons of potatoes per worker. If another farm grows
15 tons of potatoes per worker, it unambiguously produces more potatoes per worker (assuming the potatoes are
the same).
The problem with using sales to measure productivity is that
prices
get in the way. Imagine that
two farms, Old McDonald's and Spuds-R-Us, both produce 10 tons of potatoes per worker. Next, imagine that Old
McDonald's sells their potatoes for $100 per ton. Spuds-R-Us, however, sells their potatoes for $200 per ton.
The result is that Spuds-R-Us has double the sales per worker as Old McDonald's. When we equate sales with
productivity, it appears that workers at Spuds-R-Us are twice as productive as workers at Old McDonald's. But
they're not. We've been fooled by prices.
The solution to this problem seems simple. Rather than use sales to measure output, we should measure a
firm's output
directly
. Count up what the firm produces, and that's its output. Problem solved.
So why don't economists measure output directly? Because the restrictions needed to do so are severe. In
fact, they're so severe that they're almost never met in the real world. Let's go through these restriction.
1: Firms must produce identical commodities
To objectively compare productivity, you have to find firms that produce the same commodity. You could, for
instance, compare the productivity of two farms that produce (the same) potatoes. But if the farms produce
different things, you're out of luck.
Here's why. When firms produce different commodities, we need a common dimension to compare their outputs.
The problem is that the choice of dimension affects our measure of output.
To see the problem, let's return to our two farms, Old McDonald's and Spuds-R-Us. Suppose that Spuds-R-Us
produces 10 tons of potatoes per worker. Tired of growing potatoes, Old McDonald's instead grows 5 tons of corn
per worker. Which workers are more productive?
The answer depends on our dimension of analysis.
Suppose we compare potatoes and corn using mass. We find that Spuds-R-Us workers (who produce 10 tons per
worker) are more productive than Old McDonald's workers (who produce 5 tons per worker).
Now suppose we compare potatoes and corn using energy. Furthermore, imagine that corn has twice the caloric
density of potatoes. Now we find that workers at Spuds-R-Us (who produce half the mass of food at twice the
caloric density) have the same labor productivity as Old McDonald's workers.
The lesson? Unless two firms produce the same commodity, productivity comparisons are subjective. They
depend on the choice of dimension.
Restriction 2: Firm output must be countable
When you read economic textbooks, it's clear that the discipline of economics is stuck in the 19th century.
Firms, the textbooks say, produce
stuff
.
But what about all those other firms that don't produce stuff? What is their output? What, for instance, is
the output of Goldman Sacks? What is the output of a high school? What is the output of a hospital? What is the
output of a legal firm?
Yes, these institutions do things. But it defies reason to give these activities a 'unit quantity'. In other
words, it defies reason to quantify the output of these institutions.
Restriction 3: Firms must produce a single commodity
Complicating things further, we can objectively measure output only when firms produce a single commodity.
If a firm produces two (or more) commodities, its output is affected by how we add the commodities together.
To see the problem, let's return to Old McDonald's and Spuds-R-Us. Suppose that both farms have diversified
their production. Spuds-R-Us produces 5 tons of potatoes and 1 ton of corn per worker. Old McDonald's produces
1 ton of potatoes and 5 tons of corn. Which workers are more productive?
The answer depends on our dimension of analysis. In terms of mass, both farms produce 6 tons of food per
worker. So labor productivity appears the same. But suppose we measure the output of energy. Again, we'll
assume that corn has double the caloric density of potatoes. Suppose corn contains 2 GJ (gigajoule) per ton,
while potatoes contain 1 GJ per ton. Now we find that Old McDonald's workers are about 60% more productive than
workers at Spuds-R-Us. Here's the calculation:
Spuds-R-Us:
5 tons potato × 1 GJ / ton + 1 ton corn × 2 GJ / ton = 7 GJ
Old McDonald's:
1 ton potato × 1 GJ / ton + 5 ton corn × 2 GJ / ton = 11 GJ
This 'aggregation problem' is why the neoclassical theory of income distribution assumes a single-commodity
world -- a world in which everyone produces and consumes the same thing. In this one-commodity world, we can
measure productivity unambiguously. In the real world (with many commodities) productivity depends on our
choice of dimension.
The Severity of the Problem
Let's take stock. If we want to measure productivity objectively, the restrictions are severe:
Firms must produce the same commodity
This commodity must be countable
Firms must produce only one commodity
These conditions are so stringent that they're rarely met in the real world. This is a bit of a problem for
neoclassical theory. It proposes that everyone's income is explained by their productivity. But only in the
rarest of circumstances can we measure productivity objectively.
It's hard not to laugh at this predicament. It's like Newton proclaiming that gravitational force is
proportional to mass. But in the next sentence he realizes that mass can be measured only in the rarest of
circumstances.
The Neoclassical Sleight of hand
Neoclassical economists don't think of themselves as Newtons who can't measure mass. Instead, economics
textbooks don't even mention the problems with measuring productivity. In these textbooks, all seems well in
neoclassical land.
But all is not well. Neoclassical economists perpetuate their fantasy by relying on a sleight of hand.
Here's what they do.
First, economists argue that the purpose of all economic activity is to give consumers
utility
. Buy
a potato and you get utility. Buy a cigarette and you get utility. Utility, economists say, is the universal
dimension of output. By measuring utility, we can compare the output of any and all firms (no matter what they
produce).
After proclaiming that utility is the universal dimension of output, economists pull their trick. Utility,
they say, is
revealed through prices
. So a painting worth $1000 gives the buyer 1000 times the utility
as a $1 potato.
With this thinking in hand, economists see that a firm's sales measure its output of utility:
Sales = Unit Price × Unit Quantity
Sales = Unit Utility × Unit Quantity = Gross Utility
So sales become a universal measure of utility, and utility is the universal measure of output. Now, when we
compare sales per worker to wages (as in Figure 1), economists proclaim that we're comparing productivity to
wages.
Except we're not.
The problem is that this whole operation is circular. The idea that prices reveal utility is a
hypothesis
.
And as every good scientist knows, you can't use your hypothesis to test your hypothesis. But that's what
neoclassical economists do. They assume that one aspect of their theory is true (the link between prices and
utility) to test another aspect of their theory (the link between productivity and income). This is a big no
no.
Why do economists use this circular reasoning? Probably because they don't know they're doing it. Economists
take as received wisdom the idea that prices reveal utility. But this is just a hypothesis. In fact, it's a bad
hypothesis. Why? Because we can never measure utility independently of prices.
Why are Sales Related to Wages
Whenever I go through the logic above, mainstream economists will retort: "But look at the correlation
between wages and sales! How can this not show that productivity explains wages?" Their reasoning seems to be
that, absent an alternative explanation, this correlation must support their hypothesis.
In
No,
Productivity Does Not Explain Income
, I gave an alternative explanation. The correlation between wages and
sales per worker, I argued, follows from accounting principles.
Sales isn't a measure of output. It's an
income
stream. Once earned, this income gets split by the
firm into different categories. Some of it goes to workers. Some of it goes to other firms (as non-labor
costs). And some of it goes to the firm's owners as profit.
By
definition, the terms on the left must sum to the terms on the right. So it's not surprising that we find a
correlation between wages and sales. They're related by an accounting identity.
In comments on
No,
Productivity Does Not Explain Income
(and on other sites), some economists pounced on this argument, saying
it was fatally flawed. And in hindsight, I admit that I wasn't clear enough about my reasoning. I was thinking
about the real world. But the economists who critiqued my reasoning were thinking in terms of pure mathematics.
To frame the debate, let's think about something more concrete than income. Let's think about volume. In
rough terms, the volume of an object is the product of its length, width and height:
V = L × W × H
Now, let's pick a dimension -- say length. Will the length of an object correlate with its volume? In general
terms, no. I can make an object with any volume using any length. I just have to adjust the other dimensions
appropriately. By doing so, I can make a cube have the same volume as a box that is long and thin.
So in pure mathematical terms, the accounting definition of volume doesn't lead to a correlation between
length and volume.
But when we look at real-world objects -- like animals -- we
will
find a correlation. If we took all
the species on earth and plotted their length against their volume, we'd expect a tight correlation. A bacteria
has a small length and a small volume. A blue whale has a big length and a big volume. Fill in the gaps between
and we should get a nice tight line.
The reason for this correlation is that animals cannot take any shape. You'll never find an animal that is a
mile long and a few micrometers wide. Such a beast doesn't exist. Yes, the shapes of animals vary. But in the
grand scheme, this varation is small. As a first approximation, animals are roughly cubes. Or, if you're a
physicist,
they're
spheres
.
With this shape restriction, it follows from the definition of volume that animal length should correlate
with animal volume. We'd be astonished if it didn't.
So too with the correlation between sales per worker and wages. True, this correlation doesn't follow purely
from accounting principles. It follows jointly from accounting principles, and the fact that firms can't take
any form. We don't find firms that pay their workers nothing. That's slavery and its illegal. Similarly, we
don't find (many) firms that pay their workers the entirety of sales. That leaves no room for profit.
So in the real world, there are restrictions on how firms can divide their income stream. Here's what these
restrictions look like. In Figure 3, I've plotted the distribution of firms' payroll as a portion of sales.
This is the portion of sales that goes to workers. Across all firms, it's a pretty tight distribution,
clustered around 25%.
Yes, it's theoretically possible for a firm to give any portion of its sales to workers. But this isn't what
happens in reality. In the real world, most firms give between 10% and 50% of their sales to workers. Just like
with the shape of animals, there are real-world restrictions on the 'shape' that firms can take.
Given these restrictions, it's not surprising that we find a correlation between sales per worker and wages.
When a firm's income stream grows, so does the amount going to workers.
None of this has anything to do with productivity. It's all about income. Sales are the firm's income. And
wages are the portion of this income given to workers.
Prices The Elephant in the Room
Let's conclude this foray into neoclassical thinking. The reason that sales don't measure firm output is
because they mix unit prices with unit quantities. Yes, sales per worker correlates with wages. But the
elephant in the room is prices. Greater sales may be due to greater output. But it can also be due to greater
unit prices.
In many cases, price differences are
everything
.
Imagine that a lawyer and a janitor both work 40 hours a week as self-employed contractors. The lawyer
charges $1000 per hour, while the janitor charges $20. At the end of the week, the lawyer has 50 times the
sales as the janitor. This difference comes down solely to price. The lawyer charges 50 times more for their
hourly services than the janitor.
The question is
why
?
Neoclassical economists proclaim they have the answer. The lawyer, they say, produces 50 times the utility
as the janitor. Ask economists how they know this, and they'll answer with a straight face: "Prices revealed
it."
It's time to recognize this sleight of hand for what it is: a farce. The reality is that we know virtually
nothing about what causes prices. And we will continue to know nothing as long as researchers believe the
neoclassical farce.
Further Reading
The Aggregation Problem: Implications for Ecological and Biophysical Economics.
BioPhysical Economics
and Resource Quality
. 4(1), 1-15.
SocArxiv
Preprint
.
Economists are always prepared for yesterday's problems.
Inflation was a big problem in the Keynesian era and every effort has been made to ensure that it doesn't
return.
Exceptionally intelligent Chinese economists have been looking at today's problems.
Davos 2018 – They know financial crises come from the private debt-to-GDP ratio and inflated asset prices
https://www.youtube.com/watch?v=1WOs6S0VrlA
The PBoC know how to spot a Minsky Moment coming, unlike the FED, BoE, ECB and BoJ.
The black swan flies in under our policymaker's radar.
Our policymakers are always looking in the wrong direction.
They fixate on public debt, and so don't see the problems emerging in private debt
The central banks look at consumer price inflation, while the problems are emerging in asset price inflation.
Your salesperson might negotiate higher prices on every deal, and that might correlate with their higher
productivity in a regulated and truly competitive market.
What does sales at higher prices in a (de facto) deregulated and increasingly monopolist market space
point to? Not to greater productivity, imo, but to deregulated monopoly. It too oftern points to unregulated
rentier-ism, or price gouging. Why has the cost of, say, insulin
tripled
over
the past decade? Not because of greater productivity. How can these price increases in this deregulated
market environment possibly point to real productivity? It points to price gouging. Since there is more
rentier-ism in the market, the old idea that prices/wages can be reliably equated with productivity becomes
meaningless, imo.
Do your other employees building widgets become "less productive" suddenly when your salesman catches a
cold? (You can come up with a bunch of these showing that productive can not be precisely equal to money
earned, because they exist on different time scales measuring different firm aggregates).
Is the salesman "more productive" if he kidnaps the children of a client and blackmails him into buying
more product? What would "productive" mean in any useful sense if there's no independent definition of
utility? Not every dollar earned is a measure of "productive" -- unless you redefine productive to mean
"every dollar earned by any measure".
When the US invaded Santo Domingo to extract debts, was that "productive" in any meaningful sense? That
would seem to be an abuse of language, rather than saying what you mean.
The problem here is that "productive" is a
moral
justification -- and so it must continue to mean
something more than simply money earned in order to morally justify the order. That's the goal of the use of
the word productive -- that thus the results are
just
.
"It's time to recognize this sleight of hand for what it is: a farce. The reality is that we know
virtually nothing about what causes prices. And we will continue to know nothing as long as researchers believe
the neoclassical farce."
This is what I don't understand, I think its obvious why there are prices. The whole idea of business, and
capitalism generally, is to charge as much as possible while spending as little as possible.
Beyond a certain point I do believe greed drives inflation -- companies will charge whatever they think they
can get away with long before there is wage pressure. Wage pressure in my experience is a reaction to
inflation, not a driver of it. For some reason many people of the conservative persuasion seem to get this
backwards.
Absolutely. The use of "we" here is problematic. What needs to be made clear is the fundamental
distinction between those who study capitalism, where the fundamental driver is the search for profit, and
those who study "the economy," for whom profit either doesn't exist or is the "marginal productivity of
capital," a concept which has been shown over and over to be nonsensical, and the fundamental drivers are
things we can't explain – individual wants and preferences and various completely unpredictable "shocks."
There is no collective "we." It's them against us.
It is obvious that prices are seriously out of kilter with actual value of products & services but is this a
result of all that extra money that was created to save the banks after 2008? And what about the vital function
of price discovery then. How does that work out? I do believe that there is something missing from this article
and that is a break-out of "wages". I suppose you could break it down to wages, salary & management which may
be more instructive. How does productivity relate to management then, both internally and externally? By
externally I mean when consultants are called into a company to do management's job. If you think that this
cannot be a serious concern, then reflect that the UK's NHS paid out between $350 million and $600 million
worth of taxpayer money on management consultancy in 2014 alone. What effect did that have on the NHS's
productivity then?
It sounds like the sure path to higher productivity is to encourage monopolies and oligopolies that can
raise prices pretty much at will while reducing the number of workers. The question becomes: why hasn't US
productivity surged as its markets became increasingly concentrated?
Blair Fix touches on an important issue behind the layers of terminology, concepts and policies that have so
impacted our everyday lives. So if labor productivity doesn't explain wages, income or prices, then what are
the true factors influencing prices and stagnant real wages?
Pricing power, labor cost, and profit margins of large transnational corporations have benefitted from their
increasingly monopolistic control of markets to suppress competition, use of global labor arbitrage, enjoyment
of very low and even negative real interest rates, tax policies and use of tax havens, hidden subsidies,
automation, neutering of organized labor, and purchased political influence. The productivity of labor in the
West has essentially been made irrelevant in many cases. Important stuff in so many ways.
Still appreciate the famous EPI chart that shows how the wealthy have captured the entire differential
between stagnant real wages and the rising productivity of labor since neoliberal capitalism made its
appearance on the world stage four decades ago. Trillions:
Hence 'private equity' is a euphemism for cannibalizing any source of equity for a quick profit. We have
an entire paradigm that is a farce. Based on value (equity) which in turn is based subjectively on whatever
you can snooker. It is one step forward and two steps backwards at this point. The Chinese have a beautiful
view of our debacle. No wonder they can tease out the contradictions. But it's not like we, places like NC,
haven't been screaming about all this loud and clear. (Steve Keen for starters.) The thing the aptly named
Mr. Fix is saying resides beneath the surface: If we are ever in so desperate a position to raise prices too
much nobody will buy and the system will collapse. And because of our horror-at-the-thought we have avoided
pricing oil where it belongs. Instead we have burned it with abandon, devastating the environment while we
were at it. A very expensive abandonment. It was an unrecognized consequence; an unavoidable one for the
sake of profit – whereas the other accounting anomalies are more "discretionary". When you are desperate
nothing is discretionary. If price ever comes to equal "utility" aka value, then there will be very little
commerce. It makes Richard Murphy's advocacy for Oil Bankruptcy a very rational suggestion. Mitigate the
devastation – that's about all we'll be able to do.
Even Adam Smith admitted that the economic value of something has no relation to its intrinsic utility, but
only to the relative balance of supply and demand for it.
If there are more workers than jobs, wages will be driven down and productivity gains will decouple from
wages – although with low wages, there will be little incentive to invest in making workers more productivity
so productivity may decline as a second-order effect.
If there are more jobs than workers, wages will be bid up, and productivity gains will be largely captured
by workers because it is the limiting factor in any economy that captures the profits. At the same time, high
wages will tend to spur higher productivity because there will be strong incentive to make efficient use of
relatively expensive labor.
At the base of Niagara Falls, water is cheap and it is not used efficiently. Using water efficiently in
Niagara Falls will not increase its price. In the Gobi desert, water is expensive and it is used efficiently.
Not using water efficiently in the Gobi desert will not make it cheaper.
The core of modern macroeconomics is to take what is fundamentally simple and confuse the heck out of it.
then what are the true factors influencing prices and stagnant real wages?
That would be the human factor. Greed, honesty, and desires and conscious acts. Economics cannot capture the
human factor.
Every human on Earth is capable of affecting markets dramatically by one act. Humans making multiple
decisions every day. All 7.5 billion. One person can change markets and history with one act. Gavrilo Princip,
for instance. Or by using an Internet post to affect markets.
To accurately model economics? All decisions made by each and every person on the planet would have to be an
input into any model. Each person's actions would have to have a solid, predictable outcome with no deviations.
A person becomes depressed, then A and B and C can ONLY happen.
Which would rule out occurrences such as Malaysia Flight 370 and quite a few other possibilities.
Economics and economists are in no way, shape, or form capable of accounting for the human factor. Which is
why there should be no laws of economics. More like, guesswork and observing trends in a general and gross
manner. Only to pray for accuracy.
LTCM was an example of economics and economists over-stepping their intellect. LTCM employed the
observations from John Nash (the subject of the move, A Beautiful Mind) and his Nobel prize winning work. Their
system worked until it didn't. Other humans made decisions that trashed.
People chose not to play the game. For LTCM? Such decisions by others outside of LTCM's control were fatal.
The issue with game theory, etc? For it to work, one has to have enforcers or project power to force people to
play by a set of rules. One could call this, the basis of American foreign policy – financial in nature.
The "Law of Supply and Demand"? Routinely violated. A person can decide arbitrarily to put items on sale.
The Human Factor.
Trends in economics are like trends on Twitter. You just never know. Economists are trend chasers. Having
more in common with Internet "influencers" trying to convince people that a $5 pair of shoes is actually worth
$400, than with actual science. THAT being an example of how prices are determined, in part.
Neoliberal economics is a case study of a select group (economists) influencing politicians and others, to
support their version of economics.
Economics and economists are in no way, shape, or form capable of accounting for the human factor.
Which is why there should be no laws of economics.
+1000
Great post DF! This whole discussion reminds me of the shortest job I ever had – selling crappy stereo
speakers out of the back of a white van for a day.
I'd answered an ad not knowing what I'd be getting into. The people who were "training" me would drive up
to an unsuspecting person in a mall parking lot and try to sell these speakers. They had a set dollar amount
per day there were supposed to sell to get a bonus, so if they could sell a speaker for $200 they would and
if at the end of the day they needed $25 to meet their sales quota, the last speaker would go for $25. The
whole thing depended on two very big human factors – greed and gullibility.
I'm sure an economist could come up with productivity figures for this operation, but what it really was
was a scam.
The job you describe reminds me of Eastern European bazaars back in the day where items being sold
"fell off" the back of a truck. Or Hoboken, NJ market on a certain block. :)
Thank you NC for yet another article exposing the sham of neoclassical economics. Here's a paragraph from a
book I happen to be reading yesterday
"..the neoclassical economic perspective is
the
ideology par excellence of capitalist political
economy. It is a theory that explains nothing more than how to assure that capitalism remains capitalism. That
is, neoclassical economics demonstrates how wealth and resources may continue to function to the advantage of
the minority that controls wealth and the immediate access to political power. It is an ideology because it
depicts as "rational" only economic behavior that seeks the "utility maximization" characteristic of market
exchange. That other motives and values might deserve priority in our action as economic agents is either
unthinkable (ruled out by definition) or, worse, held to be economically "irrational." Neoclassical economic
theory is itself a system of morality- and theology and ethics – masquerading as "science." Yet those who
dissent from this hidden morality have a difficult task before them. For this debate concerning the ethics of
economics is consistently suppressed in public discourse. Reigning economic theory makes calls for the
substantive realignment of existing economic power appear as madness. Dissenters are
by definition
"unrealistic," "utopian," or "irresponsible.""
And
this was written almost 30 years ago
in the book 'God and Capitalism – A Prophetic
Critique of Market Economy'. The excerpt is from chapter three – 'The "Fate" of the Middle Class in Late
Capitalism' by Beverly W. Harrison.
Can we please get an SEC or FASB ruling requiring the explicit breakout of salary payroll on the income
statement of EVERY public listed company?
Capitalism has ALL manner of enumeration of uses of capital, but nowhere is labor listed! I don't care for
labor hidden inside direct/indirect "costs of goods sold", "SG&A", "R&D" etc. Just put a payroll expense (minus
payroll taxes, minus the healthcare and whatnot, straight payroll) line item somewhere in the 10-k. Is it a
crime to ask?
Forgive me if this has been discussed previously. It's from a September Atlantic article on
economics I happened upon, a review of a book by Applebaum written by Sebastian Mallaby:
"...Applebaum opens his book with the observation that economics was not always the
imperial discipline. Roosevelt was delighted to consult lawyers such as Berle, but he
dismissed John Maynard Keynes as an impractical 'mathematician'. Regulatory agencies were
headed by lawyers, and courts dismissed economic evidence as irrelevant. In 1963, President
John F. Kennedy's Treasury secretary made a point of excluding academic economists from a
review of the international monetary order, deeming their advice useless. William McChesney
Martin, who presided over the Federal Reserve in the 1950s and '60s, confined economists to
the basement.
Starting in the l970s, however, economists began to wield extraordinary influence..."
I know all who are discussing financial matters here know this - it was just good for me
to see it spelled out. I see, however, the rest of the review is very economist oriented and
no mention of Michael Hudson whatsoever; it is, after all, the Atlantic. Yay for Roosevelt
and Kennedy though!
The
Economics Debate, again and again The debate on the economics profession – its
alleged ills and failings -- abates at times, but never ends. A recent
piece in The Guardian taking the profession to task for its lack of reform has prompted a
response from a group of economists. I thought it was time to re-up my own views on this
debate, in the form of two sets of ten commandments. The first set is directed at economists,
and the second to non-economists.
Ten commandments for economists
1. Economics is a collection of models; cherish their diversity.
2. It's a model, not the model.
3. Make your model simple enough to isolate specific causes and how they
work, but not so simple that it leaves out key interactions among causes.
4. Unrealistic assumptions are OK; unrealistic critical assumptions
are not OK.
5. The world is (almost) always second-best.
6. To map a model to the real world you need explicit empirical
diagnostics, which is more craft than science.
7. Do not confuse agreement among economists for certainty about how the
world works.
8. It's OK to say "I don't know" when asked about the economy or
policy.
9. Efficiency is not everything.
10. Substituting your values for the public's is an abuse of your
expertise.
Ten commandments for non-economists
1. Economics is a collection of models with no predetermined conclusions;
reject any arguments otherwise.
2. Do not criticize an economist's model because of its assumptions; ask
how the results would change if certain problematic assumptions were more realistic.
3. Analysis requires simplicity; beware of incoherence that passes itself
off as complexity.
4. Do not let math scare you; economists use math not because they are
smart, but because they are not smart enough.
5. When an economist makes a recommendation, ask what makes him/her sure
the underlying model applies to the case at hand.
6. When an economist uses the term "economic welfare," ask what s/he means
by it.
7. Beware that an economist may speak differently in public than in the
seminar room.
8. Economists don't (all) worship markets, but they know better how they
work than you do.
9. If you think all economists think alike, attend one of their
seminars.
10. If you think economists are especially rude to non-economists, attend
one of their seminars.
I have spent enough time around non-economists to know that their criticism often misses the
mark. In particular, many non-economists tend not to understand the value of parsimonious
modeling (especially of the mathematical kind). Their typical riposte is: "but it is more
complicated than that." It is of course. But without abstraction from detail, there cannot be
any useful analysis.
Economists, on the other hand, are very good at modeling but not so good at navigating among
their models. In particular, they often confuse a model, for the model. A big
part of the problem is that the implicit scientific method to which they subscribe is one in
which they are constantly striving to achieve the "best" model.
Macroeconomists are particularly bad at this, which accounts in part for their dismal
performance. In macroeconomics, there is too much of "is the right model the classical or the
Keynesian one" (and their variants), and too little of "how do we know whether it is the
Keynesian or the classical model that is the most relevant and applicable at this point in time
in this particular context."
By Anat R. Admati, the George G.C. Parker Professor of Finance and Economics at Stanford University Graduate School of Business
(GSB), a Director of the GSB Corporations and Society Initiative, and a senior fellow at Stanford Institute for Economic Policy Research.
Originally published at
ProMarket
Author's note: This essay is based on a speech I gave at the
Stigler Center 2019 Conference on Political Economy of Finance. Whereas the content refers to my experiences as an academic with
expertise in finance and economics, the key ideas apply to other areas in business schools and beyond. I hope colleagues will reflect
on the harm from silos and on our opportunities as academics to benefit society.
In the real world, it turned out, important economic outcomes are often the consequences of political forces. During 2010, people
within regulatory bodies told me privately that false and misleading claims were affecting key policy decisions. They urged me to
help clarify the issues and I felt compelled to become involved. Despite years of
research and advocacy , however, flawed
claims persist and still have an impact. (A recently
updated document lists and debunks 34 such claims.)
Many of my experiences in the last decade, which involved extensive interactions outside as well as within academia, were sobering.
I saw confusion, willful blindness , political
forces, various and sometimes subtle forms of corruption, and
moral disengagement
, first hand. The harm from economists ignoring political economy became increasingly evident. There was no way for me to return
to ignoring the issues.
It was also impossible to explain my experiences using economics alone. In writing an essay in 2016 for a book on Finance in
a Just Society edited by a philosopher, I went beyond economics and finance and drew from scholarship in political science, law,
sociology, and social psychology. My essay was entitled " It
Takes a Village to Maintain a Dangerous Financial System ."
Sadly, among the enablers of our inefficient and distorted financial system are economists and academics. Perhaps most shocking,
a fallacious claim about the impact and "cost" of more equity funding, which contradicts basic teachings in corporate finance, has
been included in many versions and editions of banking textbooks authored by prominent academic and former Federal Reserve governor
Frederic Mishkin. (See Section 3.3
here or Chapter 8 of The Bankers' New Clothes .)A risk manager
in one of the largest banks, whom I met in 2016 at a conference attended almost exclusively by practitioners and regulators and who
had dropped out of a top doctoral program in finance, quipped in an email after quoting from an academic paper: "with such friends
[as academics], who needs lobbyists?"
Lobbyists, who engage in "marketing" ideas to policymakers and to the public, are actually influential. They know how to work
the system and can dismiss, take out of context, misquote, misuse, or promote research as needed. If policymakers or the public are
unable or unwilling to evaluate the claims people make, lobbyists and others can create confusion and promote misleading narratives
if it benefits them. In the real political economy, good ideas and worthy research can fail to gain traction while bad ideas and
flawed research can succeed and have an impact.
Luigi Zingales highlighted political economy issues within our profession in a 2013 essay entitled "
Preventing
Economists' Capture " and in his 2015
AFA presidential address entitled "
Does Finance Benefit Society
?" Zingales notes and laments a pro-business and pro-finance bias within economics and finance and the pervasive blindness to
issues such as corporate fraud and political forces. "Awareness of the risk of [economists'] capture is the first line of defense,"
he writes in his 2013 essay. I agree that the issues are real yet often denied or ignored, and that recognizing problems is essential
for addressing them.
Governance and political economy challenges are pervasive beyond banking, where I encountered them so clearly. For example, corporate
governance research, including my own coauthored papers (in
1994 and
2009 ) on shareholder activism, has focused almost exclusively on conflicts between shareholders and managers, effectively assuming
that competitive markets, contracts, and laws protect everyone except for the narrowly-defined "shareholder" -- who is implicitly
assumed to own only one corporation's shares and to care only about the price of those shares.
Having observed governance and policy failures in banking, I realized that the focus on shareholder-manager conflicts is far too
narrow and often misses the most important problems. We must also worry about the governance of the institutions that create and
enforce the rules for all. How power structures and information asymmetries play out within and between institutions in the private
and public sectors is critical.
A 2017 Journal of Economic Perspectives Symposium on the modern corporation includes
an essay I wrote on the distortions that arise
as a result of the focus in corporate governance on financialized targets that purport to capture "shareholder value" when combined
with political economy forces that can lead to governments failing to set and enforce proper rules. The symposium also includes
an essay by Luigi Zingales on how political
and market power feed off each other. We both noted that more public awareness and understanding of these problems is essential for
addressing them.
Economists and academics have numerous opportunities to be helpful by looking more frequently out of their windows, expanding
their domain beyond "solved political problems," collaborating across disciplines, and bringing back a more holistic approach to
their work. Small changes in this direction are starting to happen, as the Stigler Center's conferences on the political economy
of finance show, but we can and should do much more.
Numerous research topics are ripe for more study by theorists and empiricists. Within the following long list of topics (still
a partial one) there are low-hanging fruits and more challenging problems that may require interdisciplinary reach and which tenured
academics are in a particularly privileged position to take on: whistleblower policies, the impact of consumers, employees, and politicians
on corporate actions, accounting rules for derivatives, the effectiveness of boards, audits and auditors regulation, the design of
bankruptcy laws, money laundering, corporate fraud, the organization and pricing of deposit insurance, debt subsidies, the role of
financial literacy and ideology in policy discussions, the structure and governance of regulatory agencies and central banks, lobbying
of multinational corporations, the governance of international bodies such as Financial Stability Board, Basel Committee, and IMF,
and the political economy of corporate enforcement.
Engaging with policy issues in our research and teaching, and even engaging in
advocacy when appropriate and effectively lobbying on behalf
of the public (for example by writing
comment letters or
opinion pieces ) can be valuable and important. Policy
involvement, however, requires not only disclosing
potential conflicts of interest but, most importantly, scrutinizing research carefully to ensure it is adequate for guiding policy.
A problem I have become acutely aware of is that economists and others can be cavalier in claiming that research is relevant for
real-world application without such scrutiny.
As a theorist, I know models have unrealistic and sometimes stylized assumptions, yet models can bring important insights, and
theoretical and empirical papers that capture key features of the real world can be useful for policy. It takes a big leap of faith,
however, and can actually do more harm than good, to claim that models whose assumptions greatly distort the real world are adequate
for real-world applications. Specific examples are discussed in the
first paper I wrote with Peter DeMarzo,
Martin Hellwig, and Paul Pfleiderer (Sections 5-7), the
omitted chapter from the book I wrote with Martin Hellwig, Paul Pfleiderer's
paper on the misuse of models in finance
and economics (which starts with the old joke about the economist assuming a can opener on a deserted island and, among other things,
compares economics and physics) and a recent
presentation by Paul Pfleiderer that discusses the role of assumptions in theoretical and empirical research and which includes
great visuals.
The key takeaways if research is claimed to be relevant for the real world are:
Just because a model claims to "explain" something in the real world does not give it logical or actual validity . Even if
we may never have the data to be able to reject a model, there are ways to apply casual empiricism ("if this model was true, we would
observe x and we don't"), and we must be especially careful if a model contradicts other plausible explanations for what we see.
(Consider: "cigarette smoking improves people's health" as an "explanation" of why people smoke.) Just because a model can be
"calibrated" does not give it logical or actual validity .
Applying inadequate economic models to policy in the real world is akin to building bridges using flawed engineering models. Serious
harm may follow.
We can also enrich our teaching and connect more dots for our students by
developing interdisciplinary courses and by bringing out
the bigger picture, at least occasionally, in teaching standard courses. For example, basic corporate finance courses show how to
calculate the debt tax shield, and we should point out that there is no good reason for the tax code to subsidize debt relative to
equity and that this tax code can create distortions. We can also ask whether shareholders as individuals actually want a company
in which they hold shares to pursue "
positive Net Present Value
" projects that involve pollution or deceptive marketing of harmful products.
Many students are anxious to have such discussions. There is a broad sense today that standard business practices and dysfunctional
governments have exacerbated economic, social, and political problems. We must find ways to broaden the discussion beyond our narrow
lanes. Academic silos are part of the problem, and we should break them to be part of the solution.
Finally, we can and should engage in trying to ensure that governments and other institutions serve society. If only conflicted
experts engage in the process of creating rules, especially on important issues that appear technical and confusing such as accounting
standards or financial regulation, we get what Karthik Ramanna calls "
thin political markets " and
our assumptions about markets are more likely to be false. Academics may be in the best position to inform policy, expose flawed
or poorly enforced rules, and help hold power to account. We cannot assume others will be able or willing to do it without our help.
Governance and politics are key to outcomes everywhere. Related issues about power and control and about the respective roles
of governments and private sector institutions are playing out prominently today in the technology sector. A course I
taught recently about
the internet allowed me to compare and contrast the finance and internet sectors. The Stigler Center has laudably been informing
policy related to digital platforms .
In a recent Harvard
Business Review piece, I argue that business schools should practice and promote "civic-minded leadership" much more than
they currently do. (The text is also available
here .) I hope more academics and academic institutions recognize and embrace the great opportunities we have to try to make
the world a better place.
Does anyone know of a good book (or series of books) that discusses the history and evolution of economics. Ideally, I'm looking
for something that discusses particular political philosophers (e.g Adam Smith, Marx, Keynes, Mises, etc.) in sequence. What I'm
interested in is not only their ideas, but also their histories–what were the circumstances of their lives that lead to their
ideas and how did the political environment they found themselves in contribute. Also, how were the philosophies adopted or corrupted
by followers (e.g. Marx and Russian communism, Adam Smith and neoliberalism). I have yet to find a truly comprehensive book that
has this info. I would expect a title something like "History of Political Economy." Any suggestions from the NC commentariate?
So far I haven't found one book that covers it all. And most books I do find try to describe all economic thought in terms
of the author's particular belief system, which to me isn't all that helpful. So I read a lot of books on history, economics,
and archeology to try and piece together an accurate story. And I still have not read nearly enough to have a complete picture.
If I was much smarter I'd try to do it on my own. Sadly, I'm only mildly intelligent and a crappy writer. Somebody get Michael
Hudson on this so I can read it. I'll start the Kickstarter campaign.
It's much like religion in that introspection and study is generally confined to the walled-garden-containing-all-that-is-true-in-this-world
of choice.
This question intrigued me enough to explore what the Library of Congress catalog has to offer in response to it. The short
answer, based on a good deal of rather fancy searching, is not much -- in English. The subject heading, "Economics–History," is
the one that LC applies to the history of economics as a discipline. However, it retrieves so many citations as to be all but
useless, even when those results are sorted chronologically, because it has been applied to so many works that treat narrow rather
than broad sub-topics. LC has numerous books sharing the straightforward title, History of Economic Thought; they range in date
from 1911 on. The oldest is by Lewis F. Haney. The latest of them seems to be the 2nd "updated" edition of History of Economic
Thought, by E. K. Hunt (2002).
The Library of Congress has also established the subject heading "Political economy–history." However,
it is attached to only one title that covers the topic broadly: Histoire de la pensée économique : abrégé des analyses et
des théories économiques des origines au XXe siècle / Alain Redslob (2011). Despite characterizing itself as a 'summary' the
book comes in at a hefty 355 pages. LC classifies this work at HB75. A title search on "Political Economy" yields, to my eye,
only one somewhat recent work that seems to offer a general treatment: Political economy / Dan Usher (2003). Coming in at 427
pages, it is classified as "Economics" and classed at HB171.5. LC applies the heading 'Economics–Historiography" to eleven works
of which the most relevant here may be: History and historians of political economy / Werner Stark ; edited by Charles M.A. Clark
(1994). As a check of those results a bit of googling turned up a set of essays edited by Maxine Berg under the title, Political
Economy in the Twentieth Century (1990), which set out to represent thinking outside the 'mainstream' of neoclassical or Keynesian
traditions. LC classes it at HB87.
For books titled "History of Political Economy" it looks like one would have to go back into
the 19th century, to discover works bearing just such a title by John K. Ingram (1888; reprinted 2013 by Cambridge UP) and Gustav
Cohn (1894), thus apparently from the point where the Berg essays begin. I have read nothing by any of the authors I've mentioned
here; am just posting the outcome of my searching fwiw.
I have, but haven't yet finished, "An Economist's Guide to Economic History" by Blum and Colvin. If the text itself is insufficient,
the bibliography ought to be pretty comprehensive.
Yes Galbraith Sr was the last classical that pointed out the failings of the payed for PR merchants that some have called economists
and to rub salt in that wound claim dominate economics has no value based biases.
Richard Wolff (of Democracy at Work) has one but I'm not able to search for the title. Just google/qwant his name and a title
that you will recognize as what you are looking for will appear.
I've skimmed that book and it seemed accessible and neatly putting together timelines and major inflection points in the development
or economics.
"In the real world, it turned out, important economic outcomes are often the consequences of political forces."
Sorry to sound mean, but, duh.
"The key takeaways if research is claimed to be relevant for the real world are:
Just because a model claims to "explain" something in the real world does not give it logical or actual validity. Even if we
may never have the data to be able to reject a model, there are ways to apply casual empiricism ("if this model was true, we would
observe x and we don't"), and we must be especially careful if a model contradicts other plausible explanations for what we see.
(Consider: "cigarette smoking improves people's health" as an "explanation" of why people smoke.)"
Did the individuals she is addressing ever take a required undergraduate course in research methods?
Not understanding that is like believing that money does actually grow on trees. I don't understand how this could be
a revelation to supposedly intelligent people with advanced degrees.
You've got Evonomic's newsletter sign-up text box, copy-pasted in here, along with the article text. Guessing that wasn't intentional.
Mentioning it just in case.
This has "Academics may be in the best position to inform policy, expose flawed or poorly enforced rules, and help hold power
to account. We cannot assume others will be able or willing to do it without our help."
Given the funding method for much of academics (wealthy patrons, wealthy think tanks, wealthy companies and wealthy parents)
is it reasonable to expect that academics will truly speak truth to power?
In my view, the article implies a more vigilant economic profession COULD be important in influencing policy.
But I have doubts this could occur.
Economics and economists may be used in the same way that an insurance company executive told me that outside consultants were
sometimes chosen at his firm.
He suggested that consultants were sometimes selected because they were expected to agree with what management wanted to do.
One could suggest that similar dynamics exist for newspaper editorial writers.
If editorial writers were to go counter to their expected editorial content (right or left), they could well be expecting their
future paychecks would be at risk.
Western economics has evolved to serve TPTB, not the common good.
One can see that outside voices, such as Steve Keen and Michael Hudson, are relegated to outside the mainstream.
And on top of that, as Nassim Nicholas Taleb and others have regularly pointed out, achieving a high degree of efficiency
typically comes at the expense of safety.
An old Star Trek episode titled The Trouble With Tribbles is about Star Fleet and Klingons disputing ownership of a planet
which can grow vast amounts of food grains. In one short scene the Klingons claim ownership based on their more efficient exploitation
of resources (more efficient than the Federation) which, they claim, gives them 'rights' to own the planet. To which either McCoy
or Kirk say to themselves, "Oh yes, they're efficient all right. Ruthless, but efficient."
And on top of that, as Nassim Nicholas Taleb and others have regularly pointed out, achieving a high degree of efficiency
typically comes at the expense of safety.
No system ever operates at a greater efficiency than at the moment before its collapse.
Just something to think about, Capitalism rewarding efficiency rather than sustainability or robustness. Both of these require
the expenditure of resources, costs, which subtract from potential profits.
Yes, exactly. I liked this piece, long overdue for me. But what exactly is "efficiency"? I agree that there is no good reason
for the tax code to subsidize debt if, if, adequate financing is otherwise available. Hence the question: Why is there no alternative?
I dunno about small changes but I'm pretty sure we need to be able to downshift, as opposed to spinning out disastrously. There's
this too: finance itself (because financial time is much faster than ordinary time) is more desperate, even frantic, to maintain
its survival in a competitive "economy" so that as finance turns into financialization it achieves critical mass. And in order
just to hang on and not explode requires massive infusions of new money just so finance can stay on top of their own monster.
Some rodeo. The first good regulation for economic security might be to extend financial time – reducing the necessity for huge
turnover profits. But doing so in a way that preserves finance in a tame and domestic manner. Like preventing all the animals
in the barn from eating exponential volumes of alfalfa and producing mud slides of manure in order that the noble farmer doesn't
lose his tennies whilst mucking . Thereby reducing the risks inherent in equity finding – which for a sole proprietor (should
any still exist) is also known as crushing debt.
> The first good regulation for economic security might be to extend financial time – reducing the necessity for huge turnover
profits.
In ecology there is a tau function, the delay time. Predator population lags prey variation and can stabilize systems. And
Theo Compernelle gives details about delaying response time, as the productivity of a work session drops with the number of interruptions.
The Oct 28 Links included the article "Asynchronous Communication: The Real Reason Remote Workers Are More Productive", along
similar lines.
This seems to go against instant messaging, hi frequency trading, and OODA loops. But those seem to operate best in disregulated
situations. To extend financial time – what would that do to speculation?
Edit: Also, Taleb had something on taking data points too often leading to noisy results.
tau function seems to apply here. so as not to eat the seed corn. by extending financial time I meant slow it way down, in
my mind that means extending obligations over a much longer period. That might also mean many fewer financings, less opportunity
to speculate. tau is interesting; nice to know nature has this one figured out.
speculation is the "money" in financial markets. lenghten time=0 opportunity=0liquidity
on the other hand maybe another LTCM can be avoided.
pet theory, financial markets and all their attendend complexity exist to abosrb blasting high energy, innovation to assure survival,nutjob
i know
I'm thinking that one possibility would be money that expires after a set amount of time. Say one year. Money could not then
be used as an asset. It would have to be continuously and reliably spent. All assets would be physical. For one thing, we would
know what society really possessed, as opposed to the imaginary stuff/asset money is.
When I was a little boy, obsessing over Christmas presents, it seemed to me that politics was economics and that economics
was about the extraction of resources from the earth, and from human beings, with all kinds of shenanigans about timing.
No matter how much I learn, it seems that not much has changed.
Thank you for this post! Political economics is a much better name for this pseudo science. If aerospace engineers were wrong
as often as theses clowns airplanes would routinely fall out of the air.
And as Boeing so aptly demonstrates, putting the MBA PMC types in charge of the engineers, also results in airplanes falling
out of the air.
But huge props to Steve Keen for calling this out!
Paul Samuelson and Milton Friedman took the "animal spirits" out of economics and turned it into a mathematical model. However,
the behavioral economics and psychological research has shown that people are hard-wired in ways that make the mathematical models
flawed and erroneous.
As a design engineer, we use lots of complex modeling but ultimately our design blueprints and specifications are not rigidly
based on these models because people and/or robots have to build and operate the things. So there is a fair amount of simplification
and clarification that has to happen to have something built without major errors and then operated without major errors, as well
as maintained with varying levels of attention and funding. These require a fair amount of understanding about how humans process
and execute things and/or the limitations on what can be programmed into robots and computers.
I point out to junior engineers that the people who will build and operate the systems did not necessarily graduate in the
top 25% of their high school class unlike the designers. However, many of them have different skill sets that the designers don't
have, such as how to operate heavy equipment and do physical trade activities. So we need to design systems to a common denominator
that work from design and operations viewpoints.
In economics, we are seeing the systems being biased by focusing on theoretical models that don't actually work in practice
because they don't account for what people actually do compared to what a "rational" model says they should do. Hence the crap
about "trickle-down" that never actually works in practice in tax cut plans for the wealthy. Similarly, complex private healthcare
systems in the US don't remotely follow a "perfect information" model that would allow the "invisible hand" to produce efficiency.
so we get massive bloat and rentiere models that prey on consumers. However, that has become a feature, not a bug, on K-street.
Thank you X 10. Samuelson and Friedman claimed they could take the "animal spirits", aka human nature however defined, out
of economics. The claim amounts to saying they could measure, quantify, model, and manipulate human responses to changing situations,
which amounts to a claim of god-like understanding of human mental capacities. How do they measure a human? Reason and logic and
measurable outputs are only a part – and how large a part is as yet undetermined – in human awareness and decision making. Logic
is a good servant but a bad master, as the saying goes. Samuelson and Friedman construct a 'rational man' without ever questioning
the epistemology of their construct. (Mary Shelly might recognize the conceit.)
Michael Hudson is perhaps the best place to start. (Bill Black is a close second. Author of "The Best Way to Rob a Bank is
to Own One.")
Really, if one's education includes a healthy dose of history, anthropology, sociology, politics, and social theory, it's tempting
to suggest that economics is a self-important and smug discipline. Wow, politics affects markets, property relations, and conflict
over economic surplus! Wow. Good to know. And someone just told me that human beings aren't as rational as economists assume.
Wow again. Thanks.
"... "There's a whole neoliberal agenda," she said, referencing the received free-market wisdom that cutting public budgets spurs economic growth. "And then the way that traditional theory has fomented it or not contested it -- there's been kind of a strange symbiosis between mainstream economic thinking and stupid policies." ..."
"... Dr. Mazzucato takes issue with many of the tenets of the neoclassical economic theory taught in most academic departments: its assumption that the forces of supply and demand lead to market equilibrium, its equation of price with value and -- perhaps most of all -- its relegation of the state to the investor of last resort, tasked with fixing market failure. She has originated and popularized the description of the state as an "investor of first resort," envisioning new markets and providing long-term, or "patient," capital at early stages of development. ..."
"... Emphasizing to policymakers not only the importance of investment, but also the direction of that investment -- "What are we investing in?" she often asks -- Dr. Mazzucato has influenced the way American politicians speak about the state's potential as an economic engine. In her vision, governments would do what so many traditional economists have long told them to avoid: create and shape new markets, embrace uncertainty and take big risks. ..."
Meet the Leftish Economist With a New Story About Capitalism
Mariana Mazzucato wants liberals to talk less about the redistribution of wealth and more
about its creation. Politicians around the world are listening.
By Katy Lederer
Mariana Mazzucato was freezing. Outside, it was a humid late-September day in Manhattan,
but inside -- in a Columbia University conference space full of scientists, academics and
businesspeople advising the United Nations on sustainability -- the air conditioning was on
full blast.
For a room full of experts discussing the world's most urgent social and environmental
problems, this was not just uncomfortable but off-message. Whatever their dress -- suit,
sari, head scarf -- people looked huddled and hunkered down. At a break, Dr. Mazzucato
dispatched an assistant to get the A.C. turned off. How will we change anything, she wondered
aloud, "if we don't rebel in the everyday?"
Dr. Mazzucato, an economist based at University College London, is trying to change
something fundamental: the way society thinks about economic value. While many of her
colleagues have been scolding capitalism lately, she has been reimagining its basic premises.
Where does growth come from? What is the source of innovation? How can the state and private
sector work together to create the dynamic economies we want? She asks questions about
capitalism we long ago stopped asking. Her answers might rise to the most difficult
challenges of our time.
In two books of modern political economic theory -- "The Entrepreneurial State" (2013) and
"The Value of Everything" (2018) -- Dr. Mazzucato argues against the long-accepted binary of
an agile private sector and a lumbering, inefficient state. Citing markets and technologies
like the internet, the iPhone and clean energy -- all of which were funded at crucial stages
by public dollars -- she says the state has been an underappreciated driver of growth and
innovation. "Personally, I think the left is losing around the world," she said in an
interview, "because they focus too much on redistribution and not enough on the creation of
wealth."
Her message has appealed to an array of American politicians. Senator Elizabeth Warren,
Democrat of Massachusetts and a presidential contender, has incorporated Dr. Mazzucato's
thinking into several policy rollouts, including one that would use "federal R & D to
create domestic jobs and sustainable investments in the future" and another that would
authorize the government to receive a return on its investments in the pharmaceutical
industry. Dr. Mazzucato has also consulted with Representative Alexandria Ocasio-Cortez,
Democrat of New York, and her team on the ways a more active industrial policy might catalyze
a Green New Deal.
Even Republicans have found something to like. In May, Senator Marco Rubio of Florida
credited Dr. Mazzucato's work several times in "American Investment in the 21st Century," his
proposal to jump-start economic growth. "We need to build an economy that can see past the
pressure to understand value-creation in narrow and short-run financial terms," he wrote in
the introduction, "and instead envision a future worth investing in for the long-term."
Formally, the United Nations event in September was a meeting of the leadership council of
the Sustainable Development Solutions Network, or S.D.S.N. It's a body of about 90 experts
who advise on topics like gender equality, poverty and global warming. Most of the attendees
had specific technical expertise -- Dr. Mazzucato greeted a contact at one point with,
"You're the ocean guy!" -- but she offers something both broad and scarce: a compelling new
story about how to create a desirable future.
'Investor of first resort'
Originally from Italy -- her family left when she was 5 -- Dr. Mazzucato is the daughter
of a Princeton nuclear physicist and a stay-at-home mother who couldn't speak English when
she moved to the United States. She got her Ph.D. in 1999 from the New School for Social
Research and began working on "The Entrepreneurial State" after the 2008 financial crisis.
Governments across Europe began to institute austerity policies in the name of fostering
innovation -- a rationale she found not only dubious but economically destructive.
"There's a whole neoliberal agenda," she said, referencing the received free-market
wisdom that cutting public budgets spurs economic growth. "And then the way that traditional
theory has fomented it or not contested it -- there's been kind of a strange symbiosis
between mainstream economic thinking and stupid policies."
Dr. Mazzucato takes issue with many of the tenets of the neoclassical economic theory
taught in most academic departments: its assumption that the forces of supply and demand lead
to market equilibrium, its equation of price with value and -- perhaps most of all -- its
relegation of the state to the investor of last resort, tasked with fixing market failure.
She has originated and popularized the description of the state as an "investor of first
resort," envisioning new markets and providing long-term, or "patient," capital at early
stages of development.
In important ways, Dr. Mazzucato's work resembles that of a literary critic or rhetorician
as much as an economist. She has written of waging what the historian Tony Judt called a
"discursive battle," and scrutinizes descriptive terms -- words like "fix" or "spend" as
opposed to "create" and "invest" -- that have been used to undermine the state's appeal as a
dynamic economic actor. "If we continue to depict the state as only a facilitator and
administrator, and tell it to stop dreaming," she writes, "in the end that is what we
get."
As a charismatic figure in a contentious field that does not generate many stars -- she
was recently profiled in Wired magazine's United Kingdom edition -- Dr. Mazzucato has her
critics. She is a regular guest on nightly news shows in Britain, where she is pitted against
proponents of Brexit or skeptics of a market-savvy state.
Alberto Mingardi, an adjunct scholar at the libertarian Cato Institute and director
general of Istituto Bruno Leoni, a free-market think tank, has repeatedly criticized Dr.
Mazzucato for, in his view, cherry-picking her case studies, underestimating economic
trade-offs and defining industrial policy too broadly. In January, in an academic piece
written with one of his Cato colleagues, Terence Kealey, he called her "the world's greatest
exponent today of public prodigality."
Her ideas, though, are finding a receptive audience around the world. In the United
Kingdom, Dr. Mazzucato's work has influenced Jeremy Corbyn, leader of the Labour Party, and
Theresa May, a former Prime Minister, and she has counseled the Scottish leader Nicola
Sturgeon on designing and putting in place a national investment bank. She also advises
government entities in Germany, South Africa and elsewhere. "In getting my hands dirty," she
said, "I learn and I bring it back to the theory."
The 'Mission Muse'
During a break at the United Nations gathering, Dr. Mazzucato escaped the air conditioning
to confer with two colleagues in Italian on a patio. Tall, with a muscular physique, she wore
a brightly colored glass necklace that has become something of a trademark on the economics
circuit. Having traveled to five countries in eight days, she was fighting off a cough.
"In theory, I'm the 'Mission Muse,'" she joked, lapsing into English. Her signature
reference is to the original mission to the moon -- a state-spurred technological revolution
consisting of hundreds of individual feeder projects, many of them collaborations between the
public and private sectors. Some were successes, some failures, but the sum of them
contributed to economic growth and explosive innovation.
Dr. Mazzucato's platform is more complex -- and for some, controversial -- than simply
encouraging government investment, however. She has written that governments and state-backed
investment entities should "socialize both the risks and rewards." She has suggested the
state obtain a return on public investments through royalties or equity stakes, or by
including conditions on reinvestment -- for example, a mandate to limit share buybacks.
Emphasizing to policymakers not only the importance of investment, but also the
direction of that investment -- "What are we investing in?" she often asks -- Dr. Mazzucato
has influenced the way American politicians speak about the state's potential as an economic
engine. In her vision, governments would do what so many traditional economists have long
told them to avoid: create and shape new markets, embrace uncertainty and take big
risks.
... ... ...
Earlier in the day, she pointed at an announcement on her laptop. She had been nominated
for the first Not the Nobel Prize, a commendation intended to promote "fresh economic
thinking." "Governments have woken up to the fact the mainstream way of thinking isn't
helping them," she said, explaining her appeal to politicians and policymakers. A few days
later, she won.
Then she would advocate free banking, like Selgin. Better more efficient banking is a huge
and profitable investment for government.
So before the leftwards jump on her idea of investment, start here and explain why
suddenly, making finance more efficient for everyone is a bad idea.
Or ask our knee jerkers, before they jump on her ideas with all their delusions, why not
invest in dumping the primary dealer system? That is obviously inefficient and generates the
ATM costs we pay. Why not remove that with a sound investment f some sort?
Everything is through the eye of the beholder, for lelftwards it is the wonder of central
planning, for the libertariaturds it is about efficiency via decentralization.
Then comes meetup, and waddya know, each side brings a 200 page insurance contract they
want guaranteed before any efficiency changes are made. The meeting selects business as
normal. We will select business as normal, our economists will approve.
I am thrilled / s at the feeling of fulfillment I, well, feel, that an academic deems the
obvious. It definitely, indicates that we are approaching, wokeness !
Economists are beginning to evolve, again, almost, but not quite capturing the curl of the
real time world.
" There's a whole neoliberal agenda," she said, referencing the received free-market wisdom
that cutting public budgets spurs economic growth. "And then the way that traditional theory
has fomented it or not contested it -- there's been kind of a strange symbiosis between
mainstream economic thinking and stupid policies."
That is a deep vision that needs to be unpacked. My impression of traditional theory is
that it discourages the neoliberal, market deism.
"... "There's a whole neoliberal agenda," she said, referencing the received free-market wisdom that cutting public budgets spurs economic growth. "And then the way that traditional theory has fomented it or not contested it -- there's been kind of a strange symbiosis between mainstream economic thinking and stupid policies." ..."
"... Dr. Mazzucato takes issue with many of the tenets of the neoclassical economic theory taught in most academic departments: its assumption that the forces of supply and demand lead to market equilibrium, its equation of price with value and -- perhaps most of all -- its relegation of the state to the investor of last resort, tasked with fixing market failure. She has originated and popularized the description of the state as an "investor of first resort," envisioning new markets and providing long-term, or "patient," capital at early stages of development. ..."
Meet the Leftish Economist With a New Story About Capitalism
Mariana Mazzucato wants liberals to talk less about the redistribution of wealth and more about
its creation. Politicians around the world are listening.
By Katy Lederer
Mariana Mazzucato was freezing. Outside, it was a humid late-September day in Manhattan, but
inside -- in a Columbia University conference space full of scientists, academics and
businesspeople advising the United Nations on sustainability -- the air conditioning was on
full blast.
For a room full of experts discussing the world's most urgent social and environmental
problems, this was not just uncomfortable but off-message. Whatever their dress -- suit, sari,
head scarf -- people looked huddled and hunkered down. At a break, Dr. Mazzucato dispatched an
assistant to get the A.C. turned off. How will we change anything, she wondered aloud, "if we
don't rebel in the everyday?"
Dr. Mazzucato, an economist based at University College London, is trying to change
something fundamental: the way society thinks about economic value. While many of her
colleagues have been scolding capitalism lately, she has been reimagining its basic premises.
Where does growth come from? What is the source of innovation? How can the state and private
sector work together to create the dynamic economies we want? She asks questions about
capitalism we long ago stopped asking. Her answers might rise to the most difficult challenges
of our time.
In two books of modern political economic theory -- "The Entrepreneurial State" (2013) and
"The Value of Everything" (2018) -- Dr. Mazzucato argues against the long-accepted binary of an
agile private sector and a lumbering, inefficient state. Citing markets and technologies like
the internet, the iPhone and clean energy -- all of which were funded at crucial stages by
public dollars -- she says the state has been an underappreciated driver of growth and
innovation. "Personally, I think the left is losing around the world," she said in an
interview, "because they focus too much on redistribution and not enough on the creation of
wealth."
Her message has appealed to an array of American politicians. Senator Elizabeth Warren,
Democrat of Massachusetts and a presidential contender, has incorporated Dr. Mazzucato's
thinking into several policy rollouts, including one that would use "federal R & D to
create domestic jobs and sustainable investments in the future" and another that would
authorize the government to receive a return on its investments in the pharmaceutical industry.
Dr. Mazzucato has also consulted with Representative Alexandria Ocasio-Cortez, Democrat of New
York, and her team on the ways a more active industrial policy might catalyze a Green New
Deal.
Even Republicans have found something to like. In May, Senator Marco Rubio of Florida
credited Dr. Mazzucato's work several times in "American Investment in the 21st Century," his
proposal to jump-start economic growth. "We need to build an economy that can see past the
pressure to understand value-creation in narrow and short-run financial terms," he wrote in the
introduction, "and instead envision a future worth investing in for the long-term."
Formally, the United Nations event in September was a meeting of the leadership council of
the Sustainable Development Solutions Network, or S.D.S.N. It's a body of about 90 experts who
advise on topics like gender equality, poverty and global warming. Most of the attendees had
specific technical expertise -- Dr. Mazzucato greeted a contact at one point with, "You're the
ocean guy!" -- but she offers something both broad and scarce: a compelling new story about how
to create a desirable future.
'Investor of first resort'
Originally from Italy -- her family left when she was 5 -- Dr. Mazzucato is the daughter of
a Princeton nuclear physicist and a stay-at-home mother who couldn't speak English when she
moved to the United States. She got her Ph.D. in 1999 from the New School for Social Research
and began working on "The Entrepreneurial State" after the 2008 financial crisis. Governments
across Europe began to institute austerity policies in the name of fostering innovation -- a
rationale she found not only dubious but economically destructive.
"There's a whole neoliberal agenda," she said, referencing the received free-market
wisdom that cutting public budgets spurs economic growth. "And then the way that traditional
theory has fomented it or not contested it -- there's been kind of a strange symbiosis between
mainstream economic thinking and stupid policies."
Dr. Mazzucato takes issue with many of the tenets of the neoclassical economic theory
taught in most academic departments: its assumption that the forces of supply and demand lead
to market equilibrium, its equation of price with value and -- perhaps most of all -- its
relegation of the state to the investor of last resort, tasked with fixing market failure. She
has originated and popularized the description of the state as an "investor of first resort,"
envisioning new markets and providing long-term, or "patient," capital at early stages of
development.
In important ways, Dr. Mazzucato's work resembles that of a literary critic or rhetorician
as much as an economist. She has written of waging what the historian Tony Judt called a
"discursive battle," and scrutinizes descriptive terms -- words like "fix" or "spend" as
opposed to "create" and "invest" -- that have been used to undermine the state's appeal as a
dynamic economic actor. "If we continue to depict the state as only a facilitator and
administrator, and tell it to stop dreaming," she writes, "in the end that is what we get."
As a charismatic figure in a contentious field that does not generate many stars -- she was
recently profiled in Wired magazine's United Kingdom edition -- Dr. Mazzucato has her critics.
She is a regular guest on nightly news shows in Britain, where she is pitted against proponents
of Brexit or skeptics of a market-savvy state.
Alberto Mingardi, an adjunct scholar at the libertarian Cato Institute and director general
of Istituto Bruno Leoni, a free-market think tank, has repeatedly criticized Dr. Mazzucato for,
in his view, cherry-picking her case studies, underestimating economic trade-offs and defining
industrial policy too broadly. In January, in an academic piece written with one of his Cato
colleagues, Terence Kealey, he called her "the world's greatest exponent today of public
prodigality."
Her ideas, though, are finding a receptive audience around the world. In the United Kingdom,
Dr. Mazzucato's work has influenced Jeremy Corbyn, leader of the Labour Party, and Theresa May,
a former Prime Minister, and she has counseled the Scottish leader Nicola Sturgeon on designing
and putting in place a national investment bank. She also advises government entities in
Germany, South Africa and elsewhere. "In getting my hands dirty," she said, "I learn and I
bring it back to the theory."
The 'Mission Muse'
During a break at the United Nations gathering, Dr. Mazzucato escaped the air conditioning
to confer with two colleagues in Italian on a patio. Tall, with a muscular physique, she wore a
brightly colored glass necklace that has become something of a trademark on the economics
circuit. Having traveled to five countries in eight days, she was fighting off a cough.
"In theory, I'm the 'Mission Muse,'" she joked, lapsing into English. Her signature
reference is to the original mission to the moon -- a state-spurred technological revolution
consisting of hundreds of individual feeder projects, many of them collaborations between the
public and private sectors. Some were successes, some failures, but the sum of them contributed
to economic growth and explosive innovation.
Dr. Mazzucato's platform is more complex -- and for some, controversial -- than simply
encouraging government investment, however. She has written that governments and state-backed
investment entities should "socialize both the risks and rewards." She has suggested the state
obtain a return on public investments through royalties or equity stakes, or by including
conditions on reinvestment -- for example, a mandate to limit share buybacks.
Emphasizing to policymakers not only the importance of investment, but also the direction of
that investment -- "What are we investing in?" she often asks -- Dr. Mazzucato has influenced
the way American politicians speak about the state's potential as an economic engine. In her
vision, governments would do what so many traditional economists have long told them to avoid:
create and shape new markets, embrace uncertainty and take big risks.
Inside the conference, the news was uniformly bleak. Pavel Kabat, the chief scientist of the
World Meteorological Organization, lamented the breaking of global temperature records and said
that countries would have to triple their current Paris-accord commitments by 2030 to have any
hope of staying below a critical warming threshold. A panel on land use and food waste noted
that nine species account for two-thirds of the world's crop production, a dangerous lack of
agricultural diversity. All the experts appeared dismayed by what Jeffrey Sachs, the S.D.S.N.'s
director, described as the "crude nationalism" and "aggressive anti-globalization" ascendant
around the world.
"We absolutely need to change both the narrative, but also the theory and the practice on
the ground," Dr. Mazzucato told the crowd when she spoke on the final expert panel of the day.
"What does it mean, actually, to create markets where you create the demand, and really start
directing the investment and the innovation in ways that can help us achieve these goals?"
Earlier in the day, she pointed at an announcement on her laptop. She had been nominated for
the first Not the Nobel Prize, a commendation intended to promote "fresh economic thinking."
"Governments have woken up to the fact the mainstream way of thinking isn't helping them," she
said, explaining her appeal to politicians and policymakers. A few days later, she won.
Reply Thursday, November 28, 2019 at 12:05 PM
"... The existence of the bubble and the fact that it was driving the economy could both be easily determined from regularly published government data, yet the vast majority of economists were surprised when the bubble burst and it gave us the Great Recession. This history should lead us to ask what other simple things economists are missing. ..."
Simple Economics that Most Economists Don't Know
By Dean Baker
Economists are continually developing new statistical techniques, at least some of which
are useful for analyzing data in ways that allow us to learn new things about the world.
While developing these new techniques can often be complicated, there are many simple things
about the world that economists tend to overlook.
The most important example here is the housing bubble in the last decade. It didn't
require any complicated statistical techniques to recognize that house prices had sharply
diverged from their long-term pattern, with no plausible explanation in the fundamentals of
the housing market.
It also didn't require sophisticated statistical analysis to see the housing market was
driving the economy. At its peak in 2005 residential construction accounted for 6.8 percent
of GDP. This compares to a long-run average that is close to 4.0 percent. Consumption was
also booming, as people spent based on the bubble generated equity in their homes, pushing
the savings rate to a record low.
The existence of the bubble and the fact that it was driving the economy could both be
easily determined from regularly published government data, yet the vast majority of
economists were surprised when the bubble burst and it gave us the Great Recession. This
history should lead us to ask what other simple things economists are missing.
For this holiday season, I will give three big items that are apparently too simple for
economists to understand.
1) Profit shares have not increased much -- While there has been some redistribution in
before-tax income shares from labor to capital, it at most explains a small portion of the
upward redistribution of the last four decades. Furthermore, shares have been shifting back
towards labor in the last four years.
2) Returns to shareholders have been low by historical standards -- It is often asserted
that is an era of shareholder capitalism in which companies are being run to maximize returns
to shareholders. In fact, returns to shareholders have been considerably lower on average
than they were in the long Golden Age from 1947 to 1973.
3) Patent and copyright rents are equivalent to government debt as a future burden –
The burden that we are placing on our children through the debt of the government is a
frequent theme in economic reporting. However, we impose a far larger burden with
government-granted patent and copyright monopolies, although this literally never gets any
attention in the media.
To be clear, none of these points are contestable. All three can all be shown with widely
available data and/or basic economic logic. The fact that they are not widely recognized by
people in policy debates reflects the laziness of economists and people who write about
economic policy.
Profit Shares
It is common to see discussions where it is assumed that there has been a large shift from
wages to profits, and then a lot of head-scratching about why this occurred. In fact, the
shift from wages to profits has been relatively modest and all of it occurred after 2000,
after the bulk of the upward redistribution of income had already taken place.
If we just compare end points, the labor share of net domestic product was 64.0 percent in
2019, a reduction of 1.6 percentage points from its 65.6 percent share in 1979, before the
upward redistribution began. If, as a counter-factual, we assume that the labor share was
still at its 1979 level it would mean that wages would be 2.5 percent higher than they are
now. That is not a trivial effect, but it only explains a relatively small portion of the
upward redistribution over the last four decades.
It is also worth noting the timing of this shift in shares. There was no change in shares
from 1979 to 2000, the point at which most of the upward redistribution to the richest one
percent had already taken place. The shift begins in the recovery from the 2001
recession.
This was the period of the housing bubble. The reason why this matters is that banks and
other financial institutions were recording large profits on the issuance of mortgages that
subsequently went bad, leading to large losses in the years 2008-09. This means that a
substantial portion of the profits that were being booked in the years prior to the Great
Recession were not real profits.
It would be as though companies reported profits based on huge sales to a country that
didn't exist. Such reporting would make profits look good when the sales were being booked,
but then would produce large losses when the payments for the sales did not materialize,
since the buyer did not exist. It's not clear that when the financial industry books phony
profits it means there was a redistribution from labor to capital.[1]
There clearly was a redistribution from labor to capital in the weak labor market
following the Great Recession. Workers did not have enough bargaining power to capture any of
the gains from productivity growth in those years. That has been partially reversed in the
last four years as the labor share of net domestic income has risen by 2.4 percentage
points.[2] This still leaves some room for further increases to make up for the drop in labor
share from the Great Recession, but it does look as though the labor market is operating as
we would expect.
Returns to Shareholders Lag in the Period of Shareholder Capitalism
It is common for people writing on economics, including economists, to say that companies
have been focused on returns to shareholders in the last four decades in a way that was not
previously true. The biggest problem with this story is that returns to shareholders have
actually been relatively low in the last two decades.
If we take the average real rate of return over the last two decades, it has been 3.9
percent. That compares to rates of more than 8.0 percent in the fifties and sixties. Even
this 3.9 percent return required a big helping hand from the government in the form a
reduction in the corporate income tax rate from 35 percent to 21 percent.
The figure for the last two decades is somewhat distorted by the fact that we were
reaching the peak of the stock bubble in the late 1990s, but the story is little changed if
we adjust for this fact. If we take the average real return from July of 1997, when the price
to earnings ratio was roughly the same as it is now, it is still just 5.7 percent, well below
the Golden Age average when companies were supposedly not being run to maximize shareholder
value.
It is striking that this drop in stock returns is so little noticed and basically does not
feature at all in discussions of the economy. Back in the late 1990s, it was nearly
universally accepted in public debates that stocks would provide a 7.0 percent real return on
average in public debates.
This was most evident in debates on Social Security, where both conservatives and liberals
assumed that the stock market would provide 7.0 percent real returns. Conservatives, like
Martin Feldstein, made this assumption as part of their privatization plans. Liberal
economists made the same assumption in plans put forward by the Clinton administration and
others to shore up the Social Security trust fund by putting a portion of it in the stock
market. The Congressional Budget Office even adopted the 7.0 percent real stock returns
assumption in its analysis of various Social Security reform proposals that called for
putting funds in the stock market.
Given the past history on stock returns and the widely held view that returns would
continue to average close to 7.0 percent over the long-term, the actual performance of stock
returns over the last two decades looks pretty disappointing from shareholders' perspective.
It certainly does not look like corporations are being run for their benefit, or if so, top
executives are doing a poor job.
One of the obvious factors depressing returns has been the extraordinary run up in price
to earnings ratios. A high price to earnings ratio (PE) effectively means that shareholders
have to pay a lot of money for a dollar in corporate profits. When PEs were lower, in the
1950s and 1960s, dividends yields were in the range of 3.0 -5.0 percent. In the recent years
they have been hovering near 2.0 percent. When the PE is over 30, as is now the case, paying
out a dividend of even 3.0 percent would essentially mean paying out all the company's
profits as dividends. Clearly that cannot happen, or at least not on a sustained basis.
While shareholders have not done well by historical standards in recent decades, CEO pay
has soared, with the ratio of the pay of CEOs to ordinary workers going from 20 or 30 to 1 in
the 1960s and 1970s, to 200 or 300 to 1 at present. There is a story that could reconcile
soaring CEO pay with historically low stock returns.
Corporations have increasingly turned to share buybacks as an alternative to dividends for
paying out money to shareholders. The process of buying back shares would drive up share
prices. Part of this is almost definitional, with fewer shares outstanding, the price per
share should go up. If buybacks push up share prices enough to raise the price to earnings
ratio, then in principle other investors should sell stock to bring the PE back to its prior
level. But if this doesn't happen, then buybacks could increase PEs.
That would of course imply huge irrationality in the stock market, but anyone who lived
through the 1990s stock bubble and the housing bubble in the last decade knows that large
investors can be exceedingly irrational for long periods of time. Anyhow, if share buybacks
do raise PEs there would be a clear story whereby CEOs could drive up their own pay, which
typically is largely in stock options, to the detriment of future shareholders, which would
explain both soaring CEO pay and declining returns to shareholders.
Whether this story of share buybacks raising PE is accurate would require some serious
research (I'd welcome references, if anyone has them), but what is beyond dispute is that the
last two decades have provided shareholders with relatively low returns. That seems hard to
reconcile with the often repeated story about this being a period of shareholder
capitalism.
Patents and Copyright Monopolies Are Implicit Government Debt
There is a whole industry dedicated to highlighting the size and growth of the government
debt, largely funded by the late private equity billionaire Peter Peterson. The leading news
outlets feel a need to regularly turn to the Peterson funded outfits to give us updates on
the size of the debt.
When presenting the horror story of a $20 trillion debt and the burden it will impose on
our children, there is never any mention of the burden created by patent and copyright
monopolies. This is an inexcusable inconsistency.
Patent and copyright monopolies are mechanisms that the government uses to pay for
services that are alternatives to direct spending. For example, instead of granting drug
companies patent monopolies and software developers copyright monopolies, the government
could just pay directly for the research and creative work that was the basis for these
monopolies. There are arguments as to why these monopolies might be better mechanisms than
direct funding, but these arguments don't change the fact they are mechanisms the government
uses for paying for services.
While we keep careful accounting of the direct spending, we pretend the implicit spending
by granting patent and copyright monopolies does not exist. This makes zero sense, especially
given the size of the rents being created by these monopolies.
In the case of prescription drugs alone, we will spend close to $400 billion (1.8 percent
of GDP) this year above the free market price, due to patent protections and other monopolies
granted by the federal government. This is considerably more than the $330 billion in
interest that the Congressional Budget Office projected we would spend on the $16.6 trillion
in publicly held debt in 2019.[3]
And this figure is just a fraction of the total rents from patent and copyright
monopolies, which would include most of the payments for medical equipment, computer software
and hardware, and recorded music and video material. Since these payments dwarf the size of
interest payments on the debt, it is difficult to understand how anyone concerned about the
burdens the government was creating could ignore patents and copyrights, while harping on
interest on the debt.
As I have often argued there are good reasons, especially in the case of prescription
drugs, for thinking that direct funding would be a more efficient mechanism than patent
monopolies. In the case of prescription drugs, direct funding would mean that all findings
would be immediately available to all researchers worldwide. If drugs were sold at free
market prices, it would no longer be a struggle to find ways to pay for them. And, we would
take away the incentive to push drugs in contexts where they are not appropriate, as happened
with the opioid crisis. (See "Rigged: How Globalization and the Rules of the Modern Economy
Were Structured to Make the Rich Richer," for a fuller discussion - it's free. * )
While the relative merits of patent/copyright monopolies and direct funding can be
debated, the logical point, that these monopolies are an implicit form of government debt,
cannot be. It shows the incredibly low quality of economic debate that this fact is not
widely recognized.
The Prospect for Simple Facts and Logic Entering Economic Debate in the Next Decade
The three issues noted here are already pretty huge in terms of our understanding of the
economy. The people who write in a wide range of areas should be aware of them, but with few
exceptions, they are not.
Unfortunately, that situation is not likely to change any time soon for a simple economic
reason, there is no incentive for people who write on economic issues to give these points
serious attention. They can continue to draw paychecks and get grants for doing what they are
doing. Why should they spend time addressing facts and logic that require they think
differently about the world?
As has been noted many times, there is no real consequence to economists and people
writing about the economy for being wrong. A custodian who doesn't clean the toilet gets
fired, but an economist who missed the housing bubble whose collapse led to the Great
Recession gets the "who could have known?" amnesty.
Given this structure of incentives, we should assume that economists and others who write
on economics will continue to ignore some of the most basic facts about the economy. That is
what economics tells us.
[1] Since income is supposed to be matched by output in the GDP accounts, the
corresponding phony entry on the output side would be the loans that subsequently went bad.
These loans were counted as a service when they were issued. Arguably, this was not accurate
accounting.
[2] This rise in labor share appears in the net domestic income calculation, but not in
the net domestic product figure. The reason is that there has been a sharp drop in the size
of the statistical discrepancy over the last four years, as output side GDP now exceeds the
income side measure. It is common to assume that the true figure lies somewhere in the
middle, which would mean the increase in labor share is likely less the 2.4 percentage points
calculated on the income side.
[3] This subtracts out the $50 billion in interest payments remitted from the Federal
Reserve Board.
This simple conception generalized deans
Bean hunt for rents
How might one do this
Well first make up a rate of interest
And take a system wide wage snap shot
From mines oceans forests and fields
Thru factories warehouses ultilities
boats and trains
To barber shops malt shops and convenience stores
Mark up the wage cells of your matrix
By your invented rate of interest
Now compare this vector to the 've tor of actual prices
You get a vector of rents aka profits of enterprise and residuals
"... As the Gramscian theorists Chantal Mouffe and Ernesto Laclau observed, our political identities are not a 'given' – something that emerges directly from the objective facts of our situation. We all occupy a series of overlapping identities in our day-to-day lives – as workers or bosses, renters or home-owners, debtors or creditors. Which of these define our politics depends on political struggles for meaning and power. ..."
"... The architects of neoliberalism understood this process of identity creation. By treating people as selfish, rational utility maximisers, they actively encouraged them to become selfish, rational utility maximisers. As the opening article points out, this is not a side effect of neoliberal policy, but a central part of its intention. As Michael Sandel pointed out in his 2012 book 'What Money Can't Buy: The Moral Limits of Markets' , it squeezes out competing values that previously governed non-market spheres of life, such as ethics of public service in the public sector, or mutual care within local communities. But these values remain latent: neoliberalism does not have the power to erase them completely. This is where the hope for the left lies, the crack of light through the doorway that needs to be prised open. ..."
"... More generally, there is some evidence that neoliberalism didn't really succeed in making us see ourselves as selfish rational maximisers – just in making us believe that everybody else was . For example, a 2016 survey found that UK citizens are on average more oriented towards compassionate values than selfish values, but that they perceive others to be significantly more selfish (both than themselves and the actual UK average). Strikingly, those with a high 'self-society gap' were found to be less likely to vote and engage in civic activity, and highly likely to experience feelings of cultural estrangement. ..."
"... Perhaps a rational system is one that accepts selfishness but keeps it within limits. Movements like the Chicago school that pretend to reinvent the wheel with new thinking are by this view a scam. As J.K. Galbraith said: "the problem with their ideas is that they have been tried." ..."
"... They tried running an economy on debt in the 1920s. The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn't look at private debt, neoclassical economics. ..."
"... Keynes looked at the problems of the debt based economy and came up with redistribution through taxation to keep the system running in a sustainable way and he dealt with the inherent inequality capitalism produced. ..."
"... Neoliberalism, which has influenced so much of the conventional thinking about money, is adamant that the public sector must not create ('print') money, and so public expenditure must be limited to what the market can 'afford.' Money, in this view, is a limited resource that the market ensures will be used efficiently. Is public money, then, a pipe dream? No, for the financial crisis and the response to it undermined this neoliberal dogma. ..."
"... The financial sector mismanaged its role as a source of money so badly that the state had to step in and provide unlimited monetary backing to rescue it. The creation of money out of thin air by public authorities revealed the inherently political nature of money. But why, then, was the power to create money ceded to the private sector in the first place -- and with so little public accountability? ..."
Lambert here: Not sure the soul is an identity, but authors don't write the headlines. Read
on!
By Christine Berry, a freelance researcher and writer and was previously Director of
Policy and Government for the New Economics Foundation. She has also worked at ShareAction and
in the House of Commons.
Originally published at Open Democracy .
"Economics is the method: the object is to change the soul." Understanding why Thatcher said
this is central to understanding the neoliberal project, and how we might move beyond it.
Carys Hughes and Jim Cranshaw's opening article poses a crucial challenge to the left in
this respect. It is too easy to tell ourselves a story about the long reign of neoliberalism
that is peopled solely with all-powerful elites imposing their will on the oppressed masses. It
is much harder to confront seriously the ways in which neoliberalism has manufactured popular
consent for its policies.
The left needs to acknowledge that aspects of the neoliberal agenda have been overwhelmingly
popular: it has successfully tapped into people's instincts about the kind of life they want to
lead, and wrapped these instincts up in a compelling narrative about how we should see
ourselves and other people. We need a coherent strategy for replacing this narrative with one
that actively reconstructs our collective self-image – turning us into empowered citizens
participating in communities of mutual care, rather than selfish property-owning individuals
competing in markets.
As the Gramscian theorists Chantal Mouffe and Ernesto Laclau observed, our political
identities are not a 'given' – something that emerges directly from the objective facts
of our situation. We all occupy a series of overlapping identities in our day-to-day lives
– as workers or bosses, renters or home-owners, debtors or creditors. Which of these
define our politics depends on political struggles for meaning and power.
Part of the job of politics – whether within political parties or social movements
– is to show how our individual problems are rooted in systemic issues that can be
confronted collectively if we organise around these identities. Thus, debt becomes not a source
of shame but an injustice that debtors can organise against. Struggles with childcare are not a
source of individual parental guilt but a shared societal problem that we have a shared
responsibility to tackle. Podemos were deeply influenced by this thinking when they sought to
redefine Spanish politics as 'La Casta' ('the elite') versus the people, cutting across many of
the traditional boundaries between right and left.
The architects of neoliberalism understood this process of identity creation. By treating
people as selfish, rational utility maximisers, they actively encouraged them to become
selfish, rational utility maximisers. As the opening article points out, this is not a side
effect of neoliberal policy, but a central part of its intention. As Michael Sandel pointed out
in his 2012 book 'What Money Can't Buy: The Moral Limits of Markets' , it squeezes out
competing values that previously governed non-market spheres of life, such as ethics of public
service in the public sector, or mutual care within local communities. But these values remain
latent: neoliberalism does not have the power to erase them completely. This is where the hope
for the left lies, the crack of light through the doorway that needs to be prised open.
The Limits of Neoliberal Consciousness
In thinking about how we do this, it's instructive to look at the ways in which neoliberal
attempts to reshape our identities have succeeded – and the ways they have failed. While
Right to Buy might have been successful in identifying people as home-owners and stigmatising
social housing, this has not bled through into wider support for private ownership. Although
public ownership did become taboo among the political classes for a generation – far
outside the political 'common sense' – polls consistently showed that this was not
matched by a fall in public support for the idea. On some level – perhaps because of the
poor performance of privatised entities – people continued to identify as citizens with a
right to public services, rather than as consumers of privatised services. The continued
overwhelming attachment to a public NHS is the epitome of this tendency. This is partly what
made it possible for Corbyn's Labour to rehabilitate the concept of public ownership, as the
2017 Labour manifesto's proposals for public ownership of railways and water – dismissed
as ludicrous by the political establishment – proved overwhelmingly popular.
More generally, there is some evidence that neoliberalism didn't really succeed in making us
see ourselves as selfish rational maximisers – just in making us believe that
everybody else was . For example, a 2016 survey found that UK citizens
are on average more oriented towards compassionate values than selfish values, but that they
perceive others to be significantly more selfish (both than themselves and the actual UK
average). Strikingly, those with a high 'self-society gap' were found to be less likely to vote
and engage in civic activity, and highly likely to experience feelings of cultural
estrangement.
This finding points towards both the great conjuring trick of neoliberal subjectivity and
its Achilles heel: it has successfully popularised an idea of what human beings are like that
most of us don't actually identify with ourselves. This research suggests that our political
crisis is caused not only by people's material conditions of disempowerment, but by four
decades of being told that we can't trust our fellow citizens. But it also suggests that deep
down, we know this pessimistic account of human nature just isn't who we really are – or
who we aspire to be.
An example of how this plays out can be seen in academic studies showing that, in game
scenarios presenting the opportunity to free-ride on the efforts of others, only economics
students behaved as economic models predicted: all other groups were much more likely to pool
their resources. Having been trained to believe that others are likely to be selfish,
economists believe that their best course of action is to be selfish as well. The rest of us
still have the instinct to cooperate. Perhaps this shouldn't be surprising: after all, as
George Monbiot argues in 'Out of the Wreckage' , cooperation is our species' main
survival strategy.
What's Our 'Right to Buy?'
The challenge for the left is to find policies and stories that tap into this latent sense
of what makes us human – what Gramsci called 'good sense' – and use it to overturn
the neoliberal 'common sense'. In doing so, we must be aware that we are competing not only
with a neoliberal identity but also with a new far-right that seeks to promote a white British
ethno-nationalist group identity, conflating 'elites' with outsiders. How we compete with this
is the million dollar question, and it's one we have not yet answered.
Thatcher's use of flagship policies like the Right to Buy was a masterclass in this respect.
Deceptively simple, tangible and easy to grasp, the Right to Buy also communicated a much
deeper story about the kind of nation we wanted to be – one of private, property-owning
individuals – cementing home-ownership as a cultural symbol of aspiration (the right to
paint your own front door) whilst giving millions an immediate financial stake in her new
order. So what might be the equivalent flagship policies for the left today?
Perhaps one of the strongest efforts to date has been the proposal for ' Inclusive Ownership
Funds ', first developed by Mathew Lawrence in a report for the New Economics Foundation,
and announced as
Labour policy by John McDonnell in 2018. This would require companies to transfer shares
into a fund giving their workers a collective stake that rises over time and pays out employee
dividends. Like the Right to Buy, as well as shifting the material distribution of wealth and
power, this aims to build our identity as part of a community of workers taking more collective
control over our working lives.
But this idea only takes us so far. While it may tap into people's desire for more security
and empowerment at work, more of a stake in what they do, it offers a fairly abstract benefit
that only cashes out over time, as workers acquire enough of a stake to have a meaningful say
over company strategy. It may not mean much to those at the sharpest end of our oppressive and
precarious labour market, at least not unless we also tackle the more pressing concerns they
face – such as the exploitative practices of behemoths like Amazon or the stress caused
by zero-hours contracts. We have not yet hit on an idea that can compete with the
transformative change to people's lives offered by the Right to Buy.
So what else is on the table? Perhaps, when it comes to the cutting edge of new left
thinking on these issues, the workplace isn't really where the action is – at least not
directly. Perhaps we need to be tapping into people's desire to escape the 'rat race'
altogether and have more freedom to pursue the things that really make us happy – time
with our families, access to nature, the space to look after ourselves, connection with our
communities. The four day working week (crucially with no loss of pay) has real potential as a
flagship policy in this respect. The Conservatives and the right-wing press may be laughing it
down with jokes about Labour being lazy and feckless, but perhaps this is because they are
rattled. Ultimately, they can't escape the fact that most people would like to spend less time
at work.
Skilfully communicated, this has the potential to be a profoundly anti-neoliberal policy
that conveys a new story about what we aspire to, individually and as a society. Where
neoliberalism tapped into people's desire for more personal freedom and hooked this to the
acquisition of wealth, property and consumer choice, we can refocus on the freedom to live the
lives we truly want. Instead of offering freedom through the market, we can offer
freedom from the market.
Proponents of Universal Basic Income often argue that it fulfils a similar function of
liberating people from work and detaching our ability to provide for ourselves from the
marketplace for labour. But in material terms, it's unlikely that a UBI could be set at a level
that would genuinely offer people this freedom, at least in the short term. And in narrative
terms, UBI is actually a highly malleable policy that is equally susceptible to being co-opted
by a libertarian agenda. Even at its best, it is really a policy about redistribution of
already existing wealth (albeit on a bigger scale than the welfare state as it stands). To
truly overturn neoliberalism, we need to go beyond this and talk about collective
ownership and creation of wealth.
Policies that focus on collective control of assets may do a better job of replacing
a narrative about individual property ownership with one that highlights the actual
concentration of property wealth in the hands of elites – and the need to reclaim these
assets for the common good. As well as Inclusive Ownership Funds, another way of doing this is
through Citizens' Wealth Funds, which socialise profitable assets (be it natural resources or
intangible ones such as data) and use the proceeds to pay dividends to individuals or
communities. Universal Basic Services – for instance, policies such as free publicly
owned buses – may be another.
Finally, I'd like to make a plea for care work as a critical area that merits further
attention to develop convincing flagship policies – be it on universal childcare, elderly
care or support for unpaid carers. The instinctive attachment that many of us feel to a public
NHS needs to be widened to promote a broader right to care and be cared for, whilst firmly
resisting the marketisation of care. Although care is often marginalised in political debate,
as a new mum, I'm acutely aware that it is fundamental to millions of people's ability to live
the lives they want. In an ageing population, most people now have lived experience of the
pressures of caring for someone – whether a parent or a child. By talking about these
issues, we move the terrain of political contestation away from the work valued by the market
and onto the work we all know really matters; away from the competition for scarce resources
and onto our ability to look after each other. And surely, that's exactly where the left wants
it to be.
The problem is that people are selfish–me included–and so what is needed is
not better ideas about ourselves but better laws. And for that we will need a higher level of
political engagement and a refusal to accept candidates who sell themselves as a "lesser
evil." It's the decline of democracy that brought on the rise of Reagan and Thatcher and
Neoliberalism and not some change in public consciousness (except insofar as the general
public became wealthier and more complacent). In America incumbents are almost universally
likely to be re-elected to Congress and so they have no reason to reject Neoliberal
ideas.
So here's suggesting that a functioning political process is the key to reform and not
some change in the PR.
Carolinian, like you, I try to include myself in statements about "the problem with
people." I believe one of the things preventing progress is our tendency to believe it's only
those people that are the problem.
Human nature people are selfish. It's like the Christian marriage vow – which I understand is a Medieval invention
and not something from 2,000 years ago – for better or worse, meaning, we share (and
are not to be selfish) the good and the bad.
"Not neoliberals, but all of us." "Not the right, but the left as well." "Not just Russia, but America," or "Not just America, but Russia too."
Perhaps a rational system is one that accepts selfishness but keeps it within limits.
Movements like the Chicago school that pretend to reinvent the wheel with new thinking are by
this view a scam. As J.K. Galbraith said: "the problem with their ideas is that they have
been tried."
My small brain got stuck on your reference to a 'Christian marriage vow'. I was just
sitting back and conceiving what a Neoliberal marriage vow would sound like. Probably a cross
between a no-liabilities contract and an open-marriage agreement.
"people are selfish"?; or "people can sometimes act selfishly"? I think the latter is the
more accurate statement. Appeal to the better side, and more of it will be forthcoming.
Neolib propaganda appeals to trivial, bleak individualism..
I'm not sure historic left attempts to appeal to "the better angels of our nature" have
really moved the ball much. It took the Great Depression to give us a New Deal and WW2 to
give Britain the NHS and the India its freedom. I'd say events are in the saddle far more
than ideas.
I rather look at it as a "both and" rather than an "either or." If the political
groundwork is not done beforehand and during, the opportunity events afford will more likely
be squandered.
And borrowing from evolutionary science, this also holds with the "punctuated equilibrium"
theory of social/political change. The strain of a changed environment (caused by both events
and intentionally created political activity) for a long time creates no visible change to
the system, and so appears to fail. But then some combination of events and conscious
political work suddenly "punctuates the equilibrium" with the resulting significant if not
radical changes.
Chile today can be seen as a great example of this: "Its not 30 Pesos, its 30 Years."
Carolinian, you provide a good illustration of the power of the dominant paradigm to make
people believe exactly what the article said–something I've observed more than enough
to confirm is true. People act in a wide variety of ways; but many people deny that altruism
and compassion are equally "human nature". Both parts of the belief pointed out
here–believing other people are selfish and that we're not–are explained by
projection acting in concert with the other parts of this phenomenon. Even though it's flawed
because it's only a political and not a psychological explanation, It's a good start toward
understanding.
"You and I are so deeply acculturated to the idea of "self" and organization and species
that it is hard to believe that man [sic] might view his [sic] relations with the environment
in any other way than the way which I have rather unfairly blamed upon the nineteenth-century
evolutionists."
Gregory Bateson, Steps to an Ecology of Mind, p 483-4
This is part of a longer quote that's been important to me my whole life. Worth looking up.
Bateson called this a mistake in epistemology–also, informally, his definition of
evil. http://anomalogue.com/blog/category/systems-thinking/
"When plunder becomes a way of life for a group of men in a society, over the course of
time they create for themselves a legal system that authorizes it and a moral code that
glorifies it."
― Frédéric Bastiat
Doesn't mean it's genetic. In fact, I'm pretty sure it means it's not.
The Iron Lady once proclaimed, slightly sinisterly: "Economics is the method. The object
is to change the soul." She meant that British people had to rediscover the virtue of
traditional values such as hard work and thrift. The "something for nothing" society was
over.
But the idea that the Thatcher era re-established the link between virtuous effort and
just reward has been effectively destroyed by the spectacle of bankers driving their
institutions into bankruptcy while being rewarded with million-pound bonuses and munificent
pensions.
The dual-truth approach of the Neoliberal Thought Collective (thanks, Mirowski) has been
more adept at manipulating narratives so the masses are still outraged by individuals getting
undeserved social benefits rather than elites vacuuming up common resources. Thanks to the
Thatcher-Reagan revolution, we have ended up with socialism for the rich, and everyone else
at the mercy of 'markets'.
Pretending that there are not problems with free riders is naive and it goes against
people's concern with justice. Acknowledging free riders on all levels with institutions that
can constantly pursue equity is the solution.
At some points in life, everyone is a free rider. As for the hard workers, many of them
are doing destructive things which the less hard-working people will have to suffer under and
compensate for. (Neo)liberalism and capitalism are a coherent system of illusions of virtue
which rest on domination, exploitation, extraction, and propaganda. Stoking of resentment (as
of free riders, the poor, the losers, foreigners, and so on) is one of the ways those who
enjoy it keep it going.
The Iron Lady once proclaimed, slightly sinisterly: "Economics is the method. The object
is to change the soul." She meant that British people had to rediscover the virtue of
traditional values such as hard work and thrift. The "something for nothing" society was
over.
But the idea that the Thatcher era re-established the link between virtuous effort and
just reward has been effectively destroyed by the spectacle of bankers driving their
institutions into bankruptcy while being rewarded with million-pound bonuses and munificent
pensions.
The dual-truth approach of the Neoliberal Thought Collective (thanks, Mirowski) has been
more adept at manipulating narratives so the masses are still outraged by individuals getting
undeserved social benefits rather than elites vacuuming up common resources. Thanks to the
Thatcher-Reagan revolution, we have ended up with socialism for the rich, and everyone else
at the mercy of 'markets'.
Pretending that there are not problems with free riders is naive and it goes against
people's concern with justice. Acknowledging free riders on all levels with institutions that
can constantly pursue equity is the solution.
The Iron Lady had a agenda to break the labor movement in the UK.
What she did not understand is Management gets the Union (Behavior) it deserves. If there
is strife in the workplace, as there was in abundance in the UK at that time, the problem is
the Management, (and the UK class structure) not the workers.
As I found out when I left University.
Thatcher set out to break the solidarity of the Labor movement, and used the neo-liberal
tool of selfishness to achieve success, unfortunately,
The UK's poor management practices, (The Working Class can kiss my arse) and complete
inability to form teams of "Management and Workers" was, IMHO, is the foundation of today's
Brexit nightmare, a foundation based on the British Class Structure.
And exploited, as it ever was, to achieve ends which do not benefit workers in any
manner.
The left needs to acknowledge that aspects of the neoliberal agenda have been
overwhelmingly popular: it has successfully tapped into people's instincts about the kind
of life they want to lead, and wrapped these instincts up in a compelling narrative about
how we should see ourselves and other people.
Sigh, no this is not true. This author is making the mistake that everyone is like the top
5% and that just is not so. Perhaps she should get out of her personal echo chamber and talk
to common people.
In my travels I have been to every state and every major city, and I have worked with just
about every class of people, except of course the ultra wealthy and ultra powerful –
they have people to protect them from the great unwashed like me – and it didn't take
me long to notice that the elite are different from the rest of us but I could never explain
exactly why. After I retired, I started studying and I've examined everything from Adam
Smith, to Hobbes, to Kant, to Durkheim, to Marx, to Ayn Rand, to tons of histories and
anthropologies of various peoples, to you name it and I've come to the conclusion that most
of us are not neoliberal and do not want what the top 5% want.
Most people are not overly competitive and most do not seek self-interest only. That is
what allows us to live in cities, to drive on our roadways, to form groups that seek to
improve conditions for the least of us. It is what allows soldiers to protect each other on
the battlefield when it would be in their self interest to protect themselves. It is what
allowed people in Europe to risk their own lives to save Jews. And it is also what allows
people to live under the worst dictators without rebelling. Of course we all want more but we
have limits on what we will do to get that more – the wealthy and powerful seem to have
no limits. For instance, most of us won't screw over our co-workers to make ourselves look
better, although some will. Most of us won't turn on our best friends even when it would be
to our advantage to do so, although some will. Most of us won't abandon those we care about,
even when it means severe financial damage to us, although some will.
For lack of a better description, I call what the 5% have the greed gene – a gene
that allows them to give up empathy and compassion and basic morality – what some of us
call fairness – in the search for personal gain. I don't think it is necessarily
genetic but there is something in their makeup that cause them to have more than the average
self interest. And because most humans are more cooperative than they are competitive, most
humans just allow these people to go after what they want and don't stand in their way, even
though by stopping them, they could make their own lives better.
Most history and economics are theories and stories told by the rich and powerful to
justify their behavior. I think it is a big mistake to attribute that behavior to the mass of
humanity. Archeology is beginning to look more at how average people lived instead of seeking
out only the riches deposited by the elite, and historians are starting to look at the other
side of history – average people – to see what life was really like for them, and
I think we are seeing that what the rulers wanted was never what their people wanted. It is
beginning to appear obvious that 95% of the people just wanted to live in their communities
safely, to have about what everyone else around them had, and to enjoy the simple pleasures
of shelter, enough food, and warm companionship.
I'm also wondering why the 5% think that all of us want exactly what they want. Do they
really think that they are somehow being smarter or more competent got them there while 95%
of the population – the rest of us – failed?
At this point, I know my theory is half-baked – I definitely need to do more
research, but nothing I have found yet convinces me that there isn't some real basic
difference between those who aspire to power and wealth and the rest of us.
" ..and I've come to the conclusion that most of us are not neoliberal and do not want
what the top 5% want. Most people are not overly competitive and most do not seek
self-interest only. That is what allows us to live in cities, to drive on our roadways, to
form groups that seek to improve conditions for the least of us. It is what allows soldiers
to protect each other on the battlefield when it would be in their self interest to protect
themselves. "
I really liked your comment Historian. Thanks for posting. That's what I've felt in my gut
for a while, that the top 5% and the establishment are operating under a different mindset,
that the majority of people don't want a competitive, dog eat dog, self interest world.
I agree with Foy Johnson. I've been reading up on Ancient Greece and realizing all the
time that 'teh Greeks' are maybe only about thirty percent of the people in Greece. Most of
that history is how Greeks were taking advantage of each other with little mention of the
majority of the population. Pelasgians? Yeah, they came from serpents teeth, the end.
I think this is a problem from the Bronze Age that we have not properly addressed.
Mystery Cycles are a nice reminder that people were having fun on their own.
I have more or less the same view. I think the author's statement about neoliberalism
tapping into what type of life people want to lead is untenable. Besides instinct (are we all
4-year olds?), what people want is also very much socially constructed. And what people do is
also very much socially coerced.
One anecdote: years ago, during a volunteer drive at work, I worked side by side with the
company's CEO (company was ~1200 headcount, ~.5bn revenue) sorting canned goods. The guy was
doing it like he was in a competition. So much so that he often blocked me when I had to
place something on the shelves, and took a lot of space in the lineup around himself while
swinging his large-ish body and arms, and wouldn't stop talking. To me, this was very rude
and inconsiderate, and showed a repulsive level of disregard to others. This kind of behavior
at such an event, besides being unpleasant to be around, was likely also making work for the
others in the lineup less efficient. Had I or anyone else behaved like him, we would have had
a good amount of awkwardness or even a conflict.
What I don't get is, how does he and others get away with it? My guess is, people don't
want a conflict. I didn't want a conflict and said nothing to that CEO. Not because I am not
competitive, but because I didn't want an ugly social situation (we said 'excuse me' and
'sorry' enough, I just didn't think it would go over well to ask him to stop being obnoxious
and dominant for no reason). He obviously didn't care or was unaware – or actually, I
think he was behaving that way as a tactical habit. And I didn't feel I had the authority to
impose a different order.
So, in the end, it's about power – power relations and knowing what to do about
it.
Yep, I think you've nailed it there deplorado, types like your CEO don't care at all
and/or are socially unaware, and is a tactical habit that they have found has worked for them
in the past and is now ingrained. It is a power relation and our current world unfortunately
is now designed and made to suit people like that. And each day the world incrementally moves
a little bit more in their direction with inertia like a glacier. Its going to take something
big to turn it around
I too believe "most of us are not neoliberal". But if so, how did we end up with the kind
of Corporate Cartels, Government Agencies and Organizations that currently prey upon
Humankind? This post greatly oversimplifies the mechanisms and dynamics of Neoliberalism, and
other varieties of exploitation of the many by the few. This post risks a mocking tie to
Identity Politics. What traits of Humankind give truth to Goebbels' claims?
There definitely is "some real basic difference between those who aspire to power and
wealth and the rest of us" -- but the question you should ask next is why the rest of us
Hobbits blindly follow and help the Saurons among us. Why do so many of us do exactly what
we're told? How is it that constant repetition of the Neoliberal identity concepts over our
media can so effectively ensnare the thinking of so many?
Maybe it's something similar to Milgram's Experiment (the movie the Experimenter about
Milgram was on last night – worth watching and good acting by Peter Sarsgaard, my kind
of indie film), the outcome is just not what would normally be expected, people bow to
authority, against their own beliefs and interests, and others interests, even though they
have choice. The Hobbits followed blindly in that experiment, the exact opposite outcome as
to what was predicted by the all the psychology experts beforehand.
people bow to authority , against their own beliefs and interests, and others
interests, even though they have choice
'Don't Make Waves' is a fundamentally useful value that lets us all swim along. This can
be manipulated. If everyone is worried about Reds Under the Beds or recycling, you go along
to get along.
Some people somersault to Authority is how I'd put it.
Yep, don't mind how you put that Mo, good word somersault.
One of the amusing tests Milgram did was to have people go into the lift but all face the
back of the lift instead of the doors and see what happens when the next person got in. Sure
enough, with the next person would get in, face the front, look around with some confusion at
everyone else and then slowly turn and face the back. Don't Make Waves its instinctive to let
us all swim along as you said.
And 'some people' is correct. It was actually the majority, 65%, who followed directions
against their own will and preferred choice in his original experiment.
That's a pretty damn good comment that, Historian. Lots to unpick. It reminded me too of
something that John Wyndham once said. He wrote how about 95% of us wanted to live in peace
and comfort but that the other 5% were always considering their chances if they started
something. He went on to say that it was the introduction of nuclear weapons that made
nobody's chances of looking good which explains why the lack of a new major war since
WW2.
Good comment. My view is that it all boils down to the sociopathic personality disorder.
Sociopathy runs on a continuum, and we all exhibit some of its tendencies. At the highest end
you get serial killers and titans of industry, like the guy sorting cans in another comment.
I believe all religions and theories of ethical behavior began as attempts to reign in the
sociopaths by those of us much lower on the continuum. Neoliberalism starts by saying the
sociopaths are the norm, turning the usual moral and ethical universe upside down.
Your theory is not half-baked; it's spot-on. If you're not the whatever it takes, end
justifies the means type, you are not likely to rise to the top in the corporate world. The
cream rises to the top happens only in the dairy.
Your 5% would correspond to Altemeyer's "social dominators". Unfortunately only
75% want a simple, peaceful life. 20% are looking for a social dominator to follow. It's
psychological.
Excellent comment. Take into consideration the probability that the majority of the top 5%
have come from a privileged background, ensconced in a culture of entitlement. This "greed"
gene is as natural to them as breathing. Consider also that many wealthy families have
maintained their status through centuries of calculated loveless marriages, empathy and other
human traits gene-pooled out of existence. The cruel paradox is that for the sake of riches,
they have lost their richness in character.
This really chimes with me. Thanks so much for putting it down in words.
I often encounter people insisting humans are selfish. It is quite frustrating that this
more predominant side of our human nature seems to become invisible against the
propaganda.
I'm barely into Jeremy Lent's The Patterning Instinct: A Cultural History of Humanity's
Search for Meaning , but he's already laid down his central thesis in fairly complete
form. Humans are both competitive and cooperative, he says, which should surprise no one.
What I found interesting is that the competitive side comes from primates who are more
intensely competitive than humans. The cooperation developed after the human/primate split
and was enabled by "mimetic culture," communication skills that importantly presuppose that
the object(s) of communication are intentional creatures like oneself but with a somewhat
different perspective. Example: Human #1 gestures to Human #2 to come take a closer look at
whatever Human #1 is examining. This ability to cooperate even came with strategies to
prevent a would-be dominant male from taking over a hunter-gatherer band:
[I]n virtually all hunter-gatherer societies, people join together to prevent powerful
males from taking too much control, using collective behaviors such as ridicule, group
disobedience, and, ultimately, extreme sanctions such as assassination [This kind of
society is called] a "reverse dominant hierarchy because rather than being dominated, the
rank and file manages to dominate.
yes, this chimes in with what I`ve been thinking for years after puzzling about why
society everywhere ends up as it does – ie the fact that in small groups as we evolved
to live in, we would keep a check on extreme selfish behaviour of dominant individuals. In
complex societies (modern) most of us become "the masses" visible in some way to the system
but the top echelons are not visible to us and are able to amass power and wealth out of all
control by the rest of us. And yes, you do have to have a very strange drive (relatively
rare, ?pathological) to want power and wealth at everyone else`s expense – to live in a
cruel world many of whose problems could be solved (or not arise in the first place) by
redistributing some of your wealth to little palpable cost to you
Africa over a few million years of Ice Ages seems to have presented our ancestors with the
possibility of reproducing only if you can get along in close proximity to other Hominids
without killing each other. I find that a compelling explanation for our stupidly big brains;
it's one thing to be a smart monkey, it's a whole different solution needed to model what is
going on in the brain of another smart monkey.
And communications: How could spoken language have developed without levels of trust and
interdependence that maybe we can not appreciate today? We have a word for 'Blue' nowadays,
we take it for granted.
There is a theory that language originated between mothers and their immediate progeny,
between whom either trust and benevolence exist, or the weaker dies. The mother's chances for
survival and reproduction are enhanced if she can get her progeny to, so to speak, help out
around the house; how to do that is extended by symbolism and syntax as well as example.
I recall the first day of Econ 102 when the Prof. (damned few adjuncts in those days)
said, "Everything we discuss hereafter will be built on the concept of scarcity." Being a
contrary buggah' I thought, "The air I'm breathing isn't scarce." I soon got with the program
supply and demand upward sloping, downward sloping, horizontal, vertical and who could forget
kinked. My personal favorite was the Giffen Good a high priced inferior product. Kind of like
Micro Economics.
Maybe we could begin our new Neo-Economics 102 with the proviso, "Everything we discuss
hereafter will be based on abundance." I'm gonna' like this class!
Neo-lib Econ does a great job at framing issues so that people don't notice what is
excluded. Think of them as proto-Dark Patternists.
If you are bored and slightly mischievous, ask an economist how theory addresses
cooperation, then assume a can opener and crack open a twist-top beer.
Isn't one of the problems that it's NOT really built on the concept of scarcity? Most
natural resources run into scarcity eventually. I don't know about the air one breaths,
certainly fish species are finding reduced oxygen in the oceans due to climate change.
If you would like that class on abundance you would love the Church of Abundant Life which
pushes Jesus as the way to Abundant Life and they mean that literally. Abundant as in Jesus
wants you to have lots of stuff -- so believe.
I believe Neoliberalism is a much more complex animal than an economic theory. Mirowski
builds a plausible argument that Neoliberalism is a theory of epistemology. The Market
discovers Truth.
Had a lovely Physics class where the first homework problem boiled down to "How often do
you inhale a atom (O or N) from Julius Caesar's last breath". Great little introduction to
the power and pratfalls of 'estimations by Physicists' that xkcd likes to poke at. Back then
we used the CRC Handbook to figure it out.
Anyway, every second breath you can be sure you have shared an atom with Caesar.
I don't think Maggie T. or uncle Milty were thinking about the future at all. Neither one
would have openly promoted turfing quadriplegic 70-year-olds out of the rest home. That's how
short sighted they both were. And stupid. We really need to call a spade a spade here. Milty
doesn't even qualify as an economist – unless economics is the study of the destruction
of society. But neoliberalism had been in the wings already, by the 80s, for 40 years. Nobody
took into account that utility-maximizing capitalism always kills the goose (except Lenin
maybe) – because it's too expensive to feed her. The neoliberals were just plain dumb.
The question really is why should we stand for another day of neoliberal nonsense? Albeit
Macht Frei Light? No thanks. I think they've got the question backwards – it shouldn't
be how should "we" reconstruct our image now – but what is the obligation of all the
failed neoliberal extractors to right society now? I'd just as soon stand back and watch the
dam burst as help the neolibs out with a little here and a little there. They'll just keep
taking as long as we give. This isn't as annoying as Macron's "cake" comment, but it's close.
I did like the last 2 paragraphs however.
Here's a sidebar. A universal one. There is an anomaly in the universe – there is
not enough accumulated entropy. It screws up theoretical physics because the missing entropy
needs to be accounted for for their theories to work to their satisfaction. It seems to be a
phenomenon of evolution. Thus it was recently discovered by a physics grad student that
entropy by heat dissipation is the "creator" of life. Life almost spontaneously erupts where
it can take advantage of an energy source. And, we are assuming, life thereby slows entropy
down. There has to be another similar process among the stars and the planets as well, an
evolutionary conservation of energy. So evolution takes on more serious meaning. From the
quantum to the infinite. And society – it's right in the middle. So it isn't too
unreasonable to think that society is extremely adaptable, taking advantage of any energy
input, and it seems true to think that. Which means that society can go long for its goal
before it breaks down. But in the end it will be enervated by lack of "resources" unless it
can self perpetuate in an evolving manner. That's one good reason to say goodbye to looney
ideologies.
For a view of humanity that is not as selfish, recommend "The Gift" by Marcel Mauss.
Basically an anthropological study of reciprocal gift giving in the oceanic potlatch
societies. My take is that the idea was to re-visit relationships, as giving a gift basically
forces a response in the receiver, "Am I going to respond in kind, perhaps even upping what
is required? Or am I going to find that this relationship simply isn't worth it and walk
away?"
Kind of like being in a marriage. The idea isn't to walk away, the idea is you constantly
need to re-enforce it. Except with the potlatch it was like extending that concept to the
clan at large, so that all the relationships within the clan were being re-enforced.
"Kind of like being in a marriage. The idea isn't to walk away, the idea is you constantly
need to re-enforce it. "
amen.
we, the people, abdicated.
as for humans being selfish by default i used to believe this, due to my own experiences
as an outlaw and pariah.
until wife's cancer and the overwhelming response of this little town,in the "reddest"
congressional district in texas.
locally, the most selfish people i know are the one's who own everything buying up their
neighbor's businesses when things get tough.
they are also the most smug and pretentious(local dems, in their hillforts come a close
second in this regard) and most likely to be gop true believers.
small town and all everybody literally knows everybody, and their extended family and those
connections are intertwined beyond belief.
wife's related, in some way, to maybe half the town.
that matters and explains my experience as an outcast: i never belonged to anything like that
and such fellowfeeling and support is hard for people to extend to a stranger.
That's what's gonna be the hard sell, here, in undoing the hyperindividualist, "there is no
such thing as society" nonsense.
I grew up until Junior High in a fishing village on the Maine coast that had been around
for well over a hundred years and had a population of under 1000. By the time I was 8 I
realized there was no point in being extreme with anyone, because they were likely to be
around for the rest of your life.
I fell in love with sun and warmth when we moved away and unfortunately it's all
gentrified now, by the 90s even a tar paper shack could be sold for a few acres up in
Lamoine.
Yep, small towns are about as close as we get to clans nowadays. And just like clans, you
don't want to be on the outside. Still when you marry in, it would be nice if the town would
make you feel more a member like a clan should / would. ;-)
But outside of the small town and extended families I think that's it. We've been atomized
into our nuclear families. Except for the ruling class – I think they have this quid
pro quo gift giving relationship building figured out quite nicely. Basically they've formed
their own small town – at the top.
By the way, I understand Mauss was an influence on Baudrillard. I could almost imagine
Baudrillard thinking how the reality of the potlatch societies was so different than the
reality of western societies.
That's the big problem I see in this discussion. We know, or at least think we know,
what's wrong, and what would be better; but we can't get other people to want to do something
about it, even those who nominally agree with us. And I sure don't have the answer.
Neoliberalism, in its early guise at least, was popular because politicians like Thatcher
effectively promised something for nothing. Low taxes but still decent public services. The
right to buy your council house without putting your parents' council house house in
jeopardy. Enjoying private medical care as a perk of your job whilst still finding the NHS
there when you were old and sick. And so on. By the time the penny dropped it was too
late.
If the Left is serious about challenging neoliberalism, it has to return to championing the
virtues of community, which it abandoned decades ago in favour of extreme liberal
individualism Unfortunately, community is an idea which has either been appropriated by
various identity warriors (thus fracturing society further) or dismissed (as this author
does) because it's been taken up by the Right. A Left which explained that when everybody
cooperates everybody benefits, but that when everybody fights everybody loses, would sweep
the board.
If the Left is serious about challenging neoliberalism, it has to return to championing
the virtues of community
I agree. The tenuous suggestions offered by the article are top down. But top-down
universal solutions can remove the impetus for local organization. Which enervates the power
of communities. And then you can't do anything about austerity, because your Rep loves the
PowerPoints and has so much money from the Real Estate community.
Before one experiences the virtue, or power, of a community, one has to go through the
pain in the ass of contributing to a community. It has to be rewarding process or it won't
happen.
"An example of how this plays out can be seen in academic studies showing that, in game
scenarios presenting the opportunity to free-ride on the efforts of others, only economics
students behaved as economic models predicted: all other groups were much more likely to pool
their resources. Having been trained to believe that others are likely to be selfish,
economists believe that their best course of action is to be selfish as well. The rest of us
still have the instinct to cooperate. Perhaps this shouldn't be surprising: after all, as
George Monbiot argues in 'Out of the Wreckage', cooperation is our species' main survival
strategy."
Since so many people believe their job is their identity, would be interssting to know
what the job training or jobs were of the "others."
>so many people believe their job is their identity
Only because the social sphere, which in the medium and long term we *all depend
on* to survive, has been debased by 24/7/365 neolib talking points, and their purposeful
economic constrictions..
How many people have spent their lives working for the "greater good"? How many work
building some transcendental edifice from which the only satisfaction they could take away
was knowing they performed a part of its construction? The idea that Humankind is selfish and
greedy is a projection promoted by the small part of Humankind that really is selfish and
greedy.
Where does wealth creation actually occur in the capitalist system?
Nations can do well with the trade, as we have seen with China and Germany, but this comes
at other nation's expense.
In a successful global economy, trade should be balanced over the long term.
Keynes was aware of this in the past, and realised surplus nations were just as much of a
problem as deficit nations in a successful global economy with a long term future.
Zimababwe has lots of money and it's not doing them any favours. Too much money causes
hyper-inflation.
You can just print money, the real wealth in the economy lies somewhere else.
Alan Greenspan tells Paul Ryan the Government can create all the money it wants and there is
no need to save for pensions. https://www.youtube.com/watch?v=DNCZHAQnfGU
What matters is whether the goods and services are there for them to buy with that money.
That's where the real wealth in the economy lies.
Money has no intrinsic value; its value comes from what it can buy.
Zimbabwe has too much money in the economy relative to the goods and services available in
that economy. You need wheelbarrows full of money to buy anything.
It's that GDP thing that measures real wealth creation.
GDP does not include the transfer of existing assets like stocks and real estate.
Inflated asset prices are just inflated asset prices and this can disappear all too easily as
we keep seeing in real estate.
1990s – UK, US (S&L), Canada (Toronto), Scandinavia, Japan
2000s – Iceland, Dubai, US (2008)
2010s – Ireland, Spain, Greece
Get ready to put Australia, Canada, Norway, Sweden and Hong Kong on the list.
They invented the GDP measure in the 1930s, to track real wealth creation in the economy
after they had seen all that apparent wealth in the US stock market disappear in 1929.
There was nothing really there.
How can banks create wealth with bank credit?
The UK used to know before 1980.
https://www.housepricecrash.co.uk/forum/uploads/monthly_2018_02/Screen-Shot-2017-04-21-at-13_53_09.png.e32e8fee4ffd68b566ed5235dc1266c2.png
Before 1980 – banks lending into the right places that result in GDP growth (business
and industry, creating new products and services in the economy)
After 1980 – banks lending into the wrong places that don't result in GDP growth (real
estate and financial speculation)
What happened in 1979?
The UK eliminated corset controls on banking in 1979 and the banks invaded the mortgage
market and this is where the problem starts.
Real estate does make the economy boom, but there is no real wealth creation in inflating
asset prices.
What is really happening?
When you use bank credit to inflate asset prices, the debt rises much faster than GDP.
https://www.housepricecrash.co.uk/forum/uploads/monthly_2018_02/Screen-Shot-2017-04-21-at-13_53_09.png.e32e8fee4ffd68b566ed5235dc1266c2.png
The bank credit of mortgages is bringing future spending power into today.
Bank loans create money and the repayment of debt to banks destroys money.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
In the real estate boom, new money pours into the economy from mortgage lending, fuelling a
boom in the real economy, which feeds back into the real estate boom.
The Japanese real estate boom of the 1980s was so excessive the people even commented on the
"excess money", and everyone enjoyed spending that excess money in the economy.
In the real estate bust, debt repayments to banks destroy money and push the economy towards
debt deflation (a shrinking money supply).
Japan has been like this for thirty years as they pay back the debts from their 1980s
excesses, it's called a balance sheet recession. https://www.youtube.com/watch?v=8YTyJzmiHGk
Bank loans effectively take future spending and bring it in today.
Jam today, penury tomorrow.
Using future spending power to inflate asset prices today is a mistake that comes from
thinking inflating asset prices creates real wealth.
GDP measures real wealth creation.
Did you know capitalism works best with low housing costs and a low cost of living?
Probably not, you are in the parallel universe of neoliberalism.
William White (BIS, OECD) talks about how economics really changed over one hundred years
ago as classical economics was replaced by neoclassical economics.
He thinks we have been on the wrong path for one hundred years.
Some very important things got lost 100 years ago.
The Mont Pelerin society developed the parallel universe of neoliberalism from
neoclassical economics.
The CBI (Confederation of British Industry) saw the light once they discovered my equation
(Michael Hudson condensed)
Disposable income = wages – (taxes + the cost of living)
"Wait a minute, employees get their money from wages and businesses have to cover high
housing costs in wages reducing profit" the CBI
It's all about the economy, and UK businesses will benefit from low housing costs. High housing costs push up wages and reduce profits. Off-shore to make more profit, you can pay lower wages where the cost of living is lower,
e.g. China; the US and UK are rubbish.
What was Keynes really doing?
Creating a low cost, internationally competitive economy. Keynes's ideas were a solution to the problems of the Great Depression, but we forgot why
he did, what he did.
They tried running an economy on debt in the 1920s. The 1920s roared with debt based consumption and speculation until it all tipped over into
the debt deflation of the Great Depression. No one realised the problems that were building
up in the economy as they used an economics that doesn't look at private debt, neoclassical
economics.
Keynes looked at the problems of the debt based economy and came up with redistribution
through taxation to keep the system running in a sustainable way and he dealt with the
inherent inequality capitalism produced.
The cost of living = housing costs + healthcare costs + student loan costs + food + other
costs of living
Disposable income = wages - (taxes + the cost of living)
High progressive taxation funded a low cost economy with subsidised housing, healthcare,
education and other services to give more disposable income on lower wages.
Employers and employees both win with a low cost of living.
Keynesian ideas went wrong in the 1970s and everyone had forgotten the problems of
neoclassical economics that he originally solved.
Classical economics – observations and deductions from the world of small state,
unregulated capitalism around them
Neoclassical economics – Where did that come from?
Keynesian economics – observations, deductions and fixes for the problems of
neoclassical economics
Neoclassical economics – Why is that back?
We thought small state, unregulated capitalism was something that it wasn't as our ideas
came from neoclassical economics, which has little connection with classical economics.
On bringing it back again, we had lost everything that had been learned in the 1930s, by
which time it had already demonstrated its flaws.
Ultimately, neoliberalism is about privatization and ownership of everything. This is why
it's so important to preserve the Common Good, the vital resources and services that support
earthly existence. The past 40 years has shown what happens when this falls out of balance.
Our value system turns upside down – the sick become more valuable than the healthy, a
violent society provides for the prisons-for-profit system and so on. The biggest upset has
been the privatization of money creation.
This latest secret bank bailout (not really secret as Dodd-Frank has allowed banks to
siphon newly created money from the Fed without Congressional approval. No more public
embarrassment that Hank Paulson had to endure.) They are now up to $690 billion PER WEEK
while the media snoozes. PPPs enjoy the benefits of public money to seed projects for private
gain. The rest of us have to rely on predatory lenders, sinking us to the point of Peak Debt,
where private debt can never be paid off and must be cancelled, as it should be because it
never should've happened in the first place.
"Neoliberalism, which has influenced so much of the conventional thinking about money,
is adamant that the public sector must not create ('print') money, and so public
expenditure must be limited to what the market can 'afford.' Money, in this view, is a
limited resource that the market ensures will be used efficiently. Is public money, then, a
pipe dream? No, for the financial crisis and the response to it undermined this neoliberal
dogma.
The financial sector mismanaged its role as a source of money so badly that the
state had to step in and provide unlimited monetary backing to rescue it. The creation of
money out of thin air by public authorities revealed the inherently political nature of
money. But why, then, was the power to create money ceded to the private sector in the
first place -- and with so little public accountability?And
if money can be created to serve the banks, why not to benefit people and the
environment? "
The Commons should have a shot at revival as the upcoming generation's desires are
outstripped by their incomes and savings. The conflict between desires and reality may give a
boost to alternate notions of what's desirable. Add to this the submersion of cities under
the waves of our expanding oceans, and one gets yet another concrete reason to think that
individual ownership isn't up to the job of inspiring young people.
A Commons of some sort
will be needed to undo the cost of generations of unpaid negative externalities. Fossil
fuels, constant warfare, income inequality, stupendous idiocy of kleptocratic government
these baked in qualities of neo-liberalism are creating a very large, dissatisfied, and
educated population just about anywhere one looks. Suburbia will be on fire, as well as
underwater. Farmlands will be parched, drenched, and exhausted. Where will Larry Summers dump
the garbage?
"... We should also note in passing that the Nobel Prize in Economics is not actually a Nobel Prize. ..."
"... You are right that the Nobel Prize in Economics is not a Nobel Prize and it is awarded by a bank. Plus, Milton Friedman won in 1976: that tells you a lot about why neoclassical economists are mainly chosen. ..."
"... many of the neoclassical models are pseudoscience, unreflective of the real world. ..."
"... Both awards pander to the rentier class. ..."
"... What? Not even a breath about the insane system called globalization, where raw material from all over the world is shipped to China to be processed into finished goods in the most polluting way possible, to have those goods then shipped and trucked to the Amazon horrorhouses and Walmart stores to be bought and then thrown in the trash a few months later. ..."
There is a quote from The Wolf (Harvey Keitel, Pulp Fiction) not apt for a family blog,
but very apt to describe what a Nobel Prize is, and most prizes indeed are. It is about
sucking
Nordhaus reinforces the conservatism of Sveriges Riksbank so he deserves the prize. I
wouldn't ever expect the prize being given to cutting edge studies that question the validity
of day-by-day assumptions embedded in institutions like S.R.
You are right that the Nobel Prize in Economics is not a Nobel Prize and it is awarded
by a bank. Plus, Milton Friedman won in 1976: that tells you a lot about why neoclassical
economists are mainly chosen.
In February 1995, following acrimony within the selection committee pertaining to the
awarding of the 1994 Prize in Economics to John Forbes Nash, the Prize in Economics was
redefined as a prize in social sciences. This made it available to researchers in such
topics as political science, psychology, and sociology.[29][30] Moreover, the composition
of the Economics Prize Committee changed to include two non-economists. This has not been
confirmed by the Economics Prize Committee. The members of the 2007 Economics Prize
Committee are still dominated by economists, as the secretary and four of the five members
are professors of economics.[31] In 1978, Herbert A. Simon, whose PhD was in political
science, became the first non-economist to win the prize,[citation needed] while Daniel
Kahneman, a professor of psychology and international relations at Princeton University is
the first non-economist by profession to win the prize.
It seems strange to me that non-economists would be awarded a prize for the economy. The
bank certainly knows who to select though!
Milton Friedman was monetarist who taught at the premier neoclassical school, the
University of Chicago. Karl Marx was the premier classical (political) economist. The
neoclassical school gradually came to deny land as a distinct factor of production, John
Bates Clark (whom there is an award named after) solidified the conflation of land and
capital.
This is why many of the neoclassical models are pseudoscience, unreflective of the
real world.
What? Not even a breath about the insane system called globalization, where raw
material from all over the world is shipped to China to be processed into finished goods in
the most polluting way possible, to have those goods then shipped and trucked to the Amazon
horrorhouses and Walmart stores to be bought and then thrown in the trash a few months
later.
Cognative dissonanace much? Lots of economic activity there, with nothing to show for it
except a growing heap of trash and Bezos and the Waltons getting richer by hundreds of
millions per day. What a phucking world.
Her premise, that neoliberal economics is past its sell-by date, is almost too little too
late. It was past its sell-by date by 1950 when it was just getting its second foul wind. We
are in this fix because it was so easy to get here. By using oil for energy. Nobody has used
the butterfly metaphor for oil fed climate change, but it describes the mess. Every
individual use of oil/natgas for our modern lifestyle puts a whole series of requirements for
the very maintenance of that lifestyle – which (like her comment that more work hours
propagate not just more emissions but more manufacturing and more consumption is a vicious
circle) expand exponentially. And what she says point blank, "the thing about a sufficiently
high carbon tax is that it is so disruptive of the market that it has to be accompanied by a
robust and comprehensive role for the state" is just pure poetic justice.
We believe this is due to two factors -- the very high carbon footprints of people at
the top and a political economy effect, in which the wealthy have outsized political impact
and are able to forestall effective climate responses.
I have my suspicions about general carbon footprints based on income levels. I suspect
that many less affluent people end up commuting more because of housing usually being more
costly in cities and immediately nearby cities. Think about it for a moment, are all the
affluent neighborhoods close or far from local centers of employment? In my view the
implication is that carbon footprint from driving around is a necessity for large part of
lower income population while car use comes out more as a luxury, a free choice, for more
affluent people – they have the financial means to find housing relatively close to the
work, while lower income people don't have this choice.
Extrapolating more, I would suspect that most of carbon footprint is at least partially a
necessity for lower income people, while the for higher income people the larger carbon
footprint represents free choice and conspicuous consumption – they do it because they
can .
There are really easy ways to decrease carbon footprint: Dense and functional cities to
enable anyone make the climate friendly choices of not driving car around. But there is
extreme opposition to these kind of dense affordable cities, even in my seemingly progressive
nordic home country. Most of all, housing is seen as a open market business instead of
personal right. This is important, as this prevents the EU countries of more forcible
interventions in to the housing markets but this whole situation is just insane right now as
most EU countries get loans at negative rates, they could easily build and rent out housing
at 'market' prices with really low margins and still at profit for the state. In my view
states should intervene forcibly to urban housing markets to push out new quality housing to
disrupt and drop the general market prices at the moment. Many people, and especially working
people, are staying out of larger cities because the general prices are too high for them.
State intervention would enable anyone to make the 'right' choices and then heavier carbon
taxes could be enacted and people would still have free choice to live where they want and
drive car if they want. But this isn't possible because the free market principles are
applied to housing markets by EU antitrust officials and this prevents state
interventions.
The most ridiculous part of this whole thing that ideology of free market capitalism and
how it's applied prevents this, it's more important to preserve the wealth and rights of
owners in the cities instead of doing the right things. Meanwhile neoliberals and european
ordoliberals are shouting with their heads red that debt is bad and demanding that all the
member countries must work hard to reduce their debt levels no matter what happens. These
people say they agree that climate change is real, but his acknowledgement is just cynical
gaslighting from them, as the only actions they will approve are debt reduction, tax
reduction and privatization of public goods. For them, the state is the problem, not the
solution.
Rich and affluent people have hijacked the whole economic discussion and most important is
ideology of protecting property rights and 'individual' freedoms, to the detriment of our
planet and all of us living on it.
Ultimately it's all about population growth, and in particular, government policies aimed
at maximizing population growth, and top-down pressure from the rich to censure any
discussion of this topic.
That's why they recently gave a Nobel Prize to some economists pushing 'solutions' to
poverty in places like India that have been demonstrated over and over not to work: because
the policy that does work is to limit fertility rates (example: China post-Mao), and the the
rich don't want that, because they love cheap labor.
The problem is compounded by the lousy reputation Economics has acquired among proponents of
an inclusive economy. Too often the discipline is viewed as the source of the policies that
have produced the excesses and fragilities of our time. Mainstream economics and neoliberalism
are viewed as one and the same.
We beg to differ:
Many of the dominant policy ideas of the last few decades are supported neither by sound
economics nor by good evidence. Neoliberalism – or market fundamentalism, market
fetishism, etc. -- is a perversion of mainstream economics, rather than an application
thereof. And contemporary economics research is rife with new ideas for creating a more
inclusive society. But it is up to us economists to convince their audience about the merits
of these claims.
As important as specific policy prescriptions in different domains of economics are, we also
have a bigger claim: our essays produce overarching themes that taken together provide a
coherent overall vision for economic policy that stands as a genuine alternative to market
fundamentalism. This is a vision that rejects the reliance on competitive equilibrium as a
realistic benchmark, understands that the world is always second-best, highlights the role of
power imbalances in shaping existing institutional arrangements, and emphasizes the need for
imagination in devising alternatives that are both more inclusive and more conducive to
prosperity. We strive for a whole that is greater than the sum of the parts.
We do not intend to duplicate the excellent work being done in policy think tanks in
Washington, D.C. and elsewhere. Many economists engage with these think tanks and their ideas
get airing through them. Our initiative is different in that it is a network of academic
economists. We are committed to policy proposals based on sound scholarship. But we also care
about what these policy ideas imply in turn for the way in which we should practice Economics
in the class room and in the seminar room. And we are less influenced by immediate political
constraints or opportunities of the policy scene in Washington, D.C.
We believe Economics can be an ally of inclusive prosperity. That is why we have embarked on
this project. The initial set of policy briefs on the EfIP website is our first step. We hope
they will stimulate and accelerate academic economists' sustained engagement with creative
ideas for inclusive prosperity and that we will be able to follow up soon with an even richer
set of policy discussions.
Political theorist Wendy Brown's latest book, In the Ruins of
Neoliberalism: The Rise of Antidemocratic Politics in the West , traces the intellectual
roots of neoliberalism and reveals how an anti-democratic project unleashed monsters –
from plutocrats to neo-fascists – that its mid-20 th century visionaries
failed to anticipate. She joins the Institute for New Economic Thinking to discuss how the
flawed blueprint for markets and the less-discussed focus on morality gave rise to threats to
democracy and society that are distinct from what has come before.
Lynn Parramore: To many people, neoliberalism is about economic agendas. But your book
explores what you describe as the moral aspect of the neoliberal project. Why is this
significant?
Wendy Brown: Most critical engagement with neoliberalism focuses on economic policy
– deregulation, privatization, regressive taxation, union busting and the extreme
inequality and instability these generate. However, there is another aspect to neoliberalism,
apparent both in its intellectual foundations and its actual roll-out, that mirrors these moves
in the sphere of traditional morality. All the early schools of neoliberalism (Chicago,
Austrian, Freiburg, Virginia) affirmed markets and the importance of states supporting without
intervening in them.
But they also all affirmed the importance of traditional morality (centered in the
patriarchal family and private property) and the importance of states supporting without
intervening in it. They all supported expanding its reach from the private into the civic
sphere and rolling back social justice previsions that conflict with it. Neoliberalism thus
aims to de-regulate the social sphere in a way that parallels the de-regulation of markets.
Concretely this means challenging, in the name of freedom, not only regulatory and
redistributive economic policy but policies aimed at gender, sexual and racial equality. It
means legitimating assertions of personal freedom against equality mandates (and when
corporations are identified as persons, they too are empowered to assert such freedom). Because
neoliberalism has everywhere carried this moral project in addition to its economic one, and
because it has everywhere opposed freedom to state imposed social justice or social protection
of the vulnerable, the meaning of liberalism has been fundamentally altered in the past four
decades.
That's how it is possible to be simultaneously libertarian, ethnonationalist and patriarchal
today: The right's contemporary attack on "social justice warriors" is straight out of
Hayek.
LP: You discuss economist and philosopher Friedrich von Hayek at length in your book.
How would you distribute responsibility to him compared to other champions of conservative
formulations for how neoliberalism has played out? What were his blind spots, which seem
evidenced today in the rise of right-wing forces and angry populations around the world?
WB: Margaret Thatcher thumped Hayek's The Constitution of
Liberty and declared it the bible of her project. She studied it, believed it, and
sought to realize it. Reagan imbibed a lot of Thatcherism. Both aimed to implement the Hayekian
view of markets, morals and undemocratic statism. Both accepted his demonization of society
(Thatcher famously quotes him, "there's no such thing") and his view that state policies aimed
at the good for society are already on the road to totalitarianism. Both affirmed traditional
morality in combination with deregulated markets and attacks on organized labor.
I am not arguing that Hayek is the dominant influence for all times and places of
neoliberalization over the past four decades -- obviously the Chicago Boys [Chilean economists of the '70s
and '80s trained at the University of Chicago] were key in Latin America while Ordoliberalism [a German
approach to liberalism] has been a major influence in the European Union's management of the
post-2008 crises. "Progressive neoliberals" and neoliberalized institutions hauled the project
in their own direction. But Hayek's influence is critical to governing rationality of
neoliberalism in the North and he also happens to be a rich and complex thinker with a fairly
comprehensive worldview, one comprising law, family, morality, state, economy, liberty,
equality, democracy and more.
The limitations? Hayek really believed that markets and traditional morality were both
spontaneous orders of action and cooperation, while political life would always overreach and
thus required tight constraints to prevent its interventions in morality or markets. It also
needed to be insulated from instrumentalism by concentrated economic interests, from aspiring
plutocrats to the masses. The solution, for him, was de-democratizing the state itself. He was,
more generally, opposed to robust democracy and indeed to a democratic state. A thriving order
in his understanding would feature substantial hierarchy and inequality, and it could tolerate
authoritarian uses of political power if they respected liberalism, free markets and
individual freedom.
We face an ugly, bowdlerized version of this today on the right. It is not exactly what
Hayek had in mind, and he would have loathed the plutocrats, demagogues and neo-fascist masses,
but his fingerprints are on it.
LP: You argue that there is now arising something distinct from past forms of fascism,
authoritarianism, plutocracy, and conservatism. We see things like images of Italian right groups giving Fascist
salutes that have been widely published. Is that merely atavism? What is different?
WB: Of course, the hard right traffics in prior fascist and ultra-racist iconography,
including Nazism and the Klan. However, the distinctiveness of the present is better read from
the quotidian right than the alt-right.
We need to understand why reaction to the neoliberal economic sinking of the middle and
working class has taken such a profoundly anti-democratic form. Why so much rage against
democracy and in favor of authoritarian statism while continuing to demand individual freedom?
What is the unique blend of ethno-nationalism and libertarianism afoot today? Why the
resentment of social welfare policy but not the plutocrats? Why the uproar over [American
football player and political activist] Colin Kaepernick but not the Panama Papers [a massive
document leak pointing to fraud and tax evasion among the wealthy]? Why don't bankrupt workers
want national healthcare or controls on the pharmaceutical industry? Why are those sickened
from industrial effluent in their water and soil supporting a regime that wants to roll back
environmental and health regulations?
Answers to these questions are mostly found within the frame of neoliberal reason, though
they also pertain to racialized rancor (fanned by opportunistic demagogues and our mess of an
unaccountable media), the dethronement of white masculinity from absolute rather than relative
entitlement, and an intensification of nihilism itself amplified by neoliberal
economization.
These contributing factors do not run along separate tracks. Rather, neoliberalism's aim to
displace democracy with markets, morals and liberal authoritarian statism legitimates a white
masculinist backlash against equality and inclusion mandates. Privatization of the nation
legitimates "nativist" exclusions. Individual freedom in a world of winners and losers assaults
the place of equality, access and inclusion in understandings of justice.
LP: Despite your view of democratized capitalism as an "oxymoron," you also observe that
capitalism can be modulated in order to promote equality among citizens. How is this feasible
given the influence of money in politics? What can we do to mitigate the corruption of
wealth?
WB: Citizens United certainly set
back the project of achieving the political equality required by and for democracy. I
wrote about this in a previous book, Undoing the Demos , and Timothy
Kuhner offers a superb account of the significance of wealth in politics in Capitalism V. Democracy: Money in Politics
and the Free Market Constitution. Both of us argue that the Citizens
United decision, and the several important campaign finance and campaign speech decisions
that preceded it, are themselves the result of a neoliberalized jurisprudence. That is,
corporate dominance of elections becomes possible when political life as a whole is cast as a
marketplace rather than a distinctive sphere in which humans attempt to set the values and
possibilities of common life. Identifying elections as political marketplaces is at the heart
of Citizens United.
So does a future for democracy in the United States depend on overturning that decision?
Hardly. Democracy is a practice, an ideal, an imaginary, a struggle, not an achieved state.
It is always incomplete, or better, always aspirational. There is plenty of that aspiration
afoot these days -- in social movements and in statehouses big and small. This doesn't make the
future of democracy rosy. It is challenged from a dozen directions – divestment
from public higher education, the trashing of truth and facticity, the unaccountability of
media platforms, both corporate and social, external influence and trolling, active voter
suppression and gerrymandering, and the neoliberal assault on the very value of democracy we've
been discussing. So the winds are hardly at democracy's back.
I think Milton Friedman was vastly more important than Hayek is shaping the worldview of
American conservatives on economic policy. Until Hayek won the Nobel he was virtually
forgotten in the US. Don't know about the UK, but his leaving the London School of Economics
undoubtedly reduced his influence there. Hayek was very isolated at the University of Chicago
even from the libertarians at the Department of Economics, largely due to methodological
issues. The Chicago economists thought was really more of as philosopher, not a real
economist like them.
Friedman was working for Hayek, in the sense that Hayek instigated the program that
Friedman fronted.
I was amused by a BBC radio piece a couple of years ago in which some City economist was
trying to convince us that Hayek was a forgotten genius who we ought to dig up and worship,
as if he doesn't already rule the World from his seat at God's right hand.
Citizens United: The conservative originalists keep whining about activist judges making
up rights, like the "right to privacy" in Roe v. Wade. Yet they were able to come up with
Citizens United that gave a whole new class of rights to corporations to effectively give
them the rights of individuals (the People that show up regularly in the Constitution,
including the opening phrase). If you search the Constitution, "company", "corporation" etc.
don't even show up as included in the Constitution. "Commerce" shows up a couple of times,
specifically as something regulated by Congress. Citizens United effectively flips the script
of the Constitution in giving the companies doing Commerce the ability to regulate Congress.
I think Citizen's United is the least conservative ruling that the conservative court could
have come up with, bordering on fascism instead of the principles clearly enunciated
throughout the Constitution. It is likely to be the "Dred Scott" decision of the 21st
century.
2. Neo-liberalism is like Marxism and a bunch of other isms, where the principles look
fine on paper until you apply them to real-world people and societies. This is the difference
between Thaler's "econs" vs "humans". It works in theory, but not in practice because people
are not purely rational and the behavioral aspects of the people and societies throw things
out of kilter very quickly. That is a primary purpose of regulation, to be a rational
fly-wheel keeping things from spinning out of control to the right or left. Marxism quickly
turned into Stalinism in Russia while Friedman quickly turned into massive inequality and
Donald Trump in the US. The word "regulate" shows up more frequently in the Constitution than
"commerce", or "freedom" (only shows up in First Amendment), or "liberty" (deprivation of
liberty has to follow due process of law which is a form of regulation). So the Constitution
never conceived of a self-regulating society in the way Hayek and Friedman think things
should naturally work – writing court rulings on the neo-liberal approach is a radical
activist departure from the Constitution.
The foundation was laid for Citizens United long before, I think, when the Supreme
Court decided that corporations were essentially people, and that money was essentially
speech. It would be nice if some justice started hacking away at those erroneous decisions
(along with what they did with the 2nd Amendment in D.C. v Heller .)
I honestly think the corporations are people was good and the money is speech is terrible.
If most of the big corporations were actually treated like people those people would be in
jail. They are treated better than people are now. Poor people, anyway. When your corporation
is too big not to commit crimes, it's too big and should go in time out at least.
My understanding is that corporate personhood arose as a convenience to allow a
corporation to be named as a single entity in legal actions, rather than having to name every
last stockholder, officer, employee etc. Unfortunately the concept was gradually expanded far
past its usefulness for the rest of us.
"If most of the big corporations were actually treated like people those people would be
in jail."
Thats part of the problem: Corporations CANNOT be put in jail because they are
organizations, not people, but they are given the same 'rights' as people. That is
fundamentally part of the problem.
True, but corporations are directed by people who *can* be jailed. Often they are
compensated as if they were taking full liability when in fact they face none. I think its
long past time to revisit the concept of limited liability.
"Limited Liability" is basic to the concept of the corporation. How about some "limited
liability" for individuals? The whole point of neo-liberalism is "lawlessness" or the "Law of
the Jungle" in unfettered markets. The idea is to rationalize raw power, both over society
and the family, the last stand of male dominance, the patriarchy. The women who succeed in
this eco-system, eschew the nurturing feminine and espouse the predatory masculine. "We came,
we saw, he died." Psychopaths all!
The executives need to go to jail. Until then, corporate fines are just a cost of doing
business and white collar lawbreaking will continue. Blowing up the world's financial system
has less legal consequence than doing 80 in a 65 mph zone. Even if they just did civil asset
forfeiture on executives based on them having likely committed a crime while in their house
and using their money would go along ways to cleaning things up.
The whittling away of white collar crime by need to demonstrate intent beyond reasonable
doubt means the executives can just plead incompetence or inattention (while collecting their
$20 million after acquittal). Meanwhile, a poor person with a baggie of marijuana in the
trunk of their car goes to jail for "possession" where intent does not need to be shown, mere
presence of the substance. If they used the same standard of the mere presence of a fraud to
be sufficient to jail white collar criminals, there wouldn't be room in the prisons for poor
people picked up for little baggies of weed.
Actually, if you research the history, the court DID NOT decide that corporations are
people. The decision was made by the secretary to the court, who included the ruling in the
headnote to Santa Clara County v. Southern Pacific Railroad, 1886. The concept was not
considered in the case itself nor in the ruling the judges made. However, it was so
convenient for making money that judges and even at least one justice on the supreme court
publicized the ruling as if it were an actual legal precedent and have followed it ever
since. I am not a lawyer, but I think that ruling could be changed by a statute, whereas
Citizens United is going to require an amendment to the constitution. On the other hand, who
knows? Maybe the five old, rich, Republican, Catholic Men will rule that it is embedded in
the constitution after all. I think it would be worth a try.
"Neo-liberalism is like Marxism and a bunch of other isms, where the principles look fine
on paper until you apply them to real-world people and societies."
Marx analysed 19th Century capitalism; he wrote very little on what type of system should
succeed capitalism. This is in distinct contrast to neo-liberalism which had a well plotted
path to follow (Mirowski covers this very well). Marxism did not turn into Stalinism; Tsarism
turned into Leninism which turned into Stalinism. Marx had an awful lot less to do with it
than Tsar Nicholas II.
+1000. I think it was Tsar Nicholas II who said, L'etat, c'est moi"./s; Lenin just
appropriated this concept to implement his idea of "the dictatorship of the proletariat."
"Neo-liberalism is like Marxism and a bunch of other isms, where the principles look fine
on paper until you apply them to real-world people and societies."
I'm sorry, but this is fundamentally intellectually lazy. Marxism isn't so much a way to
structure the world, like Neoliberalism is, but a method of understanding Capitalism and
class relations to capitalism.
Edit: I wrote this before I saw New Wafer Army's post since I hadnt refreshed the page
since I opened it. They said pretty much what I wanted to say, so kudos to them.
These critiques of neoliberalism are always welcome, but they inevitably leave me with
irritated and dissatisfied with their failure or unwillingness to mention the political
philosophy of republicanism as an alternative, or even a contrast.
The key is found in Brown's statement " It also needed to be insulated from
instrumentalism by concentrated economic interests, from aspiring plutocrats to the masses.
The solution, for him [von Hayek], was de-democratizing the state itself. He was, more
generally, opposed to robust democracy and indeed to a democratic state."
Contrast this to Federalist Paper No. 10, Madison's famous discourse on factions.
Madison writes that 1) factions always arise from economic interests ["But the most common
and durable source of factions has been the various and unequal distribution of property."],
and 2) therefore the most important function of government is to REGULATE the clash of these
factions ["The regulation of these various and interfering interests forms the principal task
of modern legislation, and involves the spirit of party and faction in the necessary and
ordinary operations of the government."
In a very real sense, neoliberalism is an assault on the founding principles of the
American republic.
Which should not really surprise anyone, since von Hayek was trained as a functionary of
the Austro-Hungarian empire. And who was the first secretary of the Mont Pelerin Society that
von Hayen founded to promote neoliberalist doctrine and propaganda? Non other than Max Thurn,
of the reactionary Bavarian Thurn und Taxis royal family.
Madison's Federalist 10 is much like Aristotle's Politics and the better Roman historians
in correctly tracing back the fundamental tensions in any political community to questions of
property and class.
And, much like Aristotle's "mixed regime," Madison proposes that the best way of
overcoming these tensions is to institutionalize organs of government broadly representative
of the two basic contesting political classes–democratic and oligarchic–and let
them hash things out in a way that both are forced to deal with the other. This is a
simplification but not a terribly inaccurate one.
The problem though so far as I can tell is that it almost always happens that the
arrangement is set up in a way that structurally privileges existing property rights
(oligarchy) over social freedoms (democracy) such that the oligarchic class quickly comes to
dominate even those governmental organs designed to be "democratic". In other words, I have
never seen a theorized republic that upon closer inspection was not an oligarchy in
practice.
1) Support welfare for the banks (e.g. deposit guarantees) and the rich (e.g. non-negative
yields and interest on the inherently risk-free debt of monetary sovereigns).
2) Seek to regulate the thievery inherent in 1).
3) Bemoan the inevitable rat-race to the bottom when 2) inevitably fails because of
unenforceable laws, such as bans on insider trading, red-lining, etc.
Shorter: Progressives ENABLE the injustice they profess, no doubt sincerely at least in
some cases, to oppose.
Rather stupid from an engineering perspective, I'd say. Or more kindly, blind.
I'm fine with the federal government providing basic banking services (which would
inherently protect depositors) but your initial post didn't say anything about that. If we
continue with a private banking system I want deposit guarantees even if they somehow
privilege the banks better than nothing
I have read that originally conservatives (including many bankers) opposed deposit
insurance because it would lead people to be less careful when they evaluated the banking
institution they would entrust with their money. They did not seem to notice that however
much diligence depositors used, they ended up losing their life's savings over and over. Just
as they do not seem to notice that despite having employer-provided insurance tens of
thousands of people every year go bankrupt because of medical bills. Funny how that
works.
Adding that rather than deposit guarantees, the US government could have expanded the
Postal Savings Service to provide the population with what private banks had so miserably
failed to provide – the safe storage of their fiat.
The banking system was failing in 1932, as was the financial system in 2008, not
necessarily because of any lack of solvency of an individual business although some were, but
because of the lack of faith in the whole system; bank panics meant that every depositor was
trying to get their money out at the same time. People lost everything. It is only the faith
in the system that enables the use of bits of paper and plastic to work. So having a
guarantee in big, bold letters of people's savings is a good idea.
Personally, I see little distance between the Neo Liberal treatment of Market and Naked
Greed, coupled with a complete rejection of Rule of Law for the Common Good.
" It means legitimating assertions of personal freedom against equality mandates (and when
corporations are identified as persons, they too are empowered to assert such freedom)."
"We need to understand why reaction to the neoliberal economic sinking of the middle and
working class has taken such a profoundly anti-democratic form." Really? Does anybody here
believe that? This reads like another clumsy attempt to dismiss actual popular anger against
neoliberalism in favour of pearl-clutching progressive angst, by associating this anger with
the latest target for liberal hate, in this case blah blah patriarchy blah blah. The reality
is that liberalism has always been about promoting the freedom of the rich and the strong to
do whatever they feel like, whilst keeping the ordinary people divided and under control.
That's why Liberals have always hated socialists, who think of the good of the community
rather than of the "freedom" of the rich, powerful and well connected.
The "democracy" that is being defended here is traditional elite liberal democracy, full of
abstract "rights" that only the powerful can exert, dominated by elite political parties with
little to choose between them, and indifferent or hostile to actual freedoms that ordinary
people want in their daily lives. Neoliberalism is simply a label for its economic views
(that haven't changed much over the centuries) whereas social justice is the label for its
social wing (ditto).
I think of this every time I wall home through the local high street, where within thirty
metres I pass two elderly eastern European men aggressively begging. (It varies in France,
but this is slightly closer than the average for a city). I reflect that twenty years of
neoliberal policies in France have given these people freedom of movement, and the freedom to
sit there in the rain with no home, no job and no prospects. Oh, and now of course they are
free to marry each other.
I agree with your analysis and assessment of Wendy Brown, as she is portrayed in her
statements in this post. However I quibble your assertion: "Neoliberalism is simply a label
for its economic views (that haven't changed much over the centuries) whereas social justice
is the label for its social wing (ditto)." The word "Neoliberalism" is indeed commonly used
as a label as you assert but Neoliberalism as a philosophy is obscured in that common
usage.
At its heart I believe Neoliberalism might best be characterized as an epistemology based
on the Market operating as the all knowing arbiter of Truth. Hayek exercises notions of
'freedom' in his writing but I believe freedom is a secondary concern once it is defined in
terms of its relation to the decisions of the Market. This notion of the Market as
epistemology is completely absent from Wendy Brown's discussion of her work in this post.
Her assertion that "neoliberalism's aim [is] to displace democracy with markets, morals
and liberal authoritarian statism legitimates a white masculinist backlash against equality
and inclusion mandates" collapses once the Market is introduced as epistemology.
Neoliberalism does not care one way or another about any of Wendy Brown's concerns. Once the
Market decides -- Truth is known. As a political theorist I am surprised there is no analysis
of Neoliberalism as a tool the Elite have used to work their will on society. I am surprised
there is no analysis of how the Elites have allowed themselves to be controlled within and
even displaced by the Corporate Entities they created and empowered using their tool. I am
surprised there is no analysis of the way the Corporate Entities and their Elite have worked
to use Neoliberalism to subordinate nation states under a hierarchy driven by the decisions
of the World Market.
[I admit I lack the stomach to read Hayek -- so I am basing my opinions on what I
understand of Phillip Mirowski's analysis of Neoliberalism.]
I don't disagree with you: I suppose that having been involved in practical politics
rather than being a political theorist (which I have no pretensions to being) I am more
interested of the reality of some of these ideas than their theoretical underpinnings. I have
managed to slog my way through Slobodian's book, and I think your presentation of Hayek's
writing is quite fair: I simply wonder how far it is actually at the origin of the
destruction we see around us. I would suggest in fact that, once you have a political
philosophy based on the value-maximising individual, rather than traditional considerations
of the good of society as a whole, you eventually wind up where we are now, once the
constraints of religious belief, fear of popular uprisings , fear of Communism etc. have been
progressively removed. It's for that reason that I argue that neoliberalism isn't really new:
it represents the essential form of liberalism unconstrained by outside forces – almost
a teleological phenomenon which, as its first critics feared, has wound up destroying
community, family, industries, social bonds and even – as you suggest – entire
nation states.
Your response to my comment, in particular your assertion "neoliberalism isn't really new"
coupled with your assertion apparently equating Neoliberalism with just another general
purpose label for a "political philosophy based on the value-maximizing individual, rather
than traditional ", is troubling. When I put your assertions with Jerry B's assertion at 6:58
pm:
" many people over focus on a word or the use of a word and ascribe way to literal view of a
word. I tend to view words more symbolically and contextually."
I am left wondering what is left to debate or discuss. If Neoliberalism has no particular
meaning then perhaps we should discuss the properties of political philosophies based on the
value-maximizing-individual, and even that construct only has meaning symbolically and
contextually, which is somehow different than the usual notion of meaning as a denotation
coupled with a connotation which is shared by those using a term in their discussion -- and
there I become lost from the discussion. I suppose I am too pedantic to deviate from the
common usages of words, especially technical words like Neoliberalism.
Considering how elites throughout history have used religion as a bulwark to guard their
privileges, it should be of no surprise that they are building a new one, only this time they
are building one that appeals to the religious and secular alike. Neoliberalism will be very
difficult to dismantle.
But what ironies we create. Citizens United effectively gave political control to the big
corporations. In a time when society has already evolved lots of legislation to limit the
power and control of any group and especially in commercial/monopoly cases. So that what CU
created was a new kind of "means of production" because what gets "produced" these days is at
least 75% imported. The means of production is coming to indicate the means of political
control. And that is fitting because ordinary people have become the commodity. Like
livestock. So in that sense Marx's view of power relationships is accurate although
civilization has morphed. Politics is, more and more, the means of production. The means of
finance. Just another reason why we would achieve nothing in this world trying to take over
the factories. What society must have now is fiscal control. It will be the new means of
production. I'm a dummy. I knew fiscal control was the most important thing, but I didn't
quite see the twists and turns that keep the fundamental idea right where it started.
Exactly. The writer seems determined to tie in neoliberalism with a broader conservative
opposition to modern social justice movements, when in reality neoliberalism (the 'neo' part
anyway) was more than happy to co-opt feminism, anti-racism, etc., into its narrative. The
more the merrier, as 'rights' became associated entirely with social issues, and not economic
rights.
The co-optation neoliberalism has exacted on rights movements has dovetailed nicely with
postmodernism's social-constructivism, an anti-materialist stance that posits discourse as
shaping the world and one that therefore privileges subjectivity over material reality.
What this means in practice is that "identity" is now a marketplace too, in which
individuals are naming their identities as a form of personal corporate branding. That's why
we have people labeling themselves like this: demisexual queer femme, on the spectrum, saying
hell no to my tradcath roots, into light BDSM, pronouns they/them.
And to prove this identity, the person must purchase various consumer products to garb and
decorate themselves accordingly.
So the idea of civil rights has now become utterly consumerist and about awarding those
rights based on subjective feelings rather than anything to do with actual material
exploitation.
The clue is in the way the words "oppression" and "privilege" are used. Under those words,
exploitation, discrimination, disadvantage, and simple dislike are conflated, though they're
very different and involve very different remedies.
The law in its majestic equality forbids the rich as well as the poor from sleeping under
bridges and stealing bread = classical Liberalism.
The bizarre thing is to meet younger neoliberal middle class people whom neoliberalism has
priced out of major cities, who have hardly any real savings, and who still are on board with
the project. The dream dies hard.
David – I enjoy reading your comments on NC as they are well reasoned and develop an
argument or counter argument. The above comment reads more like a rant. I do not disagree
with most of your comment. From my experience with Wendy Brown's writing your statement below
is not off base.:
This reads like another clumsy attempt to dismiss actual popular anger against
neoliberalism in favour of pearl-clutching progressive angst, by associating this anger with
the latest target for liberal hate, in this case blah blah patriarchy blah blah
However, in reading Wendy Brown's comments I did not have the same emotional reaction that
comes across in your comment. I have read the post twice to make sure I understand the points
Wendy Brown is trying to make and IMO she is "not wrong" either. . I would advise you to not
"throw out the baby with the bathwater".
As KLG mentions below, WB is a very successful academic at Berkeley who worked with
Sheldon Wolin as a graduate student IIRC (Sheldon Wolin wrote a terrific book entitled
Democracy Incorporated), so she is not just some random journalist.
Much of WB's writing has gender themes in it and there are times I think she goes over the
top, BUT, IMO there is also some truth to what she is saying. Much of the political power and
economic power in the US and the world is held by men so that may be where WB's reference to
patriarchy comes in.
How could there be patriarchy with men begging in the streets is a valid point. And that
is where I divert with WB, in that the term patriarchy paints with too broad a brush. But
speaking specifically to neo-liberalism and not liberalism as you refer to it, that is where
WB's reference to patriarchy may have some merit. Yes, there are many exceptions to the
neoliberalism and patriarchy connection such as Hillary Clinton, Margaret Thatcher, etc., so
again maybe painting with too broad a brush, but it would be wise not to give some value.
The sociologist Raewyn Connell has written about the connection between neoliberalism and
version of a certain type of masculinity embedded with neoliberalism. Like Wendy Brown,
Connell seems to gloss over the examples of Hillary Clinton, Margaret Thatcher, and the class
based elite bourgeois feminism as counterpoints to neoliberal patriarchy. There are
exceptions to every rule.
Women have made enormous strides in politics and the boardroom. But in the halls of political
and economic power the majority of the power is still held by men, and until women become
close to 50% or more of the seats of power, to ignore the influence of patriarchy/oligarch
version of masculinity(or whatever term a person is comfortable with) on neoliberalism would
be foolish.
Neoliberalism is simply a label for its economic views (that haven't changed much over
the centuries) whereas social justice is the label for its social wing (ditto).
I disagree. IMO, neoliberalism is a different animal than the "traditional elite liberal
democracy", and neoliberalism is much darker and as WB mentions "Neoliberalism thus aims to
de-regulate the social sphere in a way that parallels the de-regulation of markets".
If you have not I would highly recommend reading Sheldon Wolin's Democracy Incorporated:
Managed Democracy and the Specter of Inverted Totalitarianism It is an excellent book.
I haven't read that book by Wolin, though his Politics and Vision is in the bookcase next
to me. I'll try to get hold of it. I didn't know she was his student either.
I think the issues she raises about gender are a different question from neoliberalism
itself, and that it's not helpful to believe that you can fight neoliberalism by
"legitimating assertions of personal freedom against equality mandates" whatever that means.
Likewise, it's misleading to suggest that "Privatization of the nation legitimates "nativist"
exclusions", since the actual result is the opposite, as you will realise when you see that
London buses have the same logo as the ones in Paris, and electricity in the UK is often
supplied by a French company, EDF. Indeed, to the extent that there is a connection with
"nativism" it is that privatisation has enabled an international network of distant and
unaccountable private companies to take away management of national resources and assets from
the people. Likewise, neoliberalism is entirely happy to trample over traditional gender
roles in the name of efficiency and increasing the number of workers chasing the same
job.
In other words, I was irritated (and sorry if I ranted a bit, I try not to) with what I saw
as someone who already knows what the answer is, independent of what the question may be. I
suspect her analysis of, say, Brexit, would be very similar. I think that kind of person is
potentially dangerous.
==I think the issues she raises about gender are a different question from neoliberalism
itself==
Again as I said in my comment I would agree in a theoretical sense that gender and
neoliberalism are different issues but again I believe there is a thread of gender, i.e.
oligarchic patriarchy, of the type of neoliberalism that WB talks about.
===not helpful to believe that you can fight neoliberalism by "legitimating assertions of
personal freedom against equality mandates" whatever that means===
What I think that means is the more libertarian version of neoliberalism. That maybe where
our differences lie, in that my sense is WB is talking about a specific form of neoliberalism
and your view is broader.
===it's misleading to suggest that "Privatization of the nation legitimates "nativist"
exclusions"===
On this I see your disagreement with WB and understand your reference to "that
privatisation has enabled an international network of distant and unaccountable private
companies to take away management of national resources and assets from the people".
Where I think WB is coming from is the more nationalistic, Anglosphere that the Trump
administration is pushing with his border wall, etc. In this WB does expose her far left
priors but again there is some value in her points. From her far left view my sense it Wendy
Brown is reacting to the sense that Trump wants to turn the US into the US of the 1950's and
60's and on many fronts that ship has sailed.
=== Indeed, to the extent that there is a connection with "nativism" it is that
privatisation has enabled an international network of distant and unaccountable private
companies to take away management of national resources and assets from the people. Likewise,
neoliberalism is entirely happy to trample over traditional gender roles in the name of
efficiency and increasing the number of workers chasing the same job. ===
Excellent point and having read some of Wendy Brown's books and paper is a point she would
agree with while still seeing some patriarchial themes running through neoliberalism. To your
point above I would recommend reading some of Cynthia Enloe's work specifically Bananas,
Beaches and Bases.
====I think that kind of person is potentially dangerous====
Wow. Dangerous??? Clearly the post has hit a nerve. Many people in our current society are
dangerous but IMO Wendy Brown is not one of them. A bit hyperbolic in her focus on gender?
Maybe but not wrong. A bit too far left (of the bleeding heart kind)? Maybe. But to call
someone who worked for Sheldon Wolin dangerous. C'mon man.
I have gotten into disputes on NC as IMO many people over focus on a word or the use of a
word and ascribe way to literal view of a word. I tend to view words more symbolically and
contextually. I do not overreact to the use a word and instead try to step back and glean a
message or the word in context of what is the person trying to say? So for instance when WB
uses the phrase "Privatization of the nation" I am not going to react because my own
interpretation is WB is reacting to Trump's nationalism and not to the type of privatization
that your example of London shows.
I am disappointed that most of the comments to this post seem to take a critical view of
Wendy Brown's comments. Is she a bit too far left and gender focused (identity political) for
my tastes? Yes and that somewhat hurts her overall message and the arguments she is trying to
discuss which are not unlike her mentor Sheldon Wolin.
Thanks for the reply David. My sense is we have what I call a "positional" debate (i.e.
Tastes Great! Less Filling!). And positional debates tend to go nowhere.
When WB speaks of gender, note that she then mentions sex, followed by race. By "gender"
she is NOT talking about the rights and power of female people under neoliberalism.
She is speaking of the rights of people to claim, that they are the opposite sex and
therefore entitled to the rights, set-asides and affirmative discrimination permitted that
sex -- for instance, to compete athletically on that sex's sports teams, to be imprisoned if
convicted in that sex's prisons, to be considered that sex in instances where sex matters in
employment such as a job as a rape counselor or a health care position performing intimate
exams where one is entitled to request a same-sex provider, and to apply for scholarships,
awards, business loans etc. set aside for that sex.
WB, in addition to being a professor at Berkeley, is also the partner of Judith Butler,
whose book "Gender Trouble" essentially launched the postmodern idea that subjective sense of
one's sex and how one enacts that is more meaningful than the lived reality people experience
in biologically sexed bodies.
By this reasoning, a male weightlifter can become a woman, can declare that he's in fact
always been a woman -- and so we arrive at the farce of a male weightlifter (who, granted,
must under IOC policy reduce his testosterone for one year to a low-normal male range that is
5 standard deviations away from the female mean) winning a gold medal in women's
weightlifting in the Pan-Pacific games and likely to win gold again in the 2020 Olympics.
If that's not privileging individual freedom over collective rights, I don't know what
is.
>That's how it is possible to be simultaneously libertarian, ethnonationalist and
patriarchal today: The right's contemporary attack on "social justice warriors" is straight
out of Hayek.
Anyone who could write such a statement understands neither libertarianism nor
ethnonationalism. The last half-decade has seen a constant intellectual attack by
ethnonationalists against libertarianism. An hour's examination of the now-defunct Alt
Right's would confirm this.
Similarly, the contemporary attack on SJW's comes not out of Hayek, but from Gamergate. If
you do not know what Gamergate is, you do not understand where the current rightwing and
not-so-rightwing thrust of contemporary white identity politics is coming from. My guess is
Brown has never heard of it.
Far from trying to uphold patriarchy, Contemporary neoliberalism seeks a total atomization
of society into nothing but individual consumers of product. Thus what passes for
liberalization of a society today consists in little more than staging sham elections,
opening McDonalds, and holding a gay pride parade.
This is why ethnonationalism and even simple nationalism poses a mortal threat to
neoliberalism, in a way that so-called progressives never will: both are a threat to
globalization, while the rainbow left has shown itself to be little more than the useful
idiots of capital.
Brown strikes me as someone who has a worldview and will distort the world to fit that
view, no matter how this jibes with facts or logic. The point is simply to array her bugbears
into a coalition, regardless of how ridiculous it seems to anyone who knows anything about
it.
Actually, maybe not "Bingo," if by that you mean Wendy Brown is a typical representative
of "pearl clutching progressive angst." Yes, WB is a very successful academic at Berkeley who
worked with Sheldon Wolin as a graduate student IIRC (who was atypical in just about every
important way), but this book along with its predecessor Undoing the Demos are much
stronger than the normative "why are the natives so restless?" bullshit coming from my
erstwhile tribe of "liberals," most of whom are incapacitated by a not unrelated case of
Trump Derangement Syndrome.
Hayek was eloquent. Too bad he didn't establish some end goals. Think of all the misery
that would have been avoided. I mean, how can you rationalize some economic ideology to
"deregulate the social sphere" – that's just the snake eating its tail. That's what
people do who don't have boundaries. Right now it looks like there's a strange bedfellowship,
a threesome of neoliberal nazis, globalists, and old communists. Everybody and their dog
wants the world to work – for everyone. But nobody knows how to do it. And we are
experiencing multiple degrees of freedom to express our own personal version of Stockholm
syndrome. Because identity politics. What a joke. Maybe we need to come together over
something rational. Something fairly real. Instead of overturning Citizens United (which is
absurd already), we should do Creatures United – rights for actual living things on
this planet. And then we'd have a cause for the duration.
Well stated. The -isms seem like distractions, almost red herrings leading us down the
primrose path to a ceaseless is/ought problem. Rather than discuss the way the world is, we
argue how it ought to be.
Not to say theory, study, and introspection aren't important. More that we appear
paralyzed into inaction since everyone doesn't agree on the One True Way yet.
Let us not get to simplistic here. It helps to understand the origins of political,
economic, and even social ideals. The origin of modern capitalism, for there were
different and more limited earlier forms, was in the Dutch Republic and was part of the
efforts of removing and replacing feudalism; liberalism arose from the Enlightenment, which
itself was partly the creation of the Wars of Religion, which devastated Europe. The Thirty
Years War, which killed ½ of the male population of the Germanies, and is considered
more devastating to the Germans than both world wars combined had much of its energy from
religious disagreements.
The Age of Enlightenment, along with much of political thought in the Eighteenth Century,
was a attempt to allow differences in belief, and the often violent passions that they can
cause, to be fought by words instead of murder. The American Constitution, the Bill of
Rights, the whole political worldview, that most Americans unconsciously have, comes from
from those those times.
Democracy, Liberalism, even Adam Smith's work in the Wealth of Nations were
attempts to escape the dictatorship of kings, feudalism, serfdom, violence. Unfortunately,
they have all been usurped. Adam Smith's life's work has been perverted, liberalism has been
used to weaken the social bonds by making work and money central to society. Their evil child
Neoliberalism, a creation of people like Hayek, was supposed to reduce wars (most of the
founders were survivors of the world wars) and was supposed to be be partly
antidemocratic.
Modern Neoliberalism mutates and combines the partly inadvertent atomizing effects of the
ideas of the Enlightenment, Liberalism, Dutch and British Capitalism, the Free Markets of
Adam Smith, adds earlier mid twentieth century Neoliberalism as a fuel additive, and creates
this twisted flaming Napalm of social atomizing; it also clears out any challenges to money
is the worth of all things. Forget philosophy, religion, family, government, society. Money
determines worth. Even speech is only worth the money spent on it and not any inherent worth.
Or the vote.
"liberalism has been used to weaken the social bonds by making work and money central to
society"
I think you may have swapped the cart and the horse.
Money evolved as a way of aiding and organizing useful interactions within groups larger
than isolated villages of a hundred people.
It also enabled an overall increase in wealth through specialization.
Were it not for money, there would be a difficult mismatch between goods of vastly
differing value. A farmer growing wheat and carrots has an almost completely divisible supply
of goods with which to trade. Someone building a farm wagon a month, or making an iron plough
every two weeks has a problem exchanging that for items orders of magnitude less
valuable.
Specialization is a vital step in improving resources and capabilities within societies.
I've hung out with enough friends who are blacksmiths to know that every farmer hammering out
their own plough is a non-starter, for many reasons.
And I've followed enough history to know that iron ploughs mean a lot more food, which
allows someone to specialize in making ploughs rather than growing food for personal
consumption.
The obvious need is for a way of dividing the value of the plough into many smaller
amounts that can be used to obtain grain, cloth, pottery, and so on.
While the exact form of money is not rigidly fixed, at lower technological levels one
really needs something that is portable, doesn't spontaneously self destruct, and has a
clearly definable value . and exists in different concentrations of worth, to allow
flexibility in transport and use.
Various societies have come up with various tokens of value, from agricultural products to
bank drafts, each with different advantages and disadvantages, but for most of history,
precious metals, base metals, and coinage have been the most practical representation of
exchangeable value.
Money is almost certainly an inevitable and necessary consequence of the invention of
agriculture, and the corresponding increase in population density.
Agreed, but as I've suggested elsewhere liberalism always had the capacity within it to
destroy social bonds, societies and even nations, it's just that, at the time, this was
hidden behind the belief that a just God would not allow it to happen. I see liberalism less
as mutating or being usurped than finally being freed of controls. Paradoxically, of course,
this "freedom" requires servitude for others, so that no outside forces (trades unions for
example) can pollute the purity of the market. It's the same thing with social justice:
freedom for identity group comes through legal controls over the behaviour of others, which
is why the contemporary definition of a civil rights activist is someone who wants to
introduce lots of new laws to prevent people from doing things.
frankly, I don't believe the "monsters" neoliberalism has helped create are an unwanted
side effect of their approach, on the contrary, neoliberalism needs those "monsters", like
the authoritarian state, to impose itself on society (ask the mutilated gilets jaunes).
Repression, inequality, poverty, abuse, dispossession, disfranchisement, enviromental
degradation are certainly "monstrous" to those who have to endure them, but not to those who
profit the most from the system and sit on the most powerful positions. Of course, the degree
of exposure to those monstrosities is dependent on the relative position in the pyramid
shaped neoliberal society, the bottom has to endure the most. On the other side, the middle
classes tend to support the neoliberal model as long as it ensures them a power position
relative to the under classes, and the moment those middle classes feel ttheir position
relative to the under classes threatened, the switch to open fascism is not far, we can see
this in Bolivia.
"neoliberalism needs those "monsters", like the authoritarian state, to impose itself on
society"
If I understood Quinn Slobodian's "Globalists" correctly it was precisely this -- that the
neoliberal project while professing that markets were somehow "natural" spent an inordinate
amount of time working to ensure that legal structures be created to insulate them from the
dirty demos.
Their actions in this respect don't square with a serious belief that markets are natural
at all -- if they were, they wouldn't need so damned much hothousing, right?
I think the argument was that markets were "natural", but vulnerable to interference, and
so had to be protected by these legal structures. There's a metaphor there, but it's too late
here for me to find it.
===spent an inordinate amount of time working to ensure that legal structures be created
to insulate them from the dirty demos===
I enjoyed Slobodian's book as well. Interestingly, there is a new book out called The Code
of Capital: How the Law Creates Wealth and Inequality by Katharina Pistor that discusses
those "legal structures".
If you check out Katharina Pistor on Twitter, you can also find good commentaries and even
videos of talks discussing the book and the matter – it is very edifying to open your
eyes to the fundamental role of law in creating such natural phenomena as markets and, among
other things, billionaires.
Thanks deplorado. I do not frequent Pistor's twitter page as much as I would like.
In reading Pistor's book and some of the interviews with Pistor and some of her papers
discussing the themes in the book, I had the same reaction as when I read some of Susan
Strange's books such as The Retreat of the State: complete removal of any strand of
naïveté I may have had as to how the world works. And how hard it will be to undo
the destruction.
As you mention the "dirty demos" above, one of Wendy Brown's recent books was Undoing the
Demos: Neoliberalism's Stealth Revolution.
Never having read any of Susan Strange's writings, I decided to find a book review of The
Retreat of the State. I found this one and found it very interesting, enough so that I'll go
to abebooks.com and get a copy to read.
Hmm. Definitely Monsters from the Id at work here. I am going with the theory that the
wealthier class pushed this whole project all along. In the US, Roosevelt had cracked down
and imposed regulations that stopped, for example, the stock market from being turned into a
casino using ordinary people's saving. He also pushed taxes on them that exceeded 90% which
tended to help keep them defanged.
So lo and behold, after casting about, a bunch of isolated rat-bag economic radicals was
found that support getting rid of regulations, reducing taxes on the wealthy and anything
else that they wanted to do. So money was pumped into this project, think tanks were taken
over or built up, universities were taken over to teach this new theories, lawyers and future
judges were 'educated' to support their fight and that is what we have today.
If WW2 had not discredited fascism, the wealthy would have use this instead as both Mussolini
and Hitler were very friendly to the wealthy industrialists. But they were so instead they
turned to neoliberalism instead. Yes, definitely Monsters from the Id.
William White (BIS, OECD) talks about how economics really changed over one hundred years
ago as classical economics was replaced by neoclassical economics. https://www.youtube.com/watch?v=g6iXBQ33pBo&t=2485s
He thinks we have been on the wrong path for one hundred years.
This is why we think small state, unregulated capitalism is something it never was when it
existed before.
We don't understand the monetary system or how banks work because:
Our knowledge of privately created money has been going backwards since 1856.
Credit creation theory -> fractional reserve theory -> financial intermediation
theory
"A lost century in economics: Three theories of banking and the conclusive evidence" Richard
A. Werner http://www.sciencedirect.com/science/article/pii/S1057521915001477
This is why we come up with crazy ideas like "financial liberalisation".
If corporations are to be people, then they, like the extremely wealthy, need to be reined
in politically. One step we could take is to only allow money donations to political
campaigns to take place when the person is subject or going to be subject to the politicians
decisions. I live in Illinois, I should be able to donate money to the campaigns of those
running for the U.S> Senate from Illinois, but Utah? If I donate money to a Utah candidate
for the Senate, I am practicing influence peddling because that Senator does not represent
me.
If corporations are to be people, they need a primary residence. The location of their
corporate headquarters should suffice to "place" them, and donations to candidates outside of
their set of districts would be forbidden.
Of course, we do have free speech, so people are completely free to speak over the
Internet, TV, hire halls in the district involved and go speak in person. They just couldn't
pay to have someone else do that for them.
To allow unfettered political donations violates the one ma, one vote principle and also
encourages influence peddling. In fact, it seems as if our Congress and Executive operates
only through influence peddling.
Impoverished economics? Unpacking the economics Nobel Prize
When the world is facing large systemic crises, why is the economics profession celebrating
small technical fixes?
By Ingrid Harvold Kvangraven
This week it was announced that Abhijit Banerjee, Esther Duflo and Michael Kremer won the
Economics Nobel Prize (or more accurately: the 'Sveriges Riksbank Prize in Economic Sciences in
Memory of Alfred Nobel'). The trio of economists were awarded the prize for "their experimental
approach to alleviating global poverty".
On social media and in mainstream newspapers, there was an exceptional level of praise for
the laureates, reflecting their existing rockstar status within development economics. The
Financial Times even claimed that the "Economics Nobel for poverty work will help restore
profession's relevance". However, the widespread calls for celebration need to be considered
with a cautionary counterweight.
The experimental approach to poverty alleviation relies on so-called Randomized Control
Trials (RCTs). Inspired by studies in medicine, the approach targets specific interventions to
a randomly selected group (schools, classes, mothers, etc), and then compares how specific
outcomes change in the recipient group versus those who did not receive the treatment. As the
groups are assumed to be otherwise similar, the difference in outcomes can be causally
attributed to the intervention.
While the laureates were first pioneering this work in the 1990s in Kenyan schools, the
approach is now widely considered the new "gold standard" in development economics, also
sometimes simply called "New Economics". The approach has become enormously influential among
governments, international agencies and NGOs. The body of work pioneered by the laureates, or
the randomistas as they are sometimes called, is meant to alleviate poverty through simple
interventions such as combating teacher absenteeism, through cash transfers, and through
stimulating positive thinking among the people living in poverty. Sound good so far?
While the laureates' approach to poverty research and policy may seem harmless, if not
laudable, there are many reasons for concern. Both heterodox and mainstream economists as well
as other social scientists have long provided thorough critique of the turn towards RCTs in
economics, on philosophical, epistemological, political and methodological grounds. The
concerns with the approach can be roughly grouped into questions of focus, theory, and
methodology.
Focus: tackling symptoms and thinking small
The approach that is being promoted is concerned with poverty, not development, and is thus
a part of the larger trend in development economics that is moving away from development as
structural transformation to development as poverty alleviation. This movement towards
"thinking small" is a part of a broader trend, which has squeezed out questions related to
global economic institutions, trade, agricultural, industrial and fiscal policy, and the role
of political dynamics, in favor of the best ways to make smaller technical interventions.
The interventions considered by the Nobel laureates tend to be removed from analyses of
power and wider social change. In fact, the Nobel committee specifically gave it to Banerjee,
Duflo and Kremer for addressing "smaller, more manageable questions," rather than big ideas.
While such small interventions might generate positive results at the micro-level, they do
little to challenge the systems that produce the problems.
For example, rather than challenging the cuts to the school systems that are forced by
austerity, the focus of the randomistas directs our attention to absenteeism of teachers, the
effects of school meals and the number of teachers in the classroom on learning. Meanwhile,
their lack of challenge to the existing economic order is perhaps also precisely one of the
secrets to media and donor appeal, and ultimately also their success.
The lack of engagement with the conditions that create poverty has led many critics to
question to what extent RCTs will actually be able to significantly reduce global poverty. A
further consequence of this impoverished economics is that it limits the types of questions we
can ask, and it leads us "to imagine too few ways to change the world".
Theory: methodological individualism lives on
In a 2017 speech, Duflo famously likened economists to plumbers. In her view the role of an
economist is to solve real world problems in specific situations. This is a dangerous
assertion, as it suggests that the "plumbing" the randomistas are doing is purely technical,
and not guided by theory or values. However, the randomistas' approach to economics is not
objective, value-neutral, nor pragmatic, but rather, rooted in a particular theoretical
framework and world view – neoclassical microeconomic theory and methodological
individualism.
The experiments' grounding has implications for how experiments are designed and the
underlying assumptions about individual and collective behavior that are made. Perhaps the most
obvious example of this is that the laureates often argue that specific aspects of poverty can
be solved by correcting cognitive biases. Unsurprisingly, there is much overlap between the
work of randomistas and the mainstream behavioral economists, including a focus on nudges that
may facilitate better choices on the part of people living in poverty.
Another example is Duflo's analysis of women empowerment. Naila Kabeer argues that it
employs an understanding of human behavior "uncritically informed by neoclassical microeconomic
theory." Since all behavior can allegedly be explained as manifestations of individual
maximizing behavior, alternative explanations are dispensed with. Because of this, Duflo fails
to understand a series of other important factors related to women's empowerment, such as the
role of sustained struggle by women's organizations for rights or the need to address unfair
distribution of unpaid work that limits women's ability to participate in the community.
Note that there is nothing embedded in RCTs that forces randomistas to assume individuals
are rational optimizing agents. These assumptions come from the economics tradition. This is
therefore not a critique of RCTs per se, but of the way RCTs are employed in the laureates'
work and in most of mainstream economics.
Method: If you didn't randomize it, is it really knowledge?
While understanding causal processes is important in development economics, as in other
social science disciplines, RCTs do so in a very limited way. The causal model underlying RCTs
focuses on causal effects rather than causal mechanisms. Not only do RCTs not tell us exactly
what mechanisms are involved when something works, they also do not tell us whether the policy
in question can be reliably implemented elsewhere. In order to make such a judgement, a broader
assessment of economic and social realities is unavoidable.
Assuming that interventions are valid across geographies and scale suggests that micro
results are independent of their macroeconomic environment. However, while "effects" on
individuals and households are not separate from the societies in which they exist, randomistas
give little acknowledgement to other ways of knowing about the world that might help us better
understand individual motivations and socio-economic situations. As it is difficult to achieve
truly random sampling in human communities, it is perhaps not surprising that when RCTs are
replicated, they may come to substantially different results than the original.
Not only do RCTs rarely have external validity, but the specific circumstances needed to
understand the extent to which the experiments may have external validity are usually
inadequately reported. This has led even critics within the mainstream to argue that there are
misunderstandings about what RCTs are capable of accomplishing. A deeper epistemological
critique involves the problematic underlying assumption that there is one specific true impact
that can be uncovered through experiments.
Recent research has found that alternative attempts to assess the success of programs
transferring assets to women in extreme poverty in West Bengal and Sindh have been far superior
to RCTs, which provide very limited explanations for the patterns of outcomes observed. The
research concludes that it is unlikely that RCTs will be able to acknowledge the central role
of human agency in project success if they confine themselves to quantitative methods
alone.
There are also serious ethical problems at stake. Among these are issues such as lying,
instrumentalizing people, the role of consent, accountability, and foreign intervention, in
addition to the choice of who gets treatment. While ethical concerns regarding potential harm
to groups is discussed extensively in the medical literature, it receives less attention in
economics, despite the many ethically dubious experimental studies (e.g. allowing bribes for
people to get their drivers' licences in India or incentivizing Hong Kong university students
into participation in an antiauthoritarian protest). Finally, the colonial dimensions of
US-based researchers intervening to estimate what is best for people in the Global South cannot
be ignored.
Why it matters: limits to knowledge and policy-making
There will always be research that is more or less relevant for development, so why does it
matter what the randomistas do? Well, as the Nobel Committee stated, their "experimental
research methods now entirely dominate development economics". A serious epistemological
problem arises when the definition of what rigour and evidence means gets narrowed down to one
single approach that has so many limitations. This shift has taken place over the past couple
of decades in development economics, and is now strengthened by the 2019 Nobel Prize. As both
Banerjee and Duflo acknowledged in interviews after the prize was announced, this is not just a
prize for them, but a prize for the entire movement.
The discipline has not always been this way. The history of thought on development economics
is rich with debates about how capital accumulation differs across space, the role of
institutions in shaping behavior and economic development, the legacies of colonialism and
imperialism, unequal exchange, the global governance of technology, the role of fiscal policy,
and the relationship between agriculture and industry. The larger questions have since been
pushed out of the discipline, in favor of debates about smaller interventions.
The rise of the randomistas also matters because the randomistas are committed to provoke
results, not just provide an understanding of the situations in which people living in poverty
find themselves. In fact, it is one of their stated goals to produce a "better integration
between theory and empirical practice". A key argument by the randomistas is that "all too
often development policy is based on fads, and randomised evaluations could allow it to be
based on evidence".
However, the narrowness of the randomized trials is impractical for most forms of policies.
While RCTs tend to test at most a couple of variations of a policy, in the real world of
development, interventions are overlapping and synergistic. This reality recently led 15
leading economists to call to "evaluate whole public policies" rather than assess "short-term
impacts of micro-projects," given that what is needed is systems-level thinking to tackle the
scale of overlapping crises. Furthermore, the value of experimentation in policy-making, rather
than promoting pre-prescribed policies, should not be neglected.
The concept of "evidence-based policy" associated with the randomistas needs some unpacking.
It is important to note that policies are informed by reflections on values and objectives,
which economists are not necessarily well-suited to intervene in. Of course, evidence should be
a part of a policy-making process, but the pursuit of ineffective policies is often driven by
political priorities rather than lack of evidence.
While randomistas might respond to this by arguing that their trials are precisely meant to
de-politicize public policy, this is not necessarily a desirable step. Policy decisions are
political in nature, and shielding these value judgements from public scrutiny and debate does
little to strengthen democratic decision making. Suggesting that policy-making can be
depoliticized is dangerous and it belittles the agency and participation of people in
policy-making. After all, why should a policy that has been proven effective through an RCT
carry more weight than, for example, policies driven by people's demands and political and
social mobilisation?
While the Nobel Prize does leave those of us concerned with broader political economy
challenges in the world anxious, not everything is doom and gloom. Firstly, the Nobel directs
attention to the persistence of poverty in the world and the need to do something about it.
What we as critical development economists now need to do is to challenge the fact that the
Prize also legitimizes a prescriptive view of how to find solutions to global problems.
Secondly, the fact that a woman and a person of color were awarded a prize that is usually
reserved for white men is a step forward for a more open and inclusive field. Duflo herself
recognizes that the gender imbalance among Nobel Prize winners reflects a "structural" problem
in the economics profession and that her profession lacks ethnic diversity.
However, it is obvious that to challenge racism, sexism and Eurocentrism in economics, it is
not enough to simply be more inclusive of women and people of color that are firmly placed at
the top of the narrow, Eurocentric mainstream. To truly achieve a more open and democratic
science it is necessary to push for a field that is welcoming of a plurality of viewpoints,
methodologies, theoretical frameworks, forms of knowledge, and perspectives.
This is a massive challenge, but the systemic, global crises we face require broad,
interdisciplinary engagement in debates about possible solutions.
Ingrid Harvold Kvangraven is a Lecturer in International Development at the University of York.
Reply Saturday, October 26, 2019 at 11:52 AM Paine said in reply
to anne... Development v poverty amelioration
A Very basic goal conflict indeed.
Transformation
will never come
thru,
More effective off sets
to
Institutionally produced
misery powerlesses,
helplessness
The poverty of poor economics The winners of the Nobel Prize in Economics experiment on the poor, but their research doesn't
solve poverty. By Grieve Chelwa and Seán Muller
Monday, the Swedish Academy of Sciences awarded the "Nobel Prize" in economics to Abhijit
Banerjee, Esther Duflo and Michael Kremer for "their experimental approach to alleviating
global poverty."
...
Banerjee and Duflo teach at MIT while Kremer is at Harvard. The trio have been at the
forefront of pushing the use of randomized control trials (RCTs) in the sub-discipline of
economics known as development economics.... The main idea behind their work is that RCTs allow
us to know what works and doesn't work in development because of its "experimental" approach.
RCTs are most well-known for their use in medicine and involve the random assignment of
interventions into "treatment" and "control" groups. And just like in medicine, so the argument
goes, RCTs allow us to know which development pill to swallow because of the rigor associated
with the experimental approach. Banerjee and Duflo popularized their work in a 2011 book "Poor
Economics: A Radical Rethinking of the Way to Fight Global Poverty."
Even though other Nobel prize awards often attract public controversy (peace and literature
come to mind), the economics prize has largely flown under the radar with prize announcements
often met with the same shrugging of the shoulders as, for example, the chemistry prize. This
year has however been different (and so was the year that Milton Friedman, that high priest of
neoliberalism, won).
A broad section of commentary, particularly from the Global South, has puzzled over the
Committee's decision to not only reward an approach that many consider as suffering from
serious ethical and methodological problems, but also extol its virtues and supposed benefits
for poor people.
Many of the trio's RCTs have been performed on black and brown people in poor parts of the
world. And here, serious ethical and moral questions have been raised particularly about the
types of experiments that the randomistas, as they are colloquially known, have been allowed to
perform. In one study in western Kenya, which is one-half of the epicenter of this kind of
experimentation, randomistas deliberately gave some villages more money and others less money
to check if villages receiving less would become envious of those receiving more. The study's
authors, without any sense of shame, titled their paper "Is Your Gain My Pain?" In another
study in India, the other half of the epicenter, researchers installed intrusive cameras in
class rooms to police teacher attendance (this study was actually favorably mentioned by the
Swedish Academy). There are some superficial rationalizations for this sort of thing, but
studies of this kind -- and there are many -- would never have seen the light of day had the
experimental subjects been rich Westerners.
There are also concerns around the extractive nature of the RCT enterprise. To execute these
interventions, randomistas rely on massive teams of local assistants (local academics,
students, community workers, etcetera) who often make non-trivial contributions to the
projects. Similarly, those to be studied (the poor villagers) lend their incalculable emotional
labor to these projects (it is often unclear whether they have been adequately consulted or if
the randomistas have simply struck deals with local officials). The villagers are the ones that
have to deal with all the community-level disruptions that the randomistas introduce and then
leave behind once they've gone back to their cushy lives in the US and Europe.
And while there is an increasing amount of posturing to compensate for this exploitation,
with some researchers gushing about how they and their "native assistants" are bosom buddies,
the payoffs of the projects (lucrative career advancement, fame, speaking gigs, etcetera) only
ever accrue to the randomistas and randomistas alone. The extreme case is obviously this week's
award.
Beyond the ethics of the Nobel winners, their disciples, and the institutions they have
created in their image are two serious methodological problems that fundamentally undermine
their findings.
The first is that the vast majority of studies conducted using these methods (our rough
guess is more than 90%) have no formal basis for generalization. In other words, there is no
basis to believe that the findings of these studies can be applied beyond the narrow confines
of the population on which the experiments are undertaken. This is simply fatal for policy
purposes.
The prize giving committee addresses this only in passing by saying that "the laureates have
also been at the forefront of research on the issue of [whether experimental results apply in
other contexts]." This is misleading at best and false at worst. There are some advocates of
randomised trials who have done important research on the problem, but the majority of key
contributions are not by advocates of randomised trials and the three awardees have been
marginal contributors. The more important point is simply that if the problem of whether
experimental results are relevant outside the experiment has not been resolved, how can it be
claimed that the trio's work is "reducing world poverty?"
The second contradiction is more widely understood: despite the gushing headlines in the
Western press, there is simply no evidence that policy based on randomized trials is better
than alternatives. Countries that are now developed did not need foreign researchers running
experiments on local poor people to grow their economies. There is ample historical evidence
that growth, development and dramatic reductions in poverty can be achieved without randomised
trials. Randomistas claim that their methods are the holy grail of development yet they have
not presented any serious arguments to show why theirs is the appropriate response. Instead,
the case that such methods are crucial for policy is largely taken for granted by them because
they think they are doing "science." But while they are certainly imitating what researchers in
various scientific disciplines do, the claim that the results are as reliable and useful for
economic and social questions is unsupported. It is instead a matter of blind faith -- as with
the conviction many such individuals appear to have of a calling to save the poor, usually
black and brown, masses of the world.
We do not have a view on whether these individuals ought to have been awarded the prize --
prizes are usually somewhat dubious in their arbitrariness and historical contingency. But the
claims made about the usefulness and credibility of the methods employed are concerning, both
because they are unfounded and because they inform a missionary complex that we believe is more
of a threat to the progress of developing countries than it is an aid.
Grieve Chelwa teaches economics at the University of Cape Town. Seán Muller teaches
economics at the University of Johannesburg.
How curious that China starting from being among the poorest of countries, far poorer
than India in 1980, and having a population that is now 1.4 billion could have raised hundreds
of millions to middle class well-being, could have raised hundreds of millions from poverty and
coming ever closer to ending severe poverty in 2020, would have no economist worth a Nobel
prize for work on poverty. To me, this is a travesty of awarding the Nobel Prize for work on
poverty to 3 Massachusetts economists.
Distressing that the astonishing and wonderful progress China has made against poverty
should be given no attention and credit by the Nobel Prize folks or by the articles about the
prize that I have so far read. This tells me that the Massachusetts work on poverty and
evaluation of the work is highly problematic, which I already knew from reading the work.
Japan has a shrinking population. Can you explain to me why on the Earth they need
economic growth?
This preoccupation with "growth" (with narrow and false one dimensional and very
questionable measurements via GDP, which includes the FIRE sector) is a fallacy promoted by
neoliberalism.
Neoliberalism proved to be quite sophisticated religions with its own set of True
Believers in Eric Hoffer's terminology.
A lot of current economic statistics suffer from "mathiness".
For example, the narrow definition of unemployment used in U3 is just a classic example of
pseudoscience in full bloom. It can be mentioned only if U6 mentioned first. Otherwise, this
is another "opium for the people" ;-) An attempt to hide the real situation in the neoliberal
"job market" in which has sustained real unemployment rate is always over 10% and which has a
disappearing pool of well-paying middle-class jobs. Which produced current narco-epidemics
(in 2018, 1400 people were shot in half a year in Chicago (
http://www.chicagotribune.com/news/breaking/ct-met-weekend-shooting-violence-20180709-story.html
); imagine that). While I doubt that people will hang Pelosi on the street post, her
successor might not be so lucky ;-)
Everything is fake in the current neoliberal discourse, be it political or economic, and
it is not that easy to understand how they are deceiving us. Lies that are so sophisticated
that often it is impossible to tell they are actually lies, not facts. The whole neoliberal
society is just big an Empire of Illusions, the kingdom of lies and distortions.
I would call it a new type of theocratic state if you wish.
And probably only one in ten, if not one in a hundred economists deserve to be called
scientists. Most are charlatans pushing fake papers on useless conferences.
It is simply amazing that the neoliberal society, which is based on "universal deception,"
can exist for so long.
Infectious Narratives in Economics
By Robert Shiller - Bloomberg
"Narrative EconomicsHow Stories Go Viral & Drive Major Economic Events"
Concerns that inventions of new machines powered by water, wind, horse, or steam, or that
use human power more efficiently, might replace workers and cause massive unemployment have
an extremely long history, going back to ancient times. Aristotle imagined a future in which
"the shuttle would weave and the plectrum touch the lyre without a hand to guide them." In
such a world, "chief workmen would not want servants, nor masters slaves," he concluded.
Still, it wasn't until the 19th century, an era that brought innovations such as the
water-powered textile loom, the mechanical thresher, and the Corliss steam engine, that
concerns about technology-based unemployment took center stage. The narrative was
particularly contagious during economic depressions when many were unemployed.
The phrase "technological unemployment" first appeared in 1917, but it started its
epidemic upswing in 1928. The count for "technological unemployment" skyrockets in the 1930s
in Google Ngrams, tracing a hump-shaped pattern, rising through time for a while and then
falling, much as is regularly seen with infection diseases. The "technological unemployment"
curve peaked in 1933, the worst year of the Great Depression.
Frequency of Appearance
Appearances in books, as a share of all words
[Graph]
It is curious that the narrative epidemic of technological unemployment began in 1928, a
time of prosperity before the Great Depression. How did the epidemic start? In March 1928,
U.S. Senator Robert Wagner stated his belief that unemployment was much higher than
recognized, and he asked the Department of Labor to do a study. Later that month the
department delivered the study that produced the first official unemployment rates published
by the U.S. government. The study estimated that there were 1,874,030 unemployed people in
the United States and 23,348,602 wage earners, implying an unemployment rate of 7.4%. This
high estimated unemployment rate came at a time of great prosperity, and it led people to
question what would cause such high unemployment amidst abundance.
A month later, the Baltimore Sun ran an article referring to the theories of Sumner H.
Slichter, who in later decades became a prominent labor economist. In the article, readers
are told that Slichter noted several causes of unemployment but said technological
unemployment was "at present the most serious." The reason: "We are eliminating jobs through
labor-saving methods faster than we are creating them." These words, alongside the new
official reporting of unemployment statistics, created a contagion of the idea that a new era
of technological unemployment had arrived. The earlier agricultural depression, with its
associated fears of labor-saving machinery, began to look like a model for an industrial
depression to follow.
Stuart Chase, who later coined the term the "New Deal," published Men and Machines in May
1929, during a period of rapidly rising stock prices. The real, inflation-corrected, U.S.
stock market, as measured by the S&P Composite Index, rose a final 20% in the five months
after the book's publication, before the infamous October 1929 crash. But concerns about
rising unemployment were apparent even during the boom period. According to Chase, we were
approaching the "zero hour of accelerating unemployment":
Machinery saves labour in a given process; one man replaces ten. A certain number of these
men are needed to build and service a new machine, but some of them are permanently
displaced. If purchasing power has reached its limits of expansion because
mechanization is progressing at an unheard of rate, only unemployment can result. In other
words, from now on, the better able we are to produce, the worse we shall be off.
This is the economy of the madhouse.
This is significant: The narrative of out-of-control unemployment was already starting to
go viral before there was any sign of the stock market crash of 1929.
During the week before the October 28–29 stock market crash, a national business
show was running in New York in a convention center (since demolished) adjacent to Grand
Central Station that many Wall Street people passed through to and from work. The show
emphasized immense progress in robot technology in the office workplace. After the show moved
to Chicago in November, the following description appeared in the Chicago Daily Tribune:
Exhibits in the national business show yesterday revealed that the business office of the
future will be a factory in which machines will replace the human element, when the robot --
the mechanical man -- will be the principal office worker.
There were addressers, autographers, billers, calculators, cancelers, binders, coin
changers, form printers, duplicators, envelope sealers and openers, folders, labelers, mail
meters, pay roll machines, tabulators, transcribers, and other mechanical
marvels.
A typewriting machine pounded out letters in forty different languages. A portable
computing machine which could be carried by a traveling salesman was on exhibit.
By 1930 the crash itself was often attributed to the surplus of goods made possible by new
technology. According to the Washington Post, "When the climax was reached in the last months
of 1929 a period of adversity was inevitable because the people did not have enough money to
buy the surplus goods which they had produced."
Fear of robots was not strong in most of the 1920s, when the word robot was coined.
Historian Amy Sue Bix offers a theory to explain why this was so: The kinds of innovations
that received popular acclaim in the 1920s didn't obviously replace jobs. If asked to
describe new technology, people would perhaps think first of the Model T Ford, whose sales
had burgeoned to 1.5 million cars a year by the early part of the decade. Radio stations,
which first appeared around 1920, provided an exciting new form of information and
entertainment, but they did not obviously replace many existing jobs. More and more homes
were getting wired for electricity, with many possibilities for new gadgets that required
electricity.
By the 1930s, Bix notes, the news had replaced stories of exciting new consumer products
with stories of job-replacing innovations. Dial telephones replaced switchboard operators.
Mammoth continuous-strip steel mills replaced steel workers. New loading equipment replaced
coal workers. Breakfast cereal producers bought machines that automatically filled cereal
boxes. Telegraphs became automatic. Armies of linotype machines in multiple cities allowed
one central operator to set type for printing newspapers by remote control. New machines dug
ditches. Airplanes had robot copilots. Concrete mixers laid and spread new roads. Tractors
and reaper-thresher combines created a new agricultural revolution. Sound movies began to
replace the orchestras that played at movie theaters. And, of course, the decade of the 1930s
saw massive unemployment in the United States, with the unemployment rate reaching an
estimated 25% in 1933.
It is difficult to know which came first, the chicken or the egg. Were all these stories
of job-threatening innovations spurred by the exceptional pace of such innovations? Or did
the stories reflect a change in the news media's interest in such innovations because of
public concern about technological unemployment? The likely answer is "a little of both."
The "labor-saving machines" narrative was strongly connected to an underconsumption or
overproduction theory: the idea that people couldn't possibly consume all of the output
produced by machines, with chronic unemployment the inevitable result. The theory's origins
date to the 1600s, but it picked up steam in the 1920s. It was mentioned in newspaper
articles within days of the stock market crash of October 28–29, 1929.
The real peak of these narratives was in the 1930s, during which time they appeared five
times as often as in any other decade, according to a search of Proquest's database of
newspapers.
The topic now appears largely in articles about the history of economic thought, but it is
worth considering why it had such a strong hold on the popular imagination during the Great
Depression, why the narrative epidemic could recur, and the appropriate mutations or
environmental changes that would increase contagion.
Today, underconsumption sounds like a bland technical phrase, but it had considerable
emotional charge during the Great Depression, as it symbolized a deep injustice and
collective folly. At the time it was mostly a popular theory, not an academic theory.
In the 1932 presidential campaign, Franklin Roosevelt ran against incumbent Herbert
Hoover, who had been unsuccessful with deficit spending to restore the economy. Roosevelt
gave a speech in which he articulated the already-popular theory of underconsumption. His
masterstroke was putting it in the form of a story inspired by Lewis Carroll's famous
children's book Alice's Adventures in Wonderland. In that book, a bright and inquisitive
little girl named Alice meets many strange creatures that talk in nonsense and
self-contradictions. Roosevelt's version of this story replaced his opponent with the
Jabberwock, a speaker of nonsense:
A puzzled, somewhat skeptical Alice asked the Republican leadership some simple
questions.
Will not the printing and selling of more stocks and bonds, the building of new plants and
the increase of efficiency produce more goods than we can buy? No, shouted the Jabberwock,
the more we produce the more we can buy.
What if we produce a surplus? Oh, we can sell it to foreign consumers.
How can the foreigners buy it? Why we will lend them the money.
Of course, these foreigners will pay us back by sending us their goods? Oh, not at all,
says Humpty Dumpty. We sit on a high wall called a tariff.
How will the foreigners pay off these loans? That is easy. Did you ever hear of a
moratorium?
On the face of it, underconsumption seemed to explain the high unemployment of the Great
Depression, but academic economists never seriously embraced the theory, which had never been
soundly explained.
The massive unemployment caused by the Great Depression set off serious social problems.
For example, in the United States it caused the forced deportation (then called repatriation)
of a million workers of Mexican origin. The goal was to free up jobs for "real" Americans.
The popular narrative supported these deportations, and there was little public protest.
Newspaper reports showed photos of happy Mexican Americans waving goodbye at the train
station on their way back to their original home to help the Mexican nation.
The dial telephone also played an important part in narratives about unemployment and the
associated underconsumption. During the Great Depression, there rose a narrative focus on the
loss of telephone operators' jobs, and the transition to dial telephones was troubled by
moral qualms that by adopting the dial phone one was complicit in destroying a job. Three
weeks after dial phones were installed in the U.S. Senate in 1930, Senator Carter Glass
introduced a resolution to have them torn out and replaced with the older phones. Noting that
operators' jobs would be lost, he expressed true moral indignation against the new
phones:
I ask unanimous consent to take from the table Senate resolution 74 directing the sergeant
at arms to have these abominable dial telephones taken out on the Senate
side . I object to being transformed into one of the employees of the
telephone company without compensation.
His resolution passed, and the dial phones were removed. It is hard to imagine that such a
resolution would have passed if the nation had not been experiencing high unemployment. This
story fed a contagious economic narrative that helped augment the atmosphere of fear
associated with the contraction in aggregate demand during the Great Depression.
The loss of jobs to robots (that is, automation) became a major explanation of the Great
Depression, and, hence, a perceived major cause of it. Even if the man hasn't lost his job
yet, he will consume less owing to the prospect or possibility of losing his job. The U.S.
presidential candidate who lost to Herbert Hoover in 1928, Al Smith, wrote in the Boston
Globe in 1931:
We know now that much unemployment can be directly traced to the growing use of machinery
intended to replace man power. The human psychology of it is simple and
understandable to everybody. A man who is not sure of his job will not spend his money. He
will rather hoard it and it is difficult to blame him for so doing as against the day of
want.
Albert Einstein, the world's most celebrated physicist, believed this narrative, saying in
1933 that the Great Depression was the result of technical progress:
According to my conviction it cannot be doubted that the severe economic depression is to
be traced back for the most part to internal economic causes; the improvement in the
apparatus of production through technical invention and organization has decreased the need
for human labor, and thereby caused the elimination of a part of labor from the economic
circuit, and thereby caused a progressive decrease in the purchasing power of the
consumers.
By that time, people had begun to label labor-saving inventions as "robots," even if there
were no mechanical men to be seen. One article in the Los Angeles Times in early 1931, about
a year into the Great Depression, said that robots then were already the "equivalent of 80
million hand-workers in the United States alone," while the male labor force was only 40
million.
Though the technological unemployment narrative faded after 1935 (as revealed by Google
Ngrams), it did not go away completely. Instead, it continued to exert some influence in the
runup to World War II, until new narrative constellations about the war became
contagious.
Many historians point to massive unemployment in Germany to explain the accession to power
of the Nazi Party and Adolf Hitler in the election of 1933, the worst year of the Depression.
But rarely mentioned today is the fact that a Nazi Party official promised that year to make
it illegal in Germany to replace men with machines.
To go viral again, the labor-saving machines narrative needed a new twist after World War
II, a twist that could seem to reinforce the newly rediscovered appreciation of human
intelligence, and, ultimately, of the human brain. The narrative turned to the new
"electronic brains" -- that is, computers.
(2) This is not Capitalism, this is Neoliberalism.
But with those minor modifications you point stands: "The real trouble with Neoliberalism:
bought/corrupt economists" ... "And this means that [neoliberal/neo-classical] economics is
proto-scientific garbage."
Here is an extended quote from your comment so that people can more fully appreciate this
line of thinking:
== quote ==
Chris Dillow quotes Martin Wolf: "What we increasingly seem to have is an unstable rentier
capitalism, weakened competition, feeble productivity growth, high inequality and, not
coincidentally, an increasingly degraded democracy."
Chris Dillow then sets out to explain the trouble with Capitalism: "The Bank of England
has given us a big clue here. It points out that the rising profit share (a strong sign of
increased monopoly) is largely confined to the US. In the UK, the share of profits in GDP has
flatlined in recent years. Few, however, would argue that UK capitalism is less dysfunctional
than its US counterpart. Which suggests that the problem with capitalism is not increased
monopoly. So what is it? Here, I commend some brilliant work by Michael Roberts. Many of the
faults Martin discusses have their origin in a declining rate of profit ― a decline
which became acute in the 1970s but which was never wholly reversed."
The whole intellectual/moral misery of economists is contained in this paragraph. Chris
Dillow's explanation starts with the "share of profits in GDP" and ends with the "rate of
profit". Not only are these entirely different things but macroeconomic profit is not
defined, to begin with.
The simple reason is that neither Chris Dillow nor Martin Wolf nor Michael Roberts knows
what profit is.#1 This sad fate they share with Walrasians, Keynesians, Marxians, Austrians,
and MMTers. The dirty secret of economics is that since Adam Smith/Karl Marx economists do
not know what profit is.#2, #3
And this means that economics is proto-scientific garbage but economists have not realized
it to this day.
Capitalism, Alone: Four important--but somewhat hidden--themes
I review here four important, but perhaps not immediately apparent, themes from my
Capitalism, Alone. The book contains many other, more topical, subjects that are likely to
attract readers' and reviewers' attention much more than the somewhat abstract or
philosophical issues briefly reviewed here.
1. Capitalism as the only mode of production in the world. During the previous high
point of the British-led globalization, capitalism shared the world with various feudal or
feudal-like systems characterized with unfree labor: forced labor was abolished in
Austria-Hungary in 1848, serfdom in Russia in 1861, slavery ended in the US in 1865, and in
Brazil only in 1888, And labor tied to land continued to exist in India and to a lesser
degree in China. Then, after 1917, capitalism had to share the world with communism which, at
its peak, included almost a third of the world population. It is only after 1989, that
capitalism is not only a dominant, but the sole, system of organizing production (Chapter
1).
2. The global historical role of communism. The existence of capitalism (economic
way to organize society) throughout the world does not imply that the political systems must
be organized in the same way everywhere. The origins of political systems are very different.
In China and Vietnam, communism was the tool whereby indigenous capitalism was introduced
(explained below). The difference in the "genesis" of capitalism, that is, in the way
capitalism was "created" in various countries explains why there are at least two types of
capitalism today. I am doubtful that there would ever be a single type of capitalism covering
the entire globe.
To understand the point about the different origins, one needs to start from the question
of the role of communism in global history and thus from the interpretation (histoire
raisonéee) of the 20th century (Chapter 3).
There are two major narratives of the 20th century: liberal and Marxist; they are both
"Jerusalem"-like in the Russian philosopher Berdiaff's terminology. They see the world
evolving from less developed toward more developed stages ending in either a terminus of
liberal capitalist democracy or Communism (society of plenty).
Both narratives face significant problems in the interpretation of the 20th century.
Liberal narrative is unable to explain the outbreak of the First World War which, given the
liberal arguments about the spread of capitalism, (peaceful) trade, and interdependence
between countries and individuals that ostensibly abhor conflict should never have happened,
and certainly not in the way it did -- namely by involving in the most destructive war up to
date all advanced capitalism countries. Second, liberal narrative treats both fascism and
communism as essentially "mistakes" (cul de sacs) on the road to a chiliastic liberal
democracy without providing much of reasoning as to why these two "mistakes" happened. Thus
the liberal explanations for both the outbreak of the War and the two "cul de sacs" are often
ad hoc, emphasizing the role of individual actors or idiosyncratic events.
Marxist interpretation of the 20th century is much more convincing in both its explanation
of World War I (imperialism as the highest stage of capitalism) and fascism (an attempt by
the weakened bourgeoise to thwart left-wing revolutions). But Marxist view is entirely
powerless to explain 1989, the fall of communist regimes, and hence unable to provide any
explanation for the role of communism in global history. The fall of communism, in a strict
Marxist view of the world, is an abomination, as inexplicable as if a feudal society having
had experienced a bourgeois revolution of rights were suddenly to "regress" and to reimpose
serfdom and the tripartite class division. Marxism has therefore given up trying to provide
an explanation for the 20th century history.
The reason for this failure lies in the fact that Marxism never made a meaningful
distinction between standard Marxist schemes regarding the succession of socio-economic
formations (what I call the Western Path of Development, WPD) and the evolution of poorer and
colonized countries. Classical Marxism never asked seriously whether the WPD is applicable in
their case. It believed that poorer and colonized countries will simply follow, with a time
lag, the developments in the advanced countries, and that colonization and indeed imperialism
will produce the capitalist transformation of these societies. This was Marx's explicit view
on the role of English colonialism in Asia. But colonialism proved too weak for such a global
task, and succeeded in introducing capitalism only in small entropot enclaves such as Hong
Kong, Singapore and parts of South Africa.
Enabling colonized countries to effect both their social and national liberations (note
there was never a need for the latter in advanced countries) was the world-historical role of
communism. It was only Communist or left-wing parties that could prosecute successfully both
revolutions. The national revolution meant political independence. The social revolution
meant abolishment of feudal growth-inhibiting institutions (power of usurious landlords,
labor tied to land, gender discrimination, lack of access to education by the poor, religious
turpitude etc.). Communism thus cleared the path for the development of indigenous
capitalism. Functionally, in the colonized Third World societies, it played the same role
that domestic bourgeoisies played in the West. For indigenous capitalism could be established
only once feudal institutions were swept away.
The concise definition of communism is hence: communism is a social system that enabled
backward and colonized societies to abolish feudalism, regain economic and political
independence, and build indigenous capitalism.
3. The global dominion of capitalism was made possible thanks to (and in turn it
exacerbates) certain human traits that, from an ethical point, are questionable . Much
greater commercialization and greater wealth have in many ways made us more polished in our
manners (as per Montesquieu) but have done so using what were traditionally regarded as vices
-- desire for pleasure, power and profit (as per Mandeville). Vices are both fundamental for
hyper-commercialized capitalism to be "born" and are supported by it. Philosophers accept
them not because they are by themselves desirable, but because allowing their limited
exercise allows the achievement of a greater social good: material affluence (Smith;
Hume).
Yet the contrast between acceptable behavior in hyper-commercialized world and traditional
concepts of justice, ethics, shame, honor, and loss of face, create a chasm which is filled
with hypocrisy; one cannot openly accept that one has sold for a sum of money his/her right
to free speech or ability to disagree with one's boss, and thus arises the need to cover up
these facts with lies or misrepresentation of reality.
From the book:
"The domination of capitalism as the best, or rather the only, way to organize production
and distribution seems absolute. No challenger appears in sight. Capitalism gained this
position thanks to its ability, through the appeal to self-interest and desire to own
property, to organize people so that they managed, in a decentralized fashion, to create
wealth and increase the standard of living of an average human being on the planet by many
times -- something that only a century ago was considered almost utopian.
But this economic success made more acute the discrepancy between the ability to live
better and longer lives and the lack of a commensurate increase in morality, or even
happiness. The greater material abundance did make people's manners and behavior to each
other better: since elementary needs, and much more than that, were satisfied, people no
longer needed to engage in a Hobbesian struggle of all against all. Manners became more
polished, people more considerate.
But this external polish was achieved at the cost of people being increasingly driven by
self-interest alone, even in many ordinary and personal affairs. The capitalist spirit, a
testimony to the generalized success of capitalism, penetrated deeply into people's
individual lives. Since extending capitalism to family and intimate life was antithetical to
centuries-old views about sacrifice, hospitality, friendship, family ties, and the like, it
was not easy to openly accept that all such norms had become superseded by self-interest.
This unease created a huge area where hypocrisy reigned. Thus, ultimately, the material
success of capitalism came to be associated with a reign of half-truths in our private
lives."
4. Capitalist system cannot be changed. The dominion of hyper-commercial capitalism
was established thanks to our desire to permanently keep on improving our material
conditions, to keep on getting richer, a desire which capitalism satisfies the best. This has
led to the creation of a system of values that puts monetary success as its top. In many ways
it is a desirable evolution because "believing" in money alone does away with other
traditional and discriminatory hierarchical markers.
In order for capitalism to exist it needs to grow and to expand to ever new areas and new
products. But capitalism exists not outside of us, as a external system. It is individuals,
that is, us, who, in our daily lives, create capitalism and provide it with new fields of
action -- so much that we had transformed our homes into capital, and our free time into a
resource. This extraordinary commodification of almost all, including what used to be very
private, activities was made possible by our internalization of the system of values where
money acquisition is placed on the pinnacle. If this were not the case, we would not have
commodified practically all that can be (as of now) commodified.
Capitalism, in order to expand, needs greed. Greed has been entirely accepted by us. The
economic system and the system of values are interdependent and mutually reinforcing. Our
system of values enables hyper-commercialized capitalism to function and expand. It then
follows that no change in the economic system can be imagined without a change in the system
of values that underpins it, which the system promotes, and with which we are, in our
everyday activities, fully comfortable. But to produce such a change in values seems, at
present, to be an impossible task. It has been tried before and ended in the most ignominious
failure. We are thus locked in capitalism. And in our activities, day in, day out, we support
and reinforce it.
The key to the success of neoliberal was a bunch on bought intellectual prostitutes like Milton Friedman and the drive to
occupy economic departments of the the universities using money from the financial elite. which along with think tank continued
mercenary army of neoliberalism who fought and win the battle with weakened New Del capitalism supporters. After that
neoliberalism was from those departments like the centers of infection via indoctrination of each new generation of students.
Which is a classic mixture of Bolsheviks methods and Trotskyite theory adapted tot he need of financial oligarchy.
Essentially we see the tragedy of Lysenkoism replayed in the USA. When false theory supported by financial oligarchy and then
state forcefully suppressed all other economic thought and became the only politically correct theory in the USA and Western
Europe.
Notable quotes:
"... The neoliberal counterrevolution, in theory and policy, has reversed or undermined nearly every aspect of managed capitalism -- from progressive taxation, welfare transfers, and antitrust, to the empowerment of workers and the regulation of banks and other major industries. ..."
"... Neoliberalism's premise is that free markets can regulate themselves; that government is inherently incompetent, captive to special interests, and an intrusion on the efficiency of the market; that in distributive terms, market outcomes are basically deserved; and that redistribution creates perverse incentives by punishing the economy's winners and rewarding its losers. So government should get out of the market's way. ..."
"... Now, after nearly half a century, the verdict is in. Virtually every one of these policies has failed, even on their own terms. ..."
"... Economic power has resulted in feedback loops of political power, in which elites make rules that bolster further concentration. ..."
"... The culprit isn't just "markets" -- some impersonal force that somehow got loose again. This is a story of power using theory. The mixed economy was undone by economic elites, who revised rules for their own benefit. They invested heavily in friendly theorists to bless this shift as sound and necessary economics, and friendly politicians to put those theories into practice. ..."
"... The grand neoliberal experiment of the past 40 years has demonstrated that markets in fact do not regulate themselves. Managed markets turn out to be more equitable and more efficient. ..."
"... The British political economist Colin Crouch captured this anomaly in a book nicely titled The Strange Non-Death of Neoliberalism . Why did neoliberalism not die? As Crouch observed, neoliberalism failed both as theory and as policy, but succeeded superbly as power politics for economic elites. ..."
"... The neoliberal ascendance has had another calamitous cost -- to democratic legitimacy. As government ceased to buffer market forces, daily life has become more of a struggle for ordinary people. ..."
"... After the Berlin Wall came down in 1989, ours was widely billed as an era when triumphant liberal capitalism would march hand in hand with liberal democracy. But in a few brief decades, the ostensibly secure regime of liberal democracy has collapsed in nation after nation, with echoes of the 1930s. ..."
"... As the great political historian Karl Polanyi warned, when markets overwhelm society, ordinary people often turn to tyrants. In regimes that border on neofascist, klepto-capitalists get along just fine with dictators, undermining the neoliberal premise of capitalism and democracy as complements. ..."
"... Classically, the premise of a "free market" is that government simply gets out of the way. This is nonsensical, since all markets are creatures of rules, most fundamentally rules defining property, but also rules defining credit, debt, and bankruptcy; rules defining patents, trademarks, and copyrights; rules defining terms of labor; and so on. Even deregulation requires rules. In Polanyi's words, "laissez-faire was planned." ..."
"... Around the same time, the term neoconservative was used as a self-description by former liberals who embraced conservatism, on cultural, racial, economic, and foreign-policy grounds. Neoconservatives were neoliberals in economics. ..."
"... Lavishly funded centers and tenured chairs were underwritten by the Olin, Scaife, Bradley, and other far-right foundations to promote such variants of free-market theory as law and economics, public choice, rational choice, cost-benefit analysis, maximize-shareholder-value, and kindred schools of thought. These theories colonized several academic disciplines. All were variations on the claim that markets worked and that government should get out of the way. ..."
"... Market failure was dismissed as a rare special case; government failure was said to be ubiquitous. Theorists worked hand in glove with lobbyists and with public officials. But in every major case where neoliberal theory generated policy, the result was political success and economic failure. ..."
"... For example, supply-side economics became the justification for tax cuts, on the premise that taxes punished enterprise. ..."
"... Robert Bork's "antitrust paradox," holding that antitrust enforcement actually weakened competition, was used as the doctrine to sideline the Sherman and Clayton Acts. Supposedly, if government just got out of the way, market forces would remain more competitive because monopoly pricing would invite innovation and new entrants to the market. In practice, industry after industry became more heavily concentrated. ..."
"... Human capital theory, another variant of neoliberal application of markets to partly social questions, justified deregulating labor markets and crushing labor unions. Unions supposedly used their power to get workers paid more than their market worth. Likewise minimum wage laws. But the era of depressed wages has actually seen a decline in rates of productivity growth ..."
"... Financial deregulation is neoliberalism's most palpable deregulatory failure, but far from the only one ..."
"... Air travel has been a poster child for advocates of deregulation, but the actual record is mixed at best. Airline deregulation produced serial bankruptcies of every major U.S. airline, often at the cost of worker pay and pension funds. ..."
"... Ticket prices have declined on average over the past two decades, but the traveling public suffers from a crazy quilt of fares, declining service, shrinking seats and legroom, and exorbitant penalties for the perfectly normal sin of having to change plans. ..."
"... A similar example is the privatization of transportation services such as highways and even parking meters. In several Midwestern states, toll roads have been sold to private vendors. The governor who makes the deal gains a temporary fiscal windfall, while drivers end up paying higher tolls often for decades. Investment bankers who broker the deal also take their cut. Some of the money does go into highway improvements, but that could have been done more efficiently in the traditional way via direct public ownership and competitive bidding. ..."
"... The Affordable Care Act is a form of voucher. But the regulated private insurance markets in the ACA have not fully lived up to their promise, in part because of the extensive market power retained by private insurers and in part because the right has relentlessly sought to sabotage the program -- another political feedback loop. The sponsors assumed that competition would lower costs and increase consumer choice. But in too many counties, there are three or fewer competing plans, and in some cases just one. ..."
"... In practice, this degenerates into an infinite regress of regulator versus commercial profit-maximizer, reminiscent of Mad magazine's "Spy versus Spy," with the industry doing end runs to Congress to further rig the rules. Straight-ahead public insurance such as Medicare is generally far more efficient. ..."
"... Several forms of deregulation -- of airlines, trucking, and electric power -- began not under Reagan but under Carter. Financial deregulation took off under Bill Clinton. Democratic presidents, as much as Republicans, promoted trade deals that undermined social standards. Cost-benefit analysis by the Office of Information and Regulatory Affairs (OIRA) was more of a choke point under Barack Obama than under George W. Bush. ..."
"... Dozens of nations, from Latin America to East Asia, went through this cycle of boom, bust, and then IMF pile-on. Greece is still suffering the impact. ..."
"... In fact, Japan, South Korea, smaller Asian nations, and above all China had thrived by rejecting every major tenet of neoliberalism. Their capital markets were tightly regulated and insulated from foreign speculative capital. They developed world-class industries as state-led cartels that favored domestic production and supply. East Asia got into trouble only when it followed IMF dictates to throw open capital markets, and in the aftermath they recovered by closing those markets and assembling war chests of hard currency so that they'd never again have to go begging to the IMF ..."
"... The basic argument of neoliberalism can fit on a bumper sticker. Markets work; governments don't . If you want to embellish that story, there are two corollaries: Markets embody human freedom. And with markets, people basically get what they deserve; to alter market outcomes is to spoil the poor and punish the productive. That conclusion logically flows from the premise that markets are efficient. Milton Friedman became rich, famous, and influential by teasing out the several implications of these simple premises. ..."
"... The failed neoliberal experiment also makes the case not just for better-regulated capitalism but for direct public alternatives as well. Banking, done properly, especially the provision of mortgage finance, is close to a public utility. Much of it could be public. ..."
The
invisible hand is more like a thumb on the scale for the world's elites. That's why market
fundamentalism has been unmasked as bogus economics but keeps winning politically.This article appears in the Summer 2019 issue of The American Prospect magazine.
Subscribe here .
Since the late 1970s, we've had a grand experiment to test the claim that free markets
really do work best. This resurrection occurred despite the practical failure of laissez-faire
in the 1930s, the resulting humiliation of free-market theory, and the contrasting success of
managed capitalism during the three-decade postwar boom.
Yet when growth faltered in the 1970s, libertarian economic theory got another turn at bat.
This revival proved extremely convenient for the conservatives who came to power in the 1980s.
The neoliberal counterrevolution, in theory and policy, has reversed or undermined nearly every
aspect of managed capitalism -- from progressive taxation, welfare transfers, and antitrust, to
the empowerment of workers and the regulation of banks and other major industries.
Neoliberalism's premise is that free markets can regulate themselves; that government is
inherently incompetent, captive to special interests, and an intrusion on the efficiency of the
market; that in distributive terms, market outcomes are basically deserved; and that
redistribution creates perverse incentives by punishing the economy's winners and rewarding its
losers. So government should get out of the market's way.
By the 1990s, even moderate liberals had been converted to the belief that social objectives
can be achieved by harnessing the power of markets. Intermittent periods of governance by
Democratic presidents slowed but did not reverse the slide to neoliberal policy and doctrine.
The corporate wing of the Democratic Party approved.
Now, after nearly half a century, the verdict is in. Virtually every one of these policies
has failed, even on their own terms. Enterprise has been richly rewarded, taxes have been cut,
and regulation reduced or privatized. The economy is vastly more unequal, yet economic growth
is slower and more chaotic than during the era of managed capitalism. Deregulation has produced
not salutary competition, but market concentration. Economic power has resulted in feedback
loops of political power, in which elites make rules that bolster further concentration.
The culprit isn't just "markets" -- some impersonal force that somehow got loose again. This
is a story of power using theory. The mixed economy was undone by economic elites, who revised
rules for their own benefit. They invested heavily in friendly theorists to bless this shift as
sound and necessary economics, and friendly politicians to put those theories into
practice.
Recent years have seen two spectacular cases of market mispricing with devastating
consequences: the near-depression of 2008 and irreversible climate change. The economic
collapse of 2008 was the result of the deregulation of finance. It cost the real U.S. economy
upwards of $15 trillion (and vastly more globally), depending on how you count, far more than
any conceivable efficiency gain that might be credited to financial innovation. Free-market
theory presumes that innovation is necessarily benign. But much of the financial engineering of
the deregulatory era was self-serving, opaque, and corrupt -- the opposite of an efficient and
transparent market.
The existential threat of global climate change reflects the incompetence of markets to
accurately price carbon and the escalating costs of pollution. The British economist Nicholas
Stern has aptly termed the worsening climate catastrophe history's greatest case of market
failure. Here again, this is not just the result of failed theory. The entrenched political
power of extractive industries and their political allies influences the rules and the market
price of carbon. This is less an invisible hand than a thumb on the scale. The premise of
efficient markets provides useful cover.
The grand neoliberal experiment of the past 40 years has demonstrated that markets in fact
do not regulate themselves. Managed markets turn out to be more equitable and more
efficient. Yet the theory and practical influence of neoliberalism marches splendidly on,
because it is so useful to society's most powerful people -- as a scholarly veneer to what
would otherwise be a raw power grab. The British political economist Colin Crouch captured this
anomaly in a book nicely titled The Strange Non-Death of Neoliberalism . Why did
neoliberalism not die? As Crouch observed, neoliberalism failed both as theory and as policy,
but succeeded superbly as power politics for economic elites.
The neoliberal ascendance has had another calamitous cost -- to democratic legitimacy. As
government ceased to buffer market forces, daily life has become more of a struggle for
ordinary people. The elements of a decent middle-class life are elusive -- reliable jobs and
careers, adequate pensions, secure medical care, affordable housing, and college that doesn't
require a lifetime of debt. Meanwhile, life has become ever sweeter for economic elites, whose
income and wealth have pulled away and whose loyalty to place, neighbor, and nation has become
more contingent and less reliable.
Large numbers of people, in turn, have given up on the promise of affirmative government,
and on democracy itself. After the Berlin Wall came down in 1989, ours was widely billed as an
era when triumphant liberal capitalism would march hand in hand with liberal democracy. But in
a few brief decades, the ostensibly secure regime of liberal democracy has collapsed in nation
after nation, with echoes of the 1930s.
As the great political historian Karl Polanyi warned, when markets overwhelm society,
ordinary people often turn to tyrants. In regimes that border on neofascist, klepto-capitalists get along just fine with
dictators, undermining the neoliberal premise of capitalism and democracy as complements. Several authoritarian thugs,
playing on tribal nationalism as the antidote to capitalist cosmopolitanism, are surprisingly popular.
It's also important to appreciate that neoliberalism is not laissez-faire. Classically, the
premise of a "free market" is that government simply gets out of the way. This is nonsensical,
since all markets are creatures of rules, most fundamentally rules defining property, but also
rules defining credit, debt, and bankruptcy; rules defining patents, trademarks, and
copyrights; rules defining terms of labor; and so on. Even deregulation requires rules. In
Polanyi's words, "laissez-faire was planned."
The political question is who gets to make the rules, and for whose benefit. The
neoliberalism of Friedrich Hayek and Milton Friedman invoked free markets, but in practice the
neoliberal regime has promoted rules created by and for private owners of capital, to keep
democratic government from asserting rules of fair competition or countervailing social
interests. The regime has rules protecting pharmaceutical giants from the right of consumers to
import prescription drugs or to benefit from generics. The rules of competition and
intellectual property generally have been tilted to protect incumbents. Rules of bankruptcy
have been tilted in favor of creditors. Deceptive mortgages require elaborate rules, written by
the financial sector and then enforced by government. Patent rules have allowed agribusiness
and giant chemical companies like Monsanto to take over much of agriculture -- the opposite of
open markets. Industry has invented rules requiring employees and consumers to submit to
binding arbitration and to relinquish a range of statutory and common-law
rights.
Neoliberalism as Theory, Policy, and Power
It's worth taking a moment to unpack the term "neoliberalism." The coinage can be confusing
to American ears because the "liberal" part refers not to the word's ordinary American usage,
meaning moderately left-of-center, but to classical economic liberalism otherwise known as
free-market economics. The "neo" part refers to the reassertion of the claim that the
laissez-faire model of the economy was basically correct after all.
Few proponents of these views embraced the term neoliberal . Mostly, they called
themselves free-market conservatives. "Neoliberal" was a coinage used mainly by their critics,
sometimes as a neutral descriptive term, sometimes as an epithet. The use became widespread in
the era of Margaret Thatcher and Ronald Reagan.
To add to the confusion, a different and partly overlapping usage was advanced in the 1970s
by the group around the Washington Monthly magazine. They used "neoliberal" to mean a
new, less statist form of American liberalism. Around the same time, the term
neoconservative was used as a self-description by former liberals who embraced
conservatism, on cultural, racial, economic, and foreign-policy grounds. Neoconservatives were
neoliberals in economics.
Beginning in the 1970s, resurrected free-market theory was interwoven with both conservative
politics and significant investments in the production of theorists and policy intellectuals.
This occurred not just in well-known conservative think tanks such as the American Enterprise
Institute, Heritage, Cato, and the Manhattan Institute, but through more insidious investments
in academia. Lavishly funded centers and tenured chairs were underwritten by the Olin, Scaife,
Bradley, and other far-right foundations to promote such variants of free-market theory as law
and economics, public choice, rational choice, cost-benefit analysis,
maximize-shareholder-value, and kindred schools of thought. These theories colonized several
academic disciplines. All were variations on the claim that markets worked and that government
should get out of the way.
Each of these bodies of sub-theory relied upon its own variant of neoliberal ideology. An
intensified version of the theory of comparative advantage was used not just to cut tariffs but
to use globalization as all-purpose deregulation. The theory of maximizing shareholder value
was deployed to undermine the entire range of financial regulation and workers' rights.
Cost-benefit analysis, emphasizing costs and discounting benefits, was used to discredit a good
deal of health, safety, and environmental regulation. Public choice theory, associated with the
economist James Buchanan and an entire ensuing school of economics and political science, was
used to impeach democracy itself, on the premise that policies were hopelessly afflicted by
"rent-seekers" and "free-riders."
Market failure was dismissed as a rare special case; government failure was said to be
ubiquitous. Theorists worked hand in glove with lobbyists and with public officials. But in
every major case where neoliberal theory generated policy, the result was political success and
economic failure.
For example, supply-side economics became the justification for tax cuts, on the premise
that taxes punished enterprise. Supposedly, if taxes were cut, especially taxes on capital and
on income from capital, the resulting spur to economic activity would be so potent that
deficits would be far less than predicted by "static" economic projections, and perhaps even
pay for themselves. There have been six rounds of this experiment, from the tax cuts sponsored
by Jimmy Carter in 1978 to the immense 2017 Tax Cuts and Jobs Act signed by Donald Trump. In
every case some economic stimulus did result, mainly from the Keynesian jolt to demand, but in
every case deficits increased significantly. Conservatives simply stopped caring about
deficits. The tax cuts were often inefficient as well as inequitable, since the loopholes
steered investment to tax-favored uses rather than the most economically logical ones. Dozens
of America's most profitable corporations paid no taxes.
Robert Bork's "antitrust paradox," holding that antitrust enforcement actually weakened
competition, was used as the doctrine to sideline the Sherman and Clayton Acts. Supposedly, if
government just got out of the way, market forces would remain more competitive because
monopoly pricing would invite innovation and new entrants to the market. In practice, industry
after industry became more heavily concentrated. Incumbents got in the habit of buying out
innovators or using their market power to crush them. This pattern is especially insidious in
the tech economy of platform monopolies, where giants that provide platforms, such as Google
and Amazon, use their market power and superior access to customer data to out-compete rivals
who use their platforms. Markets, once again, require rules beyond the benign competence of the
market actors themselves. Only democratic government can set equitable rules. And when
democracy falters, undemocratic governments in cahoots with corrupt private plutocrats will
make the rules.
Human capital theory, another variant of neoliberal application of markets to partly social
questions, justified deregulating labor markets and crushing labor unions. Unions supposedly
used their power to get workers paid more than their market worth. Likewise minimum wage laws.
But the era of depressed wages has actually seen a decline in rates of productivity growth.
Conversely, does any serious person think that the inflated pay of the financial moguls who
crashed the economy accurately reflects their contribution to economic activity? In the case of
hedge funds and private equity, the high incomes of fund sponsors are the result of transfers
of wealth and income from employees, other stakeholders, and operating companies to the fund
managers, not the fruits of more efficient management.
There is a broad literature discrediting this body of pseudo-scholarly work in great detail.
Much of neoliberalism represents the ever-reliable victory of assumption over evidence. Yet
neoliberal theory lived on because it was so convenient for elites, and because of the inertial
power of the intellectual capital that had been created. The well-funded neoliberal habitat has
provided comfortable careers for two generations of scholars and pseudo-scholars who migrate
between academia, think tanks, K Street, op-ed pages, government, Wall Street, and back again.
So even if the theory has been demolished both by scholarly rebuttal and by events, it thrives
in powerful institutions and among their political allies.
The Practical Failure of
Neoliberal Policies
Financial deregulation is neoliberalism's most palpable deregulatory failure, but far from
the only one. Electricity deregulation on balance has increased monopoly power and raised costs
to consumers, but has failed to offer meaningful "shopping around" opportunities to bring down
prices. We have gone from regulated monopolies with predictable earnings, costs, wages, and
consumer protections to deregulated monopolies or oligopolies with substantial pricing power.
Since the Bell breakup, the telephone system tells a similar story of re-concentration,
dwindling competition, price-gouging, and union-bashing.
Air travel has been a poster child for advocates of deregulation, but the actual record is
mixed at best. Airline deregulation produced serial bankruptcies of every major U.S. airline,
often at the cost of worker pay and pension funds.
Ticket prices have declined on average over
the past two decades, but the traveling public suffers from a crazy quilt of fares, declining
service, shrinking seats and legroom, and exorbitant penalties for the perfectly normal sin of
having to change plans. Studies have shown that fares actually declined at a faster rate in the
20 years before deregulation in 1978 than in the 20 years afterward, because the prime source
of greater efficiency in airline travel is the introduction of more fuel-efficient planes.
The
roller-coaster experience of airline profits and losses has reduced the capacity of airlines to
purchase more fuel-efficient aircraft, and the average age of the fleet keeps increasing. The
use of "fortress hubs" to defend market pricing power has reduced the percentage of nonstop
flights, the most efficient way to fly from one point to another.
Robert Bork's spurious arguments that antitrust enforcement hurt competition became the
basis for dismantling antitrust. Massive concentration resulted. Charles Tasnadi/AP Photo
In addition to deregulation, three prime areas of practical neoliberal policies are the use
of vouchers as "market-like" means to social goals, the privatization of public services, and
the use of tax subsides rather than direct outlays. In every case, government revenues are
involved, so this is far from a free market to begin with. But the premise is that market
disciplines can achieve public purposes more efficiently than direct public provision.
The evidence provides small comfort for these claims. One core problem is that the programs
invariably give too much to the for-profit middlemen at the expense of the intended
beneficiaries. A related problem is that the process of using vouchers and contracts invites
corruption. It is a different form of "rent-seeking" -- pursuit of monopoly profits -- than
that attributed to government by public choice theorists, but corruption nonetheless. Often,
direct public provision is far more transparent and accountable than a web of contractors.
A further problem is that in practice there is often far less competition than imagined,
because of oligopoly power, vendor lock-in, and vendor political influence. These experiments
in marketization to serve social goals do not operate in some Platonic policy laboratory, where
the only objective is true market efficiency yoked to the public good. They operate in the
grubby world of practical politics, where the vendors are closely allied with conservative
politicians whose purposes may be to discredit social transfers entirely, or to reward
corporate allies, or to benefit from kickbacks either directly or as campaign
contributions.
Privatized prisons are a case in point. A few large, scandal-ridden companies have gotten
most of the contracts, often through political influence. Far from bringing better quality and
management efficiency, they have profited by diverting operating funds and worsening conditions
that were already deplorable, and finding new ways to charge inmates higher fees for necessary
services such as phone calls. To the extent that money was actually saved, most of the savings
came from reducing the pay and professionalism of guards, increasing overcrowding, and
decreasing already inadequate budgets for food and medical care.
A similar example is the privatization of transportation services such as highways and even
parking meters. In several Midwestern states, toll roads have been sold to private vendors. The
governor who makes the deal gains a temporary fiscal windfall, while drivers end up paying
higher tolls often for decades. Investment bankers who broker the deal also take their cut.
Some of the money does go into highway improvements, but that could have been done more
efficiently in the traditional way via direct public ownership and competitive bidding.
Housing vouchers substantially reward landlords who use the vouchers to fill empty houses
with poor people until the neighborhood gentrifies, at which point the owner is free to quit
the program and charge market rentals. Thus public funds are used to underwrite a privately
owned, quasi-social housing sector -- whose social character is only temporary. No permanent
social housing is produced despite the extensive public outlay. The companion use of tax
incentives to attract passive investment in affordable housing promotes economically
inefficient tax shelters, and shunts public funds into the pockets of the investors -- money
that might otherwise have gone directly to the housing.
The Affordable Care Act is a form of voucher. But the regulated private insurance markets in
the ACA have not fully lived up to their promise, in part because of the extensive market power
retained by private insurers and in part because the right has relentlessly sought to sabotage
the program -- another political feedback loop. The sponsors assumed that competition would
lower costs and increase consumer choice. But in too many counties, there are three or fewer
competing plans, and in some cases just one.
As more insurance plans and hospital systems become for-profit, massive investment goes into
such wasteful activities as manipulation of billing, "risk selection," and other gaming of the
rules. Our mixed-market system of health care requires massive regulation to work with
tolerable efficiency. In practice, this degenerates into an infinite regress of regulator
versus commercial profit-maximizer, reminiscent of Mad magazine's "Spy versus Spy," with
the industry doing end runs to Congress to further rig the rules. Straight-ahead public
insurance such as Medicare is generally far more efficient.
An extensive literature has demonstrated that for-profit voucher schools do no better and
often do worse than comparable public schools, and are vulnerable to multiple forms of gaming
and corruption. Proprietors of voucher schools are superb at finding ways of excluding costly
special-needs students, so that those costs are imposed on what remains of public schools; they
excel at gaming test results. While some voucher and charter schools, especially nonprofit
ones, sometimes improve on average school performance, so do many public schools. The record is
also muddied by the fact that many ostensibly nonprofit schools contract out management to
for-profit companies.
Tax preferences have long been used ostensibly to serve social goals. The Earned Income Tax
Credit is considered one of the more successful cases of using market-like measures -- in this
case a refundable tax credit -- to achieve the social goal of increasing worker take-home pay.
It has also been touted as the rare case of bipartisan collaboration. Liberals get more money
for workers. Conservatives get to reward the deserving poor, since the EITC is conditioned on
employment. Conservatives get a further ideological win, since the EITC is effectively a wage
subsidy from the government, but is experienced as a tax refund rather than a benefit of
government.
Recent research, however, shows that the EITC is primarily a subsidy of low-wage employers,
who are able to pay their workers a lot less than a market-clearing wage. In industries such as
nursing homes or warehouses, where many workers qualified for the EITC work side by side with
ones not eligible, the non-EITC workers get substandard wages. The existence of the EITC
depresses the level of the wages that have to come out of the employer's
pocket.
Neoliberalism's Influence on Liberals
As free-market theory resurged, many moderate liberals embraced these policies. In the
inflationary 1970s, regulation became a scapegoat that supposedly deterred salutary price
competition. Some, such as economist Alfred Kahn, President Carter's adviser on deregulation,
supported deregulation on what he saw as the merits. Other moderates supported neoliberal
policies opportunistically, to curry favor with powerful industries and donors. Market-like
policies were also embraced by liberals as a tactical way to find common ground with
conservatives.
Several forms of deregulation -- of airlines, trucking, and electric power -- began not
under Reagan but under Carter. Financial deregulation took off under Bill Clinton. Democratic
presidents, as much as Republicans, promoted trade deals that undermined social standards.
Cost-benefit analysis by the Office of Information and Regulatory Affairs (OIRA) was more of a
choke point under Barack Obama than under George W. Bush.
"Command and control" became an all-purpose pejorative for disparaging perfectly sensible
and efficient regulation. "Market-like" became a fashionable concept, not just on the
free-market right but on the moderate left. Cass Sunstein, who served as Obama's
anti-regulation czar,uses the example of "nudges" as a more market-like and hence superior
alternative to direct regulation, though with rare exceptions their impact is trivial.
Moreover, nudges only work in tandem with regulation.
There are indeed some interventionist policies that use market incentives to serve social
goals. But contrary to free-market theory, the market-like incentives first require substantial
regulation and are not a substitute for it. A good example is the Clean Air Act Amendments of
1990, which used tradable emission rights to cut the output of sulfur dioxide, the cause of
acid rain. This was supported by both the George H.W. Bush administration and by leading
Democrats. But before the trading regime could work, Congress first had to establish
permissible ceilings on sulfur dioxide output -- pure command and control.
There are many other instances, such as nutrition labeling, truth-in-lending, and disclosure
of EPA gas mileage results, where the market-like premise of a better-informed consumer
complements command regulation but is no substitute for it. Nearly all of the increase in fuel
efficiency, for example, is the result of command regulations that require auto fleets to hit a
gas mileage target. The fact that EPA gas mileage figures are prominently disclosed on new car
stickers may have modest influence, but motor fuels are so underpriced that car companies have
success selling gas-guzzlers despite the consumer labeling.
Image removed
Bill Clinton and his Treasury Secretary, Robert Rubin, were big promoters of financial deregulation.
Politically, whatever rationale there was for liberals to make common ground with
libertarians is now largely gone. The authors of the 2017 Tax Cuts and Jobs Act made no attempt
to meet Democrats partway; they excluded the opposition from the legislative process entirely.
This was opportunistic tax cutting for elites, pure and simple. The right today also abandoned
the quest for a middle ground on environmental policy, on anti-poverty policy, on health policy
-- on virtually everything. Neoliberal ideology did its historic job of weakening intellectual
and popular support for the proposition that affirmative government can better the lives of
citizens and that the Democratic Party is a reliable steward of that social compact. Since
Reagan, the right's embrace of the free market has evolved from partly principled idealism into
pure opportunism and obstruction.
Neoliberalism and Hyper-Globalism
The post-1990 rules of globalization, supported by conservatives and moderate liberals
alike, are the quintessence of neoliberalism. At Bretton Woods in 1944, the use of fixed
exchange rates and controls on speculative private capital, plus the creation of the IMFand
World Bank, were intended to allow member countries to practice national forms of managed
capitalism, insulated from the destructive and deflationary influences of short-term
speculative private capital flows. As doctrine and power shifted in the 1970s, the IMF, the
World Bank, and later the WTO, which replaced the old GATT, mutated into their ideological
opposite. Rather than instruments of support for mixed national economies, they became
enforcers of neoliberal policies.
The standard package of the "Washington Consensus" of approved policies for developing
nations included demands that they open their capital markets to speculative private finance,
as well as cutting taxes on capital, weakening social transfers, and gutting labor regulation
and public ownership. But private capital investment in poor countries proved to be fickle. The
result was often excessive inflows during the boom part of the cycle and punitive withdrawals
during the bust -- the opposite of the patient, long-term development capital that these
countries needed and that was provided by the World Bank of an earlier era. During the bust
phase, the IMF typically imposes even more stringent neoliberal demands as the price of
financial bailouts, including perverse budgetary austerity, supposedly to restore the
confidence of the very speculative capital markets responsible for the boom-bust cycle.
Dozens of nations, from Latin America to East Asia, went through this cycle of boom, bust,
and then IMF pile-on. Greece is still suffering the impact. After 1990, hyper-globalism also
included trade treaties whose terms favored multinational corporations. Traditionally, trade
agreements had been mainly about reciprocal reductions of tariffs. Nations were free to have
whatever brand of regulation, public investment, or social policies they chose. With the advent
of the WTO, many policies other than tariffs were branded as trade distorting, even as takings
without compensation. Trade deals were used to give foreign capital free access and to
dismantle national regulation and public ownership. Special courts were created in which
foreign corporations and investors could do end runs around national authorities to challenge
regulation for impeding commerce.
At first, the sponsors of the new trade regime tried to claim the successful economies of
East Asia as evidence of the success of the neoliberal recipe. Supposedly, these nations had
succeeded by pursuing "export-led growth," exposing their domestic economies to salutary
competition. But these claims were soon exposed as the opposite of what had actually occurred.
In fact, Japan, South Korea, smaller Asian nations, and above all China had thrived by
rejecting every major tenet of neoliberalism. Their capital markets were tightly regulated and
insulated from foreign speculative capital. They developed world-class industries as state-led
cartels that favored domestic production and supply. East Asia got into trouble only when it
followed IMF dictates to throw open capital markets, and in the aftermath they recovered by
closing those markets and assembling war chests of hard currency so that they'd never again
have to go begging to the IMF. Enthusiasts of hyper-globalization also claimed that it
benefited poor countries by increasing export opportunities, but as the success of East Asia
shows, there is more than one way to boost exports -- and many poorer countries suffered under
the terms of the global neoliberal regime.
Nor was the damage confined to the developing world. As the work of Harvard economist Dani
Rodrik has demonstrated, democracy requires a polity. For better or for worse, the polity and
democratic citizenship are national. By enhancing the global market at the expense of the
democratic state, the current brand of hyper-globalization deliberately weakens the capacity of
states to regulate markets, and weakens democracy itself.
When Do Markets Work?
The failure of neoliberalism as economic and social policy does not mean that markets never
work. A command economy is even more utopian and perverse than a neoliberal one. The practical
quest is for an efficient and equitable middle ground.
The neoliberal story of how the economy operates assumes a largely frictionless marketplace,
where prices are set by supply and demand, and the price mechanism allocates resources to their
optimal use in the economy as a whole. For this discipline to work as advertised, however,
there can be no market power, competition must be plentiful, sellers and buyers must have
roughly equal information, and there can be no significant externalities. Much of the 20th
century was practical proof that these conditions did not describe a good part of the actual
economy. And if markets priced things wrong, the market system did not aggregate to an
efficient equilibrium, and depressions could become self-deepening. As Keynes demonstrated,
only a massive jolt of government spending could restart the engines, even if market pricing
was partly violated in the process.
Nonetheless, in many sectors of the economy, the process of buying and selling is close
enough to the textbook conditions of perfect competition that the price system works tolerably
well. Supermarkets, for instance, deliver roughly accurate prices because of the consumer's
freedom and knowledge to shop around. Likewise much of retailing. However, when we get into
major realms of the economy with positive or negative externalities, such as education and
health, markets are not sufficient. And in other major realms, such as pharmaceuticals, where
corporations use their political power to rig the terms of patents, the market doesn't produce
a cure.
The basic argument of neoliberalism can fit on a bumper sticker. Markets work;
governments don't . If you want to embellish that story, there are two corollaries: Markets
embody human freedom. And with markets, people basically get what they deserve; to alter market
outcomes is to spoil the poor and punish the productive. That conclusion logically flows from
the premise that markets are efficient. Milton Friedman became rich, famous, and influential by
teasing out the several implications of these simple premises.
It is much harder to articulate the case for a mixed economy than the case for free markets,
precisely because the mixed economy is mixed. The rebuttal takes several paragraphs. The more
complex story holds that markets are substantially efficient in some realms but far from
efficient in others, because of positive and negative externalities, the tendency of financial
markets to create cycles of boom and bust, the intersection of self-interest and corruption,
the asymmetry of information between company and consumer, the asymmetry of power between
corporation and employee, the power of the powerful to rig the rules, and the fact that there
are realms of human life (the right to vote, human liberty, security of one's person) that
should not be marketized.
And if markets are not perfectly efficient, then distributive questions are partly political
choices. Some societies pay pre-K teachers the minimum wage as glorified babysitters. Others
educate and compensate them as professionals. There is no "correct" market-derived wage,
because pre-kindergarten is a social good and the issue of how to train and compensate teachers
is a social choice, not a market choice. The same is true of the other human services,
including medicine. Nor is there a theoretically correct set of rules for patents, trademarks,
and copyrights. These are politically derived, either balancing the interests of innovation
with those of diffusion -- or being politically captured by incumbent industries.
Governments can in principle improve on market outcomes via regulation, but that fact is
complicated by the risk of regulatory capture. So another issue that arises is market failure
versus polity failure, which brings us back to the urgency of strong democracy and effective
government.
After Neoliberalism
The political reversal of neoliberalism can only come through practical politics and
policies that demonstrate how government often can serve citizens more equitably and
efficiently than markets. Revision of theory will take care of itself. There is no shortage of
dissenting theorists and empirical policy researchers whose scholarly work has been vindicated
by events. What they need is not more theory but more influence, both in the academy and in the
corridors of power. They are available to advise a new progressive administration, if
that administration can get elected and if it refrains from hiring neoliberal
advisers.
There are also some relatively new areas that invite policy innovation. These include
regulation of privacy rights versus entrepreneurial liberties in the digital realm; how to
think of the internet as a common carrier; how to update competition and antitrust policy as
platform monopolies exert new forms of market power; how to modernize labor-market policy in
the era of the gig economy; and the role of deeper income supplements as machines replace human
workers.
The failed neoliberal experiment also makes the case not just for better-regulated
capitalism but for direct public alternatives as well. Banking, done properly, especially the
provision of mortgage finance, is close to a public utility. Much of it could be public. A
great deal of research is done more honestly and more cost-effectively in public, peer-reviewed
institutions such as the NIH than by a substantially corrupt private pharmaceutical industry.
Social housing often is more cost-effective than so-called public-private partnerships. Public
power is more efficient to generate, less prone to monopolistic price-gouging, and friendlier
to the needed green transition than private power. The public option in health care is far more
efficient than the current crazy quilt in which each layer of complexity adds opacity and cost.
Public provision does require public oversight, but that is more straightforward and
transparent than the byzantine dance of regulation and counter-regulation.
The two other benefits of direct public provision are that the public gets direct evidence
of government delivering something of value, and that the countervailing power of democracy to
harness markets is enhanced. A mixed economy depends above all on a strong democracy -- one
even stronger than the democracy that succumbed to the corrupting influence of economic elites
and their neoliberal intellectual allies beginning half a century ago. The antidote to the
resurrected neoliberal fable is the resurrection of democracy -- strong enough to tame the
market in a way that tames it for keeps.
Robert Kuttner is co-founder and co-editor of The American Prospect, and professor at
Brandeis University's Heller School. His latest book is The Stakes: 2020 and the Survival of American
Democracy . In addition to writing for the Prospect, he writes for HuffPost, The Boston
Globe, and The New York Review of Books.
After 2008 free market economists should be treated at their face value: as academic
charlatans. Now they are treated as goods which are past their shelf life in China and that's a
progress.
Notable quotes:
"... The Chinese don't need, and don't want, a bunch of arrogant pro-US intellectuals giving them lectures. I can't say I blame them. ..."
"... No, that is because after WW2 the US was the only major economy left standing that hadn't been wrecked, and they were in the box seat to set the agenda post Bretton-Woods (and cement for themselves the leading dominant role). The USD is being used increasingly as a cudgel to enforce US hegemony, and that will lead much of the world to seek alternatives. It's happening now, slowly at first, and will only gain speed from here. ..."
During my last visit I stopped by the offices of what remained of the Unirule Institute of
Economics. The well-respected organization was formed in 1993 by six economists, most
importantly Mao Yushi (no relation to Mao Zedong) and Sheng Hong. My organization, the Cato
Institute, gave the former the 2012 Milton Friedman Prize for Advancing Liberty to honor his
work on behalf of human freedom. Now retired at the age of ninety, Mao Yushi paid a price for
activism. Noted his award citation, Mao "has faced severe punishment, exile, and near
starvation for remarks critical of a command-based economy and society." The late Liu Xiaobo, a
Nobel laureate, said of Mao: his "bravery is worthy of our respect."
However, despite the hardship of its founder, Unirule was no revolutionary political
organization. Its name stood for "universal rules," essentially the rule of law. Its focus was
moving toward a more market-oriented economy. The group's work was scholarly, performed by
economists and academics. Its publications were high-brow, its books often published in China.
Unirule's international contacts were mainstream and focused on economic reform.
That Unirule prospered demonstrated how far the PRC had come from the bad old days under Mao
Zedong. Economic integration with the West by no means delivered a libertarian China. Still,
the increasingly vibrant private economy expanded personal autonomy, opening up space absent
since the PRC's founding seventy years ago.
As for politics, other than the question of the Chinese Communist Party's monopoly of power,
most issues could be at least discussed and sometimes debated in academic and other settings. A
vaguely independent media developed, which reported on misdeeds of local governments and
officials. Although this slightly diluted authoritarianism might have appeared to be weakness
to a few who pined for the days of the Cultural Revolution, the system offered a release valve
for people who had no control over their rulers.
That gave CCP officials additional ideas to consider and solutions to employ. Unirule
sponsored lectures, ran conferences, and published books. The group consulted with both local
governments and state companies. Even the national authorities appeared to respect if not
necessarily love Unirule. (In 1980 the government even invited Nobel Laureate Milton Friedman
to Beijing to get his advice.) Asked Jude Blanchette, at the Center for Strategic and
International Studies: "Without independent voices offering alternative viewpoints, how can
China's leaders make effective decisions."
Allowing discussion -- if not exactly dissent -- also might have drained away some of the
dissatisfaction that otherwise would have accumulated against the regime. The pervasiveness of
corruption and intensity of resulting public disgust highlighted the threat both from and to
Communist rule, which came much more from the natural consequences of the monopoly of power
rather than from the expression of discontent with that monopoly.
However, Xi Jinping's ascension to head of both party and government became a dramatic
political inflexion point...
... ... ...
The state agency which sponsored it dropped the affiliation. Newspapers stopped running
articles by its staffers. Discussions of its activities on social media, including the Chinese
phenomenon WeChat, were blocked. Venues cancelled Unirule events. The website was closed down.
Then the organization was twice pushed out of professional spaces. Last year the landlord,
under pressure from regulators, welded the office door shut with staffers still inside; they
had to call the police for rescue. About ten employees and a mass of books, papers and files
ultimately crammed into a small apartment ten floors up in an aged apartment building in a
distant suburb.
The group's latest book, a collection of academic papers, is ready for publication but was
rejected by the PRC's information overseers. The process has been transferred from state to
party, ensuring that everything will be assessed for its propaganda value. More seriously,
Unirule's business license was cancelled, a move the group was fighting. Sheng said he planned
to focus on economic research if the CCP interdict took hold.
... ... ...
A few weeks after my visit Unirule's life appears to have run out. The group announced that
the local government had declared it to be "unregistered and unauthorized." Although Unirule
plans to fight the diktat in court, Sheng admitted that it had essentially no chance of
prevailing and has begun the liquidation process. "We no longer have any space for survival,"
Sheng told the Wall Street Journal . He previously noted that Unirule had been careful
to follow the rules, so the Xi regime wished for the reformers to "disappear by ourselves."
Apparently Xi or someone else high up grew tired of waiting.
... ... ...
Doug Bandow is a senior fellow at the Cato Institute. A former special assistant to
President Ronald Reagan, he is the author of several books, including Foreign Follies: America's New Global Empire .
Nixon's initiative to integrate China with the USA was the biggest strategic mistake the
US ever did. It did not lead to democratization, but rather helped build a powerful
totalitarian Orwellian state.
China clearly has a long term strategic plan how to become the
world leader, and to this end, it steals western technology, locks other nations into dept
traps, builds fifth columns in other countries, uses propaganda and cultural subversion. It
is not yet too late to withdraw all western investment from China and to isolate the country.
Due to the behavior of the CCP, it has very few actual friends.
The strategic plan and task to defeat capitalism had been handed over to China after the
Soviet Union has failed in this endeavor because economically it was no match for capitalist
USA, plus it did not integrate science and technological innovation which without it
capitalism can not be defeated.
China has achieved economic quantity and quality, and is
heading towards full scientific and technological superiority over capitalist USA in the long
run.
In this way socialism through science defeats and overtakes capitalism. Science and more
science, the only way to defeat capitalism.
out of the 3 countries - USA, Russia, China - most of the world is clearly happy with USA
having the leading role, because it is the least evil. Yes, USA is not perfect, Trump is not
a great leader (to say it diplomatically), they have made mistakes (the invasion of Iraq
etc), but they are still much better than USSRv2.0 or totalitarian China.
Even in Asia, China
is widely disliked due to its arrogant and bullying behavior. The Japanese, the Koreans, the
Vietnamese, the Indonesians, none of them really like China.
The fact, that US dollar is the
leading currency has much to do with the world public perception of the stability of the
country. Ie all countries believe the US is the most stable country. So China will have real
trouble convincing the world that yuan is better. I do not believe that China will become a
leading power anytim soon.
You can keep telling yourself that, but its a crock and we non-Americans know it only too
well. Dishonesty and an inability to face truth seems to be an American trait, and the
corruption is only growing worse as the US declines.
"The Japanese, the Koreans, the Vietnamese, the Indonesians, none of them really like
China"
News for you buddy. None of these nations like each other... LOL!! You ever hear Koreans
talking about the Japanese? Now that's hatred...
" The fact, that US dollar is the leading currency has much to do with the world public
perception of the stability of the country."
No, that is because after WW2 the US was the only major economy left standing that hadn't
been wrecked, and they were in the box seat to set the agenda post Bretton-Woods (and cement
for themselves the leading dominant role). The USD is being used increasingly as a cudgel to
enforce US hegemony, and that will lead much of the world to seek alternatives. It's
happening now, slowly at first, and will only gain speed from here.
Pound Sterling used to dominate the world, now where is it? In the future, people will say
the same of the greenback.
I traveled for 1 year across Asia - SE Asia, Thailand, Vietnam, Cambodia, Laos, Indonesia
and 5 months across china. China is almost universally disliked all over Asia due to its
arrogant behavior. And even the famous Chinese investments are increasingly being perceived
as a form of Chinese neocolonialism and rejected
https://www.washingtonpost....
You know how African-Americans commit all sorts of violent crimes, hate speech, and racist
slurs just because they were victims of racial discrimination in America decades ago? It's
the same justification for violence Chinese mainlanders commit against everyone else just
because they suffered from century of humiliation. I'm suspecting that the CCP/PLA is being
coached by the black lefists in the US who have deep hatred against their perceived WASP
establishment. The pattern of angst and diatribes are almost the same.
In the survey you posted above, China is more popular than the USA in Indonesia. Other
countries like Malaysia, Laos, Bangladesh, North Korea are missing. Also, people generally tell to English speaking foreigners what they expect they want to
hear. If the survey was made by Chinese, the results would be different.
The answer is simple and obvious. Democracy and rule of law means that they all go to
jail. In all post-authoritarian shifts, the judicial branch of the government goes into
overdrive, prosecuting past leaders for their crimes. They're really stuck to
authoritarianism no-matter how hard they want democracy.
The CCP is just like a mafia. You won't get in unless you have blood in your hands, and
death is the only way out (unless you can defect to another country and if you can stomach
your immediate family members going to jail for you).
China is doing just great. Its citizens are enjoying a quality of life unprecedented in
China's history (even the author do not dispute this). So why should a democratic majority
89% (PEW) happy individuals must suffer for the selfish few?
History has shown that intellectuals make lousy leaders but great at fomenting chaos +
rebellions. And everyone knows that "soft-spoken criticisms", when weaponized, can kill
millions just as effectively as a nuclear bomb!
Our results have profound implications for the idea that the financial markets are Pareto
efficient which I explore
here in my paper on asset pricing in perpetual youth models. In that paper I assume that
monetary and fiscal policy are passive to
generate realistic asset market volatility. My paper with Pawel shows that the same results can
be generated in a realistic OLG model even when monetary and fiscal policy are active.
The way out of this apparent degeneracy of theory is to adopt an idea I first advocated in
my book on self-fulfilling
prophecies . The way that people form beliefs must be modeled as a new fundamental with the
same methodological status as preferences, technologies and endowments.
Our paper makes a mockery of the attempt to ground neoclassical theory in
'fundamentals'.
This is the conflict between financial elite and Silicon Valley modules against traditional manufactures and extractive
industries like oil, gas, coil, iron ore, etc.
Notable quotes:
"... The First Estate, once the province of the Catholic Church, has morphed into what Samuel Coleridge in the 1830s called "the Clerisy," a group that extends beyond organized religion to the universities, media, cultural tastemakers and upper echelons of the bureaucracy. The role of the Second Estate is now being played by a rising Oligarchy, notably in tech but also Wall Street, that is consolidating control of most of the economy. ..."
A recent
OECD report , is under assault, and shrinking in most places while prospects for upward
mobility for the working class also declines.T
he anger of the Third Estate, both the growing property-less Serf class as well as the
beleaguered Yeomanry, has produced the growth of populist, parties both right and left in
Europe, and the election of Donald Trump in 2016. In the U.S., this includes not simply the
gradual, and sometimes jarring, transformation of the GOP into a vehicle for populist rage, but
also the rise on the Democratic side of politicians such as Sens. Bernie Sanders and Elizabeth
Warren, each of whom have made class politics their signature issue.
Today's neo-feudalism recalls the social order that existed before the democratic
revolutions of the 17th and 18th Century, with our two ascendant estates filling the roles of
the former dominant classes.
The First Estate, once the province of the Catholic Church, has
morphed into what Samuel Coleridge in the 1830s called "the Clerisy," a group that extends
beyond organized religion to the universities, media, cultural tastemakers and upper echelons
of the bureaucracy. The role of the Second Estate is now being played by a rising Oligarchy,
notably in tech but also Wall Street, that is consolidating control of most of the economy.
Together these two classes have waxed while the Third Estate has declined. This essentially
reversed the
enormous gains made by the middle and even the working class over the past 50 years. The
top 1% in America captured just 4.9 percent of total U.S. income growth in 1945-1973, but since
then the country's richest classes has gobbled up an astonishing 58.7% of all new wealth in the
U.S., and 41.8 percent of total income growth during 2009-2015 alone.
In this period, the Oligarchy has benefited from the financialization of the economy and the
refusal of the political class in both parties to maintain competitive markets. As a result,
American industry has become increasingly concentrated. For example, the five largest banks now account
for close to 50 percent of all banking assets, up from barely 30 percent just 20 years ago.
(RELATED: The
Biggest Bank You've Never Heard Of)
Warren Buffett, Jeffrey Immelt, Charles Schwab and Jamie Dimon, at Georgetown University.
Chip Somodevilla/Getty Images.
The concentration numbers in tech are even more frightening. Once a highly competitive
industry, it is now among the most concentrated
. Like the barbarian chieftains who seized land after the fall of Rome, a handful of companies
-- Facebook , Google
, Apple, Microsoft
and
Amazon -- have gained total control over a host of markets, from social media to search,
the software operating systems, cloud computing and e-commerce. In many key markets such as
search, these companies enjoy market shares reaching to eighty or ninety percent.
As they push into fields such as entertainment, space travel, finance and autonomous
vehicles, they have become, as technology analyst
Izabella Kaminska notes, the modern-day "free market" equivalents of the Soviet planners
who operated Gosplan, allocating billions for their own subjective priorities. Libertarians
might point out that these tech giants are still privately held firms but they actually
represent
, as one analyst put it, "a new form of monopoly power made possible by the 'network effect' of
those platforms through which everyone must pass to conduct the business of life."
The role of the Clerisy
The new feudalism, like the original, is not based simply around the force of arms, or in
this case what Marx called "the cash nexus." Like the church in Medieval times, the Clerisy
sees itself as anointed to direct human society, a modern version of what historian Marc Bloch
called the "oligarchy of priests and monks whose task it was to propitiate heaven." This
modern-day version of the old First Estate sets down the ideological tone in the schools, the
mass media, culture and the arts. There's also a Clerisy of sorts on the right, and what's left
of the center, but this remains largely, except for Fox, an insignificant remnant.
Like their predecessors, today's Clerisy embraces an orthodoxy, albeit secular, on a host of
issues from race and gender to the environment. Universities have become increasingly dogmatic
in their worldview.
One study of 51 top colleges found the proportion of liberals to conservatives as much as
70:1, and usually at least 8:1. At elite liberal arts schools like Wellesley, Swarthmore and
Williams, the proportion reaches 120:1.
The increasing concentration of media in ever
fewer centers -- London, New York, Washington, San Francisco -- and the decline of the
local press has accentuated the elite Clerisy's domination. With most reporters well on the
left, journalism, as a 2019 Rand report reveals, is
steadily moving from a fact-based model to one that is dominated by predictable opinion. This,
Rand suggests has led to what they called "truth decay."
The new geography of feudalism
The new feudalism increasingly defines geography not only in America but across much of the
world. The great bastion of both the Oligarchy and high reaches of the Clerisy lies in the
great cities, notably New York, London, Paris, Beijing, Shanghai, Tokyo, San Francisco, Los
Angeles and Seattle. These are all among the most expensive places to live in the world and
play a dominant role in the global media.
Yet these cities are not the progressive, egalitarian places evoked by great urbanists like
the late Jane Jacobs, but more closely resemble the "gated" cities of the Middle Ages, and
their equivalents in places as diverse as China and Japan. American cities now have higher
levels of inequality, notes one recent study , than Mexico.
In fact, the
largest gaps( between the bottom and top quintiles of median incomes are in the
heartland of progressive opinion, such as in the metropolitan areas of San Francisco, New York,
San Jose, and Los Angeles. (RELATED: Got Income
Inequality? Least Affordable Cities Are Also the Bluest)
In some of the most favored blue cities, such as Seattle ,
Portland and San Francisco , not
only is the middle class disappearing, but there has been something equivalent of "ethnic
cleansing" amidst rising high levels of inequality, homelessness and social disorder.
Long-standing minority communities like the Albina neighborhood in
Portland are disappearing as 10,000 of the 38,000 residents have been pushed out of the
historic African-American section. In San Francisco, the black population has dropped from 18%
in the 1970s to single digits and what remains, notes Harry Alford ,
National Black Chamber of Commerce president, "are predominantly living under the poverty level
and is being pushed out to extinction."
This exclusive and exclusionary urbanity contrasts with the historic role of cities. The
initial rise of the Third Estate was tied intimately to the " freedom of the city . " But with
the diminishing prospects for blue-collar industries, as well as high housing costs, many
minorities and immigrants are increasingly migrating away from
multi-culturally correct regions like
Chicago , New York, Los Angeles and San Francisco for less regulated, generally less "woke"
places like Phoenix, Dallas-Ft. Worth, Houston, Atlanta and Las
Vegas.
Yet even as the middle-class populations flee, poverty remains deeply entrenched in our big
cities, with a rate roughly twice that of the suburbs. The much-celebrated urban renaissance
has been largely enjoyed by the upper echelons but not the working classes.
In the city of Philadelphia , for example, the "center city" income rose, but citywide
between 2000 and 2014, for every district that, like downtown, gained in income, two suffered
income declines. Similarly, research shows
that the number of high poverty (greater than 30 percent below the poverty line) neighborhoods
in the U.S. has tripled since 1970 from 1,100 to 3,100.
Undermining the Third Estate
The impact of the rising Clerisy and Oligarchs poses a direct threat to the future of the
Third Estate. On the economic side, relentless consolidation and financialization has
devastated Main Street. In the great boom of the 1980s, small firms and start-ups powered the
economy, but more recently the
rates of entrepreneurship have dropped as mega-mergers, chains and on-line giants slowly
reduced the scope of opportunities. Perhaps most disturbing of all has been the decline in new
formations among younger people.
This phenomenon is most evident in the tech world. Today is not a great time to start a tech
company unless you are in the charmed circle of elite firms with access to venture and private
equity funds. The old garage start-up culture of Silicon Valley is slowly dying, as large firms
gobble up or crush competitors. Indeed, since the rise of the tech economy in the 1990s, the
overall degree of industry
concentration has grown by 75 percent.
Like the peasant farmer or artisan in the feudal era, the entrepreneur not embraced by the
big venture firms lives largely at the sufferance of the tech overlords. As one online
publisher notes on his firm's status with Google:
If you're a Star Trek fan, you'll understand the analogy. It's a bit like being
assimilated by the Borg. You get cool new powers. But having been assimilated, if your
implants were ever removed, you'd certainly die. That basically captures our relationship to
Google.
The Clerisy's War on the Middle Class
For generations, the Clerisy has steadfastly opposed the growth of suburbia, driven in large
part by the aesthetic concerns –the conviction that single-family homes are fundamentally
anti-social– and, increasingly, by often dubious assertions on their environmental
toxicity. In places like California, the United Kingdom, Australia and Canada, government
policies discourage peripheral construction where home ownership rates tend to be higher, in
favor of dense, largely rental housing.
This marks a dramatic turnaround. During the middle of the 20th Century, ownership rates in
the United States leaped from 44 percent in 1940 to 63 percent in the late 1970s. Yet in the
new generation this prospect is fading. In the United States, home ownership among post-college
millennials (aged 25-34) has dropped from 45.4 percent in 2000 to 37.0 percent in 2016, a drop
of 18 percent from the 1970s, according to
Census Bureau data . In contrast, their parents and grandparents witnessed a dramatic rise
of homeownership from 44 percent in 1940 to 63 percent 30 years later.
But the Clerisy's war on middle- and working-class aspiration goes well beyond housing.
Climate change policies already enacted in California
and Germany
have driven millions into "energy poverty." If adopted, many of the latest proposals for such
things as the Green New Deal all but guarantee the
rapid reduction of millions of highly productive and often well-paying energy, aerospace,
automobile and logistics jobs.
Political implications
The war of the Estates is likely to shape our political landscape for decades to come. Parts
of the Third Estate –those working with their hands or operating small businesses–
increasingly flock to the GOP, according to a recent CityLab report. Trump also has a case to make with these workers, as real wages
for
blue-collar workers are now rising for the first time in decades. Unemployment is near
record lows not only for whites but also Latinos and African-Americans. Of course, if the
economy weakens, he may lose some of this support. (RELATED: Trump Blasts Media For
'Barely' Covering 'Great' Economy, Low Unemployment)
But the emergence of neo-feudalism also lays the foundation for a larger, more potent and
radicalized left. As opportunities for upward mobility shrink, a new generation, indoctrinated
in leftist ideology sometimes from grade school and ever more predictably in undergraduate and
graduate school, tilts heavily to the left, embracing what is essentially an updated socialist
program of massive redistribution, central direction of the economy and racial
redress.
Antifa members in Berkeley, California. AFP/Getty/Amy Osborne.
In France's most recent presidential election, the
former Trotskyite Jean-Luc Melenchon won the under-24 vote, beating the "youthful" Emmanuel
Macron by almost two to one. Similarly in the United Kingdom, the birthplace of modern
capitalism, the
Labour Party , under the neo-
Marxist Jeremy Corbyn , won over 60 percent of the vote among voters under 40, compared to
just 23 percent for the Conservatives. Similar trends can be seen across Europe, where the Red
and
Green Party enjoys wide youth support.
The shift to hard-left politics also extends to the United States– historically not a
fertile area for Marxist thinking. In
the 2016 primaries , the openly socialist
Bernie Sanders easily outpolled Hillary Clinton and Donald Trump combined. A 2016 poll by
the Communism Memorial
Foundation found that 44 percent of American millennials favored socialism while another 14
percent chose fascism or communism. By 2024,
these millennials will be by far
the country's biggest voting bloc .
In the current run-up to the Democratic nomination these young voters
overwhelming tilt toward Sanders and his slightly less radical colleague Warren, while former
Vice President Joe Biden retains the support of older Democrats. The common themes of the "new"
Left, with such things as guaranteed annual incomes, rent control, housing subsidies, and free
college might prove irresistible to a generation that has little hope of owning a home, could
remain childless, and might never earn enough money to invest in much of anything. (RELATED: Bernie Sanders Says 'Health Care For All' Will Require Tax Increases)
At the end, the war of the estates raises the prospect of rising autocracy, even under
formally democratic forms. In his assessment in "Democracy in America ," Alexis de
Tocqueville suggests a new form of tyranny -- in many ways more insidious than that of the
monarchical state -- that grants favors and entertainments to its citizens but expects little
in obligation. Rather than expect people to become adults, he warns, a democratic state can be
used to keep its members in "perpetual childhood" and "would degrade men rather than tormenting
them."
With the erosion of the middle class, and with it dreams of upward mobility, we already see
more extreme, less liberally minded class politics. A nation of clerics, billionaires and serfs
is not conducive to the democratic experiment; only by mobilizing the Third Estate can we hope
that our republican institutions will survive intact even in the near future.
Mr. Kotkin is the Presidential Fellow in Urban Futures at Chapman University and the
executive director of the Center for Opportunity Urbanism. His next book, "The Coming Of
Neo-Feudalism," will be out this spring.
The views and opinions expressed in this commentary are those of the author and do not
reflect the official position of the Daily Caller.
Thomas Piketty's New Book Brings Political Economy Back to Its Sources
In the same way that Capital in the Twenty-First Century transformed the way economists look
at inequality, Piketty's new book Capital and Ideology will transform the way political
scientists look at their own field.
By Branko Milanovic
Thomas Piketty's books are always monumental. Some are more monumental than others. His
Top Incomes in France in the Twentieth Century: Inequality and Redistribution,
1901–1998 (published in French as Les hauts revenus en France au XXe siècle)
covered more than two centuries of income and wealth inequality, in addition to social and
political changes in France. His international bestseller Capital in the Twenty-First Century
(Le capital au XXI siècle) broadened this approach to the most important Western
countries (France, the United States, United Kingdom, and Germany). His new book Capital and
Ideology (to be published in English in March 2020; already published in France as Capital et
idéologie) broadens the scope even further, covering the entire world and presenting a
historical panorama of how ownership of assets (including people) was treated, and justified,
in various historical societies, from China, Japan, and India, to the European-ruled American
colonies, and feudal and capitalist societies in Europe. Just the mention of the geographical
and temporal scope of the book suffices to give the reader an idea of its ambition.
Before I review Capital and Ideology, it is worth mentioning the importance of Piketty's
overall approach, present in all three of his books. His approach is characterized by the
methodological return of economics to its original and key functions: to be a science that
illuminates the interests and explains the behaviors of individuals and social classes in
their quotidian (material) life. This methodology rejects the dominant paradigm of the past
half-century, which increasingly ignored the role of classes and heterogeneous individuals in
the process of production and instead treated all people as abstract agents that maximize
their own income under certain constraints. The dominant paradigm has emptied almost all
social content from economics and presented a view of society that was as abstract as it was
false.
The reintroduction of actual life into economics by Piketty and several other economists
(not entirely coincidentally, most of them are economists interested in inequality) is much
more than just a return to the sources of political economy and economics. This is because
today, we have vastly more information (data) than was available to economists a century ago,
not only about our own contemporary societies but also about past societies. This combination
between political economy's original methodology and big data is what I call "turbo-Annales,"
after the French group of historians that pioneered the view of history as a social science
focusing on the broad social, economic, and political forces that shape the world. The topics
that interested classical political economy and the authors associated with the Annales
School can now be studied empirically, and even econometrically and experimentally -- things
which they could not do, both because of the scarcity of data and unavailability of modern
methodologies.
It is within this context that, I believe, we ought to consider Piketty's Capital and
Ideology. How successful was his approach, applied now to the world and over a very long
time-horizon?
"The dominant paradigm has emptied almost all social content from economics and presented
a view of society that was as abstract as it was false."
For the purposes of this review, I divide Piketty's book into two parts: the first, which
I already mentioned, looks at ideological justifications of inequality across different
societies (Parts 1 and 2 of the book, and to some extent Part 3); the second introduces an
entirely new way of studying recent political cleavages in modern societies (Part 4). I am
somewhat skeptical about Piketty's success in the first part, despite his enormous erudition
and his skills as a raconteur, because success in discussing something so geographically and
temporally immense is difficult to reach, even by the best-informed minds who have studied
different societies for the majority of their careers. Analyzing each of these societies
requires an extraordinarily high degree of sophisticated historical knowledge regarding
religious dogmas, political organization, social stratification, and the like. To take two
examples of authors who have tried to do it, one older and one more recent: Max Weber, during
his entire life (and more specifically in Economy and Society), and Francis Fukuyama in his
two-volume masterpiece on the origins of the political and economic order. In both cases, the
results were not always unanimously approved by specialists studying individual societies and
religions.
In his analysis of some of these societies, Piketty had to rely on somewhat
"straightforward" or simplified discussions of their structure and evolution, discussions
which at times seem plausible but superficial. In other words, each of these historical
societies, many of which lasted centuries, had gone through different phases in their
developments, phases which are subject to various interpretations. Treating such evolutions
as if they were a simple, uncontested story is reductionist. It is a choice of one plausible
historical narrative where many exist. This compares unfavorably with Piketty's own rich and
nuanced narrative in Top Incomes in France in the Twentieth Century.
While I am somewhat skeptical about that first part of the book, I am not skeptical about
the second. In this part, we find the Piketty who plays to his strength: bold and innovative
use of data which produces a new way of looking at phenomena that we all observe but were
unable to define so precisely. Here, Piketty is "playing" on the familiar Western economic
history "terrain" that he knows well, probably better than any other economist.
This part of the book looks empirically at the reasons that left-wing, or social
democratic parties have gradually transformed themselves from being the parties of the
less-educated and poorer classes to become the parties of the educated and affluent middle
and upper-middle classes. To a large extent, traditionally left parties have changed because
their original social-democratic agenda was so successful in opening up education and
high-income possibilities to the people who in the 1950s and 1960s came from modest
backgrounds. These people, the "winners" of social democracy, continued voting for left-wing
parties but their interests and worldview were no longer the same as that of their
(less-educated) parents. The parties' internal social structure thus changed -- the product
of their own political and social success. In Piketty's terms, they became the parties of the
"Brahmin left" (La gauche Brahmane), as opposed to the conservative right-wing parties, which
remained the parties of the "merchant right" (La droite marchande).
To simplify, the elite became divided between the educated "Brahmins" and the more
commercially-minded "investors," or capitalists. This development, however, left the people
who failed to experience upward educational and income mobility unrepresented, and those
people are the ones that feed the current "populist" wave. Quite extraordinarily, Piketty
shows the education and income shifts of left-wing parties' voters using very similar
long-term data from all major developed democracies (and India). The fact that the story is
so consistent across countries lends an almost uncanny plausibility to his hypothesis.
It is also striking, at least to me, that such multi-year, multi-country data were
apparently never used by political scientists to study this phenomenon. This part of
Piketty's book will likely transform, or at least affect, how political scientists look at
new political realignments and class politics in advanced democracies in the years to come.
In the same way that Capital in the Twenty-First Century has transformed how economists look
at inequality, Capital and Ideology will transform the way political scientists look at their
own field.
Branko Milanovic is a senior scholar at the Stone Center on Socio-Economic Inequality at the
Graduate Center, City University of New York.
This is a Marxist critique of neoliberalism. Not necessary right but they his some relevant
points.
Notable quotes:
"... The ideology of neoliberal capitalism was the promise of growth. But with neoliberal capitalism reaching a dead end, this promise disappears and so does this ideological prop. ..."
"... The ex ante tendency toward overproduction arises because the vector of real wages across countries does not increase noticeably over time in the world economy, while the vector of labor productivities does, typically resulting in a rise in the share of surplus in world output. ..."
"... While the rise in the vector of labor productivities across countries, a ubiquitous phenomenon under capitalism that also characterizes neoliberal capitalism, scarcely requires an explanation, why does the vector of real wages remain virtually stagnant in the world economy? The answer lies in the sui generis character of contemporary globalization that, for the first time in the history of capitalism, has led to a relocation of activity from the metropolis to third world countries in order to take advantage of the lower wages prevailing in the latter and meet global demand. ..."
"... The current globalization broke with this. The movement of capital from the metropolis to the third world, especially to East, South, and Southeast Asia to relocate plants there and take advantage of their lower wages for meeting global demand, has led to a desegmentation of the world economy, subjecting metropolitan wages to the restraining effect exercised by the third world's labor reserves. Not surprisingly, as Joseph Stiglitz has pointed out, the real-wage rate of an average male U.S. worker in 2011 was no higher -- indeed, it was marginally lower -- than it had been in 1968. 5 ..."
"... This ever-present opposition becomes decisive within a regime of globalization. As long as finance capital remains national -- that is, nation-based -- and the state is a nation-state, the latter can override this opposition under certain circumstances, such as in the post-Second World War period when capitalism was facing an existential crisis. But when finance capital is globalized, meaning, when it is free to move across country borders while the state remains a nation-state, its opposition to fiscal deficits becomes decisive. If the state does run large fiscal deficits against its wishes, then it would simply leave that country en masse , causing a financial crisis. ..."
"... The state therefore capitulates to the demands of globalized finance capital and eschews direct fiscal intervention for increasing demand. It resorts to monetary policy instead since that operates through wealth holders' decisions, and hence does not undermine their social position. But, precisely for this reason, monetary policy is an ineffective instrument, as was evident in the United States in the aftermath of the 2007–09 crisis when even the pushing of interest rates down to zero scarcely revived activity. 6 ..."
"... If Trump's protectionism, which recalls the Smoot-Hawley tariff of 1931 and amounts to a beggar-my-neighbor policy, does lead to a significant export of unemployment from the United States, then it will invite retaliation and trigger a trade war that will only worsen the crisis for the world economy as a whole by dampening global investment. Indeed, since the United States has been targeting China in particular, some retaliatory measures have already appeared. But if U.S. protectionism does not invite generalized retaliation, it would only be because the export of unemployment from the United States is insubstantial, keeping unemployment everywhere, including in the United States, as precarious as it is now. However we look at it, the world would henceforth face higher levels of unemployment. ..."
"... The second implication of this dead end is that the era of export-led growth is by and large over for third world economies. The slowing down of world economic growth, together with protectionism in the United States against successful third world exporters, which could even spread to other metropolitan economies, suggests that the strategy of relying on the world market to generate domestic growth has run out of steam. Third world economies, including the ones that have been very successful at exporting, would now have to rely much more on their home market ..."
"... In other words, we shall now have an intensification of the imperialist stranglehold over third world economies, especially those pushed into unsustainable balance-of-payments deficits in the new situation. By imperialism , here we do not mean the imperialism of this or that major power, but the imperialism of international finance capital, with which even domestic big bourgeoisies are integrated, directed against their own working people ..."
"... In short, the ideology of neoliberal capitalism was the promise of growth. But with neoliberal capitalism reaching a dead end, this promise disappears and so does this ideological prop. To sustain itself, neoliberal capitalism starts looking for some other ideological prop and finds fascism. ..."
"... The first is the so-called spontaneous method of capital flight. Any political formation that seeks to take the country out of the neoliberal regime will witness capital flight even before it has been elected to office, bringing the country to a financial crisis and thereby denting its electoral prospects. And if perchance it still gets elected, the outflow will only increase, even before it assumes office. The inevitable difficulties faced by the people may well make the government back down at that stage. The sheer difficulty of transition away from a neoliberal regime could be enough to bring even a government based on the support of workers and peasants to its knees, precisely to save them short-term distress or to avoid losing their support. ..."
"... The third weapon consists in carrying out so-called democratic or parliamentary coups of the sort that Latin America has been experiencing. Coups in the old days were effected through the local armed forces and necessarily meant the imposition of military dictatorships in lieu of civilian, democratically elected governments. Now, taking advantage of the disaffection generated within countries by the hardships caused by capital flight and imposed sanctions, imperialism promotes coups through fascist or fascist-sympathizing middle-class political elements in the name of restoring democracy, which is synonymous with the pursuit of neoliberalism. ..."
"... And if all these measures fail, there is always the possibility of resorting to economic warfare (such as destroying Venezuela's electricity supply), and eventually to military warfare. Venezuela today provides a classic example of what imperialist intervention in a third world country is going to look like in the era of decline of neoliberal capitalism, when revolts are going to characterize such countries more and more. ..."
"... Despite this opposition, neoliberal capitalism cannot ward off the challenge it is facing for long. It has no vision for reinventing itself. Interestingly, in the period after the First World War, when capitalism was on the verge of sinking into a crisis, the idea of state intervention as a way of its revival had already been mooted, though its coming into vogue only occurred at the end of the Second World War. 11 Today, neoliberal capitalism does not even have an idea of how it can recover and revitalize itself. And weapons like domestic fascism in the third world and direct imperialist intervention cannot for long save it from the anger of the masses that is building up against it. ..."
The ideology of neoliberal capitalism was the promise of growth.
But with neoliberal capitalism reaching a dead end, this promise disappears and so does this
ideological prop.
Harry Magdoff's The Age of
Imperialism is a classic work that shows how postwar political decolonization does not
negate the phenomenon of imperialism. The book has two distinct aspects. On the one hand, it
follows in V. I. Lenin's footsteps in providing a comprehensive account of how capitalism at
the time operated globally. On the other hand, it raises a question that is less frequently
discussed in Marxist literature -- namely, the need for imperialism. Here, Magdoff not only
highlighted the crucial importance, among other things, of the third world's raw materials for
metropolitan capital, but also refuted the argument that the declining share of raw-material
value in gross manufacturing output somehow reduced this importance, making the simple point
that there can be no manufacturing at all without raw materials. 1
Magdoff's focus was on a period when imperialism was severely resisting economic
decolonization in the third world, with newly independent third world countries taking control
over their own resources. He highlighted the entire armory of weapons used by imperialism. But
he was writing in a period that predated the onset of neoliberalism. Today, we not only have
decades of neoliberalism behind us, but the neoliberal regime itself has reached a dead end.
Contemporary imperialism has to be discussed within this setting.
Globalization and
Economic Crisis
There are two reasons why the regime of neoliberal globalization has run into a dead end.
The first is an ex ante tendency toward global overproduction; the second is that the
only possible counter to this tendency within the regime is the formation of asset-price
bubbles, which cannot be conjured up at will and whose collapse, if they do appear, plunges the
economy back into crisis. In short, to use the words of British economic historian Samuel
Berrick Saul, there are no "markets on tap" for contemporary metropolitan capitalism, such as
had been provided by colonialism prior to the First World War and by state expenditure in the
post-Second World War period of dirigisme . 2
The ex ante tendency toward overproduction arises because the vector of real wages
across countries does not increase noticeably over time in the world economy, while the vector
of labor productivities does, typically resulting in a rise in the share of surplus in world
output. As Paul Baran and Paul Sweezy argued in Monopoly Capital , following the lead of
Michał Kalecki and Josef Steindl, such a rise in the share of economic surplus, or a shift
from wages to surplus, has the effect of reducing aggregate demand since the ratio of
consumption to income is higher on average for wage earners than for those living off the
surplus. 3
Therefore, assuming a given level of investment associated with any period, such a shift would
tend to reduce consumption demand and hence aggregate demand, output, and capacity utilization.
In turn, reduced capacity utilization would lower investment over time, further aggravating the
demand-reducing effect arising from the consumption side.
While the rise in the vector of labor productivities across countries, a ubiquitous
phenomenon under capitalism that also characterizes neoliberal capitalism, scarcely requires an
explanation, why does the vector of real wages remain virtually stagnant in the world economy?
The answer lies in the sui generis character of contemporary globalization that, for the
first time in the history of capitalism, has led to a relocation of activity from the
metropolis to third world countries in order to take advantage of the lower wages prevailing in
the latter and meet global demand.
Historically, while labor has not been, and is still not, free to migrate from the third
world to the metropolis, capital, though juridically free to move from the latter to the
former, did not actually do so , except to sectors like mines and plantations, which
only strengthened, rather than broke, the colonial pattern of the international division of
labor. 4
This segmentation of the world economy meant that wages in the metropolis increased with labor
productivity, unrestrained by the vast labor reserves of the third world, which themselves had
been caused by the displacement of manufactures through the twin processes of
deindustrialization (competition from metropolitan goods) and the drain of surplus (the
siphoning off of a large part of the economic surplus, through taxes on peasants that are no
longer spent on local artisan products but finance gratis primary commodity exports to
the metropolis instead).
The current globalization broke with this. The movement of capital from the metropolis to
the third world, especially to East, South, and Southeast Asia to relocate plants there and
take advantage of their lower wages for meeting global demand, has led to a desegmentation of
the world economy, subjecting metropolitan wages to the restraining effect exercised by the
third world's labor reserves. Not surprisingly, as Joseph Stiglitz has pointed out, the
real-wage rate of an average male U.S. worker in 2011 was no higher -- indeed, it was
marginally lower -- than it had been in 1968. 5
At the same time, such relocation of activities, despite causing impressive growth rates of
gross domestic product (GDP) in many third world countries, does not lead to the exhaustion of
the third world's labor reserves. This is because of another feature of contemporary
globalization: the unleashing of a process of primitive accumulation of capital against petty
producers, including peasant agriculturists in the third world, who had earlier been protected,
to an extent, from the encroachment of big capital (both domestic and foreign) by the
postcolonial dirigiste regimes in these countries. Under neoliberalism, such protection
is withdrawn, causing an income squeeze on these producers and often their outright
dispossession from their land, which is then used by big capital for its various so-called
development projects. The increase in employment, even in countries with impressive GDP growth
rates in the third world, falls way short of the natural growth of the workforce, let alone
absorbing the additional job seekers coming from the ranks of displaced petty producers. The
labor reserves therefore never get used up. Indeed, on the contrary, they are augmented
further, because real wages continue to remain tied to a subsistence level, even as
metropolitan wages too are restrained. The vector of real wages in the world economy as a whole
therefore remains restrained.
Although contemporary globalization thus gives rise to an ex ante tendency toward
overproduction, state expenditure that could provide a counter to this (and had provided a
counter through military spending in the United States, according to Baran and Sweezy) can no
longer do so under the current regime. Finance is usually opposed to direct state intervention
through larger spending as a way of increasing employment. This opposition expresses itself
through an opposition not just to larger taxes on capitalists, but also to a larger fiscal
deficit for financing such spending. Obviously, if larger state spending is financed by taxes
on workers, then it hardly adds to aggregate demand, for workers spend the bulk of their
incomes anyway, so the state taking this income and spending it instead does not add any extra
demand. Hence, larger state spending can increase employment only if it is financed either
through a fiscal deficit or through taxes on capitalists who keep a part of their income
unspent or saved. But these are precisely the two modes of financing state expenditure that
finance capital opposes.
Its opposing larger taxes on capitalists is understandable, but why is it so opposed to a
larger fiscal deficit? Even within a capitalist economy, there are no sound economic
theoretical reasons that should preclude a fiscal deficit under all circumstances. The root of
the opposition therefore lies in deeper social considerations: if the capitalist economic
system becomes dependent on the state to promote employment directly , then this fact
undermines the social legitimacy of capitalism. The need for the state to boost the animal
spirits of the capitalists disappears and a perspective on the system that is epistemically
exterior to it is provided to the people, making it possible for them to ask: If the state can
do the job of providing employment, then why do we need the capitalists at all? It is an
instinctive appreciation of this potential danger that underlies the opposition of capital,
especially of finance, to any direct effort by the state to generate employment.
This ever-present opposition becomes decisive within a regime of globalization. As long as
finance capital remains national -- that is, nation-based -- and the state is a nation-state,
the latter can override this opposition under certain circumstances, such as in the post-Second
World War period when capitalism was facing an existential crisis. But when finance capital is
globalized, meaning, when it is free to move across country borders while the state remains a
nation-state, its opposition to fiscal deficits becomes decisive. If the state does run large
fiscal deficits against its wishes, then it would simply leave that country en masse ,
causing a financial crisis.
The state therefore capitulates to the demands of globalized finance capital and eschews
direct fiscal intervention for increasing demand. It resorts to monetary policy instead since
that operates through wealth holders' decisions, and hence does not undermine their
social position. But, precisely for this reason, monetary policy is an ineffective instrument,
as was evident in the United States in the aftermath of the 2007–09 crisis when even the
pushing of interest rates down to zero scarcely revived activity. 6
It may be thought that this compulsion on the part of the state to accede to the demand of
finance to eschew fiscal intervention for enlarging employment should not hold for the United
States. Its currency being considered by the world's wealth holders to be "as good as gold"
should make it immune to capital flight. But there is an additional factor operating in the
case of the United States: that the demand generated by a bigger U.S. fiscal deficit would
substantially leak abroad in a neoliberal setting, which would increase its external debt
(since, unlike Britain in its heyday, it does not have access to any unrequited colonial
transfers) for the sake of generating employment elsewhere. This fact deters any fiscal effort
even in the United States to boost demand within a neoliberal setting. 7
Therefore, it follows that state spending cannot provide a counter to the ex ante
tendency toward global overproduction within a regime of neoliberal globalization, which makes
the world economy precariously dependent on occasional asset-price bubbles, primarily in the
U.S. economy, for obtaining, at best, some temporary relief from the crisis. It is this fact
that underlies the dead end that neoliberal capitalism has reached. Indeed, Donald Trump's
resort to protectionism in the United States to alleviate unemployment is a clear recognition
of the system having reached this cul-de-sac. The fact that the mightiest capitalist
economy in the world has to move away from the rules of the neoliberal game in an attempt to
alleviate its crisis of unemployment/underemployment -- while compensating capitalists
adversely affected by this move through tax cuts, as well as carefully ensuring that no
restraints are imposed on free cross-border financial flows -- shows that these rules
are no longer viable in their pristine form.
Some Implications of This Dead End
There are at least four important implications of this dead end of neoliberalism. The first
is that the world economy will now be afflicted by much higher levels of unemployment than it
was in the last decade of the twentieth century and the early years of the twenty-first, when
the dot-com and the housing bubbles in the United States had, sequentially, a pronounced
impact. It is true that the U.S. unemployment rate today appears to be at a historic low, but
this is misleading: the labor-force participation rate in the United States today is lower than
it was in 2008, which reflects the discouraged-worker effect . Adjusting for this lower
participation, the U.S. unemployment rate is considerable -- around 8 percent. Indeed, Trump
would not be imposing protection in the United States if unemployment was actually as low as 4
percent, which is the official figure. Elsewhere in the world, of course, unemployment
post-2008 continues to be evidently higher than before. Indeed, the severity of the current
problem of below-full-employment production in the U.S. economy is best illustrated by capacity
utilization figures in manufacturing. The weakness of the U.S. recovery from the Great
Recession is indicated by the fact that the current extended recovery represents the first
decade in the entire post-Second World War period in which capacity utilization in
manufacturing has never risen as high as 80 percent in a single quarter, with the resulting
stagnation of investment. 8
If Trump's protectionism, which recalls the Smoot-Hawley tariff of 1931 and amounts to a
beggar-my-neighbor policy, does lead to a significant export of unemployment from the
United States, then it will invite retaliation and trigger a trade war that will only worsen
the crisis for the world economy as a whole by dampening global investment. Indeed, since the
United States has been targeting China in particular, some retaliatory measures have already
appeared. But if U.S. protectionism does not invite generalized retaliation, it would only be
because the export of unemployment from the United States is insubstantial, keeping
unemployment everywhere, including in the United States, as precarious as it is now. However we
look at it, the world would henceforth face higher levels of unemployment.
There has been some discussion on how global value chains would be affected by Trump's
protectionism. But the fact that global macroeconomics in the early twenty-first century will
look altogether different compared to earlier has not been much discussed.
In light of the preceding discussion, one could say that if, instead of individual
nation-states whose writ cannot possibly run against globalized finance capital, there was a
global state or a set of major nation-states acting in unison to override the objections of
globalized finance and provide a coordinated fiscal stimulus to the world economy, then perhaps
there could be recovery. Such a coordinated fiscal stimulus was suggested by a group of German
trade unionists, as well as by John Maynard Keynes during the Great Depression in the 1930s.
9
While it was turned down then, in the present context it has not even been discussed.
The second implication of this dead end is that the era of export-led growth is by and large
over for third world economies. The slowing down of world economic growth, together with
protectionism in the United States against successful third world exporters, which could even
spread to other metropolitan economies, suggests that the strategy of relying on the world
market to generate domestic growth has run out of steam. Third world economies, including the
ones that have been very successful at exporting, would now have to rely much more on their
home market.
Such a transition will not be easy; it will require promoting domestic peasant agriculture,
defending petty production, moving toward cooperative forms of production, and ensuring greater
equality in income distribution, all of which need major structural shifts. For smaller
economies, it would also require their coming together with other economies to provide a
minimum size to the domestic market. In short, the dead end of neoliberalism also means the
need for a shift away from the so-called neoliberal development strategy that has held sway
until now.
The third implication is the imminent engulfing of a whole range of third world economies in
serious balance-of-payments difficulties. This is because, while their exports will be sluggish
in the new situation, this very fact will also discourage financial inflows into their
economies, whose easy availability had enabled them to maintain current account deficits on
their balance of payments earlier. In such a situation, within the existing neoliberal
paradigm, they would be forced to adopt austerity measures that would impose income deflation
on their people, make the conditions of their people significantly worse, lead to a further
handing over of their national assets and resources to international capital, and prevent
precisely any possible transition to an alternative strategy of home market-based growth.
In other words, we shall now have an intensification of the imperialist stranglehold over
third world economies, especially those pushed into unsustainable balance-of-payments deficits
in the new situation. By imperialism , here we do not mean the imperialism of this or
that major power, but the imperialism of international finance capital, with which even
domestic big bourgeoisies are integrated, directed against their own working people.
The fourth implication is the worldwide upsurge of fascism. Neoliberal capitalism even
before it reached a dead end, even in the period when it achieved reasonable growth and
employment rates, had pushed the world into greater hunger and poverty. For instance, the world
per-capita cereal output was 355 kilograms for 1980 (triennium average for 1979–81
divided by mid–triennium population) and fell to 343 in 2000, leveling at 344.9 in 2016
-- and a substantial amount of this last figure went into ethanol production. Clearly, in a
period of growth of the world economy, per-capita cereal absorption should be expanding,
especially since we are talking here not just of direct absorption but of direct and indirect
absorption, the latter through processed foods and feed grains in animal products. The fact
that there was an absolute decline in per-capita output, which no doubt caused a decline in
per-capita absorption, suggests an absolute worsening in the nutritional level of a substantial
segment of the world's population.
But this growing hunger and nutritional poverty did not immediately arouse any significant
resistance, both because such resistance itself becomes more difficult under neoliberalism
(since the very globalization of capital makes it an elusive target) and also because higher
GDP growth rates provided a hope that distress might be overcome in the course of time.
Peasants in distress, for instance, entertained the hope that their children would live better
in the years to come if given a modicum of education and accepted their fate.
In short, the ideology of neoliberal capitalism was the promise of growth. But with
neoliberal capitalism reaching a dead end, this promise disappears and so does this ideological
prop. To sustain itself, neoliberal capitalism starts looking for some other ideological prop
and finds fascism. This changes the discourse away from the material conditions of people's
lives to the so-called threat to the nation, placing the blame for people's distress not on the
failure of the system, but on ethnic, linguistic, and religious minority groups, the
other that is portrayed as an enemy. It projects a so-called messiah whose sheer
muscularity can somehow magically overcome all problems; it promotes a culture of unreason so
that both the vilification of the other and the magical powers of the supposed leader
can be placed beyond any intellectual questioning; it uses a combination of state repression
and street-level vigilantism by fascist thugs to terrorize opponents; and it forges a close
relationship with big business, or, in Kalecki's words, "a partnership of big business and
fascist upstarts." 10
Fascist groups of one kind or another exist in all modern societies. They move center stage
and even into power only on certain occasions when they get the backing of big business. And
these occasions arise when three conditions are satisfied: when there is an economic crisis so
the system cannot simply go on as before; when the usual liberal establishment is manifestly
incapable of resolving the crisis; and when the left is not strong enough to provide an
alternative to the people in order to move out of the conjuncture.
This last point may appear odd at first, since many see the big bourgeoisie's recourse to
fascism as a counter to the growth of the left's strength in the context of a capitalist
crisis. But when the left poses a serious threat, the response of the big bourgeoisie typically
is to attempt to split it by offering concessions. It uses fascism to prop itself up only when
the left is weakened. Walter Benjamin's remark that "behind every fascism there is a failed
revolution" points in this direction.
Fascism Then and Now
Contemporary fascism, however, differs in crucial respects from its 1930s counterpart, which
is why many are reluctant to call the current phenomenon a fascist upsurge. But historical
parallels, if carefully drawn, can be useful. While in some aforementioned respects
contemporary fascism does resemble the phenomenon of the 1930s, there are serious differences
between the two that must also be noted.
First, we must note that while the current fascist upsurge has put fascist elements in power
in many countries, there are no fascist states of the 1930s kind as of yet. Even if the fascist
elements in power try to push the country toward a fascist state, it is not clear that they
will succeed. There are many reasons for this, but an important one is that fascists in power
today cannot overcome the crisis of neoliberalism, since they accept the regime of
globalization of finance. This includes Trump, despite his protectionism. In the 1930s,
however, this was not the case. The horrors associated with the institution of a fascist state
in the 1930s had been camouflaged to an extent by the ability of the fascists in power to
overcome mass unemployment and end the Depression through larger military spending, financed by
government borrowing. Contemporary fascism, by contrast, lacks the ability to overcome the
opposition of international finance capital to fiscal activism on the part of the government to
generate larger demand, output, and employment, even via military spending.
Such activism, as discussed earlier, required larger government spending financed either
through taxes on capitalists or through a fiscal deficit. Finance capital was opposed to both
of these measures and it being globalized made this opposition decisive . The
decisiveness of this opposition remains even if the government happens to be one composed of
fascist elements. Hence, contemporary fascism, straitjacketed by "fiscal rectitude," cannot
possibly alleviate even temporarily the economic crises facing people and cannot provide any
cover for a transition to a fascist state akin to the ones of the 1930s, which makes such a
transition that much more unlikely.
Another difference is also related to the phenomenon of the globalization of finance. The
1930s were marked by what Lenin had earlier called "interimperialist rivalry." The military
expenditures incurred by fascist governments, even though they pulled countries out of the
Depression and unemployment, inevitably led to wars for "repartitioning an already partitioned
world." Fascism was the progenitor of war and burned itself out through war at, needless to
say, great cost to humankind.
Contemporary fascism, however, operates in a world where interimperialist rivalry is far
more muted. Some have seen in this muting a vindication of Karl Kautsky's vision of an
"ultraimperialism" as against Lenin's emphasis on the permanence of interimperialist rivalry,
but this is wrong. Both Kautsky and Lenin were talking about a world where finance capital and
the financial oligarchy were essentially national -- that is, German, French, or British. And
while Kautsky talked about the possibility of truces among the rival oligarchies, Lenin saw
such truces only as transient phenomena punctuating the ubiquity of rivalry.
In contrast, what we have today is not nation-based finance capitals, but
international finance capital into whose corpus the finance capitals drawn from
particular countries are integrated. This globalized finance capital does not want the world
to be partitioned into economic territories of rival powers ; on the contrary, it wants the
entire globe to be open to its own unrestricted movement. The muting of rivalry between major
powers, therefore, is not because they prefer truce to war, or peaceful partitioning of the
world to forcible repartitioning, but because the material conditions themselves have changed
so that it is no longer a matter of such choices. The world has gone beyond both Lenin and
Kautsky, as well as their debates.
Not only are we not going to have wars between major powers in this era of fascist upsurge
(of course, as will be discussed, we shall have other wars), but, by the same token, this
fascist upsurge will not burn out through any cataclysmic war. What we are likely to see is a
lingering fascism of less murderous intensity , which, when in power, does not
necessarily do away with all the forms of bourgeois democracy, does not necessarily physically
annihilate the opposition, and may even allow itself to get voted out of power occasionally.
But since its successor government, as long as it remains within the confines of the neoliberal
strategy, will also be incapable of alleviating the crisis, the fascist elements are likely to
return to power as well. And whether the fascist elements are in or out of power, they will
remain a potent force working toward the fascification of the society and the polity, even
while promoting corporate interests within a regime of globalization of finance, and hence
permanently maintaining the "partnership between big business and fascist upstarts."
Put differently, since the contemporary fascist upsurge is not likely to burn itself out as
the earlier one did, it has to be overcome by transcending the very conjuncture that produced
it: neoliberal capitalism at a dead end. A class mobilization of working people around an
alternative set of transitional demands that do not necessarily directly target neoliberal
capitalism, but which are immanently unrealizable within the regime of neoliberal capitalism,
can provide an initial way out of this conjuncture and lead to its eventual transcendence.
Such a class mobilization in the third world context would not mean making no truces with
liberal bourgeois elements against the fascists. On the contrary, since the liberal bourgeois
elements too are getting marginalized through a discourse of jingoistic nationalism typically
manufactured by the fascists, they too would like to shift the discourse toward the material
conditions of people's lives, no doubt claiming that an improvement in these conditions is
possible within the neoliberal economic regime itself. Such a shift in discourse is in
itself a major antifascist act . Experience will teach that the agenda advanced as part of
this changed discourse is unrealizable under neoliberalism, providing the scope for dialectical
intervention by the left to transcend neoliberal capitalism.
Imperialist
Interventions
Even though fascism will have a lingering presence in this conjuncture of "neoliberalism at
a dead end," with the backing of domestic corporate-financial interests that are themselves
integrated into the corpus of international finance capital, the working people in the third
world will increasingly demand better material conditions of life and thereby rupture the
fascist discourse of jingoistic nationalism (that ironically in a third world context is not
anti-imperialist).
In fact, neoliberalism reaching a dead end and having to rely on fascist elements revives
meaningful political activity, which the heyday of neoliberalism had precluded, because most
political formations then had been trapped within an identical neoliberal agenda that appeared
promising. (Latin America had a somewhat different history because neoliberalism arrived in
that continent through military dictatorships, not through its more or less tacit acceptance by
most political formations.)
Such revived political activity will necessarily throw up challenges to neoliberal
capitalism in particular countries. Imperialism, by which we mean the entire economic and
political arrangement sustaining the hegemony of international finance capital, will deal with
these challenges in at least four different ways.
The first is the so-called spontaneous method of capital flight. Any political formation
that seeks to take the country out of the neoliberal regime will witness capital flight even
before it has been elected to office, bringing the country to a financial crisis and thereby
denting its electoral prospects. And if perchance it still gets elected, the outflow will only
increase, even before it assumes office. The inevitable difficulties faced by the people may
well make the government back down at that stage. The sheer difficulty of transition away from
a neoliberal regime could be enough to bring even a government based on the support of workers
and peasants to its knees, precisely to save them short-term distress or to avoid losing their
support.
Even if capital controls are put in place, where there are current account deficits,
financing such deficits would pose a problem, necessitating some trade controls. But this is
where the second instrument of imperialism comes into play: the imposition of trade sanctions
by the metropolitan states, which then cajole other countries to stop buying from the
sanctioned country that is trying to break away from thralldom to globalized finance capital.
Even if the latter would have otherwise succeeded in stabilizing its economy despite its
attempt to break away, the imposition of sanctions becomes an additional blow.
The third weapon consists in carrying out so-called democratic or parliamentary coups of the
sort that Latin America has been experiencing. Coups in the old days were effected through the
local armed forces and necessarily meant the imposition of military dictatorships in lieu of
civilian, democratically elected governments. Now, taking advantage of the disaffection
generated within countries by the hardships caused by capital flight and imposed sanctions,
imperialism promotes coups through fascist or fascist-sympathizing middle-class political
elements in the name of restoring democracy, which is synonymous with the pursuit of
neoliberalism.
And if all these measures fail, there is always the possibility of resorting to economic
warfare (such as destroying Venezuela's electricity supply), and eventually to military
warfare. Venezuela today provides a classic example of what imperialist intervention in a third
world country is going to look like in the era of decline of neoliberal capitalism, when
revolts are going to characterize such countries more and more.
Two aspects of such intervention are striking. One is the virtual unanimity among the
metropolitan states, which only underscores the muting of interimperialist rivalry in the era
of hegemony of global finance capital. The other is the extent of support that such
intervention commands within metropolitan countries, from the right to even the liberal
segments.
Despite this opposition, neoliberal capitalism cannot ward off the challenge it is facing
for long. It has no vision for reinventing itself. Interestingly, in the period after the First
World War, when capitalism was on the verge of sinking into a crisis, the idea of state
intervention as a way of its revival had already been mooted, though its coming into vogue only
occurred at the end of the Second World War. 11
Today, neoliberal capitalism does not even have an idea of how it can recover and revitalize
itself. And weapons like domestic fascism in the third world and direct imperialist
intervention cannot for long save it from the anger of the masses that is building up against
it.
Samuel Berrick Saul, Studies in British Overseas Trade, 1870–1914
(Liverpool: Liverpool University Press, 1960).
Paul A. Baran and Paul M. Sweezy, Monopoly Capital (New York:
Monthly Review Press, 1966).
One of the first authors to recognize this fact and its significance was Paul Baran in
The Political Economy of
Growth (New York: Monthly Review Press, 1957).
For the role of such colonial transfers in sustaining the British balance of payments and the
long Victorian and Edwardian boom, see Utsa Patnaik, "Revisiting the 'Drain,' or Transfers
from India to Britain in the Context of Global Diffusion of Capitalism," in Agrarian
and Other Histories: Essays for Binay Bhushan Chaudhuri , ed. Shubhra Chakrabarti and
Utsa Patnaik (Delhi: Tulika, 2017), 277-317.
Federal Reserve Board of Saint Louis Economic Research, FRED, "Capacity Utilization:
Manufacturing," February 2019 (updated March 27, 2019), http://fred.stlouisfed.org .
This issue is discussed by Charles P. Kindleberger in The World in Depression,
1929–1939 , 40th anniversary ed. (Oakland: University of California Press,
2013).
Joseph Schumpeter had seen Keynes's The Economic Consequences of the Peace as
essentially advocating such state intervention in the new situation. See his essay, "John
Maynard Keynes (1883–1946)," in Ten Great Economists (London: George Allen
& Unwin, 1952).
Utsa Patnaik is Professor Emerita at the Centre for Economic Studies and Planning,
Jawaharlal Nehru University, New Delhi. Her books include Peasant Class Differentiation (1987),
The Long Transition (1999), and The Republic of Hunger and Other Essays (2007). Prabhat Patnaik
is Professor Emeritus at the Centre for Economic Studies and Planning, Jawaharlal Nehru
University, New Delhi. His books include Accumulation and Stability Under Capitalism (1997),
The Value of Money(2009), and Re-envisioning Socialism(2011).
Thomas Piketty's New Book Brings Political Economy Back to Its Sources
By Branko Milanovic
In the same way that Capital in the Twenty-First Century transformed the way economists
look at inequality, Piketty's new book Capital and Ideology will transform the way political
scientists look at their own field.
Thomas Piketty's books are always monumental. Some are more monumental than others. His Top
Incomes in France in the Twentieth Century: Inequality and Redistribution,
1901–1998(published in French as Les hauts revenus en France au XXe siècle)
covered more than two centuries of income and wealth inequality, in addition to social and
political changes in France. His international bestseller Capital in the Twenty-First
Century(Le capital au XXI siècle) broadened this approach to the most important
Western countries (France, the United States, United Kingdom, and Germany). His new book
Capital and Ideology (to be published in English in March 2020; already published in France
as Capital et idéologie) broadens the scope even further, covering the entire world
and presenting a historical panorama of how ownership of assets (including people) was
treated, and justified, in various historical societies, from China, Japan, and India, to the
European-ruled American colonies, and feudal and capitalist societies in Europe. Just the
mention of the geographical and temporal scope of the book suffices to give the reader an
idea of its ambition.
Before I review Capital and Ideology, it is worth mentioning the importance of Piketty's
overall approach, present in all three of his books. His approach is characterized by the
methodological return of economics to its original and key functions: to be a science that
illuminates the interests and explains the behaviors of individuals and social classes in
their quotidian (material) life. This methodology rejects the dominant paradigm of the past
half-century, which increasingly ignored the role of classes and heterogeneous individuals in
the process of production and instead treated all people as abstract agents that maximize
their own income under certain constraints. The dominant paradigm has emptied almost all
social content from economics and presented a view of society that was as abstract as it was
false.
The reintroduction of actual life into economics by Piketty and several other economists
(not entirely coincidentally, most of them are economists interested in inequality) is much
more than just a return to the sources of political economy and economics. This is because
today, we have vastly more information (data) than was available to economists a century ago,
not only about our own contemporary societies but also about past societies. This combination
between political economy's original methodology and big data is what I call "turbo-Annales,"
after the French group of historians that pioneered the view of history as a social science
focusing on the broad social, economic, and political forces that shape the world. The topics
that interested classical political economy and the authors associated with the Annales
School can now be studied empirically, and even econometrically and experimentally -- things
which they could not do, both because of the scarcity of data and unavailability of modern
methodologies.
It is within this context that, I believe, we ought to consider Piketty's Capital and
Ideology. How successful was his approach, applied now to the world and over a very long
time-horizon?
"The dominant paradigm has emptied almost all social content from economics and presented
a view of society that was as abstract as it was false."
For the purposes of this review, I divide Piketty's book into two parts: the first, which
I already mentioned, looks at ideological justifications of inequality across different
societies (Parts 1 and 2 of the book, and to some extent Part 3); the second introduces an
entirely new way of studying recent political cleavages in modern societies (Part 4). I am
somewhat skeptical about Piketty's success in the first part, despite his enormous erudition
and his skills as a raconteur, because success in discussing something so geographically and
temporally immense is difficult to reach, even by the best-informed minds who have studied
different societies for the majority of their careers. Analyzing each of these societies
requires an extraordinarily high degree of sophisticated historical knowledge regarding
religious dogmas, political organization, social stratification, and the like. To take two
examples of authors who have tried to do it, one older and one more recent: Max Weber, during
his entire life (and more specifically in Economy and Society), and Francis Fukuyama in his
two-volume masterpiece on the origins of the political and economic order. In both cases, the
results were not always unanimously approved by specialists studying individual societies and
religions.
In his analysis of some of these societies, Piketty had to rely on somewhat
"straightforward" or simplified discussions of their structure and evolution, discussions
which at times seem plausible but superficial. In other words, each of these historical
societies, many of which lasted centuries, had gone through different phases in their
developments, phases which are subject to various interpretations. Treating such evolutions
as if they were a simple, uncontested story is reductionist. It is a choice of one plausible
historical narrative where many exist. This compares unfavorably with Piketty's own rich and
nuanced narrative in Top Incomes in France in the Twentieth Century.
While I am somewhat skeptical about that first part of the book, I am not skeptical about
the second. In this part, we find the Piketty who plays to his strength: bold and innovative
use of data which produces a new way of looking at phenomena that we all observe but were
unable to define so precisely. Here, Piketty is "playing" on the familiar Western economic
history "terrain" that he knows well, probably better than any other economist.
This part of the book looks empirically at the reasons that left-wing, or social
democratic parties have gradually transformed themselves from being the parties of the
less-educated and poorer classes to become the parties of the educated and affluent middle
and upper-middle classes. To a large extent, traditionally left parties have changed because
their original social-democratic agenda was so successful in opening up education and
high-income possibilities to the people who in the 1950s and 1960s came from modest
backgrounds. These people, the "winners" of social democracy, continued voting for left-wing
parties but their interests and worldview were no longer the same as that of their
(less-educated) parents. The parties' internal social structure thus changed -- the product
of their own political and social success. In Piketty's terms, they became the parties of the
"Brahmin left" (La gauche Brahmane), as opposed to the conservative right-wing parties, which
remained the parties of the "merchant right" (La droite marchande).
To simplify, the elite became divided between the educated "Brahmins" and the more
commercially-minded "investors," or capitalists. This development, however, left the people
who failed to experience upward educational and income mobility unrepresented, and those
people are the ones that feed the current "populist" wave. Quite extraordinarily, Piketty
shows the education and income shifts of left-wing parties' voters using very similar
long-term data from all major developed democracies (and India). The fact that the story is
so consistent across countries lends an almost uncanny plausibility to his hypothesis.
It is also striking, at least to me, that such multi-year, multi-country data were
apparently never used by political scientists to study this phenomenon. This part of
Piketty's book will likely transform, or at least affect, how political scientists look at
new political realignments and class politics in advanced democracies in the years to come.
In the same way that Capital in the Twenty-First Century has transformed how economists look
at inequality, Capital and Ideology will transform the way political scientists look at their
own field.
Branko Milanovic is a senior scholar at the Stone Center on Socio-Economic Inequality at the
Graduate Center, City University of New York.
When the Fed or the ECB raises rates, New Keynesian economic theory predicts that the hike
will eventually lead to a decrease in inflation, and that the path from point A to point B
will inevitably be accompanied by higher unemployment. But my own research suggests that New
Keynesian economic theory is wrong. After all, if the Fed were to raise the short-term rate
slowly and support equity markets with a guarantee to purchase a broad-based exchange-traded
fund at a fixed price, there is no reason why the rate increase should cause higher
unemployment.
----
Roger Farmer dumping on the Fed. Somehow a lot of economists have figured out that 'Uncle
cannot do it later'.
I have a different disagreement. First I note that the Fed always follows the One Year
Treasury, it is in the charts, that chart cannot be avoided. Second, once Treasury has
started the rate cycles, it is all over, we will complete the rate cycle, including a down
turn. This has been the case since 1980, likely earlier.
So, why do we fake it? For what purpose, except to say something stupid like Uncle can fix
it later. We always end up in the same place, imbalances that need correction, Treasury has
to take its losses. All the fakery does no one any good.
The end of Mankiw and his Phillips Curve
Comment on David Glasner on 'Mankiw's Phillips-Curve Agonistes'
Gregory Mankiw starts his history of the Phillips Curve with gossiping and name dropping:
"The economist George Akerlof, a Nobel laureate and the husband of the former Federal Reserve
chair Janet Yellen, once called the Phillips curve 'probably the single most important
macroeconomic relationship.' So it is worth recalling what the Phillips curve is, why it
plays a central role in mainstream economics and why it has so many critics. The story begins
in 1958, when the economist A. W. Phillips published an article reporting an inverse
relationship between unemployment and inflation in Britain. He reasoned that when
unemployment is high, workers are easy to find, so employers hardly raise wages, if they do
so at all. But when unemployment is low, employers have trouble attracting workers, so they
raise wages faster. Inflation in wages soon turns into inflation in the prices of goods and
services."
David Glasner immediately spots the fatal mistake of Mankiw's account: "I must note
parenthetically that, as I have written recently, a supply-demand framework (aka partial
equilibrium analysis) is not really the appropriate way to think about unemployment, because
the equilibrium level of wages and the rates of unemployment must be analyzed, as, using
different terminology, Keynes argued, in a general equilibrium, not a partial equilibrium,
framework." Unfortunately, David Glasner then gets lost in supply-demand-equilibrium
blather.
The Phillips Curve (better: Bastard or NAIRU Phillips Curve) is the centerpiece of
standard employment theory. Economists get employment theory wrong for 200+ years.#1-#5
The materially/formally inconsistent NAIRU Phillips Curve has to be replaced by the
correct macroeconomic Employment Law which is shown on Wikimedia.#6
From this equation follows:
(i) An increase in the expenditure ratio ρE leads to higher employment L (the Greek
letter ρ stands for ratio). An expenditure ratio ρE greater than 1 indicates a budget
deficit = credit expansion, a ratio ρE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρF=W/PR leads to higher employment.
The complete employment equation contains in addition profit distribution, the public
sector, and foreign trade.
Items (i) and (ii) cover Keynes' familiar arguments about aggregate demand. The factor
cost ratio ρF as defined in (iii) embodies the macroeconomic price mechanism. The fact of
the matter is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative
to average price P and productivity R. Roughly speaking, price inflation is bad for
employment and wage inflation is good. This is the exact OPPOSITE of what microfounded
supply-demand-equilibrium economics teaches.
The testable Employment Law tells one that the best policy to stabilize employment on a
high level is a price inflation of zero and a wage inflation equal to productivity increases.
The 2 percent inflation target has always been political idiocy based on defective
theory.
Thatcher was an English politico. It is not what she said, but what she did that counts. She is probably down in Dante's Inferno,
Ring 8, sub-rings 7-10. (Frauds and false councilors.) See, oh wayward sinners:
http://danteworlds.laits.utexas.edu/circle8b.html
Ah, you think that Milton should be at the bottom, eh? Then, I hope that he knows how to ice skate. (He was the worst kind
of 'class traitor.' [His parents were small store owner/managers.])
Ring 8 of the Inferno is for 'frauds' of all sorts, sub-rings 7-10 are reserved for Thieves, Deceivers, Schismatics, and Falsifiers.
Maggie should feel right at home there.
I'm not
sure the end of homogeneity was the driver of diminished respect for what was once called
character. In the US, I hazard that a bigger factor was the widespread acceptance of
libertarian/neoliberal values. As we've documented, that world view was marketed aggressively
and very successfully by a loosely coordinated but well funded right wing campaign, whose
seminal document was the Powell Memo of 1971 which laid out the vision and many of the tactics
for their war on the New Deal and the community values that supported it. For instance, it
would have been well-nigh impossible for a Mike Milken, who'd gone to prison for securities law
violations (and was widely believed to have engaged in considerably more questionable conduct)
to have rehabilitated himself to the degree he did.
From Amar:
John McArthur, in memoriam
He was one of a kind -- and his kindness and empathy (a much used word I know) was
unbounded. It touched all from dining and custodial staff to taxi drivers. My parents apart,
few other people have had such an influence on me. (And he did me the honor of reading
everything I read: every book every article, every draft, the pages a sea of yellow
highlight)
He was also astute, ruthless and got things done. His mind was extraordinary and his
reading voracious and eclectic -- although you would never guess it from his aw shucks manner
and country bumpkin style.
I first actually talked to him in my second year as assistant professor. We had a long
long lunch at his corner table in the faculty club. We talked about everything -- except why
we were having lunch. At the end he said, "Perhaps you'd like to know why i asked you to
lunch. Well I've been reading your stuff and I wanted to put a face to the writing, to know
who this person was who was writing this stuff."
A few days later a copy of Knight's Risk Uncertainty and Profit arrived in interoffice
mail with one of John's classic handwritten notes, which went something along the following
lines. "I think this will suit the way you think of the world."
I had never encountered the book in my doctoral studies, and it was revelatory.
We had lunches, lasting 2-3 hours nearly every year for the last 20 years after I left
HBS. Always at the Charles ("If we ate at HBS there would be someone stopping by every
minute" he said. At the Charles it was only every 10 minutes. And of course he knew every
single waiter and waitress by name).
The stories he told at the lunches.. Such a pity he did not put his wisdom into a memoir.
But that was not his way.
The benefits of a "classical" education.
One of the main supports of the 'civilized' social interactions that you observe here 'Down
South' is a stubborn refusal to put a price on everything. It is not universal, but it
lingers in pockets of calm salted among the storms of modern living.
Welcome to the South.
I have some neighbors who are the opposite of me politically (in fact most of my
neighbors) but are wonderfully nice people on a personal level. Some of us who grew up here
have had the opposite experience of Yves and lived for awhile in the North where all that
politeness is dismissed as a false front.
Which in many cases it is, but the usefulness of all that unthinking social glue should
not be dismissed out of hand. After decades of elites in thrall to Ayn Rand the country may
be in need a few of those social norms that beatnik rebels in the 1950s found so stultifying.
Perhaps the most amazing thing about Epstein was how all those rich people around him thought
that his three teenager a day habit was perfectly acceptable.
I don't know anything about anything, but after living in the Northeast for my whole life
I spent 10 years in North Carolina. After a decade, I realized that I was never going
to stop being a Yankee, and that I detested "Southern courtesy" which mostly involved people
telling me to "Have a Blessed Day!"
I take part of this back: My favorite item of Southern Courtesy is that you can slander
anyone as long as you end the sentence with " bless his heart!"
Seriously, it's a different culture, and not one that I was ever comfortable with.
"In the early 1950s, a young economist named Paul Volcker worked as a human calculator in
an office deep inside the Federal Reserve Bank of New York. He crunched numbers for the
people who made decisions, and he told his wife that he saw little chance of ever moving up.
The central bank's leadership included bankers, lawyers and an Iowa hog farmer, but not a
single economist. The Fed's chairman, a former stockbroker named William McChesney Martin,
once told a visitor that he kept a small staff of economists in the basement of the Fed's
Washington headquarters. They were in the building, he said, because they asked good
questions. They were in the basement because ''they don't know their own limitations.''
Martin's distaste for economists was widely shared among the midcentury American elite.
President Franklin Delano Roosevelt dismissed John Maynard Keynes, the most important
economist of his generation, as an impractical ''mathematician.'' President Eisenhower, in
his farewell address, urged Americans to keep technocrats from power. Congress rarely
consulted economists; regulatory agencies were led and staffed by lawyers; courts wrote off
economic evidence as irrelevant.
But a revolution was coming. As the quarter century of growth that followed World War II
sputtered to a close, economists moved into the halls of power, instructing policymakers that
growth could be revived by minimizing government's role in managing the economy. They also
warned that a society that sought to limit inequality would pay a price in the form of less
growth. In the words of a British acolyte of this new economics, the world needed ''more
millionaires and more bankrupts.''
In the four decades between 1969 and 2008, economists played a leading role in slashing
taxation of the wealthy and in curbing public investment. They supervised the deregulation of
major sectors, including transportation and communications. They lionized big business,
defending the concentration of corporate power, even as they demonized trade unions and
opposed worker protections like minimum wage laws. Economists even persuaded policymakers to
assign a dollar value to human life -- around $10 million in 2019 -- to assess whether
regulations were worthwhile.
The revolution, like so many revolutions, went too far. Growth slowed and inequality
soared, with devastating consequences. Perhaps the starkest measure of the failure of our
economic policies is that the average American's life expectancy is in decline, as
inequalities of wealth have become inequalities of health. Life expectancy rose for the
wealthiest 20 percent of Americans between 1980 and 2010. Over the same three decades, life
expectancy declined for the poorest 20 percent of Americans. Shockingly, the difference in
average life expectancy between poor and wealthy women widened from 3.9 years to 13.6
years.
Rising inequality also is straining the health of liberal democracy. The idea of ''we the
people'' is fading because, in this era of yawning inequality, there is less we share in
common. As a result, it is harder to build support for the kinds of policies necessary to
deliver broad-based prosperity in the long term, like public investment in education and
infrastructure.
Economists began to enter public service in large numbers in the middle of the 20th century,
as policymakers struggled to manage the rapid expansion of the federal government. The number
of economists employed by the government rose from about 2,000 in the mid-1950s to more than
6,000 by the late 1970s. At first they were hired to rationalize the administration of
policy, but they soon began to shape the goals of policy, too. Arthur F. Burns became the
first economist to lead the Fed in 1970. Two years later, George Shultz became the first
economist to serve as Treasury secretary. In 1978, Volcker completed his rise from the Fed's
bowels, becoming the central bank's chairman.
The most important figure, however, was Milton Friedman, an elfin libertarian who refused to
take a job in Washington, but whose writings and exhortations seized the imagination of
policymakers. Friedman offered an appealingly simple answer for the nation's problems:
Government should get out of the way. He joked that if bureaucrats gained control of the
Sahara, there would soon be a shortage of sand.
He won his first big victory in an unlikely battle, helping to persuade President Nixon to
end military conscription in 1973. Friedman and other economists showed that a military
comprised solely of volunteers, recruited by offering market-rate wages, was financially
viable as well as politically preferable. The Nixon administration also embraced Friedman's
proposal to let markets determine the exchange rates between the dollar and foreign
currencies, and it was the first to put a price tag on human life to justify limits on
regulation.
But the turn toward markets was a bipartisan affair. The reduction of federal income taxation
began under President Kennedy. President Carter initiated an era of deregulation in 1977 by
naming an economist, Alfred Kahn, to dismantle the bureaucracy that supervised commercial
aviation. President Clinton restrained federal spending in the 1990s as the economy boomed,
declaring that ''the era of big government is over.''
Liberal and conservative economists conducted running battles on key questions of public
policy, but their areas of agreement ultimately were more important. Although nature tends
toward entropy, they shared a confidence that markets tend toward equilibrium. They agreed
that the primary goal of economic policy was to increase the dollar value of the nation's
output. And they had little patience for efforts to limit inequality. Charles L. Schultze,
the chairman of Mr. Carter's Council of Economic Advisers, said in the early 1980s that
economists should fight for efficient policies ''even when the result is significant income
losses for particular groups -- which it almost always is.'' A generation later, in 2004, the
Nobel laureate Robert Lucas warned against any revival of efforts to reduce inequality. ''Of
the tendencies that are harmful to sound economics, the most seductive, and in my opinion the
most poisonous, is to focus on questions of distribution.''
Accounts of the rise of inequality often take a fatalistic view. The problem is described
as a natural consequence of capitalism, or it is blamed on forces, like globalization or
technological change, that are beyond the direct control of policymakers. But much of the
fault lies in ourselves, in our collective decision to embrace policies that prioritized
efficiency and encouraged the concentration of wealth, and to neglect policies that equalized
opportunity and distributed rewards. The rise of economics is a primary reason for the rise
of inequality.
And the fact that we caused the problem means the solution is in our power, too.
Markets are constructed by people, for purposes chosen by people -- and people can change
the rules. It's time to discard the judgment of economists that society should turn a blind
eye to inequality. Reducing inequality should be a primary goal of public policy.
The market economy remains one of humankind's most awesome inventions, a powerful machine
for the creation of wealth. But the measure of a society is the quality of life throughout
the pyramid, not just at the top, and a growing body of research shows that those born at the
bottom today have less chance than in earlier generations to achieve prosperity or to
contribute to society's general welfare -- even if they are rich by historical standards.
This is not just bad for those who suffer, although surely that is bad enough. It is bad
for affluent Americans, too. When wealth is concentrated in the hands of the few, studies
show, total consumption declines and investment lags. Corporations and wealthy households
increasingly resemble Scrooge McDuck, sitting on piles of money they can't use
productively.
Willful indifference to the distribution of prosperity over the last half century is an
important reason the very survival of liberal democracy is now being tested by nationalist
demagogues. I have no special insight into how long the rope can hold, or how much weight it
can bear. But I know our shared bonds will last longer if we can find ways to reduce the
strain."
If we discard political correctness issues, the real problem is that since probably late 60th
most academic economists were and still are elite prostitutes of financial oligarchy.
The level of corruption of academic economists reached really unprecedented levels under
neoliberalism. The level of remuneration (direct but mostly indirect) was raised probably ten
fold.
Because one of the way neoliberals got to power is the infiltration of economic
departments in universities via grants and specially created positions. As well as creating
think tanks staffed with "professional neoliberal revolutionaries" as a proxy of Bolsheviks
Party full time party functionaries.
The Classical Economists soon noticed those at the top don't do anything economically
productive, but maintained themselves in luxury and leisure through the hard work of everyone
else.
They couldn't miss it as the European aristocracy never did a stroke of real work.
"The labour and time of the poor is in civilised countries sacrificed to the
maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury
by the labour of his tenants. The moneyed man is supported by his extractions from the
industrious merchant and the needy who are obliged to support him in ease by a return for the
use of his money. But every savage has the full fruits of his own labours; there are no
landlords, no usurers and no tax gatherers." Adam Smith
Economics was a big problem for the powerful vested interests of the 19th century and it
was always far too dangerous to be allowed to reveal the truth about the economy.
How can we protect those powerful vested interests at the top of society?
The early neoclassical economists hid the problems of rentier activity in the economy by
removing the difference between "earned" and "unearned" income and they conflated "land" with
"capital".
They took the focus off the cost of living that had been so important to the Classical
Economists to hide the effects of rentier activity in the economy.
The landowners, landlords and usurers were now just productive members of society
again.
William White (BIS, OECD) talks about how economics really changed over one hundred years
ago as classical economics was replaced by neoclassical economics.
He thinks we have been on the wrong path for one hundred years.
This was the old switcheroo.
Economics, the time line:
Classical economics – observations and deductions from the world of small state,
unregulated capitalism around them
Neoclassical economics – Where did that come from?
Keynesian economics – observations, deductions and fixes for the problems of
neoclassical economics
Neoclassical economics – Why is that back?
We thought small state, unregulated capitalism was something that it wasn't as our ideas
came from neoclassical economics, which has little connection with classical economics.
On bringing it back again, we had lost everything that had been learned in the 1930s and
1940s, by which time it had already demonstrated its flaws.
In the second half of the 20th century, the Mont Pelerin society developed the neoliberal
ideology from neoclassical economics, under the impression that capitalism was a
self-stabilising system that doesn't need regulation.
Their expectations were rather different from the small state, unregulated capitalism that
had been observed and documented by the Classical Economists in the 19th Century.
"The interest of the landlords is always opposed to the interest of every other class
in the community" Ricardo 1815 / Classical Economist
"But the rate of profit does not, like rent and wages, rise with the prosperity and
fall with the declension of the society. On the contrary, it is naturally low in rich and
high in poor countries, and it is always highest in the countries which are going fastest to
ruin." Adam Smith / Classical Economist
Their belief in the markets came from neoclassical economics, which doesn't consider the
elements that ensures markets don't reach stable equilibriums; debt and the money creation of
bank loans.
Richard Vague has studied many of those 19th century financial crises in his book "A Brief
History of Doom" and charts the rollercoaster progress of 19th century small state,
unregulated capitalism.
"Theoretically, neither deflation nor inflation ought to affect long-run growth or
employment. After a while, people and businesses get used to changing prices. If prices fall,
eventually so will wages, and the impact on profits, employment and purchasing power will be
neutral. Borrowers suffer during deflation because their debts are fixed in value, but
creditors benefit because the dollars they get back will buy more. For the economy as a
whole, deflation ought to be a wash."
What has Ben Bernanke got wrong?
He thinks banks are financial intermediaries.
Our knowledge of privately created money has been going backwards since 1856.
Credit creation theory -> fractional reserve theory -> financial intermediation
theory
I like the title. Also, this is one of those cases where the interviewer brings quite a
lot to the table as well as the author. An excellent introduction and a well
carried/developed near metaphor as in, nail on the is a head.
That was a logical thesis to investigate. It seems strange that it has remained out of
sight for so long until Mr. Vague's research and analysis.
The student debt in the USA is currently at $1.5 trillion. That is about 7% of GDP –
and growing. I wonder how this may affect the economy in the US going forward.
As Yogi Berra reminds us, "You can observe a lot by watching."
I don't think it has been "out of sight" so much as "in sight, but ignored". The relation
of private debt to economic downturns has been noticed by others. Irving Fisher in the 20th
Century, Steve Keen today come to mind.
The connection between "over-capacity" and "inability to service" may be new.
I would like to see analysis like this subjected to peer review; I think that there must
be at least a few journals sympathetic to heterodox approaches to economics that would give a
new synthesis like this a fair review process. Going "directly to the people" via popular
writing raises a small concern in my mind.
Steve Keen mathematized the Minsky Hypothesis. The results could be displayed in three
dimensions. The graphs showed that when private debt was included in the calculations, the
recession in 2007 was accurately predicted. Interestingly, there is a period of moderation
which is followed by a rapid crash. During this period of moderation Bernanke was saying that
all the indicators showed that the economy was in good shape. Of course he didn't consider
private debt.
Some points of discussion, I'm not mad if disproven:
: Is the 2.5 Quadrillion dollars in derivatives considered debt? Or is the ability to
create derivatives what drives the excess lending?
: Is the ability to generate excess debt a function of the fractional reserve system, and
thus mostly a benefit for robbers who own banks? The Templars couldn't generate excess debt,
they needed gold on hand to pay the notes, but wasn't there increased trade from their
system, and thus general benefit?
No.
The stupid sums on derivatives are notional principals, and usually grossed up. If I have a
swap with 10m notional with you, it could be worth anything (and most likely the only debt
exposure is any margin-call amount, which would be on 10m swap trivial), but would add 20m to
that dumb number.
I can easily enough generate almost any number for the notional principal w/o increasing
the risk to the system (for example by creating any number of equal-but-opposite trades
between two parties which have a netting agreement)
I can equally (a bit harder, as it requires some thinking) do a few "well placed"
derivatives with notionals in say few billions (but nicely levered) that can sink the whole
system.
No.
In a full reserve system there's no debt, hence no question of "excess debt". As an aside,
"fractional reserve system is a myth". Bank lending is constrained only by capital, not by
any reserves (cf number of banking systems that don't even have any rules on reserves).
I have not read Mr. Vague's book. However, I am curious as to whether he adds anything to
the work of Steve Keen, who predicted the 2007-09 financial crisis, and Hyman Minsky. See,
for example, Keen's "Can We Avoid Another Financial Crisis?" (2017).
Looks like a nice validation of Keen's (and Michael Hudson's) work. That's fine with me,
although a nod in their direction certainly looks warranted since private debt was what led
Keen to predict the Great Recession (and win the Revere Prize for doing so).
Hudson's work on ancient debt jubilees exactly parallels Vague's.
Debt is the only working time machine mankind invented. But the conservation-over-time
still holds.
Technically, for any individual, over their lifetime integral of (income + debt
destruction) >= integral(expenses+ debt creation) [I'm ignoring cases where debt can be
inherited]
So are we heading for a crisis? Right now I(income + debt destruction) < I(expenses +
debt creation) for a large number of indivduals over their lifetime. So unless their income
raises dramatically (expenses for them are often way less discretionary), yes we are, as the
debt destruction will have to compensate.
But to guess the timing – well, that very much depends on the aggregate of those
individuals.A trigger that would further reduce income or increase expense (across the
population) would make it more probable. A small but not sufficient increase in income
(across the population) would postpone it.
"The student debt in the USA is currently at $1.5 trillion."
Thanks to some skillful intervention with the somnolent Congress this debt cannot be
discharged in bankruptcy. That seems to fly in the face of Mr. Vague's conclusions while
redounding to the benefit of the rentier financial class.
@ John -- Please make everyone you know aware that Democrat candidate for president Joe
Biden holds a great deal of responsibility for student debt not being dischargeable in
bankruptcy. This is only one of his high crimes and misdemeanors. Don't let anyone
forget!
That's only one of many reasons that Biden should be defeated. Here's a really good
explanation of how he helped remove educational loans (nearly all of them, not only student
loans) from discharge in bankruptcy.
Biden also strongly supported the Iraq War preventing any opposition views to testify in
his committee. Also a strong supporter of NAFTA anf the TTTP. ( Trump will hammer on this if
he runs against Biden.) His cooperation with southern segregationists resulted in the unequal
drug penalties that fed the prison industrial complex he supported. He had mutiple committee
meeting to rail against black crime when it was expedient. He threw Anita Hill under the bus
and thus aided in putting Clarence Thomas on the Supreme Court. He says he's a union man as
he goes to Comcast, a union buster, for financial aid. He is known as a representative
working for the credit card companies. etc. What's not to like if you're a corporate
democrat?
Duh. That was exactly the purpose. That bankruptcy exempt law for student loans was passed
based upon falsehoods. Its actual purpose was to enslave the college educated youth (make
them debt slaves) so that they don't go on a rampage like they did in the 1960's and 70's
vis-a-vis the Vietnam War.
I think part of the problem is that we treat money as a store of value, as well as a
medium of exchange.
As a medium, it is a contract, with one side an asset and the other a debt, so in order to
store the asset, similar amounts of debt have to be created.
This results in a centripedial effect, as positive feedback draws the asset to the center of
the system, while negative feedback pushes the debt to the edges.
Since money and finance serve as the value circulation mechanism, this is like the heart
telling the hands and feet to go suck dirt, because they don't get any blood.
A medium and a store are distinct functions. Blood is a medium, fat is a store. Roads are a
medium, parking lots are a store.
As a medium, we own money like we own the section of road we are using, or the beer passing
through our bodies. It's functionality is in its fungibility.
If we store value in healthy communities, we wouldn't need banks to mediate every
relationship.
The irony of our individualistic culture, is it leaves us in our atomized cocoons, allowing
more effective top down control and a parasitic feedback mechanism. Sort of like The
Matrix.
good description of the way an ME and a SoV work against each other; I can never think
through what I'm sure is this very contradiction in terms. thanks.
Appears to build on the work of economists Hyman Minsky and Steve Keen. Not as concerned
with developments in "Asia" (China), as there seems to be a policy willingness there to
substitute state money for private sector debt, and to allow currency depreciation as an
adjustment mechanism for the implicit debt writedowns. The policy also plays into China's
exports-driven macro model. Similar to the US government and central bank "foaming the
runway" for the banks and large corporations in the aftermath of the 2008 financial
crisis.
Contemplating the role of compound interest in private sector debt growth in a period of
low economic growth. Recent rapid growth of leveraged loans and junk bonds to fund corporate
stock buybacks, negative real interest rates to push up financial asset and real estate
prices/collateral values, and a lax regulatory environment appear to support an intentional
policy of excessive growth in private sector debt. Whether the GFC is entirely in the
rearview mirror or is till unfolding in terms of ultimately leading to systemic change also
remains open IMO, although neoliberal policies remain firmly entrenched at this time.
The part about the financial sector, including housing, being the main components of US
"industrial policy" shows the country as whole isn't taking the first advice financial
advisors usually give for stability: DIVERSIFY ..
And yet again here is another book/article on the US economy that says nothing about
defense spending.
US Defense spending is not debt. The MMT discussions state that clearly.
One test for "debt" is a simple question: Who can demand the debt be paid?
In the case of USG spending, the only party who could "call the debt" is the USG, and a
single party cannot be both debtor and creditor on a debt, that is: cannot owe oneself
money.
Well all government spending is debt if it spends currency. The dollars are debt. Your
checking account is debt too to the bank. When you write a check, you're assigning a portion
of the bank's debt to the payee. Dollars are just checks made out to "cash" in fixed amounts.
They appear in the Fed's books a liability, too.
What are we owed for a dollar? Answer: relief from a dollar's worth of (inevitable) tax
liability.
Back to the original post: It's even ambiguous whether defense spending is consumption.
After all, the internet is a product of DARPA (the "D" is for "Defense"). Marianna Mazzucato
has a nice TED talk about government as innovator.
" In both cases, the result is about 16% growth to GDP over 15 years. But in the second
case, you don't have a financial crisis."
also in the second case there are not foreclosures and repossessions whereby concentrated
financial power confiscates what they sold so they can sell it again by the way where does
that activity (repos and foreclosures) go in the calculation of GDP
Gosh. Where has Mr. Vague been? If this isn't the understatement of the century, I don't
know what is. Even dear old Ordoliberal Wolfgang Schaeuble said right up front: "We are
overbanked." Steve Keen is still fighting with Krugman about the significance of private
debt. And to imply that we have an unspoken "industrial policy" that uses real estate to get
us out of a slow patch begs the question. It is not industrial policy, it is the blatant
chickenshit avoidance of industrial policy. But never mind all that, the sea change Mr. Vague
is avoiding is that industrial manufacturing is being drastically trimmed back, limited,
maybe even rationed by country for all we know. To forgive debts won't really cut it. Not
that we shouldn't do it. We should simply because debt service is nearly impossible these
days. We need to have massive fiscal infusions; money spent wisely to improve civilization
and save the environment. Please Mr. Vague. You're more like Mr. Vacuous.
" .industrial policy, even though it was largely unstated: namely, support for the
financial and real estate sectors"
I would add the agricultural sector to government supported industry.
The brother needs to have a look a Portland, Oregon. Overcapacity, a housing bubble and a
homeless crisis all at once. It's bound to crash. Yet there're so many boomers retiring from
the first wave of the Tech Era (the folks whose awesome ideas and disruption gave us
Dot-Bomb. So they've run up the price of beer in a town famous for craft brewing to
unaffordability. They never seem to pay the price.
Bush Junior tightened the Bankruptcy laws in his final term before the great recession. I
still don't think that was coincidence.
The smart people with all the money DO know this is how economics works, and execute their
strategies on their behalf accordingly. The rest of us, get the idiot's guide to the galaxy
to work with.
"Debt, the first 5000 years" by David Graeber is on my list of probably-good books that
I'm unlikely to get around to reading. Is that similar to this one?
Yves here. Quelle surprise! Economists engage in groupthink, which sounds a little less bad if you call it
"ideology".
By Mohsen Javdani, Associate Professor of Economics, University of British Columbia –
Okanagan Campus and Ha-Joon Chang, Professor, University of Cambridge. Originally published at the
Institute for New Economic Thinking website
Mainstream (neoclassical) economics has always put a strong emphasis on the positivist conception of the
discipline, characterizing economists and their views as objective, unbiased, and non-ideological. This is
still true today, even after the 2008 economic crisis exposed the discipline to criticisms for lack of open
debate, intolerance for pluralism, and narrow pedagogy.
[1]
Even
mainstream scholars who do not blatantly refuse to acknowledge the profession's shortcomings still resist
identifying ideological bias as one of the main culprits. They often favor other "micro" explanations, such
as individual incentives related to academic power, career advancement, and personal and editorial networks.
Economists of different traditions do not agree with this diagnosis, but their claims have been largely
ignored and the debate suppressed.
Acknowledging that ideology resides quite comfortably in our economics departments would have huge
intellectual implications, both theoretical and practical. In spite (or because?) of that, the matter has
never been directly subjected to empirical scrutiny.
In a
recent study
, we do just that. Using a well-known experimental "deception" technique embedded in an
online survey that involves just over 2400 economists from 19 countries, we fictitiously attribute the
source of 15 quotations to famous economists of different leanings. In other words, all participants
received identical statements to agree or disagree with, but source attribution was randomly changed
without the participants' knowledge
. The experiment provides clear evidence that ideological bias
strongly influences the ideas and judgements of economists. More specifically, we find that changing source
attributions from mainstream to less-/non-mainstream figures significantly reduces the respondents' reported
agreement with statements. Interestingly, this contradicts the image economists have of themselves, with 82%
of participants reporting that in evaluating a statement one should only pay attention to its content and
not to the views of its author.
Moreover, we find that our estimated ideological bias varies significantly by the personal
characteristics of economists in our sample. For example, economists' self-reported political orientation
strongly influences their ideological bias, with estimated bias going up as respondents' political views
move to the right. The estimated bias is also stronger among mainstream than among heterodox economists,
with macroeconomists exhibiting the strongest bias. Men also display more bias than women. Geographical
differences also play a major role, with less bias among economists in Africa, South America, and
Mediterranean countries like Italy, Portugal, and Spain. In addition, economists with undergraduate degrees
in economics or business/management tend to show stronger ideological biases.
We give more details about our methodology and findings in the following sections, but first let us
anticipate some of the conclusions and implications. Theoretically, the implications are upsetting for the
positivist methodology dominating the neoclassical economics. As
Boland (1991)
suggests, "[p]ositive economics is now so pervasive that every competing view has been virtually eclipsed."
Yet, the strong influence of ideological bias on views among economists that is evident in our empirical
results cannot be reconciled with it.
Practically, our results imply that it is crucial to adopt changes in the profession that protect
academic discourse, as well as the consumers of the economic ideas, from the damaging impacts of ideological
bias. In fact, there exists growing evidence that suggests value judgements and political orientation of
economists affect not just research (
Jelveh
et al. 2018
,
Saint-Paul
2018
), but also citation networks (
Önder
and Terviö 2015
), faculty hiring (
Terviö
2011
), as well as economists' positions on positive and normative issues related to public policy (e.g.
Beyer and Pühringer
2019
;
Fuchs, Krueger and
Poterba 1998
;
Mayer
2001
;
van
Dalen 2019
;
Van Gunten, Martin, and Teplitskiy 2016
). It is therefore not a long stretch to imagine that ideological
bias could play an important role in suppressing plurality, narrowing pedagogy, and delineating biased
research parameters in economics.
One important step that helps identify the appropriate changes necessary to minimize the influence of
ideological biases is to understand their roots.
As argued by prominent social scientists (e.g.
Althusser 1976
,
Foucault 1969
,
Popper 1955
,
Thompson 1997
), the main source of ideological bias is knowledge-based, influenced by the institutions
that produce discourses. Mainstream economics, as the dominant and most influential institution in
economics, propagates and shapes ideological views among economists through different channels.
Economics education, through which economic discourses are disseminated to students and future
economists, is one of these important channels. It affects the way students process information, identify
problems, and approach these problems in their research. Not surprisingly, this training may also affect the
policies they favor and the ideologies they adhere to. In fact, there already exists strong evidence that,
compared to various other disciplines, students in economics stand out in terms of views associated with
greed, corruption, selfishness, and willingness to free-ride (e.g.
Frank and Schulze 2000
,
Frank et al.
1993
and
1996
,
Frey et al. 1993
,
Marwell and Ames 1981
,
Rubinstein 2006
,
Want et al. 2012
).
[2]
Another important channel through which mainstream economics shapes ideological views among economists is
by shaping the social structures and norms in the profession. While social structures and norms exist in all
academic disciplines, economics seems to stand out in at least several respects, resulting in the
centralization of power and the creation of incentive mechanisms for research, which in turn hinder
plurality, encourage conformity, and adherence to the dominant (ideological) views.
Our own exposure to different parts of this social structure while working on this project has in fact
been an unpleasant yet eye-opening experience, and a testament to dominant biases in the discipline that
strongly impede critical thinking, new perspectives, and plurality. We have been threatened, accused, and
insulted for simply asking an important and legitimate question. We have also had first-hand experience with
the Top Five journals in economics and some of their (associate) editors' exertion of their strong
prejudiced views, which is often disguised under the vail of "inevitably subjective nature of editors'
decision-making process," which is supported by the absolute and unaccountable power that is at their
disposal. In some cases, the decision regarding our submission blatantly lacked professionalism and respect
for plurality of views.
Our world today is characterized by critical issues that economics has a lot to say about, such as
inequality, austerity, the future of work, and climate change. However, relying on one dominant discourse
which ignores or isolates alternative views will make the economics profession ill-equipped to engage in
balanced conversations regarding these issues. This also makes the consumers of economic ideas skeptical
about economists and the views and policies they advocate for. We believe that addressing the issue of
ideological bias in economics first requires economists to find out about their own biases. Persistent
denial of these biases is going to be more harmful than being aware of their presence and influence, even if
mainstream economists do not necessarily change their views. Moreover, the economics profession needs to
have an in-depth introspection and a real and open debate about the factors underpinning these biases,
including economics training and social structures within the discipline that centralize power, encourage
group thinking and conformity, dampen innovative thinking and creativity, and hinder plurality.
Experimental Design
Examining issues such as the impact of bias, prejudice, or discrimination on individual views and
decisions is very challenging, given the complex nature of these types of behaviour. This has given rise to
a field experimentation literature in economics that has relied on the use of deception -- for example, through
sending out fictitious resumes and applications, to examine the prevalence and consequences of
discrimination against different groups in the labor market.
[3]
We
take a similar approach, namely using fictitious source attributions, in order to investigate the effect of
ideological bias on economists (See Section 4 in our
online appendix
for a more detailed discussion on the use of deception in economics). More specifically,
we employ a randomized controlled experiment embedded in an online survey. Economists from 19 different
countries were invited to complete an online survey where they were asked to evaluate fifteen statements
from prominent economists on a wide range of topics. We received just over 2,400 responses, with the
majority of responses (around 92%) from academics with a PhD degree in economics. As reported in our
online appendix
, our sample includes a very diverse group of economists from a diverse set of
institutions. While all participants received identical statements in the same order, source attribution for
each statement was randomly changed
without the participants' knowledge
. For each statement,
participants either received the name of a mainstream economist as the source (Control Group), or an
ideologically different less-/non-mainstream economist (Treatment 1), or no source attribution (Treatment
2). See Table A8 in our
online appendix
for a complete list of statements and sources.
The Findings, in Detail
Our analysis of the experimental results reveals several important findings. First, examining the
probability of different agreement levels for each statement as well as their comparative degree of
consensus (using relative entropy index derived from information theory), we find evidence of clear dissent
among economists on the wide variety of topics evaluated (see Figure 1 below). Given that our statements
either deal with different elements of the mainstream economics paradigm -- including its methodology,
assumptions, and the sociology of the profession -- or issues related to economic policy, the significant
disagreement evident in our results highlights the lack of paradigmatic and policy consensus among
economists on evaluated issues.
Figure 1: Probability of different agreement levels – By statement
Note: See Table A8 in our
online appendix
for a complete list of statements and sources.
Second, we find evidence of a strong ideological bias among economists. More specifically, we find that
for a given statement, the agreement level is 7.3% (or 22% of a standard deviation) lower among economists
who were told that the statement was from a less-/non-mainstream source. Examining statements individually
also reveals that in all but three statements, agreement level drops significantly (both quantitatively and
statistically, ranging from 3.6% to 16.6%) when the source is less-/non-mainstream.
For example, when a statement criticizing "symbolic pseudo-mathematical methods of formalizing a system
of economic analysis" is attributed to its real source, John Maynard Keynes, instead of its fictitious
source, Kenneth Arrow, the agreement level among economists drops by 11.6%. Similarly, when a statement
criticizing intellectual monopoly (i.e. patent, copyright) is attributed to Richard Wolff, the American
Marxian economist at the University of Massachusetts, Amherst, instead of its real source, David Levine,
professor of economics at the Washington University in St. Louis, the agreement level drops by 6.6%.
Interestingly, these results stand in sharp contrast with the image economists project of themselves in
our survey. In an accompanying questionnaire that appears at the end of the survey, a strong majority of
participants (around 82%) agreed that in evaluating a statement, one should
only
pay attention to
its content, rather than its author. Only 18% of participants agreed that both the content of the statement
as well as the views of the author matter, and only a tiny minority (around 0.5%) reported the views of the
author should be the sole basis to evaluate a statement.
Third, we find that economists' self-reported political orientation strongly influences their views. More
specifically, our results suggest that
even when we focus on statements with mainstream sources
attributed to them
, there exists a very significant difference in average agreement level among
economists with different political orientations. For example, for a given statement, the average agreement
level among economists self-identified as left is 8.4% lower than those self-identified as far left. This
already large difference widens
consistently
as we move to the far right, reaching a difference of
19.6% between the far right and the far left, which is an increase of 133%. This strong effect of political
orientation on economists' evaluation of our statements, which does not change after controlling for a wide
set of observed characteristics, is another clear manifestation of ideological bias.
The effect of political orientation on economists' views is even more drastic when we examine how changes
in attributed sources affects economists with different political orientations. More specifically, for those
on the far left, altering the sources only reduces the average agreement level by 1.5%, which is less than
one-fourth of the overall effect of 7.3% we discussed before. However, moving from the far left to the far
right of the political orientation
consistently and significantly
increases the effect of changing
the source to a 13.3% reduction in agreement level, which is almost 8 times (780%) larger compared to the
far left. Interestingly, this is despite the fact that relative to the far left, those at the far right are
17.5% more likely to agree that in evaluating a statement one should only pay attention to its content.
Fourth, our results uncover striking differences by gender. More specifically, we find that the estimated
ideological bias is 44% larger among male economists as compared to their female counterparts, even after
controlling for potential gender differences in observed characteristics including political orientation and
political/economic typology. Moreover, our results highlight a startling difference between male and female
economists in their perception of gender problems in the profession. When faced with the statement "
Unlike
most other science and social science disciplines, economics has made little progress in closing its gender
gap over the last several decades. Given the field's prominence in determining public policy, this is a
serious issue. Whether explicit or more subtle, intentional or not, the hurdles that women face in economics
are very real.
", the agreement level was a whopping 26% higher among female economists than among their
male peers.
In addition, when participants were told that the statement was made by the left-wing British feminist
economist Diane Elson (rather than the real source, Carmen Reinhart, a mainstream economist at Harvard),
male economists showed ideological biases -- their agreement level fell by 5.8%. Interestingly, however, it
stayed unchanged for female economists. This seems to suggest that the gender problem in economics is so
severe that female economists, who exhibited ideological biases on many other issues (although less than did
their male colleagues), put aside their biases in this particular case and focused on the content of the
statement.
The discussion around the gender problem in economics has recently taken the center stage. During the
recent 2019 AEA meeting, and in one of the main panel discussions titled "How can economics solve its gender
problem?" several top female economists talked about their own struggles with the gender problem in
economics. In another panel discussion, Ben Bernanke, the current president of the AEA, suggested that the
discipline has "unfortunately, a reputation for hostility toward women ." This is following the appointment
of an Ad Hoc Committee by the Executive Committee of the AEA in April 2018 to explore "issues faced by women
[ ] to improve the professional climate for women and members of underrepresented groups." AEA also
conducted a climate survey recently to "provide more comprehensive information on the extent and nature of
these [gender] issues." It is well-understood that approaching and solving the gender problem in economics
first requires a similar understanding of the problem by both men and women. However, our results suggest
that unfortunately there exists a very significant divide between male and female economists in their
recognition of the problem.
Fifth, we find systematic and significant heterogeneity in our estimated effect of ideological bias by
country, area of research, country where PhD was completed, and undergraduate major, with some groups of
economists exhibiting little or no ideological bias and some others showing very strong bias.
For example, we find that economists with a PhD degree from Asia, Canada, Scandinavia, and the U.S.
exhibit the strongest ideological bias. On the opposite end we find that economists with PhD degrees from
South America, Africa, Italy, Spain, and Portugal exhibit the smallest ideological bias. Similarly, our
results suggest that there is the smallest ideological bias from economists whose main area of research is
history of thought, methodology, heterodox approaches; cultural economics, economic sociology, economic
anthropology, or economic development. On the other hand, we find that economists whose main area of
research is macroeconomics, public economics, international economics, and financial economics are among
those with the largest ideological bias.
We also find that undergraduate training in economics has a strong effect on our estimated effect of
ideological bias. We find that those economists with an undergraduate major in economics, or
business/management, exhibit the strongest bias, while those who studied law; history, language and
literature; or anthropology, sociology, and psychology show no ideological bias. These results are
consistent with the growing evidence that suggests economic training, either directly or indirectly, induces
ideological views in students (e.g.
Allgood
et al. 2012
,
Colander and Klamer 1987
,
Colander 2005
,
Rubinstein 2006
).
Discussion
Scholars hold different views on whether economics can be a "science" in the strict sense and be free
from ideological biases. However, perhaps it is possible to have a a consensus that the type of ideological
bias that could result in endorsing or denouncing an argument on the basis of (one's interpretation of) its
author's views rather than its substance is unhealthy and in conflict with scientific tenor and the
subject's scientific aspiration,
especially when the knowledge regarding rejected views is limited
.
Some economists might object that economists are human beings and therefore these biases are inevitable.
But economists cannot have their cake and eat it too! Once you admit the existence of ideological bias, the
widely-held view that "positive economics is, or can be, an 'objective' science, in precisely the same sense
as any of the physical sciences" (Friedman 1953) must be rejected.
Furthermore, the differences we find in the estimated effects across personal characteristics such as
gender, political orientation, country, and undergraduate major clearly suggest that there are ways to limit
those ideological effects, and ways to reinforce them.
Our finding that those with an undergraduate degree in economics exhibit the strongest ideological bias
highlights the importance of economic training in shaping ideological views. In doing so, our study
contributes to the literature on economic education, suggesting that ideology can be at least limited by
changes in the curricula at earlier stages.
Rubinstein (2006)
argues that "students who come to us to 'study economics' instead become experts in
mathematical manipulation" and that "their views on economic issues are influenced by the way we teach,
perhaps without them even realizing."
Stiglitz (2002)
also argues that "[economics as taught] in America's graduate schools bears testimony
to a triumph of ideology over science."
Economics teaching not only influences students' ideology in terms of academic practice but also in terms
of personal behavior.
Colander and Klamer (1987)
and
Colander (2005)
survey
graduate students at top-ranking graduate economic programs in the U.S. and find that, according to these
students, techniques are the key to success in graduate school, while understanding the economy and
knowledge about economic literature only help a little. This lack of depth in knowledge acquired, not only
in economics but in any discipline or among any group of people, makes individuals lean more easily on
ideology.
Frank et al. (1993)
similarly highlight the importance of economics training in shaping behavior among
students by criticizing the exposure of economics students to the self-interest model in economics where
"motives other than self-interest are peripheral to the main thrust of human endeavor, and we indulge them
at our peril." They also provide evidence that such exposure does have an impact on self-interested
behavior.
But education is not the only problem: social structures and norms within the profession also deeply
influence economists' adherence to dominant ideological views.
For example, in his comprehensive analysis of pluralism in economics,
Wright (2019)
highlights several features of the discipline that make the internal hierarchical system in economics
"steeper and more consequential" compared to most other academic disciplines. These features include: (1)
particular significance of journal ranking, especially the Top Five, in various key aspects of academic life
including receiving tenure (
Heckman
and Moktan 2018)
, securing research grants, invitation to seminars and conferences, and request for
professional advice; (2) dominant role of "stars" in the discipline (
Goyal
et al. 2006
,
Offer and Söderberg 2016
); (3) governance of the discipline by a narrow group of economists (
Fourcade
et al. 2015
); (4) strong dominance of both editorial positions and publications in high-prestige
journals by economists at highly ranked institutions (
Colussi
2018
,
Fourcade et al. 2015
,
Heckman & Moktan 2018
;
Wu
2007
); and the strong effect of the ranking of one's institution, as a student or as an academic, in
career success (
Han
2003
,
Oyer 2006
).
As another example, in a
2013 interview
with the World Economic Association, Dani Rodrik highlights the role of social structure
in economics by suggesting that "there are powerful forces having to do with the sociology of the profession
and the socialization process that tend to push economists to think alike. Most economists start graduate
school not having spent much time thinking about social problems or having studied much else besides math
and economics. The incentive and hierarchy systems tend to reward those with the technical skills rather
than interesting questions or research agendas. An in-group versus out-group mentality develops rather early
on that pits economists against other social scientists." Interestingly, a very similar picture of the
profession was painted in 1973 by Axel Leijonhufvud in his light-hearted yet insightful article titled "
The
life among the Econ
."
It is hard to imagine that the biased reactions we find in our study only emerge in a low-stakes
environment, such as our experiment, without spilling over to other areas of academic life. After all, as we
discussed at the beginning, there already exists growing evidence which suggests that the political leanings
and the personal values of economists influence different aspects of their academic lives. It is also not a
long stretch to imagine that such ideological biases impede economists' engagement with alternative views,
narrow the pedagogy, and delineate biased research parameters. We believe that recognizing their own biases,
especially when there exists evidence suggesting that they could operate through implicit or unconscious
modes, is the first step for economists who strive to be objective and ideology-free. This is also
consistent with the standard to which most economists in our study hold themselves. To echo the words of
Alice Rivlin in her 1987 American Economic Association presidential address, "economists need to be more
careful to sort out, for ourselves and others, what we really know from our ideological biases."
Notes
[1]
Several scholars have highlighted the connection between ideological views and the lack of plurality
in economics and the failure of the profession to predict the 2008 crisis, or to even have an honest and
in-depth retrospective explanation that would help develop accountable counter-measures against future
crises (e.g.
Barry
2017
;
Cassidy 2009
;
Dow 2012
;
Freeman 2010
;
Heise
2016
;
Lawson 2009
;
Stilwell 2019
). There are also those who believe the 2008 crisis was not predictable, but fault the
profession, as
Colander (2010)
puts it, "for failing to develop and analyze models that, at least, had the possibility
of such a failure occurring" (e.g.
Cabalerro
2010
;
Colander et al. 2013
).
[2]
Even if this relationship is not strictly casual, it suggests that there exists something about
economic education that leads to a disproportionate self-selection of such students into economics.
20 years ago Dr Sam Tsemberis conducted a double-blind trial of chronically homeless mentally ill people
in an effort to learn whether being housed first led to better medical outcomes then placing barriers of
compliance before getting housed would produce.
Happily, the common sense proposition that having a secure roof improves people's health or medication
adherence was proven, and the concept of Housing First as a best practice is accepted today.
Economics is always political economy no matter how hard they try to pretend its algebra.
If ideology is dead then good riddance to it. I have seen and read about too many ideologues that have
caused massive damage and deaths over the centuries and economics is no different. Personally I am of the
school of thought of doing things in an empirical way and ignoring labels but just seeing what works. If it
works, adopt it. If it does not, try something else. The economics of today does not do that. It does not
work. It never saw the 2008 crisis coming and it has never proposed and backed reforms so that it will not
happen again. It is used to justify a world economy that is causing climate change as it refuses to include
most factors into their equations. I find it fascinating too how modern economics makes use of labels to
stop discussions of possible paths to explore. Ideological labels has itself proven a huge hindrance. Here
is what I mean.
"We should have health care for all."
"That is socialism that!"
"Well I guess that we can't do that then!
I think that Blair Fix's article "No, Productivity Does Not Explain Income" (
https://www.nakedcapitalism.com/2019/08/no-productivity-does-not-explain-income.html
)
shows you how modern economists work. You juggle around processes like you do mathematical formulas and
expect that it still reflects the real world. In scientific discussion you throw out a theory in a journal.
Ideally it should be reproducible in the real world and should be picked apart for any flaws in data or
reasoning. But like in Blair Fix's article. the outcome is designated first and then you work you way back
to justify it. It fails blind tests like mentioned here which shows it's flawed processes. In Washington DC
there is the Victims of Communism Memorial but I do think that there should also be a Victims of
Neoliberalism Memorial to reflect current economic thought. In the former there is the Goddess of Democracy
statue as a centerpiece. For a statue for the Victims of Neoliberalism I would suggest another statue but
based on the acronym BOHICA.
The more you see yourself as beyond ideology, the more likely it is that you are a victim of ideology.
That's what the post shows: it's the very fields such as business management that see themselves as
non-ideological, "common sense" and empirical which are the most ideological, least common sense and
least empirical.
If you are aware of your bias, you can minimize (but not eliminate) those affects. But if you believe
that you have *perfect* vision, no measurement can show you that you have an astigmatism.
Remember, Obama and Merkel see themselves as pragmatists -- but an objective observer can be assured of
finding deep ideological biases and assumption underlying their thought process.
aye.
the position of Ignorance .Socratic Perplexity is hard.
but i reckon it' the only way to avoid the mental traps this talks about.
I'm the only one i know in meatspace that even attempts to begin an investigation there("I know that i
don't know").
the idea that economics is just like Physics was always suspect, and i think it's pretty amazing that
it's taken this long and this many economic disasters to get to the point that the idea of econ=hard
science is challenged more or less in the open.
I'd add to this that i figure that the break in Philosophy, early in the last century, between
Anglo-American and "Continental" probably precedes and enables this strange phenomena in
economics(logical positivism, etc avoiding all that messy humanity attempting to shoehorn everything
into a neat equation)
there's a similar phenomenon in a lot of the Humanities anthropology, for instance: taking into
account the inherent and largely unconscious bias of the anthropologist embedded with the "savages"
he's studying.
"Orthodoxy is Unconsciousness"-Orwell
A general observation: Economics without ideology or politics is only a rather peculiar way of using
math. Without a reference what positive or negative actually means it is impossible to render jugdement or
make policy. While economic outcomes are at the same time always political outcomes and vice versa. That is
why the discipline used to call itself political economy.
About the experiment: If I understand it correctly all participants receive the questions only once. How
then is it possible to attribute a specific answer towards bias regarding the source? Given that the
questions are not of a clear 2+2=4 varietiy but at least somewhat open. Intuitively it seems far more likely
that the specific answer is determined by the respondents own beliefs than by their bias regarding the
source.
"The willingness to indulge in ideological thinking -- that is, in thinking that by definition is not one's
own, which is blind to experience and to the contradictions that arise when broader fields of knowledge are
consulted -- is a capitulation no one should ever make. It is a betrayal of our magnificent minds and of all
the splendid resources our culture has prepared for their use."
Robinson, Marilynne.
What Are We Doing Here?
(p. 2). Farrar, Straus and Giroux. Kindle Edition.
Towards the end of my final year of econ education I pointed out to a professor that the claim that
economics should be a positive science, as opposed to a normative one, was itself a normative claim and
hence self-contradictory. He looked at me like I was a crazy person and he was one of the 'leftists' in the
department.
Haha are you sure that the source of "crazy person" look was your view itself, or rather was it that
in your young naivete you spoke what anybody who needs to put food on the table as a working economist
would not dare?
I had a similar experience, diptherio. It was at the beginning of semester picnic, and one of the
profs was holding forth on how the mathematical and analytical methodology would allow us to find the
solutions to business questions. Probably because I had drunk too much wine, I piped up, but don't we
first have to define what are the critical questions? Deafening silence.
It is crazy, is it not, that "Life among the Econ" is still locked behind a paywall, despite being
written 46 years ago. Thankfully, there is sci-hub .
Reminds me of my counselor journey when therapist became aware of the blinders and prejudices that one's
theories of behavior imposed (good & bad) on clients. The admonition became, "don't marry your theory" which
another fellow revised that to "it's best only to flirt with your theory."
A friend of mine was an IT Director for a large Insurance company. After the crash in '08, he said in one
meeting an executive said "you know why we employ Economists, to lend credibility to the Astrologers"
The fact that this article has a reason to exist at all shows how poorly educated our highly trained
economists are. It's not just that they reject the better portion of the core concepts and practices of the
humanities and social sciences as being somewhere between useless and harmful. It's also that, as this
article illustrates without quite saying, pretenses aside, most economists are worse than clueless with
regards to the basics of conducting research in the "hard" sciences.
For family blog's sake, they don't even know how to pretend to be scientists. I'm not practicing
researcher, but I know enough about research methods and questions to be pretty sure that robust empirical
positivist economic research should look a lot more like something from the medical sciences than like
something out of a cut rate theoretical physics or math journal. That would have serious epistemological
problems of it's own, but sheesh, at least it might be mildly convincing to people with a modicum of a
liberal arts education who couldn't be bothered to look under the hood.
The only thing that shocks me more than the shoddyness of work from "superstar" economists is their
undying faith that their methods make them experts not just on economics, but on basically anything that you
can slap a mathematical model on.
What economics lacks is an arbiter. In the physical sciences, nature will bitch slap anyone getting out
of line. Economists need to come up with an agreed-upon set of test or natural experiments or something that
constitutes independent feedback on the merit of an idea. There is nothing more important for the future of
the discipline than this.
Well, the historical data refutes the Phillip's Curve but I bet they still teach that. 2008 was a
natural experiment that refuted the Efficient Market Hypothesis, as well as the idea that the Federal
Reserve could stop a major economic catastrophe through monkeying with interest rates but I'm sure those
things are still being taught. Which is to say that economics does not lack an arbiter -- rather, most
economists simply refuse to give it any credence.
Given that theories in economics are not testable, an application of group think would result in
"everybody was predicting that," and the consequent "who could have know" blame avoidance, coupled with the
economist selecting the analytic method that best confirmed the answers the management wanted.
The only thing missing is a display of the set of Chrystal Balls.
Do Economists speak truth to power, or just confirm what power wants?
the rest of the social scientists at least test their theories against these standards (or make an
appearance of doing so). econ seems to get around them by use of "definitions" so specific that in the end
they are describing tautologies.
An interesting study to supplement this one is of funding sources for economics departments and the
extent to which the funding is tied to hiring and model building. Then reanalize the date in this study for
correlations with the influence of funding sources.
Excellent article, I agree.
As regards clear language and definitions, I much prefer Michael Hudson's insistence that, to
the liberal economists, free markets were markets free from rent seeking, while to the
neoliberals free markets are free from government regulation.
"As governments were democratized, especially in the United States, liberals came to endorse
a policy of active public welfare spending and hence government intervention, especially on
behalf of the poor and disadvantaged. neoliberalism sought to restore the centralized
aristocratic and oligarchic rentier control of domestic politics." http://michael-hudson.com/2014/01/l-is-for-land/
– "Liberal"
"... The USA hegemony is based on ideological hegemony of neoliberalism. And BTW both Russia and China are neoliberal countries. That's probably why President Putin calls the USA administration "partners," despite clearly anti-Russian policies of all US administrations since 1991. ..."
"... One fascinating fact that escapes my understanding is why the USA elite wasted colossal advantage it got after the collapse of the USSR in just 25 years or so. I always thought that the USA elite is the most shrewd out of all countries. ..."
"... May be because they were brainwashed by neocon "intellectuals." I understand that most neocons are simply lobbyists of MIC, and MIC has huge political influence, but still neocon doctrine is so primitive that no civilized elite can take it seriously. ..."
"... I also understand Eisenhower hypocritical laments that "train with MIC left the station" and that the situation can't be reversed (lament disguised as a "warning"; let's remember that it was Eisenhower who appointed Allen Dulles to head the CIA. ..."
>US hegemony is imposed militarily, both covertly and overtly, throughout the world. It is maintained through the petrodollar,
corporate power, and the Federal Reserve Bank and its overseas counterparts
All true, but the key element is missing. The USA hegemony is based on ideological hegemony of neoliberalism. And BTW both
Russia and China are neoliberal countries. That's probably why President Putin calls the USA administration "partners," despite
clearly anti-Russian policies of all US administrations since 1991.
Ability to use military is important but secondary. Without fifth column of national elites which support neoliberalism that
would be impossible, or at least more difficult to use. Like it was when the USSR existed (Vietnam, Cuba, etc). The USSR has had
pretty powerful military, which was in some narrow areas competitive, or even superior to the USA, but when the ideology of Bolshevism
collapsed, the elite changed sides and adopted a neoliberal ideology. This betrayal led to the collapse of the USSR and all its
mighty military and the vast KGB apparatus proved to be useless.
In this sense, the article is weak, and some comments are of a higher level than the article itself in the level of understanding
of the situation (Simon in London at December 21, 2018, at 9:23 am one example; longevity of neoliberalism partially is connected
to the fact that so far there is no clear alternative to it and without the crisis similar to Great Depression adoption of New
Deal style measures is impossible )
It is really sad that the understanding that the destiny of the USA is now tied to the destiny of neoliberalism (much like
the USSR and Bolshevism) is foreign for many.
So it might well be that the main danger for the US neoliberal empire now is not China or Russia, but the end of cheap oil,
which might facilitate the collapse of neoliberalism as a social system based on wasteful use on commodities (and first of all
oil)
One fascinating fact that escapes my understanding is why the USA elite wasted colossal advantage it got after the collapse
of the USSR in just 25 years or so. I always thought that the USA elite is the most shrewd out of all countries.
May be because they were brainwashed by neocon "intellectuals." I understand that most neocons are simply lobbyists of MIC,
and MIC has huge political influence, but still neocon doctrine is so primitive that no civilized elite can take it seriously.
I also understand Eisenhower hypocritical laments that "train with MIC left the station" and that the situation can't be reversed
(lament disguised as a "warning"; let's remember that it was Eisenhower who appointed Allen Dulles to head the CIA.
"... Aditya Chakrabortty ( It's reckless. But a Tory cash splurge could win an election , 3 July) is right to point out the hypocrisy of the political right about public expenditure. While progressive proposals for public spending are decried as burdening the hard-pressed taxpayer, the right is happy to use public money to rescue the banks or boost their electoral chances. ..."
"... As I explain in my book Money: Myths, Truths and Alternatives, neoliberal economics is built on a fairytale about money that distorts our view of how a contemporary public money system operates. It is assumed that public spending depends on extracting money from the market and that money (like gold) is always in short supply. Neither is true. Both the market and the state generate money – the market through bank lending and the state through public spending. Both increase the money supply, while bank loan repayments and taxation reduce it. There is no natural shortage of money – which today mainly exists only as data. ..."
Neoliberal economics and other fairytales about money Politics is not about a
struggle over a fixed pot of money, says Mary Mellor, and the best way to end austerity is to
reject it as an ideology, says Peter McKenna
Aditya Chakrabortty (
It's reckless. But a Tory cash splurge could win an election , 3 July) is right to point
out the hypocrisy of the political right about public expenditure. While progressive proposals
for public spending are decried as burdening the hard-pressed taxpayer, the right is happy to
use public money to rescue the banks or boost their electoral chances.
As I explain in my book Money: Myths, Truths and Alternatives, neoliberal economics is built
on a fairytale about money that distorts our view of how a contemporary public money system
operates. It is assumed that public spending depends on extracting money from the market and
that money (like gold) is always in short supply. Neither is true. Both the market and the
state generate money – the market through bank lending and the state through public
spending. Both increase the money supply, while bank loan repayments and taxation reduce it.
There is no natural shortage of money – which today mainly exists only as data.
The case for austerity missed the point. Politics is not about a struggle over a fixed pot
of money. What is limited are resources (particularly the environment) and human capacity. How
these are best used should be a matter of democratic debate. The allocation of money should
depend on the priorities identified. In this the market has no more claim than the public
economy to be the source of sustainable human welfare.
Professor Mary Mellor Newcastle upon Tyne
• Over the years Aditya Chakrabortty has provided us with powerful critiques of
austerity. His message now – that EU membership "is the best way to end austerity"
– overlooks the fact that the UK was in the EU all that time.
Moreover, the EU's stability and growth pact requires that budget deficits and public debt
be pegged below 3% and 60% of GDP respectively.
Such notions are the beating heart of austerity, and the European commission's excessive
deficit procedure taken against errant states has almost universally resulted in swingeing
austerity programmes. These were approved and monitored by the commission and council, with the
UK only taken off the naughty step in 2017 after years of crippling austerity finally reduced
the deficit to 2.3% of GDP.
The best way to end austerity – and to sway voters – is to reject austerity as
an ideology regardless of remain or leave, and rehabilitate the concept of public investment in
a people's economy.
Peter McKenna
"... "the administrator uses social science the way the drunk uses a lamppost, for support rather than illumination." Scholars' disinclination to be used in this way helps explain more of the distance. ..."
The evidence suggests that foreign policymakers do not seek insight from scholars, but
rather support for what they already want to do.
As Desch quotes a World War II U.S. Navy anthropologist, "the administrator uses social
science the way the drunk uses a lamppost, for support rather than illumination." Scholars'
disinclination to be used in this way helps explain more of the distance.
"... Early in any psychology course, students are taught to be very cautious about accepting people's reports. A simple trick is to stage some sort of interruption to the lecture by confederates, and later ask the students to write down what they witnessed. Typically, they will misremember the events, sequences and even the number of people who staged the tableaux. Don't trust witnesses, is the message. ..."
"... The three assumptions -- lack of rationality, stubbornness, and costs -- imply that there is slim chance that people can ever learn or be educated out of their biases; ..."
"... So, are we as hopeless as some psychologists claim we are? In fact, probably not. Not all the initial claims have been substantiated. For example, it seems we are not as loss averse as previously claimed. Does our susceptibility to printed visual illusions show that we lack judgement in real life? ..."
"... Well the sad fact is that there's nobody in the position to protect "governments" from their own biases, and "scientists" from theirs ..."
"... Long ago a lawyer acquaintance, referring to a specific judge, told me that the judge seemed to "make shit up as he was going along". I have long held psychiatry fits that statement very well. ..."
"... Here we have a real scientist fighting the nonsense spreading from (neoclassical) economics into other realms of science/academia. ..."
"... Behavioral economics is a sideline by-product of neoclassical micro-economic theory. It tries to cope with experimental data that is inconsistent with that theory. ..."
"... Everything in neoclassical economics is a travesty. "Rational choice theory" and its application in "micro economics" is false from the ground up. It basically assumes that people are gobbling up resources without plan, meaning or relevant circumstances. Neoclassical micro economic theory is so false and illogical that I would not know where to start in a comment, so I should like to refer to a whole book about it: Keen, Steve: "Debunking economics". ..."
"... As the theory is totally wrong it is really not surprising that countless experiments show that people do not behave the way neoclassical theory predicts. How do economists react to this? Of course they assume that people are "irrational" because they do not behave according to their studied theory. (Why would you ever change your basic theory because of some tedious facts?) ..."
"... The title of the 1st ed. of Keen's book was "Debunking Economics: The Naked Emperor of the Social Sciences" which was simply a perfect title. ..."
Early in any psychology course, students are taught to be very cautious about accepting people's reports. A simple trick is
to stage some sort of interruption to the lecture by confederates, and later ask the students to write down what they witnessed.
Typically, they will misremember the events, sequences and even the number of people who staged the tableaux. Don't trust witnesses,
is the message.
Another approach is to show visual illusions, such as getting estimates of line lengths in the Muller-Lyer illusion, or studying
simple line lengths under social pressure, as in the Asch experiment, or trying to solve the Peter Wason logic problems, or the puzzles
set by Kahneman and Tversky. All these appear to show severe limitations of human judgment. Psychology is full of cautionary tales
about the foibles of common folk.
As a consequence of this softening up, psychology students come to regard themselves and most people as fallible, malleable, unreliable,
biased and generally irrational. No wonder psychologists feel superior to the average citizen, since they understand human limitations
and, with their superior training, hope to rise above such lowly superstitions.
However, society still functions, people overcome errors and many things work well most of the time. Have psychologists, for one
reason or another, misunderstood people, and been too quick to assume that they are incapable of rational thought?
He is particularly interested in the economic consequences of apparent irrationality, and whether our presumed biases really result
in us making bad economic decisions. If so, some argue we need a benign force, say a government, to protect us from our lack of capacity.
Perhaps we need a tattoo on our forehead: Diminished Responsibility.
The argument leading from cognitive biases to governmental paternalism -- in short, the irrationality argument -- consists
of three assumptions and one conclusion:
1. Lack of rationality. Experiments have shown that people's intuitions are systematically biased.
2. Stubbornness. Like visual illusions, biases are persistent and hardly corrigible by education.
3. Substantial costs. Biases may incur substantial welfare-relevant costs such as lower wealth, health, or happiness.
4. Biases justify governmental paternalism. To protect people from theirbiases, governments should "nudge" the public
toward better behavior.
The three assumptions -- lack of rationality, stubbornness, and costs -- imply that there is slim chance that people can ever
learn or be educated out of their biases; instead governments need to step in with a policy called libertarian paternalism (Thaler
and Sunstein, 2003).
So, are we as hopeless as some psychologists claim we are? In fact, probably not. Not all the initial claims have been substantiated.
For example, it seems we are not as loss averse as previously claimed. Does our susceptibility to printed visual illusions show that
we lack judgement in real life?
In Shepard's (1990) words, "to fool a visual system that has a full binocular and freely mobile view of a well-illuminated scene
is next to impossible" (p. 122). Thus, in psychology, the visual system is seen more as a genius than a fool in making intelligent
inferences, and inferences, after all, are necessary for making sense of the images on the retina.
Most crucially, can people make probability judgements? Let us see. Try solving this one:
A disease has a base rate of .1, and a test is performed that has a hit rate of .9 (the conditional probability of a positive
test given disease) and a false positive rate of .1 (the conditional probability of a positive test given no disease). What is
the probability that a random person with a positive test result actually has the disease?
Most people fail this test, including 79% of gynaecologists giving breast screening tests. Some researchers have drawn the conclusion
that people are fundamentally unable to deal with conditional probabilities. On the contrary, there is a way of laying out the problem
such that most people have no difficulty with it. Watch what it looks like when presented as natural frequencies:
Among every 100 people, 10 are expected to have a disease. Among those 10, nine are expected to correctly test positive. Among
the 90 people without the disease, nine are expected to falsely test positive. What proportion of those who test positive actually
have the disease?
In this format the positive test result gives us 9 people with the disease and 9 people without the disease, so the chance that
a positive test result shows a real disease is 50/50. Only 13% of gynaecologists fail this presentation.
Summing up the virtues of natural frequencies, Gigerenzer says:
When college students were given a 2-hour course in natural frequencies, the number of correct Bayesian inferences increased
from 10% to 90%; most important, this 90% rate was maintained 3 months after training (Sedlmeier and Gigerenzer, 2001). Meta-analyses
have also documented the "de-biasing" effect, and natural frequencies are now a technical term in evidence-based medicine (Akiet
al., 2011; McDowell and Jacobs, 2017). These results are consistent with a long literature on techniques for successfully teaching
statistical reasoning (e.g., Fonget al., 1986). In sum, humans can learn Bayesian inference quickly if the information is presented
in natural frequencies.
If the problem is set out in a simple format, almost all of us can all do conditional probabilities.
I taught my medical students about the base rate screening problem in the late 1970s, based on: Robyn Dawes (1962) "A note on
base rates and psychometric efficiency". Decades later, alarmed by the positive scan detection of an unexplained mass, I confided
my fears to a psychiatrist friend. He did a quick differential diagnosis on bowel cancer, showing I had no relevant symptoms, and
reminded me I had lectured him as a student on base rates decades before, so I ought to relax. Indeed, it was false positive.
Here are the relevant figures, set out in terms of natural frequencies
Every test has a false positive rate (every step is being taken to reduce these), and when screening is used for entire populations
many patients have to undergo further investigations, sometimes including surgery.
Setting out frequencies in a logical sequence can often prevent misunderstandings. Say a man on trial for having murdered his
spouse has previously physically abused her. Should his previous history of abuse not be raised in Court because only 1 woman in
2500 cases of abuse is murdered by her abuser? Of course, whatever a defence lawyer may argue and a Court may accept, this is back
to front. OJ Simpson was not on trial for spousal abuse, but for the murder of his former partner. The relevant question is: what
is the probability that a man murdered his partner, given that she has been murdered and that he previously battered her.
Accepting the figures used by the defence lawyer, if 1 in 2500 women are murdered every year by their abusive male partners, how
many women are murdered by men who did not previously abuse them? Using government figures that 5 women in 100,000 are murdered every
year then putting everything onto the same 100,000 population, the frequencies look like this:
So, 40 to 5, it is 8 times more probable that abused women are murdered by their abuser. A relevant issue to raise in Court about
the past history of an accused man.
Are people's presumed biases costly, in the sense of making them vulnerable to exploitation, such that they can be turned into
a money pump, or is it a case of "once bitten, twice shy"? In fact, there is no evidence that these apparently persistent logical
errors actually result in people continually making costly errors. That presumption turns out to be a bias bias.
Gigerenzer goes on to show that people are in fact correct in their understanding of the randomness of short sequences of coin
tosses, and Kahneman and Tversky wrong. Elegantly, he also shows that the "hot hand" of successful players in basketball is a real
phenomenon, and not a stubborn illusion as claimed.
With equal elegance he disposes of a result I had depended upon since Slovic (1982), which is that people over-estimate the frequency
of rare risks and under-estimate the frequency of common risks. This finding has led to the belief that people are no good at estimating
risk. Who could doubt that a TV series about Chernobyl will lead citizens to have an exaggerated fear of nuclear power stations?
The original Slovic study was based on 39 college students, not exactly a fair sample of humanity. The conceit of psychologists
knows no bounds. Gigerenzer looks at the data and shows that it is yet another example of regression to the mean. This is an apparent
effect which arises whenever the predictor is less than perfect (the most common case), an unsystematic error effect, which is already
evident when you calculate the correlation coefficient. Parental height and their children's heights are positively but not perfectly
correlated at about r = 0.5. Predictions made in either direction will under-predict in either direction, simply because they are
not perfect, and do not capture all the variation. Try drawing out the correlation as an ellipse to see the effect of regression,
compared to the perfect case of the straight line of r= 1.0
What diminishes in the presence of noise is the variability of the estimates, both the estimates of the height of the sons based
on that of their fathers, and vice versa. Regression toward the mean is a result of unsystematic, not systematic error (Stigler,1999).
Gigerenzer also looks at the supposed finding that people are over-confidence in predictions, and finds that it is another regression
to the mean problem.
Gigerenzer then goes on to consider that old favourite, that most people think they are better than average, which supposedly
cannot be the case, because average people are average.
Consider the finding that most drivers think they drive better than average. If better driving is interpreted as meaning fewer
accidents, then most drivers' beliefs are actually true. The number of accidents per person has a skewed distribution, and an
analysis of U.S. accident statistics showed that some 80% of drivers have fewer accidents than the average number of accidents
(Mousavi and Gigerenzer, 2011)
Then he looks at the classical demonstration of framing, that is to say, the way people appear to be easily swayed by how the
same facts are "framed" or presented to the person who has to make a decision.
A patient suffering from a serious heart disease considers high-risk surgery and asks a doctor about its prospects.
The doctor can frame the answer in two ways:
Positive Frame: Five years after surgery, 90% of patients are alive.
Negative Frame: Five years after surgery, 10% of patients are dead.
Should the patient listen to how the doctor frames the answer? Behavioral economists say no because both frames are logically
equivalent (Kahneman, 2011). Nevertheless, people do listen. More are willing to agree to a medical procedure if the doctor uses
positive framing (90% alive) than if negative framing is used (10% dead) (Moxeyet al., 2003). Framing effects challenge the assumption
of stable preferences, leading to preference reversals. Thaler and Sunstein (2008) who presented the above surgery problem, concluded
that "framing works because people tend to be somewhat mindless, passive decisionmakers" (p. 40)
Gigerenzer points out that in this particular example, subjects are having to make their judgements without knowing a key fact:
how many survive without surgery. If you know that you have a datum which is more influential. These are the sorts of questions patients
will often ask about, and discuss with other patients, or with several doctors. Furthermore, you don't have to spin a statistic.
You could simply say: "Five years after surgery, 90% of patients are alive and 10% are dead".
Gigerenzer gives an explanation which is very relevant to current discussions about the meaning of intelligence, and about the
power of intelligence tests:
In sum, the principle of logical equivalence or "description invariance" is a poor guide to understanding how human intelligence
deals with an uncertain world where not everything is stated explicitly. It misses the very nature of intelligence, the ability
to go beyond the information given (Bruner, 1973)
The key is to take uncertainty seriously, take heuristics seriously, and beware of the bias bias.
One important conclusion I draw from this entire paper is that the logical puzzles enjoyed by Kahneman, Tversky, Stanovich and
others are rightly rejected by psychometricians as usually being poor indicators of real ability. They fail because they are designed
to lead people up the garden path, and depend on idiosyncratic interpretations.
Critics of examinations of either intellectual ability or scholastic attainment are fond of claiming that the items are "arbitrary".
Not really. Scholastic tests have to be close to the curriculum in question, but still need to a have question forms which are simple
to understand so that the stress lies in how students formulate the answer, not in how they decipher the structure of the question.
Intellectual tests have to avoid particular curricula and restrict themselves to the common ground of what most people in a community
understand. Questions have to be super-simple, so that the correct answer follows easily from the question, with minimal ambiguity.
Furthermore, in the case of national scholastic tests, and particularly in the case of intelligence tests, legal authorities will
pore over the test, looking at each item for suspected biases of a sexual, racial or socio-economic nature. Designing an intelligence
test is a difficult and expensive matter. Many putative new tests of intelligence never even get to the legal hurdle, because they
flounder on matters of reliability and validity, and reveal themselves to be little better than the current range of assessments.
In conclusion, both in psychology and behavioural economics, some researchers have probably been too keen to allege bias in cases
where there are unsystematic errors, or no errors at all. The corrective is to learn about base rates, and to use natural frequencies
as a guide to good decision-making.
Don't bother boosting your IQ. Boost your understanding of natural frequencies.
Good concrete advice. Perhaps even more useful for those who need to explain things like this to others than for those seeking
to understand for themselves.
"intelligence deals with an uncertain world where not everything is stated explicitly. It misses the very nature of intelligence,
the ability to go beyond the information given (Bruner, 1973)"
"The key is to take uncertainty seriously, take heuristics seriously, and beware of the bias bias."
Actually I think this is an example of an increasingly common genre of malapropism, where the writer gropes for the right word,
finds one that is similar, and settles for that. The worst of it is that readers intuitively understand what was intended, and
then adopt the marginally incorrect usage themselves. That's perhaps how the world and his dog came to say "literally" when they
mean "figuratively". Maybe a topic for a future article?
In 2009 Google finished engineering a reverse search engine to find out what kind of searches people did most often. Seth Davidowitz
and Steven Pinker wrote a very fascinating/entertaining book using the tool called Everybody Lies
Everybody Lies offers fascinating, surprising, and sometimes laugh-out-loud insights into everything from economics to ethics
to sports to race to sex, gender, and more, all drawn from the world of big data. What percentage of white voters didn't vote
for Barack Obama because he's black? Does where you go to school effect how successful you are in life? Do parents secretly
favor boy children over girls? Do violent films affect the crime rate? Can you beat the stock market? How regularly do we lie
about our sex lives, and who's more self-conscious about sex, men or women?
Investigating these questions and a host of others, Seth Stephens-Davidowitz offers revelations that can help us understand
ourselves and our lives better. Drawing on studies and experiments on how we really live and think, he demonstrates in fascinating
and often funny ways the extent to which all the world is indeed a lab. With conclusions ranging from strange-but-true to thought-provoking
to disturbing, he explores the power of this digital truth serum and its deeper potential – revealing biases deeply embedded
within us, information we can use to change our culture, and the questions we're afraid to ask that might be essential to our
health – both emotional and physical. All of us are touched by big data every day, and its influence is multiplying. Everybody
Lies challenges us to think differently about how we see it and the world.
I shall treat this posting (for which many thanks, doc) as an invitation to sing a much-loved song: everybody should read Gigerenzer's
Reckoning with Risk. With great clarity it teaches what everyone ought to know about probability.
(It could also serve as a model for writing in English about technical subjects. Americans and Britons should study the English
of this German – he knows how, you know.)
Inspired by "The original Slovic study was based on 39 college students" I shall also sing another favorite song. Much of Psychology
is based on what small numbers of American undergraduates report they think they think.
" Gigerenzer points out that in this particular example, subjects are having to make their judgements without knowing a key fact:
how many survive without surgery. "
This one reminds of the false dichotomy. The patient has additional options! Like changing diet, and behaviours such as exercise,
elimination of occupational stress , etc.
The statistical outcomes for a person change when the person changes their circumstances/conditions.
@Tom
Welsh A disposition (conveyance) of an awkwardly shaped chunk out of a vast estate contained reference to "the slither of
ground bounded on or towards the north east and extending two hundred and twenty four meters or thereby along a chain link fence "
Not poor clients (either side) nor cheap lawyers. And who never erred?
Better than deliberately inserting "errors" to guarantee a stream of tidy up work (not unknown in the "professional" world)
in future.
Good article. 79% of gynaecologists fail a simple conditional probability test?! Many if not most medical research papers use
advanced statistics. Medical doctors must read these papers to fully understand their field. So, if medical doctors don't fully
understand them, they are not properly doing their job. Those papers use mathematical expressions, not English. Converting them
to another form of English, instead of using the mathematical expressions isn't a solution.
Regarding witnesses: When that jet crashed into Rockaway several years ago, a high percentage of witnesses said that they saw
smoke before the crash. But there was actually no smoke. The witnesses were adjusting what they saw to conform to their past experience
of seeing movie and newsreel footage of planes smoking in the air before a crash. Children actually make very good witnesses.
Regarding the chart. Missing, up there in the vicinity of cancer and heart disease. The third-leading cause of death. 250,000
per year, according to a 2016 Hopkins study. Medical negligence.
1. Lack of rationality. Experiments have shown that people's intuitions are systematically biased.
2. Stubbornness. Like visual illusions, biases are persistent and hardly corrigible by education.
3. Substantial costs. Biases may incur substantial welfare-relevant costs such as lower wealth, health, or happiness.
4. Biases justify governmental paternalism. To protect people from theirbiases, governments should "nudge" the public toward
better behavior.
Well the sad fact is that there's nobody in the position to protect "governments" from their own biases, and "scientists"
from theirs.
So, behind the smoke of all words and rationalisations, the law is unchanged: everyone strives to gain and exert as much power
as possible over as many others as possible. Most do that without writing papers to say it is right, others write papers,
others books. Anyway, the fundamental law would stay as it is even if all this writing labour was spared, wouldn't it?
But then another fundamental law, the law of framing all one's drives as moral and beneffective comes into play the papers
and the books are useful, after all.
An interesting article. However, I think that the only thing we have to know about how illogical psychiatry is this:
In 1973, the American Psychiatric Association (APA) asked all members attending its convention to vote on whether they believed
homosexuality to be a mental disorder. 5,854 psychiatrists voted to remove homosexuality from the DSM, and 3,810 to retain
it.
The APA then compromised, removing homosexuality from the DSM but replacing it, in effect, with "sexual orientation disturbance"
for people "in conflict with" their sexual orientation. Not until 1987 did homosexuality completely fall out of the DSM.
The article makes no mention of the fact that no "new science" was brought to support the resolution.
It appears that the psychiatrists were voting based on feelings rather than science. Since that time, the now 50+ genders have
been accepted as "normal" by the APA. My family has had members in multiple generations suffering from mental illness. None were
"cured". I know others with the same circumstances.
How does one conclude that being repulsed by the prime directive of every
living organism – reproduce yourself – is "normal"? That is not to say these people are horrible or evil, just not normal. How
can someone, who thinks (s)he is a cat be mentally ill, but a grown man thinking he is a female child is not?
Long ago a lawyer acquaintance, referring to a specific judge, told me that the judge seemed to "make shit up as he was going
along". I have long held psychiatry fits that statement very well.
Thank you for this article. I find the information about the interpretation of statistical data very interesting. My take on the
background of the article is this:
Here we have a real scientist fighting the nonsense spreading from (neoclassical) economics into other realms of science/academia.
Behavioral economics is a sideline by-product of neoclassical micro-economic theory. It tries to cope with experimental
data that is inconsistent with that theory.
Everything in neoclassical economics is a travesty. "Rational choice theory" and its application in "micro economics" is
false from the ground up. It basically assumes that people are gobbling up resources without plan, meaning or relevant circumstances.
Neoclassical micro economic theory is so false and illogical that I would not know where to start in a comment, so I should like
to refer to a whole book about it:
Keen, Steve: "Debunking economics".
As the theory is totally wrong it is really not surprising that countless experiments show that people do not behave the
way neoclassical theory predicts. How do economists react to this? Of course they assume that people are "irrational" because
they do not behave according to their studied theory. (Why would you ever change your basic theory because of some tedious facts?)
We live in a strange world in which such people have control over university faculties, journals, famous prizes. But at least
we have some scientists who defend their area of knowledge against the spreading nonsense produced by economists.
The title of the 1st ed. of Keen's book was "Debunking Economics: The Naked Emperor of the Social Sciences" which was simply
a perfect title.
As economist Russ Roberts once wrote in the
Wall Street Journal,
"The economy is a complex system, our data are imperfect and our models inevitably fail to
account for all the interactions. The bottom line is that we should expect less of
economists. Economics is a powerful tool, a lens for organizing one's thinking about the
complexity of the world around us. That should be enough. We should be honest about what we
know, what we don't know and what we may never know. Admitting that publicly is the first
step toward respectability."
In the same vein, I would urge new graduates to be skeptical of those in power who flatter
them with the lie that they can, if only they are sufficiently resolute, solve big social
problems through government interventions. The truth is that even the best-intentioned
government officials do not -- indeed, cannot possibly -- have the knowledge necessary to
deliver on any grand promises.
Sadly, this lack of knowledge never stops politicians from spending all of their time
pretending that they know it all and none of their time humbly reflecting on the arrogance of
attempts to boss the rest of us around. Making matters worse is the fact that the
decision-making process in government is not conducive to the best policies. Quite the
opposite, in fact. See, politicians spend other people's money and are unduly influenced by
special interests. As such, their interests are never served by their taking account of the
true costs of their programs, or acknowledging the (too-often invisible) victims of their
interventions.
Sometime neoliberal economics act as the Thought Police. Peddling neoclassic economy bullshit
create a dreadful environments of a cult and there are enforces on each corner to ensure students
indoctrination.
Economists are ideologically biased - finds a survey of their views on modern economies
conducted by Mark Horowitz, Associate Professor of Sociology at Seton Hall University, New
Jersey, entitled Political Identity and Economists' Perceptions of Capitalist Crises.
"Surveying academic economists in the United States, we find the field quite skeptical
of the prospects of capitalist crises. Despite considerable consensus, political orientation
is a highly significant predictor of respondents' outlooks."
"economists are generally skeptical of the prospects of capitalist crises. Very few see
mass structural unemployment on the horizon due to automation (Q2) or incompatibility between
capitalism and secure or meaningful employment (Q4, Q5). Only a third or so anticipates
global financial contagion (Q1), while even fewer affirm a systemic tendency toward monopoly
(Q11). Finally, at least two-thirds believe the global economy will likely be capitalist in
200 years (Q8)".
Marx on 'vulgar political economy': "It was henceforth no longer a question, whether
this theorem or that was true, but whether it was useful to capital or harmful, expedient or
inexpedient, politically dangerous or not. In place of disinterested enquirers, there were
hired prize-fighters; in place of genuine scientific research, the bad conscience and the
evil intent of apologetic"
I
frequently refer to Gillian
Tett's Fools' Gold as an account of ethical mathematical practice. Tett explains how
J.P. Morgan came out of the 2008-2009 Financial Crisis because it used mathematics critically
rather than blindly accepting the outputs of "black boxes". I felt the approach Tett described
was oddly discordant with the attitude of mathematicians. During the crisis, I co-ordinated
a response from UK mathematicians, through the Council of Mathematical Sciences, to
criticism of the use of mathematics in finance, this information was also passed onto the UK
Science Minister of the time.
The standard response from (senior) UK mathematicians was along the lines that finance
hadn't used mathematics but abused it.
The solution was to have "more" and "better" mathematicians. This was underpinned by some
adopting a logical positivist line, attributed to Hume, that the role of mathematicians is to
describe the world as it is, not as it ought to be.
At the time I felt mathematicians were not examining the role of their discipline in the
crisis; they were not behaving ethically. This was the start of my journey that transformed
me from an "uncritical" (unethical?) mathematician to someone who feels mathematics is vital,
so long as it is critical.
I'm gratified that there seems to be general acceptance of the core secular stagnation
argument. "Normal" policy settings of real interest rates in the 2 percent range, balanced
primary budgets and stable financial markets are a prescription for stagnation and
underemployment. Such economic success as the industrial world has enjoyed in recent decades
has reflected a combination of very low real rates, big budget deficits, private leveraging up
and asset bubbles.
No one from whom I have heard doubts the key conclusion that a combination of meaningfully
positive real interest rates and balanced budgets would likely be a prescription for sustained
recession if not depression in the industrial world.
Notice that this is a much more fundamental argument than the suggestion that the some
effective lower bound on interest rates may impede stabilizing the economy. The argument is
that because of chronic private sector tendency towards oversaving, economies may be prone to
underemployment and financial stability absent policy responses which are themselves
problematic.
This is an argument much more in the spirit of Keynes, the early Keynesians, and today's
Post-Keynesians than the New Keynesians who have set the terms for much of contemporary
macroeconomic discourse both in academia and in the world's central banks.
The central feature of New Keynesian models is an idea that economies have an equilibrium to
which they naturally revert independent of policies pursued. Good central bank policy achieves
a desired inflation target (assumed to be feasible) while minimizing the amplitude of
fluctuations around that equilibrium.
In contrast contemporary experience, where inflation has been below target almost throughout
the industrial world for a decade and is expected by markets to remain below target for
decades, and where output is sustained only by large budget deficits or extraordinary monetary
policies, suggest that central banks acting alone cannot necessarily attain inflation targets
and that misguided policy could easily not just raise the volatility of output but also reduce
its average level.
While there seems to be little doubt that real interest rates–short and long, ex ante
and ex post -- have declined very substantially even as (other things equal) budget deficits
and expanded social security programs should have increased them, there remains debate about
how to analyze these trends. Lukasz and I argue that adjustment to balance saving and
investment is the best way understand declining real rates. DeLong wonders about changing risk
premiums and Wolf cites BIS work arguing that low rates reflect the monetary policy regime.
There is no reason why there needs to be only one cause of low real rates so these factors may
enter. But as I expect we will illustrate in the revised version of the paper, the largest part
of the low frequency variation in ex ante real returns is accounted for by a downward trending
factor common to all asset prices. This is illustrated for the US in the figure below. So risk
premiums or factors specific to Treasuries are likely not high order.
Figure: Decline in US real asset returns
Granting that secular stagnation is a problem, there is the question of policy response. The
right policy response will be the one that assures that full employment is maintained with a
minimum of collateral problems. Sandbu argues against the notion of secular stagnation in part
because he thinks it may lead in unconstructive directions like protectionism and because he
believes that stagnation issues can be feasibly and relatively easily addressed by lowering
rates. Wolf, relying on the BIS, is alarmed by the toxic effects of very low rates on financial
stability in the short run and economic performance in the long run, and prefers fiscal
stimulus. Leonhardt prefers a broad menu of measures to absorb saving and promote
investment.
I am not certain of the right approach and I wish there was more evidence to bring to bear
on the question. I can certain see the logic of the "zero is just another number" view, that
holds that the current environment poses no new fundamental issues but just may require
technical changes to make more negative interest rates possible. I am skeptical because (i) I
am not sure how large the stimulus effect of rates going more negative is because of damage to
banks, reduced interest income for consumers, and because capital cost is already not the
barrier to investment; (ii) I wonder about the quality of any investment that was not made at a
zero rate but was made at a negative rate; and (iii) I suspect that a world of significantly
negative nominal rates if sustained will be a world of leveraging, risk seeking and bubbles. I
have trouble thinking about behavior in situations where people and firms are paid to
borrow!
I am inclined to prefer more reliance on reasonably managed fiscal policies as a response to
secular stagnation: government borrowing at negative real rates and investing seems very
attractive in a world where there are many projects with high social returns. Moreover, we are
accustomed to thinking in terms of debt levels but it may be more appropriate to think in terms
of sustained debt service levels. With near zero rates these are below average in most
industrial countries. The content of fiscal policies is crucial. Measures which run up
government debt without stimulating demand like large parts of the Trump tax cut are ill
advised. In contrast measures which promote investment and raise the tax base down the road are
much more attractive.
There are of course other measures beyond stabilization policies like fighting monopolies,
promoting a more equal income distribution, and strengthening retirement security for which the
desire to maintain macroeconomic stability provides an additional rationale.
That's what neoliberal bottomfeeders like Summers, Krugman and Dejong should read and
memorize
Notable quotes:
"... Neoclassical economics became important in large measure to show that markets delivered efficient outcomes, and efficiency was seen as tantamount to socially desirable. That's before considering that highly efficiency almost always comes at the expense of safety and robustness, and that efficient solutions may not be equitable. ..."
"... So, maybe the proper distinction to be made is between "trustworthy" experts and "untrustworthy" ones. The question then become what makes experts trustworthy -- not, I should stress, intrinsically trustworthy, but rather perceived by the public to be so. ..."
"... The third point is that trust in expertise seems to be quite generally declining. This is partly perhaps because education is more widespread, which makes possession of an education appear in itself less authoritative. It is also partly because of the rapid dissemination of information. It is partly because of the easy formation of groups of the disaffected and dissemination of conspiracy theories. The internet and the new social media it has spawned have turned out to be powerful engines for the spreading of disinformation aimed at manipulation of the unwary. ..."
Yves
here. Even though Martin Wolf's post makes many important observations, I feel the need to take
issue with his conclusion. Economists have been and continue to be enormously successful as
experts. PhDs in economics make roughly twice as much as those in other social sciences.
Economists are the only social scientists to have a seat at the policy table. And they continue
to do so, despite their colossal failure in the global financial crisis, with no serious change
in the discipline and no loss of reputation of any prominent economists.
Neoclassical economics became important in large measure to show that markets delivered
efficient outcomes, and efficiency was seen as tantamount to socially desirable. That's before
considering that highly efficiency almost always comes at the expense of safety and robustness,
and that efficient solutions may not be equitable.
The importance of economists as policy advisers grew in the post World War II era, after the
USSR managed the impressive feat of industrializing in the 20th century. US officials were
concerned that a command and control economy could beat a messy, consumer oriented capitalist
one, and turned to economists to give guidance on how to achieve high growth rates so as to
produce enough guns and butter.
As for the specific impetus for Wolf's article, it appears to be due to voters ignoring the
dire warnings made by the Remain campaign during the Brexit referendum campaign that Brexit
would have large economic costs. But based on reports after the vote came in, that repudiation
came not just because the public might well have good reason not to believe economists as a
result of the crisis, but how the Remain campaign carried itself in the debates. That side
apparently made arrogant-seeming, data heavy arguments, while the Leavers made stirring appeals
about sovereignty .a UK version of MAGA.
"I think people in this country have had enough of experts."
-Michael Gove
Michael Gove, winner of the Brexit referendum (though loser in the game of politics, having
failed to become leader of his party, and so, maybe, no true expert either) hit the nail on the
head. The people of this country have, it seems, had enough of those who consider themselves
experts, in some domains. The implications of this rejection of experts seem enormous. That
should be of particular significance for economists, because economists were, after all, the
"experts" against whom Mr. Gove was inveighing.
Yet it is not really true that the people of this country have had enough of experts. When
they fall ill, they still go to licensed doctors. When they fly, they trust qualified pilots.
When they want a bridge, they call upon qualified engineers. Even today, in the supposed
"post-fact" world, such people are almost universally recognized as experts.
So, maybe the proper distinction to be made is between "trustworthy" experts and
"untrustworthy" ones. The question then become what makes experts trustworthy -- not, I should
stress, intrinsically trustworthy, but rather perceived by the public to be so.
One might make three, admittedly speculative, points about this distinction between experts
deemed by the public to be deserving of trust and those who are not.
The first is that some forms of expertise appear simply to be more solidly based than others
in a body of theory and/or evidence, with recognizable successes to their credit. By and large,
doctors are associated with cures, pilots with keeping airplanes in the sky and engineers with
bridges that stay up. Such successes -- and there are many other comparable fields of expertise
-- self-evidently make people with the relevant expertise appear trustworthy.
The second is that some forms of expertise are more politically contentious than others.
Nearly everybody, for example, agrees that curing people, flying airplanes and building bridges
are good things. Social and political arrangements -- and economics is inescapably about social
and political arrangements -- are always and everywhere contentious. They affect not only how
people think the human world works, but also how it ought to work. These forms of expertise are
about values.
The third point is that trust in expertise seems to be quite generally declining. This is
partly perhaps because education is more widespread, which makes possession of an education
appear in itself less authoritative. It is also partly because of the rapid dissemination of
information. It is partly because of the easy formation of groups of the disaffected and
dissemination of conspiracy theories. The internet and the new social media it has spawned have
turned out to be powerful engines for the spreading of disinformation aimed at manipulation of
the unwary.
It might be encouraging for economists that they are not the only experts who are
mistrusted. Consider the anti-vaccination movement, hostility to evolutionary theory, or
rejection of climate science. All these are the products of doubts fueled by a combination of
core beliefs and suspicion of particular forms of expertise. The anti-vaccination movement is
driven by parents' concerns about their children. The hostility to evolution is driven by
religion. The rejection of climate science is clearly driven by ideology. Every climate denier
I know is a free marketeer. Is this an accident? No. The desire to believe in the free market
creates an emotional justification for denying climate science. In principle, after all, belief
in free markets and in the physics of the climate system have absolutely nothing to do with
each other.
So economists are in good company with other forms of politically or socially contentious
expertise. But they have a special difficulty. Not only are they engaged in an essentially
controversial, because political, arena, and so also an inherently ideological one, but they
suffer to a high degree from the first point I made above: their "science", if science it is,
just does not look to the public to be solidly based. It does not work as well as the public
wants and economists have claimed. Economists claim a certain scientific status. But much of it
looks to the outsider more like "scientism" -- the use of an incomprehensible intellectual
apparatus to obscure ignorance rather than reveal truth.
This does not mean that economists don't know useful things. It is quite clear that they do.
Markets are extraordinary institutions, for example. Economists' elucidation of markets or of
the principle of comparative advantage is a great intellectual achievement. Yet suspicion of
economics and economists is both long-standing and understandable.
The problem became far more serious after the financial crisis. The popular perception is
that the experts -- macroeconomists and financial economists -- did not appreciate the dangers
before the event and did not understand the longer-run consequences after it. Moreover, the
popular perception seems to be in large part correct. This has damaged the acceptance of the
expertise of economists to a huge extent.
So how, in this suspicious contemporary environment, might economists persuade the public
they are experts who deserve to be listened to?
I decided to ask my colleagues this question. One answered that:
1. Good economists have a clear (if incomplete) understanding of how the world works. This
is a pre-requisite to making it a better place.
2. Economists have a sense of scale. They understand the difference between big and small
and how to make that distinction. This is vital for policy.
3. Economics is all about counterfactuals. It understands the relevant comparators even if
they are difficult to work out.
4. Economists are experts on incentives and motivations and empirically try to measure
them rather than relying on wishful thinking.
5. Generally, good economists are expert in understanding the limits of their knowledge
and forecasting abilities.
Another colleague added:
The general public usually associate economists with:
-A small set of macroeconomic forecasts (growth, inflation mainly), and
-A belief that markets always produce perfect outcomes
And they attribute failure to them if either:
-point forecasts (inevitably) prove wrong, or
-markets produce some bad outcomes
Whereas the expertise of economists is really in the building blocks that enable you to
construct sensible forecasts and to understand how people are likely to behave and respond to
a given set of circumstances/policies. This structure for understanding the world allows
economists to take on board new developments, understand whether they reflect a rejection of
their existing theories or merely a (possibly tail) outcome that was consistent with their
"model," and push forward their understanding of the world from there. Rather than throwing
away all existing wisdom when circumstances change somewhat.
I agree with these propositions. Properly understood, economics remains very useful. One
realizes this as soon as one is engaged with someone who knows nothing at all about the
subject. But I still have four qualifications to make.
First, a large part of what economists actually do, namely forecasting, is not very soundly
based. It would be a good idea if economists stated that loudly, strongly, and repeatedly.
Indeed, there should be ceaseless public campaigning by the professional bodies, emphasizing
what economists don't know. Of course, that would not -- as economists might predict -- be in
their interests.
Second, in important areas of supposed economic expertise, the analytical basis is really
weak. This is true of the operation of the monetary and financial systems. It is also true of
the determinants of economic growth.
Third, economists are not disinterested outsiders. They are part of the political process.
It is crucial to remember that certain propositions favor the interests of powerful people and
groups. Economists can find themselves easily captured by such groups. "Invisible hand"
theorems are particularly open to such abuse.
Finally, the division between economic aspects of society and the rest is, in my view,
analytically unsound. The relationship between, say, economics and sociology or anthropology is
not like that between physics and chemistry. The latter rests upon the former. But economics
and anthropology lie side by side. I increasingly feel that the educated economist, certainly
those engaged in policy, must also understand political science, sociology, anthropology, and
sociology. Otherwise, they will fail to understand what is actually happening.
If I am right, the challenge is not just to purify economics of exaggerated claims, though
that is indeed needed. It is rather to recognize the limited scope of economic knowledge. This
does not mean there is no such thing as economic expertise: there is. But its scope and
generality are more limited than many suppose.
Michael Gove was wrong, in my view, about expertise applied in the Brexit debate. But he was
not altogether wrong about the expertise of economists. If we were more humble and more honest,
we might be better recognized as experts able to contribute to public debate.
With this in mind, what should be the goal of an education in economics at the university
level? A part of the answer will come from developments within the field. In time, the
incorporation of new ideas and techniques may make the academic discipline better at addressing
the intellectual and policy challenges the world now confronts.
Another part of the answer, however, must come from asking what an undergraduate education
ought to achieve. The answer should not be to produce apprentices in a highly technical and
narrow discipline taught as a branch of applied mathematics. For the great majority of those
who learn economics, what matters is appreciation of both a few core ideas and of the
complexity of the economic reality.
At bottom, economics is a field of inquiry and a way of thinking. Among its valuable core
concepts are: opportunity cost, marginal cost, rent, sunk costs, externalities, and effective
demand. Economics also allows people to make at least some sense of debates on growth,
taxation, monetary policy, economic development, inequality, and so forth.
It is unnecessary to possess a vast technical apparatus to understand these ideas. Indeed
the technical apparatus can get in the way of such an understanding. Much of the understanding
can also be acquired in a decent, but not inordinately technical, undergraduate education. That
is what I was fortunate enough to acquire in my own years studying philosophy, politics and
economics at Oxford in the late 1960s. Today, I believe, someone with my background in the
humanities would never become an economist. I am absolutely sure I would not have done so. It
might be arrogant to make this claim. But I think that would have been a pity -- and not just
for me.
In addition, it would be helpful to expose students to some of the heterodox alternatives to
orthodox economics. This can only be selective. But exposure to the ideas of Hyman Minsky, for
example, would be very helpful to anybody seeking to understand the macroeconomic implications
of liberalized finance.
The teaching of economics to undergraduates must focus on core ideas, essential questions,
and actual realities. Such a curriculum might not be the best way to produce candidates for PhD
programs. So be it. The study of economics at university must not be seen through so narrow a
lens. Its purpose is to produce people with a broad economic enlightenment. That is what the
public debate needs. It is what education has to provide.
I am afraid a worse problem with economists is that they don't seem interested in anyone's
opinions except their own.
They even hold ecology in disdain, not having any interest in learning what is, in fact,
the foundational system of their own 'science.' The booms and busts of capitalism show
familiar patterns to ecologists. Why, ecologists even have equations for them!
But I guess ecology is just too simple for the attentions of economists : Stupid animals.
They don't even use money! What kind of economy can that be?
So economists look for models everywhere except where to find them. The hubris of
humanity, not needing to give due attention to the economies of 'animal' societies.
To Yves. Well, I nearly lack the heart to respond, but I feel I must. Taking yesterday's
NC's lessons of looking at a human facing and having eye contact to remain human online, I
now do both – a human sits next to me. I read aloud to her.
Ok, you are a strong advocate of becoming a certified economist. Because 1.they make a lot
of money and 2. only they sit at the policy table.
Further claims made in your preamble: in no particular order of importance: something
about efficient outcomes that may not be equitable; command & control and guns and
butter; and sadly an analysis of Brexit voters in either camp.
(One exception to all that I say is those using MMT, certified, with a degree or not.
Again something I first learned about on NC.)
Yesterday, somewhere in the NC collective was the notion that the above mentioned
economists tell tho' we may be so out of balance with the world that our extinction as a
species is a legitimate issue to discuss, that in the end there ain't any money to not only
not fix the problem but not even deal with it. And these guys/gals you laud? I and others
have argued this gang provided the intellectual nonsense that put us where we are now.
What is your point that Econ grads make the most amount of money compared to what?
Philosophy majors? True or not I still say it's a waste of a life. Not the knowing, but the
being of one. I don't see what value there is for civilization in general but specifically
that just because they make a lot of money, it's good?
All social science grads you say v Econ grads make more money. I doubt that. Seems every
school district requires a PhD in Education, and a PhD in Business is very lucrative (not
saying useful, just pays well).
The policy table. I'm truly baffled as to what you refer. If they are the only ones at
said table then it follows they are the only ones at it. In my long life I'm trying to think
were we ever let an economist have the final say, or even a moderate say in any political,
governmental, or military policy. Some input yes, but deterministic, no. If they were sitting
at their own table, when asked they came to table with those that had the votes, give their
opinion and then left. Sociological impact statements had far bigger influence on policy. And
policy is no more then the data we can agree on to make decisions.
Sure, many governments, NGOs, multinationals all have jobs for economists but in someway
this is self serving, not a necessity. Kuhn's book on "The Structure of Scientific
Revolutions", does a good job of explain how authority gets established, vested, and in the
end becomes useless. That it exists is not an argument that it is necessary or good. That
there needs to be some way to define and explain things economic I no have issue with, that
outside of MMT that is has been, using system theory I don't see it.
As to efficient outcomes that may not be equitable that speaks for itself. It doesn't. No
'may not' about it, said with respect.
As to command & control and guns and butter, seems like a long time ago. A long time
ago, using science to help in making decisions was new and it took awhile to get it right, or
at least to get it working.
(Small note, I have dual US & UK citizenships)
An analysis of Brexit voters in either camp. I can tell you why I voted the way I did but
I need to make an appeal to Stephen Pinker's, "The Blank Slate". Either I have the free will
to make a decision and accept responsibility for it or I don't. I believe I do and did. I
voted to leave and yes their are economic impacts, as well as social, political, historical,
psychological, and philosophical. As did in electing Trump. As did the 1776 revolution, as in
the US Civil War, almost anything. Money is not everything nor the only thing. And the future
isn't what it used to be. The Long Emergency is here.
Hayek liked banding around watery terms like freedom and liberty its when he stopped being
an economist [political theory in times past] and jointed the ranks of ideologues .
Boy are you shooting the messenger. I'm not saying the way the economics discipline has
become influential is a good thing, but that is the way it is. How economics operates as a
discipline is great for economists, so why should they change? So what if their prescription
fail way too often? For instance, there haven't been any bad consequences to anyone who
didn't see the crisis coming and (even worse) advocated bank deregulation, starting with
Larry Summers (but he had plenty of company).
And you are simply wrong about the influence economists have. In the US, CBO budget
scoring is fundamental to how Congress views various proposed programs, even though we have
described how the CBOs methods are crap and the CBO operates as an a big enforcer of deficit
hysteria (as in they play a politicized role). The Fed and other central banks, the most
powerful single government economic actors, are all run by monetary economists. The IMF,
another very powerful institution, has deeply embraced and implements neoliberal policies,
namely, balanced budgets and squeezing labor (labor "reforms"). In the US, economists in op
eds and even in Congressional testimony (see Bernanke for instance) argue for balanced
budgets and argue the supposed necessity of cutting Social Security and Medicare and NEVER
mention cutting military spending. They are acting not just as enforcers of overall spending,
but by advocating what to cut, are influencing priorities.
Back in my former life as an economist-in-training, I ran into ecological economics as a
branch of natural resource economics. It was completely backwards – the extent
ecological theory was brought in didn't extend beyond simple predator-prey-plant models, and
the goal was to find the macroeconomic general equilibrium of biomass in the ecosystem.
That was probably just the most striking example of the institutional close-mindedness I
saw back among the economists.
Mr Wolf says, among the important concepts are "externalities" Like everything that
supports economic activity. Economics reduces the real world to "externalities" and simple
equations about things measured in crude tokens – money. How good can it be then.
Also, "Such a curriculum might not be the best way to produce candidates for PhD programs"
– is that a goal in itself? Like, the world needs a certain amount of economics PhDs
produced? What for?
Prof. Michael Hudson, Prof. Richard Wolff and others have long ago explained what's wrong
with mainstream economics, but that can't be said in FT.
This reminds me of the party press during the Perestroika in the 80ies talking about
reform in a similar soft and obfuscatory of the truth way, full of wishful recommendations,
striking a demurely optimistic tone supposed to convey integrity. It was bullshit and when
the real things started happening, everybody forgot about it, because it had no depth and no
bearing on real life.
It seems obvious to most people that not all values are commensurable with each other. For
instance, things like literary and artistic quality, friendships, and human lives cannot
defensibly be measured in dollar terms. However, this is just what economics attempts to do.
Hence, environmental economics simply aims to put a dollar value on environmental quality (or
degredation). Hence, the entirety of my Labor Economics course was focused on how you place a
monetary value on a human life, when the human happens to die because of their job.
So, I tend to agree with you. The whole discipline is of questionable value, so long as
economists refuse to accept some very basic truths and incorporate much more than money into
their analyses.
That comment strikes me as strange because one of the weaknesses of classical economic
models was the fact that how money works was not part of their inquiry.
In trying to judge the abilities of an expert, the best that most people can do is to see
the results on what they practice. If a doctor has a reputation of getting his patients
drug-addicted, then you would not go to them. If an engineer built a building but the roof
constantly leaked, you would think twice about giving them another contract. But let us think
about how well economists are judged. You might say that a lot of people in the UK discounted
their advice during Brexit but it has been noted that a lot of the Leave campaign was based
in depressed areas. Why were so many areas depressed? Because the people knew that the
government was using the advice of economists as to which areas to prioritize for resources.
And usually that meant London and its outer areas – which voted Remain.
People are fully aware of what happens too when WTO economists go into a country –
social services are cut, public transport is cut way back, the cost of living for the poor
skyrocket while the rich seem to be protected. And take a look at the economic state of the
United States. Wages have flatlined since the 70s, infrastructure is falling into disrepair,
whole swathes of the country are abandoned to their own devices, de-industrialisation is a
fact, etc, etc etc but the point is that the people that were giving all the advice to have
this done were economists like Ken Rogoff and his wonky austerity study. It may have been the
politicians that pulled the trigger but it was economists that were loading the gun.
if you want a breed of economists more grounded in reality, then I would suggest having them
work in a fulfillment center for a week to show the the consequences of what happens when you
get priorities wrong. Certainly they need to study the work of economists like Hyman Minsky
and Susan Strange who had gone out of fashion before the crash but the long and short of it
is to see what works and what does not work. I do not mean to be insulting here but as far as
I can see, modern economic theory has really been a theory for the top 20% and not for the
rest of the population. And now we are seeing the result up close and personal and until this
changes, people will not feel the need to take the advice of economist, even when they
should. Martin Wolf is fortunate in having also a humanities background but how true is that
nowadays?
The sentence " So, maybe the proper distinction to be made is between "trustworthy"
experts and "untrustworthy" ones " is important. Unfortunately, in the article I miss a key
aspect in making that distinction.
I seem to notice that the "trustworthy" areas of expertise in general tend to be removed
from political ideas or preferences. Left or right, liberal or conservative, democrat or
republican, it does not affect the way in which trustworthy experts go about their business.
It does not influence the way in which a doctor cures patients, a pilot flies a plane or an
engineer constructs a bridge. However, as soon as we start discussing things like the
economy, talk is full of "liberal" or "left" economists as opposed to "conservative" or
"right" economics. I have never heard of one bridge being more at risk of collapse because it
was designed by a liberal engineer versus a conservative one, or the other way round. When
discussing the strength of a bridge political leanings simply do not come into play, it is
not a factor like the strength of the steel used. But for all economic debate, these leanings
often seem to be the essence of the discussion.
Given the general public's intensifying distrust of politicians and all things political,
it does not surprise me that disciplines tainted by political colouring (like economics) are
considered "untrustworthy" compared to disciplines where political colouring is not a factor
(like the aforementioned doctors, pilots and engineers).
Since economics *is* in fact very interwoven with politics, I think the general public
will always treat economists the same way they treat politicians, that is with a healthy dose
of distrust. And who can blame them?
Yes, ability vs integrity.
And you can take 10 of the most honest and well meaning people, dedicated to the public good
and advancement of learning, employ them in a structure set up to profit first and ask
questions second, and the whole is going to be not the same as the sum of the parts.
I'd say an unhealthy dose of distrust is more likely and more common.
People tend to treat conventional econospeak as so much blah, blah, blah and then turn
around and credit or discredit what has been said on the basis of the tone with which it was
said.
Economists working for the kleptocracy get a lot of mileage out of sounding serious, while
talking complete rubbish. And, sadly, many economists working the left, get away with lame
one-liners and a rudderless iconoclasm.
I had an e-mail exchange with Mr. Wolf many years ago – before the 2008 crash
– where he basically told me that we live in the best of all possible worlds and that
nothing needs to change – he has changed his tune since then, I suppose to try to avoid
looking like a complete idiot and also to try to deflect criticism on to others. Maybe he has
öearned something in the meantime, but maybe he is just faking for the sake of
appearences.
I think he is faking it. It's the party line. It is the beginning of the neoliberal
Perestroika (see also Brad DeLong).
I quite like to look at it this way – it is very clarifying (as I lived in the
Perestroika) and I recommend it. Don't for a moment trust the Perestroika – it is
half-measures at best and purposeful deception at worst.
" The answer should not be to produce apprentices in a highly technical and narrow
discipline taught as a branch of applied mathematics ." With apologies to Mr. Richter,
economics is taught more like a branch of mathematical sophistry, and that is slighting the
original sophists.
I was an undergraduate studying applied mathematics at the time and place, present day
neoclassical economics was being developed, published and starting to be taught. I can think
of just one economics-and-finance classmate who continued to study mathematics beyond first
year calculus – which everyone had to take.
Our introductory numerical analysis professor was scathing about his colleagues at the
other side of the Quads. He made it quite plain that we could not skip the rigor and "try to
prove something like an economist". Pretty much all the econ students dropped his course when
they discovered that. The specific problem they could not address, can be simply stated. If
you know a number but don't know its error, you don't know the number. The difficulty the
great mass of economists have with just that, excludes economics as a branch of applied
mathematics.
pretty much the sum total of neoclassical economics is trying to work out the
counterfactual of how the economy would work if everyone had more-or-less complete
information to work with.
introduce genuine uncertainty, and pretty much the whole apparatus turns topsy-turvy and
all the "laws" of economics disappear or become highly contingent on circumstances unlikely
to obtain.
"Fixing" economics must start with a wholesale divestment from the idea of this profession
being a "science", said divestment openly promoted by economists themselves. All manner of
hardwired, warped thinking, to say nothing of obstinacy in changing one's views when
confronted with contradictory evidence, results from people believing that they're scientists
practising a real science. When such thinking seeps into the subconscious, the obstinacy is
locked into place and even events of the scale of the GFC aren't enough to shake loose the
erroneous biases held by the mainstream profession.
How else would an entire profession place so much faith in the predictive powers of its
models if not having such faith resting on a (supposed) firm foundation of science? An
engineer designing a beam for a bridge has justifiable faith in continuum mechanics (a real
science) as a sound foundation for their work, economics is devoid of such sound foundations
and its time the profession loudly and publicly declared this in an unprecedented act of
intellectual honesty.
Additionally, we see weak to non-existent culpability enforcement when policy
recommendations put on the table by economists wreck lives (as they have over decades), this
in stark contrast with e.g. an engineer designing a bridge that collapses and kills hundreds.
In other words, economists have outsized influence in matters of policy out of proportion
with the amount of actual skin they have in the game. On the other side, this "economics is a
science" narrative disarms a public already deficient in the marginal capacity for
independent, critical thinking to question anything economists say, said public including
politicians who, as aptly put by the Rev Kev, pull the trigger of a policy gun loaded by
economists.
>. . . economics is devoid of such sound foundations and its time the profession loudly
and publicly declared this in an unprecedented act of intellectual honesty.
Not one economist, with their ass planted firmly on their throne at the policy table, will
admit to that. The operating principle is venality.
Now that they have lost the respect of the peasants, I don't want them to matter again.
What I would like to see is mass firings of eclownomists, so they can experience life as
lived by the peasants, just once. It may even free up resources to pay people to actually do
good things instead of perpetuating one failure after another, and being grossly rewarded for
those failures.
I think he gets the wrong end of the stick here: "Consider the anti-vaccination movement,
hostility to evolutionary theory, or rejection of climate science."
No doubt there are occasions when vaccinations can do serious harm: a niece of mine was
excused a standard vaccination because of a contra-indication in her family medical
history.The anti-vaxers, though, seem to have elevated some small kernel of truth into a
stupid all-encompassing doctrine without giving the matter enough critical thought.
The anti-evolutionists seem to have failed to devote any critical thought to the matter at
all.
But the sceptics about "climate science" have deployed critical thinking to identify this
new religion as being composed largely of incompetence, dishonesty, and hysteria. It's the
likes of old Wolfie who are lacking in critical thought on this issue. Maybe he's one of
those people who is uneducated in science, and so too easily swayed by chaps shouting
excitedly about models, measurements, and so forth.
It's very odd. Goebbels Warming is now old enough that you can check the historical record
of its predictions of dreadful tipping points, of the disappearance of snow from Britain, of
the flooding of this and that Pacific island group, and so on. All false. So why should
anyone rational believe a word of it? After all, almost from the beginning its proponents
believed that the science was settled – it was inarguable. In which case why have their
predictions proved so lousy?
Consult a poet: humankind cannot bear very much reality.
Consult an economist: incentives matter.
So, Yves, you are saying ("Economists are the only social scientists to have a seat at the
policy table," etc.) that economists are like weathermen. They still have a time slot on the
evening news and are respected, even though their accuracy is abysmal. They make a lot of
money doing this.
Basically, this is because we expect very little of economists and because they have
stopped using ordinary language professionally, they have the status equivalent to someone
actually helpful.
I think economics has become an asocial science with too many economists willing to
provide some sort of academic cover for whatever the plutocrats want to do.
I think the analogy to meteorologists is interesting. As an engineer, I have some
perspective on this.
In engineering design, frequent failure of what we design is generally undesirable. So we
have our analytical tools based on both scientific theory and empirical data, and then apply
a factor of safety (sometimes called factor of ignorance, but more accurately is a
recognition that there is a probabilistic distribution of outcomes and the factors of safety
shift the design towards success instead of high probability of failure).
Airline pilots operate similar to engineers in that they aren't flying close to the edge
of the airplane's flight characteristics. Instead they stay in a zone quite a ways away from
what the airplane could potentially do. This is one of the reasons that airplane travel is
very safe, especially compared to car travel.
Meteorologists are trying to make predictions of the most likely scenario which means they
are trying to hit the center of the distribution of the potential outcomes. As a results,
they frequently are shown to have "missed" in that some other lower probability event
occurred instead. Over the past couple of decades, we have gotten used to seeing weather
forecasts with probabilities or ranges of outcomes.
I think the public presentation of economics has two separate problems, but both undermine
economics credibility.
First, economics is a field that is trying to predict the most likely event and the range
of potential outcomes, similar to the weather forecasts, but does not present the predictions
this way. So people don't cut economists slack because their public presentations don't
recognize the range of potential outcomes and the frank recognition of the inaccuracy of
their predictions that we are used to with the weather people, especially once they get past
24 hrs of predictions.
Second, many of the economists that make public predictions are funded by interest groups.
When we see a lawyer on TV, we know that he is being paid by a client to be an advocate and
that is his job as a lawyer. So we may disregard what he has to say but we understand the
context he is speaking in. However, the economists don't say who they are being paid by and
so they are presumed to be independent experts when they are sometimes not. I believe this is
a fundamental ethical issue within the economics profession.
So when the economics predictions (e.g. effects of tax cuts) fail to be accurate, it needs
to be parsed out if it was simply a lower probability event or if the predictions were
intentionally biased to begin with. None of this is well-addressed by the economics
profession, which greatly undermines credibility.
Economists also use the term 'efficiency' to denote pareto optimality, which causes much
confusion.
Especially when communicating with both analytical people of a hard-sciencey or
engineering background (efficiency = a context specific figure,
some-measure-of-output/some-measure-of-input, strict limits in how far you can generalize),
and business people (efficient = low cost)
economists also routinely distinguish the allocative efficiency they focus upon
almost exclusively from the kinds of technical or managerial efficiency that most of the rest
of the world focuses upon, but they rarely admit that their focus is so narrow and does not
generalize to encompass common sense notions of cost and efficiency -- it is almost as if
they want to avoid the critical examination engineering enables while providing double-talk
as cover for business people trying to privatize the profits while socializing the costs.
Let me start by saying that I object to the term "Dismal Science" for economics.
This is not because of the "dismal" part, it's because of the "science" part.
That being said, the devaluing of expertise is due in large part to something not
mentioned by Mr. Wolf: corruption, particularly for the field of macroeconomics.
We have seen this repeatedly in the past few decades, where nominally independent
researchers have been found to slant their research to accommodate the results desired by
their patrons. (The sad state of pharma and medical research come to mind as well)
In fact, ACCORDING TO THEIR OWN "RATIONAL ACTOR" THEORIES , academics in general, and
economists in particular,will behave in ways that will most strongly benefit themselves, and
not in ways that serve the truth or reality. (Studies have shown that economists
are the most selfish academics )
I believe that if you discuss the devaluation of knowledge and expertise without
discussing the pervasive corruption in western society, you are ignoring the proverbial
elephant in the room.
Economic Science is very optimistic that what they characterize as "economic growth" in
using up the world's resources in its pursuit, is a "good thing".
Economists are selling a limitless planet on which humans will always "pull the rabbit out
of the hat", to solve any resource issue, including climate change and overpopulation.
That being said, I view the economic profession, as largely practiced by its well-paid
members, as a mechanism to justify what the political and business elite want to do.
The elite are simply getting what they pay to hear.
I worked on simulation software for integrated circuits. My friend studied economics with
all the famous people. When I described to him what I did if there seemed to be a discrepancy
between what my simulator said and how the integrated circuit behaved in real life or the
intuition that an electrical engineer had about how it would behave in real life he was
amazed. I was amazed that he was amazed. How could you possibly believe a simulator that
necessarily has bugs in it, if you don't track down discrepancies to understand which is
right, your intuition or the simulator?
Sometimes, I had to be very inventive to find another way to make a complex calculation in
a way that would test out if the simulator was right. If economics students are taught the
math, but not how to check their work, and the necessity of checking their work, then they
shouldn't be in positions to make policy recommendations.
Many economists avoid operational modeling of the processes of the actual, institutional
economy. And, that which does take place in narrowly conceived research by specialists is
never allowed to feed back on the methods or theories embodied in the core doctrines.
One way mainstream macroeconomics defeats its own feeble efforts at empiricism is to set
the problems in a frame of time-series regression analysis of highly aggregated data:
national GDP and its high-level components year-by-year or quarter-by-quarter.
The behavior of tens or hundreds of millions of people reduced to statistics for largely
formless accounting conventions relating to a single somewhat amorphous entity (a country)
over time. History, however it happens, only ever happens one way, so there's always zero
degrees of freedom in the aggregate time-series.
There is so little information left in the data, even the most clever econometricians
would need a thousand years of data to "test" the most basic hypotheses. It is absurd to
approach the task in the way they do.
Is it necessarily as difficult a task as they make it, to learn something useful
about the way the economy works?
The problems of statistical aggregation and time-series are not rooted in the object of
study -- the actual political economy -- so much as they are created by the conceptual
apparatus.
In short form, economists have an analytic theory -- in form and epistemic status,
something akin to Euclid's geometry. A geometry is not itself a map of the world and no one
doing geometry confuses geometry with cartography or land surveying, but most economists do
not understand that their theory is not itself a model of the actual political economy.
Someone like Paul Krugman actually thinks he has "a map" of the political economy in, say,
IS/LM . No student of geometry expects to find a dimensionless point in the bathroom or an
isoceles triangle growing in the garden. Yet, economists regularly purport to casually
observe perfectly competitive markets in equilibrium or the natural interest rate.
I think economists could do as well as, say, meteorologists or geologists in developing an
empirically grounded understanding of the observable political economy, if they focused their
attention on concrete and measurable mechanisms of the institutional economy and stopped
talking meaninglessly about formless "markets" that have no existence.
This article reminds me of why I stopped reading The Economist after the GFC. The
Economist was quite explicit in advocating for a weak regulatory environment. I remember
articles talking about how great it was for the Office of Thrift Supervision to regulate
banks alongside others like the Fed because regulatory competition was good. After the GFC
they were writing articles about how they opposed this all along.
It's not just that so many economists are wrong. It's that many times their models and
predictions are wrong and they claim that it is either not what they argued for or
'externalities' intervened. Of course they never mentioned such externalities before. Many
just outright conjure up unicorns. There were no shortage of economists claiming that the
housing bubble was not a problem and the economy will grow to the point where things just
naturally level off. Of course there was no accountability for those peddling these
falsehoods.
Perhaps it's changed since I started out as an econ. major in the mid '70's, but what
disillusioned me was the total disregard for actual human behavior. Real people do NOT always
behave rationally or honestly. Emotions/psychology do figure greatly in real people making
"economic" decisions – just ask anyone who makes their living based on selling
something.
Every economic model should be prefaced with "In an ideal world " (or perhaps more
honestly "In an economist's construct of an ideal world )
How many brand name economists up and quit in disgust 11 years ago when the powers that be
decided to go against everything they stood for, and bailed out those that deserved to go
down in financial flames?
A parenthetical lifted from Randy Wray's post responding to DeLong on MMT:
an exasperated Wynne Godley came into my office a couple of decades ago and announced
that every [mainstream model] he had looked at was incoherent
That's the base problem, imho: economists are very successful as "experts" in a
sociological sense, slotting into the role with firm claims on salary, status and ritual
respect, as Yves Smith observed, but economics as a civic doctrine and a common frame of
reference for political discourse is incoherent and economics as a scholarly discipline or
"social science" fails methodological or epistemic standards.
There is a history of imperviousness to absolutely devastating critiques that isn't
explained. Is that persistent "wrongness" related to professional success or only a
by-product of an unfortunate pedagogy? Who puts the dogmatism into a dogma . . . and keeps it
there?
(disclosure: i was a professional economist myself many years ago -- neither ambitious nor
particularly successful, but I did attend ruling class schools for what that was worth)
Prof. Richard Werner has a fantastic talk (at the Russian Academy of Sciences) about,
among other things, "the unresolved puzzles of modern economics" – to me the most
striking there was how he dispenses with concept of "equilibrium".
He talks about the "puzzles" ~30 min in.
It is enough to see that and know that mainstream economists are little more than the high
priests of the peculiar modern religion guiding our society.
"The teaching of economics to undergraduates must focus on core ideas, essential
questions, and actual realities."
Sadly Mr. Wolf suffers from the same delusions that so many mainstream economist suffer.
They think they have actually considered "actual realities".
Yet the foundations of mainstream economics ignores these ACTUAL REALITIES
– Assumes Loanable Funds yet the Bank of England & the Bundesbank both publicly
published research say endogenous money is correct. Loans create Deposits. They are clueless
as to how finance works. I recall the infamous intro to econ question "If I double you income
and double prices for beer, how much beer can you now purchase?" The standard econ answer is
the same amount of beer. But in the real world the correct answer is you don't know. The
professor never told you how large the fixed debt payments of the person were which most
definitely impacts the amount of disposable income you have to buy beer. But then again most
economists would likely fail any advanced accounting class. Long gone are the days when
undergraduate economics students in economics had to take 2 or 3 semesters of accounting.
Even my alma mater which is definitely heterodox in faculty and has MMT / UMKC taught faculty
only require 1 these days. You need a strong foundation in accounting to be stock flow
consistent in your modeling of a highly monetary modern economy.
– Assumes upward sloping supply curve is the market norm. At least 3 economic studies
have attempted to measure this on large cross industry scales and every time concludes that
over 1/2 of all businesses face downward sloping cost curves (natural monopoly stuff, and we
wonder why industry concentration is the norm) and another 1/3 face flat cost curves. An
upward sloping supply curve, for those not taking advanced or graduate level economics IS the
assumed upward sloping marginal cost curve of the industry or nation if you're crazy enough
to apply it at the macro level.
There are dozens more piss pore assumptions that underpin mainstream economics. In this
day and age far more EMPIRICAL, real word data can be used to confirm what really makes an
economy work, but sadly what we teach in college is garbage where the ACTUAL REALITIES are
ignored.
a logical definition of wealth is absolutely needed for the basis of economics if it is
to be a science."
Frederick Soddy, WEALTH, VIRTUAL WEALTH AND DEBT,
2nd edition, p. 102
Economists and financiers seem to be incapable of understanding we live on a finite planet.
Nor do they seem to be able to get beyond equating money with wealth. It is much easier to
just put a price on something like a Beethoven symphony (or call it 'priceless') than to
attempt a definition of wealth. But for most of us the ingredients of a definition are much
simpler. Topping the list has to be energy. You can't create it but you can dissipate it,
i.e. render it useless, by for example manufacturing useless junk that falls apart quickly
enough for people who run or own the business to make a lot of money.
Or if your customers can no longer afford the junk because you have automated or
off-shored their jobs, you can sell guns and bombs to your wholly owned government – to
use in blowing up people who stand in the way of your accumulating more of the money created
by your bankers, financiers and politicians. Then there is the basic intelligence required to
run the machinery and discern better – i.e. more energy and resource efficient –
ways of doing things. With real wealth creation comes power. The Chinese may have figured
this out. The West's 1%, its economists, bankers and politicians don't appear to have a
clue.
Did Kenneth Rogoff apologise for his hit on Iceland and his subsequent dismay defense in
Ferguson's "Inside Job"? At least one of the Chicago boys (Jonathan Sachs) has resiled from
the opinions of Friedman and rejoined the human race but only after a raft of countries were
ground down by the mill of the moneymen. Chile and Poland seem to have survived at horrible
social cost but what of the others?
The plaint is partly true. When governments were advised by economists, they replaced the
wishes of the electorate. The economist brought along their army of lawyers who instantly
appeared as mercenary terrorists to browbeat and coerce officials with various threats to do
as the moneymen asked and cease attending to the people. This is still the state of play in
UK and USA and those core paper-issuers drag the 'also rans' along with carrots and
sticks.
I believe the fault lies in lazy officials who seldom run trials on new ideas in limited
areas but drop the entire country into one speculative foray after another. Its a shame that
its not mentioned. There is no good reason why the whole country has to be volunteered for
these new scheme. Why has the UK Treasury shut down every competing form of banking to the
high street banks – the trust banks, coop bank, post office bank, municipal banks,
mutuals – all thrown away as infringers of the BoE's monopoly. The country needs an
Oliver Cromwell or Napoleon to lead it not the present bunch of ragamuffins and
hooligans.
That brings me to the second problem the disastrous state of the representation. It is
mainly due to the control factions have brought to bear on the selection of candidates for
office. That has to stop and the way to do it to have primary assemblies of every 200-300
people who select one of their number to represent them. He's a school friend or neighbor and
a known quantity. Several primary assemblies select a chap to represent them and so on up
this new structure of democracy to the top.
The business community have sought to keep everyone's nose to the grindstone with
statistics justifying under payment by understating inflation. That has to stop. The
economics trade belongs with astrology and weather forecasting until it acknowledges the
fundamentals that drive prices.
It seems to me from my citizen's non-professional perspective that the only real
economists are experts in resource extraction, manufacturing and end use of same.
IOW, a forester, mining, petroleum, construction engineer and even a naval admiral,
sitting around a table, all beholden to and obeying the supreme chairmanship of an ecologist,
would be a better and less destructive thing for the world than a bunch of money only maximum
value extraction Wall Streeters controlling the engineers mentioned above.
Can there even be an economy without resource extraction? It seems like most new economic
schemes are attempting this with humans bodies, credit ratings and bank accounts being the
last available commodity.
The economists got Ricardo's theory of comparative advantage, but they missed this:
"The interest of the landlords is always opposed to the interest of every other class
in the community" Ricardo 1815 / Classical Economist
What does our man on free trade mean?
He was an expert on the small state, unregulated capitalism he observed in the world around
him. He was part of the new capitalist class and the old landowning class were a huge problem
with their rents that had to be paid both directly and through wages.
Disposable income = wages – (taxes + the cost of living)
Employees get less disposable income after the landlords rent has gone.
Employers have to cover the landlord's rents in wages reducing profit.
Ricardo is just talking about housing costs, employees all rented in those days.
Employees get their money from wages and so the employer pays through wages.
Look at the US cost of living: The cost of living = housing costs + healthcare costs + student loan costs + food +
other costs of living
Employees get their money from wages, so it is the employer that pays through wages,
reducing profit and driving off shoring from the US.
Maximising profit requires minimising labour costs; i.e. wages.
China, Asia and Mexico look good, the US is awful.
(This is Michael Hudson's argument in a slightly different from)
There are some fundamental problems with today's economics, like this and the fact it
doesn't look at money, debt or banks.
Also, it hasn't worked out financial markets are not like other markets.
The supply of stocks stays fairly fixed and central banks can create a "wealth effect" by
just adding liquidity. More money is now chasing a fairly fixed number of financial assets
and the price (e.g. stock market) goes up.
"There ain't no such thing as a free lunch" (alternatively, "There is no such thing as a free lunch" or other variants)
is a popular adage communicating the idea that it is impossible to get something for nothing.
The acronyms TANSTAAFL, TINSTAAFL, and TNSTAAFL, are also used. Uses of the phrase dating back to the 1930s and 1940s have
been found, but the phrase's first appearance is unknown.[1]
The "free lunch" in the saying refers to the nineteenth-century practice in American bars of offering a "free lunch" in
order to entice drinking customers.
The phrase and the acronym are central to Robert Heinlein's 1966 science-fiction novel The Moon Is a Harsh Mistress, which
helped popularize it.[2][3]
The free-market economist Milton Friedman also popularized the phrase[1] by using it as the title of a 1975 book,[4] and
it is used in economics literature to describe opportunity cost.[5]
Campbell McConnell writes that the idea is "at the core of economics".
[I was a bigger fan of Robert Heinlein's than I was of Milton Friedman and even then it was "Stranger in a Strange Land" and
"The Unpleasant Profession of Jonathan Hoag" rather than later works that appealed to me.]
Just as an aside. It is worth remembering where the current globalization came from
historically.
It started with the 1970s inflation, (caused partly by the oil crisis) and the coincident
abuse of monopoly power by a number of unions (please those on the outer left don't try to
pretend it didn't happen, it did).
Uncle Milton came along with plausible sounding solutions (monetarism and increasing
foreign competition). Increasing foreign competition worked for a while – until the
mergers starting being international and industry concentration increased on an international
scale (and so was harder to combat).
Uncle Milton has since been proved wrong about almost everything. His one big idea that
never got tried (negative income tax – which could implemented more simply and
effectively as a universal basic income) ironically is the only one I think was good.
After more than a decade at the helm of one of Harvard's largest courses, Economics
Professor N. Gregory Mankiw announced in an email to graduate students Monday that he will step
down from teaching Economics 10: "Principles of Economics" at the end of this semester.
The use of mathematics to model human reality; one of the more bizarre offshoots
that followed the mathematization of economic thought in the 20th century.
Game theory focuses on strategies used by competing actors to make rational decisions.
What should I do given my opponent may subsequently decide A, B, C, or D? It was pioneered by
John von Neumann, John Nash, and Oskar Morgenstern. The assumption that social life is a game
of logic between conniving actors is foundational to this view of economics. But do we really
behave in such a "me versus you" manner?
Game Theory's rational individualism closely resonates with neoliberal capitalism because
it reconceptualizes everyone as mini corporations who are totally selfish.
Individuals compete rather than share; seek to outsmart the next person rather than
empathize. Proponents of the approach often use the "as if" defense. The model might not
perfectly match reality, but we can approximate how someone behaves in the real world by
assuming they act "as if" they're Nashian plotters.
It's the normative assumptions underlying this "as if" that are problematic that at bottom
we're all greedy and impatient bankers. One could just as well argue that people act "as if"
they're trusting and altruistic socialists, but Game Theory won't have any of that.
"... By Enrico Sergio Levrero, Associate Professor of Economics, Roma Tre University. Originally published at the Institute for New Economic Thinking website ..."
In contrast to Keynes's emphasis on the monetary nature of interest rates, the modern theory
of central banking focuses on a benchmark rate for monetary policy that reflect "fundamental
forces" supposedly unaffected by monetary factors. Its theoretical underpinning stems from
Wicksell's analysis of the relationship between market and natural interest rates as restated
in the so-called New Keynesian theory which combines real-business-cycle general equilibrium
models with imperfect competition and nominal rigidities.
Here, at least in the short run, discrepancies between the actual and natural interest rate
are deemed to lead to a rate of price inflation different from the desired and expected one. If
some kind of price rigidity is present, the interest rate difference will also lead to a
discrepancy between actual and potential output. The resulting rule for monetary policy is that
authorities should credibly commit themselves to following the natural rate of interest (NRI).
They must therefore forecast this "neutral" rate, namely, the real rate that, if maintained,
would keep the economy at its production potential over time.
Despite the mainstream consensus on this approach,
determining the "equilibrium interest rate" is a murky business . A first problem is that,
while the "benchmark rate" ought to be based on sound theoretical foundations that allow a
meaningful interpretation of its behaviour, all sorts of definitions of it appear in the
literature when assuming real shocks away from balanced growth. They reflect the theory's
reliance on notions of perfect or imperfect competition in commodities and factor markets as
well as the possible influence of transitory or only permanent components of the natural
rate.
The result is usually a view in which we have a "short-run" natural rate of interest that
varies (usually pro-cyclically) during the cycle, resembling Dennis Robertson's old
prescription that monetary policies should follow temporary shifts of the demand for and supply
of loanable funds, along with a long – run natural rate that corresponds to
potential output for a given degree of market imperfections when both causal shocks
and lags of adjustment are averaged out.
The two approaches lead to divergent monetary policies. If you try to conduct policy by
reference to the long run notion of the natural rate determined by the steady state IS
curve when all the lags and random shocks disappear, you will not favour sharp changes in the
short-term interest rate during the cycle. By contrast, if you rely on a "short run" natural
rate that could fall during a crisis, you would see a slow decrease in the policy rates as too
little to stimulate economic activity.
Compounding these difficulties is the variability induced by the estimation methods of the
natural rate of interest. The benchmark rate of the monetary policy should in fact be readily
computable from observable economic data, but its counterfactual nature inevitably leads to a
variety of estimation methods with results that recall the early criticism by Myrdal and
Lindahl that Wicksell's natural rate is not an operational notion in the sense that it was
incapable of practical application. With each the econometric method raising special problems
of its own, the resulting variety and uncertainty of the value of the natural rate cannot but
pose significant challenges for practical monetary policy.
The divergent estimates of the NRI advanced during the recent 2008 crisis are a case in
point. The estimates vary hugely, with model-based and filtering methods producing higher
volatility than semi-structural approaches or peak-to-peak averages. Some estimates of the NRI
provided negative values on average and not only as a possible (short-lived) effect of
temporary shocks, whereas others suggested that the NRI remained close to but higher than zero.
These differences imply drastically different evaluations of the stance of monetary policy as
policymakers weighed whether it made sense to drive the nominal policy rates towards their zero
lower bound.
But the limits of the NRI as a benchmark for monetary policy are not only statistical or
related to the difficulty of distinguishing among the kind and persistency of economic shocks.
They pertain to the theory itself, specifically to model specification and the alleged
independence of the average or normal interest rate from monetary policy.
Firstly, New-Classical and New-Keynesian models focus on the volatility of output, that is,
its variance, on the assumption that the output gap will be closed by market forces. This hides
the fact that potential output may fall during the crisis due to the destruction of productive
capacity stemming from a fall in effective demand. This would break down the distinction
between short-lived demand shocks on the one hand and supply shocks on the other, thus
complicating any estimate of the NRI and raising questions about its theoretical relevance.
Secondly, in both the theoretical models and estimate procedures, an inverse relation
between the interest rates and components of aggregate demand is postulated as well as between
the former and the price level, although such relations are acknowledged as being weak and
doubtful. In practice, output elasticity with respect to interest rates appears low and
asymmetric, and investments in fixed capital are determined mainly by expected changes in
aggregate demand. Moreover, the Gibson paradox and its modern restatement in the price puzzle
suggest that a direct relation between prices and the interest rate may exist due to prices
adjusting to the monetary costs of production which include the pure remuneration of capital,
that is interest costs. All this implies that, if, after a fall in the interest rate, we
observe a fall in prices (or una tantum a lower rate of inflation), this would not
signal that the NRI should be lower. Nor should a low elasticity of output to the interest rate
be interpreted as a reliable sign that the natural rate of interest has fallen.
But a more fundamental criticism can be advanced concerning the sheer existence of a natural
rate of interest determined by "productivity and thrift" independent of the monetary policy.
New-Keynesian models restate the loanable funds theory, viewing the market rate of interest as
determined by the supply of and demand for credit, with the natural rate of interest set by the
supply of and demand for savings when output is at its potential level. This theory was already
criticised by Keynes, who questioned whether investments adjust to savings through changes in
interest rates. On the grounds of the principle of effective demand, Keynes argued that savings
equalise investments by means of income changes and considered the notion of the NRI as not
useful. He instead viewed the rate of interest as a monetary phenomenon to which capital
profitability would adjust. He also argued that credit is not an alternative to savings but the
necessary preparation for them and that until potential output is achieved, investments are
financed by the finance process and income changes rather than by any previous saving
supply.
This criticism of Keynes and his idea that there is no mechanical tendency to full
employment was strengthened later by the Cambridge capital controversy which showed that it was
impossible to derive a decreasing demand curve for investments with regard to the interest rate
-- a decreasing curve which is at the root of the neoclassical mechanism guaranteeing the
tendency of actual output toward potential output. Unless a single commodity economy is
assumed, a surrogate production function cannot in fact be derived due to the phenomena of
re-switching and reverse capital deepening. Moreover, in the market for savings and investment,
there may be multiple equilibria, the capital-labour ratio is not necessarily higher for a
lower interest rate, and changes in the rate of interest out of equilibrium may be so strong
that they question the validity of the theory.
If we put aside the loanable funds theory, due prominence can be given to Keynes's idea that
the rate of interest is a highly conventional phenomenon. It opens the way for levels of rates
of interest that are shaped by monetary authorities that affect income distribution, and this
possibility casts a different light on the purposes and channels of transmission of the
monetary policies. Of course, monetary policy is not advanced in a vacuum but takes into
account the course of money wages and, more generally, the economic and financial conditions of
the country involved. Yet, the benchmark rate to which monetary authorities anchor their
decisions does not appear to reflect "fundamental forces" acting independently of monetary
factors, and therefore those decisions cannot be conceived simply as a technical device used to
find out the "true" natural interest rate.
Summing up, estimates of the NRI are misleading both on empirical and theoretical grounds
and monetary policy is not neutral, primarily because it may influence the division of the
surplus product among different classes and social groups. Quite paradoxically, however, the
tricky nature of those estimates, with their consequent downward revision during the crisis due
to their sensitivity to current economic conditions, has been used by Central Banks to pursue a
regime of low interest rates that was required by the macroeconomic situation of industrialized
countries after the 2008 crisis. The cost of doing this has been to hide the asymmetric effects
and delay in the transmission of monetary policy, since the scant reactivity of output to the
fall in interest rates has been explained precisely by appeals to an alleged fall in the
natural rate of interest even to negative values due to reaching the zero-lower bound for
policy nominal interest rates. This makes a murky business even more opaque.
"A first problem is that, while the "benchmark rate" ought to be based on sound
theoretical foundations that allow a meaningful interpretation of its behaviour, all sorts of
definitions of it appear in the literature when assuming real shocks away from balanced
growth."
Has anyone ever shown that in fact the diff eqs being used actually are insensitive to
small perturbations? That the solutions are actually numerically stable? If they're not --
and in general, this is something that has to be shown for the constrained parameters -- the
rest is a waste.
If it's not a concave system, but the solutions are saddle points, for example given the
number of parameters and the equations steady state solutions don't require "shocks" at all
to be unstable but are inherently unstable. And most systems are unstable
All systems with non-linear feedback (eg: Fear and Greed), are Chaotic, not Unstable. A
system with Unstable but not Chaotic behavior falls to a predictable state.
It is arguable that Greed is feed-forward, possibly in all cases. Fear is both, feed
forward and feedback. For example fear of the unknown is feed forward, fear of loss generally
feedback.
A classic fear which is both, feed forward and feedback, is fear of unwanted pregnancy. It
is well know that fears of unwanted pregnancy are always handled rationally. /s.
Chaotic would mean no discernible pattern. Unstable would mean it has patterns that lurch
from some state to some other state, but which are discernible.
I'm very rusty, but I do believe that money, or capital, is itself a good, so it follows
that an interest rate is little more than the price of money. And which rate is the natural
rate, the inter bank rate, mortgage rates, brokers call, maybe the whatever a payday lender
charges? All those rates just reflect different markets, or am I really wrong?
This article is implying that there is no natural rate of interest.
That would imply that money is not subject to the laws of supply and demand so is not a
good.
Accepting that would kick away one of the pillars of Liberalism and neoclassical
economics. It would also reveal that money and capital are not equivalent, except to a
banker.
He gets close to saying that the idea is sheer ideology, serving a normalizing function
kind of like the "state of nature" in classical political theory, e.g. Rousseau or Locke,
that would be used to justify a set of political institutions. But he won't allow himself a
paragraph to step away from econospeak long enough for the point to become fully salient.
Amen. The fundamental flaw is the concept of perpetual growth. Lots of fancy words for a
pseudo science. At least meteorological predictions get judged, not fudged.
Top 5 professional journals (T5) serve as gatekeepers for professional advancement of
academic economists: "strong evidence for the influence of the T5. Without doubt, publication
in the T5 is a powerful determinant of tenure and promotion in academic economics." https://www.ineteconomics.org/perspectives/blog/the-tyranny-of-the-top-five-journals
When this happens, acceptable research and discourse tend to get established and limited
… Chinese economists probably need not apply...as well as unorthodox views in the
US.
Michael Hudson describes the Orwellian approach of today's mainstream economics: "Viewing
the economic vocabulary as propaganda, I saw that we can understand how the words you hear as
largely propaganda words. They’ve changed the meaning to the opposite of what the
classical economists meant. But if you untangle the reversal of meaning and juxtapose a more
functional vocabulary you can better understand what ís actually happening." https://michael-hudson.com/2018/12/guns-butter-the-vocabulary-of-economic-deception/
"... Hard core neoliberals say Social Security is a ponzi scheme because too few workers can't pay too many retirees, it should have bought stocks and bonds. Ok, if all the boomers had bought stocks and bonds instead of paying FICA, would too many boomers selling stocks relative to the younger workers saving for retirement buying stocks magically keep share prices rising? Was the crash the day before Chriistmas caused by too many buyers of stocks and bonds, or too many sellers? ..."
"... Hard core neoliberals have been pushing free lunch economics for several decades by erasing the connection between labor and money and real value. ..."
Why oh why can't Krugman explain economics, and especially how "voodoo" conservative free
lunch economics is.
First, why has Krugman self lobotomized and remove the economic basic axiom that
everything is about labor, especially money.
Money is labor, labor in the past or labor in the future. Eliminate work, ie, robots
completely replace all workers, then someone will tell their robot to build more robots and
tell those robots to do the same until everyone can be given as many robots as they want for
free to produce as much as the new own want, whether to consume or not, so no one will be
willing to pay anything for any thing.
So, until someone can explain how money has value without human labor, and "property" is
not the reason because I will order my robots to build an army to kill you if you refuse to
vacate the land I want as my own. And I'll build the biggest robot army to fight off any
"government" that tries to take the liberty I have gained with my robots eliminating any
requirement for me to work for what I consume or desire.
So, again, money is past or future labor, just as goods and capital are past labor, the
Fed merely ensures liquidity of labor IOUs, but if no one will pay workers to work with these
IOUs, no one will get a job no matter how many labor IOUs the Fed prints.
And it i give you labor IOUs, but no one will produce anything by work in exchange for
those labor IOUs, they are worthless. Like in Venezuela where you buy stuff paying in eggs or
fuel or other things produced by workers with capital, ie, labor.
And Trump never sees any value in money because he never works. He'll promise you money,
but if you believe he'll do any work to make his promise honest, you are a fool. And thats
true for pretty muchh all Hard core neoliberals these days.
Hard core neoliberals tell you to work more than the money paid in exchange for other working to
produce stuff for you in the future. First it was by pensions. But now they refuse. Then is
was by government IOUs, but now they are saying "nope" to redeeming the bonds.
Anyone think the businesses with skyhigh share prices are going to pay dividends, or buy
back shares at sky high prices when sellers exceed buyers?
Hard core neoliberals say Social Security is a ponzi scheme because too few workers can't pay too
many retirees, it should have bought stocks and bonds. Ok, if all the boomers had bought
stocks and bonds instead of paying FICA, would too many boomers selling stocks relative to
the younger workers saving for retirement buying stocks magically keep share prices rising?
Was the crash the day before Chriistmas caused by too many buyers of stocks and bonds, or too
many sellers?
Hard core neoliberals have been pushing free lunch economics for several decades by erasing the
connection between labor and money and real value.
Hard core neoliberals see work as too costly, and paying workers to crushingly costly, but they
want others to give them both stuff and money. A free lunch.
And they cleverly created clever lines like, "cutting taxes puts money in yoour pockets"
and "costly givernment regulations kills jobs" and "we must cut costs to create jobs".
So, voters who just got told GM is cutting costs by eliminating 10,000 jobs and closing 5
factories listen to Trump promise to cut costs to bring back factories and jobs end up voting
for Trump???
So genious Krugman can't point out the lie Trump and the GOP are telling by simply
pointing outt to those workers they lost their job because of cost cutting.
Why can't workers understand that anytime a politician says "cut" he means "fire" or
"impoverish"???
Bad Faith, Pathos and G.O.P. Economics: On professionals who sold their integrity, and got
nothing in return.
By Paul Krugman
As 2018 draws to an end, we're seeing many articles about the state of the economy. What
I'd like to do, however, is talk about something different -- the state of economics, at
least as it relates to the political situation. And that state is not good: The bad faith
that dominates conservative politics at every level is infecting right-leaning economists,
too.
This is sad, but it's also pathetic. For even as once-respected economists abase
themselves in the face of Trumpism, the G.O.P. is making it ever clearer that their services
aren't wanted, that only hacks need apply.
What you need to know when talking about economics and politics is that there are three
kinds of economist in modern America: liberal professional economists, conservative
professional economists and professional conservative economists.
By "liberal professional economists" I mean researchers who try to understand the economy
as best they can, but who, being human, also have political preferences, which in their case
puts them on the left side of the U.S. political spectrum, although usually only modestly
left of center. Conservative professional economists are their counterparts on the center
right.
Professional conservative economists are something quite different. They're people who
even center-right professionals consider charlatans and cranks; they make a living by
pretending to do actual economics -- often incompetently -- but are actually just
propagandists. And no, there isn't really a corresponding category on the other side, in part
because the billionaires who finance such propaganda are much more likely to be on the right
than on the left.
But let me leave the pure hacks on one side for a moment, and talk about the people who at
least used to seem to be trying to do real economics.
Do economists' political preferences shape their research? They surely affect the choice
of subject: Liberals are more likely to be interested in rising inequality or the economics
of climate change than conservatives. And human nature being what it is, some of them --
O.K., of us -- occasionally engage in motivated reasoning, reaching conclusions that cater to
their politics.
I used to believe, however, that such lapses were the exception, not the rule, and the
liberal economists I know try hard to avoid falling into that trap, and apologize when they
do.
But do conservative economists do the same? Increasingly, the answer seems to be no, at
least for those who play a prominent role in public discourse.
Even during the Obama years, it was striking how many well-known Republican-leaning
economists followed the party line on economic policy, even when that party line was in
conflict with the nonpolitical professional consensus.
Thus, when a Democrat was in the White House, G.O.P. politicians opposed anything that
might mitigate the costs of the 2008 financial crisis and its aftermath; so did many
economists. Most famously, in 2010 a who's who of Republican economists denounced the efforts
of the Federal Reserve to fight unemployment, warning that they risked "currency debasement
and inflation."
Were these economists arguing in good faith? Even at the time, there were good reasons to
suspect otherwise. For one thing, those terrible, irresponsible Fed actions were pretty much
exactly what Milton Friedman prescribed for depressed economies. For another, some of those
Fed critics engaged in Donald Trump-like conspiracy theorizing, accusing the Fed of printing
money, not to help the economy, but to "bail out fiscal policy," i.e., to help Barack
Obama.
It was also telling that none of the economists who warned, wrongly, about looming
inflation were willing to admit their error after the fact.
But the real test came after 2016. A complete cynic might have expected economists who
denounced budget deficits and easy money under a Democrat to suddenly reverse position under
a Republican president.
And that total cynic would have been exactly right. After years of hysteria about the
evils of debt, establishment Republican economists enthusiastically endorsed a budget-busting
tax cut. After denouncing easy-money policies when unemployment was sky-high, some echoed
Trump's demands for low interest rates with unemployment under 4 percent -- and the rest
remained conspicuously silent.
What explains this epidemic of bad faith? Some of it is clearly ambition on the part of
conservative economists still hoping for high-profile appointments. Some of it, I suspect,
may be just the desire to stay on the inside with powerful people.
But there's something pathetic about this professional self-abasement, because the rewards
center-right economists long for haven't come, and never will.
It's not just that Trump has assembled an administration of the worst and the dimmest. The
truth is that the modern G.O.P. doesn't want to hear from serious economists, whatever their
politics. It prefers charlatans and cranks, who are its kind of people.
So what we've learned about economics these past two years is that many conservative
economists were, in fact, willing to compromise their professional ethics for political ends
-- and that they sold their integrity for nothing.
By abetting the ad industry, universities are leading us into temptation, when they
should be enlightening us
... ... ...
I ask because, while considering the frenzy
of consumerism that rises beyond its usual planet-trashing levels at this time of year, I
recently stumbled across a paper that astonished
me . It was written by academics at public universities in the Netherlands and the US.
Their purpose seemed to me starkly at odds with the public interest. They sought to identify
"the different ways in which consumers resist advertising, and the tactics that can be used to
counter or avoid such resistance".
Among the "neutralising" techniques it highlighted were "disguising the persuasive intent of
the message"; distracting our attention by using confusing phrases that make it harder to focus
on the advertiser's intentions; and "using cognitive depletion as a tactic for reducing
consumers' ability to contest messages". This means hitting us with enough advertisements to
exhaust our mental resources, breaking down our capacity to think.
Intrigued, I started looking for other academic papers on the same theme, and found an
entire literature. There were articles on every imaginable aspect of resistance, and helpful
tips on overcoming it. For example, I came across a paper that counsels advertisers on how to
rebuild public trust when the celebrity they work with gets into trouble. Rather than dumping
this lucrative asset, the researchers advised that the best means to enhance "the authentic
persuasive appeal of a celebrity endorser" whose standing has slipped is to get them to display
"a Duchenne smile", otherwise known as "a genuine smile". It precisely anatomised such smiles,
showed how to spot them, and discussed the "construction" of sincerity and "genuineness": a
magnificent exercise in inauthentic authenticity.
Another paper considered how
to persuade sceptical people to accept a company's corporate social responsibility claims,
especially when these claims conflict with the company's overall objectives. (An obvious
example is ExxonMobil's attempts to convince people that it is environmentally responsible,
because it is researching algal fuels that could one day reduce CO2 – even as it
continues to
pump millions of barrels of fossil oil a day ). I hoped the paper would recommend that the
best means of persuading people is for a company to change its practices. Instead, the authors'
research showed how images and statements could be cleverly combined to "minimise stakeholder
scepticism".
A further
paper discussed advertisements that work by stimulating
Fomo – fear of missing out . It noted that such ads work through "controlled
motivation", which is "anathema to wellbeing". Fomo ads, the paper explained, tend to cause
significant discomfort to those who notice them. It then went on to show how an improved
understanding of people's responses "provides the opportunity to enhance the effectiveness of
Fomo as a purchase trigger". One tactic it proposed is to keep stimulating the fear of missing
out, during and after the decision to buy. This, it suggested, will make people more
susceptible to further ads on the same lines.
Yes, I know: I work in an industry that receives most of its income from advertising, so I
am complicit in this too. But so are we all. Advertising – with its destructive
impacts on the living planet, our peace of mind and our free will – sits at the heart of
our growth-based economy. This gives us all the more reason to challenge it. Among the places
in which the challenge should begin are universities, and the academic societies that are
supposed to set and uphold ethical standards. If they cannot swim against the currents of
constructed desire and constructed thought, who can?
"... The American Chamber of Commerce subsequently expanded its base from around 60,000 firms in 1972 to over a quarter of a million ten years later. Jointly with the National Association of Manufacturers (which moved to Washington in 1972) it amassed an immense campaign chest to lobby Congress and engage in research. The Business Roundtable, an organization of CEOs 'committed to the aggressive pursuit of political power for the corporation', was founded in 1972 and thereafter became the centrepiece of collective pro-business action. ..."
"... Nearly half the financing for the highly respected NBER came from the leading companies in the Fortune 500 list. Closely integrated with the academic community, the NBER was to have a very significant impact on thinking in the economics departments and business schools of the major research universities. ..."
"... In order to realize this goal, businesses needed a political class instrument and a popular base. They therefore actively sought to capture the Republican Party as their own instrument. The formation of powerful political action committees to procure, as the old adage had it, 'the best government that money could buy' was an important step. ..."
"... The Republican Party needed, however, a solid electoral base if it was to colonize power effectively. It was around this time that Republicans sought an alliance with the Christian right. The latter had not been politically active in the past, but the foundation of Jerry Falwell's 'moral majority' as a political movement in 1978 changed all of that. The Republican Party now had its Christian base. ..."
"... It also appealed to the cultural nationalism of the white working classes and their besieged sense of moral righteousness. This political base could be mobilized through the positives of religion and cultural nationalism and negatively through coded, if not blatant, racism, homophobia, and anti feminism. ..."
"... The alliance between big business and conservative Christians backed by the neoconservatives consolidated, not for the first time has a social group been persuaded to vote against its material, economic, and class interests ..."
"... Any political movement that holds individual freedoms to be sacrosanct is vulnerable to incorporation into the neoliberal fold. ..."
"... Neoliberal rhetoric, with its foundational emphasis upon individual freedoms, has the power to split off libertarianism, identity politics, multiculturalism, and eventually narcissistic consumerism from the social forces ranged in pursuit of social justice through the conquest of state power. ..."
"... By capturing ideals of individual freedom and turning them against the interventionist and regulatory practices of the state, capitalist class interests could hope to protect and even restore their position. Neoliberalism was well suited to this ideological task. ..."
"... Neoliberalization required both politically and economically the construction of a neoliberal market-based populist culture of differentiated consumerism and individual libertarianism. As such it proved more than a little compatible with that cultural impulse called 'postmodernism' which had long been lurking in the wings but could now emerge full-blown as both a cultural and an intellectual dominant. This was the challenge that corporations and class elites set out to finesse in the 1980s. ..."
"... Powell argued that individual action was insufficient. 'Strength', he wrote, 'lies in organization, in careful long-range planning and implementation, in consistency of action over an indefinite period of years, in the scale of financing available only through joint effort, and in the political power available only through united action and national organizations'. The National Chamber of Commerce, he argued, should lead an assault upon the major institutions––universities, schools, the media, publishing, the courts––in order to change how individuals think 'about the corporation, the law, culture, and the individual'. US businesses did not lack resources for such an effort, particularly when they pooled their resources together. ..."
The American Chamber of Commerce subsequently expanded its base from around 60,000 firms in 1972 to over a quarter of a million
ten years later. Jointly with the National Association of Manufacturers (which moved to Washington in 1972) it amassed an immense
campaign chest to lobby Congress and engage in research. The Business Roundtable, an organization of CEOs 'committed to the aggressive
pursuit of political power for the corporation', was founded in 1972 and thereafter became the centrepiece of collective pro-business
action.
The corporations involved accounted for 'about one half of the GNP of the United States' during the 1970s, and they spent close
to $900 million annually (a huge amount at that time) on political matters. Think-tanks, such as the Heritage Foundation, the
Hoover Institute, the Center for the Study of American Business, and the American Enterprise Institute, were formed with corporate
backing both to polemicize and, when necessary, as in the case of the National Bureau of Economic Research, to construct serious
technical and empirical studies and political-philosophical arguments broadly in support of neoliberal policies.
Nearly half the financing for the highly respected NBER came from the leading companies in the Fortune 500 list. Closely
integrated with the academic community, the NBER was to have a very significant impact on thinking in the economics departments
and business schools of the major research universities. With abundant finance furnished by wealthy individuals (such as
the brewer Joseph Coors, who later became a member of Reagan's 'kitchen cabinet') and their foundations (for example Olin, Scaife,
Smith Richardson, Pew Charitable Trust), a flood of tracts and books, with Nozick's Anarchy State and Utopia perhaps the most widely
read and appreciated, emerged espousing neoliberal values. A TV version of Milton Friedman's Free to Choose was funded with a
grant from Scaife in 1977. 'Business was', Blyth concludes, 'learning to spend as a class.
In singling out the universities for particular attention, Powell pointed up an opportunity as well as an issue, for these
were indeed centers of anti-corporate and anti-state sentiment (the students at Santa Barbara had burned down the Bank of America
building there and ceremonially buried a car in the sands). But many students were (and still are) affluent and privileged, or
at least middle class, and in the US the values of individual freedom have long been celebrated (in music and popular culture)
as primary. Neoliberal themes could here find fertile ground for propagation. Powell did not argue for extending state power.
But business should 'assiduously cultivate' the state and when necessary use it 'aggressively and with determination'
In order to realize this goal, businesses needed a political class instrument and a popular base. They therefore actively
sought to capture the Republican Party as their own instrument. The formation of powerful political action committees to procure,
as the old adage had it, 'the best government that money could buy' was an important step. The supposedly 'progressive' campaign
finance laws of 1971 in effect legalized the financial corruption of politics.
A crucial set of Supreme Court decisions began in 1976 when it was first established that the right of a corporation to make
unlimited money contributions to political parties and political action committees was protected under the First Amendment guaranteeing
the rights of individuals (in this instance corporations) to freedom of speech.15 Political action committees could thereafter
ensure the financial domination of both political parties by corporate, moneyed, and professional association interests. Corporate
PACs, which numbered eighty-nine in 1974, had burgeoned to 1,467 by 1982.
The Republican Party needed, however, a solid electoral base if it was to colonize power effectively. It was around this time
that Republicans sought an alliance with the Christian right. The latter had not been politically active in the past, but the
foundation of Jerry Falwell's 'moral majority' as a political movement in 1978 changed all of that. The Republican Party now had
its Christian base.
It also appealed to the cultural nationalism of the white working classes and their besieged sense of moral righteousness.
This political base could be mobilized through the positives of religion and cultural nationalism and negatively through coded,
if not blatant, racism, homophobia, and anti feminism.
The alliance between big business and conservative Christians backed by the neoconservatives consolidated, not for the first
time has a social group been persuaded to vote against its material, economic, and class interests the evangelical Christians
eagerly embraced the alliance with big business and the Republican Party as a means to further promote their evangelical and moral
agenda.
Any political movement that holds individual freedoms to be sacrosanct is vulnerable to incorporation into the neoliberal fold.
The worldwide political upheavals of 1968, for example, were strongly inflected with the desire for greater personal freedoms.
This was certainly true for students, such as those animated by the Berkeley 'free speech' movement of the 1960s or who took to
the streets in Paris, Berlin, and Bangkok and were so mercilessly shot down in Mexico City shortly before the 1968 Olympic Games.
They demanded freedom from parental, educational, corporate, bureaucratic, and state constraints. But the '68 movement also had
social justice as a primary political objective.
Neoliberal rhetoric, with its foundational emphasis upon individual freedoms, has the power to split off libertarianism,
identity politics, multiculturalism, and eventually narcissistic consumerism from the social forces ranged in pursuit of social
justice through the conquest of state power. It has long proved extremely difficult within the US left, for example, to forge
the collective discipline required for political action to achieve social justice without offending the the Construction of Consent
desire of political actors for individual freedom and for full recognition and expression of particular identities. Neoliberalism
did not create these distinctions, but it could easily exploit, if not foment, them.
In the early 1970s those seeking individual freedoms and social justice could make common cause in the face of what many saw
as a common enemy. Powerful corporations in alliance with an interventionist state were seen to be running the world in individually
oppressive and socially unjust ways. The Vietnam War was the most obvious catalyst for discontent, but the destructive activities
of corporations and the state in relation to the environment, the push towards mindless consumerism, the failure to address social
issues and respond adequately to diversity, as well as intense restrictions on individual possibilities and personal behaviors
by state-mandated and 'traditional' controls were also widely resented. Civil rights were an issue, and questions of sexuality
and of reproductive rights were very much in play.
For almost everyone involved in the movement of '68, the intrusive state was
the enemy and it had to be reformed. And on that, the neoliberals could easily agree. But capitalist corporations, business, and
the market system were also seen as primary enemies requiring redress if not revolutionary transformation: hence the threat to
capitalist class power.
By capturing ideals of individual freedom and turning them against the interventionist and regulatory practices of the state,
capitalist class interests could hope to protect and even restore their position. Neoliberalism was well suited to this ideological
task. But it had to be backed up by a practical strategy that emphasized the liberty of consumer choice, not only with respect
to particular products but also with respect to lifestyles, modes of expression, and a wide range of cultural practices. Neoliberalization
required both politically and economically the construction of a neoliberal market-based populist culture of differentiated consumerism
and individual libertarianism. As such it proved more than a little compatible with that cultural impulse called 'postmodernism'
which had long been lurking in the wings but could now emerge full-blown as both a cultural and an intellectual dominant. This
was the challenge that corporations and class elites set out to finesse in the 1980s.
In the US case a confidential memo sent by Lewis Powell to the US Chamber of Commerce in August 1971. Powell, about to be elevated
to the Supreme Court by Richard Nixon, argued that criticism of and opposition to the US free enterprise system had gone too far
and that 'the time had come––indeed it is long overdue––for the wisdom, ingenuity and resources of American business to be marshaled
against those who would destroy it'.
Powell argued that individual action was insufficient. 'Strength', he wrote, 'lies in organization, in careful long-range
planning and implementation, in consistency of action over an indefinite period of years, in the scale of financing available
only through joint effort, and in the political power available only through united action and national organizations'. The National
Chamber of Commerce, he argued, should lead an assault upon the major institutions––universities, schools, the media, publishing,
the courts––in order to change how individuals think 'about the corporation, the law, culture, and the individual'. US businesses
did not lack resources for such an effort, particularly when they pooled their resources together.
"... The term is used as a catchall for anything that smacks of deregulation, liberalisation, privatisation or fiscal austerity. Today it is routinely reviled as a shorthand for the ideas and practices that have produced growing economic insecurity and inequality, led to the loss of our political values and ideals, and even precipitated our current populist backlash ..."
"... The use of the term "neoliberal" exploded in the 1990s, when it became closely associated with two developments, neither of which Peters's article had mentioned. One of these was financial deregulation, which would culminate in the 2008 financial crash and in the still-lingering euro debacle . The second was economic globalisation, which accelerated thanks to free flows of finance and to a new, more ambitious type of trade agreement. Financialisation and globalisation have become the most overt manifestations of neoliberalism in today's world. ..."
"... That neoliberalism is a slippery, shifting concept, with no explicit lobby of defenders, does not mean that it is irrelevant or unreal. ..."
"... homo economicus ..."
"... A version of this article first appeared in Boston Review ..."
"... Main illustration by Eleanor Shakespeare ..."
As even its harshest critics concede, neoliberalism is hard to pin down. In broad terms, it denotes a preference for markets over
government, economic incentives over cultural norms, and private entrepreneurship over collective action. It has been used to describe
a wide range of phenomena – from Augusto Pinochet to Margaret Thatcher and Ronald Reagan, from the Clinton Democrats and the UK's
New Labour to the economic opening in China and the reform of the welfare state in Sweden.
The term is used as a catchall for anything that smacks of deregulation, liberalisation, privatisation or fiscal austerity.
Today it is routinely reviled as a shorthand for the ideas and practices that have produced growing economic insecurity and inequality,
led to the loss of our political values and ideals, and even precipitated our current populist backlash .
We live in the age of neoliberalism, apparently. But who are neoliberalism's adherents and disseminators – the neoliberals themselves?
Oddly, you have to go back a long time to find anyone explicitly embracing neoliberalism. In 1982, Charles Peters, the longtime editor
of the political magazine Washington Monthly, published an essay titled
A Neo-Liberal's Manifesto . It makes for interesting reading 35 years later, since the neoliberalism it describes bears little
resemblance to today's target of derision. The politicians Peters names as exemplifying the movement are not the likes of Thatcher
and Reagan, but rather liberals – in the US sense of the word – who have become disillusioned with unions and big government and
dropped their prejudices against markets and the military.
The use of the term "neoliberal" exploded in the 1990s, when it became closely associated with two developments, neither of
which Peters's article had mentioned. One of these was financial deregulation, which would culminate in the 2008
financial
crash and in the still-lingering euro debacle
. The second was economic globalisation, which accelerated thanks to free flows of finance and to a new, more ambitious type of trade
agreement. Financialisation and globalisation have become the most overt manifestations of neoliberalism in today's world.
That neoliberalism is a slippery, shifting concept, with no explicit lobby of defenders, does not mean that it is irrelevant
or unreal. Who can deny that the world has experienced a decisive shift toward markets from the 1980s on? Or that centre-left
politicians – Democrats in the US, socialists and social democrats in Europe – enthusiastically adopted some of the central creeds
of Thatcherism and Reaganism, such as deregulation, privatisation, financial liberalisation and individual enterprise? Much of our
contemporary policy discussion remains infused with principles supposedly grounded in the concept of
homo economicus
, the perfectly rational human being, found in many economic theories, who always pursues his own self-interest.
But the looseness of the term neoliberalism also means that criticism of it often misses the mark. There is nothing wrong with
markets, private entrepreneurship or incentives – when deployed appropriately. Their creative use lies behind the most significant
economic achievements of our time. As we heap scorn on neoliberalism, we risk throwing out some of neoliberalism's useful ideas.
The real trouble is that mainstream economics shades too easily into ideology, constraining the choices that we appear to have
and providing cookie-cutter solutions. A proper understanding of the economics that lie behind neoliberalism would allow us to identify
– and to reject – ideology when it masquerades as economic science. Most importantly, it would help us to develop the institutional
imagination we badly need to redesign capitalism for the 21st century.
N eoliberalism is typically understood as being based on key tenets of mainstream economic science. To see those tenets without
the ideology, consider this thought experiment. A well-known and highly regarded economist lands in a country he has never visited
and knows nothing about. He is brought to a meeting with the country's leading policymakers. "Our country is in trouble," they tell
him. "The economy is stagnant, investment is low, and there is no growth in sight." They turn to him expectantly: "Please tell us
what we should do to make our economy grow."
The economist pleads ignorance and explains that he knows too little about the country to make any recommendations. He would need
to study the history of the economy, to analyse the statistics, and to travel around the country before he could say anything.
Facebook
Twitter
Pinterest Tony Blair and Bill Clinton: centre-left politicians who enthusiastically adopted some of the central creeds of Thatcherism
and Reaganism. Photograph: Reuters
But his hosts are insistent. "We understand your reticence, and we wish you had the time for all that," they tell him. "But isn't
economics a science, and aren't you one of its most distinguished practitioners? Even though you do not know much about our economy,
surely there are some general theories and prescriptions you can share with us to guide our economic policies and reforms."
The economist is now in a bind. He does not want to emulate those economic gurus he has long criticised for peddling their favourite
policy advice. But he feels challenged by the question. Are there universal truths in economics? Can he say anything valid or useful?
So he begins. The efficiency with which an economy's resources are allocated is a critical determinant of the economy's performance,
he says. Efficiency, in turn, requires aligning the incentives of households and businesses with social costs and benefits. The incentives
faced by entrepreneurs, investors and producers are particularly important when it comes to economic growth. Growth needs a system
of property rights and contract enforcement that will ensure those who invest can retain the returns on their investments. And the
economy must be open to ideas and innovations from the rest of the world.
But economies can be derailed by macroeconomic instability, he goes on. Governments must therefore pursue a sound
monetary policy , which means restricting the growth of liquidity to the increase in nominal money demand at reasonable inflation.
They must ensure fiscal sustainability, so that the increase in public debt does not outpace national income. And they must carry
out prudential regulation of banks and other financial institutions to prevent the financial system from taking excessive risk.
Now he is warming to his task. Economics is not just about efficiency and growth, he adds. Economic principles also carry over
to equity and social policy. Economics has little to
say about how much redistribution a society should seek. But it does tell us that the tax base should be as broad as possible, and
that social programmes should be designed in a way that does not encourage workers to drop out of the labour market.
By the time the economist stops, it appears as if he has laid out a fully fledged neoliberal agenda. A critic in the audience
will have heard all the code words: efficiency, incentives, property rights, sound money, fiscal prudence. And yet the universal
principles that the economist describes are in fact quite open-ended. They presume a capitalist economy – one in which investment
decisions are made by private individuals and firms – but not much beyond that. They allow for – indeed, they require – a surprising
variety of institutional arrangements.
So has the economist just delivered a neoliberal screed? We would be mistaken to think so, and our mistake would consist of associating
each abstract term – incentives, property rights, sound money – with a particular institutional counterpart. And therein lies the
central conceit, and the fatal flaw, of neoliberalism: the belief that first-order economic principles map on to a unique set of
policies, approximated by a Thatcher/Reagan-style agenda.
Consider property rights. They matter insofar as they allocate returns on investments. An optimal system would distribute property
rights to those who would make the best use of an asset, and afford protection against those most likely to expropriate the returns.
Property rights are good when they protect innovators from free riders, but they are bad when they protect them from competition.
Depending on the context, a legal regime that provides the appropriate incentives can look quite different from the standard US-style
regime of private property rights.
This may seem like a semantic point with little practical import; but China's phenomenal economic success is largely due to its
orthodoxy-defying institutional tinkering. China turned to markets, but did not copy western practices in property rights. Its reforms
produced market-based incentives through a series of unusual institutional arrangements that were better adapted to the local context.
Rather than move directly from state to private ownership, for example, which would have been stymied by the weakness of the prevailing
legal structures, the country relied on mixed forms of ownership that provided more effective property rights for entrepreneurs in
practice. Township and Village Enterprises (TVEs), which spearheaded Chinese economic growth during the 1980s, were collectives owned
and controlled by local governments. Even though TVEs were publicly owned, entrepreneurs received the protection they needed against
expropriation. Local governments had a direct stake in the profits of the firms, and hence did not want to kill the goose that lays
the golden eggs.
China relied on a range of such innovations, each delivering the economist's higher-order economic principles in unfamiliar institutional
arrangements. For instance, it shielded its large state sector from global competition, establishing special economic zones where
foreign firms could operate with different rules than in the rest of the economy. In view of such departures from orthodox blueprints,
describing China's economic reforms as neoliberal – as critics are inclined to do – distorts more than it reveals. If we are to call
this neoliberalism, we must surely look more kindly on the ideas behind the most dramatic
poverty reduction in history.
One might protest that China's institutional innovations were purely transitional. Perhaps it will have to converge on western-style
institutions to sustain its economic progress. But this common line of thinking overlooks the diversity of capitalist arrangements
that still prevails among advanced economies, despite the considerable homogenisation of our policy discourse.
What, after all, are western institutions? The size of the public sector in OECD countries varies, from a third of the economy
in Korea to nearly 60% in Finland. In Iceland, 86% of workers are members of a trade union; the comparable number in Switzerland
is just 16%. In the US, firms can fire workers almost at will;
French
labour laws have historically required employers to jump through many hoops first. Stock markets have grown to a total value
of nearly one-and-a-half times GDP in the US; in Germany, they are only a third as large, equivalent to just 50% of GDP.
The idea that any one of these models of taxation, labour relations or financial organisation is inherently superior to the others
is belied by the varying economic fortunes that each of these economies have experienced over recent decades. The US has gone through
successive periods of angst in which its economic institutions were judged inferior to those in Germany, Japan, China, and now possibly
Germany again. Certainly, comparable levels of wealth and productivity can be produced under very different models of capitalism.
We might even go a step further: today's prevailing models probably come nowhere near exhausting the range of what might be possible,
and desirable, in the future.
The visiting economist in our thought experiment knows all this, and recognises that the principles he has enunciated need to
be filled in with institutional detail before they become operational. Property rights? Yes, but how? Sound money? Of course, but
how? It would perhaps be easier to criticise his list of principles for being vacuous than to denounce it as a neoliberal screed.
Still, these principles are not entirely content-free. China, and indeed all countries that managed to develop rapidly, demonstrate
the utility of those principles once they are properly adapted to local context. Conversely, too many economies have been driven
to ruin courtesy of political leaders who chose to violate them. We need look no further than
Latin American populists or eastern European communist regimes to appreciate the practical significance of sound money, fiscal
sustainability and private incentives.
O f course, economics goes beyond a list of abstract, largely common-sense principles. Much of the work of economists consists
of developing
stylised models of how economies work and then confronting those models with evidence. Economists tend to think of what they
do as progressively refining their understanding of the world: their models are supposed to get better and better as they are tested
and revised over time. But progress in economics happens differently.
Economists study a social reality that is unlike the physical universe. It is completely manmade, highly malleable and operates
according to different rules across time and space. Economics
advances not by settling on the right model or theory to answer such questions, but by improving our understanding of the diversity
of causal relationships. Neoliberalism and its customary remedies – always more markets, always less government – are in fact a perversion
of mainstream economics. Good economists know that the correct answer to any question in economics is: it depends.
Does an increase in the minimum wage depress employment? Yes, if the labour market is really competitive and employers have no
control over the wage they must pay to attract workers; but not necessarily otherwise. Does trade liberalisation increase economic
growth? Yes, if it increases the profitability of industries where the bulk of investment and innovation takes place; but not otherwise.
Does more government spending increase employment? Yes, if there is slack in the economy and wages do not rise; but not otherwise.
Does monopoly harm innovation? Yes and no, depending on a whole host of market circumstances.
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and precipitated our current populist backlash' Trump signing an order to take the US out of the TPP trade pact. Photograph: AFP/Getty
In economics, new models rarely supplant older models. The basic competitive-markets model dating back to Adam Smith has been
modified over time by the inclusion, in rough historical order, of monopoly, externalities, scale economies, incomplete and asymmetric
information, irrational behaviour and many other real-world features. But the older models remain as useful as ever. Understanding
how real markets operate necessitates using different lenses at different times.
Perhaps maps offer the best analogy. Just like economic models, maps are
highly stylised representations
of reality . They are useful precisely because they abstract from many real-world details that would get in the way. But abstraction
also implies that we need a different map depending on the nature of our journey. If we are travelling by bike, we need a map of
bike trails. If we are to go on foot, we need a map of footpaths. If a new subway is constructed, we will need a subway map – but
we wouldn't throw out the older maps.
Economists tend to be very good at making maps, but not good enough at choosing the one most suited to the task at hand. When
confronted with policy questions of the type our visiting economist faces, too many of them resort to "benchmark" models that favour
the
laissez-faire
approach. Kneejerk solutions and hubris replace the richness and humility of the discussion in the seminar room. John Maynard
Keynes once defined economics as the "science of thinking in terms of models, joined to the art of choosing models which are relevant".
Economists typically have trouble with the "art" part.
This, too, can be illustrated with a parable. A journalist calls an economics professor for his view on whether free trade is
a good idea. The professor responds enthusiastically in the affirmative. The journalist then goes undercover as a student in the
professor's advanced graduate seminar on international trade. He poses the same question: is free trade good? This time the professor
is stymied. "What do you mean by 'good'?" he responds. "And good for whom?" The professor then launches into an extensive exegesis
that will ultimately culminate in a heavily hedged statement: "So if the long list of conditions I have just described are satisfied,
and assuming we can tax the beneficiaries to compensate the losers, freer trade has the potential to increase everyone's wellbeing."
If he is in an expansive mood, the professor might add that the effect of free trade on an economy's longterm growth rate is not
clear either, and would depend on an altogether different set of requirements.
This professor is rather different from the one the journalist encountered previously. On the record, he exudes self-confidence,
not reticence, about the appropriate policy. There is one and only one model, at least as far as the public conversation is concerned,
and there is a single correct answer, regardless of context. Strangely, the professor deems the knowledge that he imparts to his
advanced students to be inappropriate (or dangerous) for the general public. Why?
The roots of such behaviour lie deep in the culture of the economics profession. But one important motive is the zeal to display
the profession's crown jewels – market efficiency, the invisible hand, comparative advantage – in untarnished form, and to shield
them from attack by self-interested barbarians, namely
the protectionists . Unfortunately, these economists typically ignore the barbarians on the other side of the issue – financiers
and multinational corporations whose motives are no purer and who are all too ready to hijack these ideas for their own benefit.
As a result, economists' contributions to public debate are often biased in one direction, in favour of more trade, more finance
and less government. That is why economists have developed a reputation as cheerleaders for neoliberalism, even if mainstream economics
is very far from a paean to laissez-faire. The economists who let their enthusiasm for free markets run wild are in fact not being
true to their own discipline.
H ow then should we think about globalisation in order to liberate it from the grip of neoliberal practices? We must begin by
understanding the positive potential of global markets. Access to world markets in goods, technologies and capital has played an
important role in virtually all of the economic miracles of our time. China is the most recent and powerful reminder of this historical
truth, but it is not the only case. Before China, similar miracles were performed by South Korea, Taiwan, Japan and a few non-Asian
countries such as
Mauritius . All of these countries embraced globalisation rather than turn their backs on it, and they benefited handsomely.
Defenders of the existing economic order will quickly point to these examples when globalisation comes into question. What they
will fail to say is that almost all of these countries joined the world economy by violating neoliberal strictures. South Korea and
Taiwan, for instance, heavily subsidised their exporters, the former through the financial system and the latter through tax incentives.
All of them eventually removed most of their import restrictions, long after economic growth had taken off.
But none, with the sole exception of Chile in the 1980s under Pinochet, followed the neoliberal recommendation of a rapid opening-up
to imports. Chile's neoliberal
experiment eventually produced the worst economic crisis in all of Latin America. While the details differ across countries,
in all cases governments played an active role in restructuring the economy and buffering it against a volatile external environment.
Industrial policies, restrictions on capital flows and currency controls – all prohibited in the neoliberal playbook – were rampant.
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By contrast, countries that stuck closest to the neoliberal model of globalisation were sorely disappointed. Mexico provides a
particularly sad example. Following a series of macroeconomic crises in the mid-1990s, Mexico embraced macroeconomic orthodoxy, extensively
liberalised its economy, freed up the financial system, sharply reduced import restrictions and signed the North American Free Trade
Agreement (Nafta). These policies did produce macroeconomic stability and a significant rise in foreign trade and internal investment.
But where it counts – in overall productivity and economic growth –
the experiment failed
. Since undertaking the reforms, overall productivity in Mexico has stagnated, and the economy has underperformed even by the
undemanding standards of Latin America.
These outcomes are not a surprise from the perspective of sound economics. They are yet another manifestation of the need for
economic policies to be attuned to the failures to which markets are prone, and to be tailored to the specific circumstances of each
country. No single blueprint fits all.
A s Peters's 1982 manifesto attests, the meaning of neoliberalism has changed considerably over time as the label has acquired
harder-line connotations with respect to deregulation, financialisation and globalisation. But there is one thread that connects
all versions of neoliberalism, and that is the
emphasis
on economic growth . Peters wrote in 1982 that the emphasis was warranted because growth is essential to all our social and political
ends – community, democracy, prosperity. Entrepreneurship, private investment and removing obstacles that stand in the way (such
as excessive regulation) were all instruments for achieving economic growth. If a similar neoliberal manifesto were penned today,
it would no doubt make the same point.
ss="rich-link"> Globalisation: the rise and fall of an idea that swept the world Read more
Critics often point out that this emphasis on economics debases and sacrifices other important values such as equality, social
inclusion, democratic deliberation and justice. Those political and social objectives obviously matter enormously, and in some contexts
they matter the most. They cannot always, or even often, be achieved by means of technocratic economic policies; politics must play
a central role.
Still, neoliberals are not wrong when they argue that our most cherished ideals are more likely to be attained when our economy
is vibrant, strong and growing. Where they are wrong is in believing that there is a unique and universal recipe for improving economic
performance, to which they have access. The fatal flaw of neoliberalism is that it does not even get the economics right. It must
be rejected on its own terms for the simple reason that it is bad economics.
A version of this article first appeared in
Boston Review
Like bolshevism this secular regions is to a large extent is a denial of Christianity. While Bolshevism is closer to the Islam,
Neoliberalism is closer to Judaism.
The idea of " Homo economicus " -- a person who in all
his decisions is governed by self-interest and greed is bunk.
Notable quotes:
"... There is not a shred of logical sense in neoliberalism. You're doing what the fundamentalists do... they talk about what neoliberalism is in theory whilst completely ignoring what it is in practice. ..."
"... In theory the banks should have been allowed to go bust, but the consequences where deemed too high (as they inevitable are). The result is socialism for the rich using the poor as the excuse, which is the reality of neoliberalism. ..."
"... Neoliberalism is based on the thought that you get as much freedom as you can pay for, otherwise you can just pay... like everyone else. In Asia and South America it has been the economic preference of dictators that pushes profit upwards and responsibility down, just like it does here. ..."
"... We all probably know the answer to this. In order to maintain the consent necessary to create inequality in their own interests the neoliberals have to tell big lies, and keep repeating them until they appear to be the truth. They've gotten so damn good at it. ..."
"... Neoliberalism is a modern curse. Everything about it is bad and until we're free of it, it will only ever keep trying to turn us into indentured labourers. ..."
"... It's acolytes are required to blind themselves to logic and reason to such a degree they resemble Scientologists or Jehovah's Witnesses more than people with any sort of coherent political ideology, because that's what neoliberalism actually is... a cult of the rich, for the rich, by the rich... and it's followers in the general population are nothing but moron familiars hoping one day to be made a fully fledged bastard ..."
"... Who could look at the way markets function and conclude there's any freedom? Only a neoliberal cult member. They cannot be reasoned with. They cannot be dissuaded. They cannot be persuaded. Only the market knows best, and the fact that the market is a corrupt, self serving whore is completely ignored by the ideology of their Church. ..."
Unless you are completely confused by what neoliberalism is there is not a shred of logical sense in this.
There is not a shred of logical sense in neoliberalism. You're doing what the fundamentalists do... they talk about what neoliberalism
is in theory whilst completely ignoring what it is in practice.
In theory the banks should have been allowed to go bust, but the consequences where deemed too high (as they inevitable
are). The result is socialism for the rich using the poor as the excuse, which is the reality of neoliberalism.
Savers in a neoliberal society are lambs to the slaughter. Thatcher "revitalised" banking, while everything else withered and
died.
Neoliberalism is based on the thought of personal freedom, communism is definitely not. Neoliberalist policies have lifted
millions of people out of poverty in Asia and South America.
Neoliberalism is based on the thought that you get as much freedom as you can pay for, otherwise you can just pay... like
everyone else. In Asia and South America it has been the economic preference of dictators that pushes profit upwards and responsibility
down, just like it does here.
I find it ironic that it now has 5 year plans that absolutely must not be deviated from, massive state intervention in markets
(QE, housing policy, tax credits... insert where applicable), and advocates large scale central planning even as it denies reality,
and makes the announcement from a tractor factory.
Neoliberalism is a blight... a cancer on humanity... a massive lie told by rich people and believed only by peasants happy
to be thrown a turnip. In theory it's one thing, the reality is entirely different. Until we're rid of it, we're all it's slaves.
It's an abhorrent cult that comes up with purest bilge like expansionary fiscal contraction to keep all the money in the hands
of the rich.
Why, you have to ask yourself, is this vast implausibility, this sheer unsustainability, not blindingly obvious to all?
We all probably know the answer to this. In order to maintain the consent necessary to create inequality in their own interests
the neoliberals have to tell big lies, and keep repeating them until they appear to be the truth. They've gotten so damn good
at it.
Neoliberalism is a modern curse. Everything about it is bad and until we're free of it, it
will only ever keep trying to turn us into indentured labourers.
It's acolytes are required
to blind themselves to logic and reason to such a degree they resemble Scientologists or
Jehovah's Witnesses more than people with any sort of coherent political ideology, because
that's what neoliberalism actually is... a cult of the rich, for the rich, by the rich... and
it's followers in the general population are nothing but moron familiars hoping one day to be
made a fully fledged bastard.
Who could look at the way markets function and conclude there's any freedom? Only a
neoliberal cult member. They cannot be reasoned with. They cannot be dissuaded. They cannot
be persuaded. Only the market knows best, and the fact that the market is a corrupt, self
serving whore is completely ignored by the ideology of their Church.
It's subsumed the entire planet, and waiting for them to see sense is a hopeless cause. In
the end it'll probably take violence to rid us of the Neoliberal parasite... the turn of the
century plague.
"... By James Heckman, Henry Schultz Distinguished Service Professor of Economics, University of Chicago; Founding Director, Center for the Economics of Human Development and Sidharth Moktan, Predoctoral Fellow, Center for the Economics of Human Development, University of Chicago. Originally published at VoxEU ..."
"... Anecdotal evidence suggests that the 'Top Five' economics journals have a strong influence on tenure and promotion decisions, but actual evidence on their influence is sparse. This column uses data on employment and publication histories for tenure-track faculty hired by the top US economics departments between 1996 and 2010 to show that the impact of the Top Five on tenure decisions dwarfs that of non-Top Five journals. A survey of US economics department faculties confirms the Top Five's outsized influence. ..."
"... American Economic Review ..."
"... Journal of Political Economy ..."
"... Quarterly Journal of Economics ..."
"... Review of Economic Studies ..."
"... We find that the Top Five has a large impact on tenure decisions within the top 35 US departments of economics, dwarfing the impact of publications in non-Top Five journals. A survey of current tenure-track faculty hired by the top 50 US economics departments confirms the Top Five's outsize influence. ..."
Yves
here. In case you hadn't noticed it, the economics discipline has doctrinal norms. Academics
who stray too far from it find themselves welcome only at the small number of colleges and
universities, such as the University of Missouri – Kansas City and the University of
Massachusetts – Amherst, that embrace heterodox views.
The top five economics journals play a large role in enforcing the orthodoxy. Jamie
Galbraith has described how he'd submit suitably mathed-up papers to one of the heavyweights,
get an initial positive response, but when they understood where he was going, they'd alway
reject the paper. The reviewers would claim that the mathematics were flawed, when that was not
the case. But being published by the top five is essential to advancing in prestigious
economics faculties, such as Harvard, Chicago, Princeton, and MIT.
It should be noted that no real science has a rigid hierarchy of journals like this. The
article documents disfunction among the editors at these journals, such as incest and
clientelism.
By James Heckman, Henry Schultz Distinguished Service Professor of Economics, University
of Chicago; Founding Director, Center for the Economics of Human Development and Sidharth
Moktan, Predoctoral Fellow, Center for the Economics of Human Development, University of
Chicago. Originally published at VoxEU
Anecdotal evidence suggests that the 'Top Five' economics journals have a strong
influence on tenure and promotion decisions, but actual evidence on their influence is sparse.
This column uses data on employment and publication histories for tenure-track faculty hired by
the top US economics departments between 1996 and 2010 to show that the impact of the Top Five
on tenure decisions dwarfs that of non-Top Five journals. A survey of US economics department
faculties confirms the Top Five's outsized influence.
Anyone who talks with young economists entering academia about their career prospects and
those of their peers cannot fail to note the importance they place on publication in the
so-called Top Five journals in economics: the American Economic Review ,
Econometrica ,the Journal of Political Economy ,the Quarterly Journal of
Economics , and the Review of Economic Studies .The discipline's preoccupation
with the Top Five is reflected in the large number of scholarly papers that study aspects of
the these journals, many of which acknowledge the Top Five's de facto role as arbiter in tenure
and promotion decisions (e.g. Ellison 2002, Frey 2009, Card and DellaVigna 2013, Anauti et al.
2015, Hamermesh 2013, 2018, Colussi 2018).
While anecdotal evidence suggests that the Top Five has a strong influence on tenure and
promotion decisions, actual evidence on such influence is sparse. Our paper (Heckman and Moktan
2018) fills this gap in the literature. We find that the Top Five has a large impact on
tenure decisions within the top 35 US departments of economics, dwarfing the impact of
publications in non-Top Five journals. A survey of current tenure-track faculty hired by the
top 50 US economics departments confirms the Top Five's outsize influence.
Our empirical and survey-based findings of the Top Five's influence beg the question: is the
Top Five an adequate filter of quality? Extending the analysis of Hamermesh (2018), we show
that appearance of an article in the Top Five is a poor predictor of quality as measured by
citations. Substantial variation in the citations accrued by papers published in the Top Five
and overlap in article quality across journals outside the Top Five make aggregate measures of
journal quality such as the Top Five label and Impact Factors poor measures of individual
article quality. This is a view expressed by many economists and non-economists alike.
1
There are many consequences of the discipline's reliance on the Top Five. It subverts the
essential process of assessing and rewarding original research. Using the Top Five to screen
the next generation of economists incentivises professional incest and creates clientele
effects whereby career-oriented authors appeal to the tastes of editors and biases of journals.
It diverts their attention away from basic research toward strategising about formats, lines of
research, and favoured topics of journal editors, many with long tenures. It raises the entry
costs for new ideas and persons outside the orbits of the journals and their editors. An
over-emphasis on Top Five publications perversely incentivises scholars to pursue follow-up and
replication work at the expense of creative pioneering research, since follow-up work is easier
to judge, is more likely to result in clean publishable results, and is hence more likely to be
published. 2 This behaviour is consistent with basic common sense: you get what you
incentivise.
In light of the many adverse and potentially severe consequences associated with current
practices, we believe that it is unwise for the discipline to continue using publication in the
Top Five as a measure of research achievement and as a predictor of future scholarly potential.
The call to abandon the use of measures of journal influence in career advancement decisions
has already gained momentum in the sciences. As of the time of the writing of this column, 667
organisations and 13,019 individuals have signed the San Francisco Declaration of Research
Assessment, a declaration denouncing the use of journal metrics in hiring, career advancement,
and funding decisions within the sciences. 3 Economists should take heed of these
actions. We provide suggestions for change in the concluding portion of this column.
Documenting the Power of the Top Five
We find strong evidence of the influence of the Top Five. Without doubt, publication in the
Top Five is a powerful determinant of tenure and promotion in academic economics. We analyse
longitudinal data on employment and publication histories for tenure-track faculty hired by the
top 35 US economics department between 1996 and 2010. We find that Top Five publications
greatly increase the probability of receiving tenure during the first spell of tenure-track
employment (see Figure 1). This is true if we limit samples to the first seven years of
employment. Estimates from duration analyses of time to tenure show that publishingthree Top
Five articles is associated with a 370% increase in the rate of receiving tenure, compared to
candidates with similar levels of publication in non-Top Five journals. The estimated effects
of publication in non-Top Five journals pale in comparison.
Figure 1 Predicted probabilities for receipt of tenure in the first spell of tenure-track
employment
Notes : The figures plot the predicted probabilities associated with
different levels of publications by authors in different journal categories, where the
predictions are obtained from a logit model. White diamonds on the bars indicate that the
prediction is significantly different than zero at the 5% level.
A survey of current assistant and associate professors hired by the top 50 US economics
departments corroborates these findings. On average, junior faculty rank Top Five publications
as being the single most influential determinant of tenure and promotion outcomes (see Figure
2). 4
Figure 2 Ranking of performance areas based on their perceived influence on tenure and
promotion decisions
Notes : The figure summarises respondents' rankings of either performance
areas. Responses are summarised by type of career advancement: tenure receipt, promotion to
assistant professor, and promotion to associate professor. The bars present mean responses for
each performance area. Respondents were given the option to not rank any or all of the eight
performance areas. As a result, the number of respondents varies across the performance
areas.
Responses to our survey reveal a widespread belief among junior faculty that the effect of
the Top Five on career advancement operates independently of differences in article quality. To
separate quality effects from a Top Five placement effect, we ask respondents to report the
probability that their department awards tenure or promotion to an individual with Top Five
publications compared to an individual identical to the first individual in every way except
that he/she has published the same number and quality of articles in non-Top Five journals. If
the Top Five influence operates solely through differences in article impact and quality, the
expected reported probability would be 0.5. The results in Figure 3 show large and
statistically significant deviations from 0.5 in favour of Top Five publication. On average,
respondents from top 10 departments believe that the Top Five candidate would receive tenure
with a probability of 0.89. The mean probability increases slightly for lower-ranked
departments.
Figure 3 Probability that a candidate with Top Five publications receives tenure or
promotion instead of an identical candidate with non-Top Five publications, ceteris paribus
Notes : The figure summarises respondents' perceptions about the probability
that a candidate with Top Five publications is granted tenure or promotion by the respondent's
department instead of a candidate with non-Top Five publications, ceteris paribus. Responses
are summarised by type of career advancement: tenure receipt, promotion to assistant professor,
and promotion to associate professor. The bars present mean responses for each performance
area. White diamonds indicate that the mean response is significantly different than 50% at the
10% level.
The Top Five as a Filter of Quality
The current practice of relying on the Top Five has weak empirical support if judged by its
ability to produce impactful papers as measured by citation counts. Extending the citation
analysis of Hamermesh (2018), we find considerable heterogeneity in citations within journals
and overlap in citations across Top Five and non-Top Five journals (see Figure 4). Moreover,
the overlap increases considerably when one compares non-Top Five journals to the less-cited
Top Five journals. For instance, while the median Review of Economics and Statistics
article ranks in the 38thpercentile of the overall Top Five citation distribution, the same
article outranks the median-cited article in the combined Journal of Political Economy
and Review of Economic Studies distributions.
Figure 4 Distribution of residualalog citations for articles published between 2000 and 2010
(as at July 2018)
Source : Scopus.com (accessed July 2018) Note : a The table plots distributions of residual log citations obtained from a model
that estimates log(citations+1) as a function of third-degree polynomial for years elapsed
between the date of publication and 2018, the year citations were measured. This
residualisation adjusts log citations for exposure effects, thereby allowing for comparison of
citations received by papers from different publication cohorts. Definition of journal abbreviations : QJE–Quarterly Journal Of Economics,
JPE–Journal Of Political Economy, ECMA–Econometrica, AER–American Economic
Review, ReStud–Review Of Economic Studies, JEL–Journal Of Economic Literature,
JEP–Journal Of Economic Perspectives, ReStat–Review Of Economics And Statistics,
JEG–Journal Of Economic Growth, JOLE–Journal Of Labor Economics, JHR–Journal
Of Human Resources, EJ–Economic Journal, JHE–Journal Of Health Economics,
ICC–Industrial And Corporate Change, WBER–World Bank Economic Review,
RAND–Rand Journal Of Economics, JDE–Journal Of Development Economics,
JPub–Journal Of Public Economics, JOE–Journal Of Econometrics, HE–Health
Economics, ILR–Industrial And Labor Relations Review, JEEA–Journal Of The European
Economic Association, JME–Journal Of Monetary Economics, JRU–Journal Of Risk And
Uncertainty, JInE–Journal Of Industrial Economics, JOF–Journal Of Finance,
JFE–Journal Of Financial Economics, ReFin–Review Of Financial Studies,
JFQA–Journal Of Financial And Quantitative Analysis, and MathFin–Mathematical
Finance.
Restricting the citation analysis to the top of the citation distribution produces the same
conclusion. Among the top 1% most-cited articles in our citations database, 5 13.6%
were published by three non-Top Five journals. 6
Low Editorial Turnover and Incest
Figure 5 Density plot of the number of years served by editors between 1996 and 2016
Source : Brogaard et al. (2014) for data up to 2011. Data for subsequent
years collected from journal front pages.
Compounding the privately rational incentive to curry favour with editors is the phenomenon
of longevity of editorial terms, especially at house journals (see Figure 5). Low turnover in
editorial boards creates the possibility of clientele effects surrounding both journals and
their editors. We corroborate the literature that documents the inbred nature of economics
publishing (Laband and Piette 1994, Brogaard et al. 2014, Colussi 2018) by estimating incest
coefficients that quantify the degree of inbreeding in Top Five publications. We show that
network effects are empirically important – editors are likely to select the papers of
those they know. 7
Table 1 Incest coefficients: Publications in Top Five between 2000 and 2016, by author
affiliation listed during publication
Source : Elsevier, Scopus.com.
Notes : The table reports three columns for each Top Five journal. The left
most columns report the number of articles that were affiliated to each university. The middle
columns present the percentage of articles published in the journal that were affiliated to the
university out of all articles affiliated to the list top universities. The right most columns
present the percentage of articles published in the journal that were affiliated to the
university out of all articles published in the journal. An author is defined as being
affiliated with a university during a given year if he/she listed the university as an
affiliation in any publication that was made during that specific year. An article is defined
as being affiliated with a university during a specific year if at least one author was
affiliated to the university during the year.
Discussion
Reliance on the Top Five as a screening device raises serious concerns. Our findings should
spark a serious conversation in the economics profession about developing implementable
alternatives for judging the quality of research. Such solutions necessarily de-emphasise the
role of the Top Five in tenure and promotion decisions, and redistribute the signalling
function more broadly across a range of high-quality journals.
However, a proper solution to the tyranny will likely involve more than a simple
redefinition of the Top Five to include a handful of additional influential journals. A better
solution will need to address the flaw that is inherent in the practice of judging a scholar's
potential for innovative work based on a track record of publications in a handful of select
journals. The appropriate solution requires a significant shift from the current
publications-based system of deciding tenure to a system that emphasises departmental peer
review of a candidate's work. Such a system would give serious consideration to unpublished
working papers and to the quality and integrity of a scholar's work. By closely reading
published and unpublished papers rather than counting placements of publications, departments
would signal that they both acknowledge and adequately account for the greater risk associated
with scholars working at the frontiers of the discipline.
A more radical proposal would be to shift publication away from the current journal system
with its long delays in refereeing and publication and possibility for incest and favoritism,
towards an open source arXiv or PLOS ONE format. 8 Such formats facilitate the
dissemination rate of new ideas and provide online real-time peer review for them. Discussion
sessions would vet criticisms and provide both authors and their readers with different
perspectives within much faster time frames. Shorter, more focused papers would stimulate
dialogue and break editorial and journal monopolies. Ellison (2011 )notes that online
publication is already being practiced by prominent scholars. Why not broaden the practice
across the profession and encourage spirited dialogue and rapid dissemination of new ideas?
This evolution has begun with a recently launched economics version of arXiv .
Under any event, the profession should reduce incentives for crass careerism and promote
creative activity. Short tenure clocks and reliance on the Top Five to certify quality do just
the opposite. In the long run, the profession will benefit from application of more
creativity-sensitive screening of its next generation.
"... By L. Randall Wray, Professor of Economics at Bard College. Originally published at New Economic Perspectives ..."
"... Treatise on Money ..."
"... State Theory of Money ..."
"... Money and Credit in Capitalist Economies ..."
"... Understanding Modern Money ..."
"... Modern Money Theory ..."
"... Payback: Debt and the shadow side of wealth ..."
"... Reclaiming the State ..."
"... Austerity: The History of a Dangerous Idea ..."
"... permanent Zirp (zero interest rate policy) is probably a better policy since it reduces the compounding of debt and the tendency for the rentier class to take over more of the economy. ..."
"... that one of the consequences of the protracted super-low interest rate regime of the post crisis era was to create a world of hurt for savers, particularly long-term savers like pension funds, life insurers and retirees. ..."
"... income inequality ..."
"... even after paying interest ..."
"... It seems to me that the US macroeconomic policy has been operating under MMT at least since FDR (see for example Beardsley Ruml from 1945). ..."
"... After learning MMT I've occasionally thought I should get a refund for the two economics degree's I originally received. ..."
"... "Taxes or other obligations (fees, fines, tribute, tithes) drive the currency." ..."
"... "JG is a critical component of MMT. It anchors the currency and ensures that achieving full employment will enhance both price and financial stability." ..."
I was asked to give a short presentation at the MMT conference. What follows is the text
version of my remarks, some of which I had to skip over in the interests of time. Many readers
might want to skip to the bullet points near the end, which summarize what I include in
MMT.
I'd also like to quickly respond to some comments that were made at the very last session of
the conference -- having to do with "approachability" of the "original" creators of MMT. Like
Bill Mitchell, I am uncomfortable with any discussion of "rockstars" or "heroes". I find this
quite embarrassing. As Bill said, we're just doing our job. We are happy (or, more accurately
pleasantly surprised) that so many people have found our work interesting and useful. I'm happy
(even if uncomfortable) to sign books and to answer questions at such events. I don't mind
emailed questions, however please understand that I receive hundreds of emails every day, and
the vast majority of the questions I get have been answered hundreds, thousands, even tens of
thousands of times by the developers of MMT. A quick reading of my Primer or search of NEP (and
Bill's blog and Warren's blogs) will reveal answers to most questions. So please do some
homework first. I receive a lot of "questions" that are really just a thinly disguised pretense
to argue with MMT -- I don't have much patience with those. Almost every day I also receive a
2000+ word email laying out the writer's original thesis on how the economy works and asking me
to defend MMT against that alternative vision. I am not going to engage in a debate via email.
If you have an alternative, gather together a small group and work for 25 years to produce
scholarly articles, popular blogs, and media attention -- as we have done for MMT -- and then
I'll pay attention. That said, here you go: [email protected] .
As an undergraduate I studied psychology and social sciences -- but no economics, which
probably gave me an advantage when I finally did come to economics. I began my economics career
in my late 20's studying mostly Institutionalist and Marxist approaches while working for the
local government in Sacramento. However, I did carefully read Keynes's General Theory
at Sacramento State and one of my professors -- John Henry -- pushed me to go to St. Louis to
study with Hyman Minsky, the greatest Post Keynesian economist.
I wrote my dissertation in Bologna under Minsky's direction, focusing on private banking and
the rise of what we called "nonbank banks" and "off-balance sheet operations" (now called
shadow banking). While in Bologna, I met Otto Steiger -- who had an alternative to the barter
story of money that was based on his theory of property. I found it intriguing because it was
consistent with some of Keynes's Treatise on Money that I was reading at the time.
Also, I had found Knapp's State Theory of Money -- cited in both Steiger and
Keynes–so I speculated on money's origins (in spite of Minsky's warning that he didn't
want me to write Genesis ) and the role of the state in my dissertation that became a
book in 1990 -- Money and Credit in Capitalist Economies -- that helped to develop the
Post Keynesian endogenous money approach.
What was lacking in that literature was an adequate treatment of the role of the
state–which played a passive role -- supplying reserves as demanded by private bankers --
that is the Post Keynesian accommodationist or Horzontalist approach. There was no discussion
of the relation of money to fiscal policy at that time. As I continued to read about the
history of money, I became more convinced that we need to put the state at the center.
Fortunately I ran into two people that helped me to see how to do it.
First there was Warren Mosler, who I met online in the PKT discussion group; he insisted on
viewing money as a tax-driven government monopoly. Second, I met Michael Hudson at a seminar at
the Levy Institute, who provided the key to help unlock what Keynes had called his "Babylonian
Madness" period -- when he was driven crazy trying to understand early money. Hudson argued
that money was an invention of the authorities used for accounting purposes. So over the next
decade I worked with a handful of people to put the state into monetary theory.
As we all know, the mainstream wants a small government, with a central bank that follows a
rule (initially, a money growth rate but now some version of inflation targeting). The fiscal
branch of government is treated like a household that faces a budget constraint. But this
conflicts with Institutionalist theory as well as Keynes's own theory. As the great
Institutionalist Fagg Foster -- who preceded me at the University of Denver–put it:
whatever is technically feasible is financially feasible. How can we square that with the
belief that sovereign government is financially constrained? And if private banks can create
money endogenously -- without limit -- why is government constrained?
My second book, in 1998, provided a different view of sovereign spending. I also revisited
the origins of money. By this time I had discovered the two best articles ever written on the
nature of money -- by Mitchell Innes. Like Warren, Innes insisted that the dollar's value is
derived from the tax that drives it. And he argued this has always been the case. This was also
consistent with what Keynes claimed in the Treatise, where he said that money has been a state
money for the past four thousand years, at least. I called this "modern money" with intentional
irony -- and titled my 1998 book Understanding Modern Money as an inside joke. It only
applies to the past 4000 years.
Surprisingly, this work was more controversial than the earlier endogenous money research.
In my view it was a natural extension -- or more correctly, it was the prerequisite to a study
of privately created money. You need the state's money before you can have private money.
Eventually our work found acceptance outside economics -- especially in law schools, among
historians, and with anthropologists.
For the most part, our fellow economists, including the heterodox ones, attacked us as
crazy.
I benefited greatly by participating in law school seminars (in Tel Aviv, Cambridge, and
Harvard) on the legal history of money -- that is where I met Chris Desan and later Farley
Grubb, and eventually Rohan Grey. Those who knew the legal history of money had no problem in
adopting MMT view -- unlike economists.
I remember one of the Harvard seminars when a prominent Post Keynesian monetary theorist
tried to argue against the taxes drive money view. He said he never thinks about taxes when he
accepts money -- he accepts currency because he believes he can fob it off on Buffy Sue. The
audience full of legal historians broke out in an explosion of laughter -- yelling "it's the
taxes, stupid". All he could do in response was to mumble that he might have to think more
about it.
Another prominent Post Keynesian claimed we had two things wrong. First, government debt
isn't special -- debt is debt. Second, he argued we don't need double entry book-keeping -- his
model has only single entry book-keeping. Years later he agreed that private debt is more
dangerous than sovereign debt, and he's finally learned double-entry accounting. But of course
whenever you are accounting for money you have to use quadruple entry book-keeping. Maybe in
another dozen years he'll figure that out.
As a student I had read a lot of anthropology -- as most Institutionalists do. So I knew
that money could not have come out of tribal economies based on barter exchange. As you all
know, David Graeber's book insisted that anthropologists have never found any evidence of
barter-based markets. Money preceded market exchange.
Studying history also confirmed our story, but you have to carefully read between the lines.
Most historians adopt monetarism because the only economics they know is Friedman–who
claims that money causes inflation. Almost all of them also adopt a commodity money view --
gold was good money and fiat paper money causes inflation. If you ignore those biases, you can
learn a lot about the nature of money from historians.
Farley Grubb -- the foremost authority on Colonial currency -- proved that the American
colonists understood perfectly well that taxes drive money. Every Act that authorized the issue
of paper money imposed a Redemption Tax. The colonies burned all their tax revenue. Again,
history shows that this has always been true. All money must be redeemed -- that is, accepted
by its issuer in payment. As Innes said, that is the fundamental nature of credit. It is
written right there in the early acts by the American colonies. Even a gold coin is the
issuer's IOU, redeemed in payment of taxes. Once you understand that, you understand the nature
of money.
So we were winning the academic debates, across a variety of disciplines. But we had a hard
time making progress in economics or in policy circles. Bill, Warren, Mat Forstater and I used
to meet up every year or so to count the number of economists who understood what we were
talking about. It took over decade before we got up to a dozen. I can remember telling Pavlina
Tcherneva back around 2005 that I was about ready to give it up.
But in 2007, Warren, Bill and I met to discuss writing an MMT textbook. Bill and I knew the
odds were against us -- it would be for a small market, consisting mostly of our former
students. Still, we decided to go for it. Here we are -- another dozen years later -- and the
textbook is going to be published. MMT is everywhere. It was even featured in a New
Yorker crossword puzzle in August. You cannot get more mainstream than that.
We originally titled our textbook Modern Money Theory , but recently decided to
just call it Macroeconomics . There's no need to modify that with a subtitle. What we
do is Macroeconomics. There is no coherent alternative to MMT.
A couple of years ago Charles Goodhart told me: "You won. Declare victory but be magnanimous
about it." After so many years of fighting, both of those are hard to do. We won. Be nice.
Let me finish with 10 bullet points of what I include in MMT:
1. What is money: An IOU denominated in a socially sanctioned money of account. In almost
all known cases, it is the authority -- the state -- that chooses the money of account. This
comes from Knapp, Innes, Keynes, Geoff Ingham, and Minsky.
2. Taxes or other obligations (fees, fines, tribute, tithes) drive the currency. The ability
to impose such obligations is an important aspect of sovereignty; today states alone monopolize
this power. This comes from Knapp, Innes, Minsky, and Mosler.
3. Anyone can issue money; the problem is to get it accepted. Anyone can write an IOU
denominated in the recognized money of account; but acceptance can be hard to get unless you
have the state backing you up. This is Minsky.
4. The word "redemption" is used in two ways -- accepting your own IOUs in payment and
promising to convert your IOUs to something else (such as gold, foreign currency, or the
state's IOUs).
The first is fundamental and true of all IOUs. All our gold bugs mistakenly focus on the
second meaning -- which does not apply to the currencies issued by most modern nations, and
indeed does not apply to most of the currencies issued throughout history. This comes from
Innes and Knapp, and is reinforced by Hudson's and Grubb's work, as well as by Margaret
Atwood's great book: Payback: Debt and the shadow side of wealth .
5. Sovereign debt is different. There is no chance of involuntary default so long as the
state only promises to accept its currency in payment. It could voluntarily repudiate its debt,
but this is rare and has not been done by any modern sovereign nation.
6. Functional Finance: finance should be "functional" (to achieve the public purpose), not
"sound" (to achieve some arbitrary "balance" between spending and revenues). Most importantly,
monetary and fiscal policy should be formulated to achieve full employment with price
stability. This is credited to Abba Lerner, who was introduced into MMT by Mat Forstater.
In its original formulation it is too simplistic, summarized as two principles: increase
government spending (or reduce taxes) and increase the money supply if there is unemployment
(do the reverse if there is inflation). The first of these is fiscal policy and the second is
monetary policy. A steering wheel metaphor is often invoked, using policy to keep the economy
on course. A modern economy is far too complex to steer as if you were driving a car. If
unemployment exists it is not enough to say that you can just reduce the interest rate, raise
government spending, or reduce taxes. The first might even increase unemployment. The second
two could cause unacceptable inflation, increase inequality, or induce financial instability
long before they solved the unemployment problem. I agree that government can always afford to
spend more. But the spending has to be carefully targeted to achieve the desired result. I'd
credit all my Institutionalist influences for that, including Minsky.
7. For that reason, the JG is a critical component of MMT. It anchors the currency and
ensures that achieving full employment will enhance both price and financial stability. This
comes from Minsky's earliest work on the ELR, from Bill Mitchell's work on bufferstocks and
Warren Mosler's work on monopoly price setting.
8. And also for that reason, we need Minsky's analysis of financial instability. Here I
don't really mean the financial instability hypothesis. I mean his whole body of work and
especially the research line that began with his dissertation written under Schumpeter up
through his work on Money Manager Capitalism at the Levy Institute before he died.
9. The government's debt is our financial asset. This follows from the sectoral balances
approach of Wynne Godley. We have to get our macro accounting correct. Minsky always used to
tell students: go home and do the balances sheets because what you are saying is nonsense.
Fortunately, I had learned T-accounts from John Ranlett in Sacramento (who also taught
Stephanie Kelton from his own, great, money and banking textbook -- it is all there, including
the impact of budget deficits on bank reserves). Godley taught us about stock-flow consistency
and he insisted that all mainstream macroeconomics is incoherent.
10. Rejection of the typical view of the central bank as independent and potent. Monetary
policy is weak and its impact is at best uncertain -- it might even be mistaking the brake
pedal for the gas pedal. The central bank is the government's bank so can never be independent.
Its main independence is limited to setting the overnight rate target, and it is probably a
mistake to let it do even that. Permanent Zirp (zero interest rate policy) is probably a better
policy since it reduces the compounding of debt and the tendency for the rentier class to take
over more of the economy. I credit Keynes, Minsky, Hudson, Mosler, Eric Tymoigne, and Scott
Fullwiler for much of the work on this.
That is my short list of what MMT ought to include. Some of these traditions have a very
long history in economics. Some were long lost until we brought them back into discussion.
We've integrated them into a coherent approach to Macro. In my view, none of these can be
dropped if you want a macroeconomics that is applicable to the modern economy. There are many
other issues that can be (often are) included, most importantly environmental concerns and
inequality, gender and race/ethnicity. I have no problem with that.
A JG is to discontinue NAIRU or structural under-unemployment with attendant
monetarist/quasi inflation views. Something MMT has be at pains to point out wrt fighting a
nonexistent occurrence due to extended deflationary period.
Its double entry accounting counting both sides of the equation. Fed deposits money into
bank requires 4 entries, a double entry for the Fed and for the bank. Typical double entry
accounting only looks at the books of 1 entity at a time. Quadruple Entry accounting makes
the connection between the government monetary policy and private business accounting. I'm
not an accountant, I may have butchered that.
think about banks and reserves, your money is on the bank's liability side (and your
asset), while the reserves are on the bank's asset side (and gov't or fed's liability.)
i think its the reserves that quadruple it, reserves are confusing because when you move
$5 from a bank account to buy ice cream its not just one copy of the $5 that moves between
checking accounts, there is another $5 that moves "under the hood" so to speak in reserve
world
Very briefly, double entry bookkeeping keeps track of how money comes in/out, and where it
came from/went. Cash is the determining item (although there may be a few removes). Hence,
say I buy a $20 dollar manicure from you. I record my purchase as "Debit (increase) expense:
manicure $20, credit (decrease) cash, $20". Bonus! If my bookkeeping is correct, my debits
and credits are equal and if I add them up (credits are minus and debits are plus) the total
is zero – my books "balance". So, double-entry bookkeeping is also a hash-total check
on my accounting accuracy. But I digress.
On your books, the entry would be "Debit (increase) cash $20, credit (decrease)
sales, $20".
So, your double-entry book plus my double-entry books would be quadruple-entry
accounting.
#7 was my immediate stopper, too. It drives me nuts when people introduce 2-3-4 letter
acronyms with no explanation (I work for the DoD and I'm surrounded by these "code words". I
rarely know what people are talking about and when I ask, the people talking rarely know what
these TLAs – T hree L etter A cronyms – stand for either!).
Next question regarding #7: What is ELR?
Other than #7, I really appreciate this article. NC teaches and/or clarifies on a daily
basis.
This quick, entertaining read is IMHO nothing less than a "Rosetta Stone" that can bring
non-specialists to understand MMT: not just how , but why it differs from
now-conventional neoliberal economics. I hope it finds a wide readership and that its many
references to MMT's antecedents inspire serious study by the unconvinced (and I hope they
don't take Wray's invitation to skip the 10 bullet points).
This piece is a fine demonstration of why I've missed Wray as he seemed to withdraw from
public discourse for the last few years.
Thank you! The (broad) analogies with my own experience are there. I had a decidedly
"mainstream" macro education at Cambridge (UK); though many of the "old school"
professors/college Fellows who, although not MMT people as we'd currently understand (or
weren't at *that* stage – Godley lectured a module I took but this was in the early
1990s) were still around, in hindsight the "university syllabus" (i.e. what you needed to
regurgitate to pass exams) had already steered towards neoliberalism. I never really
understood why I never "got" macro and it was consistently my weakest subject.
It was later, having worked in the City of London, learned accountancy in my actuarial
training, and then most crucially starting reading blogs from people who went on to become
MMT leading lights, that I realised the problem wasn't ME, it was the subject matter. So I
had to painfully unlearn much of what I was taught and begin the difficult process of getting
my head around a profoundly different paradigm. I still hesitate to argue the MMT case to
friends, since I don't usually have to hand the "quick snappy one liners" that would torpedo
their old discredited understanding.
I'm still profoundly grateful for the "old school" Cambridge College Fellows who were
obviously being sidelined by the University and who taught me stuff like the Marxist/Lerner
critiques, British economic history, political economy of the system etc. Indeed whilst I had
"official" tutorials with a finance guy who practically came whenever Black-Scholes etc was
being discussed, an old schooler was simultaneously predicting that it would blow the world
economy up at some point (and of course he was in the main , correct). I still had to fill in
some gaps in my knowledge (anthropology was not a module, though Marxist economics was), with
hindsight I appreciate so much more of what the "old schoolers" said on the sly during quiet
points in tutorials – Godley being one, although he wasn't ready at that time to
release the work he subsequently published and was so revolutionary. Having peers educated
elsewhere during my Masters and PhD who knew nothing of the subjects that – whilst
certainly not the "key guide" to "proper macro" described in the article – began to
horrify me later in my career.
This is really great. Thanks a ton, as Yves would say.
I know I have used to "rock star" metaphor on occasion, so let me explain that to
me what is important in excellent (i.e., live) rock and roll is improvisational
interplay among the group members -- the dozen or so who understood MMT in the beginning, in
this case -- who know the tune, know each other, and yet manage to make the song a little
different each time. It's really spectacular to see in action. Nothing to do with spotlights,
or celebrity worship, or fandom!
I'm no MMT expert, but I think
this article does a good job of juxtaposing MMT with classic (non-advanced)
macroeconomics. I quote:
In the language of Tinbergen (1952), the debate between MMT and mainstream macro can be
thought of as a debate over which instrument should be assigned to which target. The
consensus assignment is that the interest rate, under the control of an independent central
bank, should be assigned to the output gap target, while the fiscal position, under control
of the elected budget authorities, should be assigned to the debt sustainability target. [
] The functional finance assignment is the reverse -- the fiscal balance under the budget
authorities is assigned to the output target, while any concerns about debt sustainability
are the responsibility of the monetary authority.
What about interest rate fixing? The central bank would remain in charge of that, but in
an MMT context this instrument would lose most of its relevance:
[W]hile a simple swapping of instruments and targets is one way to think about
functional finance, this does not describe the usual MMT view of how the policy interest
rate should be set. What is generally called for, rather, is that the interest rate be
permanently kept at a very low level, perhaps zero. In an orthodox policy framework, of
course, this would create the risk of runaway inflation; but keep in mind that in the
functional framework, the fiscal balance is set to whatever level is consistent with price
stability.
It may be a partial reconstruction of MMT, but to me this seems to be a neat way to
present MMT to most people. Saying that taxes are there just to remove money from the economy
or to provide incentives is a rather extreme statement that is bound to elicit some fierce
opposition.
Having said that, I've never seen anyone address what I think are two issues to MMT: how
to make sure that the power to create money is not exploited by a political body in order to
achieve consensus, and how to assure that the idea of unlimited monetary resources do not
lead to misallocation and inefficiencies (the bloated, awash-with-money US military industry
would probably be a good example).
The best comparison of MMT with neoliberal neoclassical economics, in my view, is Bill
Mitchell's blog post, "How to Discuss Modern Monetary Theory" ( http://bilbo.economicoutlook.net/blog/?p=25961
). I especially recommend the table near the end as a terrific summary of the differences
between the mainstream narrative and MMT.
Thanks! I have enormous respect for Mitchell, given the quantity and quality of his
blogging. However, my only nitpick is that a lot of his blog entries are quite long and "not
easily digestible". I have long thought that one of those clever people who can do those 3
minute rapid animation vids we see on youtube is needed to "do a Lakoff" and change the
metaphors/language. But this post of Mitchell (which I missed, since I don't read all his
stuff) is, IMHO, his best at "re-orienting us".
Saying that taxes are there just to remove money from the economy or to provide
incentives is a rather extreme statement that is bound to elicit some fierce
opposition.
Yes this is a frightening statement. The power to tax is the power to destroy. If this is
a foundation point of the proposal then
Having said that, I've never seen anyone address what I think are two issues to MMT: how
to make sure that the power to create money is not exploited by a political body in order
to achieve consensus, and how to assure that the idea of unlimited monetary resources do
not lead to misallocation and inefficiencies (the bloated, awash-with-money US military
industry would probably be a good example).
Bingo. My thoughts exactly. Too much power in the hands of the few. Easy to slide into
Orwell's Animal Farm – where some people are more equal than others.
MMT is based upon very good intentions but, in my view, there is a moral rot at the root
of the US of A's problems, not sure this can be solved by monetary policy and more
centralized control.
And the JG? Once the government starts to permanently guarantee jobs
I suggest you delve into what is proposed by the MMT – PK camp wrt a JG because its
not centralized in the manner you suggest. It would be more regional and hopefully
administrated via social democratic means e.g. the totalitarian aspect is moot.
I think its incumbent on commenters to do at least a cursory examination before heading
off on some deductive rationalizations, which might have undertones of some book they read
e.g. environmental bias.
Skippy, I read the article, plus the links, including those links of the comments. I will
admit that I am a little more right of center in my views than many on the website.
The idea is interesting, but the administration of such a system would require rewriting
the US Constitution, or an Amendment to it if one thinks the process through, would it not? I
think of the Amendment required to create the Federal Reserve System when I say this.
One thing I really don't like at all -- and I've crossed swords with many over this -- is
that we do tend to take (not just in the US, this is prevalent in far too many
places) things like the constitution, or cultural norms, or traditions or other variants of
"that's the way we've always done this" and elevate them to a level of sacrosanctity.
Not for one moment am I suggesting that we should ever rush into tweaking such devices
lightly nor without a great deal of analysis and introspective consultations.
Constitutions get amended all the time. The Republic of Ireland changed its to renounce a
territorial claim on Northern Ireland. The U.K. created a right for Scotland to secede from
the Union. There's even a country in Europe voting whether to formally change its name right
now. Britain "gave up" its empire territories (not, I would add speedily, without a lot of
prodding, but still, we got there in the end). All of which were, at one time or another,
"unthinkable". Even the US, perhaps the most inherently resistant to change country when it
thinks it's being "forced" to do so, begrudgingly acknowledged Cuba.
Why would a jobs guarantee require a constitutional amendment? The federal government
creates jobs all the time, with certain defined benefits. This would merely expand upon that,
to potentially include anyone who wants a job.
There are a couple different aspects of this that people are getting mixed together, I
think. The core of MMT is not a proposal for government to implement. Rather, it is simply a
description of how sovereign currencies actually operate, as opposed by mainstream economics,
which has failed in this regard. In other words, we don't need any new laws to implement MMT
– we need a paradigm shift.
The Jobs Guarantee is a policy proposal that flows from this different paradigm.
It has been stated many times that it is to inform policy wrt to potential and not some
booming voice from above dictating from some ridged ideology.
Persoanly as a capitalist I can't phantom why anyone would want structural under –
unemployment. Seems like driving around with the hand brake on and then wondering why
performance is restricted or parts wear out early.
Thinking of the Federal Reserve Act being enabled by the Federal Income Tax of the 16th
Amendment.
Using Federal taxes to fund the JG; I do not think that this aspect of it (and others)
would survive a Constitutional challenge. Therefore ultimately an Amendment might be
needed.
Then again I may be wrong. Technically Obamacare should have been implemented by an
Amendment were strict Constitutional law applied.
Rights to health care and jobs are not enumerated in either the Constitution or Bill of
Rights, as far as I am aware.
Not opposed to some of the principles of MMT, just don't understand, in this modern age
where effectively all currency is electronic digits in a banking computer system, the issue
of a currency must be tied to taxes. In years past, where currency was printed and in one's
pocket, or stuffed under a mattress, or couriered by stagecoach, then yes – taxes would
be needed. But today can we not just print (electronically) the cash needed for government
operations each year based upon a fixed percentage of private sector GDP? Why therefore do we
need government debt? Why do we need an income tax?
Skippy, I have lived and worked in countries without income tax (but instead indirect tax)
and where government operating revenue was based upon a percentage of projected national
revenue. I have been involved in the administration of such budgets.
I am in favor of government spending, or perhaps more accurately termed investing, public
money on long-term, economically beneficial projects. But this is not happening. The reality
is that government priorities can easily be hijacked by political interests, as we currently
witness.
While I agree that political highjacking is possible and must be dealt with, this is not
strictly speaking part of an economic theory, which is what MMT is. While MMT authors may
take political positions, the theory itself is politically neutral.
Income taxes, tithes, or any other kind of driver is what drives the monetary circuit.
Consider it from first principles. You have just set up a new government with a new currency
where this government is the monopoly issuer. No one else has any money yet. So, the
government must be the first spender. However, how is this nascent government going to
motivate anyone to use this new currency? Via taxation, or like means, that can only be met
by using the national currency, whatever form that currency may take, marks on a stick,
paper, an entry in a ledger, or the like.
Thank you for this explanation. I understand that, for example, this is why the Federal
Reserve Act of 1913, I believe, created the Federal Reserve and Federal Income Tax at the
same time.
But the US economy functioned adequately, survived a civil war, numerous banking crises,
experienced industrialization, national railways, etc without a central bank or federal
income tax from the 1790's to 1913.
To me, the US's state of perpetual war is enabled by Federal Income Tax. Without it the
MIC would collapse, I am certain.
Functioned adequately
During the 150 yr hard money period we had recessions/depressions that we're both far more
frequent (every three years) and on avg far deeper than what we have had since fdr copied the
brits and took us off the gold standard. Great deprecession was neither the longest or
deepest.
Two reasons
Banks used to fail frequently, a run on one bank typically leading to runs on other banks,
spreading across regions like prairie fires if your bank failed you lost all your money.
Consequences were serious.
During GR so many banks failed in the Midwest, leading to farm foreclosures, the region was
near armed insurrection in 1932. Fiat meant that the fed can supply unlimited liquidity.
Since then banks have failed but immediately taken over by another. Critically, no depositor
has lost a penny, even those with far more exposed than the deposit insurance limit. No runs
on us banks since 1933.
Second, we now have auto stabilizers, spending continues during downturns because gov has no
spending limit. Note previously in an emergency gov borrowed. 10 mil from J.P. Morgan.
But at what cost? no depositor loses money, yet huge amounts are required to be printed,
thus devaluing the "currency". So is the answer inflation that must by necessity become
hyperinflation?
I don't understand why it is important to protect a bank vs. making it perform its function
without risking collapse. This is magical thinking as we have found very few banks in this
world not ready and willing to pillage their clients, be it nations or just the little
folk.
Why would anyone trust a government to do the right thing by its population? When has that
ever worked out in favor of the people?
I can not understand the trust being demanded by this concept. It wants trust for the users,
but in no way can it expect trust or virtue from the issuer of the "currency"
also, I can't help but think MMT is for growth at all costs. Hasn't the growth shown that
it is pernicious in itself? Destroy the planet for the purpose of stabilizing "currency".
Our federal reserve gave banks trillions of dollars, and then demanded they keep much of
it with the Fed and are paid interest not to use it. It inflated the "currency" in
circulation yet again and now it is becoming clear a great percentage of people in our
country can no longer eat, no longer purchase medications, a home, a business
If being on a hard money system as we were causes recessions and depressions, would we
find that it was a natural function to cut off the speculators at their knees?
How does MMT promote and retain value for the actual working and producing people that
have no recourse with their government? I would like to read about what is left out of this
monumental equation.
US had a federal income tax during the civil war and for a decade or so after.
I have always assumed that mass conscription and the Dreadnought arms race led to the
implementation of the modern taxing/monetary system. (gov't needed both warfare and
welfare)
Taxes, just as debt, create an artificial demand for currency as one must pay back their
taxes in {currency}, and one must pay back debt in {currency}. It doesn't have to be an
income tax, and I think a sales tax would be a better driver of demand than an income
tax.
The US had land sales that helped fund government expenditures in the 1800s.
Not all taxes are income taxes. Back in the day (20's/30's/40's),my grandfather could pay
off the (county) property taxes on his farm by plowing snow for the county in the winter --
and he was damned careful to make sure that the county commissioners' driveways were plowed
out as early as possible after a storm.
In the 30's/40's the property tax laws were changed to be payable only in dollars.
So Grandpa had to make cash crops. Things changed and money became necessary.
But today can we not just print (electronically) the cash needed for government
operations each year based upon a fixed percentage of private sector GDP?
The élites could, but it would be totally undemocratic and the economics profession's
track record of forecasting growth is no better than letting a cat choose a number written on
an index card.
Why therefore do we need government debt?
There is no government debt. It's just a record of interest payments Congress has agreed
to make because the wealthy wanted another welfare program.
Why do we need an income tax?
The only logically consistent purpose is because people have too much income.
I think the point they're driving at, is that by requiring the payment of taxes in a
particular currency, a government creates demand for that currency. There are other uses for
federal taxes, not the least of which is to keep inflation in check.
Government debt is not needed, at least not at the federal level. My understanding of it
is that it's a relic from the days of the gold standard. It's also very useful to some rather
large financial institutions, so eliminating it would be politically difficult.
Wray has said in interviews that the debt (and associated treasury bonds), while not
strictly necessary in a fiat currency, is of use in that it provides a safe base for
investment, for pensioners and retirees, etc.
Sure, it could be eliminated by (a) trillion dollar platinum coins deposited at the
Federal Reserve followed by (b) slowly paying off the existing debt when the bonds mature or
(c) simply decreeing that the Fed must go to a terminal and type in 21500000000000 as the US
Gov account balance (hope I got the number of zeroes correct!).
It could be argued that the US doesn't strictly need taxes to drive currency demand as
long as our status as the world reserve currency is maintained (see oft-discussed
petrodollar, Libya, etc). If that status is imperiled, say by an push by a coalition of
nations to establish a different currency as the "world reserve currency") taxes would be
needed to drive currency demand.
I think most of this is covered in one way or another here:
Government debt is not actually a 'real thing'. It is a residue of double-entry
bookkeeping, as is net income (income minus expenses, that's a credit in the double-entry
system). It could as well be called 'retained earnings (also a 'book' credit in the
double-entry system). If everybody had to take bookkeeping in high school there would be far
few knickers in knots!
There are two kinds of government 'debt': the accumulated deficit which is the money in
circulation not a real debt, and outstanding bonds which is real in the sense that it must be
repaid with interest.
However, the government can choose the interest rate and pay it (or buy back the bonds at
any time) with newly minted money at no cost to itself, cf. QE.
seems to me that the guaranteed jobs would be stigmatized, and make it harder for people
to get private sector jobs. "once youre in the JG industry, its hard to get out" etc.
how much of a guarantee is the job guarantee supposed to be? ie. at what point can you get
fired from a guaranteed job?
Yes, my mind wandered into the same territory. While I agree that something needs to be
done, it also has the potential to strike at the heart of a lean, merit-based system by
introducing another layer of bureaucracy. In principle, I am not against the idea, but as
they say, "God (or the Devil – take your pick) is in the details ".
If you haven't already read it, "Reclaiming the State" by Mitchell and Fazi (Pluto Press
2017) provides a detailed and cogent analysis of how neoliberalism came into ascendency, and
how the principles of MMT can be used to pave the way to a more humane and sustainable
economic system. A new political agenda for the left, drawing in a different way upon the
nationalism that has energized the right, is laid out for those progressives who understand
the necessity of broadening their appeal. And the jobs guarantee that MMT proposes has
NOTHING to do with MacJobs and Amazon workers. It has to do with meeting essential human and
environmental needs which are not profitable to meet in today's private sector.
Job guarantee, or govt as employer of last resort -- now there is a social
challenge/opportunity if there ever was one.
Well managed, it would guarantee a living wage to anyone who wants to work, thereby
setting a floor on minimum wages and benefits that private employers would have to meet or
exceed. These minima would also redound to the benefit of self-employed persons by setting
standards re income and care (health, vacations, days off, etc) *and* putting money in the
pockets of potential customers.
Poorly managed it could create the 'digging holes, filling them in' programs of the
Irish Potato Famine
ore worse (hard to imagine, but still ). It has often been remarked that the potato blight
was endemic across Europe, it was only a famine in Ireland -- through policy choices.
So, MMT aside (as being descriptive, rather than prescriptive), we are down to who
controls policy. And that is *really* scary.
In terms of power, the government has the power to shoot your house to splinters, or blow
it up, with or without you in it. We say they're not supposed to, but they have the ability,
and it has been done.
The question of how to hold your government to the things it's supposed to do applies to
issues beyond money. We'd best deal with government power as an issue in itself. I should
buckle down and get Mitchell's next-to-newest book Reclaiming the State .
I don't claim to fully understand MMT yet, but I find Wray's use of the derogatory term
"gold bugs" to be both disappointing and revealing. To lump those, some of whom are quite
sophisticated, who believe that currencies should be backed by something of tangible value
(and no, "the military" misses the point), or those who hold physical gold as an insurance
policy against political incompetence, and the inexorable degradation of fiat currencies, in
with those who promote or hold gold in the hopes of hitting some type of lottery, is
disingenuous at best.
OMT seemingly has no reason to exist being old school, but for what it's worth, the
almighty dollar has lost over 95% of it's value when measured against something that matters,
since the divorce in 1971.
I found this passage funny, as in flipping the dates around to 1791, is when George
Washington set an exchange rate of 1000-1 for old debauched Continental Currency, in exchange
for newly issued specie. (there was no Federal currency issued until 1861)
So yeah, they burned all of their tax revenue, because the money wasn't worth jack.
Farley Grubb -- the foremost authority on Colonial currency -- proved that the American
colonists understood perfectly well that taxes drive money. Every Act that authorized the
issue of paper money imposed a Redemption Tax. The colonies burned all their tax
revenue.
Gold bug is akin to money crank e.g. money = morals. That's not to mention all the
evidence to date does not support the monetarist view nor how one gets the value into the
inanimate object or how one can make it moral.
Gold doesn't historically perform as a hedge but as a speculative trade. Those who think
it can protect them from political events typically don't realize that a gold standard means
public control of the gold industry, thereby cutting any separation from the political
process off at the knees.
When a government declares that $20 is equal in value to one ounce of gold, it also
declares an ounce of gold is equal to $20 dollars. It is therefore fixing, through a
political decision subject to political changes, the price of the commodity.
Nonsense. When fiat currencies invariably degrade, and especially at a fast rate, gold has
proven to be a relative store of value for millennia . All one need do is to look at
Venezuela, Argentina, Turkey, etc., to see that ancient dynamic in action today.
You, and others who have replied to my comment, are using the classical gold standard as a
straw man, as well. Neither I, nor many other gold "bugs" propose such a simple solution to
the obviously failed current economy, which is increasingly based on mountains of debt that
can never be repaid.
gold has proven to be a relative store of value for millennia.
As long as one is mindful that gold is just another commodity, subject to the same
speculative distortions as any other commodity (see Hunt brothers and silver).
But that is obviously false, given that no other commodity has remotely performed with
such stability over such a long period of time.
It is true that over short periods distortions can appear, and the *true* value of gold
has been suppressed in recent years through the use of fraudulent paper derivatives. But
again, I'm not arguing for the return of a classical gold standard.
Don't worry, I'm likely to be at least equally dense!
I didn't mean to suggest that there is some formula from which a *true* value of precious
metals might be derived. I simply meant that gold has clearly been the object of price
suppression in recent years through the use of paper derivatives (i.e. future contracts). The
reason for such suppression, aside from short-term profits to be made, is that gold has
historically acted as a barometer relating to political and economic stability, and those in
power have a particular interest in suppressing such warning signals when the system becomes
unstable.
So, while the Central Banks created previously unimaginable mountains of debt, it was
important not to alarm the commoners.
The suppression schemes have become less effective of late, and will ultimately fail when
the impending crisis unfolds in earnest.
As long as one is mindful that gold is just another commodity, subject to the same
speculative distortions as any other commodity
It sounds good in theory, but history says otherwise.
The value remained more or less the same for well over 500 years as far as an English
Pound was concerned, the weight and value of a Sovereign hardly varied, and the exact weight
and fineness of one struck today or any time since 1817, is the same, no variance
whatsoever.
Thus there was no speculative distortions in terms of value, the only variance being the
value of the Pound (= 1 Sovereign) itself.
" who believe that currencies should be backed by something of tangible value"
As I understand it, MMT also requires that currency be backed by something of tangible
value: a well managed and productive economy. It doesn't matter in the least if your debt is
denominated in your own currency if you have the economy of Zimbabwe.
Sounds reasonable in theory, but that was supposed to be the case with the current
economic system, as well, and we can all see where that has led.
I'm not arguing that there isn't a theoretically better way to create and use
"modern" money, but rather doubt that those empowered to create it out of thin air will ever
do so without abusing such power.
Oh, I agree with you. In no universe that I am aware of would the temptation to create
money beyond the productive capacity of the economy to back it up be resisted. I think
Zimbabwe is a pretty good example of where the theory goes in practice.
That's exactly wrong. Zimbabwe had a production collapse. Same amount of money to buy a
much smaller amount of goods. The gov responded not by increasing goods, but increasing money
supply.
Mark Blyth has a good discussion of the gold standard in his book Austerity: The
History of a Dangerous Idea . He makes the point that, in imposing the adjustments
necessary to keep the balance of payments flowing, the measures imposed by a government would
be so politically toxic, that no elected official in his or her right mind would implement
them, and expect to remain in office. In short, you can have either democracy, or a gold
standard, but you can't have both.
Also, MMT does recognize that there are real world constraints on a currency, and that is
represented by employment, not some artificially-imposed commodity such as gold (or bitcoin,
or seashells, etc). The Jobs Guarantee flows out of this.
As mentioned above, you, among others who have replied to my original comment, are using
the classical gold standard as a straw manl. Neither I, nor many other gold "bugs", propose
such a simple solution for the failed current economic system, which is increasingly based on
mountains of debt that can never be repaid.
increasingly based on mountains of debt that can never be repaid.
Huh? I listed two ways they could be repaid above. In the US, the national debt is
denominated in dollars, of which we have an infinite supply (fiat). In addition, the Federal
Reserve could buy all the existing debt by [defer to quad-entry accounting stuff from Wray's
primer] and then figuratively burn it. Sure, the rest of the world would be pissed and
inflation *may* run amok, but "can never" is just flat out wrong.
Of course it can be extinguished through hyperinflation. I didn't think that it would be
necessary to point that out. No "may" about it, though, as if the U.S. prints tens of
trillions of dollars to extinguish the debt, hyperinflation will be assured.
I didn't think that it would be necessary to point that out.
Sorry, but I'm an old programmer; logic rules the roost. When one's software is expected
to execute billions of times a day without fail for years (and this post is very likely
routed through a device running an instance of something I've written). Always means every
time, no exceptions; never means not ever, no matter what.
I'm sure that there is no one solution proposed, though an alternative to the current
system which seems plausible would be a currency backed by a basket of commodities, including
gold.
Hi Tinky, much late but still. Gold will have value as long as people believe it has
value. But what will they trade it for? The bottom line is your life.
I don't have any gold, too expensive, and it really has no use. But I remember Dimitri Orlov's
advice : I am long in needles, pins, thread, nails and screws, drill bits, saws, files,
knives, seeds, manual tools of many sorts, mechanical skills and beer recipes. Plus I can
sing.
The vast majority of people who hold physical gold are well aware of the value of having
skills and supplies, etc., in case of a serious meltdown. But it's not a zero-sum game, as
you suggest. Gold will inexorably rise sharply in value when today's fraudulent markets
crash, and there will be plenty of opportunities for those who own it to trade it for other
assets.
Furthermore, as previously mentioned, gold's utility is already on full display,
to those who are paying attention, and not looking myopically through a USD lens.
"Mountains of debt that can never be repaid" is a propaganda statement with no reference
to any economic fact. Why do you feel that this "debt" needs to be "repaid"? It is simply an
accounting artifact. The "debt" is all of the dollars that have been spent *into* the economy
without having been taxed back *out*. The word "debt" activates your feels, but has no
intrinsic meaning in this context. Please step back from your indoctrinated emotional
reaction and understand that the so-called national "debt" is nothing more than money that
has been created via public spending, and "repaying" it would be an act of destruction.
I keep telling (boring, annoying, infuriating) people that, in the simplest terms, the
national debt is the money supply and they won't grasp that simple declaration. When I said
it to my Freedom Caucus congress critter (we were seated next to each other on an exit aisle)
his head started spinning, reminding me of Linda Blair in The Exorcist.
As I said to my congress critter, if the debt bother's y'all so much, why not just pay it
off, dust off your hands, and be done with it?
Personally, if I were President for a day, I'd have the mint stamp out 40 or so trillion
dollar platinum coins just to fill the top right drawer of the Resolute desk. Would give me
warm fuzzy feelings all day long.
p.s. I also told him that the man with nothing cares not about inflation. He didn't like
that either.
"those, some of whom are quite sophisticated, who believe that currencies should be backed
by something of tangible value (and no, "the military" misses the point), or those who hold
physical gold as an insurance policy against political incompetence, and the inexorable
degradation of fiat currencies"
I suspect that Wray exactly means that these people are the goldbugs, not the ones who
speculate on gold.
The whole point that currencies should be backed by something of tangible value IMO is
wrong, and I think the MMTers agree with me on this.
If so, then he should clarify his position, as again, lumping the billions –
literally – of people who consider gold to be economically important, together as one,
is disingenuous.
I think people that consider gold to be a risk hedge understand its anthro, per se an
early example of its use was a fleck of golds equal weight to a few grains of wheat e.g. the
gold did not store value, but was a marker – token of the wheat's value – labour
inputs and utility. Not to mention its early use wrt religious iconography or vis-à-vis
the former as a status symbol. Hence many of the proponents of a gold standard are really
arguing for immutable labour tokens, problem here is scalability wrt high worth individuals
and resulting distribution distortions, unless one forwards trickle down sorts of
theory's.
Not to mention in times of nascent socioeconomic storms many that forward the idea of gold
safety are the ones selling it. I think as such the entire thing is more a social psychology
question than one of factual natural history e.g. the need to feel safe i.e. like commercials
about "peace of mind". I think a reasonably stable society would provide more "peace of mind"
than some notion that an inanimate object could lend too – in an atomistic
individualistic paradigm.
I once had an co-worker that was a devout Christian. When he realized I wasn't religious,
he asked me, incredulously, how I was able to get out of bed in the morning. Meaning, he
couldn't face a world without meaning.
I think a lot of people feel that same way about money. They fight over it, lie for it,
steal it, kill for it, go to war over it, and most importantly, slave for it. Therefore, it
must have intrinsic value. I think gold bugs are in this camp.
Talking about Warren's blog ( http://moslereconomics.com/ ), everytime I try to go there,
Cloudflare asks me to prove that I am human. Anyone know what's up with that? It's the only
website I've ever seen do that.
That's a good suggestion. Unfortunately, as I sometimes find, you can pass ALL the major
test-sites but something (a minor, less-used site using out-of-date info?) can give you
grief. NC site managers once (kindly) took the time to explain to me why I might have
problems that they had no ability to address at their end. I had to muck around with a link
given earlier to Bill Mitchell's blog before my browser would load it.
I think there can be quirks that are beyond our control (unfortunately) – for instance
I think a whole block of IP addresses (including mine) used by my ISP have been flagged
*somewhere* – no doubt due to another customer doing stuff that the checker(s) don't
like. (The issue I mentioned above was more likely due to a strict security protocol in my
browser, however.)
Monetary policy in terms of interest rates is not just weak, it also tends to treat all
targets the same. Fiscal policy can be targetted to where it is felt it can do the most
good.
Christine Desan's book, "Making Money," exhaustively documents the history of money as a
creature of the state. Recall as well that creating money and regulating its value are among
the enumerated POWERS granted to our government by we, the people. Money, indeed, is
power.
Hmmm Randy Wray states that " permanent Zirp (zero interest rate policy) is probably a
better policy since it reduces the compounding of debt and the tendency for the rentier class
to take over more of the economy. "
But just last week, Yves stated that " that one of the consequences of the protracted
super-low interest rate regime of the post crisis era was to create a world of hurt for
savers, particularly long-term savers like pension funds, life insurers and retirees. "
[ https://www.nakedcapitalism.com/2018/09/crisis-caused-pension-train-wreck.html
]
So are interest rates today too high, or too low? We're getting mixed messages here.
IMO, interest rates are too low . Beyond the harmful effect to savers, it also
drives income inequality . How? When interest rates are less than inflation, it is
trivial to borrow money, buy some assets, wait for the assets to appreciate, sell the assets,
repay the debt, and still have profit left over even after paying interest . Well,
it's trivial if you're already rich and have a line of credit that is both large and
low-interest. If you're poor with a bad FICO score, you don't get to play the asset
appreciation game at all.
The rates between riskier and less risky borrowers will still be reflected in the
different rates given to each.
The low rates encourage greater risk taking to increase the reward(a higher rate of
return). This is what leads to the gross malinvestment.
Case in point: the low rates led to more investments into the stock market, where the
returns are unlimited. This is what led to the income inequality of Obama's term, as
mentioned above.
I cannot speak for Yves, nor or Randy, but IMO, interest rates are too low for people who
depend on interest for their living -- as an old person, I have seen my expected income drop
to about zilch when I had expected 7 to 10% on my savings. Haha! So yeah, too low for us who
saved for 'retirement'.
Too high for people financing on credit, since a decent mortgage on a modestly-priced
house will cost you almost the same as
the house . And that doesn't even begin to look at unsecured consumer credit (ie, credit
card debt), which is used in the US and other barbaric countries for medical expenses, not to
mention student debt. The banks can create the principal with their keystrokes, but they
don't create the interest. Where do you suppose that comes from? Hint: nowhere, as in
foreclosures and bankruptcies.
Wray's statement reflects his preferences from an operational policy perspective.
Sovereign government debt cares no risk and therefore should not pay interest. The income
earned from that interest is basically a subsidy and all income when spent caries a risk of
inflation induced excess demand. Therefore who unnecessarily add the risk to the economy and
potential risk needing to reduce other policy objectives to accommodate unnecessary interest
income subsidies to mostly rich people?
Yves comment reflects the reality of prior decades of economic history. Even if Wray's
policy perspective is optimal, there are decades of people with pensions and retirement
savings designed around the assumption of income from risk-free government debt. It's this
legacy that Yves is commenting on and is a real problem that current policy makers are just
ignoring.
As for your comments on how low cost credit can be abused, I believe you'll find most MMT
practitioners would recommend far more regulation on the extension of credit for
non-productive purposes.
I just wrote a note to Randy:
The origin of money is not merely for accounting, but specifically for accounting for DEBT --
debt owed to the palatial economy and temples.
I make that clear in my Springer dictionary of money that will come out later this year:
Origins of Money and Interest: Palatial Credit, not Barter
Can somebody help me out here? It seems to me that the US macroeconomic policy has been
operating under MMT at least since FDR (see for example Beardsley Ruml from 1945).
Since then, insofar as I understand MMT, fiat has been printed and distributed to flow
primarily through the MIC and certain other periodically favored sectors (e.g. the Interstate
Highway System). Then, rather than destroying this fiat through taxation, the sectoral
balances have been kept deliberately out of balance: Taxes on unearned income have been
almost eliminated with an eye to not destroying fiat, but to sequestering as much as possible
in the private hands of the 1%. This accumulating fiat cannot be productively invested
because that would cause overproduction, inflation, and reduce the debt burden by which the
1% retains power over the 99%. So the new royalists, as FDR would have styled them, keep
their hoard as a war chest against "socialists".
I get all this, more or less, and I appreciate that it is well and good and important that
MMTers insistently point out that the emperor has no clothes. This is a necessary first step
in educating the 99%.
But I don't see MMT types discussing the fact that US (and NATO) macroeconomic policy
already has a Job Guarantee: if you don't want to work alongside undocumented immigrants on a
roof or in a slaughterhouse or suffer the humiliation of US welfare, such as it is, you can
always get a job with the army, or the TSA, or the police, or as a prison guard, or if you
have some education, with a health unsurance company or pushing drone buttons. You only have
to be willing to follow orders to kill–or at least help to kill–strangers.
(Okay, perhaps I overstate. If you're a medical doctor or an "educator" with university
debt you don't have to actively kill. You can decline scant Medicaid payments and open a
concierge practice, or you can teach to the test in order that nobody learns anything
moral.)
It is difficult to get a man to understand something, when his salary depends on his not
understanding it. Wouldn't it be clarified matters if MMTers acknowledged that we already
have a JG?
We have been operating on MMT since the end of WW2, with 2 exceptions in 1968 when Silver
Certificate banknotes no longer were redeemable for silver, and in 1971 when foreign central
banks (not individuals!) weren't allowed to exchange FRN's for gold @ $35 an ounce
anymore.
It's been full on fiat accompli since then and to an outsider looks absurd in that money
is entirely a faith-based agenda, but it's worked for the majority of all of lives, so nobody
squawks.
It's an economic "the emperor has no clothes" gig.
It seems to me that the US macroeconomic policy has been operating under MMT at
least since FDR (see for example Beardsley Ruml from 1945).
Yup, you are correct, IMO. And about the jobs guarantee, too. The point of MMT is not that
we have to adopt, believe in, or implement it, but that *this is how things work* and we need
to get a %&*^* handle on it *STAT* or they will ride it and us to the graveyard. The
conservatives and neo-cons are already on to this, long-time.
I believe the chant is:
We can have anything we want that is available in our (sovereign) currency and for which
there are resources
What we get depends on what we want and how well we convince/coerce our 'leaders' to make
it so.
JG is geared toward community involvement to create an open-ended collection of potential
work assignments, not top-down provision of a limited number of job slots determined by
bureaucrats on a 1% leash.
About every 80 years, there has been a great turning in terms of money in these United
States
Might as well start with 1793 and the first Federal coins, followed in 1861 by the first
Federal paper money, and then the abandonment of the gold standard (a misnomer, as it was one
of many money standards @ era, most of them fiat) in 1933.
We're a little past our use-by date for the next incarnation of manna, or is it already
here in the guise of the great giveaway orchestrated since 2008 to a selected few?
After learning MMT I've occasionally thought I should get a refund for the two economics
degree's I originally received. One of the primary mainstream teachings that I now readily
see as false is the concept of money being a vale over a barter economy. It's lazy,
self-serving analysis. It doesn't even pass a basic logical analysis let alone archeological
history. Even in a very primitive economy it would be virtually impossible for barter to be
the main form of transaction. The strawberry farmer can't barter with the apple farmer. His
strawberries will be rotten before the apples are ripe. He could give the apple farmer
strawberries in June on the promise of receiving apples in October, but that's not barter
that's credit. The apple farmer could default of his own free will or by happenstance (he
dies, his apple harvest is destroyed by an act of god, etc ). How does the iron miner get his
horse shoed if the blacksmith needs iron before he can make the horse show? Credit has to
have always been a key component of any economy and therefore barter could never have been
the original core.
After learning MMT I've occasionally thought I should get a refund for the two
economics degree's I originally received.
Agreed. Richard Wolff notes that in most Impressive Universities there are two schools,
one for Economics (theory) and another for Business (practice). Heh. I say, go for the
refund, you was robbed.
All the Rupee* has done over time is go down in value against other currencies, and up in
the spot price measured in Rupees even as gold is trending down now, and that whole stupid
demonetization of bank notes gig, anybody on the outside of the fiat curtain looking in, had
to be laughing, and ownership there is no laughing matter, as it's almost a state financial
religion, never seen anything like it.
* A silver coin larger than a U.S. half dollar pre-post WW2, now worth a princely 1.4
cents U.S.
Not an economist, but I appreciate both the applicability of MMT and the fierce, but often
subtle resistance its proponents have encountered academically, institutionally and
politically. However, I have questioned to what extent MMT is uniquely applicable to a nation
with either a current account surplus or that controls access to a global reserve
currency.
How does a nation that is sovereign in its own currency, say Argentina for example (there
are many such examples), lose 60 percent of its value in global foreign exchange markets in a
very short time period?
Is this due primarily to private sector debts denominated in a foreign currency (and if
so, what sectors of the Argentine economy undertook those debts, for what purposes, and to
whom are they owed?), foreign exchange market manipulation by external third parties, the
effective imposition of sanctions by those who control the global reserve currency and
international payments system, or some combination of those or other factors?
MMT makes more sense than orthodox neoliberal accounts of currency and sovereign spending
to me, as it does a better job of acknowledging reality. MMT recognizes that currency is an
artifice and that imagined limitations on it are just that, and real resources are the things
which are limited. Neoliberal economics acts as if all sorts of byzantine factors mean
currency must be limited, but we can think of resources, and the growth machine they feed, as
being infinite.
"Taxes or other obligations (fees, fines, tribute, tithes) drive the
currency."
Specifically, what does "drive" mean? Does it mean:
1. When taxes are reduced, the value of money falls?
2. If taxes were zero, the value of money would be zero?
3. Cryptocurrencies, which are not supported by taxes, have no value?
"JG is a critical component of MMT. It anchors the currency and ensures that achieving
full employment will enhance both price and financial stability."
Specifically, what do "anchors" and "critical component" mean? Do they mean:
1. Since JG does not exist, the U.S. dollar is unanchored and MMT does not exist?
2. Providing college graduates with ditch-digging jobs enhances price and financial
stability?
3. Forcing people to work is both morally and economically superior to giving them money and
benefits?
"Drive" means "creates initial demand for":
1. No, not for an established currency.
2. See 1.
3. Crypto is worth what you can buy with it.
"Anchors" means it acts against inflation and deflation. "Critical component" means the
economy works better if it has it.
1. Yes and no.
2. Yes, if no-one else will hire them.
3. No element of force is implied.
"... I still find it incredible that this video by Samuelson essentially acknowledging that a key part of his multi-decade "core" textbook is religion, not science, is not more widely shared. ..."
Steve Keen of Kingston University, London gives an important high-level talk on the
considerable shortcomings of mainstream economics. Keen argues that a major objective of the
discipline is to justify the virtues of markets, which in turn leads them to adopt a strongly
ideological posture along with highly simplified models and narrow mathematical approaches to
reach conclusions that they find acceptable.
Keen has many informative asides, like the introductory level texts he used in the 1970s
were more advanced than many graduate level guides.
I still find it incredible that this video by Samuelson essentially acknowledging that a
key part of his multi-decade "core" textbook is religion, not science, is not more widely
shared.
OK the person who constructed the complete youtube vid has typos etc and editing
probably didn't help the cause. but still
"... By Philip E. Mirowski, Carl Koch Chair of Economics and the History and Philosophy of Science, University of Notre Dame. Originally published at the Institute for New Economic Thinking website ..."
"... Inside Job ..."
"... Philosophy. The neoliberal PR campaign of 'the market is the ultimate and true arbiter of all' has all the appearance of a regression to what I can only call inverted marxist dialectical-materialism as espoused by the old soviets; where anything, even scientific findings, that threatened the supremacy of the doctrine's claim of economic inevitability, was suppressed. ( No wonder the old soviet finally collapsed. ) The neoliberals substitutes a sort of libertarian dialectical-materialism that requires suppression of any theory that contradicts their claim of 'market infallibility' and inevitability. This is dogma, not science or even economics. ..."
At the beginning of May 2018, there was a brief furor over donations from Koch
family-affiliated philanthropies to fund the Mercatus Institute and the newly-named Antonin
Scalia School of Law at George Mason University (GMU). Although articles concerning the
admirable efforts of the GMU student organization UnKoch My Campus appeared in many of
the prominent news outlets, the attention span of journalists seemed to barely outpace that of
interest in one of Donald Trump's tweets, with even less consequence. But more to the point,
the silence of the economics profession concerning the revelations was pretty deafening.
Briefly, I would like to revisit why this was so and why it matters.
The details of the controversy can be briefly summarized: the assortment of Koch family
foundations and allied charitable cutouts (which some libertarians have dubbed the "Kochtopus,"
but will henceforth here be shortened to 'the Kochs') have been making targeted donations to
more than 300 schools since 2005, predominantly to economics departments. But George Mason
University has been the most lavishly favored, garnering more than a third of the estimated
$150 million bequeathed to universities from 2005-2015. The event that stirred campus
resistance at GMU was a massive donation of $10 million from the Kochs tied to a $20 million
donation from an anonymous benefactor to rename the Law School after Antonin Scalia, "formally"
earmarked for "student scholarships." The first thing one notices was the budgetary legerdemain
which obscured the relationship between faculty selection and line items in budgetary terms.
Thus, the GMU Provost S. David Wu could tell his Faculty Senate in April 2016 that the bequest
came with "no strings attached The entire $30M is for scholarships for students and nothing
else." This narrative might have prevailed, if not for the document dump by UnKoch My
Campus at the end of April, [1]
a result of a FOIA suit by Transparency GMU , which detailed the series of negotiations
with the Kochs (including the overwhelming role of figures from the Federalist Society as
intermediaries: another Koch funded arm), including stipulations of how designated
representatives would have input into GMU hiring decisions. This forced GMU President Angel
Cabrera to reverse earlier statements that existing donor arrangements had not been allowed to
influence internal academic matters. This, in turn, was the trigger which attracted the
national press. As Inside Higher Ed put it: "academic values have long held that donors
don't get to pick who holds chairs, or evaluate them."
"It's now abundantly clear that the administration of Mason, in partnership with the
Mercatus Center and private donors, violated principles of academic freedom, academic control
and ceded faculty governance to private donors," said Bethany Letiecq, President of GMU's
chapter of the AAUP. But this reaction might underestimate the scope of the problem, reducing
it to a mere matter of moral integrity. I shall argue instead that this event has more
structural underpinnings, touching upon the very conception of education in relation to
markets, and involve some crucial aspects of economic theory.
Broadly speaking, economists greeted this controversy with a big yawn: this sort of thing
happens all the time, so don't get your panties in a twist. Indeed, the Kochs have been making
similar grants to many universities for more than a decade, as have other philanthropies. The
attitude was that the GMU case was nothing special.
How do economists justify the unflappable lightness of their nonchalance?
First off, many opine that the donors don't really interfere in academic matters; it
is just the optics that are less than optimal. There are some crucial details which mitigate
this pronouncement when it comes to the GMU case, which are dealt with in a footnote.
[2]
Nevertheless, in general, most economists are quick to denounce the idea that there are subtle
procedural moves attached to donations that substantially alter the practices of universities,
as well as the composition of what is taught and researched.
Secondly, for most economists, there are no such things as conflicts of interest, at least
when it comes to economic thinking. They regularly declare with ardor that no one is
compromising their pronouncements or perverting their beliefs for money. Years ago, I
documented this attitude with regard to the culpability of economists for the Great Crash of
2007-8, even in the face of embarrassments such as the scathing portrayal of certain figures in
the documentary Inside Job , or the prospect of a code of ethics for economists by the
American Economics Association (AEA), a point to which I will return. [3]
In the GMU case, the prescription for disclosure was rejected -- hence the need for FOIA
requests. The economists generally argued that the people involved had long ago settled upon
their personal political beliefs; they were just being selected by the donors to provide a
coherent curriculum in "free market doctrine." I shall argue below that this imprecision over
the criteria of which doctrines have been selected allow this sense that the ecology of
knowledge persists unaltered in the face of concerted Koch intervention.
Third, the orthodox economist would be inclined point out that all potential donors, just
like all fledgling academics, possess their own prior interests and convictions, which will be
subject to further selection one way or another. It is not the money that makes the
difference in the larger scheme of things. As the late Craufurd Goodwin of Duke University used
to say, "The only tainted money is the money that t'aint [ sic ] mine." In other words,
the sociology of knowledge pretty much works independently of the wishes of any funders
involved, since everyone is selfishly scrambling for support. Money as such never taints the
well of human inquiry, or so most economists postulate. Of course, one's appreciation for this
putative conservation rule might be qualified when one learns that Goodwin had himself been a
Program Officer for European and International Affairs under McGeorge Bundy at the Ford
Foundation during the Cold War. [4]
Finally, although they might not say this out loud in front of journalists, many economists
tend to suspect that all the complaints about the Kochs are just sour grapes, an ideological
reaction deriving from the wailers' disdain for the politics of the Koch brothers and their
minions. After all, what's so suspicious about wanting to "rectify the bias" of academics
hostile to free markets and freedom of speech? That sounds like something most economists would
voluntarily support in any event, independent of whomever was fronting the funding. But, just
as in the previous cases, this ignores the actual content of the doctrines that the Koch
brothers, as well as that of many of their fellow travelers and cooperating philanthropists,
[5]
seek to promote through their initiatives.
It will come as no surprise to realize that public education is being brutally weaned from
state support across the developed world in the recent past, and that private funding has been
touted as the deliverance for cash-strapped universities. In this regard, it is pivotal to
realize the significance of the fact that George Mason University is a public and not a
private university. Far from being a mere shifting of sources of sustenance, this trend itself
constitutes one of the prime prescriptions of the political doctrine that motivates the Kochs,
namely, neoliberalism. [6]
Neoliberalism shouldn't be confused with actual libertarianism; it is predicated upon
intervention to bring about the types of government and markets that the neoliberals believe
are necessary for the success of capitalism: it just won't happen by itself. One of their
central doctrines relevant to the current controversy is their belief that an efficient market
is one that processes and validates information, and conveys it to the appropriate agents when
and where they need it. Human knowledge is thus first and foremost a market phenomenon.
A direct consequence of this doctrine is that the state should not control public education:
the purpose of education is the personal accumulation of human capital, and not the
creation of the common denominator of an educated citizenry. Hence many of the major figures of
the Neoliberal Thought Collective -- Milton Friedman, James Buchanan, Charles Koch -- long ago
proposed that education be "privatized" in most of its various manifestations. Knowledge is
paltry if not put up for sale, as they see it. This is the major consideration which dictates
that the points at issue at GMU and elsewhere are not merely some symmetrical offsetting
response to left wing donations to universities; rather, the whole point of the Koch brothers'
intervention is to produce a different kind of university , one which renders
government-run education much more responsive to market signals and market dictates. It is a
world where people of means can freely buy the kinds of doctrines that they wish to be conveyed
to the young, without being coy or ambagious about it. Hence the Koch's doctrines and their
philanthropic behaviors are tightly bound into a single package, displaying a coherence not
found in the motives of lesser philanthropists. This explains why the Kochs are willing to
conduct their negotiations with universities in secret, to carry out their stipulations through
cutouts and hard to trace intermediaries and foundations, to package their offers with other
rich (and anonymous) donors en banc and to impose conditions upon their bequests that
effectively neutralize all previous principles of academic freedom in the long run.
There is a different implication of neoliberal conceptions of knowledge, and that extends to
the ideas which constitute the microeconomic orthodoxy. Once information was introduced into
the standard pricing model, it was discovered there was no single correct way to formalize
epistemology. Through a sequence of different models, the profession moved from the agent as
capable of super-cognition, to the portrait of the agent as a flawed vessel for knowledge,
offset by a neoliberal notion of the market as super-information processor. [7]
Truth became a function of the skewed and arbitrary ability to pay; and consequently,
economists were deemed to have possessed superior wisdom concerning whom should get to know
what under which circumstances. As self-appointed Engineers of the Human Soul, this reinforced
their conviction that there was no need to worry about conflicts of interest, nor indeed, about
the increasing prevalence of unashamed mendacity and fake news. [8]
Thus, the Koch interventions were therefore regarded as essentially harmless.
Of course, economists would be most interested in the ways this promotes the careers of
other economists, but the ambitions of the neoliberal thought collective extends well beyond
the social sciences, even unto the realm of the natural sciences. Neoliberalism is supremely
hostile to expertise, which is the flip side of its hostility to old-school universities. Hayek
denounced intellectuals as 'second-hand dealers in ideas', and modern neoliberals extrapolate
that inclination to the limit. In their view, even natural scientists need to learn to
subordinate their own research to "the market," and accept that tomorrow the market might
devalue their own expertise in favor of the beliefs of less trained participants. "Freedom" is
in this instance made manifest as the ability to insert your own 2 cents at will; let the
market sort it out. This insight prompts another reconstruction of university life, this time
in the direction of so-called 'open science' and 'citizen science'. [9]
The literal construction of a 'marketplace of ideas' leads directly to the elevation of the
market as the ultimate validator of truth in most dimensions, and the subordination of
professional researchers to a less central role, surrounded by platforms that harvest the
unremunerated labor of the reserve army of the undereducated. This is creative destruction with
a vengeance, which further diminishes the role of the university.
Consequently, while economists tend to think they come equipped to understand all the
implications of a thoroughgoing marketplace of ideas, the four conventional ideas sketched
above reveal that they currently are far from having a comprehensive appreciation of the
"economics of information" as it plays out in the world.
An example of this inadequate approach is a very brief code of professional conduct ratified
in April 2018 by the AEA. Its actual wording is significant. It states, "Integrity demands
honesty, care and transparency in conducting and presenting research; disinterested assessment
of ideas; acknowledgement of the limits of expertise; and disclosure of real and perceived
conflicts of interest." [10]
There was nothing in the statement proposing that the AEA or any other institution should
promote or enforce disclosure, nor indeed define what should be disclosed; it says absolutely
nothing at all about "academic freedom." "Integrity" is apparently conceived as personal
virtue, although a subsequent paragraph promotes "a professional environment with equal
opportunity and fair treatment for all economists." This species of "environment" seems be more
concerned with employment of economists than the preservation of academic inquiry as such.
This is why the GMU incident deserves far more scrutiny than it has received from
economists, and academics in general.
[2]
Some sources report the document dump reveals that 'the Kochs' reserved the right of
designation of members on faculty selection committees and veto rights in earlier gifts to
Mercatus, but in the Scalia School case, the agreement stated that they would have no power
over retention or promotion. On this, see https://www.nationalreview.com/2018/05/washington-post-koch-brothers-scoop-falls-apart/
. However, the situation at GMU was far more complex than that, because the emails
independently stipulated whom among existing Koch-financed GMU faculty and the Federalist
society would make such decisions for the Law School; and furthermore, the Kochs reserved the
right to withdraw from the agreement without notice or just cause. Clearly, this Sword of
Damocles allowed them to veto any subsequent choices, all the while asserting formally in the
document that they unreservedly supported academic freedom. The Kochs, after decades of
experience, have gotten good at circumventing faculty who don't understand how the takeover of
universities actually works.
[3]
See Philip Mirowski, Never Let a Serious Crisis Go to Waste (Verso, 2013), pp.
218-223.
[5]
See, for instance, the fascinating case of BB&T: Douglas Beets, "BB&T, Atlas Shrugged,
and the ethics of corporation influence on college curricula," Journal of Academic
Ethics , 2015, (13):311-344.
[7]
This is described in detail in: Philip Mirowski and Edward Nik-Khah, The Knowledge we Have
Lost in Information , (Oxford, 2017).
[8]
See, for instance, Matthew Gentzkow & Jesse Shapiro, "Competition and Truth in the Market
for News," Journal of Economic Perspectives , (2008) 22:133-154. On his later work, "A
reader of our study could very reasonably say, based on our set of facts, that it is unlikely
that fake news swayed the election," said Gentzkow. At:
https://news.stanford.edu/2017/01/18/stanford-study-examines-fake-news-2016-presidential-election
.
The New Golden Rule: "Them as has the gold (or money and influence) rules." (re-cast to
avoid any charge that I am a Gold Bug )
I recall other actions by many sociopathic malefactors of great wealth to control the
larger narrative and school curricula through history, like "supporting" the Catholic Church
in all its machinations. The Reformation opened the door, along with common understandings of
Darwin's notions, to Calvinism. I was bred up in the Presbyterian church, where TULIP
blossomed in the young minds of the catechism classes and was reinforced in every bit of the
Westminster Fellowship youth group's activities (the Total Depravity proven by all the
efforts of young hormone sufferers to get into each others; pants). A pretty sick set of
doctrines, http://www.auburn.edu/~allenkc/openhse/calvinism.html
, when one gets on a little bit in life, and sees how humans really interact, and how "the
Calvinist economics" actually work. https://marketmonetarist.com/2011/10/20/calvinist-economics-the-sin-of-our-times/
So the ho-hum economists and the media midgets are sort of right, at least in pointing out
that there's nothing new in what the Kochtopus and all the other wealthy individuals and
their "philanthropies" are about. Huge amounts are spent to control the content of Texas
lower-grade text books, because as those go, so goes all the curricula of most of the
country. http://www.nybooks.com/articles/2012/06/21/how-texas-inflicts-bad-textbooks-on-us/
"If only the people were aware of what is being done to them, they would
__________________."
The fact that the evergreen Glenn Hubbard interview from Inside
Job didn't make Hubbard a pariah
in the economics community tells us all we need to know about
the intersectionality of integrity and academic economics.
Oh, they don't argue that. They know that monetary incentives work. They just don't want
to agree that money isn't neutral in terms of what it 'incentivises' any more than does how
money is distributed in terms of macroeconomic 'growth'.
This allows them to pretend that money is neutral.
Back in day, our Economics faculty used to tell us that the study of economics was "value
free." What was presented was simply a reflection of real world conditions. No value
judgements were to be made. These fellows, like many of our parents, were all deeply scared
products of the Great Depression and committed Keynesians (public policy anyone?) to a man.
Of course, all we had to do was pick up a copy of Theory of the Leisure Class, and if
Veblen's prose didn't hurt our hair to badly, we knew this was a bunch of nonsense.
The worthy successors to this faculty now offer two different Bachelor of Science in
Economics degrees. Indeed, the profession has gone entirely through the looking-glass. If we
see the past (economic anthropology) or the future (post-capitalism), history will be
destroyed. Now we all know that the Red Queen has a cock-eyed head and the royal crown would
never fit her. Moreover, the Red Queen ate the stolen tart and is beyond redemption in any
case. Are we to believe the Jabberwocky? Is time itself in danger? Can we recapture the
Chronosphere? Can we get back through the looking-glass? And if we do, will we all wake up in
mental hospitals?
Antonin Scalia School of Law at George Mason University
Hmm.. ASSoL at George Mason University.
Can these people be that stupid?
I'm enrolled in ASSoL at GMU, or
I'm an ASSoL Graduate
One could not have chosen a better name working for Monty Python.
Secondly, for most economists, there are no such things as conflicts of interest,
Because each item, pronouncement, thesis, or work product is to ensure the Economist's
Master that their view of the universe is correct, then, obviously there is no Conflict of
Interest.
"The Corruption of Economics" by Mason Gaffney dives deep into this. "False Education in
our Colleges and Universities" by Emil O. Jorgensen referenced within this gem gives an
example – ' in the 1924 Professor Richard T. Ely was the director of the Institute for
Research in Land Economics and Public Utilities at the University of Wisconsin at Madison but
relocated over questions of it being entirely financed by certain corporations and economic
groups seeking to have privilege and monopoly taxed less and industry and consumption taxed
more Although it was denied that the removal of Prof. Ely was in any way due to compulsion,
it is a curious fact that no sooner had Prof. Ely gone than the Board of Regents voted that
no more money "shall in the future be accepted by or in behalf of the University of Wisconsin
from any incorporated educational endowments or organizations of like character." But Prof.
Ely with his old-time shrewdness and skill had dodged the descending ax. Suspecting evidently
that such a resolution would sooner or later be passed, the Professor began in the early part
of the year to cast about for a safe place to escape and picked out as his refuge
Northwestern University in Evanston – a privately endowed institution noted for its
conservatism and its close affiliation with the powers that be Having definitely laid his
plans Prof. Ely then added Frank O. Lowden (former governor of Illinois) and Nathan W.
MacChesney (General Counsel for the National Association of Real Estate Boards as well as a
trustee of Northwestern University) to his own board of trustees Very grateful for the
welcome extended to him by Northwestern University, Prof. Ely commences his activities in
that institution with larger plans, wider ambitions and a harder determination than ever to
build up a great national machine that will promote, under the cloak of "disinterested
research," not the welfare of all, but the special interests of a few '
Ely had a complicated history. Business interests tried to drive him out of the Univ of
Wisconsin in the 1890s not because he was a corrupt neoclassical economist but because he was
argued to be a socialist. (He wasn't.) He was responsible for bringing JR Commons, one of the
great institutional economists, to Wisconsin and at least partly responsible for the quality
of the economics faculty at Wisconsin that developed in the 1910s many of the state programs
(unemployment insurance, workers compensation) that ultimately became models for the New
Deal.
But he became more right-wing as he got older. He campaigned to have Robert LaFollette
removed from the Senate because LaFollette was anti-WW1 and then went off to Northwestern as
a pretty conventional rightwing economist.
Interestingly, a number of pro-labor New Deal economists followed a similar trajectory.
For example, Leo Wolman.
Thanks very much for this post. This has been playing out at my uni for some time now.
2 thoughts:
Money. The Kochs certainly appear to hate taxes almost as much as regulation. Public
universities and colleges require adequate funding from the public(taxes) to support the
mission of education – as opposed to just training.
A good education requires good teachers; professors who are paid well enough to make a
career in academia – not a king's ransom but not a church mouse salary either –
and the freedom to research into all areas.
So, the neoliberals get a huge tax cut passed in states and at the federal level; then
claim there's not enough state/federal money to support higher ed (please, no MMT talk here,
I'm making a different point); as higher ed struggles financially, pretend to be a white
knight riding in with grant money to save the day. It's cheaper than taxes for the grantors,
since the "white knight" controls how much and how often they give money. And, it gives them
leverage over the curriculum. There are many tricks to claim a "chaired" position isn't
"really in the department", so the grants are "not changing the quality of education" they
will argue. It's a vicious financial circle for higher ed .
Philosophy. The neoliberal PR campaign of 'the market is the ultimate and true arbiter
of all' has all the appearance of a regression to what I can only call inverted marxist
dialectical-materialism as espoused by the old soviets; where anything, even scientific
findings, that threatened the supremacy of the doctrine's claim of economic inevitability,
was suppressed. ( No wonder the old soviet finally collapsed. )
The neoliberals substitutes a sort of libertarian dialectical-materialism that requires
suppression of any theory that contradicts their claim of 'market infallibility' and
inevitability. This is dogma, not science or even economics.
People who are paid to think, think what they are paid to think.
The Kochs, and those like them, seem to labor under under the delusion that reality will
conform to their beliefs. Since they are powerful, they are able to inflict this delusion on
society.
The return to the real world from the world of delusion is always extremely costly. We
will all pay.
Economics has a lot of similarities with Theology.
People can believe whatever interpretation fits with their own indoctrination.
The difference being there is a truth to economics that seems to be invisible to most people,
major economists included.
Your post highlights some of the stark realities that people just refuse to accept for some
inexplicable reason.
Maybe the better economic managers will come to the rescue or maybe there will be a
collective awakening when in a moment of clarity we start to realise how badly we have been
conned.
This looks like Ann Rand philosophy: "The people who needed protection were property owners,
and their rights could only be secured though constitutional limits to prevent the majority of
voters from encroaching on them, an idea Buchanan lays out in works like Property as a
Guarantor of Liberty (1993). MacLean observes that Buchanan saw society as a cutthroat realm
of makers (entrepreneurs) constantly under siege by takers (everybody else) His own language was
often more stark, warning the alleged "prey" of "parasites" and "predators" out to fleece
them."
Notable quotes:
"... By Lynn Parramore, Senior Research Analyst, Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website ..."
"... The Limits of Liberty ..."
"... Property as a Guarantor of Liberty ..."
"... Brown v. Board of Education ..."
"... Calhoun, called the "Marx of the Master Class" by historian Richard Hofstadter, saw himself and his fellow southern oligarchs as victims of the majority. Therefore, as MacLean explains, he sought to create "constitutional gadgets" to constrict the operations of government ..."
"... She argues out that unlike even the most property-friendly founders Alexander Hamilton and James Madison, Buchanan wanted a private governing elite of corporate power that was wholly released from public accountability. ..."
"... Suppressing voting, changing legislative processes so that a normal majority could no longer prevail, sowing public distrust of government institutions -- all these were tactics toward the goal. But the Holy Grail was the Constitution: alter it and you could increase and secure the power of the wealthy in a way that no politician could ever challenge. ..."
"... MacLean observes that the Virginia school, as Buchanan's brand of economic and political thinking is known, is a kind of cousin to the better-known, market-oriented Chicago and Austrian schools -- proponents of all three were members of the Mont Pelerin Society, an international neoliberal organization which included Milton Friedman and Friedrich Hayek. But the Virginia school's focus and career missions were distinct. In an interview with the Institute for New Economic Thinking (INET), MacLean described Friedman and Buchanan as yin and yang: "Friedman was this genial, personable character who loved to be in the limelight and made a sunny case for the free market and the freedom to choose and so forth. Buchanan was the dark side of this: he thought, ok, fine, they can make a case for the free market, but everybody knows that free markets have externalities and other problems. So he wanted to keep people from believing that government could be the alternative to those problems." ..."
"... Buchanan's school focused on public choice theory, later adding constitutional economics and the new field of law and economics to its core research and advocacy. The economist saw that his vision would never come to fruition by focusing on who rules. It was much better to focus on the rules themselves , and that required a "constitutional revolution." ..."
"... MacLean describes how the economist developed a grand project to train operatives to staff institutions funded by like-minded tycoons, most significantly Charles Koch, who became interested in his work in the '70s and sought the economist's input in promoting "Austrian economics" in the U.S. and in advising the Cato Institute, a libertarian think tank. ..."
"... With Koch's money and enthusiasm, Buchanan's academic school evolved into something much bigger. By the 1990s, Koch realized that Buchanan's ideas -- transmitted through stealth and deliberate deception, as MacLean amply documents -- could help take government down through incremental assaults that the media would hardly notice. The tycoon knew that the project was extremely radical, even a "revolution" in governance, but he talked like a conservative to make his plans sound more palatable. ..."
"... At the 1997 fiftieth anniversary of the Mont Pelerin Society, MacLean recounts that Buchanan and his associate Henry Manne, a founding theorist of libertarian economic approaches to law, focused on such affronts to capitalists as environmentalism and public health and welfare, expressing eagerness to dismantle Social Security, Medicaid, and Medicare as well as kill public education because it tended to foster community values. Feminism had to go, too: the scholars considered it a socialist project. ..."
"... To put the success into perspective, MacLean points to the fact that Henry Manne, whom Buchanan was instrumental in hiring, created legal programs for law professors and federal judges which could boast that by 1990 two of every five sitting federal judges had participated. "40 percent of the U.S. federal judiciary," writes MacLean, "had been treated to a Koch-backed curriculum." ..."
"... Buchanan's role in the disastrous Pinochet government of Chile has been underestimated partly because unlike Milton Friedman, who advertised his activities, Buchanan had the shrewdness to keep his involvement quiet. With his guidance, the military junta deployed public choice economics in the creation of a new constitution, which required balanced budgets and thereby prevented the government from spending to meet public needs. Supermajorities would be required for any changes of substance, leaving the public little recourse to challenge programs like the privatization of social security. ..."
"... The Limits of Liberty ..."
"... MacLean is not the only scholar to sound the alarm that the country is experiencing a hostile takeover that is well on its way to radically, and perhaps permanently, altering the society. Peter Temin, former head of the MIT economics department, INET grantee, and author of The Vanishing Middle Class ..."
"... The One Percent Solution ..."
"... She observes, for example, that many liberals have missed the point of strategies like privatization. Efforts to "reform" public education and Social Security are not just about a preference for the private sector over the public sector, she argues. You can wrap your head around, even if you don't agree. Instead, MacLean contents, the goal of these strategies is to radically alter power relations, weakening pro-public forces and enhancing the lobbying power and commitment of the corporations that take over public services and resources, thus advancing the plans to dismantle democracy and make way for a return to oligarchy. The majority will be held captive so that the wealthy can finally be free to do as they please, no matter how destructive. ..."
"... MacLean argues that despite the rhetoric of Virginia school acolytes, shrinking big government is not really the point. The oligarchs require a government with tremendous new powers so that they can bypass the will of the people. This, as MacLean points out, requires greatly expanding police powers "to control the resultant popular anger." The spreading use of pre-emption by GOP-controlled state legislatures to suppress local progressive victories such as living wage ordinances is another example of the right's aggressive use of state power. ..."
Nobel laureate James Buchanan is the intellectual lynchpin of the Koch-funded attack on
democratic institutions, argues Duke historian Nancy MacLean
Ask people to name the key minds that have shaped America's burst of radical right-wing
attacks on working conditions, consumer rights and public services, and they will typically
mention figures like free market-champion Milton Friedman, libertarian guru Ayn Rand, and
laissez-faire economists Friedrich Hayek and Ludwig von Mises.
James McGill Buchanan is a name you will rarely hear unless you've taken several classes in
economics. And if the Tennessee-born Nobel laureate were alive today, it would suit him just
fine that most well-informed journalists, liberal politicians, and even many economics students
have little understanding of his work.
The reason? Duke historian Nancy MacLean contends that his philosophy is so stark that even
young libertarian acolytes are only introduced to it after they have accepted the relatively
sunny perspective of Ayn Rand. (Yes, you read that correctly). If Americans really knew what
Buchanan thought and promoted, and how destructively his vision is manifesting under their
noses, it would dawn on them how close the country is to a transformation most would not even
want to imagine, much less accept.
That is a dangerous blind spot, MacLean argues in a meticulously researched book,
Democracy in Chains , a finalist for the National Book Award in Nonfiction. While Americans
grapple with Donald Trump's chaotic presidency, we may be missing the key to changes that are
taking place far beyond the level of mere politics. Once these changes are locked into place,
there may be no going back.
An Unlocked Door in Virginia
MacLean's book reads like an intellectual detective story. In 2010, she moved to North
Carolina, where a Tea Party-dominated Republican Party got control of both houses of the state
legislature and began pushing through a radical program to suppress voter rights, decimate
public services, and slash taxes on the wealthy that shocked a state long a beacon of southern
moderation. Up to this point, the figure of James Buchanan flickered in her peripheral vision,
but as she began to study his work closely, the events in North Carolina and also Wisconsin,
where Governor Scott Walker was leading assaults on collective bargaining rights, shifted her
focus.
Could it be that this relatively obscure economist's distinctive thought was being put
forcefully into action in real time?
MacLean could not gain access to Buchanan's papers to test her hypothesis until after his
death in January 2013. That year, just as the government was being shut down by Ted Cruz &
Co., she traveled to George Mason University in Virginia, where the economist's papers lay
willy-nilly across the offices of a building now abandoned by the Koch-funded faculty to a new,
fancier center in Arlington.
MacLean was stunned. The archive of the man who had sought to stay under the radar had been
left totally unsorted and unguarded. The historian plunged in, and she read through boxes and
drawers full of papers that included personal correspondence between Buchanan and billionaire
industrialist Charles Koch. That's when she had an amazing realization: here was the
intellectual lynchpin of a stealth revolution currently in progress.
A Theory of Property Supremacy
Buchanan, a 1940 graduate of Middle Tennessee State University who later attended the
University of Chicago for graduate study, started out as a conventional public finance
economist. But he grew frustrated by the way in which economic theorists ignored the political
process.
Buchanan began working on a description of power that started out as a critique of how
institutions functioned in the relatively liberal 1950s and '60s, a time when economist John
Maynard Keynes's ideas about the need for government intervention in markets to protect people
from flaws so clearly demonstrated in the Great Depression held sway. Buchanan, MacLean notes,
was incensed at what he saw as a move toward socialism and deeply suspicious of any form of
state action that channels resources to the public. Why should the increasingly powerful
federal government be able to force the wealthy to pay for goods and programs that served
ordinary citizens and the poor?
In thinking about how people make political decisions and choices, Buchanan concluded that
you could only understand them as individuals seeking personal advantage. In interview cited by
MacLean, the economist observed that in the 1950s Americans commonly assumed that elected
officials wanted to act in the public interest. Buchanan vehemently disagreed -- that was a
belief he wanted, as he put it, to "tear down." His ideas developed into a theory that came to
be known as "public choice."
Buchanan's view of human nature was distinctly dismal. Adam Smith saw human beings as
self-interested and hungry for personal power and material comfort, but he also acknowledged
social instincts like compassion and fairness. Buchanan, in contrast, insisted that people were
primarily driven by venal self-interest. Crediting people with altruism or a desire to serve
others was "romantic" fantasy: politicians and government workers were out for themselves, and
so, for that matter, were teachers, doctors, and civil rights activists. They wanted to control
others and wrest away their resources: "Each person seeks mastery over a world of slaves," he
wrote in his 1975 book, The Limits of Liberty .
Does that sound like your kindergarten teacher? It did to Buchanan.
The people who needed protection were property owners, and their rights could only be
secured though constitutional limits to prevent the majority of voters from encroaching on
them, an idea Buchanan lays out in works like Property as a Guarantor of Liberty
(1993). MacLean observes that Buchanan saw society as a cutthroat realm of makers
(entrepreneurs) constantly under siege by takers (everybody else) His own language was often
more stark, warning the alleged "prey" of "parasites" and "predators" out to fleece them.
In 1965 the economist launched a center dedicated to his theories at the University of
Virginia, which later relocated to George Mason University. MacLean describes how he trained
thinkers to push back against the Brown v. Board of Education decision to desegregate
America's public schools and to challenge the constitutional perspectives and federal policy
that enabled it. She notes that he took care to use economic and political precepts, rather
than overtly racial arguments, to make his case, which nonetheless gave cover to racists who
knew that spelling out their prejudices would alienate the country.
All the while, a ghost hovered in the background -- that of John C. Calhoun of South
Carolina, senator and seventh vice president of the United States.
Calhoun was an intellectual and political powerhouse in the South from the 1820s until his
death in 1850, expending his formidable energy to defend slavery. Calhoun, called the "Marx of
the Master Class" by historian Richard Hofstadter, saw himself and his fellow southern
oligarchs as victims of the majority. Therefore, as MacLean explains, he sought to create
"constitutional gadgets" to constrict the operations of government.
Economists Tyler Cowen and Alexander Tabarrok, both of George Mason University, have noted
the two men's affinities, heralding Calhoun "a
precursor of modern public choice theory" who "anticipates" Buchanan's thinking. MacLean
observes that both focused on how democracy constrains property owners and aimed for ways to
restrict the latitude of voters. She argues out that unlike even the most property-friendly
founders Alexander Hamilton and James Madison, Buchanan wanted a private governing elite of
corporate power that was wholly released from public accountability.
Suppressing voting, changing legislative processes so that a normal majority could no longer
prevail, sowing public distrust of government institutions -- all these were tactics toward the
goal. But the Holy Grail was the Constitution: alter it and you could increase and secure the
power of the wealthy in a way that no politician could ever challenge.
Gravy Train to Oligarchy
MacLean explains that Virginia's white elite and the pro-corporate president of the
University of Virginia, Colgate Darden, who had married into the DuPont family, found
Buchanan's ideas to be spot on. In nurturing a new intelligentsia to commit to his values,
Buchanan stated that he needed a "gravy train," and with backers like Charles Koch and
conservative foundations like the Scaife Family Charitable Trusts, others hopped aboard. Money,
Buchanan knew, can be a persuasive tool in academia. His circle of influence began to
widen.
MacLean observes that the Virginia school, as Buchanan's brand of economic and political
thinking is known, is a kind of cousin to the better-known, market-oriented Chicago and
Austrian schools -- proponents of all three were members of the Mont Pelerin Society, an
international neoliberal organization which included Milton Friedman and Friedrich Hayek. But
the Virginia school's focus and career missions were distinct. In an interview with the
Institute for New Economic Thinking (INET), MacLean described Friedman and Buchanan as yin and yang: "Friedman was this genial, personable character who loved to be in the limelight and made a
sunny case for the free market and the freedom to choose and so forth. Buchanan was the dark
side of this: he thought, ok, fine, they can make a case for the free market, but everybody
knows that free markets have externalities and other problems. So he wanted to keep people from
believing that government could be the alternative to those problems."
The Virginia school also differs from other economic schools in a marked reliance on
abstract theory rather than mathematics or empirical evidence. That a Nobel Prize was awarded
in 1986 to an economist who so determinedly bucked the academic trends of his day was nothing
short of stunning, MacLean observes. But, then, it was the peak of the Reagan era, an
administration several Buchanan students joined.
Buchanan's school focused on public choice theory, later adding constitutional economics and
the new field of law and economics to its core research and advocacy. The economist saw that
his vision would never come to fruition by focusing on who rules. It was much better
to focus on the rules themselves , and that required a "constitutional
revolution."
MacLean describes how the economist developed a grand project to train operatives to staff
institutions funded by like-minded tycoons, most significantly Charles Koch, who became
interested in his work in the '70s and sought the economist's input in promoting "Austrian
economics" in the U.S. and in advising the Cato Institute, a libertarian think tank.
Koch, whose mission was to save capitalists like himself from democracy, found the ultimate
theoretical tool in the work of the southern economist. The historian writes that Koch
preferred Buchanan to Milton Friedman and his "Chicago boys" because, she says, quoting a
libertarian insider, they wanted "to make government work more efficiently when the true
libertarian should be tearing it out at the root."
With Koch's money and enthusiasm, Buchanan's academic school evolved into something much
bigger. By the 1990s, Koch realized that Buchanan's ideas -- transmitted through stealth and
deliberate deception, as MacLean amply documents -- could help take government down through
incremental assaults that the media would hardly notice. The tycoon knew that the project was
extremely radical, even a "revolution" in governance, but he talked like a conservative to make
his plans sound more palatable.
MacLean details how partnered with Koch, Buchanan's outpost at George Mason University was
able to connect libertarian economists with right-wing political actors and supporters of
corporations like Shell Oil, Exxon, Ford, IBM, Chase Manhattan Bank, and General Motors.
Together they could push economic ideas to public through media, promote new curricula for
economics education, and court politicians in nearby Washington, D.C.
At the 1997 fiftieth anniversary of the Mont Pelerin Society, MacLean recounts that Buchanan
and his associate Henry Manne, a founding theorist of libertarian economic approaches to law,
focused on such affronts to capitalists as environmentalism and public health and welfare,
expressing eagerness to dismantle Social Security, Medicaid, and Medicare as well as kill
public education because it tended to foster community values. Feminism had to go, too: the
scholars considered it a socialist project.
The Oligarchic Revolution Unfolds
Buchanan's ideas began to have huge impact, especially in America and in Britain. In his
home country, the economist was deeply involved efforts to cut taxes on the wealthy in 1970s
and 1980s and he advised proponents of Reagan Revolution in their quest to unleash markets and
posit government as the "problem" rather than the "solution." The Koch-funded Virginia school
coached scholars, lawyers, politicians, and business people to apply stark right-wing
perspectives on everything from deficits to taxes to school privatization. In Britain,
Buchanan's work helped to inspire the public sector reforms of Margaret Thatcher and her
political progeny.
To put the success into perspective, MacLean points to the fact that Henry Manne, whom
Buchanan was instrumental in hiring, created legal programs for law professors and federal
judges which could boast that by 1990 two of every five sitting federal judges had
participated. "40 percent of the U.S. federal judiciary," writes MacLean, "had been treated to
a Koch-backed curriculum."
MacLean illustrates that in South America, Buchanan was able to first truly set his ideas in
motion by helping a bare-knuckles dictatorship ensure the permanence of much of the radical
transformation it inflicted on a country that had been a beacon of social progress. The
historian emphasizes that Buchanan's role in the disastrous Pinochet government of Chile has
been underestimated partly because unlike Milton Friedman, who advertised his activities,
Buchanan had the shrewdness to keep his involvement quiet. With his guidance, the military
junta deployed public choice economics in the creation of a new constitution, which required
balanced budgets and thereby prevented the government from spending to meet public needs.
Supermajorities would be required for any changes of substance, leaving the public little
recourse to challenge programs like the privatization of social security.
The dictator's human rights abuses and pillage of the country's resources did not seem to
bother Buchanan, MacLean argues, so long as the wealthy got their way. "Despotism may be the
only organizational alternative to the political structure that we observe," the economist had
written in The Limits of Liberty . If you have been wondering about the end result of
the Virginia school philosophy, well, the economist helpfully spelled it out.
A World of Slaves
Most Americans haven't seen what's coming.
MacLean notes that when the Kochs' control of the GOP kicked into high gear after the
financial crisis of 2007-08, many were so stunned by the "shock-and-awe" tactics of shutting
down government, destroying labor unions, and rolling back services that meet citizens' basic
necessities that few realized that many leading the charge had been trained in economics at
Virginia institutions, especially George Mason University. Wasn't it just a new, particularly
vicious wave of partisan politics?
It wasn't. MacLean convincingly illustrates that it was something far more disturbing.
MacLean is not the only scholar to sound the alarm that the country is experiencing a
hostile takeover that is well on its way to radically, and perhaps permanently, altering the
society. Peter Temin, former head of the MIT economics department, INET grantee, and author of
The Vanishing Middle Class, as well as economist Gordon Lafer of the
University of Oregon and author of The One Percent Solution , have provided eye-opening analyses of where America is
headed and why. MacLean adds another dimension to this dystopian big picture, acquainting us
with what has been overlooked in the capitalist right wing's playbook.
She observes, for example, that many liberals have missed the point of strategies like
privatization. Efforts to "reform" public education and Social Security are not just about a
preference for the private sector over the public sector, she argues. You can wrap your head
around, even if you don't agree. Instead, MacLean contents, the goal of these strategies is to
radically alter power relations, weakening pro-public forces and enhancing the lobbying power
and commitment of the corporations that take over public services and resources, thus advancing
the plans to dismantle democracy and make way for a return to oligarchy. The majority will be
held captive so that the wealthy can finally be free to do as they please, no matter how
destructive.
MacLean argues that despite the rhetoric of Virginia school acolytes, shrinking big
government is not really the point. The oligarchs require a government with tremendous new
powers so that they can bypass the will of the people. This, as MacLean points out, requires
greatly expanding police powers "to control the resultant popular anger." The spreading use of
pre-emption by GOP-controlled state legislatures to suppress local progressive victories such
as living wage ordinances is another example of the right's aggressive use of state power.
Could these right-wing capitalists allow private companies to fill prisons with helpless
citizens -- or, more profitable still, right-less undocumented immigrants? They could, and
have . Might they engineer a retirement crisis by moving Americans to inadequate 401(k)s?
Done . Take away the rights of consumers and workers to bring grievances to court by
making them sign forced arbitration agreements? Check . Gut public education to the
point where ordinary people have such bleak prospects that they have no energy to fight back?
Getting it done .
Would they even refuse children clean water? Actually, yes.
MacLean notes that in Flint, Michigan, Americans got a taste of what the emerging oligarchy
will look like -- it tastes like poisoned water. There, the Koch-funded Mackinac Center pushed
for legislation that would allow the governor to take control of communities facing emergency
and put unelected managers in charge. In Flint, one such manager switched the city's water
supply to a polluted river, but the Mackinac Center's lobbyists ensured that the law was
fortified by protections against lawsuits that poisoned inhabitants might bring. Tens
of thousands of children were exposed to lead, a substance known to cause serious health
problems including brain damage.
Tyler Cowen has provided an
economic justification for this kind of brutality, stating that where it is difficult to
get clean water, private companies should take over and make people pay for it. "This includes
giving them the right to cut off people who don't -- or can't -- pay their bills," the
economist explains.
To many this sounds grotesquely inhumane, but it is a way of thinking that has deep roots in
America. In Why I, Too, Am Not a Conservative (2005), Buchanan considers the charge of
heartlessness made against the kind of classic liberal that he took himself to be. MacLean
interprets his discussion to mean that people who "failed to foresee and save money for their
future needs" are to be treated, as Buchanan put it, "as subordinate members of the species,
akin to animals who are dependent.'"
Do you have your education, health care, and retirement personally funded against all
possible exigencies? Then that means you.
Buchanan was not a dystopian novelist. He was a Nobel Laureate whose sinister logic exerts
vast influence over America's trajectory. It is no wonder that Cowen, on his popular blog
Marginal Revolution, does not
mention Buchanan on a list of underrated influential libertarian thinkers, though elsewhere
on the blog, he expresses admiration for several of Buchanan's contributions and
acknowledges that the southern economist "thought more consistently in terms of 'rules of
the games' than perhaps any other economist."
The rules of the game are now clear.
Research like MacLean's provides hope that toxic ideas like Buchanan's may finally begin to
face public scrutiny. Yet at this very moment, the Kochs' State Policy Network and the American
Legislative Exchange Council (ALEC), a group that connects corporate agents to conservative
lawmakers to produce legislation, are involved in projects that the Trump-obsessed media hardly
notices, like pumping money into state judicial races. Their aim is to stack the legal deck
against Americans in ways that MacLean argues may have even bigger effects than Citizens
United, the 2010 Supreme Court ruling which unleashed unlimited corporate spending on American
politics. The goal is to create a judiciary that will interpret the Constitution in favor of
corporations and the wealthy in ways that Buchanan would have heartily approved.
"The United States is now at one of those historic forks in the road whose outcome will
prove as fateful as those of the 1860s, the 1930s, and the 1960s," writes MacLean. "To value
liberty for the wealthy minority above all else and enshrine it in the nation's governing
rules, as Calhoun and Buchanan both called for and the Koch network is achieving, play by play,
is to consent to an oligarchy in all but the outer husk of representative form."
"... By Laura Basu, a Marie Curie Research Fellow at Cardiff School of Journalism, Media and Culture. Originally published at openDemocracy ..."
"... This ideology spread through the media from the 1980s ..."
"... Fast-forward to April 2009, barely 6 months after the announcement of a £500 billion bank bailout. A media hysteria was nowraging around Britain's deficit . While greedy bankers were still taking some of the blame, the systemic problems in finance and the problems with the free-market model had been forgotten. Instead, public profligacy had become the dominant explanation for the deficit. The timeline of the crisis was being erased and rewritten. ..."
"... These measures were a ramped-up version of the kinds of reforms that had produced the crisis in the first place. This fact, however, was forgotten. These 'pro-business' moves were enthusiastically embraced by the media, far more so than austerity. Of the 5 outlets analysed (The BBC, Telegraph, Sun, Guardian and Mirror), only the Guardian rejected them more frequently than endorsing them. ..."
"... "One of the saddest lessons of history is this: If we've been bamboozled long enough, we tend to reject any evidence of the bamboozle. We're no longer interested in finding out the truth. The bamboozle has captured us. It's simply too painful to acknowledge, even to ourselves, that we've been taken. Once you give a charlatan power over you, you almost never get it back." ..."
"... This post is disheartening in so many ways. Start with "media hysteria" -- adding yet another glib coinage to hide a lack of explanation behind a simple but innapt analogy like the endless "addictions" from which personifications of various abstract entities suffer. ..."
"... This coinage presupposes a media sufficiently free to be possessed by hysteria. Dancing puppets might with some art appear "hysterical". And the strange non-death of Neoliberalsm isn't so strange or poorly understood in 2018 though the detailed explanation hasn't reached as many as one might have hoped, including the authors of this brief post. Consider their unhappy mashup of thoughts in a key sentence of the first paragraph: "This power has been maintained with the help of a robust ideology centred on free markets (though in reality markets are captured by corporations and are maintained by the state) and the superiority of the private sector over the public sector." The tail of this sentence obviates the rest of the post. And we ought not ignore the detail that Neoliberalism believes in the Market as a solution to all problems -- NOT the 'free market' of neoclassical economics or libertarian ideology. ..."
"... From "media hysteria" the post postulates "amnesia" of a public convinced of "greedy bankers" who need regulation. In the U.S. the propaganda was more subtle -- at least in my opinion. We were fed the "bad apples" theory mocked in a brief series of media clips presented in the documentary film "Inside Job". Those clips suggest a better explanation for the swift media transitions from banking reform to balanced budgets and austerity with more tax cuts for the wealthy than "amnesia" or "hyper-amnesia". The media Corporations are tightly controlled by the same forces that captured Corporations and -- taking the phrase "the superiority of the private sector over the public sector" in the sense that a superior directs an inferior [rather than the intended(?) sense] -- direct and essentially own our governments. ..."
"... The remarkable thing about public discourse and political and economic news reporting is how superficial it has become, so devoid of a foundation of any kind in history or theory. You can not have an effective critique of society or the economy or anything, if you do not see a system with a history and think it matters. Neoliberalism has become what people say when they think none of it really matters; it is all just noise. ..."
"... "Neoliberalism has become what people say when they think none of it really matters; it is all just noise." ..."
"... I also think that the crisis of neoliberalism echos a problem caused by capitalism, itself. I think David Harvey stated that "capitalism doesn't solve problems, it often just moves them around". ..."
"... Matt Stoller tweet from August 2017, as germane now as ever: "The political crisis we are facing is simple. American commerce, law, finance, and politics is organized around cheating people." ..."
"... George Orwell noted that the middle class Left couldn't handle dealing with real working class people, although there isn't the same huge gulf these days, I believe there is still a vestige of it due to the British class system. The Fabians set up shop in the East End around the turn of the last century & directly rubbed shoulders with the likes of Coster Mongers – a combination that led to a strike that was one of the first success stories in the attempt to get a few more crumbs than what was usually allowed to fall from the top table. ..."
"... If Neoliberalism is now being noticed I imagine that it is because of it's success in working it's way up the food chain. After all these same Middle classes for the most part did not care much for the plight of the poor during those Victorian values. Many could not wait to employ maids of all work who slaved for up to fourteen hours a day with only Sunday afternoon's off. The Suffragettes had a real problem with this as their relatively comfortable lives would soon descend into drudgery without their servants. ..."
"... Coincidentally, the NYT article on Austerity Britain is the closest I have read to an accurate picture that I have seen for a good while. ..."
"... It's also not a new thing. British media worship of neoliberalism has been growing since the 1980s, at the same time as newspapers have been closing and media sources of all kinds laying off their staff. 2008 was a temporary blip, and since the average journalist has the attention span of a hamster, it was back to usual a few months later. Once the crash stopped being "news" old patterns reasserted themselves. I wonder, incidentally, how many economics journalists in the UK actually remember the time before neoliberalism? ..."
"... Consuming corporate media is increasingly a bizarro-world experience. Even something like the Trump scandal/constitutional crisis/investigation seems like the arrogant internecine warfare of corrupt factions of the establishment. Meanwhile, Americans are increasingly living out of their cars. ..."
"... 1. Oligarchs having captured thoroughly the media, the legislatures and the judiciary, (as well as large parts of what might be construed as "liberal" political organisations e.g. the Democratic Party of the USA) ..."
Posted on
May 29, 2018 by Yves Smith Yves here. I'm sure readers
could write a US version of this timeline despite the fact that we had a second crisis and
bailout, that of way more foreclosures than were warranted, thanks to lousy incentives to
mortgage servicers and lack of political will to intervene, and foreclosure fraud to cover up
for chain of title failures.
By Laura Basu, a Marie Curie Research Fellow at Cardiff School of Journalism, Media and
Culture. Originally published at
openDemocracy
It hasn't escaped many people's attention that, a decade after the biggest economic crash of
a generation, the economic model producing that meltdown has not exactly been laid to rest.
The crisis in the
NHS and the
Carillion and Capital scandals are testament to that. Sociologist Colin Crouch wrote a book
in 2011 about the 'strange non-death of neoliberalism', arguing that the neoliberal model is
centred on the needs of corporations and that corporate power actually intensified after the
2008 financial meltdown. This power has been maintained with the help of a robust ideology
centred on free markets (though in reality markets are captured by corporations and are
maintained by the state) and the superiority of the private sector over the public sector. It
advocates privatisation, cuts in public spending, deregulation and tax cuts for businesses and
high earners.
This ideology
spread through the media from the 1980s , and the media have continued to play a key
role in its persistence through a decade of political and economic turmoil since the 2008
crash. They have done this largely via an acute amnesia about the causes of the crisis, an
amnesia that helped make policies like austerity, privatisation and corporate tax breaks appear
as common sense responses to the problems.
This amnesia struck at dizzying speed. My research carried out at Cardiff University shows
that in 2008 at the time of the banking collapse, the main explanations given for the problems
were financial misconduct ('greedy bankers'), systemic problems with the financial sector, and
the faulty free-market model. These explanations were given across the media spectrum,
with even the Telegraph and Sun complaining about a lack of regulation . Banking reform was
advocated across the board.
Fast-forward to April 2009, barely 6 months after the announcement of a £500
billion bank bailout.
A media hysteria was nowraging around Britain's deficit . While greedy bankers were still
taking some of the blame, the systemic problems in finance and the problems with the
free-market model had been forgotten. Instead, public profligacy had become the dominant
explanation for the deficit. The timeline of the crisis was being erased and
rewritten.
Correspondingly, financial and corporate regulation were forgotten. Instead, austerity
became the star of the show, eclipsing all other possible solutions to the crisis. As a
response to the deficit, austerity was mentioned 2.5 as many times as the next most covered
policy-response option, which was raising taxes on the wealthy. Austerity was mentioned 18
times more frequently than tackling tax avoidance and evasion. Although coverage of austerity
was polarized, no media outlet rejected it outright, and even the left-leaning press implicitly
(and sometimes explicitly) backed 'austerity lite'.
In 2010, the Conservative-Lib Dem government announced £99 billion in spending cuts
and £29 billion in tax increases per year by 2014-15. Having made these 'tough choices',
from 2011 the coalition wanted to focus attention away from austerity and towards growth (which
was, oops, being stalled by austerity). To do this, they pursued a zealously 'pro-business'
agenda, including privatisation, deregulation, cutting taxes for the highest earners, and
cutting corporation tax in 2011, 2012, 2013, and in 2015 and 2016 under a Conservative
government.
These measures were a ramped-up version of the kinds of reforms that had produced the
crisis in the first place. This fact, however, was forgotten. These 'pro-business' moves were
enthusiastically embraced by the media, far more so than austerity. Of the 5 outlets analysed
(The BBC, Telegraph, Sun, Guardian and Mirror), only the Guardian rejected them more frequently
than endorsing them.
The idea behind these policies is that what's good for business is good for everyone. If
businesses are handed more resources, freed from regulation and handed tax breaks, they will be
encouraged to invest in the economy, creating jobs and growth. The rich are therefore 'job
creators' and 'wealth creators'.
This is despite the fact that these policies have an impressive fail rate. Business
investment and productivity growth remain low, as corporations spend the savings not on
training and innovation but on share buy-backs and shareholder dividends. According to the
Financial Times, in 2014, the top 500 US companies
returned 95 per cent of their profits to shareholders in dividends and buybacks. Meanwhile,
inequality is spiralling and in the UK more than a million
people are using food banks .
Poverty and inequality, meanwhile, attracted surprising little media attention. Of my sample
of 1,133 media items, only 53 had a primary focus on living standards, poverty or inequality.
This
confirms other researchshowing a lack of media attention to these issues . Of these 53
items, the large majority were from the Guardian and Mirror. The coverage correctly identified
austerity as a primary cause of these problems. However, deeper explanations were rare. Yet
again, the link back to the 2008 bank meltdown wasn't made, let alone the long-term causes of
that meltdown. Not only that, the coverage failed even to identify the role of most of the
policies pursued since the onset of the crisis in producing inequality – such as
the bank bailouts, quantitative easing, and those 'pro-business' measures like corporation tax
cuts and privatisation.
And so it seems we are living with a hyper-amnesia , in which it is increasingly
difficult to reconstruct timelines and distinguish causes from effects. This amnesia has helped
trap us in a neoliberal groundhog day. The political consensus around the free market model
finally seems to be breaking. If we are to find a way out, we will need to have a lot more
conversations about how to organise both our media systems and our economies.
Tick-Tock.
It depends. Do you believe the worst can be avoided or do you believe the world is already
knee deep in all the things we're told to be afraid will happen? There is a big difference
between organizing for reform and organizing to break capture.
" Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Surely some revelation is at hand;
Surely the Second Coming is at hand "
W.B. Yeats
I suppose we can take some succour from the fact that WWI (and the Spanish flu) seemed to
be a harbinger of worse to come but we're still here
The hyper-amnesia ground hog problem described in the post happens, in part, because the
'centre continues to hold'. It demonstrates the center can, and does, hold. We don't want the
centre to hold. We want it to disappear and get replaced by policies and perspectives keen on
an economy (and society) that works for all, not just some
I know what you're saying and I tend to agree. But the centre to Yeats (my interpretation,
anyway) is that there is a cultural centre both apart from but also part of the social
centre, and when that centre goes all hell breaks loose. Meaning of events becomes very
confused or impossible to understand on many levels.
Then, it's often the little people (and don't go making jokes about leprechauns) that get
crushed in the confusion.
We should reflect about the root causes of why our information is not informing us. How
can decades go by with the meme "smoking has not been conclusively proven to cause cancer" or
now "the science of climate change is inconclusive", not to mention countless similar horror
stories in pharma. Bullshit about the effectiveness of supply side economics is no
different.
Somehow we collectively need to expect and demand more objectivity from our information
sources. We fall for the fox guarding hen houses scam over and over, from TARP bailouts, to
FDA approvals to WMD claims. Not sure of the answer, but I know from talking with my boomer
parents, skepticism about information sources is not in the DNA of many information
consumers.
"One of the saddest lessons of history is this: If we've been bamboozled long enough, we
tend to reject any evidence of the bamboozle. We're no longer interested in finding out the
truth. The bamboozle has captured us. It's simply too painful to acknowledge, even to
ourselves, that we've been taken. Once you give a charlatan power over you, you almost never
get it back."
― Carl Sagan, The Demon-Haunted World: Science as a Candle in the Dark
One of Sagan's best, I loaned this out to a not terribly thoughtful acquaintance and I was
told it was "too preachy".
I guess Sagan proves himself correct time and time again.
It is also worth noting that a number of newspapers lauded Hitler's rise to power –
they overlooked violence against Jews because the trains ran on time. Nor should we ignore
disinformation campaigns, led by newspapers (e.g. Hearst and cannabis). In general, each
media outlet is a reflection of its owners, most of whom are rich and adverse to any
suggestion that we "tax the rich."
I've come to the conclusion that we don't have a media anymore. I was watching MSNBC this
AM discuss the "missing" 1500 immigrant children. The agency responsible says it calls the
people who now have the kids, but most of the people don't call back within the 30-day
requirement period.
Now the next logical questions to ask the rep would be: What happens after 30 days? Do you
keep calling them? Do send out investigators?" But are these questions asked? No. Instead we
get speculation or non-answers. It's the same with every issue.
The internet is not any better. Many articles are just repeating what appears elsewhere
with no one checking the facts, even on respected sites. I also got a chain email today
regarding petition for a Constitutional Convention. The impetus is a list of grievances
ranging from "a congressman can retire after just one term with a full pension" to "children
of congressmen don't have to pay back college loans." I already knew most of the claims
weren't true but the 131 recipients of the organization I belong to didn't. I did find out
that this chain email has been circulating on the internet for five years and it is the work
of a conservative groups whose real aim is to stop abortion and make Christianity the law of
the land. I was not surprised.
I have said for years that there is no news on the news. And I have repeated this meme for
just as long: There is a reason why America is called Planet Stupid.
Now the next logical questions to ask the rep would be: What happens after 30 days? Do
you keep calling them? Do send out investigators?" But are these questions asked? No.
Instead we get speculation or non-answers. It's the same with every issue.
Even competent reporting takes practice, time, and effort, even money sometimes. The same
with even half way competent governing. Neither is rewarded, and are often punished, for
doing nowadays; asking as a follow-up question "did you call the local police or send over a
pair of ICE officers just to politely knock on the door?" Police do people checks all the
time. "I haven't see so and so for a week", or "my relative hasn't returned my calls for a
month, can you?" It is possible that the paperwork just got lost and asking the
guardians/family some questions personally would solve.
But all that is boring bovine excrement, which is just not done.
This post is disheartening in so many ways. Start with "media hysteria" -- adding yet
another glib coinage to hide a lack of explanation behind a simple but innapt analogy like
the endless "addictions" from which personifications of various abstract entities suffer.
This coinage presupposes a media sufficiently free to be possessed by hysteria. Dancing
puppets might with some art appear "hysterical". And the strange non-death of Neoliberalsm
isn't so strange or poorly understood in 2018 though the detailed explanation hasn't reached
as many as one might have hoped, including the authors of this brief post. Consider their
unhappy mashup of thoughts in a key sentence of the first paragraph: "This power has been
maintained with the help of a robust ideology centred on free markets (though in reality
markets are captured by corporations and are maintained by the state) and the superiority of
the private sector over the public sector." The tail of this sentence obviates the rest of
the post. And we ought not ignore the detail that Neoliberalism believes in the Market as a
solution to all problems -- NOT the 'free market' of neoclassical economics or libertarian
ideology.
From "media hysteria" the post postulates "amnesia" of a public convinced of "greedy
bankers" who need regulation. In the U.S. the propaganda was more subtle -- at least in my
opinion. We were fed the "bad apples" theory mocked in a brief series of media clips
presented in the documentary film "Inside Job". Those clips suggest a better explanation for
the swift media transitions from banking reform to balanced budgets and austerity with more
tax cuts for the wealthy than "amnesia" or "hyper-amnesia". The media Corporations are
tightly controlled by the same forces that captured Corporations and -- taking the phrase
"the superiority of the private sector over the public sector" in the sense that a superior
directs an inferior [rather than the intended(?) sense] -- direct and essentially own our
governments.
The essayist complains that poverty and the manifest failures of neoliberalism get little
critical attention, but she leads off, "It hasn't escaped many people's attention . . ."
The remarkable thing about public discourse and political and economic news reporting is
how superficial it has become, so devoid of a foundation of any kind in history or theory.
You can not have an effective critique of society or the economy or anything, if you do not
see a system with a history and think it matters. Neoliberalism has become what people say
when they think none of it really matters; it is all just noise.
Another thing to recall was how quickly talk of nationalizing banks evaporated. Even Paul
Krugman, among others were supporting the idea that "real capitalists nationalize".
Once LIBOR came down, and the lending channels began to reopen, the happy talk ensued and
the amnesia kicked in strongly.
I also think that the crisis of neoliberalism echos a problem caused by capitalism,
itself. I think David Harvey stated that "capitalism doesn't solve problems, it often just
moves them around".
The financial crisis and austerity have now manifested themselves into a media crisis of
elites and elite legitimacy (BREXIT, Trump's election, etc). The ability to manufacture
consent is running into increased difficulty. I don't think the financial crisis narrative
shift helped very much at all. A massive crime requires an equally massive cover-up,
naturally.
Why, it's almost as if 90% of all media outlets are owned by 5 multibillion dollar
conglomerates, controlled by the top 0.1%, for the purposes of protecting their unearned
parasitic power, and the employees making six-to-low-seven figures are on the Upton Sinclair
"paycheck demands I not understand it" model.
Or it's amnesia.
Matt Stoller tweet from August 2017, as germane now as ever: "The political crisis we are
facing is simple. American commerce, law, finance, and politics is organized around cheating
people."
A big thumbs up for that! Sobotka was a hero in very dark times.
As my brother-in-law puts it: The American Dream used to be "work hard in a useful job,
raise a family of citizens, retire with dignity, and hand the controls to the next
generation." Now? It's just "Win the lottery."
Problem is, "The Lottery" is right out of Shirley Jackson.
Agreed. The author is inclined to interpret at the level of cumulative effect -- apparent
forgetting -- and to ignore how fear -- of editors, of owners -- plays any role. Her proposed
unveiling of a coercive process becomes yet another veiling of it.
Sadly the narrative of details is lost to history The German landesbanks who had
guaranteed payments in loan pools in the USA were allowed to skirt thru crash and burn by the
agencies (moody s&p and your little fitch too) fake and shake ratings process But all
things German are magical Having lived thru NYC Mac Corp effective bankruptcy of man hat
tan..
it was amusing watching the hand wave given when the city of Berlin actually defaulted
.
My own view for what it is worth is that the Guardian pays some lip service to the plight
of the UK's " Deplorables ", but like most of it's readership does not really give a damn. A
state of being exacerbated by Brexit similar to the situation in the US with Trump. It's much
easier to imagine hordes of racist morons who inhabit places that you have no direct
experience of, than to actually go & take a look. It's also very easy to be in favour of
mass immigration if it does not effect your employment, housing & never likely to spoil
your early morning dawn chorus with a call to prayer.
Unfortunately it has been left to the Right to complain about such things as the Rotherham
abuse scandal, which involved a couple of thousand young girls, who I suspect are worth less
to some than perhaps being mistaken as a racist. There are also various groups made up of
Muslim women who protest about Sharia councils behaviour to their sex, but nobody in the
media is at all interested.
George Orwell noted that the middle class Left couldn't handle dealing with real working
class people, although there isn't the same huge gulf these days, I believe there is still a
vestige of it due to the British class system. The Fabians set up shop in the East End around
the turn of the last century & directly rubbed shoulders with the likes of Coster Mongers
– a combination that led to a strike that was one of the first success stories in the
attempt to get a few more crumbs than what was usually allowed to fall from the top
table.
As for Mirror readers, I suspect that the majority are either the voiceless or are too
busy fighting to avoid the fate of those who find themselves availing of food banks, while
being labelled as lazy scroungers all having expensive holidays, twenty kids, about thirty
grand a year, while being subjected to a now updated more vicious regime of that which was
illustrated by " I, Daniel Blake ".
If Neoliberalism is now being noticed I imagine that it is because of it's success in
working it's way up the food chain. After all these same Middle classes for the most part did
not care much for the plight of the poor during those Victorian values. Many could not wait
to employ maids of all work who slaved for up to fourteen hours a day with only Sunday
afternoon's off. The Suffragettes had a real problem with this as their relatively
comfortable lives would soon descend into drudgery without their servants.
Coincidentally, the NYT article on Austerity Britain is the closest I have read to an
accurate picture that I have seen for a good while.
It's also not a new thing. British media worship of neoliberalism has been growing since
the 1980s, at the same time as newspapers have been closing and media sources of all kinds
laying off their staff. 2008 was a temporary blip, and since the average journalist has the
attention span of a hamster, it was back to usual a few months later. Once the crash stopped
being "news" old patterns reasserted themselves. I wonder, incidentally, how many economics
journalists in the UK actually remember the time before neoliberalism?
"And so it seems we are living with a hyper-amnesia"
Consuming corporate media is increasingly a bizarro-world experience. Even something like
the Trump scandal/constitutional crisis/investigation seems like the arrogant internecine
warfare of corrupt factions of the establishment. Meanwhile, Americans are increasingly
living out of their cars.
The corporate media forgets the causes of the worst economic crisis since the Depression,
and it put Trump in a position to be elected. Trump was the Republican nominee because he was
relentlessly promoted by the media -- because ratings, because neoliberal rigged markets.
Break up the media monopolies, roll back Citizens United, enforce the fairness
doctrine.
" Consuming corporate media is increasingly a bizarro-world experience the Trump
scandal/constitutional crisis/investigation is nothing other than internecine warfare between
corrupt factions of the establishment."
I think there are several issues here for Americans, which can partially be applied to the
Europeans.
First, the American nation as whole only has short term memory. It is our curse.
Second, those with the money spend a lot of money, time and effort the late 19th century
covering up, massaging, or sometimes just creating lies about the past. American and British
businesses, governments, and even private organizations are masters at advertising and
propaganda. Perhaps the best on Earth.
Third, the people and the institutions that would counter this somewhat, independent
unions, multiple independent media, tenured professors at functioning schools, even
non-neoliberalized churches, and social organizations like bowling, crocheting, or heck, the
Masons would all maintain a separate continuing body of memory and knowledge.
Lastly, we are all freaking terrified somewhere inside us. Those relative few who
are not are fools, and most people, whatever their faults, truly are not fools. Even if they
act like one. Whatever your beliefs, position, or knowledge, the knowing of the oncoming
storm is in you. Money or poverty may not save you. The current set of lies, while they are
lies, gives everyone a comfortable known position of supporting or opposing in the same old,
same old while avoiding thinking about whatever catastrophe(s) and radical changes we all
know are coming. The lies are more relaxing than the truth.
Even if you are one of society's homeless losers, who would welcome some changes, would
you be comfortable thinking about just how likely it is to be very traumatic? Hiding behind
begging for change might be more comfortable.
"Even if you are one of society's homeless losers, who would welcome some changes, would
you be comfortable thinking about just how likely it is to be very traumatic? Hiding behind
begging for change might be more comfortable."
On the contrary, the upheaval the "losers" have been subjected to will be turned around
and used as a just cause for rectification. Trumatic consequences can be unpredictable and
this is why society should have socio-economic checks and balances to prevent an economic
system running amok. Commonsense that necessitates amnesia for neoliberalism to seem
viable.
1. Oligarchs having captured thoroughly the media, the legislatures and the judiciary, (as
well as large parts of what might be construed as "liberal" political organisations e.g. the
Democratic Party of the USA)
2. the seemingly inexorable trend to wealth concentration in the hands of said
oligarchs
..one asks oneself.."What is one to do?"
My own response, (and I acknowledge straight off its limited impact), is to do the
following:
1. support financially in the limited ways possible media channels such as Naked
Capitalism that do their level best to debunk the lies and deceptions perpetrated by the
oligarchs
2. support financially social organisations and structures that are genuinely citizen
based and focused on a sustainable future for all
3. Do very very limited monitoring of the oligarch's "lies and deceptions" (one needs to
understand one's enemies to have a chance to counter them) and try on a personal level, in
one's day to day interactions, to present counter arguments
We cannot throw in the towel. We must direct our limited financial resources and personal
efforts to constructive change, as, for the 99%..there are no "bunker" to run to when the
"proverbial" hits the fan..as it must in the fullness of time.
Yep. One has to go ahead and do what one can. It all makes a difference. Thanks for your
strategy, Peter Phillips. Limited impact is not no impact, and we don't have the luxury of
despairing because there is only a bit we can do.
Yet this has been going on forever – – this past Sunday, for the first time I
recall, I finally heard an accurate Real News story filed on the Bobby Kennedy assassination
(50th anniversary coming this June 6, 2018) by the BBC World Service.
They actually noted that there were multiple shooters, that Sen. Kennedy was shot from
behind, not the front where Sirhan was located, etc., etc.
I guess we do occasionally witness Real News – – – just that it takes 50
years or so to be reported . . .
"... There is in the US a concerted effort to praise capitalism as some sort of god-given system and to defame all other systems. ..."
"... "Stocks have reached what looks like a permanently high plateau." ..."
"... "The problem this essay addresses can be framed in terms of two quotations from Alexis de Tocqueville. The first comes from his famous speech in the French Chamber of Deputies just prior to the outbreak of the Revolution of 1848: "We are sleeping on a volcano .do you not see that the earth is beginning to tremble. The wind of revolt rises; the tempest is on the horizon." The second is from Democracy in America: "When the past no longer illuminates the future, the spirit walks in darkness." ..."
"... "These fools in Wall Street think they can go on forever! They can't!" ..."
"... "a giant suction pump had by 1929 to 1930 drawn into a few hands an increasing proportion of currently produced wealth. This served then as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied themselves the kind of effective demand for their products which would justify reinvestment of the capital accumulation in new plants. In consequence as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When the credit ran out, the game stopped" ..."
By Rob Johnson, Institute for New Economic Thinking President,
Senior Fellow and Director, Franklin and Eleanor Roosevelt Institute and Thomas Ferguson, Director of Research, Institute for New
Economic Thinking. Originally published at the Institute for New Economic Thinking website
...
The problem this essay addresses can be framed in terms of two quotations from Alexis de Tocqueville. The first comes from his famous
speech in the French Chamber of Deputies just prior to the outbreak of the Revolution of 1848: "We are sleeping on a volcano .do
you not see that the earth is beginning to tremble. The wind of revolt rises; the tempest is on the horizon." The second is from
Democracy in America : "When the past no longer illuminates the future, the spirit walks in darkness."
In 2018, the darkness is all too palpable: A chain of economic reverses that no prominent economists, central bankers, or policymakers
anticipated has combined with other shocks from technology, wars, and migrations to produce the political equivalent of the perfect
storm. The world financial meltdown of 2008 set the cyclone spinning. As citizens watched helplessly while their livelihoods, savings,
and hopes shriveled, states and central banks stepped in to rescue the big financial institutions most responsible for the disaster.
But recovery for average citizens arrived only slowly and in some places barely at all, despite a wide variety of policy experiments,
especially from central banks.
The cycle of austerity and policy failure has now reached a critical point. Dramatic changes in public opinion and voting behavior
are battering long entrenched political parties in many countries. In many of the world's richest countries, more and more citizens
are losing faith in the very ideas of science, expertise, and dispassionate judgment -- even in medicine, as witness the battles
over vaccines in Italy, the US, and elsewhere. The failure of widely heralded predictions of immediate economic disaster when the
UK voted to leave the European Union and Donald Trump became President of the United States has only fanned the skepticism.
Placing entire responsibility for this set of plagues on bad economic theory or deficient policy evaluation does not make sense.
Power politics, contending interests, ideologies, and other influences all shaped events. But from the earliest days of the financial
collapse, reflective economists and policymakers nourished some of the same suspicions as the general public. Like the Queen of England,
they asked plaintively, "Why did no one see it coming?"
Answers were not long in arriving. Critics, including more than a few Nobel laureates in economics, pointed to a series of propositions
and attitudes that had crystallized in economic theory in the years before the crisis hit.
[1] Economists had closed ranks as though in a phalanx, but the crisis showed how fragile these tenets were. They included:
A resolute unwillingness to recognize that fundamental uncertainty shadows economic life in the real world. Neglect of the roles
played by money, credit, and financial systems in actual economies and the inherent potential for instability they create. A fixation
on economic models emphasizing full or nearly complete information and tendencies for economies either to be always in equilibrium
or heading there, not just in the present but far into the indefinite future. A focus on supply as the key to economic growth and,
increasingly after 1980, denials that economies could even in theory suffer from a deficiency of aggregate demand. Supreme confidence
in the price system as the critical ordering device in economies and the conviction that getting governments and artificial barriers
to their working out of the way was the royal road to economic success both domestically and internationally.
Initially, debates over this interlocking system of beliefs mostly sparked arguments about the usefulness of particular tools
and analytical simplifications that embodied the conventional wisdom: Dynamic stochastic general equilibrium models; notions of a
"representative agent" in macroeconomics and the long run neutrality of money; icy silence about interactions between monetary rates
of interest and ruling rates of profit, or the failure of labor markets to clear.
Increasingly, however, skeptics wondered if the real problems with economics did not run deeper than that. They began to ask if
something was not radically wrong with the structure of the discipline itself that conduced to the maintenance of a narrow belief
system by imposing orthodoxies and throwing up barriers to better arguments and dissenting evidence.
The empirical evidence now seems conclusive: Yes.
"Top 5" Dominance for Promotion and Tenure
Studies by James Heckman demonstrate the critical gatekeeping role of five so-called "top journals" in recruitment and promotions
within economics as a field.
[2] Four of the journals -- the American Economic Review , the Journal of Political Economy , the Quarterly
Journal of Economics , and the Review of Economic Studies -- are Anglo-American centered and published in the US or
the UK as is the fifth, Econometrica , though it is sponsored by the Econometric Society, which has long involved scholars
from Scandinavia and other countries.
Heckman's research shows that the number of Top 5 (T5) articles published by candidates plays a crucial role in the evaluation
of candidates for promotion and tenure. This is true not only in leading departments but more generally in the field, though the
influence of the count weakens in lower ranked institutions.
The Great Disjunction
Heckman compares citations in Top 5 journals with articles frequently cited by leading specialists in various fields and with
publication histories of Nobel laureates and winners of the Clark Medal. He is crystal clear that many important articles appear
in non-T5 journals -- a finding supported by other studies.
[3] This evidence, he argues, highlights a "fundamental contradiction" within the whole field: "Specialists who themselves publish
primarily in field journals defer to generalist journals to screen quality of their colleagues in specialty fields."
Citations as Pernicious Measures of Quality in Economics
Heckman draws attention to the increase in the number of economists over time and the relative stability of the T5. He argues
that his findings imply that the discipline's "reluctance to distribute gatekeeping responsibility to high quality non-T5 Journals
is inefficient in the face of increasing growth of numbers of people in the profession and the stagnant number of T5 publications."
Other scholars who have scrutinized what citations actually measure underscore this conclusion. Like Heckman, they know that citation
indices originated from efforts by libraries to decide what journals to buy. They agree that transforming " journal impact
factors" into measures of the quality of individual articles is a grotesque mistake, if only because of quality variation
within journals and overlaps in average quality among them. Counts of journal articles also typically miss or undercount books and
monographs, with likely serious effects on both individual promotion cases and overall publication trends in the discipline. As Heckman
observes, the notion that books are not important vehicles for communication in economics is seriously mistaken.
Analytical efforts to explain who gets cited and why are especially thought provoking. All serious studies converge on the conclusion
that raw counts can hardly be taken at face value.
[4] They distort because they are hopelessly affected by the size of fields (articles in bigger fields get more citations) and
bounced around by self-citations, varying numbers of co-authors, "halo effects" leading to over-citation of well-known scholars,
and simple failures to distinguish between approving and critical references, etc. One inventory of such problems, not surprisingly
by accounting professors, tabulates more than thirty such flaws.
[5]
But cleaning up raw counts only scratches the surface. Heckman's study raised pointed questions about editorial control at top
journals and related cronyism issues. Editorial control of many journals turns over only very slowly and those sponsored by major
university departments accept disproportionately more papers from their own graduates.
[6] Interlocking boards are also fairly common, especially among leading journals.
[7] Carlo D'Ippoliti's study of empirical citation patterns in Italy also indicates that social factors within academia figure
importantly: economists are prone to cite other economists who are their colleagues in the same institutions, independently of the
contents of their work, but they are even more likely to cite economists closer to their ideological and political positions.
[8] Other research confirms that Italy is not exceptional and that, for example, the same pattern shows up in the debates over
macroeconomics in the US and the UK after 1975.
[9]
Other work by Jakob Kapeller, et al., and D'Ippoliti documents how counting citations triggers a broad set of pathologies that
produces major distortions.
[10] Investing counts with such weighty significance, for example, affects how both authors and journal editors behave. Something
uncomfortably close to the blockbuster syndrome characteristic of Hollywood movies takes root: Rather than writing one major article
that would be harder to assimilate, individual authors have strong incentives to slice and dice along fashionable lines. They mostly
strive to produce creative variations on familiar themes. Risk-averse gatekeepers know they can safely wave these products through,
while the authors run up their counts. Journal editors have equally powerful incentives: They can drive up their impact factors by
snapping up guaranteed blockbusters produced by brand names and articles that embellish conventional themes. Kapeller, et al. suggest
that this and several other negative feedback loops they discuss lead to a form of crowding out, which has particularly pernicious
effects on potential major contributions since those are placed at a disadvantage by comparison with articles employing safer, more
familiar tropes.
[11] The result is a strong impetus to conformism, producing a marked convergence of views and methods.
These papers, and George Akerlof in several presentations, also show that counting schemes acutely disadvantage out-of-favor fields,
heterodox scholars, and anyone interested in issues and questions that the dominant Anglo-Saxon journals are not.
[12] This holds true even though, as Kapeller et al. observe, articles that reference some contrary viewpoints actually attract
more attention, conditioning on appearance in the same journal -- an indication that policing the field, not simply quality control,
is an important consideration in editorial judgment. One consequence of this narrowing is its weirdly skewed international impact.
Reliance on the current citations system originated in the US and UK, but has now spread to the rest of Europe and even parts of
Asia, including China. But T5 journals concentrate on articles that deal with problems that economists in advanced Anglo-Saxon lands
perceive to be important; studies of smaller countries or those at different stages of development face higher publication hurdles.
The result is a special case of the colonial mind in action: economics departments outside the US and UK that rely on "international"
standards advantage scholars who focus their work on issues relevant to other countries rather than their own.
Oh wait, Fourcade and her colleagues are sociologists, not economists, so no reason to consider their research and thinking.
Also, and not for nothing, she and they are French, and read Pierre Bourdieu who has done a lot of work on the sociology of academics,
focused on France but widely applicable.
And here's something interesting; there is no mention of the funding of economics at universities and colleges. So, no mention
of the hundreds of millions the filthy rich have poured into the field. Of course, they heatedly deny that matters. A recent tweet
from a Geroge Mason/Mercatus prof was livid at the very suggestion that Koch money influenced hiring decisions.
And that's before we get into the gendered nature of economics, or it's political usage by ideologically-driven politicians
looking for "experts" to support their preconceptions.
There is a lot more and someone needs to say it out loud in clear, uncoded language.
Just a thought line here. I have heard and read conservatives say that "Politics is downstream from culture" and I get what
they are saying. You change the culture and that predetermines the politics that you get. In reading this article, the thought
struck me that perhaps the reason that economics as a profession has been corrupted so badly is that maybe conservatives consider
government to be downstream of economics. Thus you control what economics theories are permitted to be discussed and that gives
them the governments that they want.
I support your contention. There is in the US a concerted effort to praise capitalism as some sort of god-given system and
to defame all other systems. Venezuela's current problems are due to socialism, not bad management, of course. Of course, since
the wealthy are doing oh so well under the status quo, they are bound to favor it, but they are not just favoring it, they are
nailing it down onto our culture.
There is in the US a concerted effort to praise capitalism as some sort of god-given system and to defame all other
systems.
The Marxist economist Richard Wolff made the claim that economists are simply cheerleaders for capitalism in an interview on
Chapo Trap House, He elaborated and substantiated this claim by saying that business schools had to be founded because economics
departments were useless as a method of educating a cohort of business specialists.
Very succinct and thoughtful indeed. Remember Ronald Reagan's now infamous, "Government is the Problem" mantra. The real cultural
warriors were the neoliberal terrorists who are hell bent on commodifying the entire planet for their own exploitation- masked
in the language of "freedom" and "democracy".
This line of thought is also important in that your framing cuts to the core of the cognitive problem attempting to deal with
economics, namely, it is a religion. I would define a religion as a system of faith and worship that is driven by a particular
interest. All the wordy-ness and arm waiving is just an attempt to obfuscate this simple truth. Persecution of the unfaithful
is also a dead giveaway.
This whole notion that the current reigning economics profession is ready, or attempting to "see the light" is somewhat amusing,
or in another sense should be insulting considering the social damage they have caused, and are continuing to inflict on the broader
citizenry. Burning at the stake is more appropriate, and maybe these slight rumblings of contrition are a sign that some might
be getting worried that their "economic" program has gone too far.
When what goes on in the human mind looses connection to events in the real world, changes must be made in order to remain
sane. The current orthodoxy is also ultimately doomed to failure in that what is the point of creating and maintaining a deluded
and demoralized citizenry? That is a recipe for internal stagnation and external conquest. It would only be a successful strategy
if the elite are able to move on after the broader society falters and fails. That thought is almost too cynical to contemplate.
But that might explain why the .001% remains the .001%. The current economic priests are starting to feel the pressure because
their flocks are beginning to realize that their everyday experience no longer matches the sermons they receive.
Following Rev Kev's point and Ed Walker's third paragraph, have there been any studies of the sources of gifts, underwriting,
and other purchases of academic work at the most "influential" economics and business economics departments?
In the academic side of the economics profession, it would seem to be prudent to "go with the flow."
Even the economists who recognized problems in 2008, such as Steve Keen and Dean Baker, are not celebrated.
In our society, it seems more likely that some powerful group or individual wants to do something and then proceeds to find
an economist to support that action, via an editorial or media appearance, perhaps it is "free" trade, more immigration, easy
money, tight money, quantitative easing, outsourcing, insourcing, charter schools, or austerity.
I suspect there are economists who attempt to accurately anticipate economic events.
But they work for hedge funds and private wealth management firms.
And what is the incentive for a prominent public economist to warn of economic problems that may have been caused by government
and well-connected interests?
If someone, such as Alan Greenspan, gave early notice of sub-prime/mortgage backed security issues how would he have been better
off?
It suggests a central banker career strategy that, if one observes a large economic problem brewing, retire and publish your
book before the SHTF.
If the career central banker actually warned/took actions to circumvent a financial bubble and the bubble popped anyway, they
could be tagged as a goat for causing the crisis.
Maybe the economics profession is functioning as one would expect?
One has to wonder, if the elite economists who have defined the parochial and narrow scope of what capitalism is, how it works,
and who wins and loses in the system, and maybe in particular it's late 20th Century form, neroliberalism, had maybe expanded
their self-serving views to include a Marxian critique and analysis of they might not had been so stupid?
That's not to say the Marx had all the answers, but is only to say that if you presuppose the outcome you want and buttress
it with only the information that supports (no matter how poorly) those outcomes, you end up with crisis and the contradictions
within capitalism resulting in the failures described above.
Universities and Econ departments don't allow the wide critical view needed into their schools, and no matter what you think
of Marx and his ideas, they should at least be the starting point in the discussion when approaching economic policy. The right
wing shift in the governments and the people's of the world is not some unexpected outcome but is directly related to a system
that builds in economic disparity, short-term planning (due to emphasis on next quarters profits and stock price), and an emphasis
on winner take all rather than human needs.
It's not "the economy, stupid." It"s the stupid system.
The problem with the American system is that its founding principles, that all men are created equal, and are endowed with
certain, God given, unalienable rights, runs in contradiction to the chosen economic models of building society. Slavery and Capitalism
are antithetical to these sentiments. Capitalism might be workable if restrained and heavily regulated, but why bother with that
because human corruption will always find a way to undermine such a system; it is inherently weak and guarantees suffering will
be born by the masses- Brexit will provide the perfect example as predicted by Yves.
A heavily regulated capitalism is socialism by another name.
The same, self-serving arguments are also made about war. The thought that humans could live in peace is treated as some unrealistic
and insane idea. Instead of selecting from the human population for cooporation and peace-loving sensibilities, the minority sociopathic
murders are allowed to run wild.
Real human "progress" will be made when the peace faction gains supremacy. But that is impossible as long as the economic system
upon which all human subsistence depends remains entrenched in competition and striving to hoard against fears of scarcity.
FDR had it right, although imperfect, society was moving in the right direction. We live in a world of abundance that is being
squandered. The only way to avoid ultimate destruction is to embrace this abundance as stewards and conservators instead of fearful
exploiters.
Conserve the world by embracing sustainable living. Now that is a powerful political message. So powerful, it will be met with
the full force of the sociopathic murders currently in charge of human societies.
The equality stuff is in the Declaration of Independence, not the Constitution. The latter is specifically devoted to protecting
the interests of property holders, specifically including slavers. This is not surprising. The Founders were heavily influenced
by John Locke. Locke was a slaver himself
https://www.jstor.org/stable/2709512?seq=1#page_scan_tab_contents
. And remember that Lockean ideas are based on protecting private property from the random predation of absolute monarchs.
That's an amazing slip of the keys. It explains a ton too. I love that it combines the term which the people discussed in this
article usually deride with the name of the last Roman emperor who is renowned for extravagance and tyranny.
I agree with your comment whole heartedly.
But:"the name of the last Roman emperor who is renowned for extravagance and tyranny."(& please forgive my quibble) Nero was certainly
not the last emperor to have had such characteristics.
(Elagabalus springs to mind)
It's been said that you can tell how dominated economics is by a particular minority of society, by the economists' word for
phenomena where workers are paid more for their labor being "disease". As in Baumol's Disease for example.
Both sides of the political divide often go awry simply because they refuse to acknowledge the role of human nature. We mere
mortals know this as we are the full recipients of the "free market," the good, the bad, and the extremely ugly. The likes of
Alan Greenspan in the rarified air strata were shocked, shocked, shocked! I bring you a small excerpt from Mr. Greenspan's testimony
before the Government Oversight Committee of the House of Representatives. Still clueless, he does acknowledge a flaw:
Pressed by Waxman, Greenspan conceded a more serious flaw in his own philosophy that unfettered free markets sit at the root
of a superior economy.
"I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they
were best capable of protecting their own shareholders and their equity in the firms," Greenspan said.
Waxman pushed the former Fed chief, who left office in 2006, to clarify his explanation.
"In other words, you found that your view of the world, your ideology, was not right, it was not working," Waxman said.
"Absolutely, precisely," Greenspan replied. "You know, that's precisely the reason I was shocked, because I have been going
for 40 years or more with very considerable evidence that it was working exceptionally well."
In many of the world's richest countries, more and more citizens are losing faith in the very ideas of science, expertise,
and dispassionate judgment – even in medicine, as witness the battles over vaccines in Italy, the US, and elsewhere.
Might be believed by some, others might believe that more and more citizens are sceptical about the practioners ability to
provide expertise and dispassionate judgment. From my own perspective I do believe in science, expertise and dispassionate judgment
but I don't believe that many professional economists have much expertise (outside of knowledge of basic statistics and statistics
software) or that they practice dispassionate judgment.
Pharmaceutical companies are not in business to heal people, they are in business -> They do whatever they legally can to make
money and they even put pressure on the legislative to get more opportunities to legally make more money.
The article contains this link to the Lancet relating to "the reproducibility and reliability of biomedical research": https://www.thelancet.com/journals/lancet/article/PIIS0140-6736%2815%2960696-1/fulltext
The case against science is straightforward: much of the scientific literature, perhaps half, may simply be untrue. Afflicted
by studies with small sample sizes, tiny effects, invalid exploratory analyses, and flagrant conflicts of interest, together
with an obsession for pursuing fashionable trends of dubious importance, science has taken a turn towards darkness.
If we looked and any other (social) scientific discipline, we'd get the same result.
The articles from medium and The Lancet you link highlight the problems well enough, the system is corrupt from top to bottom.
Another examples of where misguided emphasis on juicing "metrics" (for personal gain) rather than taking one's time to develop
expertise and do things correctly is literally killing people, or simply ruining lives (as if that is some consolation).
Economies are inherently cyclical. Keynesianism, in its original incarnation, envisaged surpluses during economic expansions
to offset the fiscal deficits provoked by recessions. But surpluses are a distant memory -- now it's pedal to the metal all the
time, just to keep a becalmed, debt-choked economy treading water.
Credit is also procyclical. It was severely rationed during and after the 2008 meltdown. Now covenant-lite bonds prevail for
corporate financing, while individuals can get 3 percent down FHA loans to buy houses at prices that exceed the 2006 peak, with
33 times leverage. Prudent!
What role can academics play in this endless sisyphean tragedy? None, probably. Warning of recession invites career risk for
economists, so most of them just won't do it. Like the Hazmat team, economists show up after the train wreck to help with the
cleanup. Federal Reserve economists are engineering that crack-up right now, with their fruitcake bond dumping campaign.
By 2020, they'll be tanned, rested and ready for their next exciting outing. :-)
As others have stated, there are economists out there who have already seen through the current dogmas.
Michael Hudson is one and another that comes to mind is Chilean economist Manfred Max-Neef. A transcript of an interview with
him from 2010:
"I worked for about ten years of my life in areas of extreme poverty in the Sierras, in the jungle, in urban areas in different
parts of Latin America. And at the beginning of that period, I was one day in an Indian village in the Sierra in Peru. It was
an ugly day. It had been raining all the time. And I was standing in the slum. And across me, another guy also standing in the
mud -- not in the slum, in the mud. And, well, we looked at each other, and this was a short guy, thin, hungry, jobless, five
kids, a wife and a grandmother. And I was the fine economist from Berkeley, teaching in Berkeley, having taught in Berkeley and
so on. And we were looking at each other, and then suddenly I realized that I had nothing coherent to say to that man in those
circumstances, that my whole language as an economist, you know, was absolutely useless. Should I tell him that he should be happy
because the GDP had grown five percent or something? Everything was absurd.
So I discovered that I had no language in that environment and that we had to invent a new language. And that's the origin
of the metaphor of barefoot economics, which concretely means that is the economics that an economist who dares to step into the
mud must practice. The point is, you know, that economists study and analyze poverty in their nice offices, have all the statistics,
make all the models, and are convinced that they know everything that you can know about poverty. But they don't understand poverty.
And that's the big problem. And that's the big problem. And that's why poverty is still there. And that changed my life as an
economist completely. I invented a language that is coherent with those situations and conditions."
It's a good interview of someone developing an alternate view.
(There are critiques and studies of wealth that I think we need more of as well, only poverty is thought of as pathological –
a subject which he tackles.)
And just maybe, human goodness and human evil have a cyclical nature too and we are just in the bad part of the cycle right
now. However, it may be true also that the time period of 1950 to 1970 was an anomaly that may not recur, and that the true nature
of human beings is to lie, to cheat, to steal, to commit fraud and practice multifarious corruptions and violence. When you look
at the widest version of history, human nature is not so benign.
1950 to 1970 the rest of the industrial world was decimated after 2 world wars.
And more countries wanted independence from colonialism (less loot spread around, however thinly, back home – though not totally
disappeared).
Psychology turns into sociology. Either the system is making everyone prosperous and happy or it is making everyone desperate.
Desperation is the American way. The comfort of misery seen as pathological in the individual is a more general pathology. Too
much bile in the system.
"The Sticky Floor." is the phrase my cousin invented. She is a leader in Women's Studies. It may well apply more correctly that
"The Glass Ceiling". Overall the turn in the article to the dearth of women economists threw me.
As science enables engineering, economics enables financial engineering. The predominant financial engineer of our times is Meyer
Lansky. Organized business, the "real" economy of General Motors and Dow & Dupont & General Dynamics & Raytheon, ITT, Apple, Google,
Microsoft all now have adopted Meyer Lansky Financial Engineering.
It was made legal as economic theory and practice under Clinton Unit 1's reign.
The preeminent financial engineer is David Cay Johnston. He called Dean Baker a "real" economist as opposed to Michael Hudson.
I prefer Hudson to Dean myself. Nobody knows everything. This is why all you really have to know is the goal. "You cannot go wrong
if your goals are correct." is what Einstein said.
The main reason for misery is poverty, which is not having enough to operate the household without debt peonage.
The United States and the EU as run by Central Banks have it so only the selected have infinite access to currency. The States
don't have enough money so the System prefers they deny their people things like education and healthcare, and sell bonds.
It is okay for the Federal Government to tax or not tax but the States must tax to fill their treasuries.
Alan Greenspan's philosophy came from Ayn Rand whose world view encouraged the exclusive access and economic security to have
and do whatever they, the rich, people like Elon Musk or Jeff Bezos, envisioned as ideal for them, and them only. (They live in
airport land with a pond.)
It came from Russian Dystopian Objectivism and produces Dystopia.
The American Philosophy, that which made America loved is American Eclectic Pragmatism.
The wrong goal is to make only those in Finance rich. The right goal is to make everyone as much a jet setter as the jet setters.
Until the goal of Economists is blatantly aimed at relative equality of life, the discipline is simply on the wrong track and
is never going to be worth doing.
Thanks.
Approved economics has nothing to do with actually understanding or solving anything except be a useful smokescreen for wealthy
special interests. I have gotten a more accurate and functional understanding of overall economics from classes, and books in
anthropology, political science, and history than in any classes labeled as "economics."
That is really sad. It is also very deliberate. Those who say modern economic studies have been stripped of anything but neoliberal/libertarian
economic ideas are right. Even then, it seems that it has been either further simplified, or abstracted, to further channel any
thoughts away from real life.
Let's put it this way. Philosophy can be used to actual ask and study questions or it can be used to debate how many angels
can fit on the head of a pin. Guess what what modern mainstream economics does?
There are inherent flaws in neoclassical economics that have already been discovered.
The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great
Depression. No one realised the problems that were building up in the economy as they used an economics that doesn't look at private
debt, neoclassical economics.
The two elements of neoclassical economics that come together to cause financial crises.
1) It doesn't consider debt
2) It holds a set of beliefs about markets where they represent the rational decisions of market participants; they reach stable
equilibriums and the valuations represent real wealth.
Everyone marvels at the wealth creation of rising asset prices, no one looks at the debt that is driving it.
The "black swan" was obvious all along and it was pretty much the same as 1929.
1929 – Inflating US stock prices with debt (margin lending)
2008 – Inflating US real estate prices with debt (mortgage lending)
"Stocks have reached what looks like a permanently high plateau." Irving Fisher 1929.
An earlier neoclassical economist believed in price discovery, stable equilibriums and the rational decisions of market participants,
and what the neoclassical economist believes about the markets means they can't even imagine there could be a bubble.
The amount of real wealth stored in the markets becomes apparent once the bubble has burst.
The debt overhang (ref. graph above) is dragging the US economy down and is the cause of Janet Yellen's inflation mystery,
but they don't know because they don't consider debt. It's called a balance sheet recession.
The problems that led to 2008 come from private debt in the economy and the problems now come from the overhang of private
debt in the economy, but they are using an economics that doesn't consider private debt.
"The problem this essay addresses can be framed in terms of two quotations from Alexis de Tocqueville. The first comes
from his famous speech in the French Chamber of Deputies just prior to the outbreak of the Revolution of 1848: "We are sleeping
on a volcano .do you not see that the earth is beginning to tremble. The wind of revolt rises; the tempest is on the horizon."
The second is from Democracy in America: "When the past no longer illuminates the future, the spirit walks in darkness."
How about this quote ..
"These fools in Wall Street think they can go on forever! They can't!" President Theodore Roosevelt 1909.
The US has just forgotten its own history; this is what it was like at the end of the 19th and beginning of the 20th century.
Capitalism was running wild, but the difference was there used to be a critical press.
Catch up on US history.
"PR! A Social History of Spin" Stuart Ewen
Finding out what the private sector uses PR for also helps you understand their motivations, it's worth reading.
Our Esteemed Elites are mostly college educated which hopefully includes American history. But maybe it's become like modern
college economics. Stripped of inconvenient information.
I agree that beyond the normal American nation's ultra short memory, there is a regular effort by some to eliminate any inconvenience
ones. If history is a career or even a hobby you will likely know much about America history bad (and good too!) that goes zooop
into the memory hole. It becomes a boring national hagiography. Sanitized. But that shouldn't be.
But STEM courses are so much more important than fluff like history.
As with a few other commenters here, the essay puts me in mind of historiography, to wit E.H. Carr whose 'before studying history,
study the historians' became the fighting slogan for the radical history movement of the 1960s:
"The facts are really not at all like fish on the fishmonger's slab. They are like fish swimming about in a vast and sometimes
inaccessible ocean; and what [facts] the historian catches will depend, partly on chance, but mainly on what part of the ocean
he chooses to fish in and what tackle he chooses to use."
"Economists had closed ranks as though in a phalanx, but the crisis showed how fragile these tenets were. They included:
1. A resolute unwillingness to recognize that fundamental uncertainty shadows economic life in the real world."
. And for this one, do I even need to requote Upton Sinclair?!
Economists and central bankers are our modern day priest-astrologers. We *need* them to know! to appease Bel-Marduk and Istar,
to ensure a fruitful harvest, the birth of worthy sons
.and also, for a small commission, to manage our tax collections/ debts/ alehouses/ brothels [hat tip to Prof Hudson].
This is about the UK, but applies equally to the US as we are all doing the same neoliberal things.
Why isn't the economy growing?
We shouldn't get side tracked with productivity as productivity is GDP per hour worked and we need to grow GDP.
What is GDP?
The amount of money spent into the economy by consumers, businesses and the Government plus the income we receive from the
trade balance with the rest of the world.
Now we know what GDP is we can immediately see why austerity is contractionary. The cut in Government spending comes straight
off GDP (someone tell Macron).
The aim is to increase the amount of goods and services within the economy at the same rate as the demand for those goods and
services, whilst increasing the money supply to allow those extra goods and services to be purchased.
Milton Freidman understood the money supply had to rise gradually to grow the economy with his "Monetarism". He thought that
central bank reserves controlled the money supply and this is why it didn't work.
The economists focus on supply (neoclassical economics) or demand (Keynesian economics) until the balance of supply and demand
gets out of step. The economy stagnates due to either insufficient supply (1970s stagflation) or insufficient demand (today's
ultra low inflation).
Money needs to enter the economy to increase the supply of goods and services, while at the same time; the increased money
supply enables the demand for those goods and services.
Banks and governments create money and this is now well understood outside the mainstream.
The banks have been creating money to lend into real estate and inflate financial asset prices. This is not what you want;
they should be creating money to increase the supply of goods and services by lending into business and industry. Their lending
hasn't been increasing GDP.
It all started going wrong when with financial liberalisation and a 1979 policy decision. The UK eliminated corset controls
on banking in 1979 and the banks invaded the mortgage market. This is the start of the real estate frenzy.
You can let bankers do what they want, but they have no idea how to grow the economy with bank credit.
Supply had outstripped demand by the 1920s in the US and they used bank credit to maintain demand, but this can never work in
the longer term as this money needs to be paid back. Government created money has to fill the gap as it doesn't need to be paid
back.
Governments can create money, jobs and wages in the public sector, building the infrastructure for the economy and looking
after the health and education of the population to provide the economic framework necessary for the private sector who can't
make a profit doing these things.
The magic number is GDP, we need to focus on what increasing that number means.
Our main problem is an ideological Left who think the answer always lies on the demand side and an ideological Right who always
think the answer lies on the supply side.
The Left think Government is the answer and the Right think the private sector is the answer.
You need both, due to the increased productivity of the private sector that cannot create the necessary demand for those goods
and services through private sector wages alone.
Understanding money is critical and this is something central bankers monitor, but they don't appear to know what it means
The flow of funds within the economy.
This helps us understand why Government surpluses precede finical crises and why balanced budgets and Government surpluses
push the private sector into debt
Richard Koo shows the graph central bankers use, the flow of funds within the economy, which sums to zero (32-34 mins.).
Government assets + corporate assets + household assets + transfers from/to the rest of the world = zero
They can't all be positive.
The US runs a large trade deficit and this money needs to come from somewhere.
It is the Government that should run the big deficit to fund the other three and if you clamp down on government spending your
economy can't grow unless it starts running on bank debt. The corporate sector and households have to get into debt to balance
this zero sum equation.
A Government surplus requires an indebted private sector unless you are Germany and run a trade surplus.
Clinton was proud of the Government surplus but he didn't realise that this meant the private sector had to go into debt. The
last Government surplus occurred in 1927 – 1930, it precedes crises.
Richard Koo's video shows the Japanese Government ran a surplus just before the Japanese economy blew up.
Neoclassical economics doesn't focus on GDP because it predates it. It was put together before they knew how to measure economic
activity.
It lets the wealthy accumulate all the money until the economy falls over though a lack of demand.
Mariner Eccles, FED chair 1934 – 48, passes comment the last time they used neoclassical economics in the US in the 1920s.
"a giant suction pump had by 1929 to 1930 drawn into a few hands an increasing proportion of currently produced wealth.
This served then as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied
themselves the kind of effective demand for their products which would justify reinvestment of the capital accumulation in new
plants. In consequence as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could
stay in the game only by borrowing. When the credit ran out, the game stopped"
This time it's global.
2014 – "85 richest people as wealthy as poorest half of the world"
2016 – "Richest 62 people as wealthy as half of world's population"
2017 – World's eight richest people have same wealth as poorest 50%
Lying, cheating, and stealing is what we human beings seem to do best, so when the pot becomes big enough, the elite [those
willing to do whatever it takes] do what the elite have done, lie, cheat and steal with reckless abandon.
Those who choose to live a noble life must always be grounded by the notion that the reward for doing such is in achieving
good night's sleep, and little more. You truly can not have your cake and eat it too, not then, not now, not ever
"... Another defect of neoliberal economics is the doctrine's denial that resources are finite and their exhaustion a heavy cost not born by those who exploit the resources. Many local and regional civilizations have collapsed from exhaustion of the surrounding resources. Entire books have been written about this, but it is not part of neoliberal economics. Supplement study of Hudson with study of ecological economists such as Herman Daly. ..."
Readers ask me how they can learn economics, what books to read, what university economics
departments to trust. I receive so many requests that it is impossible to reply individually.
Here is my answer.
There is only one way to learn economics, and that is to read Michael Hudson's books. It is
not an easy task. You will need a glossary of terms. In some of Hudson's books, if memory
serves, he provides a glossary, and his recent book "J Is for Junk Economics" defines the
classical economic terms that he uses. You will also need patience, because Hudson sometimes
forgets in his explanations that the rest of us don't know what he knows.
The economics taught today is known as neoliberal. This economics differs fundamentally from
classical economics that Hudson represents. For example, classical economics stresses taxing
economic rent instead of labor and real investment, while neo-liberal economics does the
opposite.
An economic rent is unearned income that accrues to an owner from an increase in value that
he did nothing to produce. For example, a new road is built at public expense that opens land
to development and raises its value, or a transportation system is constructed in a city that
raises the value of nearby properties. These increases in values are economic rents. Classical
economists would tax away the increase in values in order to pay for the road or transportation
system.
Neoliberal economists redefined all income as earned. This enables the financial system to
capitalize economic rents into mortgages that pay interest. The higher property values created
by the road or transportation system boost the mortgage value of the properties. The
financialization of the economy is the process of drawing income away from the purchases of
goods and services into interest and fees to financial entities such as banks. Indebtedness and
debt accumulate, drawing more income into their service until there is no purchasing power left
to drive the economy.
For example, formerly in the US lenders would provide a home mortgage whose service required
up to 25% of the family's monthly income. That left 75% of the family's income for other
purchases. Today lenders will provide mortgages that eat up half of the monthly income in
mortgage service, leaving only 50% of family income for other purchases. In other words, a
financialized economy is one that diverts purchasing power away from productive enterprise into
debt service.
Hudson shows that international trade and foreign debt also comprise a financialization
process, only this time a country's entire resources are capitalized into a mortgage. The West
sells a country a development plan and a loan to pay for it. When the debt cannot be serviced,
the country is forced to impose austerity on the population by cutbacks in education, health
care, public support systems, and government employment and also to privatize public assets
such as mineral rights, land, water systems and ports in order to raise the capital with which
to pay off the loan. Effectively, the country passes into foreign ownership. This now happens
even to European Community members such as Greece and Portugal.
Another defect of neoliberal economics is the doctrine's denial that resources are
finite and their exhaustion a heavy cost not born by those who exploit the resources. Many
local and regional civilizations have collapsed from exhaustion of the surrounding resources.
Entire books have been written about this, but it is not part of neoliberal economics.
Supplement study of Hudson with study of ecological economists such as Herman Daly.
The neglect of external costs is a crippling failure of neoliberal economics. An external
cost is a cost imposed on a party that does not share in the income from the activity that
creates the cost. I recently wrote about the external costs of real estate speculators.
https://www.paulcraigroberts.org/2018/04/26/capitalism-works-capitalists/
Fracking, mining, oil and gas exploration, pipelines, industries, manufacturing, waste
disposal, and so on have heavy external costs associated with the activities.
Neoliberal economists treat external costs as a non-problem, because they theorize that the
costs can be compensated, but they seldom are. Oil spills result in companies having to pay
cleanup costs and compensation to those who suffered economically from the oil spill, but most
external costs go unaddressed. If external costs had to be compensated, in many cases the costs
would exceed the value of the projects. How, for example, do you compensate for a polluted
river? If you think that is hard, how would the short-sighted destroyers of the Amazon rain
forest go about compensating the rest of the world for the destruction of species and for the
destructive climate changes that they are setting in motion? Herman Daly has pointed out that
as Gross Domestic Product accounting does not take account of external costs and resource
exhaustion, we have no idea if the value of output is greater than all of the costs associated
with its production. The Soviet economy collapsed, because the value of outputs was less than
the value of inputs.
Supply-side economics, with which I am associated, is not an alternative theory to
neoliberal economics. Supply-side economics is a successful correction to neoliberal
macroeconomic management. Keynesian demand management resulted in stagflation and worsening
Phillips Curve trade-offs between employment and inflation. Supply-side economics cured
stagflation by reversing the economic policy mix. I have told this story many times. You can
find a concise explanation in my short book, "The Failure of Laissez Faire Capitalsim." This
book also offers insights into other failures of neoliberal economics and for that reason would
serve as a background introduction to Hudson's books.
I can make some suggestions, but the order in which you read Michael Hudson is up to you. "J
is for Junk Economics" is a way to get information in short passages that will make you
familiar with the terms of classical economic analysis. "Killing the Host" and "The Bubble and
Beyond" will explain how an economy run to maximize debt is an economy that is
self-destructing. "Super Imperialism" and "Trade, Development and Foreign Debt" will show you
how dominant countries concentrate world economic power in their hands. "Debt and Economic
Renewal in the Ancient Near East" is the story of how ancient economies dying from excessive
debt renewed their lease on life via debt forgiveness.
Once you learn Hudson, you will know real economics, not the junk economics marketed by
Nobel prize winners in economics, university economic departments, and Wall Street economists.
Neoliberal economics is a shield for financialization, resource exhaustion, external costs, and
capitalist exploitation.
Neoliberal economics is the world's reigning economics. Russia is suffering much more from
neoliberal economics than from Washington's economic sanctions. China herself is overrun with
US trained neoliberal economists whose policy advice is almost certain to put China on the same
path to failure as all other neoliberal economies.
It is probably impossible to change anything for two main reasons. One is that so many
greed-driven private economic activities are protected by neoliberal economics. So many
exploitative institutions and laws are in place that to overturn them would require a more
thorough revolution than Lenin's. The other is that economists have their entire human capital
invested in neoliberal economics. There is scant chance that they are going to start over with
study of the classical economists.
Neoliberal economics is an essential part of The Matrix, the false reality in which
Americans and Europeans live. Neoliberal economics permits an endless number of economic lies.
For example, the US is said to be in a long economic recovery that began in June 2009, but the
labor force participation rate has fallen continuously throughout the period of alleged
recovery. In previous recoveries the participation rate has risen as people enter the work
force to take advantage of the new jobs.
In April the unemployment rate is claimed to have fallen to 3.9 percent, but the
participation rate fell also. Neoliberal economists explain away the contradiction by claiming
that the falling participation rate is due to the retirement of the baby boom generation, but
BLS jobs statistics indicate that those 55 and older account for a large percentage of the new
jobs during the alleged recovery. This is the age class of people forced into the part time
jobs available by the absence of interest income on their retirement savings. What is really
happening is that the unemployment rate does not include discouraged workers, who have given up
searching for jobs as there are none to be found. The true measure of the unemployment rate is
the decline in the labor force participation rate, not a 3.9 percent rate concocted by not
counting those millions of Americans who cannot find jobs. If the unemployment rate really was
3.9 percent, there would be labor shortages and rising wages, but wages are stagnant. These
anomalies pass without comment from neoliberal economists.
The long expansion since June 2009 might simply be a statistical artifact due to the
under-measurement of inflation, which inflates the GDP figure. Inflation is under-estimated,
because goods and services that rise in price are taken out of the index and less costly
substitutes are put in their place and because price increases are explained away as quality
improvements. In other words, statistical manipulation produces the favorable picture required
by The Matrix.
Since the financial collapse caused by the repeal of Glass-Steagall and by financial
deregulation, the Federal Reserve has robbed tens of millions of American savers by driving
real interest rates down to zero for the sole purpose of saving the "banks too big to fail"
that financial deregulation created. A handful of banks has been provided with free money -- in
addition to the money that the Federal Reserve created in order to take the banks' bad
derivative investments off their hands -- to put on deposit with the Fed from which to collect
interest payments and with which to speculate and to drive up stock prices.
In other words, for a decade the economic policy of the United States has been run for the
benefit of a few highly concentrated financial interests at the expense of the American people.
The economic policy of the United States has been used to create economic rents for the
mega-rich.
Neoliberal economists point out that during the 1950s the labor force participation rate was
much lower than today and, thereby, they imply that the higher rates prior to the current
"recovery" are an anomaly. Neoliberal economists have no historical knowledge as the past is of
no interest to them. They do not even know the history of economic thought. Whether from
ignorance or intentional deception, neoliberal economists ignore that the lower labor force
participation rates of the 1950s reflect a time when married women were at home, not in the
work force. In those halcyon days, one earner was all it took to sustain a family. I remember
the days when the function of a married woman was to provide household services for the
family.
But capitalists were not content to exploit only one member of a family. They wanted more,
and by using economic policy to suppress pay while fomenting inflation, they drove married
women into the work force, imposing huge external costs on the family, child-raising, relations
between spouses, and on the children themselves. The divorce rate has exploded to 50 percent
and single-parent households are common in America.
In effect, unleashed Capitalism has destroyed America. Privatization is now eating away
Europe. Russia is on the same track as a result of its neoliberal brainwashing by American
economists. China's love of success and money could doom this rising Asian giant as well if the
government opens China to foreign finance capital and privatizes public assets that end up in
foreign hands.
Nudge was the title of a book by Richard Thaler and Cass Sunstein on how to manipulate
people in their supposed best interest, like in cafeteria lines, to put whole fruit before
desserts made with sugar.
If you liked Nudge , you'll love " cognitive infiltration ":
Conspiracy Theories
Harvard Public Law Working Paper No. 08-03
Because those who hold conspiracy theories typically suffer from a crippled
epistemology, in accordance with which it is rational to hold such theories, the best
response consists in cognitive infiltration of extremist groups. Various policy dilemmas,
such as the question whether it is better for government to rebut conspiracy theories or to
ignore them, are explored in this light.
Keywords: conspiracy theories, social networks, informational cascades, group
polarization https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1084585
Is not this what discerning MIC's all do these days, via FBI FB?
And of course we mopes have been "nudged" into pretty much that blind serfdom alluded to.
Back in the Cave, with not much chance of dispelling the belief in and subjection to the
shadows projected on the wall we are forced to face
I rather detest the notion of someone or entity 'nudging' me in the direction of some
behavior, especially in a paternalistic mode where the assumption is that they know better
than I what I 'should' be doing or thinking.
On one level, isn't that a working definition of advertising? On another, it smacks of
authoritarianism. Don't we have enough of this kind of thing already? Worse, what's the first
reaction one naturally has when they realize they're being manipulated? Seems to be a
strategy fraught with risk of getting exactly the wrong response.
If I'm to be encouraged to behave in a given way, show me the respect of offering a
conscious, intelligent argument to do so on the merits, or kindly go (family blog)
yourself!
In economics, the single most important thing to understand is debt.
If you understand debt; you won't have any debt.
Debt and freedom are the antithisis of each other.
Without debt; nudges have no influence.
Like many high demand cults neoliberalism is a trap, from which it is very difficult to escape...
Notable quotes:
"... A large, open-border global free market would be left, not subject to popular control but managed by a globally dispersed, transnational one percent. And the whole process of making this happen would be camouflaged beneath the altruistic stylings of a benign humanitarianism. ..."
"... Globalists, as neoliberal capitalists are often called, also understood that democracy, defined by a smattering of individual rights and a voting booth, was the ideal vehicle to usher neoliberalism into the emerging world. Namely because democracy, as commonly practiced, makes no demands in the economic sphere. Socialism does. Communism does. These models directly address ownership of the means of production. Not so democratic capitalism. This permits the globalists to continue to own the means of production while proclaiming human rights triumphant in nations where interventions are staged. ..."
"... The enduring lie is that there is no democracy without economic democracy. ..."
This 'Washington Consensus' is the false promise promoted by the West. The reality is quite
different. The crux of neoliberalism is to eliminate democratic government by downsizing,
privatizing, and deregulating it. Proponents of neoliberalism recognize that the state is the
last bulwark of protection for the common people against the predations of capital. Remove the
state and they'll be left defenseless .
Think about it. Deregulation eliminates the laws. Downsizing eliminates departments and their
funding. Privatizing eliminates the very purpose of the state by having the private sector take
over its traditional responsibilities.
Ultimately, nation-states would dissolve except perhaps for armies and tax systems. A large, open-border global free
market would be left, not subject to popular control but managed by a globally dispersed, transnational one percent. And the
whole process of making this happen would be camouflaged beneath the altruistic stylings of a benign humanitarianism.
Globalists, as neoliberal capitalists are often called, also understood that democracy, defined
by a smattering of individual rights and a voting booth, was the ideal vehicle to usher
neoliberalism into the emerging world. Namely because democracy, as commonly practiced, makes
no demands in the economic sphere. Socialism does. Communism does. These models directly
address ownership of the means of production. Not so democratic capitalism. This permits the
globalists to continue to own the means of production while proclaiming human rights triumphant
in nations where interventions are staged.
The enduring lie is that there is no democracy
without economic democracy.
What matters to the one percent and the media conglomerates that disseminate their worldview is
that the official definitions are accepted by the masses. The real effects need never be known.
The neoliberal ideology (theory) thus conceals the neoliberal reality (practice). And for the
masses to accept it, it must be mass produced. Then it becomes more or less invisible by virtue
of its universality.
"... In a short span of time in the 1970s, dozens of think tanks were established across the western world and billions of dollars were spent proselytizing the tenets of the Powell Memo in 1971, which galvanized a counter-revolution to the liberal upswing of the Sixties. The neoliberal economic model of deregulation, downsizing, and privatization was preached by the Reagan-Thatcher junta, liberalized by the Clinton regime, temporarily given a bad name by the unhinged Bush administration, and saved by telegenic restoration of the Obama years. ..."
"... Today think tanks like the Heritage Foundation, the Brookings Institute, Stratfor, Cato Institute, American Enterprise Institute, Council on Foreign Relations, Carnegie Endowment, the Open Society Foundation, and the Atlantic Council, among many others, funnel millions of dollars in donations into cementing neoliberal attitudes in the American mind. ..."
"... The ideological assumptions, which serve to justify what you could call neocolonial tactics, are relatively clear: the rights of the individual to be free of overreach from monolithic institutions like the state. Activist governments are inherently inefficient and lead directly to totalitarianism. Markets must be free and individuals must be free to act in those markets. People must be free to choose, both politically and commercially, in the voting booth and at the cash register. ..."
"... This conception of markets and individuals is most often formulated as "free-market democracy," a misleading conceit that conflates individual freedom with the economic freedom of capital to exploit labor. So when it comes to foreign relations, American and western aid would only be given on the condition that the borrowers accepted the tenets of an (highly manipulable) electoral system and vowed to establish the institutions and legal structures required to fully realize a western market economy. ..."
In Christopher Nolan's captivating and visually dazzling film Inception, a practitioner of
psychic corporate espionage must plant and idea inside a CEO's head. The process is called
inception, and it represents the frontier of corporate influence, in which mind spies no longer
just "extract" ideas from the dreams of others, but seed useful ideas in a target's
subconscious.
Inception is a well-crafted piece of futuristic sci-fi drama, but some of the ideas it
imparts are already deeply embedded in the American subconscious.
The notion of inception, of hatching an idea in the mind of a man or woman without his or
her knowledge, is the kernel of propaganda, a black art practiced in the States since the First
World War. Today we live beneath an invisible cultural hegemony, a set of ideas implanted in
the mass mind by the U.S. state and its corporate media over decades. Invisibility seems to
happen when something is either obscure or ubiquitous. In a propaganda system, an overarching
objective is to render the messaging invisible by universalizing it within the culture.
Difference is known by contrast. If there are no contrasting views in your field of vision,
it's easier to accept the ubiquitous explanation. The good news is that the ideology is
well-known to some who have, for one lucky reason or another, found themselves outside the
hegemonic field and are thus able to contrast the dominant worldview with alternative opinions.
On the left, the ruling ideology might be described as neoliberalism, a particularly vicious
form of imperial capitalism that, as would be expected, is camouflaged in the lineaments of
humanitarian aid and succor.
Inception 1971
In a short span of time in the 1970s, dozens of think tanks were established across the
western world and billions of dollars were spent proselytizing the tenets of the Powell
Memo in 1971, which galvanized a counter-revolution to the liberal upswing of the Sixties.
The neoliberal economic model of deregulation, downsizing, and privatization was preached by
the Reagan-Thatcher junta, liberalized by the Clinton regime, temporarily given a bad name by
the unhinged Bush administration, and saved by telegenic restoration of the Obama years.
The
ideology that underlay the
model saturated academia, notably at the University of Chicago, and the mainstream media,
principally at The New York Times. Since then it has trickled down to the general populace, to
whom it now feels second nature.
Today think tanks like the Heritage Foundation, the Brookings
Institute, Stratfor, Cato Institute, American Enterprise Institute, Council on Foreign
Relations, Carnegie Endowment, the Open Society Foundation, and the Atlantic Council, among
many others, funnel millions of dollars in donations into cementing neoliberal attitudes in the
American mind.
The ideological assumptions, which serve to justify what you could call neocolonial tactics,
are relatively clear: the rights of the individual to be free of overreach from monolithic
institutions like the state. Activist governments are inherently inefficient and lead directly
to totalitarianism. Markets must be free and individuals must be free to act in those markets.
People must be free to choose, both politically and commercially, in the voting booth and at
the cash register.
This conception of markets and individuals is most often formulated as
"free-market democracy," a misleading conceit that conflates individual freedom with the
economic freedom of capital to exploit labor. So when it comes to foreign relations, American
and western aid would only be given on the condition that the borrowers accepted the tenets of
an (highly manipulable) electoral system and vowed to establish the institutions and legal
structures required to fully realize a western market economy.
These demands were supplemented
with notions of the individual right to be free of oppression, some fine rhetoric about women
and minorities, and somewhat more quietly, a judicial understanding that corporations were
people, too. Together, an unshackled economy and an unfettered populace, newly equipped with
individual rights, would produce the same flourishing and nourishing demos of mid-century
America that had been the envy of humanity.
Neoliberal economists are a new type of clergy. As simple as this. Neoliberal God is great that's what they are preaching to students.
Notable quotes:
"... Bronze Age: Greatest Age EVAH! ..."
"... It's surprising economists feel the need to engage in happy talk, considering that markets are supposed to be natural, just, and efficient. Like clergy preaching to a perpetually backsliding laity about the one true God, Whom only a fool would doubt. If God were so great, there'd be no need to harp on it. In any case, this goes some way toward accounting for Bennet's statement. ..."
"... It takes a half-educated person to say something like that. First you get the ideas by way of a certain education, and then you don't think about them, in part because the educators discourage that kind of thing. ..."
"[Capitalism] has been the greatest engine of, it's been the greatest anti-poverty program
and engine of progress that we've seen."
I can almost smell the economics section of my local bookstore. Strange science,
economics. Judging from the titles, much of it consists of cheerleading. Very different from
history, anthropology, or sociology.
I never see history titles like Bronze Age: Greatest Age EVAH!It's
surprising economists feel the need to engage in happy talk, considering that markets are
supposed to be natural, just, and efficient. Like clergy preaching to a perpetually
backsliding laity about the one true God, Whom only a fool would doubt. If God were so great,
there'd be no need to harp on it. In any case, this goes some way toward accounting for
Bennet's statement.
It takes a half-educated person to say something like that. First you get the ideas by
way of a certain education, and then you don't think about them, in part because the
educators discourage that kind of thing.
I am posting this info. to this site, as part of personal approach as a US citizen to try to
get some REAL FACTS out into the supposedly professional platforms of economists. This
platforms are woefully lacking in good, factual information to communicate to anyone, even
amongst themselves, and especially to Joe living on an street, or hopefully any house on any
street in the US.
Now, what am I posting? The information that I am posting is an example of confusing
information that is extremely invalid and should NOT be posted by so-called reliable sources,
of professional, or "expertise" information. The reason I am posting an article that is
confusing is because this article by Krugman is also confusing, and just as unreliable as the
"confusing article" that was written by Alan Harkin at INVESTOPEDIA.
If you can't believe Investopedia's information, then who can you believe? I am posting
the article as an article that the reader can NOT believe. The linked article is absolutely
mis-stating IRS facts. This article is one of many that confuse the message about corporate
taxation.
Personally, I think it is deliberate. The title of the article: http://bit.ly/2Eof6eM
basically leads the reader "to believe" the article is about how much US corporations such as
APPLE, GOOGLE etc. "actually" bottomline- deliver to IRS. BUT, wait, when the reader "really
reads" the reader then notes, that the "charts" ONLY reflect the "tax rate". Now, that's a
whole different story. Tax rate is not bottomline taxes paid.
So, now if my "logic" and conclusion is "faulty", please enlighten me. The IRS data and
this article don't jive in the real world of statistical data. Here is link to STATISTA that
is THE data base that is used by top researchers worldwide.
This link shows the REAL data and percentage of corporate TAX PAID, AND FUTURE projections
for US etc. etc. I have selected the most obvious and easy to read chart.
The following link presents reliable fact VS The article from INVESTOPEDIA as garbage.
I am writing that the article in Investopedia by Aaron Hankin is BS. The content of the
article also attempts to establish correlations to S/P action that has absolutely NO
plausible fact to make any correlation about anything. I am also writing that most of the
media reports about "corporate tax" is BS. I also am writing that this article by Krugman is
a fluff, nonsense piece that is also BS. If Krugman were an economist that had any concern
about the US economy, he would have, and would be posting this link everywhere on earth.
All that I definitely am trying to do is to get "reasonable data" out there to influence
the public mindset to counter BS and try to present FACTS, just like a lot of other
intelligent readers are trying to do.
Basically, I am saying that the political posturing, and propaganda strategies of so many
different monied groups is demanding that any "serf" needs to present any comment as if the
"serf" is writing some sort of thesis. Really, all the "Talking Faces" are the ones who
should be doing that as they present messages to the public"serfs". Otherwise, there should
be public disclaimers as to who is paying the "Talking Faces" for delivering their
"propaganda". The "sponsored message" dynamics is so convoluted, that any viewer sure can't
presume anything. Basically, It just looks like a lot of "Talking Faces" are just making
themselves into asses, based on their assumption, and presumptions.
Why do you think anyone associated with investors is an economist rather than a snake oil
salesman in the medicine show that is extremely boring?
What to understand economics? Pay attention to Elon Musk, Jeff Bezos.
They pay US workers to build productive assets like factories, transportation products,
energy harvesting products, information you want products, all of which can be matched only
by competitors paying hundreds of billions to millions of US workers just to catch up in a
decade.
"... Consider those who in their late forties got hit by the last bank-owned/Wall Street crash. They lost a good chunk of their 401ks...and had to cash out the remainder to just cover former obligations. Then they were told to go back to school (again involving, at least here in the US, major debt to do so). Who benefited.. the same bank and Wall Street loan sharks. So now in their early fifties and competing against much younger people, they struggled to pay off their incurred re-training/education loans, with nary a penny to spare to invest for what they had after years of saving lost. It's a mugs game, with the only ones winning are the top 1-2% who are able to bet against their own investments. ..."
Both sides of Congress serve the wealthy with the intention of gaining wealth for themselves.
Trump is not much different than the dems (that's why Obama told Bernie to leave). The US is
purely capitalistic. Money is everything. People without money are nothing, but if you toss
them in prison you can make money (and make them work for free). After eight years of Obama
the US is still the world's top prison state and there's more poverty than ever. Trump,
Obama, Hillary. All very similar. I just see dollar signs.
Consider those who in their late forties got hit by the last bank-owned/Wall Street crash.
They lost a good chunk of their 401ks...and had to cash out the remainder to just cover
former obligations. Then they were told to go back to school (again involving, at least here
in the US, major debt to do so). Who benefited.. the same bank and Wall Street loan sharks.
So now in their early fifties and competing against much younger people, they struggled to
pay off their incurred re-training/education loans, with nary a penny to spare to invest for
what they had after years of saving lost. It's a mugs game, with the only ones winning are
the top 1-2% who are able to bet against their own investments.
"... By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Originally published at New Economic Perspectives ..."
"... A dilettante is a person who cultivates an area of interest, such as the arts, without real commitment or knowledge. The Dilettante Doctrine takes modern macro's arrogance to a new pinnacle. Only their model is legitimate, and it is illegitimate to criticize their DSGE models, even though they repeatedly fail. Instead, we must all "like" their models. We cannot make any statements about macroeconomics unless we "like [DSGE] models." The Dilettante Doctrine is a sure-fire means of winning academic disputes. You demand that your critics endorse your views, or you dismiss them as dilettantes unworthy of respect. ..."
"... Readers may recall that the scientific method works in the opposite direction of the Dilettante Doctrine. Modern macro proposes a theory (DSGE) and tests its predictive ability. The DSGE models fail recurrently, on the most important macro events, and the failures are massive. The scientific method requires the theorist of the failed model to declare it falsified. Economists who "like" repeatedly falsified DSGE models are, as Paul Romer famously declared, engaged in "pseudoscience." ..."
"... BTW, one of the best takes of macroeconomics I've encountered is Steve Keen's work, which I gratefully acknowledge I first read here on NC. Keen's critique of DSGE models is utterly spot-on and mathematically sophisticated. Part of the problem with economics is that it has been afflicted with 'math envy' since its earliest days, and the ADM results were proved with Banach Space methods, so they just *had* to be right. Google the phrase "spherical cow" for more on this mindset, not to mention one of the few really funny math jokes I know. ..."
By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate
professor of economics and law at the University of Missouri-Kansas City, and co-founder of
Bank Whistleblowers United. Originally published at New
Economic Perspectives
The truly exceptional thing about 'modern macroeconomics' devotees is not that they are so
consistently and horrifically wrong or that they persist in their errors – but their
exceptional combination of arrogance and disdain for those who have dramatically better records
and broader and more relevant expertise. Kartik Athreya, the Richmond Fed's Research Director,
led the modern macro parade on June 17, 2010 with his blog
(which he later withdrew in embarrassment) when he announced the Athreya Axiom of Absolute
Arrogance.
So far, I've claimed something a bit obnoxious-sounding: that writers who have not taken a
year of PhD coursework in a decent economics department (and passed their PhD qualifying
exams), cannot meaningfully advance the discussion on economic policy. Taken literally, I am
almost certainly wrong. Some of them have great ideas, for sure. But this is irrelevant. The
real issue is that there is extremely low likelihood that the speculations of the untrained,
on a topic almost pathologically riddled by dynamic considerations and feedback effects, will
offer anything new. Moreover, there is a substantial likelihood that it will instead offer
something incoherent or misleading.
Modern macro devotees suffered far worse substantive embarrassment than Athreya's personal
embarrassment. After Athreya (briefly) published his Axiom, a flurry of the world's top
economists issued devastating critiques of modern macro's foundational myths in their dynamic
stochastic general equilibrium (DSGE) models. The takedowns enraged and humiliated modern macro
devotees, and because they are incapable of staying embarrassed, they doubled-down on Athreya's
Axiom by announcing the Dilettante
Doctrine .
People who don't like dynamic stochastic general equilibrium (DSGE) models are
dilettantes. By this we mean they aren't serious about policy analysis.
Lawrence J. Christiano, Martin S. Eichenbaum, and Mathias Trabandt, authored "On DSGE Models
on November 9, 2017. Christiano and Eichenbaum are freshwater modern macro devotees trained
largely at the University of Minnesota, and now holding prominent positions at Northwestern.
Trabandt is a German modern macro devotee.
A dilettante is a person who cultivates an area of interest, such as the arts, without
real commitment or knowledge. The Dilettante Doctrine takes modern macro's arrogance to a new
pinnacle. Only their model is legitimate, and it is illegitimate to criticize their DSGE
models, even though they repeatedly fail. Instead, we must all "like" their models. We cannot
make any statements about macroeconomics unless we "like [DSGE] models." The Dilettante
Doctrine is a sure-fire means of winning academic disputes. You demand that your critics
endorse your views, or you dismiss them as dilettantes unworthy of respect.
Readers may recall that the scientific method works in the opposite direction of the
Dilettante Doctrine. Modern macro proposes a theory (DSGE) and tests its predictive ability.
The DSGE models fail recurrently, on the most important macro events, and the failures are
massive. The scientific method requires the theorist of the failed model to declare it
falsified. Economists who "like" repeatedly falsified DSGE models are, as Paul Romer famously
declared, engaged in "pseudoscience."
Athreya then inadvertently compounded modern macro's failures by putting in writing a bit
too many of modern macro's darker secrets in his 2013
book about macroeconomics. Athreya confirmed many of the most fundamental criticisms of
modern macro devotees, revealed additional failures that were even more devastating, and
illustrated perfectly the blindness of modern macro's devotees to their dogmas and logic.
Athreya did recognize clearly one dogma that made modern macro devotees unable to spot even the
world's largest bubble – but treated that failure as if it were a virtue. Modern macro
devotees train macroeconomists to be unable to identify warn against, or take action to end
even the most destructive bubbles. This is like training surgeons to believe that shock cannot
occur and they should ignore shock in treating patients.
I will return to these errors in subsequent columns, but in this initial column, I introduce
Athreya's most embarrassing and devastating admission. Athreya goes on for over 100 pages on
how wondrous his fellow modern macro devotees are. They are brilliant specialists who are the
world's top practitioners of ultra-rigorous logic and ultra-sophisticated mathematics skills
that make it impossible for them to be anything other than transparent and scrupulously honest.
In particular, Athreya tells the reader that the paramount problem in macro and microeconomics
is recognizing, understanding, and countering deceit, the defining element at law of fraud.
(Actually, he does that only in an exceptionally opaque manner.) On p.103, however, Athreya
admits that modern macro devotees know that their vaunted DSGE models rest on a fatal premise
that is so preposterous and embarrassing that they dare not state it. "A silent assumption of
the ADM model" is that "the ADM God" perfectly prevents all crimes, predation, and deceit
– at no cost. Note that this means that modern macro devotees (silently) designed their
DSGE models to be incapable of recognizing, understanding, measuring, or countering deceit,
which they admit is their paramount and fatal failure.
It is never good to be arrogant. It is always dangerous and limiting to be (proudly)
ignorant of fields that are likely to have superior understanding of issues such as deceit,
fraud, and predation. Athreya's book displays his pride in both of these faults.
The authors of the Dilettante Doctrine inadvertently revealed another embarrassing modern
macro failure of great importance. It is the combination of repeated, devastating failure and
unfailing arrogance that defines (and dooms) modern macro as pseudoscientists. In fairness to
the authors, they announced their Dilettante Doctrine in the context of an article admitting
catastrophic errors in modern macro. They also unintentionally admit the non-scientific nature
of their enterprise. Consider this passage:
For [IMF's leader] to take DSGE model-based recommendations seriously, the economic
intuition underlying those recommendations has to be made in compelling and intuitive
ways.
Yes, they actually wrote that for anyone to take DSGE models "seriously" their "economic
intuition" must "be made intuitive." Wow, who knew science could be so 'intuitive?' Not
satisfied with announcing their new "intuitive method" as a substitute for the scientific
method, the authors double-down on the concept that 'intuition' is the secret sauce of
economics declaring that the super-secret is to keep that 'intuition' "simple."
To be convincing, it is critical for a DSGE modeler to understand and convey the economic
intuition behind the model's implications in simple and intuitive terms.
Notice that the authors are not stating the conditions required to make the DSGE models
'correct.' They are only interested in what practices will make the models' results
"convincing" to the bosses.
The bosses decide "actual policymaking." The Dilettante Doctrine authors declare
policymaking to be even less scientific than relying on 'simple' 'intuition' to convey DSGE
model results. It turns out that DSGE models are the 'canvas' on which modern macro devotees
"see the combined effect of the different colors" of their "art."
Inevitably, actual policymaking will always be to some extent an art. But even an artist
needs a canvas to see the combined effect of the different colors. A DSGE model is that
canvas.
These passages are not simply embarrassing, they are revealing. DSGE is a substantive farce
that repeatedly fails because modern macro devotees shaped their models from the beginning to
embrace laissez faire dogmas. The 'simple' 'intuitions' underlying DSGE models are the
most destructive laissez faire dogmas.
Narayana Kocherlakota's sly use of the word "almost" reveals his agreement with this
point.
[A]lmost coincidentally -- in these [early DSGE] models, all government interventions
(including all forms of stabilization policy) are undesirable.
The authors of the Dilettante Doctrine agree with Kocherlakota's observation about the
original DSGE models.
The associated policy implications are clear: there was no need for any form of government
intervention. In fact, government policies aimed at stabilizing the business cycle are
welfare-reducing.
Modern macro is proud that its 'freshwater' and 'saltwater' factions have achieved a grand
fusion. The saltwater types agreed to use DSGE models and the freshwater types agreed that the
freshwater types could add 'frictions' to the DSGE models that would allow the models to at
least purport to address some of the actual macroeconomic problems. There is a misleading view
that because the 'saltwater' types often call themselves "New Keynesians" they must have views
sympathetic to Keynesian thought. The Dilettante Doctrine authors make the useful point that
"New Keynesian" dogma is actually Milton Friedman's core laissez faire dogmas.
Prototypical pre-crisis DSGE models built upon the chassis of the RBC model to allow for
nominal frictions, both in labor and goods markets. These models are often referred to as New
Keynesian (NK) DSGE models. But, it would be just as appropriate to refer to them as
Friedmanite DSGE models. The reason is that they embody the fundamental world view
articulated in Friedman's seminal Presidential Address .
The Dilettante Doctrine authors admit that DSGE models failed at the most fundamental level
– they could not even spot that the economy was becoming progressively more dangerous and
harmful.
Pre-crisis DSGE models didn't predict the increasing vulnerability of the US economy to a
financial crisis.
The authors go badly wrong in multiple ways when they attempt to explain the DSGE models
failures and their implications for economic theory and policy.
There is still an ongoing debate about the causes of the financial crisis. Our view,
shared by Bernanke (2009) and many others, is that the financial crisis was precipitated by a
rollover crisis in a very large and highly levered shadow-banking sector that relied on
short-term debt to fund long-term assets.19
The trigger for the rollover crisis was developments in the housing sector. U.S. housing
prices had risen rapidly in the 1990's with the S&P/Case-Shiller U.S. National Home Price
Index rising by a factor of roughly 2.5 between 1991 and 2006. The precise role played by
expectations, the subprime market, declining lending standards in mortgage markets, and
overly-loose monetary policy is not critical for our purposes. What is critical is that
housing prices began to decline in mid-2006, causing a fall in the value of the assets of
shadow banks that had heavily invested in mortgage-backed securities. The Fed's willingness
to provide a safety net for the shadow banking system was at best implicit, creating the
conditions under which a roll-over crisis was possible. In fact a rollover crisis did occur
and shadow banks had to sell their asset-backed securities at fire-sale prices, precipitating
the Great Recession.
In sum, the pre-crisis mainstream DSGE models failed to forecast the financial crisis
because they did not integrate the shadow banking system into their analysis.
I begin with the most fundamental failure – the failure to ask the right questions.
Two prominent examples are why didn't the DSGE models warn us decades ago that the economy was
systematically misallocating assets and creating the largest bubble in world history and what
should we do to change the perverse incentives harming the economy and economic stability?
Kocherlakota, in the same article from which I quoted above, emphasized that modern macro
failed to warn about the coming financial crisis and the Great Recession and failed to provide
effective policies to respond to them.
The dilettante article only uses the word 'bubble' once – to describe the tech bubble.
It never labels the vastly larger housing bubble a 'bubble.' The dilettante article's authors
claim it is not relevant for their purposes to know how the bubble arose, why it continued to
inflate for over a decade, why it burst, or why it triggered the global financial crisis and
the Great Recession. Only a dilettante could make or believe that claim.
Recall that Athreya emphasizes that deceit is the key factor that screws up economies
– and that DSGE models "silently" assume "the ADM God" makes deceit impossible. I have
explained in scores of columns why deceit, fraud, and predation were the central causes of the
housing bubble hyper-inflating, the financial crisis, and the creation of the Great Recession.
The dilettante authors refusal to call the housing bubble a bubble does not change the fact
that they claim that the dramatic fall in housing values after 2005 was the paramount "trigger"
of the financial crisis and the Great Recession.
The dilettante authors create a fiction about what "precipitat[ed] the Great Recession.
In fact a rollover crisis did occur and shadow banks had to sell their asset-backed
securities at fire-sale prices, precipitating the Great Recession.
The dilettante authors then make their twin ' mea culpa ' on behalf of modern
macro.
Against this background, we turn to the first of the two criticisms of DSGE models
mentioned above, namely their failure to signal the increasing vulnerability of the U.S.
economy to a financial crisis. This criticism is correct. The failure reflected a broader
failure of the economics community.
The failure was to allow a small shadow-banking system to metastasize into a massive,
poorly-regulated wild west-like sector that was not protected by deposit insurance or
lender-of-last-resort backstops.
We now turn to the second criticism of DSGE models, namely that they did not sufficiently
emphasize financial frictions. One reason why modelers did not emphasize financial frictions
in DSGE models is that until the recent crisis, post-war recessions in the U.S. and Western
Europe did not seem closely tied to disturbances in financial markets. The Savings and Loans
crisis in the US was a localized affair that did not grow into anything like the Great
Recession. Similarly, the stock market meltdown in the late 1980's and the bursting of the
tech-bubble in 2001 only had minor effects on aggregate economic activity.
At the same time, the financial frictions that were included in DSGE models did not seem
to have very big effects.
The dilettante authors have no idea how important their concessions are. Their premise is
that it was government regulation, deposit insurance, and the central bank's 'lender of last
resort' function that prevented prior epidemics of accounting control fraud from causing
anything worse than "minor effects on aggregate economic activity." The obvious problem is that
since its inception 30 years ago modern macro ideologues have claimed the opposite is true
– that governmental action is unnecessary and harmful. They constructed their DSGE models
to valorize their Friedmanite dogmas.
The less obvious problem is that freshwater modern macro has claimed that the lesson of the
financial crisis is the opposite. Athreya and the Richmond Fed have
preached for years that the federal safety net caused the housing problem, the financial
crisis, and the Great Recession. The Richmond Fed claims that the key policy response to future
financial crises is allowing the shadow sector to collapse in an orgy of "rollover
cris[e]s."
The broader problem is why the dilettante authors are so wedded to their failed models,
which at their core assume out of existence the institutions and events they say are most
critical to explaining the catastrophic failures of their models. Why, for example, start with
a general equilibrium model based on absurdly utopian assumptions (stated and unstated) that
invariably produces equilibrium when the things we most need to study involve the failure of
markets to function? It is nonsensical to make contradictory assumptions in different parts of
your model about human behavior. Modern macro models keep failing and their devotees' response
is to add (over time) dozens of fudges that posit that humans typically act in a manner that
contradicts to the explicit and unstated assumptions of the DSGE model about human behavior.
DSGE models increasingly resemble Borg constructs. The Borg also claim that there is no
alternative to assimilation into their collective.
Excellent points. Helps to explain how you get a supposedly serious site covering real
estate falling for ridiculous tripe about the root cause of the housing crisis (aka Great
Recession). Take a careful look at the bombshell "working paper" and the new "narrative"
cited, and you can see the groupstink of the Fed written all over it
https://betterdwelling.com/forget-subprime-canadian-real-estate-buyers-investors-crashed-the-us-market/
Modern mainstream macro is like a police detective whose model of the world states that
people are nice and the body heals itself, and that therefore we will all live happily ever
after. When confronted by a murder victim lying in a pool of their own blood, and that fact's
apparent incompatibility with their model of the world, they respond, "My model is correct
only, you see, it failed to account for sudden massive blood loss. How that loss of blood
happened is beyond the scope of my investigation, the important thing is that I've now
incorporated that knowledge in my new improved model, which proves that we will all live
happily ever after -- except in cases of a sudden, massive loss of blood ."
There has not been a big mea-culpa from neoliberal economists after the 2008 Financial
Crisis. I don't think there will be. Many are essentially the equal of religious
fundamentalists.
However, we should also remember that the very wealthy have backed the neoliberal
economists against the general public. Neolibe3ralism provides a pseudoscientific economic
excuse for what amounts to turning society into a plutocracy, which is precisely what the
rich want.
The GFC worked out very well for the neoliberal agenda. What you can't predict, you don't
need to prevent or protect against. If the result happens to be a massive transfer of funds
from states to speculators that eases the path to austerity and asset stripping, what's to
apologize for?
Lack of higher math skills precludes citizen involvement in economics.
Blame it on the math card in PCs that makes doing it by hand and thus learning and
understanding how numbers work.
Most economists lack higher math skills too, but that doesn't seem to be obstacle for
them. It's spherical chickens in a vacuum, models that are supposedly related to real world
but are simplified beyond recognition because most economists are ignorant of even
rudimentary statistics.
and you don't need math to discover that the holy Models rely on downright silly
assumptions about Human Beings.
"rational actors with perfect information".
lol.
Most of the economic actors I know do not even remotely resemble that.
and whomever said that modern econ is akin to fundamentalist religion is right on.
I can't read "Money" or watch CNBC without thinking about Pat Robertson or Billy Graham.
It's just a different god they worship.
With this in mind, I think it's hilarious that the current hyperventilation about
"cryptocurrency" could possibly be the bubble that, in popping, brings the whole mess
down.
"Masters of the Universe", indeed.
Personally I believe economic as practiced is an example of telling the boss (the King)
what they want to hear.
Economist appear descended form a long line of Court Magicians, telling the futures from
the entrails of an animal, consulting the spirits for guidance, or using a Chrystal ball.
Of more pointedly Bullshit, baffles brains.
Prof Black make the point that he DSGE models assume away fraud. They also assume people
are "rational actors, driven only by logic," that is: we are all Vulcans from Star Trek.
A simple view of women's fashions (high heels) with regard to comfort or safety would
demolish any theory of people as "rational actors." Or men's behavior over their "sports
teams."
To assume away human behavior and emotion, and thus chaos or catastrophe theory, would put
economists at odds with their masters, and cut their income, by the nearly always fatal, or
career limiting "telling truth to power."
It's interesting to speculate what would be the scope or size of common ground in a dialog
between anthropologists and economists. Null set perhaps?
Just a quick note for those who were initially confused by Bill Black's use of "modern
macroeconomic theory" and thought "modern monetary theory". (I know I did, and was initially
really confused by his take, and had to re-read the first three paragraphs a few times to
re-set my mental pointers). As far as I know (and I did a year of Ph.D economics at Stanford,
so I pass Arthreya's first test) I haven't heard of "modern" applied to DSGE macro but that
probably reflects my choice of reading material more than anything else. In short, "modern
macro" is bad, "modern monetary" is good.
BTW, one of the best takes of macroeconomics I've encountered is Steve Keen's work,
which I gratefully acknowledge I first read here on NC. Keen's critique of DSGE models is
utterly spot-on and mathematically sophisticated. Part of the problem with economics is that
it has been afflicted with 'math envy' since its earliest days, and the ADM results were
proved with Banach Space methods, so they just *had* to be right. Google the phrase
"spherical cow" for more on this mindset, not to mention one of the few really funny math
jokes I know.
Nice illustration of ideologically based ostrakism as practiced in Academia: "Larry [Summers] leaned back in his chair and offered me some advice. I had a choice. I could be an insider or I could
be an outsider. Outsiders can say whatever they want. But people on the inside don't listen to them. Insiders, however, get lots of access and a chance to push their ideas. People
- powerful people - listen to what they have to say. But insiders also understand one unbreakable rule: they don't criticize
other insiders."
Notable quotes:
"... A more probable school of thought is that this game was created as a con and a cover for the status quo capitalist establishment to indulge themselves in their hard money and liquidity fetishes, consequences be damned. ..."
"... The arguments over internal and external consistency of models is just a convenient misdirection from what policy makers are willing to risk and whose interests they are willing to risk policy decisions for ..."
"... Mathematical masturbations are just a smoke screen used to conceal a simple fact that those "economists" are simply banking oligarchy stooges. Hired for the specific purpose to provide a theoretical foundation for revanschism of financial oligarchy after New Deal run into problems. Revanschism that occurred in a form of installing neoliberal ideology in the USA in exactly the same role which Marxism was installed in the USSR. With "iron hand in velvet gloves" type of repressive apparatus to enforce it on each and every university student and thus to ensure the continues, recurrent brainwashing much like with Marxism on the USSR universities. ..."
"... To ensure continuation of power of "nomenklatura" in the first case and banking oligarchy in the second. Connections with reality be damned. Money does not smell. ..."
"... Economic departments fifth column of neoliberal stooges is paid very good money for their service of promoting and sustaining this edifice of neoliberal propaganda. Just look at Greg Mankiw and Rubin's boys. ..."
"... "Larry [Summers] leaned back in his chair and offered me some advice. I had a choice. I could be an insider or I could be an outsider. Outsiders can say whatever they want. But people on the inside don't listen to them. Insiders, however, get lots of access and a chance to push their ideas. People - powerful people - listen to what they have to say. But insiders also understand one unbreakable rule: they don't criticize other insiders." ..."
At the risk of oversimplifying might it not be as simple as stronger leanings towards IS-LM and kind are indicative of a bias
towards full employment and stronger leanings towards DSGE, microfoundations, and kind are indicative of a bias towards low inflation?
IN general I consider over-simplification a fault, if and only if, it is a rigidly adhered to final position. This is to say
that over-simplification is always a good starting point and never a good ending point. If in the end your problem was simple
to begin with, then the simplified answer would not be OVER-simplified anyway. It is just as bad to over-complicate a simple problem
as it is to over-simplify a complex problem. It is easier to build complexity on top of a simple foundation than it is to extract
simplicity from a complex foundation.
A lot of the Chicago School initiative into microfoundations and DSGE may have been motivated by a desire to bind Keynes in
a NAIRU straight-jacket. Even though economic policy making is largely done just one step at a time then that is still one step
too much if it might violate rentier interests.
Darryl FKA Ron -> Barry...
There are two possible (but unlikely) schools of (generously attributed to as) thought for which internal consistency might
take precedence over external consistency. One such school wants to consider what would be best in a perfect world full of perfect
people and then just assume that is best for the real world just to let the chips fall where they may according to the faults
and imperfections of the real world. The second such school is the one whose eyes just glaze over mesmerized by how over their
heads they are and remain affraid to ask any question lest they appear stupid.
A more probable school of thought is that this game was created as a con and a cover for the status quo capitalist establishment
to indulge themselves in their hard money and liquidity fetishes, consequences be damned.
Richard H. Serlin
Consistency sounds so good, Oh, of course we want consistency, who wouldn't?! But consistent in what way? What exactly do you
mean? Consistent with reality, or consistent with people all being superhumans? Which concept is usually more useful, or more
useful for the task at hand?
Essentially, they want models that are consistent with only certain things, and often because this
makes their preferred ideology look far better. They want models, typically, that are consistent with everyone in the world having
perfect expertise in every subject there is, from finance to medicine to engineering, perfect public information, and perfect
self-discipline, and usually on top, frictionless and perfectly complete markets, often perfectly competitive too.
But a big thing to note is that perfectly consistent people means a level of perfection in expertise, public information, self-discipline,
and "rationality", that's extremely at odds with how people actually are. And as a result, this can make the model extremely misleading
if it's interpreted very literally (as so often it is, especially by freshwater economists), or taken as The Truth, as Paul Krugman
puts it.
You get things like the equity premium "puzzle", which involves why people don't invest more in stocks when the risk-adjusted
return appears to usually be so abnormally good, and this "puzzle" can only be answered with "consistency", that people are all
perfectly expert in finance, with perfect information, so they must have some mysterious hidden good reason. It can't be at all
that it's because 65% of people answered incorrectly when asked how many reindeer would remain if Santa had to lay off 25% of
his eight reindeer ( http://richardhserlin.blogspot.com/2013/12/surveys-showing-massive-ignorance-and.html ).
Yes, these perfect optimizer consistency models can give useful insights, and help to see what is best, what we can do better,
and they can, in some cases, be good as approximations. But to say they should be used only, and interpreted literally, is, well,
inconsistent with optimal, rational behavior -- of the economist using them.
Richard H. Serlin -> Richard H. Serlin...
Of course, unless the economist using them is doing so to mislead people into supporting his libertarian/plutocratic ideology.
dilbert dogbert
As an old broken down mech engineer, I wonder why all the pissing and moaning about micro foundations vs aggregation. In strength
of materials equations that aggregate properties work quite well within the boundaries of the questions to be answered. We all
know that at the level of crystals, materials have much complexity. Even within crystals there is deeper complexities down to
the molecular levels. However, the addition of quantum mechanics adds no usable information about what materials to build a bridge
with.
But, when working at the scale of the most advanced computer chips quantum mechanics is required. WTF! I guess in economics
there is no quantum mechanics theories or even reliable aggregation theories.
Poor economists, doomed to argue, forever, over how many micro foundations can dance on the head of a pin.
RGC -> dilbert dogbert...
Endless discussions about how quantum effects aggregate to produce a material suitable for bridge building crowd out discussions
about where and when to build bridges. And if plutocrats fund the endless discussions, we get the prominent economists we have
today.
Darryl FKA Ron -> dilbert dogbert...
"...I guess in economics there is no quantum mechanics theories or even reliable aggregation theories..."
[I guess it depends upon what your acceptable confidence interval on reliability is. Most important difference that controls
all the domain differences between physical science and economics is that underlying physical sciences there is a deterministic
methodology for which probable error is merely a function of the inaccuracy in input metrics WHEREAS economics models are incomplete
probabilistic estimating models with no ability to provide a complete system model in a full range of circumstances.
YOu can design and build a bridge to your load and span requirements with alternative models for various designs with confidence
and highly effective accuracy repeatedly. No ecomomic theory, model, or combination of models and theories was ever intended to
be used as the blueprint for building an economy from the foundation up.
With all the formal trappings of economics the only effective usage is to decide what should be done in a given set of predetermined
circumstance to reach some modest desired effect. Even that modest goal is exposed to all kinds of risks inherent in assumptions,
incomplete information, externalities, and so on that can produce errors of uncertain potential bounds.
Nonetheless, well done economics can greatly reduce the risks encountered in the random walk of economics policy making. So
much so is this true, that the bigger questions in macro-economics policy making is what one is willing to risk and for whom.
The arguments over internal and external consistency of models is just a convenient misdirection from what policy makers
are willing to risk and whose interests they are willing to risk policy decisions for.]
Darryl FKA Ron -> Peter K....
unless you have a model which maps the real world fairly closely like quantum mechanics.
[You set a bar too high. Macro models at best will tell you what to do to move the economy in the direction that you seek to
go. They do not even ocme close to the notion of a theory of everything that you have in physics, even the theory of every little
thing that is provided by quantum mechanics. Physics is an empty metaphor for economics. Step one is to forgo physics envy in
pursuit of understanding suitable applications and domain constraints for economics models.
THe point is to reach a decision and to understand cause and effect directions. All precision is in the past and present. The
future is both imprecise and all that there is that is available to change.
For the most part an ounce of common sense and some simple narrative models are all that are essential for making those policy
decisions in and of themselves. HOWEVER, nation states are not ruled by economist philosopher kings and in the process of concensus
decision making by (little r)republican governments then human language is a very imprecise vehicle for communicating logic and
reason with respect to the management of complex systems. OTOH, mathematics has given us a universal language for communicating
logic and reason that is understood the same by everyone that really understands that language at all. Hence mathematical models
were born for the economists to write down their own thinking in clear precise terms and check their own work first and then share
it with others so equipped to understand the language of mathematics. Krugman has said as much many times and so has any and every
economist worth their salt.]
likbez -> Syaloch...
I agree with Pgl and PeterK. Certain commenters like Darryl seem convinced that the Chicago School (if not all of econ) is driven
by sinister, class-based motives to come up justifications for favoring the power elite over the masses. But based on what I've
read, it seems pretty obvious that the microfoundation guys just got caught up in their fancy math and their desire to produce
more elegant, internally consistent models and lost sight of the fact that their models didn't track reality.
That's completely wrong line of thinking, IMHO.
Mathematical masturbations are just a smoke screen used to conceal a simple fact that those "economists" are simply banking
oligarchy stooges. Hired for the specific purpose to provide a theoretical foundation for revanschism of financial oligarchy after
New Deal run into problems. Revanschism that occurred in a form of installing neoliberal ideology in the USA in exactly the same
role which Marxism was installed in the USSR.
With "iron hand in velvet gloves" type of repressive apparatus to enforce it on each and every university student and thus to
ensure the continues, recurrent brainwashing much like with Marxism on the USSR universities.
To ensure continuation of power of "nomenklatura" in the first case and banking oligarchy in the second. Connections with reality
be damned. Money does not smell.
Economic departments fifth column of neoliberal stooges is paid very good money for their service of promoting and sustaining
this edifice of neoliberal propaganda. Just look at Greg Mankiw and Rubin's boys.
But the key problem with neoliberalism is that the cure is worse then disease. And here mathematical masturbations are very
handy as a smoke screen to hide this simple fact.
likbez -> likbez...
Here is how Rubin's neoliberal boy Larry explained the situation to Elizabeth Warren:
"Larry [Summers] leaned back in his chair and offered me some advice. I had a choice. I could be an insider or I could
be an outsider. Outsiders can say whatever they want. But people on the inside don't listen to them. Insiders, however, get lots of access and a chance to push their ideas. People
- powerful people - listen to what they have to say. But insiders also understand one unbreakable rule: they don't criticize
other insiders."
Actually Marx's "labor theory of value" should be properly called the "theory of surplus value".
Notable quotes:
"... For Marx, value was socially-necessary labour time: David Harvey is good on this. From this perspective, exploitation and alienation are linked. Workers are exploited because they must work longer than necessary to get their consumption bundle. And they are alienated because this work is unsatisfying and a source of unfreedom. Now, I'll concede that many people hate the labour theory of value. One reason for this is that many discussions of it quickly become obscurantist – as if "value" is some mystical entity embodied in commodities. ..."
"... This, though, certainly was not Marx's intention. Quite the opposite. He intended his theory to be a demystification. He wanted to show how what looked like relations between things – the exchange of money for goods or labour-time – were in fact relations between people. And unequal ones at that. ..."
"... I suspect that some of the animosity to Marx's use of LTV arises because of a resistance to the inference that Marx drew from it – that workers are exploited. This issue, however, is independent of the validity of not of the LTV. For example, Roemer thinks workers are exploited without believing in the LTV, and Smith believed the LTV without arguing that workers were exploited. ..."
"... * He seems to be recovering now. The vet is also expected to make a full recovery eventually. ..."
"... Further understanding, which evolved after Marx, is that the LTV is just special case of the principle that what produces a surplus of usefulness is not labour per se, but the energy used in the transformation of a larger quantity of something into a smaller quantity of something else, and muscle power is just one way, even if it was the main one for a very long time, to obtain energy to transform a large quantity of less useful commodities into a smaller quantity of more useful commodities. ..."
"... And this follows into the impression that I have derived from various authors that our high standards of living depend not on the high "productivity" of labour, but on the high "productivity" of fossil fuels, which are the product of the fertility of land ..."
"... the complex process of differentiation in the economy (aka the division of labor) obscures the relationship between the creation of the surplus (work time above that necessary to reproduce consumption bundle) and its utilization by capitalists via investment. Investment is not possible without exploitation of workers, but that relationship is occluded by the mechanics of employment, markets, and property. ..."
"... My impression is that your bearded friend Karl does not use "alienation" in that sense at all, in an economic sense, but in a humanist sense: that by being separated from the means of production proletarians are alienated from the meaning of their work, from work as a human activity, as distinct from an economic activity ..."
"... Practically every "Dilbert" strip is about "alienation". This is my favourite ..."
"... Placing a high value on the frivolous and "useless" has always been the hallmark of those most able to decide the value of anything, because they have no use for economic use (so to speak), but rather social signaling. Broad social respect is an extremely expensive thing to buy with money alone. ..."
Lucius has been poorly recently, which has required some trips to the vet and therefore a bill of a size that only David Davis
could negotiate*. This has made me wonder: is there more to be said for the labour theory of
value than we like to think?
For a long time, I've not really cared about this theory one way or the other. This is partly because I've not bothered much with
questions of value; partly because, as John Roemer has shown, we don't
need (pdf)
a labour theory of value to suggest workers are exploited; and partly because the main Marxian charges against capitalism – for
example that it entails relationships of
domination – hold
true (or not!) independently of the theory.
As I approach retirement, however, I've begun to change my mind. I think of major expenses in terms of labour-time because they
mean I have to work longer. A trip to the vet is an extra fortnight of work; a good guitar an extra month, a car an extra year, and
so on.
When I consider my spending, I ask: what must I give up in order to get that? And the answer is my time and freedom. My labour-time
is the measure of value.
This is a reasonable basis for the claim that workers are exploited. To buy a bundle of goods and services, we must work a number
of hours a week. But taking all workers together, the hours we work are greater than the hours needed to produce those bundles because
we must also work to provide a profit for the capitalist. As Marx
put it:
We have seen that the labourer, during one portion of the labour-process, produces only the value of his labour-power, that
is, the value of his means of subsistence During the second period of the labour-process, that in which his labour is no longer
necessary labour, the workman, it is true, labours, expends labour-power; but his labour, being no longer necessary labour, he
creates no value for himself. He creates surplus-value which, for the capitalist, has all the charms of a creation out of nothing.
This portion of the working-day, I name surplus labour-time.
For Marx, value was socially-necessary labour time: David Harvey is
good on this. From this
perspective, exploitation and alienation are linked. Workers are exploited because they must work longer than necessary to get their
consumption bundle. And they are alienated because this work is unsatisfying and a source of unfreedom. Now, I'll concede that many
people hate the labour theory of value. One reason for this is that many discussions of it quickly become obscurantist – as if "value"
is some mystical entity embodied in commodities.
This, though, certainly was not Marx's intention. Quite the opposite. He intended his theory to be a demystification. He wanted
to show how what looked like relations between things – the exchange of money for goods or labour-time – were in fact relations between
people. And unequal ones at that.
What's more, the charge of obscurantism against Marx is an especially weak one when it comes from orthodox economics. Much of
this invokes unobservable concepts such as the natural rate of unemployment, marginal productivity, utility, the marginal product
of
capital and natural rate of interest – ideas which,
in the last two cases, might not even be theoretically coherent.
In fact, the LTV is reasonably successful by the standards of conventional economics: we have empirical evidence to suggest that
it does (pdf) a
decent (pdf) job of
explaining (pdf) relative prices – not that this was
how Marx intended it to be used.
You can of course, think of counter-examples to the theory. But so what? in the social sciences, no substantial theory is 100%
true.
I suspect that some of the animosity to Marx's use of LTV arises because of a resistance to the inference that Marx drew from
it – that workers are exploited. This issue, however, is independent of the validity of not of the LTV. For example, Roemer thinks
workers are exploited without believing in the LTV, and Smith believed the LTV without arguing that workers were exploited.
By the (low) standards of economic theories, perhaps the LTV
isn't so bad.
* He seems to be recovering now. The vet is also expected to make a full recovery eventually.
But the LTV says more than the output of the economy is divided between the workers and the (suppliers and) owners of capital
goods, doesn't it? I mean, mainstream econ says that too. And unless ownership of capital inputs to production is distributed
equally across society, then some people consume things that other's labour has produced, which means workers must produce more
than they consume. But again, that's basic mainstream stuff, not LVT. You end by saying you can believe in exploitation but not
LVT, and vice versa, but the main body of this blog seems to be connecting the two. I am confused.
Of course if you have the ability to vary your labour supply, and labour is how you earn your money, then you ask yourself
how much you need to work to purchase whatever. But again that's mainstream not LVT.
"Smith believed the LTV without arguing that workers were exploited."
The Marxian approach was interested in, as other commenters have said, in the specific capitalist case, where "capitalism"
for him means strictly "labour for hire" by workers alienated from the means of production by their ownership by capitalists.
But the labour theory of value, as understood by what Marx called "classicals", applies also to all labour, and he used it
in that sense.
My understanding of the classicals and the LTV is reduced to a minimum this:
By "value" we mean "surplus".
The "physiocrats" correctly identified "land" (mines, farms, the sea) as a producer of physical surplus: once corn seed
produces a whole corn cob. The quantity of physical output appears to be greater than the quantity of physical input, a phenomenon
that used to be called "fertility".
However the "classicals" recognized that there is surplus also when the quantity of output is physically smaller than the
quantity of input: a larger quantity of iron ore and coal gets turned into a much smaller quantity of metal called "spoon",
and that generates surplus too.
Since the surplus is not quantitative they called it a surplus of "ofelimity", of usefulness. A spoon is more useful than
the physically larger quantity of iron ore and coal used to make it, in most contexts.
So the question is what creates a surplus of ofelimity even if quantity shrinks drastically.
The classicals observed that while quantitative surplus may be spontaneous, as in apple trees just produce apples by themselves,
all cases involving a surplus of ofelimity involved the application of labour.
The LTV is simply that observation: that the whole chain of surpluses of ofelimity always goes back to the application
of labour, from the first people who chipped obsidian blocks into blades onwards.
As such the LTV is not really a "theory": it is a generic principle. It would be more properly a theory if there was some
kind of "law" that related the quantity of labour embedded in a commodity to the surplus of usefulness it seems to have. But
any such law cannot be universal, because usefulness is strictly context dependent. Sraffa wrote some preliminary booklet about
that :-).
Further understanding, which evolved after Marx, is that the LTV is just special case of the principle that what produces
a surplus of usefulness is not labour per se, but the energy used in the transformation of a larger quantity of something into
a smaller quantity of something else, and muscle power is just one way, even if it was the main one for a very long time, to obtain
energy to transform a large quantity of less useful commodities into a smaller quantity of more useful commodities.
And this follows into the impression that I have derived from various authors that our high standards of living depend
not on the high "productivity" of labour, but on the high "productivity" of fossil fuels, which are the product of the fertility
of land.
"value, in terms of risk among others, that the employers put in starting a new business?"
If the business produces a surplus, that is value added, than the surplus is the product of the energy/labour expended by all
participants
How it is accounted for is one issue, especially over multiple time periods, and how it is shared out is a social relationship.
As to risk, everybody in the business runs the risk of not getting paid at the end of the month, and the opportunity cost of
not doing something else, whichever labour they put in.
How risk and opportunity cost are accounted for, especially over multiple time periods, is another issue, and how they are
shared is another social relationship.
"the surplus is the product of the energy/labour expended by all participants"
I'll perhaps further diminish the reputation of my "contributions" this way: perhaps all social relationships of production
(at least among males) map closely onto (cursorial) group hunts.
"a very long winded way of saying that making stuff requires labour"
Well, that's obvious, but what the classicals thought of as the LTV was not entirely obvious: that "surplus" (rather than "stuff")
comes from the fertility of land and the transformation achieved with labour, and that nothing else is needed to achieve "surplus".
Because for example capital goods are themselves surplus from fertility or labour, again back to the first blades made from chipping
lumps of obsidian.
That's quite a bit more insightful, never mind also controversial, than "making stuff requires labour".
Love this post. But, being a fellow marxist, I can't help but to disagree with this bit: "And they are alienated because this
work is unsatisfying and a source of unfreedom." This is a colloquial use of alienation, and its not wrong.
But Marx is getting at something else: the complex process of differentiation in the economy (aka the division of labor)
obscures the relationship between the creation of the surplus (work time above that necessary to reproduce consumption bundle)
and its utilization by capitalists via investment. Investment is not possible without exploitation of workers, but that relationship
is occluded by the mechanics of employment, markets, and property.
That's the sense in which workers are alienated under capitalism. Socialism could still have boring work, but, in so far as
the investment function is brought under collective democratic control, workers would not be alienated in the special sense Marx
is using.
"Where else could stuff come from?" Well, assuming by "stuff" we mean objects of value, nowhere. But the reasons for which
we value them are not dependent upon their natural origins or the labor required for their production. I don't value a computer
because it's made of plastic and silicon and so forth, nor because of the labor required to produce it. It's useful because of
what it does, not what it is; it's sort of Kant's definition of art versus the general conception of tools.
As for the relationship between production functions and the LTV, that seems (at least prima facie) pretty straightforward.
If there is a high olefimity ascribed to the surplus provided by the product created by X, Y, then those production functions
will, themselves, be assigned greater value, i.e., be worthy of more labor-time to attain. E.g., even if I'm not very good at
fishing, if I really like the flavor of fish over other protein sources, I'll spend more time increasing my labor efficiency (be
a better fisherman).
"Everything ultimately derives from nature and the labour of humans. Where else could stuff come from? That's all there
is."
Then in theory the cost (not the price) of everything can be measured in terms of physical quantities of primary inputs and
of hours of work.
"What's controversial about it?"
What is controversial is that written like that you sound like a Marxist: the alternative approach is to say that *property*
creates surplus.
In the standard neoclassical approach "property" is the often forgotten "initial endowments" of the single representative agent.
Anyhow the "narrative" is: as Mr. Moneybags owns the iron mine and the coal mine and the smelter and the ingot roller and spoon
press, then he is entitled to the surplus because without his property it is impossible to make spoons. Labour on its own is worthless,
wastes away, while property is "valuable" capital.
"And how one gets from a production function (stuff is made from X, Y and Z) to LTV"
Production functions are just not very elaborate scams to pretend that property is the factor of production, rather then the
fertility of land and the energy of labour, and land does not exist (after JB Clark "disappeared" it) and labour is just an accessory.
Part of the scam is that "X, Y and Z" are denominated in money, not physical quantities.
As I wrote in another answer accounting for the output of land fertility and labour energy and how it is shared are the difficult
bits. Welcome to the institutional approach to the political economy. :-)
"the reasons for which we value them are not dependent upon their natural origins or the labor required for their production"
And here be dragons. Your old bearded acquaintance Karl has something to say about this :-).
"It's useful because of what it does, not what it is"
So cleaning floors which is very useful should have a high value, while Leonardo paintings, that are merely scarce, should
have a low value :-).
I though that most people reckoned that "value" depends on scarcity: so there is a scarcity of even not very good promoters
of torysm, so G Osborne is entitled to £600,000 a year to edit the "Evening Standard", but there is no scarcity of excellent cleaners,
so cleaners gets minimum wage if they are lucky.
counting hours of worked is not a measure of cost, it is a tally of hours worked. In mainstream econ, production functions
describe a physical production process (to make 1 unit of Y, you combine inputs like so) and are not not denominated in money.
e.g. You multiply L by w to get cost.
Economies are zero sum. GDP must be paid for, otherwise it won't be produced. The only source of money comes from labor costs,
the money paid to workers to work producing GDP. As conservatives note, all taxes fall on workers by directly taking their pay,
or by hiking the prices of what workers buy.
Taxes pay workers, e.g. teachers, and doctors with Medicare and Medicaid, weapons makers and warriors, or pay people to pay
workers, Social Security benefits and SNAP.
Capital has value because it is built by paying workers. It gets a cut to repay the payers of workers.
Monopoly rent seeking is unsustainable. If a monoplists takes more from workers than they pay workers, he eventually takes
so much money workers can no longer pay for GDP and it falls to zero as workers produce what they consume without buying from
the monopolist capital.
Tanstaafl
As Keynes put it:
"I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock
of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital
instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion
by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate
return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs
of production plus an allowance for risk and the costs of skill and supervision.
"Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia
of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value
of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain
interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be
intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for
such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest,
would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character
that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so,
it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the
growth of capital up to the point where it ceases to be scarce."
Economies are zero sum. The value of goods and services must equal the labor costs in the long run. Tanstaaafl
"Socialism could still have boring work, but, in so far as the investment function is brought under collective democratic
control, workers would not be alienated in the special sense Marx is using."
My impression is that your bearded friend Karl does not use "alienation" in that sense at all, in an economic sense, but
in a humanist sense: that by being separated from the means of production proletarians are alienated from the meaning of their
work, from work as a human activity, as distinct from an economic activity.
Collective ownership does not change at all that kind of alienation: being a cog in the capitalist machinery is no less alienating
than being a cog in the collectivist machinery.
I think that our blogger when he talks about distributing control of the production process to workers is far closer to the
marxian ideal than a collectivist approach.
Practically every "Dilbert" strip is about "alienation". This is my favourite:
"counting hours of worked is not a measure of cost"
For a definition of "cost" that is made-up disregarding P Sraffa's work and in general the classics.
"multiply L by w to get cost."
As J Robinson and others pointed out that "w" depends on the distribution of income, on the interest rate, etc., so is an institutional
matter.
As I was saying, accounting for the surplus and how to share it is not so easily handwavable.
sorry, I meant for a money definition of cost that is not just counting inputs, but which is inputs multiplied by their prices.
nobody is hand waving. I think the mainstream view is that 'value' and 'surplus' are not meaningful terms, only prices and
profits and subjective value. A production function says nothing about prices, you have to explain them with other stuff, and
as you say, institutions and all manner of things could come in the play there.
You can say that that workers produce more in money terms than than they are paid, which is trivial (the wages paid by an employer
are less than its gross profits so long as there are non-zero returns to capital, interest on a loan or dividends or whatever)
and to my mind it's silly to define that as exploitation because it would apply in situations where the 'capitalist' is getting
a small return and workers rewarded handsomely by any standard. Better imo to define exploitation as when capitalists are earning
excess returns (and I'd fudge that by differentiating between workers' wages and salaries of top execs). Otherwise you lay yourself
open to "the only thing worse than being exploited by capitlists is not beingn exploited by capitalists" which is J Robinson too
I believe.
This is a genuine question: what you exposed above is related to or influenced by Steve Keen's ideas, yes? If so, I'd be interested
in reading about that in more detail.
I've always thought that defining value by scarcity was an absurd misdirection, in part because there is no reason that the
two should correlate at all. At any point in socioeconomic development beyond subsistence, value is to some extent socially defined,
not economically defined. Status ends up being the most "useful" resource, as we see among all those who've never had to worry
about their material conditions.
Placing a high value on the frivolous and "useless" has always been the hallmark of those most able to decide the value
of anything, because they have no use for economic use (so to speak), but rather social signaling. Broad social respect is an
extremely expensive thing to buy with money alone.
@Luis Enrique
Ah, but name for me a production process that doesn't take place over time. There's an infinite amount of time for all of us,
but for each of us only so much, and those who fail to value it die full of regret. Surely someone somewhere must have something
to say about this.
I don't know why I wrote the above. Surplus is also a mainstream term. See wages set by bargaing over a surplus. Presume it's
based on prices of outputs compared to inputs or if in model with real quantities not prices, then in subjective values.
Lukas production functions are defined over a period of time.
Ahem, I am trying to explain my understanding of Marx, who wrote both as economist and a philosopher, and a politial theorist.
Alienation, exploitation and inequality are technically distinct concepts, even if in the marxist (view (and that of every
business school, that are faithful to marxist political economy) capitalist control of the means of production leads to alienation
which leads to exploitation which leads to inequality. In the marxian political economy inequality can exist even with exploitation,
for example, and that makes it less objectionable.
"Surplus is also a mainstream term. See wages set by bargaing over a surplus."
Some Economists have not forgotten at least some terminology of political economy and some Departments of Business still have
surviving "history of economic thought" courses that some postgrads may still accidentally occasionally wander into and pick up
some terms from...
"are not meaningful terms, only prices and profits and subjective value."
But the mainstream focus on prices and profits etc. is the purest handwaving, because it begs the question...
"A production function says nothing about prices"
Ha! This is one of the best examples where mainstream theory handwaves furiously: mainstream production functions switch effortlessly
from "capital" as phusical quantities to aggregating "capital" by reckoning it in "numeraire". That is all about prices, and even
about future expected prices and future expected rates of discount. Therefore rational expectations, a grand feat of handwaving.
"defining value by scarcity was an absurd misdirection, in part because there is no reason that the two should correlate at
all."
Ahhhhhhh but this is a very political point and not quite agreeable because:
One of the conceits of "microfoundations" is to show that there are "laws" of Economics that are precise, so everybody get
exactly their just compensation, so for example demand-supply schedules are always presented, cleverly, as lines and static.
The view of political economists is that instead "everything" lies within boundaries of feasibility, which are dynamic, so
for example demand-supply schedules are ribbons that change over time and circumstances, and transactions happens not at uniquely
determined points of intersections, but in regions of feasibility, the precise point dependent on institutional arrangements.
So the LTV determines one boundary for "price" and desirability another boundary.
"exposed above is related to or influenced by Steve Keen's ideas"
Related and independently derived, but also a bit influenced. I had always suspected that the "classicals" used "labour" as
a synonym for "muscle power", but various later readings persuaded me that was indeed the case. Later post will have some hopefully
interesting detail. Then I looked into the literature and found that obviously this had been figured out before (centuries ago
in some cases, like B de Mandeville).
Blissex if you can come up with a better way of trying to describe total quantities of highly heterogeneous things (i.e. capital)
you have a Nobel awaiting. Everybody know that attempts to put a number on the real quantity of capital is always going to be
a rough and ready endeavour.
I don't see how working with prices and profits is 'handwaving'. What question does it beg? Much of economics is about trying
to explain these things. I would not say economics focuses on prices and profits because many economics models work with real
quantities that are high abstract and in theory are made commensurate using subjective value (utility) as the unit of account.
The Phillips Curve is back. In saying so, I do not mean to imply that being "back" refers to
a sudden reappearance of a stable empirical relationship between unemployment (or the output
gap) and inflation. The Phillips Curve is back in the same way that conspiracy theories about
the assassination of JFK are back after the recent release of government documents. In other
words, the Phillips Curve is something that people desperately want to believe in, despite the
lack of evidence.
The Phillips Curve is all the rage among central bankers. Since the Federal Reserve embarked
on quantitative easing, they have been ensuring the public that QE would not be inflationary
because of the slack in the economy. Until labor market conditions tighten, there would be
little threat of inflation. Then, as the labor market tightened, the Federal Reserve warned
that they might have to start raising interest rates to prevent these tightening conditions
from creating inflation.
What is remarkable about this period is that the Federal Reserve has undershot its target
rate of inflation throughout this entire period -- and continues to do so today. So what does
this tell us about the Phillips Curve and what can we learn about monetary policy?
If one looks at the data on unemployment and inflation (or even the output gap and
inflation), you could
more easily draw Orion the Hunter as you could a stable Phillips Curve. Fear not,
sophisticated advocates of the Phillips Curve will say. This is simply the Lucas Critique at
play here. If a Phillips Curve exists, and if the central bank tries to exploit it, then it
will not be evident in the data. In fact, if you take a really basic 3-equation-version of the
New Keynesian model, there is a New Keynesian Phillips Curve in the model. However, when you
solve for the equilibrium conditions, you find that inflation is a function of demand shocks,
technology shocks, and unexpected changes in interest rates. The output gap doesn't appear in
the solution. But fear not, this simply means that monetary policy is working properly. The
Phillips Curve is apparently like the observer effect in quantum mechanics in that when we try
to observe the Phillips Curve, we change the actual result (this is a joke, please do not leave
comments about why I've misunderstood the observer effect).
... ... ...
What all of this means is that even given the fact that the New Keynesian model features an
equation that resembles the Phillips curve, this does not imply that there is some predictive
power that comes from thinking about this equation in isolation. In addition, it certainly does
not imply that changes in the output gap cause changes in the rate of inflation. There
is no direction of causation implied by this one equilibrium condition.
"... During the two decades following the neoliberal economists' take-over of Western governments in the 1980s, many felt that the almost mystical terms of economics - such as derivatives, hedging, leverage, contangos, etc - were beyond the understanding of most ordinary people. ..."
"... They pursued them as a matter of faith in the market and its processes, despite the apparent warning signs of their imminent failure. ..."
"... as within many custom or belief systems, what economics enshrines is a social order. One where a dominant minority are able to take a small quantity of wealth from each member of the majority in order to maintain their higher status. ..."
"... idea of economics as an exploitative mechanism is echoed in the cover picture of the book, Bosch's The Conjurer ..."
"... Within its exposition of economics as a quasi-religious theory, Brian Davey's book helps us to understand why economic theory is driving us toward a global system failure - and why politics and economics are incapable of responding to the pressing ecological crisis which the pursuit of economic growth has spawned. ..."
Brian Davey's new book, Credo: Economic Beliefs in a World in Crisis, is an analysis of economic theory as if it were a system
of religious belief.
It's a timely book. The simplistic, perhaps 'supernatural' assumptions which underpin key parts of economic theory demand far
more attention. It's a debate we've failed to have as a society.
... ... ...
During the two decades following the neoliberal economists' take-over of Western governments in the 1980s, many felt that
the almost mystical terms of economics - such as derivatives, hedging, leverage, contangos, etc - were beyond the understanding of
most ordinary people.
And without understanding those terms, irrespective of our gut feeling that there was something wrong, how could we challenge
the political lobby those theories had put into power? In the end it took the
financial crash of 2007/8 to demonstrate
that those in charge of this system didn't understand the complexity and risk of those practices either.
They pursued them as a matter of faith in the market and its processes, despite the
apparent
warning signs of their imminent failure. Those outside 'orthodox' economics could already see where the economy
was heading in the longer-term.
Question is, did economists learn anything from that failure? Or,
through austerity, have they once again committed us to their dogmatic belief system, unchanged by that experience?
... ... ...
However, through simple hubris or optimism bias, the political
class has been convinced that 'fracking' is a solution to our economic woes
- even though there is a paucity of verifiable evidence to demonstrate those claims, and
it has already lost billions of investors money.
Economics is a reflection of power
Ultimately though, as within many custom or belief systems, what economics enshrines is a social order. One where a dominant
minority are able to take a small quantity of wealth from each member of the majority in order to maintain their higher status.
This idea of economics as an exploitative mechanism
is echoed in the cover picture of the book, Bosch's
The Conjurer - where a magician distracts
the public with a sleight of hand trick so that they can be more easily robbed by his associate.
Again, in a world where we're hitting the limits to human material growth, political models of well-being based upon wealth and
consumption are damaging to human society in the long-term. The evidence that we're heading for a longer-term failure is there, as
was the case with the warning signs before the 2007 crash. The problem is that those in positions of power
do not wish to see it.
... ... ...
Within its exposition of economics as a quasi-religious theory, Brian Davey's book helps us to understand why economic theory
is driving us toward a global system failure - and why politics and economics are incapable of responding to the pressing ecological
crisis which the pursuit of economic growth has spawned.
Contrary to the economic hubris of many world leaders, set alongside the reality of ecological limits humanity is not 'too big
to fail'.
"... An interview by Gordon T. Long of the Financial Repression Authority. Originally published at his website ..."
"... One of the most important distinctions that investors have to understand is the difference between secular and cyclical trends Let us begin with definitions from the Encarta® World English Dictionary: ..."
"... Secular – occurring only once in the course of an age or century; taking place over an extremely or indefinitely long period of time ..."
"... Cycle – a sequence of events that is repeated again and again, especially a causal sequence; a period of time between repetitions of an event or phenomenon that occurs regularly ..."
"... Secular stagnation is when the predators of finance have eaten too many sheeple. ..."
"... Real estate rents in this latest asset bubble, whether commercial or residential, appear to have been going up in many markets even if the increases are slowing. That rent inflation will likely turn into rent deflation, but that doesn't appear to have happened yet consistently. ..."
"... Barter has always existed and always will. Debt money expands and contracts the middle class, acting as a feedback signal, which never works over the long term, because the so encapsulated system can only implode, when natural resource liquidation cannot be accelerated. The whole point is to eliminate the initial requirement for capital, work. Debt fails because both sides of the same coin assume that labor can be replaced. The machines driven by dc technology are not replacing labor; neither the elites nor the middle class can fix the machines, which is why they keep accelerating debt, to replace one failed technology only to be followed by the next, netting extortion by whoever currently controls the debt machine, which the majority is always fighting over, expending more energy to avoid work, like the objective is to avoid sweating, unless you are dumb enough to run on asphalt with Nike gear. ..."
"... . . . The whole argument for privatization, for instance, is the opposite of what was taught in American business schools in the 19th century. The first professor of economics at the Wharton School of Business, which was the first business school, was Simon Patten. He said that public infrastructure is a fourth factor of production. But its role isn't to make a profit . It's to lower the cost of public services and basic inputs to lower the cost of living and lower the cost of doing business to make the economy more competitive. But privatization adds interest payments, dividends, managerial payments, stock buybacks, and merges and acquisitions . Obviously these financialized charges are factored into the price system and raise the cost of living and doing business . ..."
GORDON LONG: Thank you for joining us. I'm Gordon Long with the Financial Repression Authority. It's my pleasure to have with
me today Dr. Michael Hudson Professor Hudson's very well known in terms of the FIRE economy to-I think, to a lot of our listeners,
or at least he's recognized by many as fostering that concept. A well known author, he has published many, many books. Welcome, Professor
Hudson.
MICHAEL HUDSON: Yes.
LONG: Let's just jump into the subject. I mentioned the FIRE economy cause I know that I have always heard it coming from yourself-or,
indirectly, not directly, from yourself. Could you explain to our listeners what's meant by that terminology?
HUDSON: Well it's more than just people getting fired. FIRE is an acronym for Finance, Insurance and Real Estate. Basically that
sector is about assets, not production and consumption. And most people think of the economy as being producers making goods and
services and paying labor to produce them – and then, labour is going to buy these goods and services. But this production and consumption
economy is surrounded by the asset economy: the web of Finance, Insurance, and Real Estate of who owns assets, and who owes the debts,
and to whom.
LONG: How would you differentiate it (or would you) with what's often referred to as financialization, or the financialization
of our economy? Are they one and the same?
HUDSON: Pretty much. The Finance, Insurance, and Real Estate sector is dominated by finance. 70 to 80% of bank loans in North
America and Europe are mortgage loans against real estate. So instead of a landowner class owning property clean and clear, as they
did in the 19 th century, now you have a democratization of real estate. 2/3 or more of the population owns their own
home. But the only way to buy a home, or commercial real estate, is on credit. So the loan-to-value ratio goes up steadily. Banks
lend more and more money to the real estate sector. A home or piece of real estate, or a stock or bond, is worth whatever banks are
willing to lend against it
As banks loosen their credit terms, as they lower their interest rates, take lower down payments, and lower amortization rates
– by making interest-only loans – they are going to lend more and more against property. So real estate is bid up on credit. All
this rise in price is debt leverage. So a financialized economy is a debt-leveraged economy, whether it's real estate or insurance,
or buying an education, or just living. And debt leveraging means that a larger proportion of assets are represented by debt. So
debt equity ratios rise. But financialization also means that more and more of people's income and corporate and government tax revenue
is paid to creditors. There's a flow of revenue from the production-and-consumption economy to the financial sector.
LONG: I don't know if you know Richard Duncan. He was with the IMF, etc, and lives in Thailand. He argues right now that capitalism
is no longer functioning, and really what he refers to what we have now is "creditism." Because in capitalism we have savings that
are reinvested into productive assets that create productivity, which leads to a higher level of living. We're not doing that. We
have no savings and investments. Credit is high in the financial sector, but it's not being applied to productive assets. Is he valid
in that thinking?
HUDSON: Not as in your statement. It's confused.
LONG: Okay.
HUDSON: There's an enormous amount of savings. Gross savings. The savings we have that are mounting up are just about as large
as they've ever been – about, 18-19% of the US economy. They're counterpart is debt. Most savings are lent out to borrowers se debt.
Basically, you have savers at the top of the pyramid, the 1% lending out their savings to the 99%. The overall net savings may be
zero, and that's what your stupid person from the IMF meant. But gross savings are much higher. Now, the person, Mr. Duncan, obviously-I
don't know what to say when I hear this nonsense. Every economy is a credit economy.
Let's start in Ancient Mesopotamia. The group that I organized out of Harvard has done a 20-study of the origins of economic structuring
in the Bronze Age, even the Neolithic, and the Bronze Age economy – 3200 BC going back to about 1200 BC. Suppose you're a Babylonian
in the time of Hammurabi, about 1750 BC, and you're a cultivator. How do you buy things during the year? Well, if you go to the bar,
to an ale woman, what she'd do is write down the debt that you owe. It was to be paid on the threshing floor. The debts were basically
paid basically once a year when the income was there, on the threshing floor when the harvest was in. If the palace or the temples
would advance animals or inputs or other public services, this would be as a debt. It was all paid in grain, which was monetized
for paying debts to the palace, temples and other creditors.
The IMF has this Austrian theory that pretends that money began as barter and that capitalism basically operates on barter. This
always is a disinformation campaign. Nobody believed this in times past, and it is a very modern theory that basically is used to
say, "Oh, debt is bad." What they really mean is that public debt is bad. The government shouldn't create money, the government shouldn't
run budget deficits but should leave the economy to rely on the banks. So the banks should run and indebt the economy.
You're dealing with a public relations mythology that's used as a means of deception for most people. You can usually ignore just
about everything the IMF says. If you understand money you're not going to be hired by the IMF. The precondition for being hired
by the IMF is not to understand finance. If you do understand finance, you're fired and blacklisted. That's why they impose
austerity programs that they call "stabilization programs" that actually are destabilization programs almost wherever they're imposed.
LONG: Is this a lack of understanding and adherence to the wrong philosophy, or how did we get into this trap?
HUDSON: We have an actively erroneous view, not just a lack of understanding. This is not by accident. When you have an error
repeated year after year after year, decade after decade after decade, it's not really insanity doing the same thing thinking it'll
be different. It's sanity. It's doing the same thing thinking the result will be the same again and again and again. The result
will indeed be austerity programs, making budget deficits even worse, driving governments further into debt, further into reliance
on the IMF. So then the IMF turns them to the knuckle breakers of the World Bank and says, "Oh, now you have to pay your debts by
privatization". It's the success. The successful error of monetarism is to force countries to have such self-defeating policies that
they end up having to privatize their natural resources, their public domain, their public enterprises, their communications and
transportation, like you're seeing in Greece's selloffs. So when you find an error that is repeated, it's deliberate. It's not insane.
It's part of the program, not a bug.
LONG: Where does this lead us? What's the roadmap ahead of us here?
HUDSON: A thousand years ago, if you were a marauding gang and you wanted to take over a country's land and its natural resources
and public sector, you'd have to invade it with military troops. Now you use finance to take over countries. So it leads us into
a realm where everything that the classical economists saw and argued for – public investment, bringing costs in line with the actual
cost of production – that's all rejected in favor of a rentier class evolving into an oligarchy. Basically, financiers – the
1% – are going to pry away the public domain from the government. Pry away and privatize the public enterprises, land, natural resources,
so that bondholders and privatizers get all of the revenue for themselves. It's all sucked up to the top of the pyramid, impoverishing
the 99%.
LONG: Well I think most people, without understanding economics, would instinctively tell you they think that's what's happening
right now, in some way.
HUDSON: Right. As long as you can avoid studying economics you know what's happened. Once you take an economics course you step
into brainwashing. It's an Orwellian world.
LONG: I think you said it perfectly well there. Exactly. It gets you locked into the wrong way of thinking as opposed to just
basic common sense. Your book is Killing the Host . What was the essence of its message? Was it describing exactly what we're
talking about here?
HUDSON: Finance has taken over the industrial economy, so that instead of finance becoming what it was expected to be in the 19
th century, instead of the banks evolving from usurious organizations that leant to governments, mainly to wage war, finance
was going to be industrialized. They were going to mobilize savings and recycle it to finance the means of production, starting with
heavy industry. This was actually happening in Germany in the late 19 th century. You had the big banks working with government
and industry in a triangular process. But that's not what's happening now. After WW1 and especially after WW2, finance reverted to
its pre-industrial form. Instead of allying themselves with industry, as banks were expected to do, banks allied themselves with
real estate and monopolies, realizing that they can make more money off real estate.
The bank spokesman David Ricardo argued against the landed interest in 1817, against land rent. Now the banks are all in favor
of supporting land rent, knowing that today, when people buy and sell property, they need credit and pay interest for it. The banks
are going to get all the rent. So you have the banks merge with real estate against industry, against the economy as a whole. The
result is that they're part of the overhead process, not part of the production process.
LONG: There's a sense that there's a crisis lying ahead in the next year, two years, or three years. The mainstream economy's
so disconnected from Wall Street economy. What's your view on that?
HUDSON: It's not disconnected at all. The Wall Street economy has taken over the economy and is draining it. Under what economics
students are taught as Say's Law, the economy's workers are supposed to use their income to buy what they produce. That's why Henry
Ford paid them $5 a day, so that they could afford to buy the automobiles they were producing.
LONG: Exactly.
HUDSON: But Wall Street is interjecting itself into the economy, so that instead of the circular flow between producers and consumers,
you have more and more of the flow diverted to pay interest, insurance and rent. In other words, to pay the FIRE sector. It all ends
up with the financial sector, most of which is owned by the 1%. So, their way of formulating it is to distract attention from today's
debt quandary by saying it's just a cycle, or it's "secular stagnation." That removes the element of agency – active politicking
by the financial interests and Wall Street lobbyists to obtain all the growth of income and wealth for themselves. That's what happened
in America and Canada since the late 1970s.
LONG: What does an investor do today, or somebody who's looking for retirement, trying to save for the future, and they see some
of these things occurring. What should they be thinking about? Or how should they be protecting themselves?
HUDSON: What all the billionaires and the heavy investors do is simply try to preserve their wealth. They're not trying to make
money, they're not trying to speculate. If you're an investor, you're not going to outsmart Wall Street billionaires, because the
markets are basically fixed. It's the George Soros principle. If you have so much money, billions of dollars, you can break the Bank
of England. You don't follow the market, you don't anticipate it, you actually make the market and push it up, like the Plunge Protection
Team is doing with the stock market these days. You have to be able to control the prices. Insiders make money, but small investors
are not going to make money.
Since you're in Canada, I remember the beginning of the 1960s. I used to look at the Treasury Bulletin and Federal Reserve
Bulletin figures on foreign investment in the US stock market. We all used to laugh at Canada especially. The Canadians don't
buy stocks until they're up to the very top, and then they lose all the money by holding these stocks on the downturn. Finally, when
the market's all the way at the bottom, Canadians decide to begin selling because they finally can see a trend. So they miss the
upswing until they decide to buy at the top once again. It's hilarious to look at how Canada has performed in the US bond market,
and they did the same in the silver market. I remember when silver was going up to $50. The Canadians said, "Yes, we can see the
trend now!" and they began to buy it. They lost their shirts. So, basically, if you're a Canadian investor, move.
LONG: So the Canadian investors are a better contrarian indicator than the front page cover, you're saying.
HUDSON: I'd think so. Once they get in, you know the bubble's over.
LONG: Absolutely on that one. What are you currently writing? What is your current focus now?
HUDSON: Well, I just finished a book. You mentioned Killing the Host . My next book will be out in about three months:
J is for Junk Economics . It began as a dictionary of terms, so I can provide people with a vocabulary. As we got in the argument
at the beginning of your program today, our argument is about the vocabulary we're using and the words you're using. The vocabulary
taught to students today in economics – and used by the mass media and by government spokesmen – is basically a set of euphemisms.
If you look at the television reports on the market, they say that any loss in the stock market isn't a loss, it's "profit taking".
And when they talk about money. the stock market rises – "Oh that's good news." But it's awful news for the short sellers it wipes
out. Almost all the words we get are kind of euphemisms to conceal the actual dynamics that are happening. For instance, "secular
stagnation" means it's all a cycle. Even the idea of "business cycles": Nobody in the 19 th century used the word "business
cycle". They spoke about "crashes". They knew that things go up slowly and then they plunge very quickly. It was a crash. It's not
the sine curve that you have in Josef Schumpeter's book on Business Cycles . It's a ratchet effect: slow up, quick down. A
cycle is something that is automatic, and if it's a cycle and you have leading and lagging indicators as the National Bureau of Economic
Research has. Then you'd think "Oh, okay, everything that goes up will come down, and everything that goes down will come up, just
wait your turn." And that means governments should be passive.
Well, that is the opposite of everything that's said in classical economics and the Progressive Era, when they realized that economies
don't recover by themselves. You need a-the government to step in, you need something "exogenous," as economist say. You need something
from outside the system to revive it. The covert idea of this business cycle analysis is to leave out the role of government. If
you look at neoliberal and Austrian theory, there's no role for government spending, and no role of public investment. The whole
argument for privatization, for instance, is the opposite of what was taught in American business schools in the 19 th
century. The first professor of economics at the Wharton School of Business, which was the first business school, was Simon Patten.
He said that public infrastructure is a fourth factor of production. But its role isn't to make a profit. It's to lower the cost
of public services and basic inputs to lower the cost of living and lower the cost of doing business to make the economy more competitive.
But privatization adds interest payments, dividends, managerial payments, stock buybacks, and merges and acquisitions. Obviously
these financialized charges are factored into the price system and raise the cost of living and doing business.
LONG: Well, Michael, we're-I thank you for the time, and we're up against our hard line. I know we didn't have as much time as
we always like, so we have to break. Any overall comments you'd like to leave with our listeners who might be interested this school
of economics?
HUDSON: Regarding the downturn we're in, we're going into a debt deflation. The key of understanding the economy is to look at
debt. The economy has to spend more and more money on debt service. The reason the economy is not recovering isn't simply because
this is a normal cycle. And It's not because labour is paid too much. It's because people are diverting more and more of their income
to paying their debts, so they can't afford to buy goods. Markets are shrinking – and if markets are shrinking, then real estate
rents are shrinking, profits are shrinking. Instead of using their earnings to reinvest and hire more labour to increase production,
companies are using their earnings for stock buybacks and dividend payouts to raise the share price so that the managers can take
their revenue in the form of bonuses and stocks and live in the short run. They're leaving their companies as bankrupt shells, which
is pretty much what hedge funds do when they take over companies.
So the financialization of companies is the reverse of everything Adam Smith, John Stuart Mill, and everyone you think of as a
classical economist was saying. Banks wrap themselves in a cloak of classical economics by dropping history of economic thought from
the curriculum, which is pretty much what's happened. And Canada-I know since you're from Canada, my experience there was that the
banks have a huge lobbying power over government. In 1979, I wrote for the IRPP Institute there on Canada In the New Monetary
Order . At that time the provinces of Canada were borrowing money from Switzerland and Germany because they could borrow it at
much lower interest rates. I said that this was going to be a disaster, and one that was completely unnecessary. If Canadian provinces
borrow in Francs or any other foreign currency, this money goes into the central bank, which then creates Canadian dollars to spend.
Why not have the central bank simply create these dollars without having Swiss francs, without having German marks? It's unnecessary
to have an intermediary. But the more thuggish banks, like the Bank of Nova Scotia, said, "Oh, that way's the road to serfdom." It's
not. Following the banks and the Austrian School of the banks' philosophy, that's the road to serfdom. That's the road
to debt serfdom. It should not be taken now. It lets universities and the government be run by neoliberals. They're a travesty of
what real economics is all about.
LONG: Michael, thank you very much. I learned a lot, appreciate it; certainly appreciate how important it is for us to use the
right words on the right subject when we're talking about economics. Absolutely agree with you. Talk to you again?
Interesting, but after insulting Duncan, Hudson says the banks stopped partnering with industry and went into real estate,
which sounded like what Duncan said.
I mention this because for a non- expert like myself it is sometimes difficult to tell when an expert is disagreeing with someone
for good reasons or just going off half- cocked. I followed what Hudson said about the evils of the IMF, but didn't see where
Duncan had defended any of that, unless it was implicit in saying that capitalism used to function better.
"As we got in the argument at the beginning of your program today, our argument is about the vocabulary we're using and the
words you're using. The vocabulary taught to students today in economics – and used by the mass media and by government spokesmen
– is basically a set of euphemisms ."Almost all the words we get are kind of euphemisms to conceal the actual dynamics that are
happening."
May consider it's about recognizing and deciphering the "doublespeak", "newspeak", "fedspeak", "greenspeak" etc, whether willing
or unwitting using words for understanding and clarifying as opposed to misleading and confusing dialectic as opposed to sophistry.
What I objected to was the characterization of today's situation as "financialization." I explained that financialization is
the FIRST stage - when finance WORKS. We are now in the BREAKDOWN of financialization - toward the "barter" stage.
Treating "finance" as an end stage rather than as a beginning stage overlooks the dynamics of breakdown. It is debt deflation.
First profits fall, and as that occurs, rents on commercial property decline. This is already widespread here in New York, from
Manhattan (8th St. near NYU is half empty) to Queens (Austin St. in Forest Hills.).
I wrote an article you might be interested in reading. It outlines a tax policy which would help prevent what you are discussing
in your article. The abuse of credit to receive rents and long term capital gains.
Thank you for another eye-opening exposition. My political economy education was negative (counting a year of Monetarism and
Austrian Economics around 1980), so I appreciate your interviews as correctives.
From your interview answer to the question about what we, the 99+% should do,I gathered only that we should not try to beat
the market. Anything more than that?
From my understanding, post Plaza banking lost most of its traditional market to the shadow sector, as a result, expanded off
into C/RE and increasingly to Financialization of everything sundry.
Disheveled Marsupial interesting to note Mr. Hudson's statement about barter, risk factors – ?????
One of the most important distinctions that investors have to understand is the difference between secular and cyclical
trends Let us begin with definitions from the Encarta® World English Dictionary:
Secular – occurring only once in the course of an age or century; taking place over an extremely or indefinitely long period
of time
Cycle – a sequence of events that is repeated again and again, especially a causal sequence; a period of time between repetitions
of an event or phenomenon that occurs regularly
Secular stagnation is a condition of negligible or no economic growth in a market-based economy . When
per capita income stays at relatively high levels, the percentage of savings is likely to start exceeding the percentage of longer-term
investments in, for example, infrastructure and education, that are necessary to sustain future economic growth. The absence of
such investments (and consequently of the economic growth) leads to declining levels of per capita income (and consequently of
per capita savings). With the reduced percentage savings rate converging with the reduced investment rate, economic growth comes
to a standstill – ie, it stagnates. In a free economy, consumers anticipating secular stagnation, might transfer their savings
to more attractive-looking foreign countries. This would lead to a devaluation of their domestic currency, which would potentially
boost their exports, assuming that the country did have goods or services that could be exported.
Persistent low growth, especially in Europe, has been attributed by some to secular stagnation initiated by stronger European
economies, such as Germany, in the past few years.
Words. What they mean depends on who's talking.
Secular stagnation is when the predators of finance have eaten too many sheeple.
Markets are shrinking – and if markets are shrinking, then real estate rents are shrinking, profits are shrinking.
Real estate rents in this latest asset bubble, whether commercial or residential, appear to have been going up in many
markets even if the increases are slowing. That rent inflation will likely turn into rent deflation, but that doesn't appear to
have happened yet consistently.
Perhaps he meant to say that markets are going to shrink as the debt deflation becomes more evident?
Yes, I think we are into turnip country now. Figure 1 in
this
prior article looks clear enough – even if you don't like the analysis that went with it. Wealth inequality still climbs but
income inequality has plateaued since Clinton I. Whatever the reasons for that, the 1% should be concerned – where is the ROI?
Barter has always existed and always will. Debt money expands and contracts the middle class, acting as a feedback signal,
which never works over the long term, because the so encapsulated system can only implode, when natural resource liquidation cannot
be accelerated. The whole point is to eliminate the initial requirement for capital, work. Debt fails because both sides of the
same coin assume that labor can be replaced. The machines driven by dc technology are not replacing labor; neither the elites
nor the middle class can fix the machines, which is why they keep accelerating debt, to replace one failed technology only to
be followed by the next, netting extortion by whoever currently controls the debt machine, which the majority is always fighting
over, expending more energy to avoid work, like the objective is to avoid sweating, unless you are dumb enough to run on asphalt
with Nike gear.
Labor has no problem with multiwhatever presidents, geneticists, psychologists, or economists, trying to hunt down and replace
labor, in or out of turn, but none are going to be any more successful than the others. Trump is being employed to bypass the
middle class and cut a deal. There is no deal. Labor is always going to pay males to work and their wives to raise children. Obviously,
the majority will vote for a competing economy, and it is welcome to do so, but if debt works so well, why is the majority voting
to kidnap our kids with public healthcare and education policies.
I'm not sure I heard an answer to the question of what people, who might be trying to save for the future or plan for retirement,
can do? Is the point that there isn't anything? Because I'm definitely between rocks and hard places
Yeah, he basically said there is no good savings plan. Big-money interests have rigged the rules and are now manipulating the
market (this used to be the definition of what was NOT allowed). Thus, they use computer algorithms to squeeze small amounts out
of the market millions of times. This means that the "investments" are nothing of the sort. You don't "invest" in something for
milliseconds. He said that the 1% are mostly just trying to hold on to what they have. Very few trust the rigged markets.
Low rent & cheap energy are key to the arts & innovations. My model has to work for airports, starts at the fuel farm as the
CIA & MI6 Front Page Avjet did. Well before that was Air America. I wonder if now American Airlines itself is a Front.
All of America is a Front far as I can about tell. Hadn't heard that Manhattan rents were coming down. Come in from out of
town, how you going to know? Not supposed to I guess.
I got that textbook and I liked that guy John Commons. He says capitalism is great, but it always leads to Socialism because
of unbridled greed.
The frenzy to find another stable cash currency showing in Bit Coin and the discussion of Future Tax Credits while the Euro
is controlled by the rent takers demands change on both sides of the Atlantic.
We got shot dead protesting the war, and civil rights backlash is the gift that keeps giving to the Southerners looking up
every day in every courthouse town, County seat is all about spreading fear and desperation.
How to change it all without violence is going to be really tricky.
. . . So, basically, if you're a Canadian investor, move.
LONG: So the Canadian investors are a better contrarian indicator than the front page cover, you're saying.
HUDSON: I'd think so. Once they get in, you know the bubble's over.
When one reads the financial press in Canada, every dollar extracted by the lords of finance is a glorious taking by brilliant
people at the top of the financial food chain from the stupid little people at the bottom, but when it counts, there was silence,
in cooperation with Canada's one percent.
The story starts about five years ago, with smart meters. Everyone knows what they are, a method by which electrical power
use can be priced depending on the time of day, and day of the week.
To make this tasty, Ontario's local utilities at first kept the price the same for all the time, and then after all the meters
were installed, came the changes, phased in over time. Prices were increased substantially, but there was an out. If you changed
your living arrangements to live like a nocturnal rodent and washed your clothes in the middle of the night, had supper later
in the evening or waited for weekend power rates you could still get low power rates, from the three tier price structure.
The local utilities bought the power from the government of Ontario power generation utility, renamed to Hydro One, and this
is where Michael Hudson's talk becomes relevant.
The successful error of monetarism is to force countries to have such self-defeating policies that they end up having to
privatize their natural resources, their public domain, their public enterprises, their communications and transportation, like
you're seeing in Greece's selloffs. So when you find an error that is repeated, it's deliberate. It's not insane. It's
part of the program, not a bug .
LONG: Where does this lead us? What's the roadmap ahead of us here?
HUDSON: A thousand years ago, if you were a marauding gang and you wanted to take over a country's land and its natural
resources and public sector, you'd have to invade it with military troops. Now you use finance to take over countries. So it leads
us into a realm where everything that the classical economists saw and argued for – public investment, bringing costs
in line with the actual cost of production – that's all rejected in favor of a rentier class evolving into an oligarchy. Basically,
financiers – the 1% – are going to pry away the public domain from the government. Pry away and privatize the public enterprises,
land, natural resources, so that bondholders and privatizers get all of the revenue for themselves. It's all sucked up to the
top of the pyramid, impoverishing the 99% .
Eighteen months ago, there was an election in Ontario, and the press was on radio silence during the whole time leading up
to the election about the plans to "privatize" Hydro One. I cannot recall one instance of any mention that the new Premier, Kathleen
Wynne was planning on selling Hydro One to "investors".
Where did this come from? Did the little people rise up and say to the politicians "you should privatize Hydro One" for whatever
reason? No. This push came from the 1% and Hydro One was sold so fast it made my head spin, and is now trading on the Toronto
Stock exchange.
At first I though the premier was an economic ignoramus, because Hydro One was generating income for the province and there
was no other power supplier, so one couldn't even fire them if they raised their prices too high.
One of the arguments put forward by the 1% to privatize Hydro One was a classic divide and conquer strategy. They argued that
too many people at Hydro One were making too much money, and by privatizing, the employees wages would be beat down, and the resultant
savings would be passed on to customers.
Back to Michael Hudson
. . . The whole argument for privatization, for instance, is the opposite of what was taught in American business schools
in the 19th century. The first professor of economics at the Wharton School of Business, which was the first business school,
was Simon Patten. He said that public infrastructure is a fourth factor of production. But its role isn't to make a profit
. It's to lower the cost of public services and basic inputs to lower the cost of living and lower the cost of doing
business to make the economy more competitive. But privatization adds interest payments, dividends, managerial payments,
stock buybacks, and merges and acquisitions . Obviously these financialized charges are factored into the price system
and raise the cost of living and doing business .
Power prices have increased yet again in Ontario since privatization, and Canada's 1% are "making a killing" on it. There has
been another change as well. Instead of a three tier price structure, there are now two, really expensive and super expensive.
There is no longer a price break to living like a nocturnal rodent. The 1% took that for themselves.
I am so tired of seeing that old lie about Old Henry and the $5 a day. I realize it was just a tossed off reference to something
most people believe for the purpose of describing a discarded policy, but the fact is very, very few of Old Henry's employees
ever got that pay. See, there were strings attached.
Old Henry hired a lot of spies, too. He sent them around to the neighborhoods where his workers lived (it was convenient having
them all in Detroit). If the neighbors saw your kid bringing a bucket of beer home from the corner tavern for the family, you
didn't get the $5.
If your lawn wasn't mowed to their satisfaction, you didn't get the $5. If you were thought not to bathe as often as they liked,
you didn't get the $5. If you didn't go to a church on Sundays, you didn't get the $5. If you were an immigrant and not taking
English classes at night school, you didn't get the $5. There were quite a lot of strings attached. The whole story was a public
relations stunt, and Old Henry never intended to live up to it; he hated his workers.
"... Controlling inflation solely by focusing on workers wages since 1980 but allowing monopoly power and economic rents to skyrocket
since 1980 is the main reason for the extreme inequality that has developed ..."
"... Prima facie evidence of distorted labor market where buyers of labor have control. At the very least, the next democratic President
should use their weekly address to point out the metrics relating economic gains, net wealth gains, productivity gains, to wage gains.
The Presudent should remind employers to fairly share the gains. Once the metrics indicate distortion in the labor markets the President
will then introduce corrective legislation using the public communications weight behind this free market notion of a fair labor market,
using these metrics. Let us try this bully pulpit, public communications effort with the idea of building public momentum for correctives,
and maybe we will return to the 1960s future when gains were more proportionally shared. Perhaps we wont need much legislation at all,
afterall we had one generation comport with fairness, you know, rational expectations. ..."
"... if demand cannot be kept up by wages, then the only option is loans and we have seen in 2008 the catastrophic results of that
..."
non accelerating inflation rate of unemployment is a better term
there is nothing "natural" about that rate
there are many factors that play a role, but the most important are
1. monopoly power is the most important, without monopoly power, in a perfectly competitive market, excessive inflation is
not possible
2. factors that affect bargaining power OF workers
Controlling inflation solely by focusing on workers wages since 1980 but allowing monopoly power and economic rents to
skyrocket since 1980 is the main reason for the extreme inequality that has developed
Prima facie evidence of distorted labor market where buyers of labor have control.
At the very least, the next democratic President should use their weekly address to point out the metrics relating economic
gains, net wealth gains, productivity gains, to wage gains. The Presudent should remind employers to fairly share the gains.
Once the metrics indicate distortion in the labor markets the President will then introduce corrective legislation using the
public communications weight behind this free market notion of a fair labor market, using these metrics.
Let us try this bully pulpit, public communications effort with the idea of building public momentum for correctives, and
maybe we will return to the 1960s future when gains were more proportionally shared. Perhaps we wont need much legislation at
all, afterall we had one generation comport with fairness, you know, rational expectations.
We can expect to do that again, especially as all new economists will be trained on the why and on how to accomplish this metric
of shared gains. One can only hope.
if we don't allow median wages to go up to match production/productivity
and if economic rents continue to go up disproportionally then we need to do a redistribution, ideally by taxes, to get the
median wage to keep pace with production/productivity
otherwise demand for products will eventually falter, making us all poorer for it
if demand cannot be kept up by wages, then the only option is loans and we have seen in 2008 the catastrophic results of
that
Should
We Reject the Natural Rate Hypothesis?, by Olivier Blanchard, PIIE : Fifty years ago,
Milton Friedman articulated the natural rate hypothesis. It was composed of two
sub-hypotheses: First, the natural rate of unemployment is independent of monetary policy.
Second, there is no long-run tradeoff between the deviation of unemployment from the natural
rate and inflation. Both propositions have been challenged. Blanchard reviews the arguments
and the macro and micro evidence against each and concludes that, in each case, the evidence
is suggestive but not conclusive. Policymakers should keep the natural rate hypothesis as
their null hypothesis but keep an open mind and put some weight on the alternatives. [
paper ]
"there is a strong case, although not an overwhelming case, to allow U.S. output to exceed
potential for some time, so as to reintegrate some of the workers who left the labor force
during the last ten years."
Blanchard calls for exploring the unknown regions
of lower and lower unemployment
Lower UE rates
Instead of accelerating output price inflation
Or even wage inflation
Given possible productivity pick ups
We may discover
We get a return to higher and higher participation
Not an unhappy result after all
The parting of the ways with the likes of Blanchard and krugman might come
When at long last wage rates do begin to rise faster then
Say
labor productivity plus three percent
But if the acceleration of the expected rate of change
of the rate of output price change
accelerates slowly
We'll have plenty of policy means and time to moderate the expansion of demand
Given the political will
What is completely missed by looking at the impact of a slump on long run output capacity
Is the actual lost output out of existing capacity
And the misery this inflicts now
for many too many
Ten years of sub possible output
Contain How many weeks upon weeks
of reduced Welfare for too many souls ?
Blanchards uses the definition of potential output
That suggests over production has to be off set by under production
I.e. Potential output is not technical maximum output by any means
PO
Is more like a rate of output and consequent rate of existing factor utilization
That does not unduly
stress
the various institutional arrangements and practices
Or overly tax
the stability of existing social norms
Considered necessary
to sustaining the good of society
thru
It's gradual development over time
There is another set of conflicting visions
One of which
That any class pov might hatch
A vision
Perhaps too Faustian for most souls of that class
That is restless
to push faster
To Venture more
Face uncertainty with boldness even audacity
"... The History of the Phillips Curve: Consensus and Bifurcation ..."
"... The Fed Has a Theory. Trouble is the Proof is Patchy ..."
"... Do Phillips Curves Conditionally Help to Forecast Inflation? ..."
"... Declining Labor and Capital Shaes ..."
"... I am constantly baffled by economists trying to explain very complex non-linear system with simple two variable models. I have been dealing with a couple of engineering problems today where the publication I am using has over 50 design charts just for gravity pipe flow. Each chart has about five variables accommodated while holding a number of others constant. ..."
"... So I think we see the Philips curve predictably happening in the short-term in fields like technology where there is big demand and not enough people. However, as a general rule across the economy, I simply don't see why the relationship between inflation and unemployment should be the same today as it was in 2007, 1997, 1987, or 1977. ..."
"... Economics is infected with too much ideology and not enough scientific method. That is more the definition of a religion than a science. ..."
"... If neoliberals were intellectually honest, they wouldn't call it supply side economics, they'd call it philo-capital economics ..."
"... 80's Poly-Sci defined, "neo-feudalism" (or, as "Shock Doctrine", privatization of all "resource" + government capacity, subject financial sector capture) ..."
"... As far as I can tell, the whole idea of NAIRU is strictly an artifact of economic modeling, not something that's actually ever been observed in the wild. And doesn't it seem odd that making sure we don't drop below NAIRU is something the Fed feels like it needs to intervene to ensure rather than letting the market sort it out. Even if NAIRU was a real thing, you would assume that low unemployment –> increased wages –> increased prices –> reduced consumption –> lay-offs and higher unemployment. Which is to say, if there were such a thing as a natural rate of unemployment, wouldn't markets naturally produce it, obviating any need for the Fed to, say, jack up interest rates to keep the economy from "heating up" (I guess because people have so much money burning holes in their pockets?). It almost like, when it suits the capitalists, they stop believing in this whole "invisible hand" thing .strange ..."
"... "Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that "the market" delivers benefits that could never be achieved by planning. ..."
The Rise and Fall of
the Phillips Curve Posted on October 27, 2017 The
Phillips Curve says that there is an inverse relation between unemployment and inflation. Low
unemployment is correlated with a rise in inflation. It's an article of faith to economists of
all stripes. It's listed in the popular introductory economics textbook by N. Gregory Mankiw as
one of the Ten Things All Economists agree
on . It's especially loved by the Fed, which raises or lowers interest rates depending in
part on its predictions. Its critics point out that its predictions are poor.
In this post, I discuss the derivation of the Phillips Curve, its adaption by Samuleson and
Solow to manage the economy, its breakdown in the 1970s, exploitation by neoliberals of that
breakdown to replace Keynesian demand-based economics with monetarism and supply-side
economics, its rejuvenation, and the evidence that it doesn't make accurate predictions.
I conclude with some observations based on an important paper by Simcha Barkai that
challenges the core beliefs of neoliberalism. It suggests we can raise wages substantially
without causing inflation by lowering corporate profits.
History
This part is based on Sections I-III of Robert Gordon's article, The History of the
Phillips Curve: Consensus and Bifurcation , Economica (2011) 78, 10–50 (behind
paywall, but you can find it online at your local library). Gordon is an economics professor at
Northwestern and has worked on the Phillips Curve for decades.
William Phillips published a paper in 1958 showing a correlation between wage growth and
inflation in the UK between 1861 and 1913. He fitted a curve to the data, and then compared
that curve to UK data from two later periods. There was a remarkable similarity for most of the
two periods, with exceptions Phillips explains away. Here is the curve Phillips derived:
1. w t = -.90 + 9.64U -1.39
Gordon says that " the inflation rate would be expected to equal the growth rate of wages
minus the long-term growth rate of productivity." P. 12.
1a. p = w – k
Here p is inflation, w is wage growth, and k is productivity growth. Generally in these
equations, lower case letters are rates of change and upper case letters are levels. We can
substitute Equation 1a into Equation 1 to get the original Phillips Curve.
2. p = -.90 + 9.64U -1.39 – k.
Paul Samuelson and Robert Solow picked up on the Phillips paper with a paper of their own in
1960. Gordon says much of their paper is a discussion of pre-Phillips theory. They can't find
data on the US economy similar to that found by Phillips for the UK economy, so they work up
some of their own data and make some calculations showing a result similar to that of Phillips.
Whereas Phillips does not mention the possibility that the curve might shift, Samuelson and
Solow find such shifts and offer possible explanations, such as strong labor unions.
Here's a schematic drawing of the Phillips Curve from Wikipedia :
The standard curve might be the one on the left. It shows very high inflation at very low
unemployment, but falls quickly as unemployment rises. That suggested to Samuelson and Solow
that there is a trade-off if the economy is in specific parts of the Phillips Curve: by
allowing a slightly higher level of inflation, you could get a big drop in unemployment. The US
tried this idea in the 1960s. This policy was tied to Keynesianism, which was the predominate
theory in the Kennedy and Johnson era, and into the Nixon Presidency.
When OPEC massively increased the price of oil in the early 70s, inflation soared far past
the level suggested by the Phillips Curve. The neoliberals at the University of Chicago argued
that the failure of the Phillips Curve proved that Keynesian economics was worthless, and
pushed their solution: monetarism. They also had a formula to replace the Phillips Curve as a
predictor of inflation.
Their explanation for the failure of the trade-off was something like this. Suppose the
beginning rates of inflation and unemployment are at Point A on the above chart. The Fed lowers
interest rates resulting in a small increase of inflation, so that the economy moves to Point B
with lower unemployment. People believe that is unsustainable, and that the economy will revert
to the natural rate of unemployment, the vertical line. As a result, the Phillips Curve shifts
up and to the right over time, so that the economy moves to Point C, with the beginning
unemployment rate but higher inflation.
The neoliberals won. Keynesianism lost out and was replaced by monetarism. This was probably
not deserved, according to Gordon. He says that Samuelson and Solow were not talking about the
situation that came about in the 70s, but rather the situation in the early 1960s. He also
spends a good part of his paper showing that the formulas offered by Friedman and the
neoliberals for predicting inflation were a total failure both on factual and theoretical
grounds.
Gordon himself proposed a version of the Phillips Curve designed to deal with the problem of
supply and demand shocks like the Oil Shock:
3. p = Ep t + b(U t – U tN ) + z
t + e t
In Equation 3, the second U term is the natural rate of unemployment, z t
represents cost-push pressure, and e t is apparently a constant. The natural rate of
unemployment and the z term vary over time, and for some reason so does the e term. There is
nothing left of the wage term. The Phillips Curve is now free from the bonds of factual data
that gave Phillips his interesting result. It's a curve-fitting exercise, using economic
theories put together in a way that fits the data. It's a complicated formula in which every
term needs to be calculated from some other theory or data.
Gordon says that Equation 3 is the canonical version of the Phillips Curve. It is
incorporated in most econometric models, modified by some other variables and terms, including
levels of taxation, expectations of inflation, inflation inertia, which relates to price and
wage rigidity in the short run, and a host of other terms. But as we shall see, it doesn't work
as a predictor.
Criticism of the Phillips Curve
The Phillips Curve has been controversial for a long time, as Mankiw
admits in his introductory textbook. Ben Leubsdorf wrote a very readable criticism for the
Wall Street Journal on August 14, 2014, just before the Fed started raising interest rates. His
title is The Fed Has a Theory. Trouble is the Proof is Patchy (sadly behind a paywall;
it's available online at your local library).
Leubsdorf confirms that most economists believe that there is a short run trade-off between
inflation and unemployment and also agree that this trade-off doesn't hold in the long term,
meaning that we can't get permanently lower unemployment by accepting a bit more inflation. But
the problem is that there is also no apparent connection in the short run either. Here's a
chart originally in Leubsdorf's article and reprinted in a post discussing the article by
Jared Bernstein .
Source: Wall Street Journal
To read this chart, select an expansion period from the list on the upper right, find the
line that color, and locate the circle at one end of the line; that's the starting point. Then
follow the line to see how the relationship between unemployment (x-axis) and inflation
(y-axis) changes over time. As you can see there is no apparent connection in any except the
first expansion. The lack of connection to theory is especially obvious in the current
expansion.
The Leubsdorf article has several quotes from Very Serious People to the effect we think
there's a relationship and we're going to act like there is a relationship, and we can
fine-tune the economy with our gut instincts.
It doesn't look like the latest study will change minds either. That one comes from the
Philadelphia Fed in August 2017, Do Phillips Curves Conditionally Help to Forecast
Inflation? The conclusion is that the Phillips Curve does worse than something called a
univariate model which I won't discuss.
In this September 26
New York Times article there are more Very Serious People explaining they need to follow
their instincts about the economy in deciding on interest rates and they are sure inflation is
coming. Meanwhile, the economy continues to add jobs with no obvious increase in inflation as
shown by the blue line on the above chart. Inflation is
currently running at 1.3% .
Damage From the Phillips Curve
We have already seen that the first notable failure of the Phillips Curve was used to
undermine Keynesian economics in favor of monetarism. As a result, working people of all
classes were doubly harmed, first by the abandonment of the Fed of any significant role in
cutting unemployment, and second by the savage use of high rates to control inflation.
Here's a chart showing the labor share in gross national product on the left axis (blue
line) and the prime rate on the right axis (red line).
The grey bars are recessions. This chart shows that up to 2000 every time workers start to
get a bigger share of the GDP, the Fed raises interest rates. The Phillips Curve was the
justification for those rate hikes. There is some evidence wages are firming up today, and
maybe even rising a fraction faster than inflation. Following tradition but not evidence, the
Fed is raising rates. If that hurts workers, also in accordance with tradition, that's just too
bad.
Observations
Take another look at Equation 1a. If we set inflation at zero, Equation 1 says that wage
growth equals productivity growth. That's not true. Here's a chart from the Economic Policy Institute .
The wage line is for production and non-supervisory personnel, which the EPI says is about
80% of employed people. The average wage for all workers has grown somewhat faster, but is
still well under the rate of increase of productivity over the long term.
Money produced in the economy goes either to capital or labor. So, the excess gains from
productivity must be going to capital.
Actually, it seems strange to suggest that none of the gains from increased productivity go
to capital, as Equation 1a does. Consider a company like Google. It can buy a few more computer
blades and serve more customers with little or no increase in total wages. The gains from the
productivity of the new capital all go to the company. Or consider a company that outsources
its labor. Some of the gains might be used to cut prices, I suppose, but surely most of the
gain stays with the company.
The following chart shows the sudden growth in top wealth. It demonstrates that the growth
began at the same time as the productivity-wages gap began, more support for the idea that the
gains from productivity are going to capital.
Capital can take many forms. It could be plant and equipment, commercial or agricultural
land, personal residences, art, gold, and many other things believed to store value, whether or
not they are actually producing anything, or even whether they actually store value. We know
that top wealth is rising, the stock market is up, and the value of residential real property
in all major cities is rising. All these and more suggest that the total amount of capital is
increasing. All that increase is funded by the gains from productivity.
A recent paper by Simcha Barkai, Declining Labor and
Capital Shaes , provides a convincing explanation. The labor share is declining he
says. But so is what he calls the "capital share", a defined term, calculated by multiplying
the "required rate of return" by the capital stock deployed in the non-financial business
sector. Capital stock includes plant and equipment, land, and intangibles such as patents and
software, less depreciation. The required return on capital is approximately and sensibly
defined as the cost of obtaining capital in the financial markets. He shows that the cost of
capital has declined by 7% over the period of his study, 1984-2014. If the amount of capital
deployed had increased as might be expected with this large drop in cost, the capital share
might have remained the same. Instead, businesses did not deploy additional capital, and the
capital share declined by some 30% over the period. During that period the labor share declined
10% from a larger starting point.
The combined losses were more than made up by increases in the profits share. Profits add to
the value of the firm, and are distributed by the owners of firms as they see fit, which isn't
to lowly workers. This is from Barkai's paper:
Across specifications, the profit share (equal to the ratio of profits to gross value
added) has increased by more than 12 percentage points. To offer a sense of magnitude, the
value of this increase in profits amounts to over $1.1 trillion in 2014, or $14 thousand for
each of the approximately 81 million employees of the non-financial corporate sector. P.
3.
Barkai attributes this almost entirely to increased concentration of US industries, and most
of the paper is devoted to proof of that conclusion. He links that increase in concentration to
changes in anti-trust law and policy engineered by Robert Bork when he was at the University of
Chicago.
Conclusion
Following Barkai, we should rewrite Equation 1a like this:
1b. p = w + γ + c t – k
where γ is the rate of growth of the profits share, c t is the rate of
growth of the capital share, w is the rate of growth of wages, p is inflation, and k is
productivity. Substituting the original Phillips equation, Equation 1 into Equation 1b gives
us
4. p = -.90 + 9.64U -1.39 + γ + c t – k.
This equation calls attention to the role that profits play in the economy, something
economists generally generally ignore. When people do discuss profits, it's always in the
context of the importance of capital and the need to coddle it. That view lies at the heart of
neoliberalism, and at the heart of Fed policy. It is also at the heart of the Law and Economics
movement also spawned at the University of Chicago, a movement that has changed the legal
system to favor capital. If neoliberals were intellectually honest, they wouldn't call it
supply side economics, they'd call it philo-capital economics.
Equation 1 has been replaced by Equation 3 in the standard model of the Phillips Curve.
3. p = Ep t + b(U t – U tN ) + z
t + e t
Making this work with Barkai's analysis is harder. We get a clue from Gordon's explanation
of the z term: he call it cost push, meaning price shocks caused by labor unions and "bauxite
barons". This is where capital growth fits in. The ability to control markets gives firms the
ability to cause price shocks, as when pharmaceutical companies drive up the price of epi-pens
or other drugs, but also the ability to gradually increase prices above the rate of inflation.
Therefore, I'd rewrite Equation 3 this way:
5. 3. p = Ep t + b(U t – U tN ) + γ
+ c t + e t
Gordon doesn't explain the e term, so we'll just let that pick up anything that used to be
in the z term that is somehow missed by my addition. It would, for example, include demand-pull
inflation, which hasn't been a problem for some time.
In the current situation, with profits at very high levels, we can easily increase wages
without increasing inflation if the rich were willing to accept lower profits, subject to the
availability of sufficient resources to meet the new levels of demand substantially higher
wages might cause.
Barkai says just distributing the historically high profits to workers would give every
working person (other than those in the financial sector) a $14K raise. That dwarfs the
make-believe
$4K-9K per household the Republicans promise from their proposed tax cuts.
Unfortunately, the Phillips Curve isn't the only thing blocking action to help the average
citizen.
I am constantly baffled by economists trying to explain very complex non-linear system
with simple two variable models. I have been dealing with a couple of engineering problems
today where the publication I am using has over 50 design charts just for gravity pipe flow.
Each chart has about five variables accommodated while holding a number of others
constant.
So I believe the Philips curve is valid but it is in a different place in multi-variable
space each decade or so based on fundamental changes in the economy. Over the past thirty
years, I can think of four major changes off the top of my head that lead me to expect the
Philips curve to translate in multi-variable space:
1. Free trade agreements (NAFTA etc.)
2. Technology displacing workers
3. Baby boomer demographic moving from entering peak productivity to retirement age
4. Women and minorities are becoming more widespread throughout most or all jobs.
So workers to day are now competing more with Second and Third World workers while
technology is dramatically changing the workplace (e.g. secretarial positions dramatically
reduced), and inexperienced 25 year old white men, women, minorities are being hired to
replace experienced 60 year old white men. Why would we expect to have a nice linear
relationship between unemployment and wages across this period?
So I think we see the Philips curve predictably happening in the short-term in fields like
technology where there is big demand and not enough people. However, as a general rule across
the economy, I simply don't see why the relationship between inflation and unemployment
should be the same today as it was in 2007, 1997, 1987, or 1977.
Economics is infected with too much ideology and not enough scientific method. That is
more the definition of a religion than a science.
Good article. In my econ undergrad, I remember my intermediate macro professor pointing
out that reality didn't match the theoretical Philips curve very well and then we continued
assuming that it did, for the remainder of the course. {facepalm}
If neoliberals were intellectually honest, they wouldn't call it supply side economics,
they'd call it philo-capital economics
Might I suggest "capitalphilic economics"? Seems to roll off the tongue a little
better.
80's Poly-Sci defined, "neo-feudalism" (or, as "Shock Doctrine", privatization of all
"resource" + government capacity, subject financial sector capture)
Doncha just love how it's defined, in practice, as whatever the unemployment rate seems to
settle around. If I'm not mistaken, in the 70's NAIRU was considered to be 6 or 7 %. Then
unemployment fell and inflation didn't accelerate so they changed NAIRU to 5%.
What I want to know is if there has ever been a documented case where it can be shown that
low unemployment levels actually led to accelerating-inflation. The inflationary periods in
US history that I'm familiar with seem to have all been caused by supply shocks (i.e. oil
embargo) or financial shenanigans (the housing market of the early aughties). Ditto for other
countries, so far as I know.
As far as I can tell, the whole idea of NAIRU is strictly an artifact of economic
modeling, not something that's actually ever been observed in the wild. And doesn't it seem
odd that making sure we don't drop below NAIRU is something the Fed feels like it needs to
intervene to ensure rather than letting the market sort it out. Even if NAIRU was a real
thing, you would assume that low unemployment –> increased wages –>
increased prices –> reduced consumption –> lay-offs and higher
unemployment. Which is to say, if there were such a thing as a natural rate of unemployment,
wouldn't markets naturally produce it, obviating any need for the Fed to, say, jack up
interest rates to keep the economy from "heating up" (I guess because people have so much
money burning holes in their pockets?). It almost like, when it suits the capitalists, they
stop believing in this whole "invisible hand" thing .strange
If I remember right, Phillips published this paper because LSE was pushing him to publish
something so that they could justify awarding him professorship and tenure, and he could go
to tinkering with his MONIAC. I was told he just wanted to get something out, and this was
the first idea he had so he wrote it up, but wasn't really persuaded..
The damage to the real world the academia demands does..
"Real world" powers can riffle through the files of academia, hard and soft sciences or
the various humanities or whatever, even languages and linguistics, and, because "freedom,"
can always come up with something published that "proves" whatever line of BS the looters are
pushing at any given moment to increase their "take."
But then ever since humans discovered ratiocination, thus it has always been. SOMEone or
SOMEthing always has to be "the authority," or at least "authoritative "
This is one reason why America is being parasitized by finance -- - Math. That and the
math card in computers that allows the instantaneous creation of speculation and playing of
the numbers with hypothetical money that later translates into real productivity or more
likely misery.
The average American's eyes glaze over as soon as you put up a math formula. He of course,
will memorize all manner of arcane sports trivia and statistics, but when it comes time to
quantify his own economic doom, or to think about his or her own economic travails with
numbers and curves, it's mind shutdown time.
This is why we love Yves. She has allowed us to get an insight into, become informed and
learn about economics through high quality reporting. Thank you for this reminder of the
hocus pocus and the witch-doctory that is casting our spell into economic hell.
not just "math": Rand-Friedman-libertarian ideological definition:
"Neoliberalism sees competition as the defining characteristic of human relations. It
redefines citizens as consumers, whose democratic choices are best exercised by buying and
selling, a process that rewards merit and punishes inefficiency. It maintains that "the
market" delivers benefits that could never be achieved by planning.
Attempts to limit competition are treated as inimical to liberty. Tax and regulation
should be minimised, public services should be privatised. The organisation of labour and
collective bargaining by trade unions are portrayed as market distortions that impede the
formation of a natural hierarchy of winners and losers. Inequality is recast as virtuous: a
reward for utility and a generator of wealth, which trickles down to enrich everyone. Efforts
to create a more equal society are both counterproductive and morally corrosive. The market
ensures that everyone gets what they deserve.
We internalise and reproduce its creeds. The rich persuade themselves that they acquired
their wealth through merit, ignoring the advantages – such as education, inheritance
and class – that may have helped to secure it. The poor begin to blame themselves for
their failures, even when they can do little to change their circumstances.
Never mind structural unemployment: if you don't have a job it's because you are
unenterprising. Never mind the impossible costs of housing: if your credit card is maxed out,
you're feckless and improvident. Never mind that your children no longer have a school
playing field: if they get fat, it's your fault. In a world governed by competition, those
who fall behind become defined and self-defined as losers."
Your link dances around calling it out: neoliberalism is a rebranding of social
darwinism.
Not much "neo" about it. But for all the alleged "progress," it seems we're trapped in a
culture that really finds it hard to let go of the 19th Century. And mot just economically,
but socially as well.
"natural hierarchy of winners and losers " – does not exist. They rebranded to try
to get around all the artificial selection in the global economy.
In an early draft of this article, I had a reference to Econned, where Yves discusses the
use of the Gaussian Copula in the organization of RMBSs. So, yes, it's largely the math that
Samuelson and Solow and the people who came later loved.
You'll note that I only use very simple math, mostly because it's a nice shorthand, like
Equations 1a and 1b
vlade hit on a key point, IMO. I was an undergrad at prestigious Midwestern school during
the period where they split the Econ department in 2 -- a econometrics-esque degree from the
Math/Science school, vs. 'Economics' which they kept in the College of Arts and Letters.
They've been strangling the latter department since while ensuring steady flow of grants to
the math-based department, a la the Phillips story alluded to above.
Seconding diptherio – I remember the introductory statistics and econometric courses
I was required to take, where we'd routinely dissect econ reporting in the press based on
flawed mathematics or poor statistical methods, and yet carry as though these were meaningful
and useful figures (e.g. unemployment, inflation).
So what to do -- do you try to change the way economics is practiced? Or do you try to
take away the influence that neoliberalism and/or industrial capitalism have on the education
fields? And how exactly do you do that (reform education) given how instrumental it is for
neoliberalism to continue.
I see an analogy here, maybe I am wrong. Picture bull-fighting, an appropriate concept,I
think. I see neoliberalism as the Matador, education as the cape, and the public as the bull.
So the questions above might be rephrased as from the bull's perspective, do you chase the
cape or gore the matador?
The stakes are high for the matador -- although as a spectator that fact is hidden in
plain sight.
Thanks for this very readable and important post. Demystify the Phillips Curve and other
economic "truths" being used against Main Street is significant.
" This equation calls attention to the role that profits play in the economy, something
economists generally generally ignore. When people do discuss profits, it's always in the
context of the importance of capital and the need to coddle it. That view lies at the heart
of neoliberalism, and at the heart of Fed policy."
When you think about it, the PC supports the argument of how Supply & Demand explains
pretty much everything about economics. It you need to explain economics in a nutshell to a
working guy who thinks nothing is really all that complicated (were it not for intellectuals
over-thinking things), it fills the bill rather nicely. A matter of rhetorical Supply &
Demand, come to think of it.
For most people, being confronted with "scientific evidence" is enough to lay to rest any
and all doubt about the claims being made in a proposition. Scientific evidence hardens
claims into hard facts, and does so quickly. What better way to make something appear
scientific than to riddle its academic literature with curves and formulas, and give it its
own pride of place at the nobles side by side with real sciences. That real sciences have
laws that are universally applicable or can at least be reconciled across levels of reality
with the consistency you'd expect of something labelled a science (e.g. how quantum
electrodynamics reconciles classical electrodynamics at the atomic and subatomic levels)
seems to be a minor inconvenience to those with vested interests in having economics accepted
by the public as a hard science (precisely, I say again, because presenting "scientific
evidence" with formulas and curves disarms most people, among them the political ruling
class, of their critical thinking faculties). Add living in an age of credentialism to the
mix and the general ineptitude of our ruling politicians and one can see how economists can
wreak so much havoc with their ex-cathedra pronouncements on what makes the economy work
The material about Simcha Barkai's paper is the most interesting part of this to me. That
paper strikes a serious blow at the heart of neoliberal antitrust law, but it also explains
the wage-productivity gap and shows the way to social changes that would benefit most of
us.
The Philips Curve exemplifies the dysfunction created by separating
mathematical/quantitative descriptions of an economy from that same lived economy and its
history. The PC was originally developed on British data covering a period roughly from ten
years after the Crystal Palace Exhibition of 1851 to WWI, and then extended to WWII. Over the
same period, literature met Oliver Twist and Alice and her rabbit hole, was jostled by Hardy
and Lawrence, and jolted by Joyce, Woolf and Eliot, not least because a woman writer demanded
a room of her own. The changes in social, economic and political life were comparable.
The British statistics cover a period when power shifted as dramatically as literature. A
suffrage limited to propertied men became universal. The agency, the organization,
persistence and determination necessary to create that change was considerable. So, too, a
landowning aristocracy, once at the apex of all social, political, legal and economic life,
saw its monopoly shrink, or rather found itself joined by large business owners, financiers,
traders and press lords, and for a time, trades union leaders.
Parliament expressed that power shift, for example, by ending tariffs protecting domestic
grain production, substituting, instead, subsidies for imported food stuffs, in order more
cheaply to keep workers fed and at their machines. (A hard-fought concession to a new,
competing power block of manufacturers, their financiers and traders,) A major constitutional
crisis in 1910-11 presaged adoption of Bismarckian welfare programs, which America did not
see until FDR and LBJ. These were a modest but viciously fought concession in order to avoid
the kind of extra-constitutional change experienced by Russia a few years later.
Workers over this period witnessed the final stage of enclosures (privatizing of common
lands), the end of cottage industries, and the rise, dominance and decline of heavy industry.
The Crystal Palace's startling iron pillars and acres of glass yielded to curtain walls and
structural steel. Technology, as today, raced headlong. Stage coaches gave way to steam
railroads; the telegraph to the telephone and wireless; lances, swords and muzzle loaders to
dreadnoughts, flying machines, automatic weapons and poison gas – all with vastly
different supply chains, need for capital and levels of employment.
The empire added half of Africa, notably South Africa and its ores, diamonds and gold, and
de facto control of Egypt and its canal at Suez. De jure imperial relations existed with
India and the "white commonwealth" countries of Canada, Australia, New Zealand and South
Africa (post-Boer War). De facto imperial relations existed with much of Latin America, the
Caribbean and East Asia. The pound was a global currency and the Royal Navy was admonished to
"rule the waves", an aspiration that has since given way to following and buying from the
stars and stripes. The ebb and flow of imperial power affected raw material prices coming in
and export prices going out.
By what logic would the statistics of economic relations, of changing notions of
acceptable levels of employment and inflation (capital's nemesis), not be affected by
dramatic changes in social, political and economic conditions? Demonstrating sufficient
continuity to establish a "law" for those relations for a single country, let alone one valid
across time and national boundaries, would seem to be a sisyphean task.
There's a persuasive interpretation of Phillips' original work and application to US data
by John Hussman, which argues :
1) Phillips' original paper is right but most of the work since is garbage which missed
the point.
2) Phillips' correct result is a relationship between unemployment and real wage growth
("wage inflation"), not consumer prices.
3) Most modern interpretations have either incompetently lost the point about real wages,
or deliberately obfuscated. (Modern econ exists to serve capital more than labor, so this is
not surprising.)
"When labor is scarce (low unemployment), the price of labor
tends to rise relative to the price of other things (thus we observe real wage inflation ).
In contrast, when labor is plentiful (high unemployment), the price of labor tends to
stagnate relative to the price of other things (real wages stagnate)."
Whether real wage inflation translates into consumer price inflation depends on the supply
and demand of consumer goods, repayment of debts, workers' need to save for retirements
etc.
I believe real wage growth, at the expense of corporate profits, is exactly what has been
missing from the health of the economy for the past 20-40 years.
I also suspect the true reason why central banks fear low unemployment is because those
increases in workers' wages will come at the expense of corporate profitability. (Especially
in an economy with high corporate profit levels and inadequate price competition.)
I also suspect most modern recessions have not been caused by the low unemployment, but
rather by the credit tightening applied to prevent low unemployment – to prevent
workers from enjoying higher wages at the owners' expense.
The paper is two years old. Looks how his prediction fared. Stagnation is still with us
althouth low oil prices lifted all the boats. But this period is coming to the end.
Notable quotes:
"... The financial crisis that erupted in 2008 challenged the foundations of orthodox economic theory and policy. At its outset, orthodox economists were stunned into silence as evidenced by their inability to answer the Queen of England's simple question (November 5th, 2008) to the faculty of the London School of Economics as to why no one foresaw the crisis. ..."
"... Six years later, orthodoxy has fought back and largely succeeded in blocking change of thought and policy. The result has been economic stagnation ..."
"... Perspective # 3 is the progressive position which is rooted in Keynesian economics and can be labeled the "destruction of shared prosperity hypothesis" ..."
"... It is identified with the New Deal wing of the Democratic Party and the labor movement, but it has no standing within major economics departments owing to their suppression of alternatives to economic orthodoxy. ..."
"... However, financial excess is just an element of the crisis and the full explanation is far deeper than just financial market regulatory failure According to the Keynesian destruction of shared prosperity hypothesis, the deep cause is generalized economic policy failure rooted in the flawed neoliberal economic paradigm that was adopted in the late 1970s and early 1980s. ..."
"... globalization reconfigured global production by transferring manufacturing from the U.S. and Europe to emerging market economies. This new global division of labor was then supported by having U.S. consumers serve as the global economy's buyer of first and last resort, which explains the U.S. trade deficit and the global imbalances problem. ..."
"... This new global division of labor inevitably created large trade deficits that also contributed to weakening the aggregate demand (AD)generation process by causing a hemorrhage of spending on imports (Palley, 2015) ..."
"... Finance does this through three channels. First, financial markets have captured control of corporations via enforcement of the shareholder value maximization paradigm of corporate governance. Consequently, corporations now serve financial market interests along with the interests of top management. Second, financial markets in combination with corporations lobby politically for the neoliberal policy mix. ..."
"... Third, financial innovation has facilitated and promoted financial market control of corporations via hostile take-overs, leveraged buyouts and reverse capital distributions. Financial innovation has therefore been key for enforcing Wall Street's construction of the shareholder value maximization paradigm. ..."
"... The second vital role of finance is the support of AD. The neoliberal model gradually undermined the income and demand generation process, creating a growing structural demand gap. The role of finance was to fill that gap. Thus, within the U.S., deregulation, financial innovation, speculation, and mortgage lending fraud enabled finance to fill the demand gap by lending to consumers and by spurring asset price inflation ..."
"... this AD generation role of finance was an unintended consequence and not part of a grand plan. Neoliberal economists and policymakers did not realize they were creating a demand gap, but their laissez-faire economic ideology triggered financial market developments that coincidentally filled the demand gap. ..."
"... the financial process they unleashed was inevitably unstable and was always destined to hit the wall. There are limits to borrowing and limits to asset price inflation and all Ponzi schemes eventually fall apart. ..."
"... the long duration of financial excess made the collapse far deeper when it eventually happened. It has also made escaping the after-effects of the financial crisis far more difficult as the economy is now burdened by debts and destroyed credit worthiness. That has deepened the proclivity to economic stagnation. ..."
"... The neoliberal labor market flexibility agenda explicitly attacks unions and works to shift income to wealthier households. ..."
"... That model inevitably produces stagnation because it produces a structural demand shortage via (i) its impact on income distribution, and (ii) via its design of globalization which generates massive trade deficits, wage competition and off-shoring of jobs and investment. In terms of the three-way contest between the government failure hypothesis, the market failure hypothesis and the destruction of shared prosperity hypothesis, the economic policy debate during the Great Recession was cast as exclusively between government failure and market failure. ..."
"... This attitude to fiscal policy reflects the dominance within the Democratic Party of "Rubinomics", the Wall Street view associated with former Treasury Secretary Robert Rubin, that government spending and budget deficits raise real interest rates and thereby lower growth. According to that view, the US needs long-term fiscal austerity to offset Social Security and Medicare Side-by-side with the attempt to reflate the economy, the Obama administration also pushed for major overhaul and tightening of financial sector regulation via the Dodd- Frank Act (2010). ..."
"... The Obama administration's softcore neoliberalism would have likely generated stagnation by itself, but the prospect has been further strengthened by Republicans. ..."
"... The Obama administration was to provide fiscal stimulus to jump start the economy; the Fed would use QE to blow air back into the asset price bubble; the Dodd-Frank Act (2010) would stabilize financial markets; and globalization would be deepened by further NAFTA-styled international agreements. This is a near-identical model to that which failed so disastrously. Consequently, stagnation is the logical prognosis. ..."
"... Consequently, the economy is destined to repeat the patterns of the 1990s and 2000s. However, the US economy has also experienced almost twenty more years of neoliberalism which has left its economic body in worse health than the 1990s. That means the likelihood of delivering another bubble-based boom is low and stagnation tendencies will likely reassert themselves after a shorter and weaker period of expansion ..."
This paper examines the major competing interpretations of the economic crisis in the US and
explains the rebound of neoliberal orthodoxy. It shows how US policymakers acted to stabilize
and save the economy, but failed to change the underlying neoliberal economic policy model.
That failure explains the emergence of stagnation, which is likely to endure
Current economic
conditions in the US smack of the mid-1990s. The 1990s expansion proved unsustainable and so
will the current modest expansion. However, this time it is unlikely to be followed by
financial crisis because of the balance sheet cleaning that took place during the last
crisis
Revised 1: This paper has been prepared for inclusion in Gallas, Herr, Hoffer and Scherrer
(eds.), Combatting Inequality: The Global North and South , Rouledge, forthcoming in
2015.
The crisis and the resilience of neoliberal economic orthodoxy
The financial crisis that erupted in 2008 challenged the foundations of orthodox economic
theory and policy. At its outset, orthodox economists were stunned into silence as evidenced by
their inability to answer the Queen of England's simple question (November 5th, 2008) to the
faculty of the London School of Economics as to why no one foresaw the crisis.
Six years later,
orthodoxy has fought back and largely succeeded in blocking change of thought and policy. The
result has been economic stagnation
This paper examines the major competing interpretations of
the economic crisis in the US and explains the rebound of neoliberal orthodoxy. It shows how US
policymakers acted to stabilize and save the economy, but failed to change the underlying
neoliberal economic policy model.
That failure explains the emergence of stagnation in the US
economy and stagnation is likely to endure.
Current economic conditions in the US smack of the
mid-1990s. The 1990s expansion proved unsustainable and so will the current modest expansion.
However, this time it is unlikely to be followed by financial crisis because of the balance
sheet cleaning that took place during the last crisis.
Competing explanations of the
crisis
The Great Recession, which began in December 2007 and includes the financial crisis of 2008,
is the deepest economic downturn in the US since the World War II. The depth of the downturn is
captured in Table 1 which shows the decline in GDP and the peak unemployment rate. The
recession has the longest duration and the decline in GDP is the largest. The peak unemployment
rate was slightly below the peak rate of the recession of 1981-82. However, this ignores the
fact that the labor force participation rate fell in the Great Recession (i.e. people left the
labor force and were not counted as unemployed) whereas it increased in the recession of
1981-82 (i.e. people entered the labor force and were counted as unemployed).
Table 1. Alternative measures of the depth of US recessions.
... ... ...
Table 2 provides data on the percent change in private sector employment from business cycle
peak to trough. The 7.6 percent loss of private sector jobs in the Great Recession dwarfs other
recessions, providing another measure of its depth and confirming it extreme nature. 2 Over the
course of the 1981-82 labor force participation rose from 63.8 percent to 64.2 percent, thereby
likely increasing the unemployment rate. In contrast, over the course of the Great Recession
the labor force participation rate fell from 66.0 percent to 65.7 percent, thereby likely
decreasing the unemployment. The decrease in the labor force participation rate was even
sharper for prime age (25 – 54 years old) workers, indicating that the decrease in the
overall participation rate was not due to demographic factors such as an aging population.
Instead, it was due to lack of job opportunities, which supports the claim that labor force
exit lowered the unemployment rate. Table 2. U.S. private employment cycles, peak to trough.
Source: Bureau of labor statistics and author's calculations.
... ... ...
Broadly speaking there exist three competing perspectives on the crisis (Palley, 2012).
Perspective # 1 is the hardcore neoliberal position which can be labeled the
"government failure hypothesis" . In the U.S. it is identified with the Republican
Party and with the economics departments of Stanford University, the University of Chicago,
and the University of Minnesota.
The hardcore neoliberal government failure argument is that
the crisis is rooted in the U.S. housing bubble and its bust. The claim is that the bubble
was due to excessively prolonged loose monetary policy and politically motivated government
intervention in the housing market aimed at increasing ownership. With regard to monetary
policy, the Federal Reserve pushed interest rates too low for too long following the
recession of 2001.
With regard to the housing market, government intervention via the
Community Reinvestment Act and Fannie Mae and Freddie Mac, drove up house prices and
encouraged homeownership beyond peoples' means.
Perspective # 2 is the softcore neoliberal position, which can be labeled the "market
failure hypothesis" . It is identified with the Obama administration, the Walls Street
and Silicon Valley wing of the Democratic Party, and economics departments such as those at
MIT, Yale and Princeton. In Europe it is identified with "Third Way" politics.
The softcore
neoliberal market failure argument is that the crisis is due to inadequate financial sector
regulation. First, regulators allowed excessive risk-taking by banks. Second, regulators
allowed perverse incentive pay structures within banks that encouraged management to engage
in "loan pushing" rather than "sound lending." Third, regulators pushed both deregulation and
self-regulation too far. Together, these failures contributed to financial misallocation,
including misallocation of foreign saving provided through the trade deficit, that led to
financial crisis. The crisis in turn deepened an ordinary recession, transforming it into the
Great Recession which could have become the second Great Depression absent the extraordinary
policy interventions of 2008-09
Perspective # 3 is the progressive position which is rooted in Keynesian economics and
can be labeled the "destruction of shared prosperity hypothesis".
It is identified
with the New Deal wing of the Democratic Party and the labor movement, but it has no
standing within major economics departments owing to their suppression of alternatives to
economic orthodoxy. The Keynesian "destruction of shared prosperity" argument is that
the crisis is rooted in the neoliberal economic paradigm that has guided economic policy for
the past thirty years. An important feature of the argument is that, though the U.S. is the
epicenter of the crisis, all countries are implicated as they all participated in the
adoption of a systemically flawed policy paradigm. That paradigm infected finance via
inadequate regulation, enabling financial excess that led to the financial crisis of 2008.
However, financial excess is just an element of the crisis and the full explanation is far
deeper than just financial market regulatory failure According to the Keynesian destruction
of shared prosperity hypothesis, the deep cause is generalized economic policy failure rooted
in the flawed neoliberal economic paradigm that was adopted in the late 1970s and early
1980s.
For the period 1945 - 1975 the U.S. economy was characterized by a "virtuous circle"
Keynesian growth model built on full employment and wage growth tied to productivity growth.
This model is illustrated in Figure 1 and its logic was as follows. Productivity growth drove
wage growth, which in turn fuelled demand growth and created full employment. That provided an
incentive for investment, which drove further productivity growth and supported higher wages.
This model held in the U.S. and, subject to local modifications, it also held throughout the
global economy - in Western Europe, Canada, Japan, Mexico, Brazil and Argentina.
Figure 1. The 1945 – 75 virtuous circle Keynesian growth model. Wage growth Demand
growth Full employment Productivity growth Investment
After 1980 the virtuous circle Keynesian
growth model was replaced by a neoliberal growth model. The reasons for the change are a
complex mix of economic, political and sociological reasons that are beyond the scope of the
current paper. The key changes wrought by the new model were:
Abandonment of the commitment
to full employment and the adoption of commitment to very low inflation;
Severing of the
link between wages and productivity growth.
Together, these changes created a new economic
dynamic. Before 1980, wages were the engine of U.S. demand growth. After 1980, debt and asset
price inflation became the engine The new economic model was rooted in neoliberal economic
thought. Its principal effects were to weaken the position of workers; strengthen the position
of corporations; and unleash financial markets to serve the interests of financial and business
elites.
As illustrated in figure 2, the new model can be described as a neoliberal policy box
that fences workers in and pressures them from all sides. On the left hand side, the corporate
model of globalization put workers in international competition via global production networks
that are supported by free trade agreements and capital mobility.
On the right hand side, the
"small" government agenda attacked the legitimacy of government and pushed persistently for
deregulation regardless of dangers. From below, the labor market flexibility agenda attacked
unions and labor market supports such as the minimum wage, unemployment benefits, employment
protections, and employee rights. From above, policymakers abandoned the commitment of full
employment, a development that was reflected in the rise of inflation targeting and the move
toward independent central banks influenced by financial interests.
Figure 2. The neoliberal
policy box. Globalization WORKERS Abandonment of full employment Small Government Labor Market
Flexibility
Corporate globalization is an especially key feature. Not only did it exert
downward inward pressures on economies via import competition and the threat of job
off-shoring, it also provided the architecture binding economies together. Thus, globalization
reconfigured global production by transferring manufacturing from the U.S. and Europe to
emerging market economies. This new global division of labor was then supported by having U.S.
consumers serve as the global economy's buyer of first and last resort, which explains the U.S.
trade deficit and the global imbalances problem.
This new global division of labor inevitably
created large trade deficits that also contributed to weakening the aggregate demand
(AD)generation process by causing a hemorrhage of spending on imports (Palley, 2015)
An
important feature of the Keynesian hypothesis is that the neoliberal policy box was implemented
on a global basis, in both the North and the South. As in the U.S., there was also a structural
break in policy regime in both Europe and Latin America. In Latin America , the International
Monetary Fund and World Bank played an important role as they used the economic distress
created by the 1980s debt crisis to push neoliberal policy
They did so by making financial
assistance conditional on adopting such policies. This global diffusion multiplied the impact
of the turn to neoliberal economic policy and it explains why the Washington Consensus enforced
by the International Monetary Fund and World Bank has been so significant. It also explains why
stagnation has taken on a global dimension.
III The role of finance in the neoliberal
model
Owing to the extraordinarily deep and damaging nature of the financial crisis of 2008,
financial market excess has been a dominant focus of explanations of the Great Recession.
Within the neoliberal government failure hypothesis the excess is attributed to ill-advised
government intervention and Federal Reserve interest rate policy. Within the neoliberal market
failure hypothesis it is attributed to ill-advised deregulation and failure to modernize
regulation.
According to the Keynesian destruction of shared prosperity hypothesis neither of
those interpretations grasps the true significance of finance. The government failure
hypothesis is empirically unsupportable (Palley, 2012a, chapter 6), while the market failure
hypothesis has some truth but also misses the true role of finance That role is illustrated in
Figure 3 which shows that finance performed two roles in the neoliberal model. The first was to
structurally support the neoliberal policy box. The second was to support the AD generation
process. These dual roles are central to the process of increasing financial domination of the
economy which has been termed financialization (Epstein, 2004, p.3; Krippner, 2004, 2005;
Palley, 2013). Figure 3. The role of finance in the neoliberal model. The role of finance:
"financialization" Supporting the neoliberal policy box Aggregate demand generation Corporate
behavior Economic policy Financial innovation The policy box shown in Figure 2 has four sides.
A true box has six sides and a four sided structure would be prone to structural weakness.
Metaphorically speaking, one role of finance is to provide support on two sides of the
neoliberal policy box, as illustrated in Figure 4.
Finance does this through three channels.
First, financial markets have captured control of corporations via enforcement of the
shareholder value maximization paradigm of corporate governance. Consequently, corporations now
serve financial market interests along with the interests of top management. Second, financial
markets in combination with corporations lobby politically for the neoliberal policy mix.
The
combination of changed corporate behavior and economic policy produces an economic matrix that
puts wages under continuous pressure and raises income inequality.
Third, financial innovation
has facilitated and promoted financial market control of corporations via hostile take-overs,
leveraged buyouts and reverse capital distributions. Financial innovation has therefore been
key for enforcing Wall Street's construction of the shareholder value maximization paradigm.
Figure 4. Lifting the lid on the neoliberal policy box. The neoliberal box Corporations
Financial markets
The second vital role of finance is the support of AD. The neoliberal model
gradually undermined the income and demand generation process, creating a growing structural
demand gap. The role of finance was to fill that gap. Thus, within the U.S., deregulation,
financial innovation, speculation, and mortgage lending fraud enabled finance to fill the
demand gap by lending to consumers and by spurring asset price inflation
Financialization
assisted with this process by changing credit market practices and introducing new credit
instruments that made credit more easily and widely available to corporations and households.
U.S. consumers in turn filled the global demand gap, along with help from U.S. and European
corporations who were shifting manufacturing facilities and investment to the emerging market
economies.
Three things should be emphasized.
First, this AD generation role of finance was an
unintended consequence and not part of a grand plan. Neoliberal economists and policymakers did
not realize they were creating a demand gap, but their laissez-faire economic ideology
triggered financial market developments that coincidentally filled the demand gap.
Second, the
financial process they unleashed was inevitably unstable and was always destined to hit the
wall. There are limits to borrowing and limits to asset price inflation and all Ponzi schemes
eventually fall apart. The problem is it is impossible to predict when they will fail. All that
can be known with confidence is that it will eventually fail.
Third, the process went on far
longer than anyone expected, which explains why critics of neoliberalism sounded like Cassandras (Palley, 1998, Chapter 12). However,
the long duration of financial excess made the
collapse far deeper when it eventually happened. It has also made escaping the after-effects of
the financial crisis far more difficult as the economy is now burdened by debts and destroyed
credit worthiness. That has deepened the proclivity to economic stagnation.
IV
Evidence
Evidence regarding the economic effects of the neoliberal model is plentiful and clear
Figure 5 shows productivity and average hourly compensation of non-supervisory workers (that is
non-managerial employees who are about 80 percent of the workforce). The link with productivity
growth was severed almost 40 years ago and hourly compensation has been essentially stagnant
since then.
Figure 5.
... ... ...
Table
3 shows data on the distribution of income growth by business cycle expansion across the
wealthiest top 10 percent and bottom 90 percent of households. Over the past sixty years there
has been a persistent decline in the share of income gains going to the bottom 90 percent of
households ranked by wealth. However, in the period 1948 – 1979 the decline was gradual.
After 1980 there is a massive structural break and the share of income gains going to the
bottom 90 percent collapses. Before 1980, on average the bottom 90 percent received 66 percent
of business cycle expansion income gains. After 1980, on average they receive just 8 percent.
Table 3. Distribution of income growth by business cycle expansion across the wealthiest top 10
percent and bottom 90 percent of households. Source: Tcherneva (2014), published in The New
York Times , September 26, 2014. '49- '53 '54- '57 '59- '60 '61- '69 '70- '73 '75- '79
'82- '90 '91- '00 '01- '07 '09- '12 Average Pre-1908 Average Post-1980 Top 10% 20% 28 32 33
43 45 80 73 98 116 34% 92% Bottom 90% 80% 72 68 67 57 55 20 27 2 -16 66% 8%
Figure 6
shows the share of total pre-tax income of the top one percent of households ranked by wealth.
From the mid-1930s, with the implementation of the New Deal social contract, that share fell
from a high of 23.94 percent in 1928 to a low of 8.95 percent in 1978. Thereafter it has
steadily risen, reaching 23.5 percent in 2007 which marked the beginning of the Great
Recession. It then fell during the Great Recession owing to a recession-induced fall in
profits, but has since recovered most of that decline as income distribution has worsened again
during the economic recovery. In effect, during the neoliberal era the US economy has retraced
its steps, reversing the improvements achieved by the New Deal and post-World War II
prosperity, so that the top one percent's share of pre-tax income has returned to pre-Great
Depression levels.
Figure 6. US pre-tax income share of top 1 percent. Source:
http://inequality.org/income-inequality/. Original source: Thomas Piketty and Emanuel Saez
(2003), updated at http://emlab.edu/users/saez.
As argued in Palley (2012a, p. 150-151) there
is close relationship between union membership density (i.e. percent of employed workers that
are unionized) and income distribution. This is clearly shown in Figure 7 which shows union
density and the share of pre-tax income going to the top ten percent of wealthiest households.
The neoliberal labor market flexibility agenda explicitly attacks unions and works to shift
income to wealthier households.
Share of income going to the top 10 percent 2013: 47.0% Union
membership density 11.2% 0% 10% 20% 30% 40% 50% 60% 1917 1923 1929 1935 1941 1947 1953 1959
1965 1971 1977 1983 1989 1995 2001 2007 2013 Source: Data on union density follows the
composite series found in Historical Statistics of the United States; updated to 2013 from
unionstats.com. Income inequality (share of income to top 10%) from Piketty and Saez,
"Income
Inequality in the United States, 1913-1998, Quarterly Journal of Economics , 118(1),
2003, 1-39. Updated Figure 7. Union membership and the share of income going to the top ten
percent of wealthiest households, 1917 – 2013. Source: Mishel, Gould and Bivens (2015).
Table 4 provides data on the evolution of the U.S. goods and services trade balance as a share
of GDP by business cycle peak. Comparison across peaks controls for the effect of the business
cycle. The data show through to the late 1970s U.S. trade was roughly in balance, but after
1980 it swung to massive deficit and the deficits increased each business cycle. These deficits
were the inevitable product of the neoliberal model of globalization (Palley, 2015) and they
undermined the AD generation process in accordance with the Keynesian hypothesis.
Table 4. The
U.S. goods & services trade deficit/surplus by business cycle peaks, 1960 – 2007.
Sources: Economic Report of the President, 2009 and author's calculations. Business cycle
peak year Trade balance ($ millions) GDP ($ billions) Trade balance/ GDP (%) 1960 3,508
526.4 0.7 1969 91 984.6 0.0 1973 1,900 1,382.7 0.1 1980 -25,500 2,789.5
-0.9 1981 -28,023 3,128.4 -0.9 1990 -111,037 5,803.1 -1.9 2001 -429,519
10,128.0 -4.2 2007 -819,373 13,807.5 -5.9
Finally, Figure 8 shows total domestic debt
relative to GDP and growth. This Figure is highly supportive of the Keynesian interpretation of
the role of finance. During the neoliberal era real GDP growth has actually slowed but debt
growth has exploded. The reason is the neoliberal model did nothing to increase growth, but it
needed faster debt growth to fill the demand gap created by the model's worsening of income
distribution and creation of large trade deficits. Debt growth supported debt-financed consumer
spending and it supported asset price inflation that enabled borrowing which filled the demand
gap caused by the neoliberal model. Figure 8. Total domestic debt and growth (1952-2007).
Source: Grantham, 2010.
V The debate about the causes of the crisis: why it matters
The importance of the debate about the causes of the crisis is that each perspective
recommends its own different policy response. For hardcore neoliberal government failure
proponents the recommended policy response is to double-down on the policies described by the
neoliberal policy box and further deregulate markets; to deepen central bank independence and
the commitment to low inflation via strict rules based monetary policy; and to further shrink
government and impose fiscal austerity to deal with increased government debt produced by the
crisis For softcore neoliberal market failure proponents the recommended policy response is to
tighten financial regulation but continue with all other aspects of the existing neoliberal
policy paradigm. That means continued support for corporate globalization, socalled labor
market flexibility, low inflation targeting, and fiscal austerity in the long term.
Additionally, there is need for temporary large-scale fiscal and monetary stimulus to combat
the deep recession caused by the financial crisis.
However, once the economy has recovered,
policy should continue with the neoliberal model For proponents of the destruction of shared
prosperity hypothesis the policy response is fundamentally different. The fundamental need is
to overthrow the neoliberal paradigm and replace it with a "structural Keynesian" paradigm.
That involves repacking the policy box as illustrated in Figure 9.
The critical step is to take
workers out of the box and put corporations and financial markets in so that they are made to
serve a broader public interest. The key elements are to replace corporate globalization with
managed globalization that blocks race to the bottom trade dynamics and stabilizes global
financial markets; restore a commitment to full employment; replace the neoliberal
anti-government agenda with a social democratic government agenda; and replace the neoliberal
labor market flexibility with a solidarity based labor market agenda.
The goals are restoration
of full employment and restoration of a solid link between wage and productivity growth.
Figure
9. The structural Keynesian box Corporations & Managed Financial Markets Globalization Full
Employment Social Democratic Government Solidarity Labor Markets
Lastly, since the neoliberal
model was adopted as part of a new global economic order, there is also need to recalibrate the
global economy. This is where the issue of "global rebalancing" enters and emerging market
economies need to shift away from export-led growth strategies to domestic demand-led
strategies. That poses huge challenges for many emerging market economies because they have
configured their growth strategies around export-led growth whereby they sell to U.S.
consumers.
VI From crisis to stagnation: the failure to change
Massive policy interventions, unequalled in the post-war era, stopped the Great Recession
from spiraling into a second Great Depression. The domestic economic interventions included the
2008 Troubled Asset Relief Program (TARP) that bailed out the financial sector via government
purchases of assets and equity from financial institutions; the 2009 American Recovery and
Reinvestment Act (ARRA) that provided approximately $800 billion of fiscal stimulus, consisting
of approximately $550 billion of government spending and $250 billion of tax cuts; the Federal
Reserve lowering its interest target to near-zero (0 - 0.25 percent); and the Federal Reserve
engaging in quantitative easing (QE) transactions that involve it purchasing government and
private sector securities. At the international level, in 2008 the Federal Reserve established
a temporary $620 billion foreign exchange (FX) swap facility with foreign central banks.
That
facility provided the global economy with dollar balances, thereby preventing a dollar
liquidity shortage from triggering a wave of global default on short-term dollar loans that the
financial system was unwilling to roll-over because of panic.3
Additionally, there was
unprecedented globally coordinated fiscal stimulus arranged via the G-20 mechanism. 3
The FX
swaps with foreign central banks have been criticized as being a bail-out for foreign
economies. In fact, they saved the US financial system which would have been pulled down by
financial collapse outside
Despite their scale, these interventions did not stop the recession
from being the deepest since 1945, and nor did they stop the onset of stagnation. Table 5 shows
how GDP growth has failed to recover since the end of the Great Recession, averaging just 2.1
percent for the five year period from 2010 – 2014. Furthermore, that period includes the
rebound year of 2010 when the economy rebounded from its massive slump owing to the
extraordinary fiscal and monetary stimulus measures that were put in place
Table 5. U.S. GDP
growth. Source: Statistical Annex of the European Union, Autumn 2014 and author's calculations.
The growth rate for 2014 is that estimated in October 2014.
Table 6 shows employment creation in the five years after the end of recessions, which provides
another window on stagnation. The job creation numbers show that the neoliberal model was
already slowing in the 1990s with the first episode of "jobless the US.
Many foreign banks
operating in the US had acquired US assets financed with short-term dollar borrowings. When the
US money market froze in 2008 they could not roll-over these loans in accordance with normal
practice. That threatened massive default by these banks within the US financial system, which
would have pulled down the entire global financial system.
The Federal Reserve could not lend
directly to these foreign banks and their governing central banks lacked adequate dollar
liquidity to fill the financing gap. The solution was to lend dollars to foreign central banks,
which then made dollar loans to foreign banks in need of dollar roll-over short-term financing.
recovery".
It actually ground to stagnation in the 2001 – 2007 period, but this was
masked by the house price bubble and the false prosperity it created. Stagnation has persisted
after the Great Recession, but the economic distress caused by the recession has finally
triggered awareness of stagnation among elites economists. In a sense, the Great Recession
called out the obvious, just as did the little boy in the Hans Anderson story about the
emperor's new suit
Table 6. U.S. private sector employment creation in the five year period
after the end of recessions for six business cycles with extended expansions. Source: Bureau of
labor statistics and author's calculations. * = January 1980 the beginning of the next
recession Recession end date Employment at recession end date (millions) Employment five years
later (millions) Percent growth in employment Feb 1961 45.0 52.2 16.0% Mar 1975 61.9 74.6*
20.5% Nov 1982 72.8 86.1 18.3% March 1991 90.1 99.5 10.4% Nov 2001 109.8 115.0 4.7% June 2009
108.4 117.1 8.0% The persistence of stagnation after the Great Recession raises the question
"why"? The answer is policy has done nothing to change the structure of the underlying
neoliberal economic model.
That model inevitably produces stagnation because it produces a
structural demand shortage via (i) its impact on income distribution, and (ii) via its design
of globalization which generates massive trade deficits, wage competition and off-shoring of
jobs and investment. In terms of the three-way contest between the government failure
hypothesis, the market failure hypothesis and the destruction of shared prosperity hypothesis,
the economic policy debate during the Great Recession was cast as exclusively between
government failure and market failure.
With the Democrats controlling the Congress and
Presidency after the 2008 election, the market failure hypothesis won out and has framed policy
since then. According to the hypothesis, the financial crisis caused an exceptionally deep
recession that required exceptionally large monetary and fiscal stimulus to counter it and
restore normalcy. Additionally, the market failure hypothesis recommends restoring and
renovating financial regulation, but other than that the neoliberal paradigm is appropriate and
should be deepened In accordance with this thinking, the in-coming Obama administration
affirmed existing efforts to save the system and prevent a downward spiral by supporting the
Bush administration's TARP, the Federal Reserve's first round of QE (November/December 2008)
that provided market liquidity, and the Federal Reserve's FX swap agreement with foreign
central banks
Thereafter, the Obama administration worked to reflate the economy via passage of
the ARRA (2009) which provided significant fiscal stimulus. With the failure to deliver a
V-shaped recovery, candidate Obama became even more vocal about fiscal stimulus However,
reflecting its softcore neoliberal inclinations, the Obama administration then became much less
so when it took office. Thus, the winners of the internal debate about fiscal policy in the
first days of the Obama administration were those wanting more modest fiscal stimulus.4
Furthermore, its analytical frame was one of temporary stimulus with the 4 Since 2009 there has
been some evolution of policy positions characterized by a shift to stronger support for fiscal
stimulus. This has been especially marked in Larry Summers, who was the Obama administration's
goal of long-term fiscal consolidation, which is softcore neoliberal speak for fiscal austerity
Seen in the above light, after the passage of ARRA (2009), the fiscal policy divide between the
Obama administration and hardcore neoliberal Republicans was about the speed and conditions
under which fiscal austerity should be restored.
This attitude to fiscal policy reflects the
dominance within the Democratic Party of "Rubinomics", the Wall Street view associated with
former Treasury Secretary Robert Rubin, that government spending and budget deficits raise real
interest rates and thereby lower growth. According to that view, the US needs long-term fiscal
austerity to offset Social Security and Medicare Side-by-side with the attempt to reflate the
economy, the Obama administration also pushed for major overhaul and tightening of financial
sector regulation via the Dodd- Frank Act (2010).
That accorded with the market failure
hypothesis's claim about the economic crisis and Great Recession being caused by financial
excess permitted by the combination of excessive deregulation, lax regulation and failure to
modernize regulation Finally, and again in accordance with the logic of the market failure
hypothesis, the Obama administration has pushed ahead with doubling-down and further
entrenching the neoliberal policy box. This is most visible in its approach to globalization.
In 2010, free trade agreements modelled after NAFTA were signed with South Korea, Colombia and
Panama. The Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment
Partnership (TTIP), two mega-agreements negotiated in secrecy and apparently bearing chief
economic adviser when it took office. This shift has become a way of rewriting history by
erasing the memory of initial positions. That is also true of the IMF which in 2010-2011 was a
robust supporter of fiscal consolidation in Europe. similar hallmarks to prior trade
agreements, are also being pushed by the Obama administration
The Obama administration's softcore neoliberalism would have likely generated stagnation by itself, but the prospect has
been further strengthened by Republicans.
Thus, in accordance with their point of view,
Republicans have persistently pushed the government failure hypothesis by directing the policy
conversation to excessive regulation and easy monetary policy as the causes of the crisis.
Consequently, they have consistently opposed strengthened financial regulation and demands for
fiscal stimulus.
At the same time, they have joined with softcore neoliberal Democrats
regarding doubling-down on neoliberal box policies, particularly as regards trade and
globalization Paradoxically, the failure to change the overall economic model becomes most
visible by analyzing the policies of the Federal Reserve, which have changed the most
dramatically via the introduction of QE. The initial round of QE (QE1) was followed by QE2 in
November 2010 and QE3 in September 2012, with the Fed shifting from providing short-term
emergency liquidity to buying private sector financial assets.
The goal was to bid up prices of
longer term bonds and other securities, thereby lowering interest rates on longer-term
financing and encouraging investors to buy equities and other riskier financial assets. The
Fed's reasoning was lower long-term rates would stimulate the economy, and higher financial
asset prices would trigger a positive wealth effect on consumption spending. This makes clear
the architecture of policy.
The Obama administration was to provide fiscal stimulus to jump
start the economy; the Fed would use QE to blow air back into the asset price bubble; the
Dodd-Frank Act (2010) would stabilize financial markets; and globalization would be deepened by
further NAFTA-styled international agreements. This is a near-identical model to that which
failed so disastrously. Consequently, stagnation is the logical prognosis.
VII
Déjà vu all over again: back to the 1990s but with a weaker economy
The exclusion of the destruction of shared prosperity hypothesis, combined with the joint
triumph of the market failure and government failure hypotheses, means the underlying economic
model that produced the Great Recession remains essentially unchanged. That failure to change
explains stagnation. It also explains why current conditions smack of "déjà vu
all over again" with the US economy in 2014-15 appearing to have returned to conditions
reminiscent of the mid-1990s.
Just as the 1990s failed to deliver durable prosperity, so too
current optimistic conditions will prove unsustainable absent deeper change The
déjà vu similarities are evident
in the large US trade deficit that has started
to again deteriorate rapidly;
a return of the over-valued dollar problem that promises to
further increase the trade deficit and divert jobs and investment away from the US economy;
a
return to reliance on asset price inflation and house price increases to grow consumer demand
and construction;
a return of declining budget deficits owing to continued policy disposition
toward fiscal austerity; a return of the contradiction that has the Federal Reserve tighten
monetary policy when economic strength triggers rising prices and wages that bump against the
ceiling of the Fed's self-imposed 2 percent inflation target; and renewal of the push for
neoliberal trade agreements
All of these features mean both policy context and policy design
look a lot like the mid-1990s. The Obama administration saved the system but did not change it
Consequently, the economy is destined to repeat the patterns of the 1990s and 2000s. However,
the US economy has also experienced almost twenty more years of neoliberalism which has left
its economic body in worse health than the 1990s. That means the likelihood of delivering
another bubble-based boom is low and stagnation tendencies will likely reassert themselves
after a shorter and weaker period of expansion
This structurally weakened state of the US
economy is evident in the further worsening of income inequality that has occurred during the
Great Recession and subsequent slow recovery.
... ... ...
Thomas I. Palley, Senior Economic Policy Advisor, AFL-CIO Washington, D.C. [email protected]
Among interesting ideas that Mirkowski presented in this lecture are "privatization of science" -- when well paid
intellectual prostitutes produce the reuslt which are expected by their handlers. the other is his thought
on the difference between neoclassical economics and neoliberalism. Neoliberalism believes in state
intervention and this intervention should take the form of enforcing market on all spheres of human
society.
Another interesting idea that neoliberalism in many cases doe not need the success of its ideas.
The failure can also be exploited for enforcing "more market" on the society.
In other words market fundamentalism has all features of civil religion and like in Middle Ages
it is enforced from above. heretics are not burned at the stake but simply ostracized.
Notable quotes:
"... how it is that science came to be subordinate to economics and the very future of nature to be contingent upon the market. ..."
"... As a leading exponent of the Institutional school, he has published formal treatments of financial markets that update Minsky's 'financial instability hypothesis' for the world of computerised derivative trading. ..."
Life and Debt: Living through the Financialisation of the Biosphere
How can it be that the climate crisis, the biodiversity crisis and the deepest financial crisis
since 1930s have done so little to undermine the supremacy of orthodox economics?
The lecture will preview material from Mirowski's new book: Never Lt a Serious Crisis Go to Waste:
How Neoliberalism Survived the Financial Meltdown (Verso, 2013).
In this lecture, Professor Mirowski responds to the question of how it is that science came
to be subordinate to economics and the very future of nature to be contingent upon the market.
Charting the contradictions of the contemporary political landscape, he notes that science denialism,
markets for pollution permits and proposals for geo-engineering can all be understood as political
strategies designed to neutralize the impact of environmentalism, as they all originated in the network
of corporate-sponsored think-tanks that have made neoliberal accounts of society, politics and the
economy so prevalent that even the most profound crises are unable to shake their grip on the political
imagination.
For those of us who are still paying attention, the task of constructing an alternative politics
of science and markets is a vital one.
Philip Mirowski is Carl E. Koch Professor at the University of Notre Dame, Indiana. His most famous
book, More Heat Than Light: Economics as Social Physics (1989) established his reputation as a formidable
critic of the scientific status of neoclassical economics. His Machine Dreams: Economics becomes
a Cyborg Science (2002) presents a history of the Cold War consolidation of American economic orthodoxy
in the same intellectual milieu that produced systems theory, the digital computer, the atomic bomb,
the strategy of Mutually Assured Destruction, and the 'think tank'. The Road from Mont Pelerin: the
Making of the Neoliberal Thought Collective (with Dieter Plewhe, 2009), drawn from the archives of
the Mont Pelerin Society and the Chicago School, presents a scholarly history of neoliberalism: the
political movement initiated by Friedrich Hayek and Milton Friedman in the 1940s, which has since
become the world's dominant philosophy of government.
As a leading exponent of the Institutional school, he has published formal treatments of financial
markets that update Minsky's 'financial instability hypothesis' for the world of computerised derivative
trading.
This lecture is presented by the UTS Cosmopolitan Civil Societies Research Centre and the Australian
Working Group on Financialisation at the University of Sydney.
The idea the a scientist can be a gangster was probably first presented by
Sir Arthur Conan Doyle
in his famous Sherlock Holmes
detective stories. Neoliberalism just made this a reality. Mass production of "scientific gangsters"
is an immanent feature of neoliberalism.
Notable quotes:
"... By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website ..."
"... The Idea That Businesses Exist Solely to Enrich Shareholders Is Harmful Nonsense ..."
"... Neil Fligstein wrote a good book awhile back called The Transformation of Corporate Control that shows how most large manufacturing companies were initially run by engineers, then sales people, then finance people (as corporations came to be seen as bundles of assets as opposed to businesses). I think this transformation paralleled the rise of neoclassical economics. So, not so much "chicken-and-egg" as "class war." In Germany, at least until recently, I believe CEO's of manufacturing firms were still disproportionately engineers. ..."
"... a group of hedge fund activists can suck the value that you've created right out, driving your company down and making you worse off and the company financially fragile ..."
"... That means transforming business education, including the replacement of agency theory with innovation theory ..."
"... since gigantism is the norm, rather than family run farms in a mostly agrarian economy such failures are catastrophic. The linkage between these elephants tends to create systemic risk. Previously, failure was small and isolated. ..."
"... Welcome to our wonderful new world of infinite mutual vulnerability! Risk On! Nuclear weapons, Equifax, Googleamazon, NSApanopticon, FIRE, hacking, crapification The Soviet Union vanished as an entity, many starved, but the mopes there at least still knew how to raise up edible crops and live on "less" and maybe do better collective response to that sharp peak on the entropy curve. Wonder how things might play out exceptionally, here in the Empire? ..."
"... It should be noted that Michael Jensen of HBS, one of the originators of the `maximize shareholder value' of corporate governance, is on some short lists for this year's not-exactly-the-Nobel Prize in Economics. ..."
The Idea That Businesses Exist Solely to Enrich Shareholders Is Harmful Nonsense
In a new
INET paper
featured in the Financial Times , economist William Lazonick lays out a theory about how corporations
can work for everyone – not just a few executives and Wall Streeters. He challenges a set of controversial
ideas that became gospel in business schools and the mainstream media starting in the 1980s. He
sat down with INET's Lynn Parramore to discuss.
Lynn Parramore: Since the 1980s, business schools have touted "agency theory," a controversial
set of ideas meant to explain how corporations best operate. Proponents say that you run a business
with the goal of channeling money to shareholders instead of, say, creating great products or making
any efforts at socially responsible actions such as taking account of climate change. Many now take
this view as gospel, even though no less a business titan than Jack Welch, former CEO of GE, called
the notion that a company should be run to maximize shareholder value "the dumbest idea in the world."
Why did Welch say that?
William Lazonick: Welch made that statement in a 2009
interview
, just ahead of the
news that GE had lost its S&P Triple-A rating in the midst of the financial crisis. He explained
that, "shareholder value is a result, not a strategy" and that a company's "main constituencies are
your employees, your customers and your products." During his tenure as GE CEO from 1981 to 2001,
Welch had an obsession with increasing the company's stock price and hitting quarterly earnings-per-share
targets, but he also understood that revenues come when your company generates innovative products.
He knew that the employees' skills and efforts enable the company to develop those products and sell
them.
If a publicly-listed corporation succeeds in creating innovative goods or services, then shareholders
stand to gain from dividend payments if they hold shares or if they sell at a higher price. But where
does the company's value actually come from? It comes from employees who use their collective and
cumulative learning to satisfy customers with great products. It follows that these employees are
the ones who should be rewarded when the business is a success. We've become blinded to this simple,
obvious logic.
LP: What have these academic theorists missed about how companies really operate and perform?
How have their views impacted our economy and society?
WL: As I show in my new INET paper " Innovative Enterprise Solves the Agency Problem ," agency
theorists don't have a theory of innovative enterprise. That's strange, since they are talking about
how companies succeed.
They believe that to be efficient, business corporations should be run to "maximize shareholder
value." But as I have argued in
another recent INET paper , public shareholders at a company like GE are not investors
in the company's productive capabilities.
LP: Wait, as a stockholder I'm not an investor in the company's capabilities?
WL: When you buy shares of a stock, you are not creating value for the company -- you're just
a saver who buys shares outstanding on the stock market for the sake of a yield on your
financial portfolio. Public shareholders are value extractors , not value creators.
By touting public shareholders as a corporation's value creators, agency theorists lay the groundwork
for some very harmful activities. They legitimize "hedge fund activists," for example. These are
aggressive corporate predators who buy shares of a company on the stock market and then use the power
bestowed upon them by the ill-conceived U.S. proxy voting system, endorsed by the Securities and
Exchange Commission (SEC), to demand that the corporation inflate profits by cutting costs. That
often means mass layoffs and depressed incomes for anybody who remains. In an industry like
pharmaceuticals , the activists also press for extortionate product price increases. The higher
profits tend to boost stock prices for the activists and other shareholders if they sell their shares
on the market.
LP: So the hedge fund activists are extracting value from a corporation instead of creating it,
and yet they are the ones who get enriched.
WL: Right. Agency theory aids and abets this value extraction by advocating, in the name of "maximizing
shareholder value," massive distributions to shareholders in the form of dividends for holding shares
as well as stock buybacks that you hear about, which give manipulative boosts to stock prices. Activists
get rich when they sell the shares. The people who created the value -- the employees -- often get
poorer.
###p"downsize-and-distribute" -- something that corporations have been doing since the 1980s,
which has
resulted in extreme concentration of income among the richest households and the erosion of middle-class
employment opportunities.
LP: You've called stock buybacks -- what happens when a company buys back its own shares from
the marketplace, often to manipulate the stock price upwards -- the "legalized looting of the U.S.
business corporation." What's the problem with this practice?
WL: If you buy shares in Apple, for example, you can get a dividend for holding shares and, possibly,
a capital gain when you sell the shares. Since 2012, when Apple made its first dividend payment since
1996, the company has shelled out $57.4 billion as dividends, equivalent to over 22 percent of net
income. That's fine. But the company has also spent $157.9 billion on stock buybacks, equal to 62
percent of net income.
Yet the only time in its history that Apple ever raised funds on the public stock market was in
1980, when it
collected $97 million in its initial public offering. How can a corporation return capital to
parties that never supplied it with capital? It's a very misleading concept.
The vast majority of people who hold Apple's publicly-listed shares have simply bought outstanding
shares on the stock market. They have contributed nothing to Apple's value-creating capabilities.
That includes veteran corporate raider Carl Icahn, who raked in
$2 billion by holding $3.6 billion in Apple shares for about 32 months, while using his influence
to encourage Apple to do $80.3 billion in buybacks in 2014-2015, the largest repurchases ever. Over
this period, Apple, the most cash-rich company in history, increased its debt by $47.6 billion to
do buybacks so that it would not have to repatriate its offshore profits, sheltered from U.S. corporate
taxes.
There are many ways in which the company could have returned its profits to employees and taxpayers
-- the real value creators -- that are consistent with an innovative business model. Instead,
in doing massive buybacks, Apple's board (which includes former Vice President Al Gore) has endorsed
legalized looting. The SEC bears a lot of blame. It's supposed to protect investors and make sure
financial markets are free of manipulation. But back in 1982, the SEC bought into agency theory under
Reagan and came up with a rule that gives corporate executives a "safe harbor" against charges of
stock-price manipulation when they do billions of dollars of buybacks for the sole purpose of manipulating
their company's stock price.
LP: But don't shareholders deserve some of the profits as part owners of the corporation?
WL: Let's say you buy stock in General Motors. You are just buying a share that is outstanding
on the market. You are contributing nothing to the company. And you will only buy the shares because
the stock market is highly liquid, enabling you to easily sell some or all of the shares at any moment
that you so choose.
In contrast, people who work for General Motors supply skill and effort to generate the company's
innovative products. They are making productive contributions with expectations that, if
the innovative strategy is successful, they will share in the gains -- a bigger paycheck, employment
security, a promotion. In providing their labor services, these employees are the real value creators
whose economic futures are at risk.
LP: This is really different from what a lot of us have been taught to believe. An employee gets
a paycheck for showing up at work -- there's your reward. When we take a job, we probably don't expect
management to see us as risk-takers entitled to share in the profits unless we're pretty high up.
WL: If you work for a company, even if its innovative strategy is a big success, you run a big
risk because under the current regime of "maximizing shareholder value" a group of hedge fund activists
can suck the value that you've created right out, driving your company down and making you worse
off and the company financially fragile. And they are not the only predators you have to deal with.
Incentivized with huge amounts of stock-based pay, senior corporate executives will, and often do,
extract value from the company
for their own personal gain -- at your expense. As Professor Jang-Sup Shin and I argue in a forthcoming
book, senior executives often become value-extracting insiders. And they open the corporate coffers
to hedge fund activists, the value-extracting outsiders. Large institutional investors can use their
proxy votes to support corporate raids, acting as value-extracting enablers.
You put in your ideas, knowledge, time, and effort to make the company a huge success, and still
you may get laid off or find your paycheck shrinking. The losers are not only the mass of corporate
employees -- if you're a taxpayer, your money provides the business corporation with physical infrastructure,
like roads and bridges, and human knowledge, like scientific discoveries, that it needs to innovate
and profit. Senior corporate executives are constantly complaining that they need lower corporate
taxes in order to compete, when what they
really want is more cash to distribute to shareholders and boost stock prices. In that system,
they win but
the rest of us lose .
LP: Some academics say that hedge fund activism is great because it makes a company run better
and produce higher profits. Others say, "No, Wall Streeters shouldn't have more say than executives
who know better how to run the company." You say that both of these camps have got it wrong. How
so?
WL: A company has to be run by executive insiders, and in order to produce innovation these executives
have got to do three things:
First you need a resource-allocation strategy that, in the face of uncertainty, seeks to generate
high-quality, low-cost products. Second, you need to implement that strategy through training, retaining,
motivating, and rewarding employees, upon whom the development and utilization of the organization's
productive capabilities depend. Third, you have to mobilize and leverage the company's cash flow
to support the innovative strategy. But under the sway of the "maximizing shareholder value" idea,
many senior corporate executives have been unwilling, and often unable, to perform these value-creating
functions. Agency theorists have got it so backwards that they actually celebrate the virtues of
"
the value extracting CEO ." How strange is that?
Massive stock buybacks is where the incentives of corporate executives who extract value align
with the interests of hedge fund activists who also want to suck value from a corporation. When they
promote this kind of alliance, agency theorists have in effect served as academic agents of activist
aggression. Lacking a theory of the value-creating firm, or what I call a "theory of innovative enterprise,"
agency theorists cannot imagine what an executive who creates value actually does. They don't see
that it's crucial to align executives' interests with the value-creating investment requirements
of the organizations over which they exercise strategic control. This intellectual deficit is not
unique to agency theorists; it is inherent in their training in
neoclassical economics .
LP: So if shareholders and executives are too often just looting companies to enrich themselves
– "value extraction," as you put it – and not caring about long-term success, who is in a better
position to decide how to run them, where to allocate resources and so on?
WL: We need to redesign corporate-governance institutions to promote the interests of American
households as workers and taxpayers. Because of technological, market, or competitive uncertainties,
workers take the risk that the application of their skills and the expenditure of their efforts will
be in vain. In financing investments in infrastructure and knowledge, taxpayers make productive capabilities
available to business enterprises, but with no guaranteed return on those investments.
These stakeholders need to have representation on corporate boards of directors. Predators, including
self-serving corporate executives and greed-driven shareholder activists, should certainly not have
representation on corporate boards.
LP: Sounds like we've lost sight of what a business needs to do to be successful in the long run,
and it's costing everybody except a handful of senior executives, hedge fund managers, and Wall Street
bankers. How would your "innovation theory" help companies run better and make for a healthier economy
and society?
WL: Major corporations are key to the operation and performance of the economy. So we need a revolution
in corporate governance to get us back on track to stable and equitable economic growth. Besides
changing board representation, I would change the incentives for top executives so that they are
rewarded for allocating corporate resources to value creation. Senior executives should gain along
with the rest of the organization when the corporation is successful in generating competitive products
while sharing the gains with workers and taxpayers.
Innovation theory calls for changing the mindsets and skill sets of senior executives. That means
transforming business education, including the replacement of agency theory with innovation theory.
That also means changing the career paths through which corporate personnel can rise to positions
of strategic control, so that leaders who create value get rewarded and those who extract it are
disfavored. At the institutional level, it would be great to see the SEC, as the regulator of financial
markets, take a giant step in supporting value creation by banning stock buybacks whose purpose it
is to manipulate stock prices.
To get from here to there, we have to replace nonsense with common sense in our understanding
of how business enterprises operate and perform.
Owners come first!
That was the slogan of our former board chair. He didn't disclose to the employees that his compensation
was influenced mightily by how big the net income was. He did tell the employees that they were
well down the hierarchy, after Owners (capital O) and then vendors and then customers. His former
employees deserted in droves.
I'd say that maximizing long-term shareholder value is a great idea the problem is, as is so
often the case these days, short-term thinking.
Driving away a company's best employees makes that quarter's numbers look better, but destroys
long-term value. Same thing for so many other short-term, "I'll be gone, you'll be gone" strategies.
One step to fixing things – change the definition of long-term capital gains from the current
1 year to, say, 5 years. This "one simple trick" would fix everything from the carried interest
loophole to the abuses inherent in the current Wall Street gambling mentality.
We can talk about what is best in theory, but reality is just that, shareholders come first.
They control the board and the CEO and the CEO institutes the will of the shareholders down
into the business entities, determining the level of reinvestment in the business units and the
level of employee compensation. That will continue to be the case until the company goes bankrupt
at which point shareholders are entitled to nothing.
I agree with others that Jack Welch is saying what he is saying after the fact. Way too easy
to do.
>Welch had an obsession with increasing the company's stock price and hitting quarterly
earnings-per-share targets, but he also understood
Yeah so he talks a good game but when he had the reins – one of the most powerful men in the
world meekly (ok, that's a hilarious adjective when applied to Jack Welsh) followed the herd.
Or more accurately, found out where the herd was heading and got out in front of it. The true
sign of modern "leadership".
Or more accurately, found out where the herd was heading and got out in front of it.
The true sign of modern "leadership".
Reminds me of something i have read, supposedly a quite from some politician or other, going
to the tune of "i need to find out where the mob is going, so i can lead them there".
Welch's primary business strategy at GE was to exit every product market in which GE's market
share was not in the top two in the industry (selling them off or closing them down) and reallocate
resources to industries where GE was market dominant, often buying up the competition rather than
truly investing in innovation. A truly awful human being.
As I personally have always believed, Employees have more invested in their employers than
shareholders. Shareholders can sell quickly and have no loyalty. Employees do not enjoy such a
liquid "jobs market."
There also seems to be a turning point in companies, where they change the perception of the
customers form a group to be treasured, to a group who are to b exploited – change the relationship
so the customers become "marks."
I also believe there should be an almost automatic "break -up" provision for companies who
reach a certain market share.
Finally there should be one definition of income, and it should include Wages, Dividends, and
Capital Gains.
there should be an almost automatic "break -up" provision for companies who reach a certain
market share.
Yes, anti-trust enforcement would be nice. Hypothetical President Sanders might actually do
that. Real and hypothetical Presidents Bush, Obama, Romney, B. Clinton, H. Clinton, and Trump
have other priorities.
Sen Bernie Sanders sees right through the neoclassical fetters, blinders, and bullshit. He
recognizes how intellectually and economically stagnant and dangerous it is. He has the most powerful
conceptual, articulate grasp of economics that I've seen the past 40 years. He also, IIRC, had
MMTer Stephanie Kelton as an advisor, and had her advise the Senate Finance Committee. Also notable:
Sen Elizabeth Warren.
The other political operators that you mention are still in thrall to neoclassical assumptions.
They mistake 'takers' for 'makers' and are economically bamboozled. And it has worked out well
for all of them, on a personal basis, so it is not surprising that they don't see the problems.
Anyone actually trying to build an innovative business, OTOH, has to see through the bamboozlement
or else you're out of business pronto.
The class of humans that by inclination and opportunity become C-Suite and VC looters and "owners:"
did they precede the imprimatur of "economists" with their notions of price, value, and crossing
of curves, or did the "economists" do a Martin Luther, nail up a bunch of theses, and preach fire
and brimstone to turn the greedheads loose?
And was/is any other outcome for the species and the planet even possible?
Neil Fligstein wrote a good book awhile back called The Transformation of Corporate Control
that shows how most large manufacturing companies were initially run by engineers, then sales
people, then finance people (as corporations came to be seen as bundles of assets as opposed to
businesses). I think this transformation paralleled the rise of neoclassical economics. So, not
so much "chicken-and-egg" as "class war." In Germany, at least until recently, I believe CEO's
of manufacturing firms were still disproportionately engineers.
"most large manufacturing companies were initially run by engineers, then sales people,
then finance people"
The Lincoln Electric Company, which became famous for its "Incentive Management" program of
compensating employees, was a client of mine. Over three decades I saw it progress through precisely
those stages, and gradually lose every characteristic that had made the company unique.
This post was a genuine pleasure to read. Especially:
If you work for a company, even if its innovative strategy is a big success, you run a big
risk because under the current regime of "maximizing shareholder value" a group of hedge
fund activists can suck the value that you've created right out, driving your company down
and making you worse off and the company financially fragile .
And we've had a government by and for hedge fund managers for about the same amount of time
that we've had economic woes. One problem is that hedge funders like Romney, who actually don't
think about consumer product development, actually don't have to test and deploy products, bring
their bean-counter assumptions to business and make a hash of things. I mention Romney specifically,
because he presents himself to the world as a paragon of economic wisdom.
Romney has a prestigious business school background. Which makes me want to highlight this:
Innovation theory calls for changing the mindsets and skill sets of senior executives.
That means transforming business education, including the replacement of agency theory
with innovation theory .
Just a thought: "innovation theory," like MMT, is maybe just a tool set? "Innovation" includes
"autonomous combat devices," and CRSP-R, and nuclear weapons, and the F-35, and fracking, and
derivatives, and plastics, and charter schools, stuff and ideas that for some of us constitute
"value" are corporations as the category has grown to be, any more likely to "innovate" in the
areas of social improvements and possibilities, or stewardship of the planet, or close down the
toll stations and all the other rent collection scams and extortions they have "innovated" to
date? Or release their chokehold on "policy?"
Says the proponent: "Major corporations are key to the operation and performance of the economy.
So we need a revolution in corporate governance to get us back on track to stable and equitable
economic growth. Besides changing board representation, I would change the incentives for top
executives so they are rewarded for allocating corporate resources to value creation. Senior executives
should gain along with the rest of the organization when the corporation is successful in generating
competitive products while sharing the gains with workers and taxpayers." There seems to be so
much wrong and just more Biz-babble about this, one hardly knows where to start unpacking.
"Major corporations are key?" Really? Monsanto? GM? Bechtel? The Big Banks? And "back on track":
When has the political economy, writ small or large, ever been "on track to stability and equitable
growth," said "growth' itself seemingly one of the pathologies that's killing us? And who's going
to write the entries for the corporate senior executives' dance cards that will measure their
"success," in those feel-good categories?
But it's a good conversation piece, and maybe an opening into Something Better, however us
inherently mostly self-interested, self-pleasing omnivorous predators might define "better "
Badly run companies, naturally extinguish themselves. Unfortunately they take down their customers,
owners, vendors and employees in the process. But the government can step in and either save a
company that otherwise would die, or act as a crony corruption partner on behalf of a well connected
company. Same as it always was.
But since gigantism is the norm, rather than family run farms in a mostly agrarian economy
such failures are catastrophic. The linkage between these elephants tends to create systemic risk.
Previously, failure was small and isolated.
Welcome to our wonderful new world of infinite mutual vulnerability! Risk On! Nuclear weapons,
Equifax, Googleamazon, NSApanopticon, FIRE, hacking, crapification The Soviet Union vanished as
an entity, many starved, but the mopes there at least still knew how to raise up edible crops
and live on "less" and maybe do better collective response to that sharp peak on the entropy curve.
Wonder how things might play out exceptionally, here in the Empire?
It should be noted that Michael Jensen of HBS, one of the originators of the `maximize
shareholder value' of corporate governance, is
on some short lists
for this year's not-exactly-the-Nobel Prize in Economics.
"... Mirowski identifies three basic aspects of neoliberalism that the Left has failed to understand: the movement's intellectual history, the way it has transformed everyday life, and what constitutes opposition to it. Until we come to terms with them, Mirowski suggests, right-wing movements such as the Tea Party (a prominent player in the book) will continue to reign triumphant. ..."
"... Joining a long line of thinkers, most famously Karl Polanyi, Mirowski insists that a key error of the Left has been its failure to see that markets are always embedded in other social institutions. Neoliberals, by contrast, grasp this point with both hands -- and therefore seek to reshape all of the institutions of society, including and especially the state, to promote markets. Neoliberal ascendancy has meant not the retreat of the state so much as its remaking. ..."
"... he also recognizes that the neoliberals themselves have been canny about keeping the real nature of their project hidden through a variety of means. Neoliberal institutions tend to have what he calls a "Russian doll" structure, with the most central ones well hidden from public eyes. Mirowski coins an ironic expression, "the Neoliberal Thought Collective," for the innermost entities that formulate the movement's doctrine. The venerable Mont Pelerin Society is an NTC institution. Its ideas are frequently disseminated through venues which, formally at least, are unconnected to the center, such as academic economics departments. Thus, neoclassical economists spread the gospel of the free market while the grand project of remaking the state falls to others. ..."
"... At the same time as neoliberal commonsense trickles down from above, Mirowski argues that it also wells up from below, reinforced by our daily patterns of life. Social networking sites like Facebook encourage people to view themselves as perpetual cultural entrepreneurs, striving to offer a newer and better version of themselves to the world. Sites like LinkedIn prod their users to present themselves as a fungible basket of skills, adjustable to the needs of any employer, without any essential characteristics beyond a requisite subservience. Classical liberalism always assumes the coherent individual self as its basic unit. Neoliberalism, by contrast, sees people as little more than variable bundles of human capital, with no permanent interests or even attributes that cannot be remade through the market. For Mirowski, the proliferation of these forms of everyday neoliberalism constitute a "major reason the neoliberals have emerged from the crisis triumphant." ..."
"... Finally, Mirowski argues that the Left has too often been sucked in by neoliberalism's loyal opposition. Figures like Joseph Stiglitz or Paul Krugman, while critical of austerity and supportive of the welfare state, accept the fundamental neoclassical economic precepts at the heart of neoliberal policy. Mirowski argues that we must ditch this tradition in its entirety. Even attempts to render its assumptions more realistic -- as in the case of behavioral economics, for example, which takes account of the ways real people diverge from the hyperrationality of homo economicus -- provide little succor for those seeking to overturn the neoliberals. ..."
"... Mirowski's insistence on the centrality of the state to the neoliberal project helps correct the unfortunate tendency of many leftists over the past decade to assent to neoliberal nostrums about the obsolescence of the state. Indeed, Mirowski goes further than many other critics who have challenged the supposed retreat of the state under neoliberalism. ..."
"... Loïc Wacquant, for instance, has described the "centaur state" of neoliberalism, in which a humanist liberalism reigns for the upper classes, while the lower classes face the punitive state apparatus in all its bestiality. ..."
"... Mirowski shows us that the world of the rich under neoliberalism in no way corresponds to the laissez-faire of classical liberalism. The state does not so much leave the rich alone as actively work to reshape the world in their interests, helping to create markets for the derivatives and securities that made (and then destroyed) so many of the fortunes of the recent past. The neoliberal state is an eminently interventionist one, and those mistaking it for the austere nightwatchman of libertarian utopianism have little hope of combating it. ..."
"... Mirowski's concern to disabuse his readers of the notion that the wing of neoliberal doctrine disseminated by neoclassical economists could ever be reformed produces some of the best sections of the book. His portrait of an economics profession in haggard disarray in the aftermath of the crisis is both comic and tragic, as the amusement value of the buffoonery on display diminishes quickly when one realizes the prestige still accorded to these figures. Reading his comprehensive examination of the discipline's response to the crisis, one is reminded of Freud's famous broken kettle. The professional economists' account of their role in the crisis went something like (a) there was no bubble and (b) bubbles are impossible to predict but (c) we knew it was a bubble all along. ..."
"... Though Krugman and Stiglitz have attacked concepts like the efficient markets hypothesis (which holds that prices in a competitive financial market reflect all relevant economic information), Mirowski argues that their attempt to do so while retaining the basic theoretical architecture of neoclassicism has rendered them doubly ineffective. ..."
"... First, their adoption of the battery of assumptions that accompany most neoclassical theorizing -- about representative agents, treating information like any other commodity, and so on -- make it nearly impossible to conclusively rebut arguments like the efficient markets hypothesis. ..."
To understand how a body of thought became an era of capitalism requires more than intellectual
history.
"What is going to come after neoliberalism?" It was the question on many radicals' lips, present
writer included, after the financial crisis hit in 2008. Though few were so sanguine about our prospects
as to repeat the suicidal optimism of previous radical movements ("After Hitler, Our Turn!"), the
feeling of the day was that the era of unfettered marketization was coming to a close. A new period
of what was loosely referred to as Keynesianism would be the inevitable result of a crisis caused
by markets run amok.
Five years later, little has changed. What comes after neoliberalism? More neoliberalism, apparently.
The prospects for a revived Left capable of confronting it appear grim.
Enter Philip Mirowski's Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived
the Financial Meltdown . Mirowski maintains that the true nature of neoliberalism has gone
unrecognized by its would-be critics, allowing the doctrine to flourish even in conditions, such
as a massive financial crisis, that would seem to be inimical to its survival. Leftists keep busy
tilting at the windmill of deregulation as the giants of neoliberalism go on pillaging unmolested.
Mirowski identifies three basic aspects of neoliberalism that the Left has failed to understand:
the movement's intellectual history, the way it has transformed everyday life, and what constitutes
opposition to it. Until we come to terms with them, Mirowski suggests, right-wing movements such
as the Tea Party (a prominent player in the book) will continue to reign triumphant.
The book begins with the war of ideas -- a conflict in which, Mirowski argues, the Left has been
far too generous in taking neoliberals at their word, or at least their best-publicized word. We
have, in effect, been suckered by kindly old Milton Friedman telling us how much better off we'd
all be if the government simply left us "free to choose." But neoliberals have at times been forthright
about their appreciation for the uses of state power. Markets, after all, do not simply create themselves.
Joining a long line of thinkers, most famously Karl Polanyi, Mirowski insists that a key error
of the Left has been its failure to see that markets are always embedded in other social institutions.
Neoliberals, by contrast, grasp this point with both hands -- and therefore seek to reshape all of
the institutions of society, including and especially the state, to promote markets. Neoliberal ascendancy
has meant not the retreat of the state so much as its remaking.
If Mirowski is often acidic about the Left's failure to understand this point, he also recognizes
that the neoliberals themselves have been canny about keeping the real nature of their project hidden
through a variety of means. Neoliberal institutions tend to have what he calls a "Russian doll" structure,
with the most central ones well hidden from public eyes. Mirowski coins an ironic expression, "the
Neoliberal Thought Collective," for the innermost entities that formulate the movement's doctrine.
The venerable Mont Pelerin Society is an NTC institution. Its ideas are frequently disseminated through
venues which, formally at least, are unconnected to the center, such as academic economics departments.
Thus, neoclassical economists spread the gospel of the free market while the grand project of remaking
the state falls to others.
At the same time as neoliberal commonsense trickles down from above, Mirowski argues that
it also wells up from below, reinforced by our daily patterns of life. Social networking sites like
Facebook encourage people to view themselves as perpetual cultural entrepreneurs, striving to offer
a newer and better version of themselves to the world. Sites like LinkedIn prod their users to present
themselves as a fungible basket of skills, adjustable to the needs of any employer, without any essential
characteristics beyond a requisite subservience. Classical liberalism always assumes the coherent
individual self as its basic unit. Neoliberalism, by contrast, sees people as little more than variable
bundles of human capital, with no permanent interests or even attributes that cannot be remade through
the market. For Mirowski, the proliferation of these forms of everyday neoliberalism constitute a
"major reason the neoliberals have emerged from the crisis triumphant."
Finally, Mirowski argues that the Left has too often been sucked in by neoliberalism's loyal
opposition. Figures like Joseph Stiglitz or Paul Krugman, while critical of austerity and supportive
of the welfare state, accept the fundamental neoclassical economic precepts at the heart of neoliberal
policy. Mirowski argues that we must ditch this tradition in its entirety. Even attempts to render
its assumptions more realistic -- as in the case of behavioral economics, for example, which takes
account of the ways real people diverge from the hyperrationality of homo economicus -- provide
little succor for those seeking to overturn the neoliberals.
For Mirowski, these three failures of the Left go a long way toward explaining how neoliberals
have largely escaped blame for a crisis they created. The Left persistently goes after phantoms like
deregulation or smaller government, which neoliberals easily parry by pointing out that the regulatory
apparatus has never been bigger. At the same time, we ignore the deep roots of neoliberal ideology
in everyday life, deceiving ourselves as to the scale of the task in front of us.
Whatever criticisms of Mirowski's analysis are in order, much of it is compelling, particularly
in regard to the intellectual history of the NTC. Mirowski's insistence on the centrality of
the state to the neoliberal project helps correct the unfortunate tendency of many leftists over
the past decade to assent to neoliberal nostrums about the obsolescence of the state. Indeed, Mirowski
goes further than many other critics who have challenged the supposed retreat of the state under
neoliberalism.
Loïc Wacquant, for instance, has described the "centaur state" of neoliberalism, in which
a humanist liberalism reigns for the upper classes, while the lower classes face the punitive state
apparatus in all its bestiality. But Mirowski shows us that the world of the rich under
neoliberalism in no way corresponds to the laissez-faire of classical liberalism. The state does
not so much leave the rich alone as actively work to reshape the world in their interests, helping
to create markets for the derivatives and securities that made (and then destroyed) so many of the
fortunes of the recent past. The neoliberal state is an eminently interventionist one, and those
mistaking it for the austere nightwatchman of libertarian utopianism have little hope of combating
it.
It's here that we begin to see the strategic genius of neoliberal infrastructure, with its teams
of college economics professors teaching the wondrous efficacy of supply and demand on the one hand,
and the think tanks and policy shops engaged in the relentless pursuit of state power on the other.
The Left too often sees inconsistency where in fact there is a division of labor.
Mirowski's concern to disabuse his readers of the notion that the wing of neoliberal doctrine
disseminated by neoclassical economists could ever be reformed produces some of the best sections
of the book. His portrait of an economics profession in haggard disarray in the aftermath of the
crisis is both comic and tragic, as the amusement value of the buffoonery on display diminishes quickly
when one realizes the prestige still accorded to these figures. Reading his comprehensive examination
of the discipline's response to the crisis, one is reminded of Freud's famous broken kettle. The
professional economists' account of their role in the crisis went something like (a) there was no
bubble and (b) bubbles are impossible to predict but (c) we knew it was a bubble all along.
Incoherence notwithstanding, however, little in the discipline has changed in the wake of the
crisis. Mirowski thinks that this is at least in part a result of the impotence of the loyal opposition
-- those economists such as Joseph Stiglitz or Paul Krugman who attempt to oppose the more viciously
neoliberal articulations of economic theory from within the camp of neoclassical economics. Though
Krugman and Stiglitz have attacked concepts like the efficient markets hypothesis (which holds that
prices in a competitive financial market reflect all relevant economic information), Mirowski argues
that their attempt to do so while retaining the basic theoretical architecture of neoclassicism has
rendered them doubly ineffective.
First, their adoption of the battery of assumptions that accompany most neoclassical theorizing
-- about representative agents, treating information like any other commodity, and so on -- make
it nearly impossible to conclusively rebut arguments like the efficient markets hypothesis.
Instead, they end up tinkering with it, introducing a nuance here or a qualification there. This
tinkering causes their arguments to be more or less ignored in neoclassical pedagogy, as economists
more favorably inclined toward hard neoliberal arguments can easily ignore such revisions and hold
that the basic thrust of the theory is still correct. Stiglitz's and Krugman's arguments, while receiving
circulation through the popular press, utterly fail to transform the discipline.
Mirowski also heaps scorn on the suggestion, sometimes made in leftist circles, that the problem
at the heart of neoclassical economics is its assumption of a hyperrational homo economicus
, relentlessly comparing equilibrium states and maximizing utility. Though such a revision may
be appealing to a certain radical romanticism, Mirowski shows that a good deal of work going on under
the label of behavioral economics has performed just this revision, and has come up with results
that don't differ substantively from those of the mainstream. The main problem with neoclassicism
isn't its theory of the human agent but rather its the theory of the market -- which is precisely
what behavioral economics isn't interested in contesting.
In all, Mirowski's indictment of the state of economic theory and its imbrication with the neoliberal
project is devastating. Unfortunately, he proves much less successful in explaining why
things have turned out as they have. The book ascribes tremendous power to the Neoliberal Thought
Collective, which somehow manages to do everything from controlling the economics profession to reshaping
the state to forging a new sense of the human self. The reader is left wondering how the NTC came
to acquire such power. This leads to the book's central flaw: a lack of any theory of the structure
of modern capitalism. Indeed, the NTC seems to operate in something of a vacuum, without ever confronting
other institutions or groups, such as the state or popular movements, with interests and agendas
of their own.
To be fair, Mirowski does offer an explanation for the failure of popular movements to challenge
neoliberalism, largely through his account of "everyday" neoliberalism. At its strongest, the book
identifies important strategic failures, such as Occupy's embrace of "a mimicry of media technologies
as opposed to concerted political mobilization." However, Mirowski extends the argument well beyond
a specific failure of the Occupy movement to propose a general thesis that developments like Facebook
and reality TV have transmitted neoliberal ideology to people who have never read Friedman and Hayek.
In claiming that this embodied or embedded ideology plays an important role in the failure of the
Left, he places far more explanatory weight on the concept of everyday neoliberalism than it is capable
of bearing.
At the simplest level, it's just not clear that everyday neoliberalism constitutes the kind of
block to political action that Mirowski thinks it does. No doubt, many people reading this article
right now simultaneously have another browser tab open to monster.com or LinkedIn, where they are
striving to present themselves as a fungible basket of skills to any employer that will have them.
In this economy, everyone has to hustle, and that means using all available means. That many of these
same readers have probably also done things like organize against foreclosures should give pause
to any blurring of the distinction between using various media technologies and embracing the ideology
Mirowski sees embodied in them.
Indeed, the ubiquity of participation in such technologies by people who support, oppose, or are
apathetic about neoliberalism points to a larger phenomenon on which Mirowski is silent: the labor
market. Put bluntly, it is difficult to imagine anyone engaging in the painfully strained self-advertisement
facilitated by LinkedIn in a labor market with, say, 2-percent unemployment. In such a market, in
which employers were competing for comparatively scarce workers, there would be very little need
for those workers to go through the self-abasing ritual of converting themselves into fungible baskets
of skills. In our current situation, by contrast, where secure and remunerative employment is comparatively
scarce, it is no surprise that people turn to whatever technologies are available to attempt to sell
themselves. As Joan Robinson put it, the only thing worse than being exploited by capitalism is not
being exploited by it.
In evaluating the role of everyday neoliberalism, it is also helpful to move, for the moment,
beyond the perspective of the United States, where the NTC has clearly had great success, and adopt
that of countries where resistance is significantly more developed, such as Venezuela or South Africa.
Especially in the former, popular movements have been notably successful in combating neoliberal
efforts to take over the state and reshape the economy, and have instead pushed the country in the
opposite direction. Is it really plausible that a main reason for this difference is that everyday
neoliberalism is more intense in the United States? I doubt it. For one thing, the strength of Venezuela's
radical movements, in comparison with the US, clearly antedates the developments (social media,
Here Comes Honey Boo Boo , and so on) that Mirowski discusses.
Moreover, it is just as plausible that the entrepreneurial culture he describes is even more extensive
in the slums of the global South, where neoliberal devastation has forced many poor households to
rely on at least one family member engaging in semi-legal arbitrage in goods salvaged from garbage
or made at home. Surely such activities provide a firmer foundation for commercial subjectivity than
having a 401(k). That resistance has grown in such circumstances suggests that looking to malignant
subjectivities to explain popular passivity is an analytic dead-end.
If everyday neoliberalism doesn't explain the comparative weakness of the US left, what does?
This is, of course, the key question, and I can do no more than gesture at an answer here. But I
would suggest that the specific histories of the institutions of the American left, from the Communist
Party to Students for a Democratic Society to labor unions, and the histories of the situations they
confronted, provide us with a more solid foundation for understanding our current weakness than the
hegemony of neoliberal culture does. Moreover, with a theory of capitalism that emphasizes the way
the structure of the system makes it both necessary and very difficult for most people to organize
to advance their interests, it becomes very easy to explain the persistence of a low level of popular
mobilization against neoliberalism in the context of a weakened left.
If Mirowski's account doesn't give us a good basis for explaining why popular resistance has been
so lacking in the US, it nonetheless suggests why he is so concerned with explaining the supposed
dominance of neoliberal ideology among the general population. From the beginning, he raises the
specter of right-wing resurgence, whether in the form of Scott Walker surviving the recall campaign
in Wisconsin, the Tea Party mania of 2010, or the success of right-wing parties in Europe. However,
much of this seems overstated, especially from a contemporary perspective. The Tea Party has, for
all intents and purposes, disappeared from the front lines of American politics, and the Republican
Party, while capable of enacting all kinds of sadistic policies on the state level, has remained
in a state of disarray on the national level since the 2006 congressional elections.
More fundamentally, the argument that the voting public embraces neoliberalism doesn't square
well with recent research by political scientists like Larry Bartels and Martin Gilens emphasizing
the profound disconnect between the policy preferences of the poor and what transpires in Washington.
What appears to be happening is less the general populace's incorporation into neoliberalism than
their exclusion from any institutions that would allow them to change it. Importantly, this alternative
explanation does not rely on the Left conceit that rebellion lurks perpetually just below the placid
social surface, ready to explode into radical insurgency at any moment. It simply contends that the
political passivity of neoliberalism's victims reflects a real diminution of their political options.
Mirowski's failure to address these larger institutional and structural dynamics vitiates much
of the explanatory power of his book. On a purely descriptive level, the sections on the intellectual
history of neoliberalism and the non-crisis of neoclassical economics illuminate many of the hidden
corners of neoliberal ideology. However, if Mirowski is right to suggest that we need to understand
neoliberalism better to be successful in fighting it -- and he surely is -- then much more is needed
to explain neoliberal success and Left failure.
To understand how a body of thought became an era of capitalism requires more than intellectual
history. It demands an account of how capitalism actually works in the period in question, and how
the ideas of a small group of intellectuals came to be the policy preferences of the rich. Mirowski
has given us an excellent foundation for understanding the doctrine, but it will remain for others
to explain its actual development.
"... Two of my criticisms about Krugman/Friedman, etc is that is 'free markets' are supposed to substitute for policy in the government sphere. Except very telling except when we're talking about funding the security state. ..."
"... The other is that the real power of markets is that in a real free market (not a Potemkin one) decisions are made often at the point where needs, information, incentives, and economic power come together. But where the large scale decisions the governments have to make, markets fail. Policy though doesn't. But Neoliberals hate policy. ..."
"... Well, duh. "Policy" and "Capitalism" don't go together and never have. When you enact policy, you destroy the ability to make profit and you get the 1970's. ..."
"... Free market is a neoliberal myth, the cornerstone of neoliberalism as a secular religion. Somewhat similar to "Immaculate Conception" in Catholicism. ..."
"... In reality market almost by definition is controlled by government, who enforces the rules and punish for the transgressions. ..."
"... Also note interesting Orwellian "corruption of the language" trick neoliberals use: neoliberals talk about "free market, not "fair market". ..."
"... After 2008 few are buying this fairy tale about how markets can operate and can solve society problems independently of political power, and state's instruments of violence (the police and the military). This myths is essentially dead. ..."
"... Friedmanism is this sense a flavor of economic Lysenkoism. Note that Lysenko like Friedman was not a complete charlatan. Some of his ideas were pretty sound and withstood the test of time. But that does not make his less evil. ..."
Krugman's refusal to endorse fiscal stimulus unless the economy is at zero lower bound. That is
not only anti-Keynesian, it plays directly into the hands of the debt fear mongers. (Krugman is
also worried about the debt.)
[ Only correct to a degree, economic weakness is recognized. ]
Two of my criticisms about Krugman/Friedman, etc is that is 'free markets' are supposed to substitute
for policy in the government sphere. Except very telling except when we're talking about funding
the security state.
The other is that the real power of markets is that in a real free market (not a Potemkin one)
decisions are made often at the point where needs, information, incentives, and economic power
come together. But where the large scale decisions the governments have to make, markets fail. Policy
though doesn't. But Neoliberals hate policy.
Well, duh. "Policy" and "Capitalism" don't go together and never have. When you enact policy,
you destroy the ability to make profit and you get the 1970's.
likbez -> Gibbon1... , -1
Free market is a neoliberal myth, the cornerstone of neoliberalism as a secular religion.
Somewhat similar to "Immaculate Conception" in Catholicism.
In reality market almost by definition is controlled by government, who enforces the rules
and punish for the transgressions.
Also note interesting Orwellian "corruption of the language" trick neoliberals use: neoliberals
talk about "free market, not "fair market".
After 2008 few are buying this fairy tale about how markets can operate and can solve society
problems independently of political power, and state's instruments of violence (the police and
the military). This myths is essentially dead.
But like Adventists did not disappear when the Second Coming of Christ did not occurred in
predicted timeframe, neoliberals did not did not disappeared after 2008 either. And neither did
neoliberalism, it just entered into zombie, more bloodthirsty stage.
The fact that even the term
"neoliberalism" is prohibited in the US MSM also helped. It is king of stealth ideology, unlike
say, Marxists, neoliberals do not like to identify themselves as such. The behave more like members
of some secret society, free market masons.
Friedmanism is this sense a flavor of economic Lysenkoism. Note that Lysenko like Friedman
was not a complete charlatan. Some of his ideas were pretty sound and withstood the test of time.
But that does not make his less evil.
And for those who try to embellish this person, I would remind his role in 1973 Chilean coup
d'état ( https://en.wikipedia.org/wiki/1973_Chilean_coup_d%27%C3%A9tat
) and bringing Pinochet to power. His "Chicago boys" played a vital role in the events. This
man did has blood on his hands.
Of course, bringing a reign of terror to Chile was not why the CIA had sponsored him. The reason
he was there was to reverse the gains of the Allende social democracy and return control of the
country's economic and political assets to the oligarchy. Pinochet was convinced, through supporters
among the academics in the elite Chilean universities, to try a new series of economic policies,
called "neoliberal" by their founders, the economists of the University of Chicago, led by an
economist by the name of Milton Friedman, who three years later would go on to win a Nobel Prize
in Economics for what he was about to unleash upon Chile.
Friedman and his colleagues were referred to by the Chileans as "the Chicago Boys." The term
originally meant the economists from the University of Chicago, but as time went on, as their
policies began to disliquidate the middle class and poor, it took on a perjorative meaning. That
was because as the reforms were implemented, and began to take hold, the results were not what
Friedman and company had been predicting. But what were the reforms?
The reforms were what has come to be called "neoliberalism." To understand what "neoliberal"
economics is, one must first understand what "liberal" economics are, and so we'll digress briefly
from our look at Chile for a quick
"... The book was The Constitution of Liberty by Frederick Hayek . Its publication, in 1960, marked the transition from an honest, if extreme, philosophy to an outright racket. The philosophy was called neoliberalism . It saw competition as the defining characteristic of human relations. The market would discover a natural hierarchy of winners and losers, creating a more efficient system than could ever be devised through planning or by design. Anything that impeded this process, such as significant tax, regulation, trade union activity or state provision, was counter-productive. Unrestricted entrepreneurs would create the wealth that would trickle down to everyone. ..."
"... But by the time Hayek came to write The Constitution of Liberty, the network of lobbyists and thinkers he had founded was being lavishly funded by multimillionaires who saw the doctrine as a means of defending themselves against democracy. Not every aspect of the neoliberal programme advanced their interests. Hayek, it seems, set out to close the gap. ..."
"... He begins the book by advancing the narrowest possible conception of liberty: an absence of coercion. He rejects such notions as political freedom, universal rights, human equality and the distribution of wealth, all of which, by restricting the behaviour of the wealthy and powerful, intrude on the absolute freedom from coercion he demands. ..."
"... The general thrust is about the gradual hollowing out of the middle class (or more affluent working class, depending on the analytical terms being used), about insecurity, stress, casualisation, rising wage inequality. ..."
"... So Hayek, I feel, is like many theoreticians, in that he seems to want a pure world that will function according to a simple and universal law. The world never was, and never will be that simple, and current economics simply continues to have a blindspot for externalities that overwhelm the logic of an unfettered so-called free market. ..."
"... J.K. Galbraith viewed the rightwing mind as predominantly concerned with figuring out a way to justify the shift of wealth from the immense majority to an elite at the top. I for one regret acutely that he did not (as far as I know) write a volume on his belief in progressive taxation. ..."
"... The system that Clinton developed was an inheritance from George H.W. Bush, Reagan (to a large degree), Carter, with another large assist from Nixon and the Powell Memo. ..."
"... What's changed is the distribution of the gains in GDP growth -- that is in no small part a direct consequence of changes in policy since the 1970s. It isn't some "market place magic". We have made major changes to tax laws since that time. We have weakened collective bargaining, which obviously has a negative impact on wages. We have shifted the economy towards financial services, which has the tendency of increasing inequality. ..."
"... Wages aren't stagnating because people are working less. Wages have stagnated because of dumb policy choices that have tended to incentives looting by those at the top of the income distribution from workers in the lower parts of the economy. ..."
"... "Neoliberalism" is entirely compatible with "growth of the state". Reagan greatly enlarged the state. He privatized several functions and it actually had the effect of increasing spending. ..."
"... When it comes to social safety net programs, e.g. in health care and education -- those programs almost always tend to be more expensive and more complicated when privatized. If the goal was to actually save taxpayer money, in the U.S. at least, it would have made a lot more sense to have a universal Medicare system, rather than a massive patch-work like the ACA and our hybrid market. ..."
"... As for the rest, it's the usual practice of gathering every positive metric available and somehow attributing it to neoliberalism, no matter how tenuous the threads, and as always with zero rigour. Supposedly capitalism alone doubled life expectancy, supports billions of extra lives, invented the railways, and provides the drugs and equipment that keep us alive. As though public education, vaccines, antibiotics, and massive availability of energy has nothing to do with those things. ..."
"... I think the damage was done when the liberal left co-opted neo-liberalism. What happened under Bill Clinton was the development of crony capitalism where for example the US banks were told to lower their credit standards to lend to people who couldn't really afford to service the loans. ..."
The events that led to Donald Trump's election started in England in 1975. At a meeting a few months after Margaret Thatcher became
leader of the Conservative party, one of her colleagues, or so the story goes, was explaining what he saw as the core beliefs of
conservatism. She snapped open her handbag, pulled out a dog-eared book, and
slammed it on the table . "This is what we believe," she said. A political revolution that would sweep the world had begun.
The book was The Constitution
of Liberty by Frederick Hayek . Its publication, in 1960, marked the transition from an honest, if extreme, philosophy to an
outright racket.
The philosophy
was called neoliberalism . It saw competition as the defining characteristic of human relations. The market would discover a
natural hierarchy of winners and losers, creating a more efficient system than could ever be devised through planning or by design.
Anything that impeded this process, such as significant tax, regulation, trade union activity or state provision, was counter-productive.
Unrestricted entrepreneurs would create the wealth that would trickle down to everyone.
This, at any rate, is how it was originally conceived. But by the time Hayek came to write The Constitution of Liberty, the
network of lobbyists and thinkers he had founded was being lavishly funded by multimillionaires who saw the doctrine as a means of
defending themselves against democracy. Not every aspect of the neoliberal programme advanced their interests. Hayek, it seems, set
out to close the gap.
He begins the book by advancing the narrowest possible conception of liberty: an absence of coercion. He rejects such notions
as political freedom, universal rights, human equality and the distribution of wealth, all of which, by restricting the behaviour
of the wealthy and powerful, intrude on the absolute freedom from coercion he demands.
Democracy, by contrast, "is not an ultimate or absolute value". In fact, liberty depends on preventing the majority from exercising
choice over the direction that politics and society might take.
He justifies this position by creating a heroic narrative of extreme wealth. He conflates the economic elite, spending their money
in new ways, with philosophical and scientific pioneers. Just as the political philosopher should be free to think the unthinkable,
so the very rich should be free to do the undoable, without constraint by public interest or public opinion.
The ultra rich are "scouts", "experimenting with new styles of living", who blaze the trails that the rest of society will follow.
The progress of society depends on the liberty of these "independents" to gain as much money as they want and spend it how they wish.
All that is good and useful, therefore, arises from inequality. There should be no connection between merit and reward, no distinction
made between earned and unearned income, and no limit to the rents they can charge.
Inherited wealth is more socially useful than earned wealth: "the idle rich", who don't have to work for their money, can devote
themselves to influencing "fields of thought and opinion, of tastes and beliefs". Even when they seem to be spending money on nothing
but "aimless display", they are in fact acting as society's vanguard.
Hayek softened his opposition to monopolies and hardened his opposition to trade unions. He lambasted progressive taxation and
attempts by the state to raise the general welfare of citizens. He insisted that there is "an overwhelming case against a free health
service for all" and dismissed the conservation of natural resources. It should come as no surprise to those who follow such matters
that he was awarded
the Nobel prize for economics .
By the time Thatcher slammed his book on the table, a lively network of thinktanks, lobbyists and academics promoting Hayek's
doctrines had been established on both sides of the Atlantic,
abundantly financed by some of the world's richest people and
businesses , including DuPont, General Electric, the Coors brewing company, Charles Koch, Richard Mellon Scaife, Lawrence Fertig,
the William Volker Fund and the Earhart Foundation. Using psychology and linguistics to brilliant effect, the thinkers these people
sponsored found the words and arguments required to turn Hayek's anthem to the elite into a plausible political programme.
Thatcherism and Reaganism were not ideologies in their own right: they were just two faces of neoliberalism. Their massive tax
cuts for the rich, crushing of trade unions, reduction in public housing, deregulation, privatisation, outsourcing and competition
in public services were all proposed by Hayek and his disciples. But the real triumph of this network was not its capture of the
right, but its colonisation of parties that once stood for everything Hayek detested.
Bill Clinton and Tony Blair did not possess a narrative of their own. Rather than develop a new political story, they thought
it was sufficient to
triangulate
. In other words, they extracted a few elements of what their parties had once believed, mixed them with elements of what their
opponents believed, and developed from this unlikely combination a "third way".
It was inevitable that the blazing, insurrectionary confidence of neoliberalism would exert a stronger gravitational pull than
the dying star of social democracy. Hayek's triumph could be witnessed everywhere from Blair's expansion of the private finance initiative
to Clinton's
repeal of the Glass-Steagal Act , which had regulated the financial sector. For all his grace and touch, Barack Obama, who didn't
possess a narrative either (except "hope"), was slowly reeled in by those who owned the means of persuasion.
As I warned
in April, the result is first disempowerment then disenfranchisement. If the dominant ideology stops governments from changing
social outcomes, they can no longer respond to the needs of the electorate. Politics becomes irrelevant to people's lives; debate
is reduced to the jabber of a remote elite. The disenfranchised turn instead to a virulent anti-politics in which facts and arguments
are replaced by slogans, symbols and sensation. The man who sank Hillary Clinton's bid for the presidency was not Donald Trump. It
was her husband.
The paradoxical result is that the backlash against neoliberalism's crushing of political choice has elevated just the kind of
man that Hayek worshipped. Trump, who has no coherent politics, is not a classic neoliberal. But he is the perfect representation
of Hayek's "independent"; the beneficiary of inherited wealth, unconstrained by common morality, whose gross predilections strike
a new path that others may follow. The neoliberal thinktankers are now swarming round this hollow man, this empty vessel waiting
to be filled by those who know what they want. The likely result is the demolition of our remaining decencies,
beginning with the agreement to limit global warming .
Those who tell the stories run the world. Politics has failed through a lack of competing narratives. The key task now is to tell
a new story of what it is to be a human in the 21st century. It must be as appealing to some who have voted for Trump and Ukip as
it is to the supporters of Clinton, Bernie Sanders or Jeremy Corbyn.
A few of us have been working on this, and can discern what may be the beginning of a story. It's too early to say much yet, but
at its core is the recognition that – as modern psychology and neuroscience make abundantly clear – human beings, by comparison with
any other animals, are both
remarkably social and
remarkably
unselfish . The atomisation and self-interested behaviour neoliberalism promotes run counter to much of what comprises human
nature.
Hayek told us who we are, and he was wrong. Our first step is to reclaim our humanity.
justamug -> Skytree 16 Nov 2016 18:17
Thanks for the chuckle. On a more serious note - defining neoliberalism is not that easy since it is not a laid out philosophy
like liberalism, or socialism, or communism or facism. Since 2008 the use of the word neoliberalism has increased in frequency
and has come to mean different things to different people.
A common theme appears to be the negative effects of the market on the human condition.
Having read David Harvey's book, and Phillip Mirowski's book (both had a go at defining neoliberalism and tracing its history)
it is clear that neoliberalism is not really coherent set of ideas.
ianfraser3 16 Nov 2016 17:54
EF Schumacher quoted "seek first the kingdom of God" in his epilogue of "Small Is Beautiful: a study of economics as if people
mattered". This was written in the early 1970s before the neoliberal project bit in the USA and the UK. The book is laced with
warnings about the effects of the imposition of neoliberalism on society, people and the planet. The predictions have largely
come true. New politics and economics needed, by leaders who place at the heart of their approach the premise, and fact, that
humans are "by comparison with any other animals, are both remarkably social and remarkably unselfish". It is about reclaiming
our humanity from a project that treats people as just another commodity.
Filipio -> YouDidntBuildThat 16 Nov 2016 17:42
Whoa there, slow down.
Your last post was questioning the reality of neoliberalism as a general policy direction that had become hegemonic across
many governments (and most in the west) over recent decades. Now you seem to be agreeing that the notion does have salience, but
that neoliberalism delivered positive rather than negative consequences.
Well, its an ill wind that blows nobody any good, huh?
Doubtless there were some positive outcomes for particular groups. But recall that the context for this thread is not whether,
on balance, more people benefited from neoliberal policies than were harmed -- an argument that would be most powerful only in
very utilitarian style frameworks of thought (most good for the many, or most harm for only the few). The thread is about the
significance of the impacts of neoliberalism in the rise of Trump. And in specific relation to privatisation (just one dimension
of neoliberalism) one key impact was downsizing (or 'rightsizing'; restructuring). There is a plethora of material, including
sociological and psychological, on the harm caused by shrinking and restructured work-forces as a consequence of privatisation.
Books have been written, even in the business management sector, about how poorly such 'change' was handled and the multiple deleterious
outcomes experienced by employees.
And we're still only talking about one dimension of neoliberalism! Havn't even touched on deregulation yet (notably, labour
market and financial sector).
The general thrust is about the gradual hollowing out of the middle class (or more affluent working class, depending on
the analytical terms being used), about insecurity, stress, casualisation, rising wage inequality.
You want evidence? I'm not doing your research for you. The internet can be a great resource, or merely an echo chamber. The
problem with so many of the alt-right (and this applies on the extreme left as well) is that they only look to confirm their views,
not read widely. Open your eyes, and use your search engine of choice. There is plenty out there. Be open to having your preconceptions
challenged.
RichardErskine -> LECKJ3000 16 Nov 2016 15:38
LECKJ3000 - I am not an economist, but surely the theoretical idealised mechanisms of the market are never realised in practice.
US subsidizing their farmers, in EU too, etc. And for problems that are not only externalities but transnational ones, the idea
that some Hayek mechanism will protect thr ozone layer or limit carbon emissions, without some regulation or tax.
Lord Stern called global warming the greatest market failure in history, but no market, however sophisticated, can deal with
it without some price put on the effluent of product (the excessive CO2 we put into the atmosphere).
As with Montreal and subsequent agreements, there is a way to maintain a level playing field; to promote different substances
for use as refrigerants; and to address the hole in ozone layer; without abandoning the market altogether. Simple is good, because
it avoids over-engineering the interventions (and the unintended consequences you mention).
The same could/ should be true of global warming, but we have left it so late we cannot wait for the (inevitable) fall of fossil
fuels and supremacy of renewables. We need a price on carbon, which is a graduated and fast rising tax essentially on its production
and/or consumption, which has already started to happen ( http://www.worldbank.org/content/dam/Worldbank/document/SDN/background-note_carbon-tax.pdf
), albeit not deep / fast / extensive enough, or international in character, but that will come, if not before the impacts really
bite then soon after.
So Hayek, I feel, is like many theoreticians, in that he seems to want a pure world that will function according to a simple
and universal law. The world never was, and never will be that simple, and current economics simply continues to have a blindspot
for externalities that overwhelm the logic of an unfettered so-called free market.
LionelKent -> greven 16 Nov 2016 14:59
And persistent. J.K. Galbraith viewed the rightwing mind as predominantly concerned with figuring out a way to justify the
shift of wealth from the immense majority to an elite at the top. I for one regret acutely that he did not (as far as I know)
write a volume on his belief in progressive taxation.
RandomLibertarian -> JVRTRL 16 Nov 2016 09:19
Not bad points.
When it comes to social safety net programs, e.g. in health care and education -- those programs almost always tend to be more
expensive and more complicated when privatized. If the goal was to actually save taxpayer money, in the U.S. at least, it would
have made a lot more sense to have a universal Medicare system, rather than a massive patch-work like the ACA and our hybrid market.
Do not forget that the USG, in WW2, took the deliberate step of allowing employers to provide health insurance as a tax-free
benefit - which it still is, being free even from SS and Medicare taxes. In the post-war boom years this resulted in the development
of a system with private rooms, almost on-demand access to specialists, and competitive pay for all involved (while the NHS, by
contrast, increasingly drew on immigrant populations for nurses and below). Next, the large sums of money in the system and a
generous court system empowered a vast malpractice industry. So to call our system in any way a consequence of a free market is
a misnomer.
Entirely state controlled health care systems tend to be even more cost-effective.
Read Megan McArdle's work in this area. The US has had similar cost growth since the 1970s to the rest of the world. The problem
was that it started from a higher base.
Part of the issue is that privatization tends to create feedback mechanism that increase the size of spending in programs.
Even Eisenhower's noted "military industrial complex" is an illustration of what happens when privatization really takes hold.
When government becomes involved in business, business gets involved in government!
Todd Smekens 16 Nov 2016 08:40
Albert Einstein said, "capitalism is evil" in his famous dictum called, "Why Socialism" in 1949. He also called communism,
"evil", so don't jump to conclusions, comrades. ;)
His reasoning was it distorts a human beings longing for the social aspect. I believe George references this in his statement
about people being "unselfish". This is noted by both science and philosophy.
Einstein noted that historically, the conqueror would establish the new order, and since 1949, Western Imperialism has continued
on with the predatory phase of acquiring and implementing democracy/capitalism. This needs to end. As we've learned rapidly, capitalism
isn't sustainable. We are literally overheating the earth which sustains us. Very unwise.
Einstein wrote, "Man is, at one and the same time, a solitary being and a social being. As a solitary being, he attempts to
protect his own existence and that of those who are closest to him, to satisfy his personal desires, and to develop his innate
abilities. As a social being, he seeks to gain the recognition and affection of his fellow human beings, to share in their pleasures,
to comfort them in their sorrows, and to improve their conditions of life. Only the existence of these varied, frequently conflicting,
strivings accounts for the special character of a man, and their specific combination determines the extent to which an individual
can achieve an inner equilibrium and can contribute to the well-being of society."
Personally, I'm glad George and others are working on a new economic and social construct for us "human beings". It's time
we leave the predatory phase of "us versus them", and construct a new society which works for the good of our now, global society.
zavaell -> LECKJ3000 16 Nov 2016 06:28
The problem is that both you and Monbiot fail to mention that your "the spontaneous order of the market" does not recognize
externalities and climate change is outside Hayek's thinking - he never wrote about sustainability or the limits on resources,
let alone the consequences of burning fossil fuels. There is no beauty in what he wrote - it was a cold, mechanical model that
assumed certain human behaviour but not others. Look at today's money-makers - they are nearly all climate change deniers and
we have to have government to reign them in.
aLERNO 16 Nov 2016 04:52
Good, short and concise article. But the FIRST NEOLIBERAL MILESTONE WAS THE 1973 COUP D'ETAT IN CHILE, which not surprisingly
also deposed the first democratically-elected socialist government.
accipiter15 16 Nov 2016 02:34
A great article and explanation of the influence of Hayek on Thatcher. Unfortunately this country is still suffering the consequences
of her tenure and Osborne was also a proponent of her policies and look where we are as a consequence. The referendum gave the
people the opportunity to vent their anger and if we had PR I suspect we would have a greater turn-out and nearly always have
some sort of coalition where nothing gets done that is too hurtful to the population. As for Trump, again his election is an expression
of anger and desperation. However, the American voting system is as unfair as our own - again this has probably been the cause
of the low turn-out. Why should people vote when they do not get fair representation - it is a waste of time and not democratic.
I doubt that Trump is Keynsian I suspect he doesn't have an economic theory at all. I just hope that the current economic thinking
prevailing currently in this country, which is still overshadowed by Thatcher and the free market, with no controls over the city
casino soon collapses and we can start from a fairer and more inclusive base!
JVRTRL -> Keypointist 16 Nov 2016 02:15
The system that Clinton developed was an inheritance from George H.W. Bush, Reagan (to a large degree), Carter, with another
large assist from Nixon and the Powell Memo.
Bill Clinton didn't do it by himself. The GOP did it with him hand-in-hand, with the only resistance coming from a minority
within the Democratic party.
Trump's victory was due to many factors. A large part of it was Hillary Clinton's campaign and the candidate. Part of it was
the effectiveness of the GOP massive resistance strategy during the Obama years, wherein they pursued a course of obstruction
in an effort to slow the rate of the economic recovery (e.g. as evidence of the bad faith, they are resurrecting a $1 trillion
infrastructure bill that Obama originally proposed in 2012, and now that they have full control, all the talk about "deficits"
goes out the window).
Obama and the Democratic party also bear responsibility for not recognizing the full scope of the financial collapse in 2008-2009,
passing a stimulus package that was about $1 trillion short of spending needed to accelerate the recovery by the 2010 mid-terms,
combined with a weak financial regulation law (which the GOP is going to destroy), an overly complicated health care law -- classic
technocratic, neoliberal incremental policy -- and the failure of the Obama administration to hold Wall Street accountable for
criminal misconduct relating to the financial crisis. Obama's decision to push unpopular trade agreements didn't help either.
As part of the post-mortem, the decision to continuing pushing the TPP may have cost Clinton in the rust belt states that went
for Trump. The agreement was unpopular, and her shift on the policy didn't come across as credible. People noticed as well that
Obama was trying to pass the measure through the lame-duck session of Congress post-election. With Trump's election, the TPP is
done too.
JVRTRL daltonknox67 16 Nov 2016 02:00
There is no iron law that says a country has to run large trade deficits. The existence of large trade deficits is usually
a result of policy choices.
Growth also hasn't gone into the tank. What's changed is the distribution of the gains in GDP growth -- that is in no small
part a direct consequence of changes in policy since the 1970s. It isn't some "market place magic". We have made major changes
to tax laws since that time. We have weakened collective bargaining, which obviously has a negative impact on wages. We have shifted
the economy towards financial services, which has the tendency of increasing inequality.
The idea too that people will be "poorer" than in the 1920s and 1930s is just plain ignorant. It has no basis in any of the
data. Wages in the bottom quartile have actually decreased slightly since the 1970s in real terms, but those wages in the 1970s
were still exponentially higher than wages in the 1920s in real terms.
Wages aren't stagnating because people are working less. Wages have stagnated because of dumb policy choices that have tended
to incentives looting by those at the top of the income distribution from workers in the lower parts of the economy. The 2008
bailouts were a clear illustration of this reality. People in industries rigged rules to benefit themselves. They misallocated
resources. Then they went to representatives and taxpayers and asked for a large no-strings attached handout that was effectively
worth trillions of dollars (e.g. hundreds of billions through TARP, trillions more through other programs). As these players become
wealthier, they have an easier time buying politicians to rig rules further to their advantage.
JVRTRL -> RandomLibertarian 16 Nov 2016 01:44
"The tyranny of the 51 per cent is the oldest and most solid argument against a pure democracy."
"Tyranny of the majority" is always a little bizarre, given that the dynamics of majority rule are unlike the governmental
structures of an actual tyranny. Even in the context of the U.S. we had minority rule due to voting restrictions for well over
a century that was effectively a tyranny for anyone who was denied the ability to participation in the elections process. Pure
majorities can go out of control, especially in a country with massive wealth disparities and with weak civic institutions.
On the other hand, this is part of the reason to construct a system of checks and balances. It's also part of the argument
for representative democracy.
"Neoliberalism" is entirely compatible with "growth of the state". Reagan greatly enlarged the state. He privatized several
functions and it actually had the effect of increasing spending.
When it comes to social safety net programs, e.g. in health care and education -- those programs almost always tend to be more
expensive and more complicated when privatized. If the goal was to actually save taxpayer money, in the U.S. at least, it would
have made a lot more sense to have a universal Medicare system, rather than a massive patch-work like the ACA and our hybrid market.
Entirely state controlled health care systems tend to be even more cost-effective. Part of the issue is that privatization
tends to create feedback mechanism that increase the size of spending in programs. Even Eisenhower's noted "military industrial
complex" is an illustration of what happens when privatization really takes hold.
daltonknox67 15 Nov 2016 21:46
After WWII most of the industrialised world had been bombed or fought over with destruction of infrastructure and manufacturing.
The US alone was undamaged. It enjoyed a manufacturing boom that lasted until the 70's when competition from Germany and Japan,
and later Taiwan, Korea and China finally brought it to an end.
As a result Americans born after 1950 will be poorer than the generation born in the 20's and 30's.
This is not a conspiracy or government malfunction. It is a quirk of history. Get over it and try working.
Arma Geddon 15 Nov 2016 21:11
Another nasty neoliberal policy of Reagan and Thatcher, was to close all the mental hospitals, and to sweeten the pill to sell
to the voters, they called it Care in the Community, except by the time those hospitals closed and the people who had to relay
on those institutions, they found out and are still finding out that there is very little care in the community left any more,
thanks to Thatcher's disintegration of the ethos community spirit.
In their neoliberal mantra of thinking, you are on your own now, tough, move on, because you are hopeless and non productive,
hence you are a burden to taxpayers.
Its been that way of thinking for over thirty years, and now the latest group targeted, are the sick and disabled, victims
of the neoliberal made banking crash and its neoliberal inspired austerity, imposed of those least able to fight back or defend
themselves i.e. vulnerable people again!
AlfredHerring GimmeHendrix 15 Nov 2016 20:23
It was in reference to Maggie slapping a copy of Hayek's Constitution of Liberty on the table and saying this is what we believe.
As soon as you introduce the concept of belief you're talking about religion hence completeness while Hayek was writing about
economics which demands consistency. i.e. St. Maggie was just as bad as any Stalinist: economics and religion must be kept separate
or you get a bunch of dead peasants for no reason other than your own vanity.
Ok, religion based on a sky god who made us all is problematic but at least there's always the possibility of supplication
and miracles. Base a religion on economic theory and you're just making sausage of your neighbors kids.
TanTan -> crystaltips2 15 Nov 2016 20:10
If you claim that the only benefit of private enterprise is its taxability, as you did, then why not cut out the middle man
and argue for full state-directed capitalism?
Because it is plainly obvious that private enterprise is not directed toward the public good (and by definition). As we have
both agreed, it needs to have the right regulations and framework to give it some direction in that regard. What "the radical
left" are pointing out is that the idea of private enterprise is now completely out of control, to the point where voters are
disenfranchised because private enterprise has more say over what the government does than the people. Which is clearly a problem.
As for the rest, it's the usual practice of gathering every positive metric available and somehow attributing it to neoliberalism,
no matter how tenuous the threads, and as always with zero rigour. Supposedly capitalism alone doubled life expectancy, supports
billions of extra lives, invented the railways, and provides the drugs and equipment that keep us alive. As though public education,
vaccines, antibiotics, and massive availability of energy has nothing to do with those things.
As for this computer being the invention of capitalism, who knows, but I suppose if one were to believe that everything was
invented and created by capitalism and monetary motives then one might believe that. Energy allotments referred to the limit of
our usage of readily available fossil fuels which you remain blissfully unaware of.
Children have already been educated to agree with you, in no small part due to a fear of the communist regimes at the time,
but at the expense of critical thinking. Questioning the system even when it has plainly been undermined to its core is quickly
labelled "radical" regardless of the normalcy of the query. I don't know what you could possibly think left-wing motives could
be, but your own motives are plain to see when you immediately lump people who care about the planet in with communist idealogues.
If rampant capitalism was going to solve our problems I'm all for it, but it will take a miracle to reverse the damage it has
already done, and only a fool would trust it any further.
YouDidntBuildThat -> Filipio 15 Nov 2016 20:06
Filipo
You argue that a great many government functions have been privatized. I agree. Yet strangely you present zero evidence of
any downsides of that happening. Most of the academic research shows a net benefit, not just on budgets but on employee and customer
satisfaction. See for example.
And despite these privitazation cost savings and alleged neoliberal "austerity" government keeps taking a larger share of our
money, like a malignant cancer. No worries....We're from the government, and we're here to help.
Keypointist 15 Nov 2016 20:04
I think the damage was done when the liberal left co-opted neo-liberalism. What happened under Bill Clinton was the development
of crony capitalism where for example the US banks were told to lower their credit standards to lend to people who couldn't really
afford to service the loans.
It was this that created too big to fail and the financial crisis of 2008. Conservative neo-liberals believe passionately in
competition and hate monopolies. The liberal left removed was was productive about neo-liberalism and replaced it with a kind
of soft state capitalism where big business was protected by the state and the tax payer was called on to bail out these businesses.
THIS more than anything else led to Trump's victory.
"... The word ["neoliberalism"] has become a rhetorical weapon, but it properly names the reigning ideology of our era – one that venerates the logic of the market and strips away the things that make us human. ..."
"... Last summer, researchers at the International Monetary Fund settled a long and bitter debate over "neoliberalism": they admitted it exists. Three senior economists at the IMF, an organisation not known for its incaution, published a paper questioning the benefits of neoliberalism ..."
"... The paper gently called out a "neoliberal agenda" for pushing deregulation on economies around the world, for forcing open national markets to trade and capital, and for demanding that governments shrink themselves via austerity or privatisation. The authors cited statistical evidence for the spread of neoliberal policies since 1980, and their correlation with anaemic growth, boom-and-bust cycles and inequality. ..."
"... In the aftermath of the 2008 financial crisis, it was a way of assigning responsibility for the debacle, not to a political party per se, but to an establishment that had conceded its authority to the market. For the Democrats in the US and Labour in the UK, this concession was depicted as a grotesque betrayal of principle. Bill Clinton and Tony Blair, it was said, had abandoned the left's traditional commitments, especially to workers, in favour of a global financial elite and the self-serving policies that enriched them; and in doing so, had enabled a sickening rise in inequality. ..."
"... Peer through the lens of neoliberalism and you see more clearly how the political thinkers most admired by Thatcher and Reagan helped shape the ideal of society as a kind of universal market ..."
"... Of course the goal was to weaken the welfare state and any commitment to full employment, and – always – to cut taxes and deregulate. But "neoliberalism" indicates something more than a standard rightwing wish list. It was a way of reordering social reality, and of rethinking our status as individuals. ..."
"... In short, "neoliberalism" is not simply a name for pro-market policies, or for the compromises with finance capitalism made by failing social democratic parties. It is a name for a premise that, quietly, has come to regulate all we practise and believe: that competition is the only legitimate organising principle for human activity. ..."
"... No sooner had neoliberalism been certified as real, and no sooner had it made clear the universal hypocrisy of the market, than the populists and authoritarians came to power ..."
"... Against the forces of global integration, national identity is being reasserted, and in the crudest possible terms. What could the militant parochialism of Brexit Britain and Trumpist America have to do with neoliberal rationality? ..."
"... It isn't only that the free market produces a tiny cadre of winners and an enormous army of losers – and the losers, looking for revenge, have turned to Brexit and Trump. There was, from the beginning, an inevitable relationship between the utopian ideal of the free market and the dystopian present in which we find ourselves; ..."
"... That Hayek is considered the grandfather of neoliberalism – a style of thought that reduces everything to economics – is a little ironic given that he was such a mediocre economist. ..."
"... This last is what makes neoliberalism "neo". It is a crucial modification of the older belief in a free market and a minimal state, known as "classical liberalism". In classical liberalism, merchants simply asked the state to "leave us alone" – to laissez-nous faire. Neoliberalism recognised that the state must be active in the organisation of a market economy. The conditions allowing for a free market must be won politically, and the state must be re-engineered to support the free market on an ongoing basis. ..."
"... Hayek had only his idea to console him; an idea so grand it would one day dissolve the ground beneath the feet of Keynes and every other intellectual. Left to its own devices, the price system functions as a kind of mind. And not just any mind, but an omniscient one: the market computes what individuals cannot grasp. Reaching out to him as an intellectual comrade-in-arms, the American journalist Walter Lippmann wrote to Hayek, saying: "No human mind has ever understood the whole scheme of a society At best a mind can understand its own version of the scheme, something much thinner, which bears to reality some such relation as a silhouette to a man." ..."
"... The only social end is the maintenance of the market itself. In its omniscience, the market constitutes the only legitimate form of knowledge, next to which all other modes of reflection are partial, in both senses of the word: they comprehend only a fragment of a whole and they plead on behalf of a special interest. Individually, our values are personal ones, or mere opinions; collectively, the market converts them into prices, or objective facts. ..."
"... According to the logic of Hayek's Big Idea, these expressions of human subjectivity are meaningless without ratification by the market ..."
"... ociety reconceived as a giant market leads to a public life lost to bickering over mere opinions; until the public turns, finally, in frustration to a strongman as a last resort for solving its otherwise intractable problems. ..."
"... What began as a new form of intellectual authority, rooted in a devoutly apolitical worldview, nudged easily into an ultra-reactionary politics ..."
The word ["neoliberalism"] has become a rhetorical weapon, but it properly names the reigning ideology of
our era – one that venerates the logic of the market and strips away the things that make us human.
Last summer, researchers at the International Monetary Fund settled a long and bitter debate over
"neoliberalism": they admitted it exists. Three senior economists at the IMF, an organisation not
known for its incaution, published
a paper questioning
the benefits of neoliberalism. In so doing, they helped put to rest the idea that the word is
nothing more than a political slur, or a term without any analytic power. The paper gently called
out a "neoliberal agenda" for pushing deregulation on economies around the world, for forcing open
national markets to trade and capital, and for demanding that governments shrink themselves via austerity
or privatisation. The authors cited statistical evidence for the spread of neoliberal policies since
1980, and their correlation with anaemic growth, boom-and-bust cycles and inequality.
Neoliberalism is an old term, dating back to the 1930s, but it has been revived as a way of describing
our current politics – or more precisely,
the range of thought allowed by our politics . In the aftermath of the 2008 financial crisis,
it was a way of assigning responsibility for the debacle, not to a political party per se, but to
an establishment that had conceded its authority to the market. For the Democrats in the US and Labour
in the UK, this concession was depicted as a grotesque betrayal of principle. Bill Clinton and Tony
Blair, it was said, had abandoned the left's traditional commitments, especially to workers, in favour
of a global financial elite and the self-serving policies that enriched them; and in doing so, had
enabled a sickening rise in inequality.
Neoliberalism: the idea that swallowed the world – podcast
Over the past few years, as debates have turned uglier, the word has become a rhetorical weapon,
a way for anyone left of centre to incriminate those even an inch to their right. (No wonder centrists
say it's a meaningless insult: they're the ones most meaningfully insulted by it.) But "neoliberalism"
is more than a gratifyingly righteous jibe. It is also, in its way, a pair of eyeglasses.
Peer through the lens of neoliberalism and you see more clearly how the political thinkers most
admired by Thatcher and Reagan helped shape the ideal of society as a kind of universal market
(and
not, for example, a polis, a civil sphere or a kind of family) and of human beings as profit-and-loss
calculators (and not bearers of grace, or of inalienable rights and duties). Of course the goal
was to weaken the welfare state and any commitment to full employment, and – always – to cut taxes
and deregulate. But "neoliberalism" indicates something more than a standard rightwing wish list.
It was a way of reordering social reality, and of rethinking our status as individuals.
Still peering through the lens, you see how, no less than the welfare state, the free market
is a human invention. You see how pervasively we are now urged to think of ourselves as proprietors
of our own talents and initiative, how glibly we are told to compete and adapt. You see the extent
to which a language formerly confined to chalkboard simplifications describing commodity markets
(competition, perfect information, rational behaviour) has been applied to all of society, until
it has invaded the grit of our personal lives, and how the attitude of the salesman has become enmeshed
in all modes of self-expression.
In short, "neoliberalism" is not simply a name for pro-market policies, or for the compromises
with finance capitalism made by failing social democratic parties. It is a name for a premise that,
quietly, has come to regulate all we practise and believe: that competition is the only legitimate
organising principle for human activity.
No sooner had neoliberalism been certified as real, and no sooner had it made clear the universal
hypocrisy of the market, than the populists and authoritarians came to power. In the US, Hillary
Clinton, the neoliberal arch-villain, lost – and to a man who knew just enough
to pretend he hated free trade . So are the eyeglasses now useless? Can they do anything to help
us understand what is broken about British and American politics? Against the forces of global
integration, national identity is being reasserted, and in the crudest possible terms. What could
the militant parochialism of Brexit Britain and Trumpist America have to do with neoliberal rationality?
What possible connection is there between the president – a freewheeling boob – and the bloodless
paragon of efficiency known as the free market?
It isn't only that the free market produces a tiny cadre of winners and an enormous army of
losers – and the losers, looking for revenge, have turned to Brexit and Trump. There was, from the
beginning, an inevitable relationship between the utopian ideal of the free market and the dystopian
present in which we find ourselves; between the market as unique discloser of value and guardian
of liberty, and our current descent into post-truth and illiberalism.
Moving the stale debate about neoliberalism forward begins, I think, with taking seriously the
measure of its cumulative effect on all of us, regardless of affiliation. And this requires returning
to its origins, which have nothing to do with Bill or Hillary Clinton. There once was a group of
people who did call themselves neoliberals, and did so proudly, and their ambition was a total revolution
in thought. The most prominent among them, Friedrich Hayek, did not think he was staking out a position
on the political spectrum, or making excuses for the fatuous rich, or tinkering along the edges of
microeconomics.
He thought he was solving the problem of modernity: the problem of objective knowledge. For Hayek,
the market didn't just facilitate trade in goods and services; it revealed truth. How did his ambition
collapse into its opposite – the mind-bending possibility that, thanks to our thoughtless veneration
of the free market, truth might be driven from public life altogether?
When the idea occurred to Friedrich Hayek in 1936, he knew, with the conviction of a "sudden illumination",
that he had struck upon something new. "How can the combination of fragments of knowledge existing
in different minds," he wrote, "bring about results which, if they were to be brought about deliberately,
would require a knowledge on the part of the directing mind which no single person can possess?"
This was not a technical point about interest rates or deflationary slumps. This was not a reactionary
polemic against collectivism or the welfare state. This was a way of birthing a new world. To his
mounting excitement, Hayek understood that the market could be thought of as a kind of mind.
Adam Smith's "invisible hand" had already given us the modern conception of the market: as an
autonomous sphere of human activity and therefore, potentially, a valid object of scientific knowledge.
But Smith was, until the end of his life, an 18th-century moralist. He thought the market could be
justified only in light of individual virtue, and he was anxious that a society governed by nothing
but transactional self-interest was no society at all. Neoliberalism is Adam Smith without the anxiety.
That Hayek is considered the grandfather of neoliberalism – a style of thought that reduces
everything to economics – is a little ironic given that he was such a mediocre economist. He
was just a young, obscure Viennese technocrat when he was recruited to the London School of
Economics to compete
with, or possibly even dim, the rising star of John Maynard Keynes at Cambridge.
The plan backfired, and Hayek lost out to Keynes in a rout. Keynes's General Theory of Employment,
Interest and Money, published in 1936, was greeted as a masterpiece. It dominated the public discussion,
especially among young English economists in training, for whom the brilliant, dashing, socially
connected Keynes was a beau idéal . By the end of the second world war, many prominent free-marketers
had come around to Keynes's way of thinking, conceding that government might play a role in managing
a modern economy. The initial excitement over Hayek had dissipated. His peculiar notion that doing
nothing could cure an economic depression had been discredited in theory and practice. He later admitted
that he wished his work criticising Keynes would simply be forgotten.
... Hayek built into neoliberalism the assumption that the market provides all necessary protection
against the one real political danger: totalitarianism. To prevent this, the state need only keep
the market free.
This last is what makes neoliberalism "neo". It is a crucial modification of the older belief
in a free market and a minimal state, known as "classical liberalism". In classical liberalism, merchants
simply asked the state to "leave us alone" – to laissez-nous faire. Neoliberalism recognised that
the state must be active in the organisation of a market economy. The conditions allowing for a free
market must be won politically, and the state must be re-engineered to support the free market on
an ongoing basis.
That isn't all: every aspect of democratic politics, from the choices of voters to the decisions
of politicians, must be submitted to a purely economic analysis. The lawmaker is obliged to leave
well enough alone – to not distort the natural actions of the marketplace – and so, ideally, the
state provides a fixed, neutral, universal legal framework within which market forces operate spontaneously.
The conscious direction of government is never preferable to the "automatic mechanism of adjustment"
– ie the price system, which is not only efficient but maximises liberty, or the opportunity for
men and women to make free choices about their own lives.
As Keynes jetted between London and Washington, creating the postwar order, Hayek sat pouting
in Cambridge. He had been sent there during the wartime evacuations; and he complained that he was
surrounded by "foreigners" and "no lack of orientals of all kinds" and "Europeans of practically
all nationalities, but very few of real intelligence".
Stuck in England, without influence or respect, Hayek had only his idea to console him; an
idea so grand it would one day dissolve the ground beneath the feet of Keynes and every other intellectual.
Left to its own devices, the price system functions as a kind of mind. And not just any mind, but
an omniscient one: the market computes what individuals cannot grasp. Reaching out to him as an intellectual
comrade-in-arms, the American journalist Walter Lippmann wrote to Hayek, saying: "No human mind has
ever understood the whole scheme of a society At best a mind can understand its own version of
the scheme, something much thinner, which bears to reality some such relation as a silhouette to
a man."
It is a grand epistemological claim – that the market is a way of knowing, one that radically
exceeds the capacity of any individual mind. Such a market is less a human contrivance, to be manipulated
like any other, than a force to be studied and placated. Economics ceases to be a technique – as
Keynes believed it to be – for achieving desirable social ends, such as growth or stable money.
The only social end is the maintenance of the market itself. In its omniscience, the market constitutes
the only legitimate form of knowledge, next to which all other modes of reflection are partial, in
both senses of the word: they comprehend only a fragment of a whole and they plead on behalf of a
special interest. Individually, our values are personal ones, or mere opinions; collectively, the
market converts them into prices, or objective facts.
... ... ...
The more Hayek's idea expands, the more reactionary it gets, the more it hides behind its pretence
of scientific neutrality – and the more it allows economics to link up with the major intellectual
trend of the west since the 17th century. The rise of modern science generated a problem: if the
world is universally obedient to natural laws, what does it mean to be human? Is a human being simply
an object in the world, like any other? There appears to be no way to assimilate the subjective,
interior human experience into nature as science conceives it – as something objective whose rules
we discover by observation.
... ... ...
More than anyone, even Hayek himself, it was the great postwar Chicago economist Milton Friedman
who helped convert governments and politicians to the power of Hayek's Big Idea. But first he broke
with two centuries of precedent and declared that economics is "in principle independent of any particular
ethical position or normative judgments" and is "an 'objective' science, in precisely the same sense
as any of the physical sciences". Values of the old, mental, normative kind were defective, they
were "differences about which men can ultimately only fight". There is the market, in other words,
and there is relativism.
Markets may be human facsimiles of natural systems, and like the universe itself, they may be
authorless and valueless. But the application of Hayek's Big Idea to every aspect of our lives negates
what is most distinctive about us. That is, it assigns what is most human about human beings – our
minds and our volition – to algorithms and markets, leaving us to mimic, zombie-like, the shrunken
idealisations of economic models. Supersizing Hayek's idea and radically upgrading the price system
into a kind of social omniscience means radically downgrading the importance of our individual capacity
to reason – our ability to provide and evaluate justifications for our actions and beliefs.
As a result, the public sphere – the space where we offer up reasons, and contest the reasons
of others – ceases to be a space for deliberation, and becomes a market in clicks, likes and retweets.
The internet is personal preference magnified by algorithm; a pseudo-public space that echoes the
voice already inside our head. Rather than a space of debate in which we make our way, as a society,
toward consensus, now there is a mutual-affirmation apparatus banally referred to as a "marketplace
of ideas". What looks like something public and lucid is only an extension of our own pre-existing
opinions, prejudices and beliefs, while the authority of institutions and experts has been displaced
by the aggregative logic of big data. When we access the world through a search engine, its results
are ranked, as the founder of Google puts it, "recursively" – by an infinity of individual users
functioning as a market, continuously and in real time.
... ... ...
According to the logic of Hayek's Big Idea, these expressions of human subjectivity are meaningless
without ratification by the market – as Friedman said, they are nothing but relativism, each
as good as any other. When the only objective truth is determined by the market, all other values
have the status of mere opinions; everything else is relativist hot air. But Friedman's "relativism"
is a charge that can be thrown at any claim based on human reason. It is a nonsense insult, as all
humanistic pursuits are "relative" in a way the sciences are not. They are relative to the (private)
condition of having a mind, and the (public) need to reason and understand even when we can't expect
scientific proof. When our debates are no longer resolved by deliberation over reasons, then the
whimsies of power will determine the outcome.
This is where the triumph of neoliberalism meets the political nightmare we are living through
now. "You had one job," the old joke goes, and Hayek's grand project, as originally conceived in
30s and 40s, was explicitly designed to prevent a backslide into political chaos and fascism. But
the Big Idea was always this abomination waiting to happen. It was, from the beginning, pregnant
with the thing it was said to protect against. Society reconceived as a giant market leads to
a public life lost to bickering over mere opinions; until the public turns, finally, in frustration
to a strongman as a last resort for solving its otherwise intractable problems.
... ... ...
What began as a new form of intellectual authority, rooted in a devoutly apolitical worldview,
nudged easily into an ultra-reactionary politics. What can't be quantified must not be real,
says the economist, and how do you measure the benefits of the core faiths of the enlightenment –
namely, critical reasoning, personal autonomy and democratic self-government? When we abandoned,
for its embarrassing residue of subjectivity, reason as a form of truth, and made science the sole
arbiter of both the real and the true, we created a void that pseudo-science was happy to fill.
"... I argue here that it's the abuse of mathematics by Neoclassical economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone. ..."
"... A lady in the audience named Barb Jacobson suggested that using the name Neo-Classical gives it a certain degree of cache and wants you guys to start calling it for what it is: "Scorched Earth Economics." What a great name to use and doesn't it ring true? ..."
This is the brief talk I gave at a conference celebrating 25 years of the
Critical Realist seminar series at Cambridge University. Critical realists argue against the
use of mathematics in economics; I argue here that it's the abuse of mathematics by Neoclassical
economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some
phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone.
I give the example of my own model of Minsky's Financial Instability Hypothesis, which revealed
the possibility of a "Great Moderation" preceding a "Great Recession" before either event had happened.
David Milburn, September 12, 2015 at 9:38 am
Steve,
Last week Prof Bill Mitchell was in London where he gave a talk on re-framing the language
used in the media that carried on the myth of the mainstream groupthink. A lady in the audience
named Barb Jacobson suggested that using the name Neo-Classical gives it a certain degree of
cache and wants you guys to start calling it for what it is: "Scorched Earth Economics." What
a great name to use and doesn't it ring true? Barb Jacobson is spot on!
Sue Madden, September 13, 2015 at 8:28 am
Hi Steve,
I was really amused to see an interview a while back in the New Scientist, with the "research
chief" (!!) at the B of E. If you haven't seen it, you really must:
Opinion Interview with Andy Haldane: "Sackcloth and Ashes on Thread needle Street" New Scientist
25 March 2015
Corbyn was elected leader!!!! Now the sparks will fly. At least a public debate worthy of
the name might at last be heard in our sad country.
Thanks for your work in trying to enlighten us!!
Sue.
"... Comparative advantage is an absurdity. Protectionism is the only way to wealth, yet economists brainwashed generations of 17 and 18 year olds to believe that up was down and free trade would help the US. ..."
"... This is a new "flat earth" cult. And pretty well paid one: academic economists recently became something like lackeys of financial oligarchy and get some crump from the financial oligarchy table in return to promoting neo-classical economics, as a valuable for neoliberals pseudo-science. ..."
"... People who "do not fit" are filtered at early stages, much like in political parties. Nepotism is another factor. Having relatives in high positions (like is the case with Summers), being member of the dominant ethnic clan, or being a friend of an influential economist (like academic Mafiosi Andrei Shleifer) greatly helps... ..."
"... The most interesting part about this pseudoscience is how well it fits together (reminding me Marxism, to which it was a reaction). ..."
Will the American Economic Association ever apologize to the American people
for helping to destroy the country with their absurd, simple-minded free
trade preaching?
Comparative advantage is an absurdity. Protectionism is the only
way to wealth, yet economists brainwashed generations of 17 and 18 year
olds to believe that up was down and free trade would help the US.
AEA should toast itself in the ruins of Ohio, North Carolina or Iowa
- pick any one of the thousands of ruined cities to gloat over.
libezkova -> Will US Economists apologize for destroying the US? Free trade
ruined America,
April 11, 2017 at 04:48 PM
You are simply naïve.
This is a new "flat earth" cult. And pretty well paid one: academic
economists recently became something like lackeys of financial oligarchy
and get some crump from the financial oligarchy table in return to promoting
neo-classical economics, as a valuable for neoliberals pseudo-science.
Tremendous value of neoclassical economics for neoliberals is that they
can use mathiness (trying to imitate physics) to obscure the promotions
of neoliberal thinking. In fact, neoclassical economics is the major tool
of indoctrination into "free market" nonsense of university students.
People who "do not fit" are filtered at early stages, much like in
political parties. Nepotism is another factor. Having relatives in high
positions (like is the case with Summers), being member of the dominant
ethnic clan, or being a friend of an influential economist (like academic
Mafiosi Andrei Shleifer) greatly helps...
People who do not fit but have tremendous talent are often suppressed.
Like was the case with Hyman Minsky (and he was lucky that his career was
at late stages during the full triumph of neoliberalism -- he managed to
get a tenured professor position in 1965 when he was 46)
The most interesting part about this pseudoscience is how well it
fits together (reminding me Marxism, to which it was a reaction).
Set of neoclassical myths such as "efficient market hypothesis", "rational
expectations", "generalized stochastic equilibrium", "invisible hand", comprise
a pretty coherent "secular religion". It may even have some minor value
as a mathematical theory of some fictitious economic space (almost like
in a computer game like Civilization) that never existed and will never
exist.
But it is sold differently and tends to produce predictions and prescriptions
(highly politicized in their nature) in line with neoliberal thinking. That's
why it is maintained and promoted.
So expecting them to apologize is nonsense.
You can benefit from re-reading recent discussion of Karl Polanyi famous
book "The Great Transformation" in this blog
Another interesting question is how neoliberalism and neo-classical economics
survived the financial meltdown. Here Professor Phillip Mirowski has some
interesting insights:
"... This piece sounds like the survival of the fittest in vogue during GE's CEO Jack Welch days. I always add something to the nietzschean sentence. What does not kill you will make you stronger or will physically and mentally disable you for life. What is the what? The what can be the being pushed to play the most distasteful and absurd capitalist games. A hierarchical screwing! ..."
"... We rely on groups to support each other, because individually it is very hard to survive through chaos. That's the reason we are herd or pack animals, and our associations are know as society. ..."
"... When Maggott Thatcher stated 'there is no such thing as society." she was denying our basic survival mechanism to promote her own narrow, neoliberal, selfish ends. ..."
"... The Master and His Emissary ..."
"... The Minimalist Program ..."
"... brain functions across time and under myriad circumstances to generate behaviors ..."
"... i was disappointed to find he simply dove deeper into the proposition that our behavior is determined by our genes. Homo sapiens's prime adaptation is culture, which allows learned behaviors in individuals to be tranformed into adaptations. Our genes do not determine our behavior. We do. And we determine the behavior of the next generation by our choices of what cultural norms to propagate. ..."
"... As Bill Black has pointed out numerous times, the people who brought on the financial collapse were acting completely rationally. They crashed their own corporations not out of irrationality. They did it because they were trying to make themselves rich, and they didn't give a damn about the corporations they were looting in the process. ..."
"... The writer himself should have spent more time focusing on that great white shark because he's failed to notice he's given renewed life to social darwinism. These "highly evolved" institutions he talks about – like banks and hedge funds – are, in fact, keenly honed predators. Which is odd. An advanced social species like ours isn't supposed to prey on other members. His competition model involves people essentially eating other people. He's failed to note any distinction between inter-species and intra-species competition. ..."
diptherio, that was my thought also as I read more and more rapidly
down the article. Fraud seems to have disappeared from financial
discussions altogether.
Convenient is putting it mildly. About 2/3 of the way through I was
waiting for a reference to Keynes, or Minsky, or Marx or -- and this is
from my reading of Geoffrey Ingham's "The Nature of Money" -- Weber but
instead found him coasting into some general behavioral precepts before
landing without reference to anyone. It's like we're witnessing Spinoza
concoct a system, rather than an economist talk about the importance of
dropping models that have been under attack, and via arguments that are
much more specific, for decades.
I think this model handles fraud a lot better than the EMT does. If
you accept that individuals make decisions based on a collection of
subjective heuristics unique to that individual (which may not bear more
than an indirect relationship to rationality) then you need to consider
the possibility that those heuristics might be manipulated by an outside
party for the purpose of separating said individual from their cash.
Which would cover a wide range of behaviours, from fraud to lesser
examples like marketing (which is also not modeled by the EMT).
On a first impression it seems to be at least approximately consistent
with reality and how people behave, which puts it ahead of EMT and most
modern economic theory right off the bat, but it looks like more work is
needed to get it to a point where it becomes a developed model capable of
making falsifiable predictions.
I also take exception to the definition of 'rationality' as the
solution to an optimization problem based on a universal utility function
in which everything can be measured by a single number and is directly
comparable to everything else. To the extent this article uses the term,
it seems to be adopting the standard utility maximization definition,
which means it's more of a minor heresy than a completely new theory.
So adaptive markets are pretty much the same as rational ones, just
taking a slightly more roundabout route to those optimal outcomes?
Never been taken with the invocation of evolution outside biology. A lot
of bacteria get killed before they find a way round a decent antibiotic.
Evolution at the speed of thought
has me quite baffled.
This piece sounds like the survival of the fittest in vogue during
GE's CEO Jack Welch days. I always add something to the nietzschean
sentence. What does not kill you will make you stronger or will
physically and mentally disable you for life. What is the what? The what
can be the being pushed to play the most distasteful and absurd
capitalist games. A hierarchical screwing!
OK I lay my cards on the table as someone who came from economics and
ended up following the psychologists but this sounds like a belated attempt
to reconcile a bunch of findings from experimental economics that were long
known in psychology And which lay out an unduly long list of assumptions in
an attempt to keep some links with economics when the psychologists
recognised back in 1960 that just two assumptions were needed – giving the
flexibility required to explain all sorts of heuristics.
We've seen how biofeedback measurements can be used to study
behavior, We know that human behavior, both the rational and the seemingly
irrational ,
Nonlinear Feedback generates Chaos .
As a result of this feedback As long as those challenges remain
stable over time, their heuristics will eventually adapt to yield
approximately optimal solutions to those challenges.
Nonlinear feedback – Chaos
Assumption = As long as these challenges remain stable .
Chaos removes any possibility of stability.
Good article, but the conclusion is hopeless, because the author is
seeking some assurance of stability where there is none.
Now to the social part of the thought experiment:
We rely on groups to support each other, because individually it is very
hard to survive through chaos. That's the reason we are herd or pack
animals, and our associations are know as society.
When Maggott Thatcher stated 'there is no such thing as society." she was
denying our basic survival mechanism to promote her own narrow, neoliberal,
selfish ends.
I agree with your comment Synoia but I do have a small quibble with
where you say Chaos removes any possibility of stability. Chaos in
markets can lead to financial ruin, which is a form of stability. Think
bank runs. Sudden, unpredictable changes in the market could cause
investors to get cold feet and pull out there money en masse. Once my
bank runs out of money I can predict with reasonable certainty that if I
didn't get my money out in time, I ain't getting it back (well ok, maybe
if I was too big to fail things would be different ). Regardless, you are
right, the author isn't doing his theory any justice in assuming
"challenges remain stable over time".
Financial markets are a product of human evolution, and follow
biological laws instead. The same basic principles of mutation,
competition, and natural selection that determine the life history of a
herd of antelope also apply to the banking industry, albeit with somewhat
different population dynamics.
It's time Lefties admit that the conservatives are right about one thing:
there is such a thing as "human nature." Traditional humanism with its roots
in religion prefers to see us as moral beings who must choose between good
and evil using our "free will." But it's possible that what is really
happening is that our sometimes overpowering instincts are warring with our
reason. Where the conservatives get it wrong is by putting all the emphasis
on the former–the latter not so much.
I have a friend who dislikes dogs and complains about people
anthropomorphizing their pets. My reply is that what motivates animal lovers
is not so much that they are like us but that we are like them. This
recognition–that we are a part of nature–may be a way out of the planet's
looming disaster. Good to see economists taking up a theory that admits
reality.
As a psychologist, when I look at economics (which is often), I see a few
dangerous linear assumptions elaborated in complex calculus trying to apply
LISREL or some other tool to make sense of past economic behavior which is
then projected forward just in time to be proven incorrect – much of the
time.
A theory is no use if it cannot be shown to predict better than what we
have already. We have theories in behavioral science like chaos and
complexity which seem to capture irrationality to some extent. We also have
analytic strategies that do not depend on linear equations – dynamical
models. Such dynamic models have been shown to predict all sorts of
behaviors in the animal world, and work by folks like Josh Epstein has shown
it works for people too.
Maybe thinking more dynamically is key to better understanding – like why
Bitcoins are worth anything more than a bag of Legos – at least Legos are
tangible.
Homo sapiens isn't Homo economicus. Humans have a full set of values,
some of which conflict with straight up monetary gains.
There is some level of honest behavior that is most profitable to a
society. Brazil and the U.S. have had similar level of land and natural
resources but very different outcomes. Corruption is the indicator that
determines which society did better.
Your statement: "Homo sapiens isn't Homo economicus" is the crux of
the issue. This is why so much of modern economic theory is bunk. The
main hypothesis is incorrect. My training is in physics so what we used
to say to denigrate a theory that was based on bad assumptions was
"assume a spherical cow". The economics profession has been harming the
common people with their "spherical cows" for decades but it's all good
because the people Carlin called the real owners have done nicely. At
least until now. I think I'm beginning to here the distant sound of
tumbrils rolling toward the homes of the real owners.
Isn't "Assume a can-opener" or something like that the punch line
for the joke about some guys starving on a desert island when a can of
stew washes up on the beach.
Found it!:
[https://en.wikipedia.org/wiki/Assume_a_can_opener]
"There is a story that has been going around about a physicist, a
chemist, and an economist who were stranded on a desert island with no
implements and a can of food. The physicist and the chemist each
devised an ingenious mechanism for getting the can open; the economist
merely said, "Assume we have a can opener"
yeah I always loved that joke. It ties in with the comments
above made by Tomonthebeach and edr. The psychological stuff I deal
with is careful to stay within the confines of the problem we are
trying to solve, rather than assume some global utility function
underpinned by homo economicus (and which therefore borders on
religion).
Synoia also made a great comment regarding dynamics . if I'd
stayed in academia the next project I'd have been trying to address
was using choice model parameters as "starting values" to implement
agent based models alas that's something I never got to
investigate and that I hope others will.
Reminds me of another joke -- mechanical engineering has made
great progress elaborating the mathematics for a chair with zero
legs and for chairs with one and two legs. There is a lot of
excitement in recent developments in the study of chairs with
three legs but deep mysteries remain in efforts to understand
the mathematics of chairs with more than three legs.
Ayn Rand's Objectivism was just a mating strategy in that it provided
justification for her to poach husbands from heiresses and slap the buns on
dreamboat Alan Greenspan. [Have you read my book? Let's erect that
skyscraper.–Ayn] The economy is just a vehicle for the human genomes of
economists to replicate.
Survival to what? For the most part to a second nature world which is a
cultural construction.
Adaptation to environment, as if the latter had been thrown to us by the
gods of nature or, to give you a more scientific tang, it had been formed by
natural evolutionary forces. Undoubtedly, the most powerful agents through
the institutions they shape and control have a lot to do on how thick is the
air we breath and how heavy is the weight of the world we carry on our
backs. This is not to say that they are not to some degree obliged to their
inheritance and creations or that others can not have any saying, influence
or acquiescence to them.
Adaptations to changes, as if the changes were the inevitable product of
autopiloted supra-objective structures for agents without agents and such
changes-now indeed- brought about the corollary of adaptation.
I still prefer Iain McGilchrist's
The Master and His Emissary
,
for its neurological detail. It covers the same scope as this post, yet also
says some things.
Noam Chomsky was careful to label his latest linguistic approach
The
Minimalist
Program
, because it is not testable by
hypotheses. It is a shame that this point of rigor was lost on his MIT
colleges at the Sloan School.
Whatever. Adaptive Market? Fine. Never admit to the command economy.
Thank you for the reference to Chomsky's recent books on linguistics.
But a quibble -- did Chomsky label his linguistic approach as a 'Program'
because it doesn't generate testable hypotheses? I haven't read "The
Minimalist Program" yet but would think he used the label 'Program' to
indicate he was proposing a broad framework for new research in
linguistics and its implications for human cognition. I believe Chomsky
is presenting the case for his life's work and proposing paths for its
continuation.
The MP is an approach to the subject of linguistics and language.
While it encapsulates theoretical elements, an approach isn't
provable. Linguistics is goofy because it is within the intersection
of mathematics and biology, fields which expose themselves to
different levels of rigor.
The sloppy five key principles of the singular Adaptive Market
Hypothesis are teasing my
brain functions across time and under
myriad circumstances to generate behaviors
other than to retch.
They read like a sell sheet.
Thank you very much! it's too late at night to follow Chomsky's
video but I put it on my list for tomorrow afternoon. I was
surprised by how the price for Chomsky's book "The Minimalist
Program" cost. The video will help me decide whether to spring for
the book now or watch for a used copy..
As for the post -- I am not sure why we were presented with it.
It seems like some warmed over rancid tripe.
Did you mean to reference
https://www.youtube.com/watch?v=Oq5lMTKJiqE
This is titled "The minimalist program and language acqusition". I
have a copy of "What kind of Creatures are We?" and I've watched
several of his videos derivative from his Dewey Lectures.
5. Survival is the ultimate force driving competition, innovation, and
adaptation.
Nope.
This is an old view of evolution. Evolution has evolved more than that.
Survival is just one of the forces. I would argue that randomness is a very
powerful force.
This seems a transparent effort by (some) economists to substitute one
ridiculous paradigm with another. I guess the title says it all.
This was the most hilarious part:
On one side of the divide were the free market economists, who believe
that we are all economically rational adults, governed by the law of
supply and demand. On the other side were the behavioral economists, who
believe that we are all irrational animals, driven by fear and greed like
so many other species of mammals.
So not only is the neoclassical paradigm NOT driven by greed but
apparently it (rational maximization) is the exact opposite! Who knew?
yeah it's why people like me are regarded as traitors . if you
disagree with both sides you simply double your enemies (there is a Terry
Pratchett point in there) ..
it's simply a case of horses for courses in certain circumstances yes
a traditional individual maximisation function works in others the
maximand is some societal one. You can use the same simple psychological
theory of prediction but you have to recognise what the intrinsic
"underlying scale of value" is. The psychologists have known since 1927
that choices can be "irrational" according to neoclassical economics. By
understanding how people make errors they have been streets ahead (e.g.
proving something in 1960 that an economist published in 1974 and got a
"nobel" prize for)
Is this post representative of the deep thought available from the Sloan
School? Drag in some evolution and discussions of our origins as troglodytes -- make a quick review of behavioral theories of the market -- throw in some
Darwin and voilà -- "adaptive markets". If I give up on trying to derive a
theory for how the market operates from a theory for how the individuals in
that market operate why do I care about the rational economic man or the
adaptive man evolving in the jungles of the market. Perhaps I might question
some of the other assumptions used to construct my model of the market and
look more closely at some of the fraud and some of the smarmy trading
practices[as many other commenters noted].
Does the new book by the author of this post explain how to develop the
heuristics which will eventually adapt to yield approximately optimal
solutions -- so some quants can program my adaptive trader computer program?
[Footnote: "adaptive" is cool also for sounding like "adaptive systems" a
systems approach for solving problems like noise cancellation.]
If it takes a theory to beat a theory, this author needs to look under
more rocks. This theory isn't new. Its former iteration was faith healing
(to pray harder). The Adaptive Markets Hypothesis iteration is to flail and
suffocate on the beach longer. I'll give it points though for cleverly
tucking old articles of faith into a pocket protector.
Nice when you don't even have to revise the textbooks to accommodate the
new paradigm. I can already hear the calls for deregulation so that markets
can better adapt.
About a third through I thought I knew where he was going: economic
behavior is predicated on cultural norms, it appears to give rise to laws
where those norms are stable across time, but recent rapid shifts in norms
have created behaviors which are not anticipated by the laws, exposing the
fallacy of calling them laws. Example: short term profit seeking to the
exclusion of all else was not culturally allowed before, but now it is. This
leads to different market behavior. Prior observers were not wrong about the
laws they pronounced. The laws simply relied on moral restraints that were
as ubiquitous, and thus as hidden, as water is to a fish.
Instead, i was disappointed to find he simply dove deeper into the
proposition that our behavior is determined by our genes. Homo sapiens's
prime adaptation is culture, which allows learned behaviors in individuals
to be tranformed into adaptations. Our genes do not determine our behavior.
We do. And we determine the behavior of the next generation by our choices
of what cultural norms to propagate.
Yeah, if he had specified culture to be what most would call
sub-cultures, like the 1%, the professional class, the blue-collar group,
etc., then he would have a broad based, but consistent actions, division
of an economy. But that idea is high heresy; there is not a 'society',
there is only lone individuals acting alone. Quite the crock of BS.
PS. in the interest of 'efficiency' (instead of creating a second
posting, I'll piggyback here), let me say these replys are one reason why
I support this site: After reading the first 3 paragraphs and skimming
his section headers, I recognized the storyline. So I dived into the
replies and learned what was worth learning. Thanks guys, you saved my
blood pressure.
This post could be a Thomas Friedman writing contest winner!
"We've travelled millions of years into our past, looked deep inside the
human brain, and explored the cutting edge of current scientific theories. ,
, , We're neither entirely rational nor entirely irrational, hence neither
the rationalists nor the behavioralists are completely convincing. We need a
new narrative for how markets work, and now have enough pieces of the puzzle
to start putting it all together."
That's not quite at Mr. Friedman's level of mixed metaphorical mayhem . .
. But it's close!
It makes me think of FANTASTIC VOYAGE with Racquel Welch and Donald
Pleasance, when scientists were shrunk to microscopic size and then rode
around inside a human body's ciruclatory system in incredibly small
submarine that lookd like a space ship. Then there was trouble and Donald
Pleasance was sucked up head first into the white blood cell. I'm not making
this up! You can Youtube it and see.
It may be that there's white blood cell like things we don't have the
scientific equipment to see that actually cause booms and busts, but if we
could see them through things like telescopes or time machine space ships
like the Post sort of says, then you could see how they suck people up into
them. This really is cutting edge financial science.
Also, if somebody has never been an animal, then how do they know animals
are driven by fear and greed, That made me stop and think, just at the end
of the first paragraph! That seems like an extraordinary claim to make.
Maybe somebody can be injected with Zebra genes and let loose in Tanzania in
some national park for a few weeks until the genes wash out of their system.
Then they can report back. But until that time, it's only speculation.
As Bill Black has pointed out numerous times, the people who brought on
the financial collapse were acting completely rationally. They crashed their
own corporations not out of irrationality. They did it because they were
trying to make themselves rich, and they didn't give a damn about the
corporations they were looting in the process.
As others have noted, the absence of fraud in this model is telling.
The writer himself should have spent more time focusing on that great
white shark because he's failed to notice he's given renewed life to social
darwinism. These "highly evolved" institutions he talks about – like banks
and hedge funds – are, in fact, keenly honed predators. Which is odd. An
advanced social species like ours isn't supposed to prey on other members.
His competition model involves people essentially eating other people. He's
failed to note any distinction between inter-species and intra-species
competition.
The gene selection he invokes is far more complicated. We live in
societies whose rules determines winners and losers. What, in essense, is
this competition best optimizing? Does "survival" in this system mean
optimizing each individual's potential? What is it we want "economic
survival" to mean? He talks about environmental adaptation but leaves out
the fact we define our own environment. There's no way to efface politics.
"... Main image: Maxian/Getty/iStockphoto/Guardian Design ..."
"... This is an edited extract from Twilight of the Money Gods: Economics as a Religion and How it all Went Wrong by John Rapley, published by Simon & Schuster on 13 July at £20. To order a copy for £17, go to ..."
"... bookshop.theguardian.com ..."
"... or call 0330 333 6846. Free UK p&p over £10, online orders only. Phone orders min p&p of £1.99. ..."
Tuesday 11 July 2017
01.00 EDT
Last modified on Tuesday 11 July 2017
11.20 EDT
A
lthough
Britain has an established church, few of us today pay it much mind. We follow an
even more powerful religion, around which we have oriented our lives: economics.
Think about it.
Economics
offers a comprehensive doctrine with a moral code promising
adherents salvation in this world; an ideology so compelling that the faithful
remake whole societies to conform to its demands. It has its gnostics, mystics and
magicians who conjure money out of thin air, using spells such as "derivative" or
"structured investment vehicle". And, like the old religions it has displaced, it
has its prophets, reformists, moralists and above all, its high priests who uphold
orthodoxy in the face of heresy.
Over time, successive economists slid into the
role we had removed from the churchmen: giving us guidance on how to reach a
promised land of material abundance and endless contentment. For a long time, they
seemed to deliver on that promise, succeeding in a way few other religions had
ever done, our incomes rising thousands of times over and delivering a cornucopia
bursting with new inventions, cures and delights.
This was our heaven, and richly did we reward the economic priesthood, with
status, wealth and power to shape our societies according to their vision. At the
end of the 20th century, amid an economic boom that saw the western economies
become richer than humanity had ever known, economics seemed to have conquered the
globe. With nearly every country on the planet adhering to the same free-market
playbook, and with university students flocking to do degrees in the subject,
economics seemed to be attaining the goal that had eluded every other religious
doctrine in history: converting the entire planet to its creed.
Yet if history teaches anything, it's that whenever economists feel certain
that they have found the holy grail of endless peace and prosperity,
the end of the present regime is nigh.
On the eve of
the 1929 Wall Street crash
, the American economist Irving Fisher advised
people to go out and buy shares; in the 1960s, Keynesian economists said there
would never be another recession because they had perfected the tools of demand
management.
The 2008 crash was no different. Five years earlier, on 4 January 2003, the
Nobel laureate Robert Lucas had delivered a triumphal presidential address to the
American Economics Association. Reminding his colleagues that macroeconomics had
been born in the depression precisely to try to prevent another such disaster ever
recurring, he declared that he and his colleagues had reached their own end of
history: "Macroeconomics in this original sense has succeeded," he instructed the
conclave. "Its central problem of depression prevention has been solved."
No sooner do we persuade ourselves that the economic priesthood has finally
broken the old curse than it comes back to haunt us all: pride always goes before
a fall. Since the crash of 2008, most of us have watched our living standards
decline. Meanwhile, the priesthood seemed to withdraw to the cloisters, bickering
over who got it wrong. Not surprisingly, our faith in the "experts" has
dissipated.
Hubris, never a particularly good thing, can be especially dangerous in
economics, because its scholars don't just observe the laws of nature; they help
make them. If the government, guided by its priesthood, changes the
incentive-structure of society to align with the assumption that people behave
selfishly, for instance, then lo and behold, people will start to do just that.
They are rewarded for doing so and penalised for doing otherwise. If you are
educated to believe greed is good, then you will be more likely to live
accordingly.
The hubris in economics came not from a moral failing among economists, but
from a false conviction: the belief that theirs was a science. It neither is nor
can be one, and has always operated more like a church. You just have to look at
its history to realise that.
T
he American
Economic Association,
to which Robert
Lucas gave his address, was created in 1885, just when economics was starting to
define itself as a distinct discipline. At its first meeting, the association's
founders proposed a platform that declared: "The conflict of labour and capital
has brought to the front a vast number of social problems whose solution is
impossible without the united efforts of church, state and science." It would be a
long path from that beginning to the market evangelism of recent decades.
Yet even at that time, such social activism provoked controversy. One of the
AEA's founders, Henry Carter Adams, subsequently delivered an address at Cornell
University in which he defended free speech for radicals and accused
industrialists of stoking xenophobia to distract workers from their mistreatment.
Unknown to him, the New York lumber king and Cornell benefactor Henry Sage was in
the audience. As soon as the lecture was done, Sage stormed into the university
president's office and insisted: "This man must go; he is sapping the foundations
of our society." When Adams's tenure was subsequently blocked, he agreed to
moderate his views. Accordingly, the final draft of the AEA platform expunged the
reference to laissez-faire economics as being "unsafe in politics and unsound in
morals".
So was set a pattern that has persisted to this day. Powerful political
interests – which historically have included not only rich industrialists, but
electorates as well – helped to shape the canon of economics, which was then
enforced by its scholarly community.
Once a principle is established as orthodox, its observance is enforced in much
the same way that a religious doctrine maintains its integrity: by repressing or
simply eschewing heresies. In Purity and Danger,
the anthropologist Mary Douglas
observed the way taboos functioned to help
humans impose order on a seemingly disordered, chaotic world. The premises of
conventional economics haven't functioned all that differently. Robert Lucas once
noted approvingly that by the late 20th century, economics had so effectively
purged itself of Keynesianism that "the audience start(ed) to whisper and giggle
to one another" when anyone expressed a Keynesian idea at a seminar. Such
responses served to remind practitioners of the taboos of economics: a gentle
nudge to a young academic that such shibboleths might not sound so good before a
tenure committee. This preoccupation with order and coherence may be less a
function of the method than of its practitioners. Studies of personality traits
common to various disciplines have discovered that economics, like engineering,
tends to attract people with an unusually strong preference for order, and a
distaste for ambiguity.
The irony is that, in its determination to make itself a science that can reach
hard and fast conclusions, economics has had to dispense with scientific method at
times. For starters, it rests on a set of premises about the world not as it is,
but as economists would like it to be. Just as any religious service includes a
profession of faith, membership in the priesthood of economics entails certain
core convictions about human nature. Among other things, most economists believe
that we humans are self-interested, rational, essentially individualistic, and
prefer more money to less. These articles of faith are taken as self-evident. Back
in the 1930s, the great economist Lionel Robbins described his profession in a way
that has stood ever since as a cardinal rule for millions of economists. The
field's basic premises came from "deduction from simple assumptions reflecting
very elementary facts of general experience" and as such were "as universal as the
laws of mathematics or mechanics, and as little capable of 'suspension'".
Deducing laws from premises deemed eternal and beyond question is a
time-honoured method. For thousands of years, monks in medieval monasteries built
a vast corpus of scholarship doing just that, using a method perfected by Thomas
Aquinas known as scholasticism. However, this is not the method used by
scientists, who tend to require assumptions to be tested empirically before a
theory can be built out of them.
But, economists will maintain, this is precisely what they themselves do – what
sets them apart from the monks is that they must still test their hypotheses
against the evidence. Well, yes, but this statement is actually more problematic
than many mainstream economists may realise. Physicists resolve their debates by
looking at the data, upon which they by and large agree. The data used by
economists, however, is much more disputed. When, for example, Robert Lucas
insisted that Eugene Fama's efficient-markets hypothesis – which maintains that
since a free market collates all available information to traders, the prices it
yields can never be wrong – held true despite "a flood of criticism", he did so
with as much conviction and supporting evidence as his fellow economist Robert
Shiller had mustered in rejecting the hypothesis. When the Swedish central bank
had to decide who would win the 2013 Nobel prize in economics, it was torn between
Shiller's claim that markets frequently got the price wrong and Fama's insistence
that markets always got the price right. Thus it opted to split the difference and
gave both men the medal
– a bit of Solomonic wisdom that would have elicited
howls of laughter had it been a science prize. In economic theory, very often, you
believe what you want to believe – and as with any act of faith, your choice of
heads or tails will as likely reflect sentimental predisposition as scientific
assessment.
It's no mystery why the data used by economists and other social scientists so
rarely throws up incontestable answers: it is
human
data. Unlike people,
subatomic particles don't lie on opinion surveys or change their minds about
things. Mindful of that difference, at his own presidential address to the
American Economic Association nearly a half-century ago, another Nobel laureate,
Wassily Leontief, struck a modest tone. He reminded his audience that the data
used by economists differed greatly from that used by physicists or biologists.
For the latter, he cautioned, "the magnitude of most parameters is practically
constant", whereas the observations in economics were constantly changing. Data
sets had to be regularly updated to remain useful. Some data was just simply bad.
Collecting and analysing the data requires civil servants with a high degree of
skill and a good deal of time, which less economically developed countries may not
have in abundance. So, for example, in 2010 alone, Ghana's government – which
probably has one of the better data-gathering capacities in Africa –
recalculated its economic output by 60%
. Testing your hypothesis before and
after that kind of revision would lead to entirely different results.
Leontief wanted economists to spend more time getting to know their data, and
less time in mathematical modelling. However, as he ruefully admitted, the trend
was already going in the opposite direction. Today, the economist who wanders into
a village to get a deeper sense of what the data reveals is a rare creature. Once
an economic model is ready to be tested, number-crunching ends up being done
largely at computers plugged into large databases. It's not a method that fully
satisfies a sceptic. For, just as you can find a quotation in the Bible that will
justify almost any behaviour, you can find human data to support almost any
statement you want to make about the way the world works.
That's why ideas in economics can go in and out of fashion. The progress of
science is generally linear. As new research confirms or replaces existing
theories, one generation builds upon the next. Economics, however, moves in
cycles. A given doctrine can rise, fall and then later rise again. That's because
economists don't confirm their theories in quite the same way physicists do, by
just looking at the evidence. Instead, much as happens with preachers who gather a
congregation, a school rises by building a following – among both politicians and
the wider public.
For example, Milton Friedman was one of the most influential economists of the
late 20th century. But he had been around for decades before he got much of a
hearing. He might well have remained a marginal figure had it not been that
politicians such as Margaret Thatcher and Ronald Reagan were sold on his belief in
the virtue of a free market. They sold that idea to the public, got elected, then
remade society according to those designs. An economist who gets a following gets
a pulpit. Although scientists, in contrast, might appeal to public opinion to
boost their careers or attract research funds, outside of pseudo-sciences, they
don't win support for their theories in this way.
However, if you think describing economics as a religion debunks it, you're
wrong. We need economics. It can be – it has been – a force for tremendous good.
But only if we keep its purpose in mind, and always remember what it can and can't
do.
T
he Irish
have been known to describe
their
notionally Catholic land as one where a thin Christian veneer was painted over an
ancient paganism. The same might be said of our own adherence to today's
neoliberal orthodoxy, which stresses individual liberty, limited government and
the free market. Despite outward observance of a well-entrenched doctrine, we
haven't fully transformed into the economic animals we are meant to be. Like the
Christian who attends church but doesn't always keep the commandments, we behave
as economic theory predicts only when it suits us. Contrary to the tenets of
orthodox economists, contemporary research suggests that, rather than seeking
always to maximise our personal gain, humans still remain reasonably altruistic
and selfless. Nor is it clear that the endless accumulation of wealth always makes
us happier. And when we do make decisions, especially those to do with matters of
principle, we seem not to engage in the sort of rational "utility-maximizing"
calculus that orthodox economic models take as a given. The truth is, in much of
our daily life
we don't fit the model
all that well.
For decades, neoliberal evangelists replied to such objections by saying it was
incumbent on us all to adapt to the model, which was held to be immutable – one
recalls Bill Clinton's depiction of neoliberal globalisation, for instance, as
a "force of nature"
. And yet, in the wake of the 2008 financial crisis and the
consequent recession, there has been a turn against globalisation across much of
the west. More broadly, there has been
a wide repudiation of the "experts"
, most notably in the 2016 US election and
Brexit referendum.
It would be tempting for anyone who belongs to the "expert" class, and to the
priesthood of economics, to dismiss such behaviour as a clash between faith and
facts, in which the facts are bound to win in the end. In truth, the clash was
between two rival faiths – in effect, two distinct moral tales. So enamoured had
the so-called experts become with their scientific authority that they blinded
themselves to the fact that their own narrative of scientific progress was
embedded in a moral tale. It happened to be a narrative that had a happy ending
for those who told it, for it perpetuated the story of their own relatively
comfortable position as the reward of life in
a meritocratic society
that blessed people for their skills and flexibility.
That narrative made no room for the losers of this order, whose resentments were
derided as being a reflection of their boorish and retrograde character – which is
to say, their fundamental vice. The best this moral tale could offer everyone else
was incremental adaptation to an order whose caste system had become calcified.
For an audience yearning for a happy ending, this was bound to be a tale of woe.
The failure of this grand narrative is not, however, a reason for students of
economics to dispense with narratives altogether. Narratives will remain an
inescapable part of the human sciences for the simple reason that they are
inescapable for humans. It's funny that so few economists get this, because
businesses do. As the Nobel laureates George Akerlof and Robert Shiller write in
their recent book,
Phishing for Phools
, marketers use them all the time, weaving stories in the
hopes that we will place ourselves in them and be persuaded to buy what they are
selling. Akerlof and Shiller contend that the idea that free markets work
perfectly, and the idea that big government is the cause of so many of our
problems, are part of a story that is actually misleading people into adjusting
their behaviour in order to fit the plot. They thus believe storytelling is a "new
variable" for economics, since "the mental frames that underlie people's
decisions" are shaped by the stories they tell themselves.
Economists arguably do their best work when they take the stories we have given
them, and advise us on how we can help them to come true. Such agnosticism demands
a humility that was lacking in economic orthodoxy in recent years. Nevertheless,
economists don't have to abandon their traditions if they are to overcome the
failings of a narrative that has been rejected. Rather they can look within their
own history to find a method that avoids the evangelical certainty of orthodoxy.
In his 1971 presidential address to the American Economic Association, Wassily
Leontief counselled against the dangers of self-satisfaction. He noted that
although economics was starting to ride "the crest of intellectual respectability
an uneasy feeling about the present state of our discipline has been growing in
some of us who have watched its unprecedented development over the last three
decades".
Noting that pure theory was making economics more remote from day-to-day
reality, he said the problem lay in "the palpable inadequacy of the scientific
means" of using mathematical approaches to address mundane concerns. So much time
went into model-construction that the assumptions on which the models were based
became an afterthought. "But," he warned – a warning that the sub-prime boom's
fascination with mathematical models, and the bust's subsequent revelation of
their flaws, now reveals to have been prophetic – "it is precisely the empirical
validity of these assumptions on which the usefulness of the entire exercise
depends."
Leontief thought that economics departments were increasingly hiring and
promoting young economists who wanted to build pure models with little empirical
relevance. Even when they did empirical analysis, Leontief said economists seldom
took any interest in the meaning or value of their data. He thus called for
economists to explore their assumptions and data by conducting social, demographic
and anthropological work, and said economics needed to work more closely with
other disciplines.
Leontief's call for humility some 40 years ago stands as a reminder that the
same religions that can speak up for human freedom and dignity when in opposition,
can become obsessed with their rightness and the need to purge others of their
wickedness once they attain power. When the church retains its distance from
power, and a modest expectation about what it can achieve, it can stir our minds
to envision new possibilities and even new worlds. Once economists apply this kind
of sceptical scientific method to a human realm in which ultimate reality may
never be fully discernible, they will probably find themselves retreating from
dogmatism in their claims.
Paradoxically, therefore, as economics becomes more truly scientific, it will
become less of a science. Acknowledging these limitations will free it to serve us
once more.
Main image: Maxian/Getty/iStockphoto/Guardian Design
This is an edited extract from Twilight of the Money Gods: Economics as a
Religion and How it all Went Wrong by John Rapley, published by Simon & Schuster
on 13 July at £20. To order a copy for £17, go to
bookshop.theguardian.com
or call 0330 333 6846. Free UK p&p over
£10, online orders only. Phone orders min p&p of £1.99.
This guy is funny (and actually rather clueless, Summers is much better
) defender of "Flat Earth" theory:
== quote ==
A related criticism of macroeconomics is that it ignores financial factors.
Macroeconomists supposedly failed to anticipate the crisis because they
were enamored by models where financial markets and institutions were absent,
as all financing was assumed to be efficient (De Grawe, 2009, Skidelsky,
2009). The field would be in denial if it continued to ignore these macro-financial
links.
One area where macroeconomists have perhaps more of an influence is in
monetary policy. Central banks hire more PhD economists than any other policy
institution, and in the United States, the current and past chair of the
Federal Reserve are distinguished academic macroeconomists, as have been
several members of the FOMC over the years. In any given week, there are
at least one conference and dozens of seminars hosted at central banks all
over the world where the latest academic research is discussed. The speeches
of central bank governors refer to academic papers in macroeconomics more
than those by any other policymaker.
... ... ...
A separate criticism of macroeconomic policy advice accuses it of being
politically biased. Since the early days of the field, with Keynes and the
Great Depression, macroeconomics was associated with aggressive and controversial
policies and with researchers that wore other hats as public intellectuals.
Even more recently, during the rational expectations microfoundations revolution
of the 1970s, early papers had radical policy recommendations, like the
result that all systematic aggregate-demand policy is ineffective, and some
leading researchers had strong political views. Romer (2016) criticizes
modern macroeconomics for raising questions about what should be obvious
truths, like the effect of monetary policy on output. He lays blame on the
influence that Edward Prescott, Robert Lucas and Thomas Sargent had on field.
Krugman (2009) in turn, claims the problem of macroeconomics is ideology,
and in particular points to the fierce battles between different types of
macroeconomists in the 1970s and 1980s, described by Hall (1976) in terms
of saltwater versus freshwater camps.
...Macroeconomists, instead, are asked to routinely produce forecasts
to guide fiscal and monetary policy, and are perhaps too eager to comply.
"Is something really wrong with macroeconomics? - Ricardo Reis"
I appreciate that the author thinks the solution is to have young people
look at economics with fresh eyes to bring up new approaches this is a quote
when describing how they pick fresh young economists to go on a tour and
present their findings:
"the choices are arguably not biased in the direction of a particular
field, although they are most likely all in the mainstream tradition"
unfortunately the mainstream tradition is full of biase and restrictions
about what is allow to be considered and what is not so if all you allow
are people who are expanding on the "mainstream tradition" I think you are
severely restricting yourself further a lot of good ideas from the past
have been discarded, not allowed, ridiculed, not really analyzed or expanded
upon.... presented or taught or represented by people who have never studied
the ideas directly got them third hand or 5th hand , from people who misrepresent
the ideas in the first place
want fresh new ideas? go back to the beginning of economics, understand
over and over what the founds say , go read Adam Smith directly, read the
generally theory by Keynes directly don't just assume the verion samuelson
gave us of Keynes represents what he actually said, or Hansen or hicks,
or what ever nonsense they are passing along today as "what Keynes said"
reevaluation the who field over and over
And yea, study over and over the current teachings so you really understand
it intuitively don't allow magical thinking to let you "pretend" you got
it don't accept that its impossible to really understand it and "that's
just what the equations show" understand the limitations, figure out when
our fearless leaders and "great minds" and elder statesman of economics
are "overplaying their hand" and concluding more than they can this is hard
work and it takes dedication and don't assume that econometrics is the only
real economics and that theory is "unprovable" or "always subjective" because
without theory there is no econometrics, there is just a bunch of meaningless
numbers
so yea we can use fresh young minds taking a new look at things but we
will nowhere if all we allow is that "they are most likely all in the mainstream
tradition"
I'm not a professional economist, but almost every time I see a "Phillips Curve", I'm
reminded how badly understood it is and how poorly economics performs as a scientific
discipline. This area needs a complete rethink. This article above is not that rethink,
though I great appreciated the discussion about the perilous state of workers' rights prior
to the 20th century.
There is a Phillips Curve but it's probably not what you think. For the U.S. at least,
there's empirical evidence that the true relationship is between unemployment and subsequent
REAL wage inflation (not nominal). Even here one must be careful, for the link is not that
strong. And real wage growth could also be productivity-related… but productivity
growth itself might also be a function of labor scarcity. When a population desires to get
more work done with fewer hands, innovation favors productivity.
For some charts showing various examples of valid and invalid "Phillips Curves", including
a persuasive graph of the unemployment/real wage inflation curve, see these links:
"... I argue here that it's the abuse of mathematics by Neoclassical economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone. ..."
"... A lady in the audience named Barb Jacobson suggested that using the name Neo-Classical gives it a certain degree of cache and wants you guys to start calling it for what it is: "Scorched Earth Economics." What a great name to use and doesn't it ring true? ..."
This is the brief talk I gave at a conference celebrating 25 years of the
Critical Realist seminar series at Cambridge University. Critical realists argue against the
use of mathematics in economics; I argue here that it's the abuse of mathematics by Neoclassical
economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some
phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone.
I give the example of my own model of Minsky's Financial Instability Hypothesis, which revealed
the possibility of a "Great Moderation" preceding a "Great Recession" before either event had happened.
David Milburn, September 12, 2015 at 9:38 am
Steve,
Last week Prof Bill Mitchell was in London where he gave a talk on re-framing the language
used in the media that carried on the myth of the mainstream groupthink. A lady in the audience
named Barb Jacobson suggested that using the name Neo-Classical gives it a certain degree of
cache and wants you guys to start calling it for what it is: "Scorched Earth Economics." What
a great name to use and doesn't it ring true? Barb Jacobson is spot on!
Sue Madden, September 13, 2015 at 8:28 am
Hi Steve,
I was really amused to see an interview a while back in the New Scientist, with the "research
chief" (!!) at the B of E. If you haven't seen it, you really must:
Opinion Interview with Andy Haldane: "Sackcloth and Ashes on Thread needle Street" New Scientist
25 March 2015
Corbyn was elected leader!!!! Now the sparks will fly. At least a public debate worthy of
the name might at last be heard in our sad country.
Thanks for your work in trying to enlighten us!!
Sue.
"... That is exactly what makes macro a pseudoscience (as Cassidy called it "Utopian economics".) You can't talk about economics ignoring existence of finance, because finance is an elephant in the room. A church of efficient stochastic equilibrium and an invisible hand that drives economics to it (the hand of God) is junk science, and always was. ..."
"macro rightly got a lot of stick by largely ignoring the role of finance,"
That is exactly what makes macro a pseudoscience (as Cassidy called it "Utopian economics".)
You can't talk about economics ignoring existence of finance, because finance is an elephant in
the room. A church of efficient stochastic equilibrium and an invisible hand that drives economics
to it (the hand of God) is junk science, and always was.
As much as I admire the mathematics, its use in macro is perverted and unscientific because
it relies on unrealistic assumptions. Its all pure mathiness.
Most of terminology that neoclassical economy introduced smells "fraud" or at least is detached
from reality. "Output gap" and related notion "potential output" can serve as an example. Look
at WWII production. For example, even potential output of a single plant (let's say three shift
work and full utilization of equipment) is pretty convoluted notion as there is a high level of
dependence on suppliers and somewhere typically "bottleneck" exists that prevent the factory achieving
this input. Still Hjalmar Schacht achieved wonders during WWII by just ordering German factories
to continue producing without waiting for orders to come.
== quote ==
Moreover, Keynes [1936, p. 177, 179] had denounced Walras's approach as wrong when he wrote
"Now the analysis of the previous chapters [of The General Theory] made it plain that this
account [in Walras] of the matter must be erroneous .this [Walrasian system] is a nonsense
theory".
== end of quote ==
And even worse, like most neoliberal economists, he tends to ignore Hyman Minsky important
contribution to understanding of source of instability in capitalist economics.
That fact alone IMHO makes his lectures junk science.
I remember that during 2008 events somebody called Bernanke not a specialist on Great Depression,
but a charlatan, who tried to explain Great Depression using neoclassic economics.
"I acknowledge that macro rightly got a lot of stick by largely ignoring the role of finance,
but I also point out that the poor recovery has involved a vindication of the core macro model:
austerity is a bad idea at the ZLB, QE was not inflationary and interest rates on government
debt did not rise but fell."
No shit Dick Tracy. Look at the devastation of the US of O (The United States of Oligarchy).
Let's join the Military in defending the shipping lanes, 3 hots and a cot.
I'm glad the core macro-model has been vindicated.
Is it my imagination or are the crazies around here getting crazier, and becoming increasingly
unable to even begin talking about macro in a serious way.
I mean, I don't mind a bit of vituperation or even limited amounts of incoherence and insanity,
if it is accompanied by at least earnest attempts to have substantive discussions. But it just
feels like the essential substance has become increasingly rare.
libezkova -> Sanjait... , -1
"Is it my imagination or are the crazies around here getting crazier, and becoming increasingly
unable to even begin talking about macro in a serious way."
If you think that neoliberal economists and their low-level supporters like some members of
this blog are crazy you are wrong. They are corrupt the same way as Mafia members are corrupt.
That's why they are unable to discuss economics in a serious way. Only "religious dogma" based
way is permitted.
Neoliberal Jesuits will defend their "flat earth" theory and ostracize heretics as long as
financial oligarchy is in power, because their well being is dependent on it, and they are paid
by financial oligarchy to do the job.
When neoliberalism was hatched it deliberately emulated methods of influence used by Communists
(and Austrians were intimately aware of them, because the country experienced communist revolution,
which failed) in trying to expand their influence at university departments and by creating think
tanks. Those subversive methods proved way too successful and they are now really entrenched:
neoclassic economic thinking permeates the society to the same or higher degree as Marx political
economy in the USSR.
See LSE discussion "Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics
"
I think that that one of the few better and more productive pathway of discussing economic events
is the one that stems from Hyman Minsky work with its idea of positive feedback loops in economics
with one from financial system that periodically destabilizes the capitalist economy and create
a financial crisis.
The neoclassical concept of equilibrium is way too primitive and attempts to build economics
as branch of physics. It should be discarded for good, as the way it is used now is close to pure
charlatanism.
We also have an uncertainty principle here as even the suggestion of the intervention can change
the dynamics of the system (look at "Fed talk" )
The role of the state now is so huge that any talk about the economy achieving equilibrium
by itself is fraud outside few special cases. And actually the introduction of neoliberalism was
the "revolution from above" -- a coup d'état, if you wish.
== quote ==
In microeconomic theory, cost-minimization by consumers and by firms implies the existence
of supply and demand correspondences for which market clearing equilibrium prices exist, if
there are large numbers of consumers and producers. Under convexity assumptions or under some
marginal-cost pricing rules, each equilibrium will be Pareto efficient: In large economies,
non-convexity also leads to quasi-equilibria that are nearly efficient.
However, the concept of market equilibrium has been criticized by Austrians, post-Keynesians
and others, who object to applications of microeconomic theory to real-world markets, when
such markets are not usefully approximated by microeconomic models. Heterodox economists assert
that micro-economic models rarely capture reality.
== end of quote ==
Steve Keen in one who uses and try to develop further Minsky concepts and he was one of the
few who predicted the financial crash on 2008. IMHO he should get more respect and coverage at
the expense of neoliberal stooges like Krugman.
Ha-Joon Chang, Philip Mirowski, Joseph Stiglitz, Richard Koo, Yanis Varoufakis, Noam Chomsky
all have interesting and IMHO more realistic ideas about how the modern economy really function
and what can be more appropriate ways to model it.
We should reject masked by mathiness typical neoclassical junk that is mainstream now.
"... Most of the debt before the crisis was taken on by the 45+. They are 10 years older now and not about to re-leverage themselves. The growth will have to come from the younger group but they are full of student and car debt. Will they be able to buy houses for which prices have returned to pre-crisis levels? ..."
"... This leverage game depends on housing but it looks like we will be forced into a change of paradigm. ..."
"... Very well put. The ' leverage game ' comprises the whole neo-liberal paradigm which as you say depends on housing . ..."
"... Here in the UK until the last fifteen years or so, apart from a small number of very top end residential properties there was a ' property ladder ' we used to say . The meaning was that you could start at the bottom and if you chose to, could move up, and even though property prices moved up your wages were likely to increase, but your debt was being eroded bit by bit by inflation which kept the whole thing in sync. ..."
"... In a recession, a debt-burdened corporate sector behaves much as households do, cutting back particularly on capital investment. Government goes the opposite way, hiking debt during a recession to fund automatic stabilizers. But heavy gov't debt, like household debt, is a drag on consumption after a lag of several years. ..."
"... Focusing on household debt alone is of questionable value, when much broader debt aggregates are available. What's clear from the chart comparing household debt in six countries is that Canada and Australia are up to their necks in debt, largely owing to mortgage debt supported by their housing bubbles. ..."
"... When these housing bubbles burst - as bubbles invariably do - these two resource-oriented economies are going to be sucking wind. Unfortunately, in 2014 USgov started applying US income taxation to Canadians who stay 182 days a year or more in the US. Refugees from the Great White North who flee south will face a whole new level of pain when the US IRS works them over with a rubber hose. ..."
For some reason, many economists still don't see it!
Now the general meme is that after 10 years, balance sheets have slowly been repaired as if
these household would be about to remake the same debt mistakes.
Most of the debt before the crisis was taken on by the 45+. They are 10 years older now
and not about to re-leverage themselves. The growth will have to come from the younger group
but they are full of student and car debt. Will they be able to buy houses for which prices have
returned to pre-crisis levels?
This leverage game depends on housing but it looks like we will be forced into a change
of paradigm.
Very well put. The ' leverage game ' comprises the whole neo-liberal paradigm which as
you say depends on housing .
Here in the UK until the last fifteen years or so, apart from a small number of very top
end residential properties there was a ' property ladder ' we used to say . The meaning was that
you could start at the bottom and if you chose to, could move up, and even though property prices
moved up your wages were likely to increase, but your debt was being eroded bit by bit by inflation
which kept the whole thing in sync.
Those days are long gone and I think it is dawning on a lot of us that the game is finally
up for this paradigm and there is no going back. Hence the certain air of melancholy which pervades
the atmosphere.
I went to a little drinks party on Saturday evening and it was interesting how the room of
twenty or so people divided between those stuck in the status quo and those beginning to perceive
of a future beyond the status quo .
Globally, household debt is the smallest of the four commonly used categories of Household,
Corporate [non-financial], Government, and Financial. Chart:
In a recession, a debt-burdened corporate sector behaves much as households do, cutting
back particularly on capital investment. Government goes the opposite way, hiking debt during
a recession to fund automatic stabilizers. But heavy gov't debt, like household debt, is a drag
on consumption after a lag of several years.
Focusing on household debt alone is of questionable value, when much broader debt aggregates
are available. What's clear from the chart comparing household debt in six countries is that Canada
and Australia are up to their necks in debt, largely owing to mortgage debt supported by their
housing bubbles.
When these housing bubbles burst - as bubbles invariably do - these two resource-oriented
economies are going to be sucking wind. Unfortunately, in 2014 USgov started applying US income
taxation to Canadians who stay 182 days a year or more in the US. Refugees from the Great White
North who flee south will face a whole new level of pain when the US IRS works them over with
a rubber hose.
"... Ann Pettifor has become so disgusted with all of this "gee, we didn't know" and other incompetencies
that she has written a piece demanding that the government take a hard look at the economics profession
in a first step to making it responsive and responsible to the people. This is the UK, and we should
definitely do it here, US, too. ..."
Ann Pettifor has become so disgusted with all of this "gee, we didn't know" and other incompetencies
that she has written a piece demanding that the government take a hard look at the economics profession
in a first step to making it responsive and responsible to the people. This is the UK, and we
should definitely do it here, US, too.
From a class conflict perspective, the economics field is responsive to its constituency: the
1%. As Marx and others have pointed out, the ideological necessity of making what is unjust appear
as "There Is No Alternative" is the unstated core mandate of the economists. Therefore, despite
the ludicrousness of this analysis, I find it another chink in the armor of the dominant ideology
that the obvious is now being so gingerly discussed by mainstream economists, the chief ideological
propagandists of the 1%.
When households take on long-term debt, they increase current spending power but commit
to a pre-specified path of future debt service (interest payments and amortisations).
How much are these people paid to come up with these thrilling and original conclusions?
"... The argument for a higher inflation target is NOT straightforward, once you understand two
things. First interest theory is axiomatically false.#1 Because of this monetary policy never had sound
scientific foundations. Second the same holds for fiscal policy.#2 ..."
"... The argument AGAINST higher inflation is that it REDUCES employment. Given the overall situation,
the ONLY sensible policy is to increase the average wage rate, such that the rate of change of the wage
rate is greater than the rate of change of productivity, because this increases employment. This is
a SYSTEMIC necessity and has NOTHING to do with social policy. Employment is co-determined by the relationship
between average wage rate, price and productivity. This relationship should automatically produce full
employment but does not. ..."
Economic bungee jumping without cord: Comment on Simon Wren-Lewis on 'Raising the inflation target'
You say: "The argument for a higher inflation target is straightforward, once you understand
two things. First the most effective and reliable monetary policy instrument is to influence the
real interest rate in the economy, which is the nominal interest rate less expected inflation.
Second nominal short term interest rates have a floor near zero (the Zero Lower Bound, or ZLB)."
The argument for a higher inflation target is NOT straightforward, once you understand
two things. First interest theory is axiomatically false.#1 Because of this monetary policy never
had sound scientific foundations. Second the same holds for fiscal policy.#2
Let us assume for a moment that, for whatever reasons, neither monetary nor fiscal policy is
applicable. So, given investment expenditures of the business sector and the expenditure ratio
of the household sector, the only alternative left is to directly influence the macroeconomic
price mechanism.#3
The argument AGAINST higher inflation is that it REDUCES employment. Given the overall
situation, the ONLY sensible policy is to increase the average wage rate, such that the rate of
change of the wage rate is greater than the rate of change of productivity, because this increases
employment. This is a SYSTEMIC necessity and has NOTHING to do with social policy. Employment
is co-determined by the relationship between average wage rate, price and productivity. This relationship
should automatically produce full employment but does not.
Standard employment theory is false.#4 The proposal to get the economy going by increasing
price inflation is the direct result of the complete lack of understanding how the market economy
works.
"... Russell Brand discusses with Yanis Varoufakis what happens when you take on the political, financial and media elite, and how radical reform can occur. Through accounts of his confrontations with the IMF, European institutions and the German government they examine where true power lies and how it is wielded. ..."
"... The 'gurus' of the dominant economic system 'teach' us how economy should be treated, based on mathematical models that assume standard conditions that, essentially, do not exist in the real world. This kind of peculiar 'determinism' in economics is already considered obsolete in other scientific fields. ..."
"... Mainstream economics, dominated by the neoliberal perception, is full of assumptions that are not applicable in the real world, yet being used to justify the satisfaction of the interests of the elites. ..."
"... Almost everywhere, neoliberal policies imposed through IMF have brought unprecedented disaster. Despite the obvious failure, financial technocrats assume that all cases are similar, imposing the same recipe in every region. Their models are full of assumptions in every level and that's why the fail miserably. Yet, despite the obvious disaster, the neoliberal priesthood demands from societies to adopt its models through simple faith. ..."
Russell Brand discusses with Yanis Varoufakis what happens when you take on the political, financial
and media elite, and how radical reform can occur. Through accounts of his confrontations with the
IMF, European institutions and the German government they examine where true power lies and how it
is wielded.
In a particular part of the interview, Varoufakis explains simply why economics is not science:
I call it organized religion with equations, superstition. The only way to become free of superstition
is through overcoming. But you need to study. I've always pissed off my academic colleagues and other
economists who actually believe that is real science what they are doing.
Our mathematical models of the weather can be judged by objective reality. If I am a meteorologist
and come up with a prediction that tomorrow there is going to be a heatwave in Leicester square,
all we have to do is to wait until tomorrow to see if I'm right or wrong. The weather will either
confirm or junk my theories about it.
And by the way, this is exactly the process of how real science progress. Try – fail - come with
an improved idea, and so on. Real scientists abolish old theories even if they work well with new
ones that explain better the nature, the world, etc.
Varoufakis continues:
Let's say that I have the same kind of computer model and actual machine and data mining that
the meteorologist does, but instead of using it to predict the weather I use it to predict the stock
exchange. And suppose that I was somebody very highly respected as a predictor of stock exchange
changes and let's say that today, I were to predict that tomorrow is going to be a major crash in
the stock exchange. There might be because I predicted it! In society and in the economy, our beliefs
about the phenomenon under study are part of the phenomenon under study.
The last paragraph above depicts soundly why mainstream economics are far from the concept of
modern science. The 'gurus' of the dominant economic system 'teach' us how economy should be treated,
based on mathematical models that assume standard conditions that, essentially, do not exist in the
real world. This kind of peculiar 'determinism' in economics is already considered obsolete in other
scientific fields.
In Quantum Mechanics, for example, Heisenberg's uncertainty principle not only acknowledges that
the observer affects the final situation of a physical system but also embeds this interference mathematically.
As a consequence, the final situation of a physical system can be determined only in statistical
terms.
Mainstream economics, dominated by the neoliberal perception, is full of assumptions that are
not applicable in the real world, yet being used to justify the satisfaction of the interests of
the elites.
Almost everywhere, neoliberal policies imposed through IMF have brought unprecedented disaster.
Despite the obvious failure, financial technocrats assume that all cases are similar, imposing the
same recipe in every region. Their models are full of assumptions in every level and that's why the
fail miserably. Yet, despite the obvious disaster, the neoliberal priesthood demands from societies
to adopt its models through simple faith.
Which shows that the only and real target of the mainstream economics, is simply retain the domination
of a small elite on the top of the economic hierarchy, at the expense of the majority of the people.
Noah Smith has a nice summation * of his critique of macroeconomics, which mainly comes down,
as I read it, as an appeal for researchers to stay close to the ground. That's definitely good
advice for young researchers.
But what about economists trying to provide useful advice, directly or indirectly, to policy
makers, who need to make decisions based on educated guesses about the whole system? Smith says,
"go slow, allow central bankers to use judgment and simple models in the meantime." That would
be better than a lot of what academic macroeconomists do in practice, which is to castigate central
bankers and other policymakers for not using elaborate models that don't work. But is there really
no role for smart academics to help out in this process? And if so, what does this say about the
utility of what the profession does?
The thing is, those simple models have done pretty darn well since 2008 - and central bankers
who used them, like Ben Bernanke, did a lot better than central bankers like Jean-Claude Trichet
who based their judgements on something else. So surely at least part of the training of macroeconomists
should prepare them to be helpful in applying simple models, maybe even in making those simple
models better.
Reading Smith, I found myself remembering an old line ** from Robert Solow in defense of "fancy"
economic theorizing:
"In economics I like a man to have mastered the fancy theory before I trust him with simple
theory because high-powered economics seems to be such an excellent school for the skillful use
of low-powered economics."
OK, can anyone make that case about modern macroeconomics? With a straight face? In practice,
it has often seemed that expertise in high-powered macroeconomics - mainly meaning dynamic stochastic
general equilibrium - positively incapacitates its possessors from the use of low-powered macroeconomics,
largely IS-LM and its derivatives.
I don't want to make a crude functional argument here: research that advances knowledge doesn't
have to provide an immediate practical payoff. But the experience since 2008 has strongly suggested
that the research program that dominated macro for the previous generation actually impaired the
ability of economists to provide useful advice in the moment. Mastering the fancy stuff made economists
useless at the simple stuff.
A more modest program would, in part, help diminish this harm. But it would also be really
helpful if macroeconomists relearned the idea that simple aggregate models can, in fact, be useful.
Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium
theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain
aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary
and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles.
some variants include different assumptions
But common assumptions include
No banks
No nominal prices
Micro founding with a single representative agent
An infinite time horizon
A fixed inter temporal fiscal budget
Continuous market clearance
No private debt
some variants include different assumptions
But common assumptions include
No banks
No nominal prices
Micro founding with a single representative agent
An infinite time horizon
A fixed inter temporal fiscal budget
Continuous market clearance
No private debt
The IS–LM model, or Hicks–Hansen model, is a macroeconomic tool that demonstrates the relationship
between interest rates and real output, in the goods and services market and the money market
(also known as the assets market). The intersection of the "investment–saving" (IS) and "liquidity
preference–money supply" (LM) curves is the "general equilibrium" where there is simultaneous
equilibrium in both markets. Two equivalent interpretations are possible: first, the IS–LM model
explains changes in national income when the price level is fixed in the short-run; second, the
IS–LM model shows why the aggregate demand curve shifts. Hence, this tool is sometimes used not
only to analyse the fluctuations of the economy but also to find appropriate stabilisation policies.
The model was developed by John Hicks in 1937, and later extended by Alvin Hansen, as a mathematical
representation of Keynesian macroeconomic theory. Between the 1940s and mid-1970s, it was the
leading framework of macroeconomic analysis. While it has been largely absent from macroeconomic
research ever since, it is still the backbone of many introductory macroeconomics textbooks.
A number of readers, both at this blog and other places, have been asking for an explanation
of what IS-LM is all about. Fair enough – this blogosphere conversation has been an exchange among
insiders, and probably a bit baffling to normal human beings (which is why I have been labeling
my posts "wonkish").
[IS-LM stands for investment-savings, liquidity-money -- which will make a lot of sense if
you keep reading.]
So, the first thing you need to know is that there are multiple correct ways of explaining
IS-LM. That's because it's a model of several interacting markets, and you can enter from multiple
directions, any one of which is a valid starting point.
My favorite of these approaches is to think of IS-LM as a way to reconcile two seemingly incompatible
views about what determines interest rates. One view says that the interest rate is determined
by the supply of and demand for savings – the "loanable funds" approach. The other says that the
interest rate is determined by the tradeoff between bonds, which pay interest, and money, which
doesn't, but which you can use for transactions and therefore has special value due to its liquidity
– the "liquidity preference" approach. (Yes, some money-like things pay interest, but normally
not as much as less liquid assets.)
How can both views be true? Because we are at minimum talking about *two* variables, not one
– GDP as well as the interest rate. And the adjustment of GDP is what makes both loanable funds
and liquidity preference hold at the same time....
"... Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles. ..."
"... expertise in high-powered macroeconomics - mainly meaning dynamic stochastic general equilibrium - positively incapacitates its possessors from the use of low-powered macroeconomics, largely IS-LM and its derivatives. ..."
A number of readers, both at this blog and other places, have been asking for an explanation
of what IS-LM is all about. Fair enough – this blogosphere conversation has been an exchange among
insiders, and probably a bit baffling to normal human beings (which is why I have been labeling
my posts "wonkish").
[IS-LM stands for investment-savings, liquidity-money -- which will make a lot of sense if
you keep reading.]
So, the first thing you need to know is that there are multiple correct ways of explaining
IS-LM. That's because it's a model of several interacting markets, and you can enter from multiple
directions, any one of which is a valid starting point.
My favorite of these approaches is to think of IS-LM as a way to reconcile two seemingly incompatible
views about what determines interest rates. One view says that the interest rate is determined
by the supply of and demand for savings – the "loanable funds" approach. The other says that the
interest rate is determined by the tradeoff between bonds, which pay interest, and money, which
doesn't, but which you can use for transactions and therefore has special value due to its liquidity
– the "liquidity preference" approach. (Yes, some money-like things pay interest, but normally
not as much as less liquid assets.)
How can both views be true? Because we are at minimum talking about *two* variables, not one
– GDP as well as the interest rate. And the adjustment of GDP is what makes both loanable funds
and liquidity preference hold at the same time.
Start with the loanable funds side. Suppose that desired savings and desired investment spending
are currently equal, and that something causes the interest rate to fall. Must it rise back to
its original level? Not necessarily. An excess of desired investment over desired savings can
lead to economic expansion, which drives up income. And since some of the rise in income will
be saved – and assuming that investment demand doesn't rise by as much – a sufficiently large
rise in GDP can restore equality between desired savings and desired investment at the new interest
rate.
That means that loanable funds doesn't determine the interest rate per se; it determines a
set of possible combinations of the interest rate and GDP, with lower rates corresponding to higher
GDP. And that's the IS curve.
Meanwhile, people deciding how to allocate their wealth are making tradeoffs between money
and bonds. There's a downward-sloping demand for money – the higher the interest rate, the more
people will skimp on liquidity in favor of higher returns. Suppose temporarily that the Federal
Reserve holds the money supply fixed; in that case the interest rate must be such as to match
that demand to the quantity of money. And the Fed can move the interest rate by changing the money
supply: increase the supply of money and the interest rate must fall to induce people to hold
a larger quantity.
Here too, however, GDP must be taken into account: a higher level of GDP will mean more transactions,
and hence higher demand for money, other things equal. So higher GDP will mean that the interest
rate needed to match supply and demand for money must rise. This means that like loanable funds,
liquidity preference doesn't determine the interest rate per se; it defines a set of possible
combinations of the interest rate and GDP – the LM curve.
And that's IS-LM:
[Graph]
The point where the curves cross determines both GDP and the interest rate, and at that point
both loanable funds and liquidity preference are valid.
What use is this framework? First of all, it helps you avoid fallacies like the notion that
because savings must equal investment, government spending cannot lead to a rise in total spending
– which right away puts us above the level of argument that famous Chicago professors somehow
find convincing. And it also gets you past confusions like the notion that government deficits,
by driving up interest rates, can actually cause the economy to contract.
Most spectacularly, IS-LM turns out to be very useful for thinking about extreme conditions
like the present, in which private demand has fallen so far that the economy remains depressed
even at a zero interest rate. In that case the picture looks like this:
[Graph]
Why is the LM curve flat at zero? Because if the interest rate fell below zero, people would
just hold cash instead of bonds. At the margin, then, money is just being held as a store of value,
and changes in the money supply have no effect. This is, of course, the liquidity trap.
And IS-LM makes some predictions about what happens in the liquidity trap. Budget deficits
shift IS to the right; in the liquidity trap that has no effect on the interest rate. Increases
in the money supply do nothing at all.
That's why in early 2009, when the Wall Street Journal, the Austrians, and the other usual
suspects were screaming about soaring rates and runaway inflation, those who understood IS-LM
were predicting that interest rates would stay low and that even a tripling of the monetary base
would not be inflationary. Events since then have, as I see it, been a huge vindication for the
IS-LM types – despite some headline inflation driven by commodity prices – and a huge failure
for the soaring-rates-and-inflation crowd.
Yes, IS-LM simplifies things a lot, and can't be taken as the final word. But it has done what
good economic models are supposed to do: make sense of what we see, and make highly useful predictions
about what would happen in unusual circumstances. Economists who understand IS-LM have done vastly
better in tracking our current crisis than people who don't.
Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium
theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain
aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary
and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles.
"expertise in high-powered macroeconomics - mainly meaning dynamic stochastic general equilibrium
- positively incapacitates its possessors from the use of low-powered macroeconomics, largely
IS-LM and its derivatives."
Brad has a fine little logic ox calculation
This is his best side
The deflection point in his zero lower bound graph
That shows a fed helpless as the real rate climbs as the deflation rate climbs ...
and his little set of equations that generate
A run away deflation
Using a Harmless looking Taylor rule
with too low...for his logic toy system...
(2%) A target inflation rate
If
The neutral rate of the system is dwelling down around one percent
In a depressed economy, with short-term nominal interest rates
at their zero lower bound, ample cyclical unemployment, and excess capacity,
increased government purchases would be neither offset by the monetary
authority raising interest rates nor neutralized by supply-side bottlenecks.
Then even a small amount of hysteresis-even a small shadow cast on future
potential output by the cyclical downturn-means, by simple arithmetic, that
expansionary fiscal policy is likely to be self-financing. Even if it is not, it is
highly likely to pass the sensible benefit-cost test of raising the present value
of future potential output. Thus, at the zero bound, where the central bank
cannot or will not but in any event does not perform its full role in stabilization
policy, fiscal policy has the stabilization policy mission that others have
convincingly argued it lacks in normal times. Whereas many economists
have assumed that the path of potential output is invariant to even a deep
and prolonged downturn, the available evidence raises a strong fear that
hysteresis is indeed a factor. Although nothing in our analysis calls into question
the importance of sustainable fiscal policies, it strongly suggests the need
for caution regarding the pace of fiscal consolidation.
Yes yes my fellow home makers
If macro conditions are right ...
even a small Amount of hysteresis can turn the project into a self financing gig
Fiscal Policy in a Depressed Economy
By J. Bradford DeLong and Lawrence H. Summers
Abstract
In a depressed economy, with short-term nominal interest rates at their zero lower bound, ample
cyclical unemployment, and excess capacity, increased government purchases would be neither offset
by the monetary authority raising interest rates nor neutralized by supply-side bottlenecks. Then
even a small amount of hysteresis-even a small shadow cast on future potential output by the cyclical
downturn-means, by simple arithmetic, that expansionary fiscal policy is likely to be self-financing.
Even if it is not, it is highly likely to pass the sensible benefit-cost test of raising the present
value of future potential output. Thus, at the zero bound, where the central bank cannot or will
not but in any event does not perform its full role in stabilization policy, fiscal policy has
the stabilization policy mission that others have convincingly argued it lacks in normal times.
Whereas many economists have assumed that the path of potential output is invariant to even a
deep and prolonged downturn, the available evidence raises a strong fear that hysteresis is indeed
a factor. Although nothing in our analysis calls into question the importance of sustainable fiscal
policies, it strongly suggests the need for caution regarding the pace of fiscal consolidation.
Thus, at the zero bound, where the central bank cannot or will not but in any event does not perform
its full role in stabilization policy, fiscal policy has the stabilization policy mission that
others have convincingly argued it lacks in normal times....
-- DeLong and Summers
[ I find such a rationale for fiscal policy to foster growth only convincing in a limited and
possible even politically self-defeating way, and would argue the rationale importantly undervalues
fiscal policy as a growth driver. The paper is clear and important though as a beginning rationale
for fiscal policy use. ]
I find such a rationale for fiscal policy to foster growth only convincing in a limited and
possibly even politically self-defeating way, and would argue the rationale importantly undervalues
fiscal policy as a growth driver. The paper is clear and important though as a beginning rationale
for fiscal policy use.
"... the experience since 2008 has strongly suggested that the research program that dominated macro
for the previous generation actually impaired the ability of economists to provide useful advice in
the moment. Mastering the fancy stuff made economists useless at the simple stuff. ..."
Macroeconomics: The Simple and the Fancy
By Paul Krugman
Noah Smith has a nice summation * of his critique of macroeconomics, which mainly comes down,
as I read it, as an appeal for researchers to stay close to the ground. That's definitely good
advice for young researchers.
But what about economists trying to provide useful advice, directly or indirectly, to policy
makers, who need to make decisions based on educated guesses about the whole system? Smith says,
"go slow, allow central bankers to use judgment and simple models in the meantime." That would
be better than a lot of what academic macroeconomists do in practice, which is to castigate central
bankers and other policymakers for not using elaborate models that don't work. But is there really
no role for smart academics to help out in this process? And if so, what does this say about the
utility of what the profession does?
The thing is, those simple models have done pretty darn well since 2008 - and central bankers
who used them, like Bernanke, did a lot better than central bankers like Trichet who based their
judgements on something else. So surely at least part of the training of macroeconomists should
prepare them to be helpful in applying simple models, maybe even in making those simple models
better.
Reading Smith, I found myself remembering an old line ** from Robert Solow in defense of "fancy"
economic theorizing:
"In economics I like a man to have mastered the fancy theory before I trust him with simple
theory because high-powered economics seems to be such an excellent school for the skillful use
of low-powered economics."
OK, can anyone make that case about modern macroeconomics? With a straight face? In practice,
it has often seemed that expertise in high-powered macroeconomics - mainly meaning dynamic stochastic
general equilibrium - positively incapacitates its possessors from the use of low-powered macroeconomics,
largely IS-LM and its derivatives.
I don't want to make a crude functional argument here: research that advances knowledge doesn't
have to provide an immediate practical payoff. But the experience since 2008 has strongly
suggested that the research program that dominated macro for the previous generation actually
impaired the ability of economists to provide useful advice in the moment. Mastering the fancy
stuff made economists useless at the simple stuff.
A more modest program would, in part, help diminish this harm. But it would also be really
helpful if macroeconomists relearned the idea that simple aggregate models can, in fact, be useful.
Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium
theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain
aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary
and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles.
Dynamic stochastic general equilibrium is a pseudoscience.
The problem with most neoclassical economics is that they are very bad mathematicians :-)
See, for example an interesting discussion at:
Why Neoclassical Economists Didnt See the Great Recession Coming by Prof Steve Keen
Uploaded on Jul 12, 2011
Mainstream "Neoclassical" Economists famously did not see the Great Recession coming, and when
you look at their theories, it's no wonder. Their favourite model prior to the crisis goes by
the name of "Dynamic Stochastic General Equilibrium", or DSGE. These models imagined that the
entire economy could be modeled as a single individual. Yet neoclassical researchers proved decades
ago that even a single market can't be modeled that way. I explain this proof while outlining
the fundamental truth that "Neoclassical Economists Don't Understand Neoclassical Economics".
The IS–LM model, or Hicks–Hansen model, is a macroeconomic tool that shows the relationship
between interest rates and real output, in the goods and services market and the money market
(also known as the assets market). The intersection of the "investment–saving" (IS) and "liquidity
preference–money supply" (LM) curves is the "general equilibrium" where there is simultaneous
equilibrium in both markets. Two equivalent interpretations are possible: first, the IS–LM model
explains changes in national income when the price level is fixed in the short-run; second, the
IS–LM model shows why the aggregate demand curve shifts. Hence, this tool is sometimes used not
only to analyse the fluctuations of the economy but also to find appropriate stabilisation policies.
"... What supply-demand-equilibrium economists never understood is that the price mechanism DESTABILIZES
the economy. The sequence is as follows: price up - rhoF down - employment down - wage rate down - rhoF
down - employment down - and so on. In other words, the market economy is inherently unstable. ..."
Think deeper
Comment on Bradford DeLong on 'RETHINK 2%'
"In order to tell the politicians and practitioners something about causes and best means,
the economist needs the true theory or else he has not much more to offer than educated common
sense or his personal opinion." (Stigum)
The fact of the matter is that economists do NOT have the true theory. More precisely, economists
do not know how the price- and profit mechanism works. The four main approaches ― Walrasianism,
Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally
inconsistent, and all got profit wrong.
Because of this economic policy guidance never had sound scientific foundations. This holds
also for the RETHINK 2% letter to the Federal Reserve Board of Governors#1 which in turn is based
on Josh Bivens's article.#2
Note for a start that Josh Bivens does not mention profit ― the pivotal variable of economics
― once. From this follows that his underlying profit theory is false. And from this in turn follows
that his whole argument is false. ALL models that do not explicitly define macroeconomic profit
are false.
The elementary version of the correct objective, systemic, behavior-free, macrofounded employment
equation is shown on Wikimedia.#3 This equation says ― among other things ― that an increase of
the factor cost ratio rhoF=W/PR leads to higher employment. The ratio rhoF embodies the price
mechanism.
In order to focus on the crucial point imagine the FED has the means to directly influence
the price P and increases it by 2%, all other variables unchanged. The correct macroeconomic employment
equation tells us that employment falls. Bad move.
Next try. The FED sets the change of price to zero and instead increases the wage rate W by
2 %. The correct macroeconomic employment equation tells us that employment rises. Good move.
What supply-demand-equilibrium economists never understood is that the price mechanism
DESTABILIZES the economy. The sequence is as follows: price up - rhoF down - employment down -
wage rate down - rhoF down - employment down - and so on. In other words, the market economy is
inherently unstable.
#4 Standard employment theory is false. The proposal to get the economy going by increasing
price inflation is the direct result of the complete lack of understanding how the market economy
works.
"... Economics is a corrupt pseudo-science that gives a pseudo-scientific justification for the
greed and rapacity of One Percenters. Its methodological flaws are glaring. It's time economists went
back to the social science faculty, where they belong. ..."
Our politicians have been brainwashed by neoliberal economists.
These economists produce models that factor-in all the upsides to globalisation, but fail to
model any of the crippling, expensive-to-treat consequences of shutting down entire towns in places
like Michigan or Lancashire.
They assume people live frictionless lives; that when the European ship-building industry moves
to Poland, riveters in Portsmouth can just up-sticks and move to Gdansk with no problem. They
encourage a narrative that implies such an English riveter are lazy if he fails to seize this
opportunity.
(Let's drop a few economists in Gdansk with £100 in their pockets, and see how their families
do.)
Economics is a corrupt pseudo-science that gives a pseudo-scientific justification for
the greed and rapacity of One Percenters. Its methodological flaws are glaring. It's time economists
went back to the social science faculty, where they belong.
Relations between the disciplines have not always been so distant. Scholastic natural lawyers
trained in the tradition of Aristotle and Aquinas developed defenses of private property and free
trade that influenced authors such as Grotius, who in the seventeenth century laid the groundwork
of the modern law of nations and thus the basis of modern trade. John Locke subsequently wrote an
incisive account of the natural right to property as the source of economic prosperity, and Adam
Smith, who wrote a treatise of moral philosophy before authoring The Wealth of Nations ,
described what he called a system of natural liberty as the matrix of genuine wealth. Although in
the nineteenth century both moral philosophy and economics in the English-speaking world developed
under the influence of utilitarianism, contemporary theory in both natural-law moral philosophy and
economics emphasizes the centrality of the human person and the practical choices he makes concerning
human goods or values. In this regard, the question of the relation of natural law to economics is
on the one hand the extent to which economic calculations can be based on notions of objective good
established by practical moral reason, and on the other hand the extent to which practical judgments
by individuals about their good can be informed by an awareness of global consequences.
Philosophy of Economics
"Philosophy of Economics" consists of inquiries concerning
(a) rational choice,
(b) the appraisal of economic outcomes, institutions and processes, and
(c) the ontology of economic phenomena and the possibilities of acquiring knowledge of them.
Although these inquiries overlap in many ways, it is useful to divide philosophy of economics
in this way into three subject matters which can be regarded respectively as branches of action theory,
ethics (or normative social and political philosophy), and philosophy of science.
Economic theories of rationality, welfare, and social choice defend substantive philosophical
theses often informed by relevant philosophical literature and of evident interest to those interested
in action theory, philosophical psychology, and social and political philosophy.
Economics is of particular interest to those interested in epistemology and philosophy of science
both because of its detailed peculiarities and because it possesses many of the overt features of
the natural sciences, while its object consists of social phenomena.
James Stoner is Professor in the Department of Political Science at Louisiana State University.
He sits on the editorial board of Public Discourse .
The papers presented at the Natural Law and Economics Conference can be found on-line at the
conference website .
Humans exist in, for all practical purposes, a closed system - the earth.
There are resources available within that system and various means for humans to avail themselves
of those resources.
Economics is supposed to be the study of the management of available resources in the most
adventageous manner.
To do that properly, economics must start with the examination of the whole system.]
Natural Law and Economics: Total Strangers or Separated Lovers?
by James Stoner
"A recent conference at Princeton University asked whether in the midst of current economic
challenges natural law philosophy might not provide a better foundation for the practice of economics
than the utilitarian account of value that currently underwrites it.
"Relations between the disciplines have not always been so distant. Scholastic natural lawyers
trained in the tradition of Aristotle and Aquinas developed defenses of private property and free
trade that influenced authors such as Grotius, who in the seventeenth century laid the groundwork
of the modern law of nations and thus the basis of modern trade. John Locke subsequently wrote
an incisive account of the natural right to property as the source of economic prosperity, and
Adam Smith, who wrote a treatise of moral philosophy before authoring The Wealth of Nations, described
what he called a system of natural liberty as the matrix of genuine wealth. Although in the nineteenth
century both moral philosophy and economics in the English-speaking world developed under the
influence of utilitarianism, contemporary theory in both natural-law moral philosophy and economics
emphasizes the centrality of the human person and the practical choices he makes concerning human
goods or values. In this regard, the question of the relation of natural law to economics is on
the one hand the extent to which economic calculations can be based on notions of objective good
established by practical moral reason, and on the other hand the extent to which practical judgments
by individuals about their good can be informed by an awareness of global consequences."
"Philosophy of Economics" consists of inquiries concerning (a) rational choice, (b) the appraisal
of economic outcomes, institutions and processes, and (c) the ontology of economic phenomena and
the possibilities of acquiring knowledge of them. Although these inquiries overlap in many ways,
it is useful to divide philosophy of economics in this way into three subject matters which can
be regarded respectively as branches of action theory, ethics (or normative social and political
philosophy), and philosophy of science. Economic theories of rationality, welfare, and social
choice defend substantive philosophical theses often informed by relevant philosophical literature
and of evident interest to those interested in action theory, philosophical psychology, and social
and political philosophy. Economics is of particular interest to those interested in epistemology
and philosophy of science both because of its detailed peculiarities and because it possesses
many of the overt features of the natural sciences, while its object consists of social phenomena.
Parable: A friend stopped by at a small forest service museum in the great northwest. From
the informational displays about forest management, there is nothing about a forest that cannot
be improved by cutting down trees.
With economics there is nothing about the economy that cannot be improved by wage cuts and
redistributing wealth upwards.
As General Sherman aptly observed:
"There is no property without a government."
The rules for our "Market Economy" are not divine nor set in stone.
In the US, the rules are the product of we the people.
We the people have control over the rules that govern rights to property and obligations to society.
If DeLong's view is correct, that under current rules wealth will become concentrated into the
hands of a few, then it is up to we the people to modify the rules to produce a more equitable,
just and economically viable set of rules
the message to take from this, is that as long the economy is viewed as ideally implemented when
people and firms selfishly acquire as much wealth as possible with no consideration for the plight
of their fellow humans, ...then that the economy will decay and many people will suffer
it is truly the job of the government to manage the economy in such a way as to maximize utility
for all
it is truly to job of economists to advise on how to do this
"... GR: Then in the beginning of the 2000s comes the beginning of your work with Professor Raghuram Rajan on "rules of the game." You looked at who's setting the rules of the game, who is influencing the rules ofthe game, and what we learn. ..."
"... GR: For decades, economists and other scholars dedicated a lot of intellectual energy to look at the relationship between companies, shareholders and executives, and between shareholders and boards. Maybe there's not enough intellectual energy going into the question of who sets the rules of the game that determine the outcomes and the dynamics in finance? ..."
"... GR: When it comes to politics, many times data aremuch more complicated and debatable, and ambiguous in many ways. When you deal with numbers and with asset prices, maybe it's easier to go with the data than when you go into the realms of politics. ..."
"... GR: Let's talk a little bit about the research that will be presented in this conference. I'll start with the most politically-sensitive paper that we have, a very interesting paper looking into the Obama administration and more than 2,000 meetings that President Obama and his chief aides had with businessmen over the last eight years. I don't know if you could call it crony capitalism, but whatever is happening out there didn't start in the Trump administration. ..."
"... GR: Another paper looks again at the United States and the way that decisions on bailouts of banks were decided after the financial crisis. Can you elaborate a bit on that? ..."
"... GR: When you're ignoring politics, the outcome many times would be to give more power in the market of ideas and in policies to vested interests, to the powerful? ..."
"... GR: Luigi Zingales, thank you very much. ..."
Ahead of the Stigler Center'sconference on the political economy of finance, we interviewed
Stigler Center Director Luigi Zingales about the motivation behind the first-of-its-kind conference.
On June 1-2, the Stigler Center will host a
first-of-its-kind conference focusing on the role of politics in finance research. In the last
twenty years, political considerations have played an increasingly important role in financial economics:
from the design of the rules that make financial markets viable to politically-motivated changes
in bankruptcy law, from political connections in firms to the effects of political uncertainty on
investments. Yet up until now, no conference has been dedicated to it.
Ahead of this conference, we interviewed University of Chicago Booth School of Business Professor
and Stigler Center Director Luigi Zingales [also, one of the editors of this blog] about the motivation
behind it and the political economy of finance.
https://www.youtube.com/embed/jB1b2T0QtFk
The following is a transcript of the interview, slightly edited for clarity:
Guy Rolnik: I was surprised to understand that, actually, there are not many conferences
on the politics of finance.
GR: Why is it that there aren't many conferences on the political economy of finance? You would
think that politics has a lot to do with finance.
LZ: I think historically, people have not looked at that aspect a lot. I would like to divide
the brief history of the academic field of finance into three periods: I would call the first one-that
started in the late '50s-the Modigliani and Miller period. Modigliani and Miller, to simplify to
the extreme, said that the way you slice a pizza does not change the size of the pizza. This is a
period in which basically finance is irrelevant, and the only frictions that matter are probably
only tax frictions.
Then, starting with the '70s, people realized: "Wait a second. If you start to divide a pizza
before you produce the pizza, maybe this will have some impact on how the pizza is produced." This
is what in jargon goes under "agency," or "asymmetric information." Essentially, the way you allocate
the cash flows of the firm has some impact on the way the firm is run.
However, all this is in the context of, "The external rules are fixed. We're in a very predetermined
society and the rules are fixed. That's what we do."
Starting with the '90s and then the 2000s, people realized that the rules are not fixed, that
actually the changing nature of the rules is very important, and of course, political gain is what
makes the rules change.
GR: So this is where the 2008 financial crisis comes in, and after the financial crisis people
started to develop a lot of interest in the role of politics in financial crises and the role of
politics in finance.
LZ: To be honest, I think things started before the financial crisis. I think probably the intellectual
origin of all this is the theory of incomplete contracts developed by Grossman and Hart, where because
the cash flow is bargain ex post, then the rules are more fluid. Then this call for renegotiation,
or re-discussion, which is to a large degree about politics, comes into the game.
One of the early papers about this is a paper by Patrick Bolton and Howard Rosenthal-a finance
guy and a political scientist-looking at how renegotiation of debt and the rules for bankruptcy change
dramatically with the business cycle. Every major financial crisis in the United States had the bankruptcy
rules restated to some extent, or reshaped.
Traditionally, finance people thought about bankruptcy as a given. Now [they] realize it is not
a given, that the rules change. How do they change? They're politically determined. Of course, for
the misbeliever, the financial crisis brought this to an attention that could not be ignored.
We've seen the work by Amir Sufi and Atif Mian and Francesco Trebbi looking at the political determinants
of the intervention on TARP, and the work that Amit Seru and co-authors have done on the politics
around regulation and how ineffective regulation is because of political constraints.
I think that by the beginning of the second decade of the 21st century, politics has become mainstream
and was overdue to have a conference dedicated to it.
GR: Then in the beginning of the 2000s comes the beginning of your work with Professor
Raghuram Rajan on "rules of the game." You looked at who's setting the rules of the game, who is
influencing the rules ofthe game, and what we learn.
LZ: I think that in the late '90s and early 2000, there was a big interest inwhy countries are
not more financially developed. Thanks to the work of Andrei Shleifer and Robert Vishny and others,
there was this importance of the law as a major factor.
Raghuram and I asked the very simple question: if it is as simple as importing a code from another
country, why don't more countries do it? It cannot be just a lack of technical expertise. Lawyers
are expensive but can be imported. In fact, Russia did import the best lawyers from the United States.
I'm not sure it was a big success.
The conclusion was, no, it's lack of political will. We started to open the debate for, say, "Look,
finance does benefit most people, but hurts others." So there is a political economy even with [the]
introduction of financial laws.
GR: For decades, economists and other scholars dedicated a lot of intellectual energy to
look at the relationship between companies, shareholders and executives, and between shareholders
and boards. Maybe there's not enough intellectual energy going into the question of who sets the
rules of the game that determine the outcomes and the dynamics in finance?
LZ: I think that the role of conferences like the one here at the Stigler Center is to bring together
scholars who work in a certain area, and also give confidence that this area is important, and attract
more research.
You're absolutely right, people tend to research where the data are. The famous old joke about
economists, that they look where the light is, not where they lost the key, has some element of truth.
In finance, there are things that we can observe very well and compensation is one. You're going
to have a lot of papers about managerial compensation.
But I think what is important is that even data are endogenous, in a sense. Compustat ExecuComp,
which is the primary data source to study this stuff, was created in the early '90s as a result of
academic interest in executive compensation.
Going back in history, CRSP, the Center for Research in Security Prices here at Chicago, which
is the main data source for security prices research, was created by Jim Lorie, a faculty here, who
saw people like Eugene Fama and others interested in this topic and said, "We have to create a data
set to analyze."
The role of academia is, in a sense, to open new avenues and then have a data provider follow.
GR: When it comes to politics, many times data aremuch more complicated and debatable,
and ambiguous in many ways. When you deal with numbers and with asset prices, maybe it's easier to
go with the data than when you go into the realms of politics.
LZ: There are two aspects: one, there are fewer data coming from thepolitical world than from
the asset pricing world, even from corporate finance. Even those data tend not to be disclosed and
available as much as data on companies. Data on lobbying now start to be widely available. Data on
campaign contributions start to be available. The data on corporate donations tend to be more difficult.
They're not as established.
Then there is a more difficult problem to tackle: in a sense, politics is much more fluid. Whenever
data are available, the deals move somewhere else. As researchers, we're always fighting the last
war because we look at what happened in the past, but politics run ahead.
GR: Let's talk a little bit about the research that will be presented in this conference.
I'll start with the most politically-sensitive paper that we have, a very interesting
paper looking into the Obama administration
and more than 2,000 meetings that President Obama and his chief aides had with businessmen over the
last eight years. I don't know if you could call it crony capitalism, but whatever is happening out
there didn't start in the Trump administration.
LZ: Certainly. I think it's actually very healthy, and one of the goals of this conference is
to bring this research from analyzing foreign countries to analyzing the United States. It's much
easier to point fingers toward other people. When
Ray Fisman
wrote the first paper on the political connections of Suharto, everybody clapped. Why? Because
it's Indonesia and corruption in Indonesia is something that we think is granted.
Now, when people apply the same technique to the United States of America, a lot of people [are]
up in arms and say, "Oh, it's impossible. This is not corruption." But if it worked as a technique
for Suharto, why can't it work for Trump, or for Obama, or for people before?
I don't think that these results are specific to the Obama administration. I think that the data
are better in recent years, and so, the paper analyzed that rather than analyzing George W. Bush,
or Bill Clinton.
GR: Another paper looks again at the United States and the way that decisions on bailouts
of banks were decided after the financial crisis. Can you elaborate a bit on that?
LZ: Again, I think that it's not surprising to international scholars that the allocation of aid,
the allocation of credit, and particularly the allocation of bailout credit to banks is very politically-determined.
This research is showing that surprise, surprise, without a doubt, in the United States the same
happens. I think it's a good example [that]what we've learned analyzing countries around the world
can be applied to the United States.
GR: We do look internationally at this conference, and we have an interesting paper on Chile.
Chile is a very interesting case for many reasons. One of them, of course, is that for many decades,
Chile was the "poster child" of a successful market economy in South America. Recently, people have
been looking into the details of what's happening in this economy, and they see some other perspectives
on Chile that were not as salient as before.
LZ: I will distinguish two things: First of all, I think that Chile is a fantastic example of
the difference between being pro-market and being pro-business. I think that Chile has been very
much pro-business, but there is no doubt that it was a huge success in terms of growth. On the other
hand, I think there is not enough antitrust policies, or attention to political connections. The
result is that the income distribution is extremely unequal, and this really puts, in my view, bounds
on future growth.
I think one needs to reconsider the limitations of looking only at micro-measures of market flexibility,
and not at the political economy of the country.
In addition, like in many countries, [in Chile] we have a phenomenon where privatizations on the
one hand improved efficiency-because the government is not very good at running things-but were probably
done to the benefit of some people. One of the major mines was sold to the then son-in-law of Pinochet
who now, ironically, was found to [have] actually [paid] money to the son of the current president,
[Michelle] Bachelet. This shows that it's not right or left, it is basically crony capitalism.
GR: And China?
LZ: China is a phenomenal example. There is a very exciting paper looking at the way loans are
made, and the political incentives, not only the economic incentives, that are present in China.
We tend to look at China with too much of a Western view, not realizing that in China, in every
major company there is a representative of the Communist Party who basically oversees the company.
These guys tend to have political incentives that are different than the standard market incentives.
I think understanding better the interaction between the two is a fascinating topic.
GR: To sum up our discussion: politics is key when it comes to finance, and we should research
the relationship between the political world and finance more. Are there any specific things that
you think are under-researched today, or over-researched? From a societal point of view, what would
be the right research agenda when it comes to finance today?
LZ: First of all, it's very difficult to ask an academic what is the right research agenda because
most of the people will answer what they're doing this moment, so I don't want to fall into this
trap. In general, the connection between finance and politics has been under-researched for years,
and the goal of this conference is precisely to motivate more research. I think there is a need to
apply more creative and different approaches.
I think that generally in academia, what tends to be overdone is research that's based on data
that areeasily available, with techniques that are fairly well-established, because the cost of production
is low, the value added is also low, but also, the risks tend to be low.
I think that what good researchers should do is to be more ambitious, take more risks-especially
after you get tenure, there is no justification not to take more risks.
GR: Do economists need help from other disciplines when they're going into the realm of political
economy of finance?
LZ: I think economists need help in other disciplines regardless. There was a long period in which
economists were sort of colonialists, and they were moving to other fields, ignoring, or not really
understanding the other fields, but just trying to grab some of those questions.
I think that those times, by and large, are gone. I think there is a lot of good research interacting
psychology with economics. I think that is less so, for example, in sociology. I think that sociologists
and economists tend to not interact a lot, and I think there are great opportunities there.
I think also with political scientists, there are more economists acting as political scientists-there
is a bit less of an integration. I think that would be helpful, especially in areas like finance.
I think if you are in the political economy section of an economics department, you naturally interact
with political scientists.
When you come to business school, and you do finance, or you do IO, you tend to be less well-integrated.
GR: Some economists shy away from politics for many reasons, but correct me if I'm wrong: the
deeper we go into the political economy of finance, we'll see that politics has a lot of influence
on the outcomes of the financial markets, and it will force us to think much more about politics.
LZ: I would also say the opposite. I think that economists, and academics in general, have a huge
impact on what happens in the political world. Not immediately, not individually, as they had in
academia by themselves, but the academic thinking isa crucial part in shaping politics.
It's very hard to do lobbying without some ideas to support the lobbying. My fear is that academics
are not sufficiently aware of their impact. Jean-Paul Sartre used to say you cannot not choose because
not choosing is choosing not to choose. I would like to paraphrase and say you cannot ignore politics
because ignoring politics is choosing a particular political perspective of ignoring it. You are
announcing a particular view, you're not abstaining from it.
The attitude of many academics that say "I do science, I have nothing to do with politics"-they
are doing politics in another way.
GR: When you're ignoring politics, the outcome many times would be to give more power in
the market of ideas and in policies to vested interests, to the powerful?
LZ: I think that that could be an outcome. It's not necessarily an outcome, but that could be
an outcome. I'm just saying that you should be aware of the consequences of your actions because
not acting is an action.
GR: Luigi Zingales, thank you very much.
LZ: You're welcome.
Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted
by special interests. The posts represent the opinions of their writers, not those of the University
of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy .
That was my point for a long time. Inability to challenge the underlying assumptions
of the neoclassical economics and current neoliberal polices (such as Washington consensus) sooner
of later backfire both in economics and politics, because politics and economics are intrinsically
connected.
to the extent that "pure economics" is a pseudo-science (with bunch of complex mathematical
masturbations, much like geocentric theory of movement of planets; which actually did predicted
certain movements of plants accurately. using overcomplicated math stuff -- epicycles)
But political posturing often prevent such a reevaluation, even when people understand that
something is wrong with the current state of economics.
Much like that fact that the USA pretentions of the world hegemony make deviations from pre-existing
policies a sign of "weakness". But is a dialectical way, the obsessive desire to project strength
is a serious weakness in itself ;-)
And it looks like this inability and lack of desire to challenge the fundamental assumptions
is a very serious problem not only with the US elite, but with the American society as a whole.
Col. Jessep: [from the witness stand] *You want answers?*
Kaffee: *I want the truth!*
Col. Jessup: [from the witness stand] *You can't handle the truth!*
Emong other things it led to the economic policies that on "being disastrous" scale are probably
close the policies that led to Iraq war (remember neocons boasting before this war that we will
be greeted with flowers and the cost will be minimal and democracy will flourish in Iraq). The
results of outsourcing of manufacturing is very similar to the real result obtains due to the
Iraq war.
So there is an important question that the article missed. Can the American elite face the
truth?
That answer is: "No". That's why neoclassical economics while discredited as a theory remain
dominant as a civil religion of neoliberalism, indoctrination into which is a prerequisite to
obtaining an academic degree, and students are indoctrinated into this this bunch of mathiness
each year. Compare with Steve Keen "Debunking economics" (
https://www.amazon.com/Debunking-Economics-Revised-Expanded-Dethroned/dp/1848139926 ). Much
like Marxism was obligatory in the USSR and can't graduate without passing exams on Marxist political
economy.
But, truth be told, neoclassical economics has a strong political undercurrent because historically
it emerged (like neoliberalism in late 30th early 40th) as an alternative to Marxism. And to certain
extent it did has its value while Marxism and Marxist theory of value were not discredited (that
means up to late 40th, early 60th).
Another point is that the US neoliberal elite demonstrated willingness and ability to engage
in self-defeating behavior because they do not want to look weak or challenge the postulated of
neoliberalism. That's the same behavior the Politburo was engaged in the USSR.
I would shy from using the term "decline od neoliberalism" because it has a flavor of "doom
and gloom" (and haw we can speak about decline if a realistic alternative does not exist?), but
neoliberalism really faces the crisis of confidence. Neoliberal myths such a "Greed is good",
"Casino capitalism is virtuous", "Entrepreneurship is the ultimate value and the source of material
reward", "free market", "free trade", "labor market", "poor are guilty of their own fate because
they lack responsibility", "rising stock market tide lifts all boats", etc are dispelled.
Promises of "prosperity for all" are not delivered (at least to the lower 80% of population.)
Basically the same situation that existed with Brezhnev socialism in the USSR with the communist
ideology stating with 70th.
Instead of the USSR alcoholism epidemic we have opioids and meth epidemic with the same or
similar social roots.
That worldview had derived from this conviction that American power implies commitment to global
hegemony, and this commitment expressed the nation's enduring devotion to its founding ideals
of freedom and democracy.
That also means that election of Trump will not result in proper actions that can change the
course of "battleship America" and can rectify the current difficulties. Much like the election
of Barack Obama before him.
"... By Jason Smith, a physicist who messes around with economic theory. He graduated from the University
of Texas at Austin with a degree in math and a degree in physics, and received his Ph.D. from the University
of Washington in theoretical physics. Follow him on Twitter: @infotranecon. Originally published at
Evonomics ..."
"... The New Industrial State ..."
"... I think the tradition of economic thinking has been really influential. I think it's actually
a thing that people on the left really should do - take the time to understand all of that. There is
a tremendous amount of incredible insight into some of the things we're talking about, like non-zero-sum
settings, and the way in which human exchange can be generative in this sort of amazing way. Understanding
how capitalism works has been really, really important for me, and has been something that I feel like
I'm a better thinker and an analyst because of the time and reading I put into a lot of conservative
authors on that topic. ..."
Posted on
May 17, 2017 by Yves
Smith By Jason Smith, a physicist who messes around with economic theory. He graduated from
the University of Texas at Austin with a degree in math and a degree in physics, and received his
Ph.D. from the University of Washington in theoretical physics. Follow him on Twitter: @infotranecon.
Originally published at
Evonomics
The inspiration for this piece came from a
Vox podcast with Chris Hayes of MSNBC. One of the topics they discussed was which right-of-center
ideas the left ought to engage. Hayes says:
The entirety of the corpus of [Friedrich] Hayek, [Milton] Friedman, and neoclassical economics.
I think it's an incredibly powerful intellectual tradition and a really important one to understand,
these basic frameworks of neoclassical economics, the sort of ideas about market clearing prices,
about the functioning of supply and demand, about thinking in marginal terms.
I think the tradition of economic thinking has been really influential. I think it's actually
a thing that people on the left really should do - take the time to understand all of that. There
is a tremendous amount of incredible insight into some of the things we're talking about, like
non-zero-sum settings, and the way in which human exchange can be generative in this sort of amazing
way. Understanding how capitalism works has been really, really important for me, and has been
something that I feel like I'm a better thinker and an analyst because of the time and reading
I put into a lot of conservative authors on that topic.
Putting aside the fact that the left has fully understood and engaged with these ideas, deeply
and over decades (it may be dense writing, but it's not exactly quantum field theory), I can hear
some of you asking: Do I have to?
The answer is: No.
Why? Because you can get the same understanding while also understanding where these ideas fall
apart ‒ that is to say understanding the limited
scope of market-clearing prices and supply and demand – using information theory.
Prices and Hayek
Friedrich Hayek did have some insight into prices having something to do with information, but
he got the details wrong and vastly understated the complexity of the system. He saw market prices
aggregating information from events: a blueberry crop failure, a population boom, or speculation
on crop yields. Price changes purportedly communicated knowledge about the state of the world.
However, Hayek was writing in a time before information theory. (Hayek's The Use of Knowledge
in Society was written in 1945, a just few years before Claude Shannon's A Mathematical Theory
of Communication in 1948.) Hayek thought a large amount of knowledge about biological or ecological
systems, population, and social systems could be communicated by a single number: a price. Can you
imagine the number of variables you'd need to describe crop failures, population booms, and market
bubbles? Thousands? Millions? How many variables of information do you get from the price of blueberries?
One. Hayek dreams of compressing a complex multidimensional space of possibilities that includes
the state of the world and the states of mind of thousands or millions of agents into a single dimension
(i.e. price), inevitably losing a great deal of information in the process.
... ... ...
The market as an algorithm
The picture above is of a functioning market as an algorithm matching distributions by raising
and lowering a price until it reaches a stable price. In fact, this picture is of a specific machine
learning algorithm called
Generative
Adversarial Networks (GAN, described in this
Medium article or in the original paper
) that has emerged recently. Of course, the idea of the market as an algorithm to solve a problem
is not new. For example
one of the best blog posts of all time (in my opinion) talks about linear programming as an algorithm,
giving an argument for why planned economies will likely fail, but the same argument implies we
cannot check the optimality of the market allocation of resources, therefore claims of markets
as optimal are entirely faith-based. The Medium article uses a good analogy using a painting, a forger,
and a detective, but I will recast it in terms of the information theory description.
Instead of the complex multidimensional distributions, here we have blueberry buyers and blueberry
sellers. The "supply" ( B from above) is the generator G , the demand A is the
"real data" R (the information the deep learning algorithm is trying to learn). Instead of
the random initial input I - coin tosses or dice throws - we have the complex, irrational,
entrepreneurial, animal spirits of people. We also have the random effects of weather on blueberry
production. The detector D (which is coincidentally the terminology Fieltiz and Borchardt
used) is the price p . When the detector can't tell the difference between the distribution
of demand for blueberries and the distribution of the supply of blueberries (i.e. when the price
reaches a relatively stable value because the distributions are the same), we've reached our solution
(a market equilibrium).
Note that the problem the GAN algorithm tackles can be represented by the two-player
minimax game from game theory.
The thing is that with the wrong settings, algorithms fail and you get garbage. I know this from
experience in my regular job researching machine learning, sparse reconstruction, and signal processing
algorithms. Therefore depending on the input data (especially data resulting from human behavior),
we shouldn't expect to get good results all of the time. These failures are exactly the failure of
information to flow from the real data to the generator through the detector – the failure of information
from the demand to reach the supply via the price mechanism.
When asked by Quora what the recent and upcoming breakthroughs in deep learning are, Yann LeCun,
director of AI research at Facebook and a professor at NYU, said:
The most important one, in my opinion, is adversarial training (also called GAN for Generative
Adversarial Networks). This is an idea that was originally proposed by Ian Goodfellow when he
was a student with Yoshua Bengio at the University of Montreal (he since moved to Google Brain
and recently to OpenAI).
This, and the variations that are now being proposed is the most interesting idea in the last
10 years in ML, in my opinion.
Research into these deep learning algorithms and information theory may provide insight into economic
systems.
An Interpretation of Economics for the Left
So again, Hayek had a fine intuition: prices and information have some relationship. But he didn't
have the conceptual or mathematical tools of information theory to understand the mechanisms of that
relationship - tools that emerged with Shannon's key paper in 1948, and that continue to be elaborated
to this day to produce algorithms like generative adversarial networks.
The understanding of prices and supply and demand provided by information theory and machine learning
algorithms is better equipped to explain markets than arguments reducing complex distributions of
possibilities to a single dimension, and hence, necessarily, requiring assumptions like rational
agents and perfect foresight. Ideas that were posited as articles of faith or created through incomplete
arguments by Hayek are not even close to the whole story, and leave you with no knowledge of the
ways the price mechanism, marginalism, or supply and demand can go wrong. Those arguments assume
and (hence) conclude market optimality. Leaving out the failure modes effectively declares many social
concerns of the left moot by fiat. The potential and actual failures of markets are a major concern
of the left, and are frequently part of discussions of inequality and social justice.
The left doesn't need to follow Chris Hayes' advice and engage with Hayek, Friedman, and neoclassical
economics. The left instead needs to engage with a real world vision of economics that recognizes
the limited scope of ideal markets and begins with imperfection as the more useful default scenario.
Understanding economics in terms of information flow is one way of doing that.
Is this just my lack of formal education or is this article very complicated? Honestly I did
not understand it at all. Is there any way to explain this different? ( a link to a different
way of describing informationtheory / free market theory)
Thanks Julia
To put it in more layman-friendly terms: price settings are based on information the suppliers
gather regarding the market, both demand side and supply side (sales forecasts, commodity pricing,
consumer confidence number, focus group information, etc). Demanders do the same. However, they
can never have absolute, complete information for either side. So prices, and idea of what prices
should be, in a free market never represent a true optimal price, but rather a best guess.
This pokes a few holes in neoclassical economic assumptions:
– Most obviously, prices cannot be optimal in a free market.
– Supply and demand changes cannot account entirely for changes in price, as refinements to the
information flow can affect them as well.
– Information asymmetry corrupts prices, and can be used to exploit consumers.
– Information is dependent on a large enough sample size, so neoclassical economics is useless
in markets with limited transactions. An easy example of this are those kind of items on shows
like Antique Roadshow, where there's so few of the items out there that the expert says, "This
is a guess, but really it could go for almost any amount at auction."
So the Left can use this to argue for non-market price controls (to account for the lack of
free market price optimization) and for forcing corporations to have better fiscal transparency
and more strict anti-trust laws (to increase information flow and to prevent information asymmetry).
Local prices for gasoline look a lot more like looting and chaos to me than any kind of correspondence
to "markets." Yesterday at the RaceTrac at the end of my street, "regular" dropped four cents
from morning to evening, reflecting the pricing at the two other "service stations" at the intersection.
A month or so ago (I got tired of keeping a little record of the changes) the price jumped 25
cents overnight. None of these moves seemed to correspond with the stuff I was reading about in
the market conditions around the planet and just in the US - supply and demand? More like the
Useless Looters at BP and Shell and others just spin an arrow on a kid's game board to pick the
day's price point (that sick phrase), or somebody in the C-Suite decided the "Bottom Line" needed
a goose to pump the bonus generator up a bit.
The fraud is everywhere, the looting and scamming too. Seems to me that searching for some
"touchstone" to make sense of It All is an exercise in futility.
Gasoline runs into a different limitation with free market economics, which is that consumers
need to be able to freely enter and leave the market in question in order for the free market
to function (which is why privatized healthcare doesn't work). Outside of a few urban areas with
robust public transportation, most Americans are immediately dependent on gasoline in order to
survive. Even those who do have access to a Metro are still dependent on the shipping that uses
gasoline. So they can raise prices with a greater confidence that the number of consumers will
not drop off as significantly as with other industries.
"This pokes a few holes in neoclassical economic assumptions:"
In neoclassical economics, these "holes" are pretty much understood as the prerequisites for
"perfect competition", as opposed to imperfect competition or monopolies.
When politics is mixed with economics, these are ignored, as they are in the interest of the
ruling class.
PKMKII said it very well, and here's another way to look at it: Centrally-planned economies
(say, some Politburo minister in the former Soviet Union) fail because a central bureaucrat cannot
possibly guess the demand and distribution for all products (say, metal bathtubs) across an economy
in a given year. He guesses, poorly, and either the shortages or the oversupply make our history
books.
Market economics makes a better guess, because pricing gives a dynamic estimate of what the
supply and demand really are. That this estimate is generally *better* has been (mis)represented
as that this estimate is somehow PERFECT - the best estimate that can possibly exist! As the article
describes, this assessment (that only a market economy can generate maximal wealth and optimal
wealth distributions) is FALSE.
The economics underlying communist central planning failed because they couldn't provide the
optimization that comes from valid pricing function. With Shannon's information theory and advanced
analytics, it is possible to create a more optimal economy than our current, simplistic market/pricing
function provides.
Ever since Samuelson's Economics in 1948, we've worshipped a market god based on scanty math.
The first step in moving beyond Samuelson is recognizing that progress is indeed still possible,
and then making the choice and determining the steps to pursue it.
Not just communist central planning. John Kenneth Galbraith's The New Industrial State
makes a special space in society for industries in The Planning Sector. These were the very
large businesses that worked with huge capital bases, long lead times, populations comparable
to small nations. Planning, both input and output, was key to these businesses because there was
too much at stake to risk losing it to the whims of any market. Communist societies were extreme
examples, as they were betting the entire national economy, but the parallels with huge "private"
firms were quite exact.
The Planning Sector businesses failed when they had to slough off all the activities that were
too hard to plan; then they morphed into the Finance/Insurance/Real Estate Sector.
I don't think it is a lack of formal education. It is simply written in a way that is not easy
to understand. I have my master's in engineering, and I'm still not sure exactly what this passage
is trying to say:
"If you randomly generated thousands of messages from the distribution of possible messages, the
distribution of generated messages would be an approximation to the actual distribution of messages.
If you sent these messages over your noisy communication channel that met the requirement for
faithful transmission, it would reproduce an informationally equivalent distribution of messages
on the other end."
From that point on I simply skimmed it and, if I'm not mistaken, the author also assigns positions
to Hayek that seem to be a little more extreme than the positions he actually held.
If you randomly generated thousands of messages from the distribution of possible messages,
the distribution of generated messages would be an approximation to the actual distribution
of messages.
You can only get to the true distribution assuming an infinite number of samples, everything
else is asymptotic approximation to the true posterior distribution. This is true for any mathematical
function approximated numerically were closed solutions are not possible to find (ie. not integrable).
But this is relevant to the second phrase because:
If you sent these messages over your noisy communication channel that met the requirement
for faithful transmission, it would reproduce an informationally equivalent distribution of
messages on the other end.
A noisy communication channel introduces random bits of information which are not part of the
original distribution, but because that noise is random, you would get a message that is an approximation
of the true distribution of the original message being transmitted (is informationally equivalent)
as the noise is distributed 'randomly' .
However, this is only true when the number of information bits approach infinity (for large
numbers), BE WARE! Indeed that randomness can be very skewed for small samples. this is relevant
and interesting because complex systems were you have a large number of variables are not easy
to converge with, even when you are aware of the whole system variables (is a mathematically intractable
problem).
You can think as market pricing (in an ideal world free of politics and power games, which
is not) as a convergence to a complex multidimensional problem, and even though we know that we
are NOT aware of all the variables at play for a given product, hence this supposedly God like
attributes of market price discovery are unwarranted.
"Because the information flow from A can never be greater than A's total information, and
will mostly be less than that total, the observed prices in a real economy will most likely fall
below the ideal market prices."
Surely not. Post-industrial economies feature an asymmetry: individual consumers, catered to
predominantly by large nationwide publicly-traded suppliers.
Because of the superior knowledge possessed by suppliers, further leveraged by advertising
and publicity which exploits human psychological foibles such as peer pressure and herding, prices
in the economy are almost certainly too high versus the ideal of complete information flow (while
the price of labor is almost certainly too low).
Nowhere are prices higher than in the nonnegotiable, monopoly services of government. Not only
does it charge astronomical property taxes which mean that there's really no such thing as secure
property title without income, but also it compels hapless working schmoes to "invest" 15.3% of
their income for their entire working lives at approximately zero return.
With respect, it is not empirically incorrect that immigration lowers wages. The historical
experience is quite clear, that when governments force population growth, whether through increased
immigration or via incentives to increase the local fertility rate, wages for the many fall and
profits for the few increase.
Sure more workers means more competition for jobs, but can also result in an increase in the
number of jobs – BUT ONLY OVER TIME AND ONLY IF NEEDED INVESTMENTS ARE MADE AND THERE IS ENOUGH
MARGINAL CAPACITY TO INVEST AND TECHNOLOGY AND RESOURCES ARE NOT ENTERING THE AREA OF DIMINISHING
RETURNS. Which is not guaranteed, especially if the immigration level is massive and constantly
increasing.
The United States from around 1929 to 1970 had very low immigration, and, starting from a low
level, wages soared. Starting in 1970, the borders to the overpopulated third world have been
progressively opened, and wages have started to diverge from productivity and are now starting
to decline in absolute terms. Other nations that recently increased the rate of immigration and
have seen significant falls in wages are: South Africa, the Ivory Coast, England, Australia, and
Singapore – and even some provinces of India, where immigration from Bangladesh has been used
to make certain that wages stay near subsistence. Yes immigration was not the only thing going
on there, but when rapid forced increases in the supply of labor are always followed by falls
in wages, well, the empirical evidence is hardly to be dismissed out of hand.
Remember, no society in all of history has run out of workers. When the headlines say that
immigrants are needed to end a labor 'shortage' what is really meant is a 'shortage' of workers
who have no option but to accept low wages. However, the only reason that workers can get high
wages is that there is a 'shortage' of workers forced to take low wages. It is thus essentially
tautological that when immigration is said to eliminate a labor shortage, it is lowering wages,
because a labor 'shortage' is in fact what high wages are based on.
They're arguing that you can't empirically say that immigration decreases wages, because
there are simply too many variables in an economy to be able to say definitively if it's a cause
or a correlation, i.e. does the immigration decrease wages, or does another socio-economic factor
simultaneously decrease wages and cause an influx of immigrants? This is why economics is treated
as a soft science, as you can't remove variables in a lab setting the way you can with other sciences.
"BUT ONLY OVER TIME AND ONLY IF NEEDED INVESTMENTS ARE MADE AND THERE IS ENOUGH MARGINAL CAPACITY
TO INVEST AND TECHNOLOGY AND RESOURCES ARE NOT ENTERING THE AREA OF DIMINISHING RETURNS."
Nope. Once immigrants arrive, demand increases instantly, even before they get a job.
Wow. Just wow. A complete, through, and total BS assertion of some kind of economic theory.
I am simply stunned at his verbal density of discourse, blithe refusal to explain, and simply
name dropping facts, ideas, and concepts that are absolutely not related except in being part
of the English language.
I know this is close to an ad hominum attack; I haven't given any specific rebuttal. But I
don't have the tools at my disposal right now to avenge what I see as an assault on my analytic
abilities.
If not a specific rebuttal, what *kinds* of things in the article do you disagree with? Perhaps
this posting is just a step to some greater knowing. Neoclassical Economics has been taught as
"factual and beyond dispute" my whole career - I'm sure that Alchemy and Leechbooks were taught
similarly in earlier ages. How might you suggest that we move forward to something better?
"It ain't what you don't know that gets you into trouble. It's what you know for sure that
just ain't so." ~ Mark Twain
"Wow. Just wow. A complete, through, and total BS assertion of some kind of economic theory.
I am simply stunned at his verbal density of discourse, blithe refusal to explain, and simply
name dropping facts, ideas, and concepts that are absolutely not related except in being part
of the English language."
Yeah that is a pretty good summation of my experience wrt Austrians over almost 2 decades in
a nutter shell[ ] kudos.
Now if only the neoclassicals would abandon the individual and consider vectors in distribution
and how groups affect information.
disheveled .. throws toys out of play pen and hurrumphs away . victoriously .
In my limited experience the prices we accept are more to do with contentment than information.
We are aware that we can never have perfect information; bounded rationality being our situation*.
So as buyers, we end up going with contentment or at least convenience; price too high, content
to leave it on the shelf. Price too low and the reaction might be the same because it is too good
to be true, or of suspect quality. You can have a bargain staring you in the face and, but you
are content because of lack of interest or knowledge.
Good luck to those who try to quantify contentment!
.And then there is the tyranny of choice; not content!
Pip Pip!
* When it comes to the prices people are prepared to pay for products such as cosmetics and
super-cars the rule seems to be unbounded irrationality, but hopefully contentment is achieved
anyway.
when it comes to the political application of this 'theoretical' argument I think it will be
easily dismissed as more leftist academic pedantry, 'immanentizing the eschaton'- all the comments
reflecting the advantages of imperfect information evidence.
This is a wonderful, cogent explanation of a very mathematically complex subject, which is
Information Theory, that has been used to make profound contributions well beyond telephonic communication
for which Claude Shannon developed it, when he discovered it trying to code the English language,
and which he failed to do.
R.A. Fisher was also brilliant. His work has had implications in probability, and statistics,
economics, and perhaps most profoundly in genetics.
The neoclassical analysis also doesn't account for single supplier, multiple demand market
situations. If blueberries both have the consumer market, but also an industrial market (dye purpose,
maybe), then the blueberry supplier has to balance both of those demands, which may end up favoring
one or the other, or some state that isn't ideal for either demand market. The universal example
is the private property of the business itself. The owner isn't just in the market of whatever
service or widget they make, but also in the commercial real estate market. This is especially
problematic with housing, as high rents + vacancies create the impression of scarcity and value
to prospective buyers.
Good work. Now add the delays in information transfer, and fear and greed buying motivations
based on multiple information streams, coupled with information conflicts (injected noise), and
you are getting closer to the real world.
Information conflicts are the differing explanations of the Trump/Corey affair. There is much
noise in the information stream.
Stable prices mean a balance of crop failures and crop booms (supply), population declines
and population booms (demand), speculation and risk-aversion (demand)
This is a good example because it's easy to understand appealing, I fear, to our neoclassical
prejudices.
It's a bad example because it doesn't seem very multidimensional; appealing to our neoclassical
prejudices it collapses easily into "How many blueberry buyers?" and "How many blueberries?"
Trying to imagine something more multidimensional there might be a preference for big blueberries
because they're big there might be a preference for small blueberries because people think that
they're wild, so they must be tastier. If the markets were segregated, there could be a market-clearing
price for big blueberries, and another for small blueberries. But the markets probably aren't
segregated, and the prices would play back and forth against each other.
Maybe good too in dealing with prices of different goods, not just The Price. Neoclassical prices
are meant to be the information that tells me whether to buy dish soap or a new overcoat instead.
Stable prices mean a balance of crop failures and crop booms (supply), population declines
and population booms (demand), speculation and risk-aversion (demand)
There are no stable prices. With this analysis, the steps to include feedback is clear, and
if the feedback is non-linear, non-linear feedback is a characteristic of chaotic systems.
Temporary stability only in a non-linear system, with tipping points etc.
Chris Hayes is an idiot. What kind of person can repeatedly visit the post-industrial wasteland
of the rust belt for town halls with Bernie Sanders and then say "what we need more of is the
philosophy of free-markets"?
But even with that being said, Hayes somehow is still by far the most worthwhile personality
on MSNBC.
I think the tradition of economic thinking has been really influential. I think it's actually
a thing that people on the left really should do - take the time to understand all of that. There
is a tremendous amount of incredible insight into some of the things we're talking about, like
non-zero-sum settings, and the way in which human exchange can be generative in this sort of amazing
way. Understanding how capitalism works has been really, really important for me, and has been
something that I feel like I'm a better thinker and an analyst because of the time and reading
I put into a lot of conservative authors on that topic.
While I agree with much of the argument Hayes is making – know thy enemy, etc. – he gets one
huge thing wrong here that is very troubling: equating capitalism with markets. "Understanding
how capitalism works has been really, really important for me " I'm amazed at how often this trips
up otherwise smart people. There is no capitalism in mainstream neoclassical economics (no government
either, and you can't have capitalism without government). And get any business person talking
freely and they will tell you that everyone in business hates super-competitive markets of the
kind fetishized by economists, and that profitability is all about finding niches and other ways
to avoid competition.
I think it's important to recognize where information theory and the principle of maximum entropy
does succeed in economics and that is as a method of doing statistical inference in economics.
For those interested, I would recommend looking at the increasing amount of information theoretic
research coming out of the Economics Department at the New School for Social Research and UMKC.
You can find many good working papers by myself, Duncan Foley, Paulo dos Santos, Gregor Semieniuk,
and others on the NSSR Repec page
https://ideas.repec.org/s/new/wpaper.html
.
At Bell Labs, plaques and a statue of Shannon occupy places of honor, in more prominent places
than the tributes to other prominent people (including 8 Nobel Prize winners in science).
Here's a presentation by Prof. Christopher Sims of Princeton, at Bell Labs. "Information Theory
in Economics" https://youtu.be/a8jt_TmwQ-U
– critique of the optimizing rational behavior models, noting people are bandwidth limited
("Rational Inattention"). Non-gaussian! Brings up example of monopolist of with no high capacity
limit vs. customers.
"... But making the observation that there are no markets as defined makes little dint on a faith-based theory like neoliberalism, especially a theory whose Church encompasses most university economics departments, most "working" economists, numerous well-funded think tanks, and owns much/most of our political elite and so effectively promotes the short-term interests of our Power Elite. ..."
Phillip Mirowski challenged the left to directly attack and defeat the neoliberal belief that
markets are information processors that can know more than any person could ever know and solve
problems no computer could ever solve.
Sorry for the long quote - I am loathe to attempt to paraphrase Hayek
"This is particularly true of our theories accounting for the determination of the systems of
relative prices and wages that will form themselves on a well functioning market. Into the determination
of these prices and wages there will enter the effects of particular information possessed by
every one of the participants in the market process – a sum of facts which in their totality cannot
be known to the scientific observer, or to any other single brain.
It is indeed the source of
the superiority of the market order, and the reason why, when it is not suppressed by the powers
of government, it regularly displaces other types of order, that in the resulting allocation of
resources more of the knowledge of particular facts will be utilized which exists only dispersed
among uncounted persons, than any one person can possess.
But because we, the observing scientists,
can thus never know all the determinants of such an order, and in consequence also cannot know
at which particular structure of prices and wages demand would everywhere equal supply, we also
cannot measure the deviations from that order; nor can we statistically test our theory that it
is the deviations from that "equilibrium" system of prices and wages which make it impossible
to sell some of the products and services at the prices at which they are offered." [Extract from Hayek's Nobel Lecture]
This just hints at Hayek's market supercomputer idea -- I still haven't found a particular writing
which exposits the idea -- so this will have to do.
Sorry - another quote from the Hayek Nobel Lecture [I have no idea how to paraphrase stuff
like this!]:
"There may be few instances in which the superstition that only measurable magnitudes can be important
has done positive harm in the economic field: but the present inflation and employment problems
are a very serious one. Its effect has been that what is probably the true cause of extensive
unemployment has been disregarded by the scientistically minded majority of economists, because
its operation could not be confirmed by directly observable relations between measurable magnitudes,
and that an almost exclusive concentration on quantitatively measurable surface phenomena has
produced a policy which has made matters worse."
I can't follow Hayek and I can't follow Jason Smith. The first quote above sounds like a "faith
based" theory of economics as difficult to characterize as it is to refute. The second quote throws
out Jason Smith's argument with a combination of faith based economics and a rejection of the
basis for Smith's argument - as "scientistically minded."
I prefer the much simpler answer implicit in Veblen and plain in "Industrial Prices and their
Relative Inflexibility." US Senate Document no. 13, 74th Congress, 1st Session, Government Printing
Office, Washington DC. Means, G. C. 1935 - Market? What Market? Can you point to one? [refer to
William Waller: Thorstein Veblen, Business Enterprise, and the Financial Crisis (July 06, 2012)
It might be interesting if Jason Smith's information theory approach to the market creature
could prove how the assumed properties of that mythical creature could be used to derive a proof
that the mythical Market creature cannot act as an information processor as Mirowski asserts that
Hayek asserts.
So far as I can tell from my very little exposure to Hayek's market creature it
is far too fantastical to characterize with axioms or properties amenable to making reasoned arguments
or proofs as Jason Smith attempts. Worse - though I admit being totally confused by his arguments
- Smith's arguments seem to slice at a strawman creature that bears little likeness to Hayek's
market creature.
The conclusion of this post adds a scary thought: "The understanding of prices and supply and
demand provided by information theory and machine learning algorithms is better equipped to explain
markets than arguments reducing complex distributions of possibilities to a single dimension,
and hence, necessarily, requiring assumptions like rational agents and perfect foresight." It
almost sounds as if Jason Smith intends to build a better Market as information processor
religion -- maybe
tweak the axioms a little and bring in Shannon. Jason Smith is not our St. George.
But making the observation that there are no markets as defined makes little dint on a faith-based
theory like neoliberalism, especially a theory whose Church encompasses most university economics
departments, most "working" economists, numerous well-funded think tanks, and owns much/most of
our political elite and so effectively promotes the short-term interests of our Power Elite.
Some interesting notes about difficulty of comparing GDP of various countries, in this case the
USA and Russia.
Notable quotes:
"... Russia's overall GDP PPP places it slightly below Germany - 6th place in the world ..."
"... But the US GDP is of an different structure. Compared it is overblown with pure financial sales and "hedonistic adjustments". More is blown by the culture. In the US much more everyday things relies on money. In case of case they are all worth nothing. Furthermore, if it comes to conflicts than the whole US Infrastructure has to be "revalued", and i doubt that it can withheld some stress tests. ..."
"... Over the years, the Pentagon encouraged Congress to move parts of national security spending out of its budget to the extent that almost half is found outside the DOD. The USA really spends over a trillion dollars a year. For example, nuclear weapons research, testing, procurement, and maintenance is found in the Dept of Energy budget. ..."
"... [AKA "SmoothieX12"] ..."
"... No serious analyst takes US GDP as 18 trillion dollars seriously. A huge part of it is a creative bookkeeping and most of it is financial and service sector. ..."
"... In general, overall power of the state (nation) is not only in its "economic" indices. I use Barnett's definition of national power constantly, remarkably Lavrov's recent speech in the General Staff Academy uses virtually identical definition. ..."
Russia spent almost 5.4% of GDP on military spending. The US last year spent 3.3% and with Trump's
proposed increase this number will increase by a few decimal points.
Russia is a middle income country while the US is a rich country, in the top 10 of GDP per
capita. If oil prices don't substantially improve and Russia continues to spend the way it does
on the military it will simply go broke.
Goods and services in Russia are considerably less expensive than in the West (and this includes
the cost of producing fighter jets or rockets), so for such purposes GDP PPP is a better indicator
than is nominal GDP. In terms of GDP PPP, Russia is of course not on par with the United States
but is considerably higher than Mexico. It is in the same neighborhood as places such as Hungary.
Russia's overall GDP PPP places it slightly below Germany - 6th place in the world
:
Russia is a middle income country while the US is a rich country, in the top 10 of GDP per
capita.
But the US GDP is of an different structure. Compared it is overblown with pure financial
sales and "hedonistic adjustments". More is blown by the culture. In the US much more everyday
things relies on money. In case of case they are all worth nothing. Furthermore, if it comes to
conflicts than the whole US Infrastructure has to be "revalued", and i doubt that it can withheld
some stress tests.
If oil prices don't substantially improve and Russia continues to spend the way it does
on the military it will simply go broke
No country that relies on oil ( Russia do not) has made substantial improvements. Normally
they are problem states where the problems made by oil are solved by money.
So from my point of view the opposite is true. Russia has made the big mistake to open itself
to the west and was bitten. Now they readjust (with a border to china). Thank's to the US Oligarchs
which thrown away that chance for they're primitive Neanderthal tribe thinking.
Over the years, the Pentagon encouraged Congress to move parts of national security spending
out of its budget to the extent that almost half is found outside the DOD. The USA really spends
over a trillion dollars a year. For example, nuclear weapons research, testing, procurement, and
maintenance is found in the Dept of Energy budget.
And as others have noted, GDP is a measure of activity, not prosperity. For example, mortgage
refinancing creates lots of GDP, but no real wealth. Hurricanes and arson are good for GDP too!
Stupid beyond belief. Countries can't go broke doing something, if they control the natural and
human resources they need to accomplish it. In addition, you apparently did not read Smoothie's
explanation of why just comparing the sums spent is silly.
"Russia is a middle income country while the US is a rich country, in the top 10 of GDP per
capita." this is very funny, how about the 20 trillions of US national debt and it is skyrocketing
fast? If you only count asset without counting liability US maybe in the top 10 GDP per capita,
but if you count net asset the US is in the negative GDP per capita, a broke nation. Perhaps it
is American Exceptionalism logic, claiming credit where credit is not due, living in a world detached
from reality.
"If oil prices don't substantially improve and Russia continues to spend the way it does
on the military it will simply go broke." this is even funnier, Russian does not use USD in
Russia, nor Russian government pay its MIC in USD, meanwhile Russian Central Bank can print Ruble
thru the thin air just like the Fed, why does oil price have any relationship with Russian internal
spending? Another example of "completely triumphalist and detached from Russia's economic realities"
which is defined by meaningless Wall Street economic indices and snakeoil economic theories and
rhetoric taught in the western universities.
P.S. No serious analyst takes US GDP as 18 trillion dollars seriously. A huge part of it
is a creative bookkeeping and most of it is financial and service sector. Out of very few
good things Vitaly Shlykov left after himself was his "The General Staff And Economics", which
addressed the issue of actual US military-industrial potential.
Then come strategic, operational and technological dimensions. You want to see operational
dimension -- look no further than Mosul which is still, after 6 months, being "liberated". Comparisons
to Aleppo are not only warranted but irresistible.
In general, overall power of the state (nation) is not only in its "economic" indices.
I use Barnett's definition of national power constantly, remarkably Lavrov's recent speech in
the General Staff Academy uses virtually identical definition.
"... By Amit Bhaduri, Professor Emeritus, Jawaharlal Nehru University and Visting Professor, Council for Social Development. Originally published at the New Economic Perspectives website ..."
"... why do we accept the artificial devolution of political economy into economics and politics? ..."
"... gets interest from ..."
"... Economics should be transferred to the divinity school. Then it will be untouchable! ..."
Yves here. I'm using the original headline from INET even though "false
arrogance" seems like rhetorical overkill. After all, arrogance and hubris are
closely related phenomena (my online thesaurus list "arrogance" as the first
synonym for "hubris"). But in Greek tragedies, the victims of hubris were all
legitimately accomplished, yet let their successes go to their heads. Thus the
use of "false arrogance" presumably means that economists' high opinion of
themselves is not warranted.
By Amit Bhaduri, Professor Emeritus,
Jawaharlal Nehru University and Visting Professor, Council for Social
Development. Originally published at the
New Economic Perspectives website
The problem of any branch of knowledge is to systematize a set of particular
observations in a more coherent form, called hypothesis or 'theory.' Two
problems must be resolved by those attempting to develop theory: (1) finding
agreement on what has been observed; (2) finding agreement on how to
systematize those observations.
In economics, there would be more agreement on the second point than on the
first. Many would agree that using the short-hand rules of mathematics is a
convenient way of systematizing and communicating knowledge - provided we have
agreement on the first problem, namely what observations are being
systematized. Social sciences face this problem in the absence of controlled
experiments in a changing, non-repetitive world. This problem may be more acute
for economics than for other branches of social science, because economists
like to believe that they are dealing with quantitative facts, and can use
standard statistical methods. However, what are quantitative facts in a
changing world? If one is dealing with questions of general interest that arise
in macroeconomics, one has to first agree on 'robust' so-called 'stylized'
facts based on observation: for example, we can agree that business cycles
occur; that total output grows as a long term trend; that unemployment and
financial crisis are recurring problems, and so on.
In the view of the economic world now dominant in major universities in the
United States - with its ripple effect around the world - is these are
transient states, aberrations from a perfectly functioning equilibrium system.
The function of theory, in this view, is to systematize the perfectly
functioning world as a deterministic system with the aid of mathematics. One
cannot but be reminded of the great French mathematician Laplace, who claimed
with chilling arrogance, two centuries after Newton, that one could completely
predict the future and the past on the basis of scientific laws of motion - if
only one knew completely the present state of all particles. When emperor
Napoleon asked how God fitted into this view, Laplace is said to have replied
that he did not need that particular hypothesis. Replace 'God' by
'uncertainty', and you are pretty close to knowing what mainstream
macro-economists in well-known universities are doing with their own variety of
temporal and inter-temporal optimization techniques, and their assumption of a
representative all knowing, all-seeing rational agent.
Some find this extreme and out-dated scientific determinism difficult to
stomach, but are afraid to move too far away, mostly for career reasons. They
change assumptions at the margin, but leave the main structure mostly
unchallenged. The tragedy of the vast, growing industry of 'scientific'
knowledge in economics is that students and young researchers are not exposed
to alternative views of how problems may be posed and tackled.
This exclusion of alternative views is not merely a question of vested
interest and the ideological view that we live in the best of all possible
worlds where optimum equilibria rule, except during transient moments. It
stems, also, from a misplaced notion of the aesthetics of good theory: Good
theory is assumed to be a closed axiomatic system. Its axioms can, at best, be
challenged empirically - e.g. testing the axiom of individual rationality by
setting up experimental devices - but such challenges hardly add up to any
workable alternative way of doing macro-economics.
There is however an alternative way, or, rather, there are alternative ways.
We must learn to accept that when undeniable facts stare us in the face and
shake up our political universe - e.g. growing unemployment is a problem, and
money and finance have roles beyond medium of payment in an uncertain world
shaken by financial crises - they are not transient problems; they are a part
of the system we are meant to study. It is no good saying my axiomatic system
does not have room for them. Instead, the alternative way is to take each
problem and devise the best ways in which we are able to handle them
analytically. Physicist Feynman (economist Dow (1995) made a similar
distinction) had made a distinction between the Greek way of doing mathematics
axiomatically, and the Babylonian way, which used separate known results
(theorems) without necessarily knowing the link among them. We must accept this
Babylonian approach to deal with macro-economic problems, without pretending
that it must follow from some grand axiom.
Awareness of history must enter economic theory by showing that concepts
such as cost, profit, wage, rent, and even commercial rationality have
anthropological dimensions specific to social systems. The humility to accept
that economic propositions cannot be universal would save us from
self-defeating arrogance.
I can't tell you how much I agree with the article.
For example, what CRITERIA are used that something is a "good" job. Before you
even start to debate the "facts" at least set up the criteria by which you will
evaluate them. It seems evident to me (pension, "good" – what is "good" health
care) but apparently, one of the "pre-eminent" economists, at least according
to another economist, thinks part time jobs are just as good as retail .
It works for me as an executive summary, but almost every paragraph would
probably require a similarly-sized essay to explain it. I agree with its
judgment that too many economists view the world as being governed by some
sort of universal economic law (or "laws"), when in reality those laws work
in very limited circumstances. Whether it's possible there could be such
laws some day, I don't have an opinion one way or another, and nothing in
this article sheds much light on that issue.
It's my experience that the overwhelming number of economists don't know
squat about employment/ unemployment, including why and employer hires and
why people look for and accept jobs. I assume this is because all of these
things are rare event in the personal lives of economists, who spend little
time looking for or between jobs. An economist is either employed, or he/she
is not an economist, and so once they gain experience with the above, they
are no longer in a position where they can speak about it among others still
in the field.
pension + black lung = good job? I mean if we're saying coal mining is a
"good job" now noone who can do better wants it though, that's what a
"good job" it is. Compensation matters but so do working conditions, and by
the way externalities matter, and "coal mining" as a good job certainly
doesn't account for that and the whole community being a cancer cluster etc.
As an economist, now semi retired (author, handyman, carer ), I can speak
of my own experiences.
I think one aspect of my degree course was a lack of normative studies
and not enough, 'well that is the mainstream theory, now this is what we
observe in practice' (and why eg control fraud, captured political
interests)
We were also mispoken to about how private banks create money, taxes fund
government spending and so on.
My choice to study economics was regretted years later, yet it gave me a
lift up career-wise.
It now seems sad that the profession has become mis-trusted and
denigrated. We don't all think alike.
When I studied economics, I realized how absurd a lot of it was so I
answered according to what the prof wanted to see.
However, I'm under the impression that my education in a Cdn
university was way less dogmatic than in the US.
Externalities were discussed, as was the dubious quality of GDP
growth. I had a book on the history of the Cdn financial system. It
explained very well how we went from gold standard to current system..
and how the leading countries used devaluations (France, UK, US) to their
advantage.
The problem with objective economists is that they realize that there
exists something called the law of unintended consequences. Once you
realize there are too many variables to control, you become a leaf in the
wind. And no one likes ambivalent people. They want leaders who KNOW the
answers. So leaders who appear to have answers are chosen.
Well said. I always appreciated having my undergraduate economic
theory class delivered by an active duty Marine Corp Major. A hardened
realist with a talent for illuminating theory.
No offense to Dean Baker, but what doesn't Krugman NOT get wrong? His
public disagreement with Real Economist, Steve Keen, would have been
hilarious had it not been so pathetic in demonstrating either what a sheer
idiot he is, or professional liar, whatever the case may be. (Krugman was
claiming that banks do not create credit as Krugman has no understanding of
that rather simple fractional reserve banking system. I once wrote to
Krugman to correct him on his supply-and-demand
theory
as to the
cause of that incredible spiking upwards of oil/energy costs around 2008,
even though the Baltic Exchange Index ad pretty much collapsed, with an
incredible number of oil tankers floating off the coasts of Singapore and
Malaysia, in an inactive state – – attempting to explain to him about
Goldman Sachs and Morgan Stanley, et al., speculating up the prices on ICE
via commodity futures speculation or wash sales, and he didn't get that
either!)
But this reminds me of a local (Seattle) witless talk show (KIRO radio
station: the John and Curley Show) where the two snarky hosts, as ignorant
as can be, go on and on about their love of globalization, scoffing at those
who don't understand that offshoring manufacturing (they ignored all the
other categories) jobs to China and elsewhere was most clever, and "freed up
America to manufacture high-end goods" - evidently ignorant of the fact as
to where most chip fabs are located, and that 70% to 100% of many auto parts
and aircraft parts are manufactured overseas, shipped back to America only
for assembling purposes.
That ultra-boondoggle, the F-35, is manufactured across 9 foreign
countries plus America - wonder why it's such a cluster screw-up, huh?
A further aside: I don't see all Greek tragedies as turning on hubris.
Where is the hubris, say, of Oedipus? He is the King, there is a plague, the
people call on him for help, he helps. And the plague is vanquished (mind
you, he and his family – the ones still living – are in a mess. But that –
Sophocles seems to be saying – is Life).
The important thing according to the Greek scholar Michael Scott is to
recognize that Greek theater and Greek democracy are joined at the hip.
The former educated the electorate in the difficult choices they would
have to make as managers of their own political existence. We have
political theater today but no-one considers it instruction in one's
civic duty.
"We" here can say it to each other, over and over, in different and
ever-better-documented ways, that almost all economics and the "findings" it
generates, and almost all economists and their credentials, are BS, MS, Ph.D
(bullish!t, more sh!t, piled higher and deeper). But how to reach a larger, and
large enough, set of people who actually have votes that count and can "call
bullsh!t" and demand and get an end to the "policies" that are built on and
gather "legitimacy" from the "findings" of all those faux 'economists?" Who
after all do have those (feedback-loop-granted) "credentials," and so many
sous-chefs to keep pumping out the mega-gallons of Bernays sauce to make the
sh!t sandwiches seem au courant, de rigeur, and somehow palatable?
Agreed, I think that's the issue. Debating whether or not economics is a
science plays right into the prevailing power structure. Rather, the
question is why do we accept the artificial devolution of political economy
into economics and politics? There are lots of quantitative (and
qualitative) "facts" in the world about economics; it can be a scientific
discipline like any other. The important civic debate is the political part:
what values should guide our interpretation and implementation of those
economic understandings?
why do we accept the artificial devolution of political economy
into economics and politics?
This is the right question if we change "why to we accept" to "how is
it that we now have" – that is, if we ask an empirical, historical
question and not a metaphysical or psychological question. In an academic
sense, I would say the answer has to do with a long battle within
economics that was decisively won in the 50s or 60s by one "school" to
the extent that they could ostracize and ignore alternative "schools"
without much effective criticism, and an implicit "bargain" with
sociology and political science to craft an academic division of labor.
And then, inertia and serious pushback against any and all challengers.
In the non-academic world, the answer has to do with a certain
confluence of interest between neoclassical economics and existing social
and economic power.
"But how to reach a larger, and large enough, set of people who
actually have votes that count and can "call bullsh!t" and demand and get
an end to the "policies" that are built on and gather "legitimacy" from
the "findings" of all those faux 'economists?"
I think one method, to move in that direction, is to make a very small
number of very specific demands. Single payer healthcare, and a living wage.
We demand them!! Why don't we have them??!!
When the "economists" tie themselves up into illogical pretzels, trying
to "explain" why we can't have these nice things, they destroy their
credibility– to the point where their dogma is revealed as false and
inhuman. Then, we can shake off their dead hand and begin to build a new
society on more rational and humane principles.
I understand and share your frustration with a brand of economics
being used as a cudgel to tell us we cannot have nice things even as each
individual US state's GDP is the equivalent to that of (at least) a
medium EU nation which individually can afford far better health
insurance schemes than we do. It should be the economists' job to smooth
the way, to find ways so that we can have nice things not just leave it
at can't.
I disagree with washunate that to engage with economists who are
failing is a waste of time that plays into the hands of the prevailing
power structure. Neoliberal economists should be hearing from us that
they are not scientists no matter how much math they dress their pet
theories with. The greatest glory of a science is the predictive powers
of its foundational theories and in that regard neoliberal economics
fails spectacularly. It is not by any definition a science and they
should hear it as often as possible. Of course they know this in their
bones but their theories give their funders significant political cover
as they seek more undeserved goods for themselves. It is our job to
remind everyone who will hear that neoliberal theories are fiction not
science.
Why don't we have universal health care? Sadly, I think the answer is
quite simple – the elasticity of demand for health is infinite as the
alternative is death. Hence, Genentech can and does charge $20,000 for a
round of rituxan, which is very effective on non-Hodgkins lymphoma. Is it
worth it? Of course it is – lymphoma is deadly.
My point is that while the social benefit of universal health care is
high, so is the opportunity cost to the healthcare industry. And since
the industry is free to bribe politicians (sans a quid pro quo of course)
we are unlikely to ever get it. As discussed above, economics divorced
from politics is useless.
wow pretty awesome that Europe/Great Britain and Japan don't have
politicians . just teasing you, how though did those countries manage
to get around your problem is the question//
The British learned from the washout of the first world war that
the usual politicians could not be trusted to produce a country fit
for heroes as was promised, so they voted for socialism.
As for the Japanese, my memory is that the US set their health
system up! Dang!
The British polititician who lost out big time in that
election that brought the Labour Party's version of socialism
into power, was Winston Churchill – after the end of World War
Two.
It goes to show that you might need one kind of leader in
existential-wartime, and another for peacetime. However,
nowadays how do you know whether the there is an existential
struggle or not?
Yes, hubris was the tragic flaw. Treating it as a mere synonym for arrogance
is a fine example of why to avoid thesaurusi. A good dictionary with synonymies
is more reliable.
Speaking of hubris, there's a recently published book by a "professor of
national security" (good luck with that one!!!), Tom Nichols, titled:
The
Death of Expertise
, and it's a real hoot!
Not because the author got anything right, he got almost everything
completely wrong, and simply for that reason!
At one point in this garbage book by Nichols, he is repeating an exchange
between a political appointee whom he believes to be an "expert" and a grad
student concerning Reagan's spaced-based missile defense {SDI or Star Wars -
in this case I believe it was the space-based platform} of which much of it
turned out to be a hoax meant to mislead the Soviets – – and historically we
know the grad student was correct, and Jastrow, if I recall his name
correctly, was most incorrect – – but you would never know it from this
author! -- !
(If you observe any American space-based missile platforms, please be
sure to let me know!)
Besides acknowledging that economic theory is bound to time and society, it
would also be good to give some fresh thought to familiar economic concepts we
take as Bible-given.
Let's re-examine the ideas of interest [can we do without it], growth [can
we have a no-growth economy], and differential pay [need we pay a much higher
salary for "higher" work],
I would go on to look at profit [should there be profit in all economic
activities, such as health care, education, and others], oligopolies [is it
good to have very large corporations], and competition [should we promote
competition is all aspects of life].
Some of these have been questioned in these pages, such as the question of
oligopoly. I encourage raising more and continued questioning, as we've done
here.
It tends to draw fire when I mention it, but "Sharia or Islamic banking
and finance" is supposed to be done without any interest. And the system
(now under assault by Western interest-holders, by physical violence and
subversion of many types, and co-optation via corruption) kind of relies on
actual trust and risk-sharing. Here's some details for anyone "interested:"
http://www.islamic-banking.com/islamic_banking_principle.aspx
Thank you for your first reference, JTMcPhee, from the Institute of
Islamic Banking. It makes a great deal of sense that lenders bear risk
along with borrowers when we are talking about financing
entrepreneurship. In this view, the lender has
an interest in
rather than
gets interest from
. [I very much suspect that the
former
meaning became detached from the
latter
very
early on in human history, which is why the latter was condemned as
'usury', a result itself of an imbalance of power leading to coercive
lending.]
I wonder, however, about 'consumer lending' where there is clearly no
entrepreneurial risk.
Do you have a useful reference about how this 'consumer lending'
occurs without 'interest' in the Islamic world?
In 1955, the economist Simon Kuznets thought he had found such a law of
motion, one that determined the path of income inequality in a growing economy.
The scant data that he could gather together seemed to suggest that, as a
nation's GDP grows, inequality first rises, then levels off, and ultimately
starts to fall. Despite Kuznets' explicit warnings that his work was 5%
empirical, 95% speculation and "some of it possibly tainted by wishful
thinking", his findings were soon touted as an economic law of motion,
immortalized as "the Kuznets Curve"– resembling an upside-down U on the page –
and has been taught to every economics student for the past half century.
As for the curve's message? When it comes to inequality, it has to get worse
before it can get better, and more growth will make it better. And so the
Kuznets Curve became a perfect justification for trickle-down economics and for
enduring austerity today in the pursuit of making everyone better off some day.
Forty years later, in the 1990s, economists Gene Grossman and Alan Krueger
thought they too had found an economic law of motion, this time about
pollution. And it appeared to follow the very same trajectory as Kuznets' curve
on inequality: first rising then falling as the economy grows. Despite the
familiar caveats that the data were incomplete, and available for local air and
water pollutants only, their findings were quickly labeled the "Environmental
Kuznets Curve". And the message? When it comes to pollution, it has to get
worse before it can get better and – guess what – more growth will make it
better. Like a well-trained child, growth will apparently clean up after
itself.
Except it doesn't.
===================================================================
More fuel to the fire
They both seem typical of the human search for knowledge, with or without
resorting to the Scientific Method.
Typical in that
1. we fail to recognize our knowledge is always partial and limited
1A. Sometimes with the added arrogance of saying we know it's partial and
limited
(Some can't afford that added arrogance, because they have been exposed
already, like, say, fortune tellers)
And yet
2. we use that knowledge as if it's complete and applicable everywhere.
The Greek concept of hubris was not merely arrogance, but involved an INJURY
to others. (I discuss this in J is for Junk Economics.) The main examples were
creditors and land monopolizers - and kings. Nemesis not only fight hubris, but
specifically supported the weak and poor who were the main injured parties. The
iconography is quite similar to Sumerian Nanshe of Lagash.
So the concept of hubris is linked to affluenza: irresponsibility of wealth,
injuring society at large.
My Lord! The best economist on the planet is commenting! Our Economist
God! (As someone here aptly characterized you a few weeks ago when Yves ran
your discussion of Jubilees.)
I'll come right out with it, I'm a Michael Hudson super fan/groupie and
after Yves published one of your articles, which of course, I had already
read being a big fan/internet tube tracker, I suggested we concerned
citizens, get a Michael Hudson fan club going and somehow convince you to
take your stellar, economics distilling/demystifying self on the road along
with other exemplary economists and some musicians and comedians. Like that
stadium event you did in Europe or that Irish Econ Conference, but this
would be for the education of the vast citizenry, hence the addition of a
bit of music/comedy to entice. A touring TED/Coachella or South by Southwest
but for the Economic Edification of the 99%. (You wouldn't neccessarily have
to deliver all of your addresses in person. Some could be taped.)
You would be bigger than Bernie if the millenials became familiar with your
work, but more importantly, you and other like minded economists, could arm
people with the deeper understanding that is essential to overturning the
prevailing paradigm.
Thank You For Your Works!
Hope
ps I looked into getting Economic Rock Star as a website but it is taken.
Yes, 'injury' as in
injustice -- Of course that may entail
physical damage, but the recent tendency to reduce 'injury' to that narrow
sense alone misses most of the point.
Thanks for the connection to 'hubris', concerning which I was Classically
clueless until a few minutes ago. If hubris corresponds to injury in the
proper sense, perhaps 'arrogance' should be paired with 'insult', i.e. the
gratuitous gloating (= self-aggrandizement of the unjust) and gleeful
blaming of the injured that at least in living memory seems almost always to
be packaged with the injustice?
None of these practices is new, although their use has expanded over the
years. What does seem to be new, as Bettina Boxall of the Los Angeles Times
reported this week, is that some California farmers are now experimenting with
flooding fields that have grapevines and almond trees growing on them. And in
general, people in California are paying a lot more attention to groundwater
than they used to.
In 2014, the California Legislature approved a package of
groundwater-management laws - long after most other Western states had done so
- that are now slowwwwwly beginning to take effect. Local
groundwater-management agencies are being formed that will have to come up with
plans to reach groundwater sustainability within 20 years.
========================================================
You can look at this optimistically or pessimistically. With the population
growing year, after year, after year, it doesn't take high intelligence that
water demand will exceed water supply. And yet CA government choose to deal
with this freight train coming down the tracks in ..2014.
> With the population growing year, after year, after year, it doesn't
take high intelligence that water demand will exceed water supply.
Supply is not fixed. A lot of the current "supply" (rainfall) isn't being
retained, stored, or used intelligently. So there's still quite a bit of
room for population growth, particularly in the northern, wetter parts of
the state. Even without artificial restrictions on usage.
On the other had, I agree with the point that humanity should not have as
its primary goal the maximization of population on a single finite sphere.
And thus economics should not have as its primary goal the maximization of
"growth".
"The problem of any branch of knowledge is to systematize a set of
particular observations in a more coherent form, called hypothesis or 'theory.'
Two problems must be resolved by those attempting to develop theory: (1)
finding agreement on what has been observed; (2) finding agreement on how to
systematize those observations."
How will modern economists agree to agree on anything real now that
post-modernist thought and critique has entered the economics field?
"But Foucault had belatedly spotted that post-modernism and "neo-liberal"
free-market economics, which had developed entirely independently of each other
over the previous half-century, pointed in much the same direction. "
http://www.economist.com/node/8401159
adding: The economists who use a post-modernist approach( all is
uncertain and events are transient and therefore immaterial to the core
theory) to defend a scientific determinist* core theory are engaging in
double-think. I'm not an economist so maybe there's a
there
there I
cannot see.
*
"Popper insisted that the term "scientific" can only be applied to
statements that are falsifiable. Popper's book The Open Universe: An
Argument For Indeterminism defines scientific determinism as the claim that
any event can be rationally predicted, with any desired degree of
precision, if we are given a sufficiently precise description of past
events, together with all the laws of nature, a notion that Popper asserted
was both falsifiable and adequately falsified by modern scientific
knowledge.
"In his book, A Brief History of Time, Hawking claims that predictability
is required for 'scientific determinism' (start of chapter 4). He defines
'scientific determinism"" as meaning: 'something that will happen in the
future can be predicted.' "
By measures that register actual human engagement – rather than fake
accounts and bot activity - Facebook does not seem to be growing at all. In
2016, its users generated about 25 percent less original content than in 2015.
The time users spend on Facebook dropped from 24 hours in mid-2015 to 18.9
hours in February, Comscore reported.
========================================
One can only hope.
I am only on Facebook because a friend and co-worker signed me up (without my
knowledge or consent, but I think most people looked upon it like getting a
greeting card) back in the day when the Facebook fad was at its peak. And I was
interested in it as a social and economic phenomenon.
My own anecdotal experience is that the most ardent users (multi daily
postings) have declined by 95%. The occasional 2 or 3 times weekly posters are
down to once monthly, and so on.
And the response to postings seems to have had even greater declines. Even good
friends who I used to TRY and keep up with postings, I scarcely ever bother now
– and when I do open one, people who used to get near 100 "looks" have 2 or 3 –
maybe once in a while for something real (somebody died, instead this is a
picture of a meal I eated) , maybe 5.
Woolworths used to be a juggernaut – so was Sears. Who remembers "My Space"
???
I saw too many people turning into Trump Fraidy Cats before the election
("Vote for Hillary because Trump! He's so awful!") or Vote Shamers ("You're
voting third party? Shame on you!").
After the election, Facebook seemed like a psych ward. Too many sobbing,
crying, and raving loons for my taste.
Cutting back on Facebook is part of my larger goal of spending less time
on social media and more time in social reality.
Bravo, another critical issue absent from MSM or even worse purposefully
being confused.
It would help a lot if people take time to understand the money in itself
that permeates every aspect of life since it is a central feature of any
financial system under any economic system ancient or contemporary.
Here is an simple essay that explains without financial jargon what money is
in itself as a social construct and whom in reality it serves:
Economics isn't economical, it is political-economics. Politics first,
economics second. Politics is the art, not the science, of sharing out the
wealth, power and fame in a society in an organized way. If your politics is
corrupt, then your economics will be corrupt also.
Blame Pythagoras. From Pythagoras and Croesus, we got the idea that value
was a number, and that everything had a value, and that a market (aka city
state) is where the hidden hand determined the relationship between prices,
goods and services. The actual "cost" per capita, of running a subsistence
agrarian society hasn't changed since the days of Babylon. We simply have
more technical bookkeeping (and accounting). A shekel was the weight of 180
grains of dried barley seed. The Babylonians didn't have a primitive society
they had monarchy, theocracy, militarism and receipts. A thing might be
valued in so many shekels of silver, but the receipt accomplished what a
coin would have, because it was honored. Clay money instead of paper money.
You got your receipt for your socialist food dole, went to the temple
granary to pick it up (this was long before Rome), visited the temple
prostitutes (way better than Roman games), then went home. And as has been
pointed out, this was a clay fiat and honesty was just as vanishing then
as now. And yes, it was a debt system, not a credit system. The US and the
world has moved from a credit system to a debt system in the last 100 years.
The Great Whore, Babylon is still awaiting her destiny.
"Daniel reads the words MENE, MENE, TEKEL, PARSIN and interprets them for
the king: MENE, God has numbered the days of your kingdom and brought it to
an end; TEKEL, you have been weighed and found wanting; and PERES, the
kingdom is divided and given to the Medes and Persians."
Having once held a 1776 edition of Wealth of Nations in my hand I recall
Smith was a Moral Philosopher and that Economics was a branch of Moral
Philosophy choosing between Goods and Bads and seeing Utility Functions as
Demand Curves.
Then I recall Keynes, the Mathematician, writing beautiful prose in The
General Theory. Somewhere the Reduced Form Equation boys started to play with
Stochastic Variables to make the R2 fit Deterministic equations replaced Moral
choices and an obsession with Beta proceeded to ignore Alpha.
Economics is something of an academic joke. Steve Keen has introduced some
life into a dead subject with his Hyman MInsky analysis since so much of
Economic Theory as propounded is simply a Java Box running inside the main
system
We must learn to accept that when undeniable facts stare us in the face
and shake up our political universe - e.g.
growing unemployment is a
problem
, and money and finance have roles beyond medium of payment in an
uncertain world shaken by financial crises - they are not transient
problems; they are a part of the system we are meant to study.
I think studying some of these things might be better left to psychologists.
I emphasized the phrase about unemployment as a case in point – it could be
argued that we have the unemployment we have right now thanks to telling
ourselves, collectively, that we can't employ people. Anyone who chooses to
look around and observe can find things we could be paying people to do, like
fixing our streets and bridges, educating our young, exploring space and
advancing science, providing medical care to the significant portion of our
population who don't have access, but we are told that this would be bad for
some reason, and many of us seem to believe this.
I don't know if that confirms the author's ideas or not, but as several of
us have observed now in these comments, our economic problems have less to do
with the dismal science (or lack of it) and more to do with what people are
inclined to believe is true, regardless of the facts.
Actually, economics is more like a branch of medieval scholasticism. It's
about forcing reality to fit dogma by imposing methodological and
epistemological gag rules on its practitioners so that they're blinded to
substance by form - and the non-expert public is bamboozled into mute
acquiescence. Econned, as Yves would say.
Yes, I'm baffled that we hear all this about oh jobs are going away becuz
robots and maybe UBI and on and on when there are SO MANY UNFILLED JOBS staring
us in the face where filling them would be of enormous benefit to all. Are they
looking around at ALL?
As you can see, I'm baffled, too. UBI might be a good idea, and various
forms of technology have certainly eliminated jobs over the years, but when
so much work remains to be done, I don't see how you can argue that we've
reached an age where most of us are truly unemployable.
FTM, what is employment? Put most simply, it is one person or entity who
has money paying someone to perform some task(s), possibly to a minimum
acceptable quality. There are many forms of work we do that no one wants to
pay us to do. My work at an amateur theatre falls into that category, as
does the work of the people in the food bank/soup kitchen next door. Maybe
our concept of what constitutes useful work needs to change, too.
The place to start paying decent wages is for all kinds of
housework, daycare and elder care. All are undervalued and underpaid
while that latter two are essential for a healthy community. None of
these should be consigned to robots as only human contact can do the
job well.
But the irony of basic income is that's one of the things it
does. A huge portion of "housework, daycare, and elder care" is
better done
informally
, outside of the GDP-measured formal
economy of employers and jobs and wages and benefits, especially
given how crappy the formal jobs tend to be in those sectors.
Income supports that lack formal work requirements by definition
create more time for people to do things in the informal economy.
But wouldn't it be better to pay parents and caregivers for
caring? First of all, it's work and deserves to be remunerated
like work. Second, keeping care work in the informal economy
only "works" if people have other income with which to satisfy
their needs and wants. There is no possibility that any basic
income grant will provide a single parent with the funds to
allow them to work taking care of their children, which is the
socially optimal situation in almost all cases.
pretty funny. that's been standard econ cirricuulum at the University of
Magonia for, oh, let's see, 1, 2 3 4 5 6 7 8 9. Nine! Nine years!
Pretty funny. Is this still April 1st? I guess not. Oh well, a day late, a
dollar short (no pun intended) is better than a year late and a grand short, or
a century late and a million short. There's a pattern there! it goes back to
the Testament of Amram, Manuscript B. The Dead Sea Scrolls. That's what we
teach in econo 101 during the "money" unit. Money, at the Universtiy of Magonia,
is an idea that mediates the boundary wtihin a society between cooperation and
conflict.. That's not a theory, it's a reality. Everybody has heard this before
in the peanut gallery so I won't reapeat myself.
They should send a delegation from Harvard to the Universtiy of Magonia for
a seminar in money and economics. hahahaha. That's pretty funny even to think
about. Believe me. They'd learn a few things but they might get ontological
shock and end up like MIT mathematical economist Ed Bucks who spent two months
in the New Hampshire woods looking at deer through binoculars in search of a
theory of economics that could survive a collision with nature AND be
deterministic and mathematically rigorous. He pretty much had a nervous
breakdown and ended up back at MIT sucking up grant money like a baby at his
mamas tits. Many are called, but few are chosen. LOL
"... Secondly, in football there's a high ratio of noise to signal: performances are due in part
to luck. This is true not just in football. ..."
"... Thirdly, imagine a top goalkeeper were playing for a better side than Sunderland. His performances
would then make a difference to his team's points: a couple of great saves per game would convert losses
to draws or wins, rather than 4-0 defeats into 2-0 ones. His marginal product would be higher. ..."
"... This tells us that, in teams, an individual's marginal product is beyond his control: if Pickford
had better colleagues, his marginal product would be higher. A similar problem arises in many large
firms. As the late Herbert Scarf wrote: ..."
David Moyes says Jordan Pickford has been a better player than Dele Alli this season. This
set me wondering about marginal productivity theory.
To see my point, think about how we'd test Moyes' claim. We could look at what the two teams
did in games which Alli and Pickford missed. But there are too few of these to draw robust inferences,
and doing so would be impossible for a player who hadn't missed any games*. Instead, we could
compare how Sunderland would have done if Pickford were replaced with a next-best alternative
to how S***s would have done with a next-best replacement for Alli. In effect, we're asking: what
are their marginal products?
I suspect that Pickford's marginal product consists in converting heavy defeats into narrower
ones: this still leaves Sunderland relegated, only with a lesser goal difference. Alli, by contrast,
has converted draws or losses into wins. That's a bigger difference.
This, I think, highlights three problems with marginal productivity analysis.
The first is that marginal product is the result of a hypothetical question. For example, in
considering my own marginal product, I ask: how would the IC do without me? That's a hypothetical
to which we cannot give a precise answer. This is true of much of neoclassical economics. As Noah
says:
Demand curves aren't actually directly observable. They're hypotheticals - "If the price were
X, how much would you buy?"
In this, he's echoing Sraffa:
The marginal approach requires attention to be focused on change, for without change either
in the scale of an industry or in the 'proportions of the factors of production' there can be
neither marginal product nor marginal cost. In a system in which, day after day, production continued
unchanged in those respects, the marginal product of a factor (or alternatively the marginal cost
of a product) would not merely be hard to find - it just would not be there to be found. (Production
of Commodities by Means of Commodities, pv)
Secondly, in football there's a high ratio of noise to signal: performances are due in
part to luck. This is true not just in football.
Consider two men of equal ability who become CFOs of start-ups. One start-up becomes massive,
the other struggles. The man who joined the former will be many times richer than the latter.
But that's more to do with fortune than with human capital or marginal product: firms don't usually
grow big because they've got a slightly better CFO than the firm down the road. Anyone who's mind
isn't befuddled by Randian nonsense will know that our lives and incomes are the product of luck.
But we know that people are terrible at distinguishing luck from skill – in part because they
suffer from the outcome bias.
Thirdly, imagine a top goalkeeper were playing for a better side than Sunderland. His performances
would then make a difference to his team's points: a couple of great saves per game would convert
losses to draws or wins, rather than 4-0 defeats into 2-0 ones. His marginal product would be
higher.
This tells us that, in teams, an individual's marginal product is beyond his control: if
Pickford had better colleagues, his marginal product would be higher. A similar problem arises
in many large firms. As the late Herbert Scarf wrote:
If economists are to study economies of scale, and the division of labor in the large firm,
the first step is to take our trusty derivatives, pack them up carefully in mothballs and put
them away respectfully; they have served us well for many a year. But derivatives are prices,
and in the presence of indivisibilities in production, prices simply don't do the jobs that they
were meant to do. They do not detect optimality; they aren't useful in comparative statics; and
they tell us very little about the organized complexity of the large firm.
For me, flaws such as these mean that marginal product theory doesn't make much sense as an
explanation of wage levels. We should abandon it as a mental model in favour of bargaining (pdf)
models. In these, matches between workers and jobs lead to surpluses, and the surplus is divided
according to the balance of power.
In such models, human capital raises wages insofar as it generates surplus and gives its holders
outside options which enhance their bargaining power. But human capital and "marginal product"
aren't the whole story. All the things that affect bargaining power, such as technology and unions,
also matter. Such models are consistent with the theory that inequality is due to the rise of
superstar firms (pdf). They're also consistent with the fact that minimum wages don't destroy
many jobs. And they help explain rising CEO pay better than marginal product theory.
What I'm appealing for here is for economists to abandon unscientific just-so stories and to
think instead about the real world. In this world, wages are determined not by unobservable entities
such as marginal product but by – among other things – power (pdf).
* S***s did well during Harry Kane's injury. Few would say this is evidence that Kane is a
poor player, and not should they.
See Denis Drew. I guess Keynes was in favor of trade unions but Keynesian economists never discuss
them. Neither do bloviating, blowhards like EMichael.
PGL used to brag about how Hillary supported striking Verizon workers during the election but
that was just a photo-op, like how all of the building trade unions hob-nobbed with Trump. It's
BS. Unions have collapsed under the watch of New Democrats. They've done nothing.
In his final speech Obama said we have to beware of automatization. There's no evidence of
it. It's an excuse. No, the Democrats have sold us out. So what that they raised taxes on the
rich a little. The rich have never had is so good.
"The first is that marginal product is the result of a hypothetical question. For example, in
considering my own marginal product, I ask: how would the IC do without me? That's a hypothetical
to which we cannot give a precise answer. This is true of much of neoclassical economics. As Noah
says:
Demand curves aren't actually directly observable. They're hypotheticals - "If the price were
X, how much would you buy?"
In this, he's echoing Sraffa:
The marginal approach requires attention to be focused on change, for without change either
in the scale of an industry or in the 'proportions of the factors of production' there can be
neither marginal product nor marginal cost. In a system in which, day after day, production continued
unchanged in those respects, the marginal product of a factor (or alternatively the marginal cost
of a product) would not merely be hard to find - it just would not be there to be found. (Production
of Commodities by Means of Commodities, pv)"
It's a cliché that the government builds "bridges to nowhere" that the private sector never
would build. That's true. And it's a credit to the public sector. Bridges to nowhere are what
turn nowheres into somewheres. We need many, many more bridges to nowhere.
Finally, I want to express my annoyance at a trope in punditry about air travel that is as
common as it is mistaken. Here is Kevin Drum:
So flying sucks because we, the customers, have made it clear that we don't care. We love to
gripe, but we just flatly aren't willing to pay more for a better experience. Certain individuals
(i.e., the 10 percent of the population over six feet tall) are willing to pay for legroom. Some
are willing to pay more for extra baggage. Some are willing to pay more for a window seat. But
most of us aren't. If the ticket price on We Care Airlines is $10 more, we click the link for
Suck It Up Airlines. We did the same thing before the web too. As usual, the fault lies not in
the stars, but in ourselves.
Here is Megan McArdle, in a piece titled (by somebody) "Hate Flying? It's Your Fault":
Ultimately, the reason airlines cram us into tiny seats and upcharge for everything is that
we're out there on Expedia and Kayak, shopping on exactly one dimension: the price of the flight.
To win business, airlines have to deliver the absolute lowest fare. And the way to do that is
. . . to cram us into tiny seats and upcharge for everything. If American consumers were willing
to pay more for a better experience, they'd deliver it. We're not, and they don't.
So it is my fault that for my travel needs, I have very few choices of carriers, if I have a strong
preference for few stopovers? As soon as I accept 1-2 additional stops than minimally necessary
(and the corresponding doubling or more of travel time, nevermind increased risk of missing flights,
delays, etc.), I can find more connections.
My problem, if I pay for the trip, is flight availability. It is usually not an option to pay
even twice as much for flying when or how I want or need to.
I know absolutely nothing about the economics of air travel (any experts here?), but how about
airport gates and airport passenger/flight processing capacity as bottlenecks, and long-distance
flights favoring if not requiring larger aircraft (which cannot use every airport for regular
flights). With larger aircraft you have the problem of selling all seats on all flights, which
would seem to favor multi-hop trips via major routes, with all the multiple de/boardings, security
checks, and as we have recently seen increased chances of "re-accommodation".
When I travel for business, my choices are further restricted by "appropriate" departure and arrival
times. Then it also becomes a multivariate problem - arriving one day earlier leads to one more
hotel stay, car rental day, etc.
In my current situation I could "save" the company around a hundred bucks by using a cheaper
carrier that has a direct flight from where I am to where I need to go, and for returning, there
is a multi-hop flight that takes ~3 hours longer to get home than the hundred bucks more expensive
competition (arriving not in the late evening but after midnight), because the first leg of the
flight is in the opposite direction of where I need to go. No thanks, if I can avoid it! I take
the more "expensive" carrier which has direct flights in both directions.
It seems to me it may be a similar problem as the debate over public transit experience vs. driving.
In public transit, unless your travel endpoints are close to a single route, it is usually the
line changes and distance between end stations and the actual destinations that make up half the
total time or more.
The problem can be "addressed" by more N-to-N routes, but then the transit agency has a problem
with getting enough ridership on every route (and where to store all the transit vessels outside
of peak traffic hours, and fleet operation/maintenance overheads, etc.).
"... He writes a DSGE model where banks hold sovereign debt, so that bad news about a possible future sovereign default both puts a strain on the funding of banks but also induces them to cut their leverage as a precautionary reaction. ..."
"... This channel for the diabolic loop linking banks and sovereign debt fits reasonably well the behavior of credit spreads across Italian banks and firms, and predicts that the ECB's interventions had a small effect. ..."
Luigi Bocola (2014, Penn, Northwestern): Bocola tries to explain the depth of the crisis in Italy
after 2011. He writes a DSGE model where banks hold sovereign debt, so that bad news about a possible
future sovereign default both puts a strain on the funding of banks but also induces them to cut
their leverage as a precautionary reaction.
This channel for the diabolic loop linking banks and sovereign debt fits reasonably well the behavior
of credit spreads across Italian banks and firms, and predicts that the ECB's interventions had a
small effect.
Blanchard (2016), Korinek (2015) and Wren-Lewis (2017) worry that the current standards and editorial
criteria in macroeconomics undermine promising ideas, deter needed diversity in the topics covered,
and impose mindless work on DSGEs that brings little useful knowledge to policy discussions.
Smith (2016) emphasizes that we have far less data than what we would need to adequately test
our models, and Romer (2016) that identification is the perennial challenge for social sciences.
Smith (2014) and Coyle and Haldane (2014) characterize the state of economics, not as the perennial
glass half full and half empty, but rather as two glasses, one full and the other empty. In their
view, applied empirical economists have been celebrating their successes, while macroeconomists lament
their losses.
... ... ...
A related criticism of macroeconomics is that it ignores financial factors. Macroeconomists supposedly
failed to anticipate the crisis because they were enamored by models where financial markets and
institutions were absent, as all financing was assumed to be efficient (De Grawe, 2009, Skidelsky,
2009). The field would be in denial if it continued to ignore these macro-financial links.
One area where macroeconomists have perhaps more of an influence is in monetary policy. Central
banks hire more PhD economists than any other policy institution, and in the United States, the current
and past chair of the Federal Reserve are distinguished academic macroeconomists, as have been several
members of the FOMC over the years. In any given week, there are at least one conference and dozens
of seminars hosted at central banks all over the world where the latest academic research is discussed.
The speeches of central bank governors refer to academic papers in macroeconomics more than those
by any other policymaker.
... ... ...
A separate criticism of macroeconomic policy advice accuses it of being politically biased. Since
the early days of the field, with Keynes and the Great Depression, macroeconomics was associated
with aggressive and controversial policies and with researchers that wore other hats as public intellectuals.
Even more recently, during the rational expectations microfoundations revolution of the 1970s, early
papers had radical policy recommendations, like the result that all systematic aggregate-demand policy
is ineffective, and some leading researchers had strong political views. Romer (2016) criticizes
modern macroeconomics for raising questions about what should be obvious truths, like the effect
of monetary policy on output. He lays blame on the influence that Edward Prescott, Robert Lucas and
Thomas Sargent had on field. Krugman (2009) in turn, claims the problem of macroeconomics is ideology,
and in particular points to the fierce battles between different types of macroeconomists in the
1970s and 1980s, described by Hall (1976) in terms of saltwater versus freshwater camps.
Macroeconomists, instead, are asked to routinely produce forecasts to guide fiscal and monetary
policy, and are perhaps too eager to comply. As I wrote in Reis (2010) " by setting themselves the
goal of unconditional forecasting of aggregate variables, macroeconomists are setting such a high
bar that they are almost sure to fail."
...Forecasting when economic agents themselves are forecasting your forecast to anticipate the
policies that will be adopted involves strategic thinking and game theory that goes well beyond the
standard statistical toolbox. Very few economists that I know of would defend themselves too vigorously
against the frequent criticisms of forecasting failures by economists. As is regularly shown, macroeconomic
forecasts come with large and often serially correlated errors.10
...At the same time, the way that forecasts are mis-read and mis-interpreted is part of the problem.
As much as economists state that their forecasts are probabilities, and come with confidence bands,
they are reported in the media always as point estimates
...Compare how economics does relative to the medical sciences. Analogies across sciences are
always very tricky, and must be taken with a large grain of salt. Moreover, surely economists are
still far from being as useful as dentists, like Keynes dreamed of, let alone to have made a contribution
to human welfare that is close to the one by doctors or biologists. The comparison to make is much
more narrow and limited, restricted only to how economic forecasts compare to medical forecasts.
...Currently, the major and almost single public funder for economic research in the United States
is the National Science Foundation. Its 2015 budget for the whole of social, behavioral and economic
sciences was $276 million. The part attributed to its social and economic sciences group was $98
million.
T Read the Reis article and I'm much relieved. State-o'-the-art mascro = which didn't even include
financial sectors at the time of the Great Recession (I mean really -how could that be a problem?)
- is now on the right track. Yes, adding more epicycles will do the trick. Because as we all know,
the sun, moon, planets and stars revolve around the earth.
Reply
Wednesday, April 12, 2017 at 06:05 AM libezkova -> T... ,
April 12, 2017 at 08:26 AM
This guy is funny (and actually rather clueless, Summers is much better ) defender of "Flat
Earth" theory:
== quote ==
A related criticism of macroeconomics is that it ignores financial factors. Macroeconomists
supposedly failed to anticipate the crisis because they were enamored by models where financial
markets and institutions were absent, as all financing was assumed to be efficient (De Grawe,
2009, Skidelsky, 2009). The field would be in denial if it continued to ignore these macro-financial
links.
One area where macroeconomists have perhaps more of an influence is in monetary policy. Central
banks hire more PhD economists than any other policy institution, and in the United States, the
current and past chair of the Federal Reserve are distinguished academic macroeconomists, as have
been several members of the FOMC over the years. In any given week, there are at least one conference
and dozens of seminars hosted at central banks all over the world where the latest academic research
is discussed. The speeches of central bank governors refer to academic papers in macroeconomics
more than those by any other policymaker.
... ... ...
A separate criticism of macroeconomic policy advice accuses it of being politically biased. Since
the early days of the field, with Keynes and the Great Depression, macroeconomics was associated
with aggressive and controversial policies and with researchers that wore other hats as public
intellectuals. Even more recently, during the rational expectations microfoundations revolution
of the 1970s, early papers had radical policy recommendations, like the result that all systematic
aggregate-demand policy is ineffective, and some leading researchers had strong political views.
Romer (2016) criticizes modern macroeconomics for raising questions about what should be obvious
truths, like the effect of monetary policy on output. He lays blame on the influence that Edward
Prescott, Robert Lucas and Thomas Sargent had on field. Krugman (2009) in turn, claims the problem
of macroeconomics is ideology, and in particular points to the fierce battles between different
types of macroeconomists in the 1970s and 1980s, described by Hall (1976) in terms of saltwater
versus freshwater camps.
...Macroeconomists, instead, are asked to routinely produce forecasts to guide fiscal and monetary
policy, and are perhaps too eager to comply.
Money quote: "An economics that helps us to live within the doughnut would seek to reduce inequalities
in wealth and income. Wealth arising from the gifts of nature would be widely shared. Money, markets,
taxation and public investment would be designed to conserve and regenerate resources rather than
squander them. State-owned banks would invest in projects that transform our relationship with
the living world, such as zero-carbon public transport and community energy schemes. New metrics
would measure genuine prosperity, rather than the speed with which we degrade our long-term prospects."
Macroeconomists largely stopped paying attention to income distribution and turned their attention
to growth decades ago. Even today, folks like Krugman, who are paid handsomely to study inequality,
don't like to talk about it much.
Before proceeding, I wish to make it quite clear that in referencing Keynes or Keynesianism,
I am referring to John Maynard Keynes of 'The General Theory of Employment, Interest and Money'
(GT) and I am not referring to neo Keynesianism or new Keynesianism or any variant of the so-called
neo classical synthesis (which, imo, is one of the most dishonest actions ever taken by an academic)
devised by Paul Samuelson and others at MIT.
With that said, I would first note that Keynes titled chapter 24 of GT:
"Concluding Notes on the Social Philosophy towards which the General Theory might Lead"
and began the chapter with:
"The outstanding faults of the economic society in which we live are its failure to provide
for full employment and its arbitrary and inequitable distribution of wealth and incomes."
Keynes next remarks on the progress toward equality in Great Britain attained via taxation
of income and inheritance taxes and argues that these measures, in conditions of less than full
employment, are, contrary to common belief, actually conducive to increased investment:
" Thus our argument leads towards the conclusion that in contemporary conditions the growth
of wealth, so far from being dependent on the abstinence of the rich, as is commonly supposed,
is more likely to be impeded by it. One of the chief social justifications of great inequality
of wealth is, therefore, removed. "
Keynes particularly approves of taxing inheritances:
"This particularly affects our attitude towards death duties: for there are certain justifications
for inequality of incomes which do not apply equally to inequality of inheritances."
Keynes then debunks the theory that interest is a reward for saving:
"The justification for a moderately high rate of interest has been found hitherto in the necessity
of providing a sufficient inducement to save. But we have shown that the extent of effective saving
is necessarily determined by the scale of investment and that the scale of investment is promoted
by a low rate of interest, provided that we do not attempt to stimulate it in this way beyond
the point which corresponds to full employment. Thus it is to our best advantage to reduce the
rate of interest to that point relatively to the schedule of the marginal efficiency of capital
at which there is full employment.
"I feel sure that the demand for capital is strictly limited in the sense that it would not
be difficult to increase the stock of capital up to a point where its marginal efficiency had
fallen to a very low figure"
And then Keynes heralds the "euthanasia of the rentier" and "the cumulative oppressive power of
the capitalist to exploit the scarcity-value of capital." because the state can supply adequate
capital:
"Now, though this state of affairs would be quite compatible with some measure of individualism,
yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative
oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards
no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest
because capital is scarce, just as the owner of land can obtain rent because land is scarce. But
whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons
for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine
sacrifice which could only be called forth by the offer of a reward in the shape of interest,
would not exist, in the long run, except in the event of the individual propensity to consume
proving to be of such a character that net saving in conditions of full employment comes to an
end before capital has become sufficiently abundant. But even so, it will still be possible for
communal saving through the agency of the State to be maintained at a level which will allow the
growth of capital up to the point where it ceases to be scarce."
But this "euthanasia" can take place gradually and need not require a revolution:
"I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear
when it has done its work. And with the disappearance of its rentier aspect much else in it besides
will suffer a sea-change. It will be, moreover, a great advantage of the order of events which
I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing
sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain,
and will need no revolution.
"Thus we might aim in practice (there being nothing in this which is unattainable) at an increase
in the volume of capital until it ceases to be scarce, so that the functionless investor will
no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and
determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are
certainly so fond of their craft that their labour could be obtained much cheaper than at present),
to be harnessed to the service of the community on reasonable terms of reward."
Then keynes notes that although his prescription will entail a greater role for the state and
"a somewhat comprehensive socialisation of investment" , it will not eliminate the role of individual
entrepreneurship:
"In some other respects the foregoing theory is moderately conservative in its implications. For
whilst it indicates the vital importance of establishing certain central controls in matters which
are now left in the main to individual initiative, there are wide fields of activity which are
unaffected. The State will have to exercise a guiding influence on the propensity to consume partly
through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in
other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of
interest will be sufficient by itself to determine an optimum rate of investment. I conceive,
therefore, that a somewhat comprehensive socialisation of investment will prove the only means
of securing an approximation to full employment; though this need not exclude all manner of compromises
and of devices by which public authority will co-operate with private initiative. But beyond this
no obvious case is made out for a system of State Socialism which would embrace most of the economic
life of the community. It is not the ownership of the instruments of production which it is important
for the State to assume. If the State is able to determine the aggregate amount of resources devoted
to augmenting the instruments and the basic rate of reward to those who own them, it will have
accomplished all that is necessary. Moreover, the necessary measures of socialisation can be introduced
gradually and without a break in the general traditions of society"
And he proceeds to describe the advantages of individualism:
"Let us stop for a moment to remind ourselves what these advantages are. They are partly advantages
of efficiency - the advantages of decentralisation and of the play of self-interest. The advantage
to efficiency of the decentralisation of decisions and of individual responsibility is even greater,
perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest
may have gone too far. But, above all, individualism, if it can be purged of its defects and its
abuses, is the best safeguard of personal liberty in the sense that, compared with any other system,
it greatly widens the field for the exercise of personal choice. It is also the best safeguard
of the variety of life, which emerges precisely from this extended field of personal choice, and
the loss of which is the greatest of all the losses of the homogeneous or totalitarian state.
For this variety preserves the traditions which embody the most secure and successful choices
of former generations; it colours the present with the diversification of its fancy; and, being
the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument
to better the future.
"Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting
to one another the propensity to consume and the inducement to invest, would seem to a nineteenth-century
publicist or to a contemporary American financier to be a terrific encroachment on individualism.
I defend it, on the contrary, both as the only practicable means of avoiding the destruction of
existing economic forms in their entirety and as the condition of the successful functioning of
individual initiative."
And furthermore, not only will the prescribed system be to the advantage of all, it will also
forestall the temptation to even more drastic measures and preclude the merchantilist and imperialist
temptations of the recent past:
"War has several causes. Dictators and others such, to whom war offers, in expectation at least,
a pleasurable excitement, find it easy to work on the natural bellicosity of their peoples. But,
over and above this, facilitating their task of fanning the popular flame, are the economic causes
of war, namely, the pressure of population and the competitive struggle for markets. It is the
second factor, which probably played a predominant part in the nineteenth century, and might again,
that is germane to this discussion.
"I have pointed out in the preceding chapter that, under the system of domestic laissez-faire
and an international gold standard such as was orthodox in the latter half of the nineteenth century,
there was no means open to a government whereby to mitigate economic distress at home except through
the competitive struggle for markets. For all measures helpful to a state of chronic or intermittent
under-employment were ruled out, except measures to improve the balance of trade on income account."
The Peoples Republic of China (PRC) began in 1949. Under the leadership of Mao Zedong the PRC
introduced Soviet-style Marxism and other "socialization" programs that resulted in famine and
other catastrophes, although national sovereignty was established.
Upon Mao's death in 1976 chinese leadership became uncertain. During some transition until
roughly 1980 market mechanisms were introduced alongside central planning.
In 1982 Deng Xioping introduced "reform and opening", which meant essentially economic reform
internally and a greater focus on foreign trade. And in 1992 he announced a focus on creating
a "socialist market economy", which entailed state control of primary industries and banking alongside
greater autonomy for secondary commercial enterprises.
Since Deng's reforms, China has far outpaced the rest of the world in economic performance.
Keynes analysed capitalist economies and concluded that "a somewhat comprehensive socialisation
of investment will prove the only means of securing an approximation to full employment; though
this need not exclude all manner of compromises and of devices by which public authority will
co-operate with private initiative. "
The leadership of the PRC analysed and managed the Chinese economy and concluded that a "socialist
market economy" was the proper system.
So from opposite directions Keynes and the Chinese arrived at the same destination. Keynes wanted
to preserve the market mechanism, the Chinese wanted to preserve Marxist socialism. They each
arrived at a centrally-controlled economy with significant market mechanisms.
The Chinese do not believe in this stuff, they have read Leviticus though, and plainly understand
that they can create credit and erase it anytime they want to do so.
There was an article somwhere here today or yesterday that made points about how the Chinese
'manipulate' affecting the Triffin calculus and domestic pricing trends influencing consumption
in order to make a steady growth and transformation of their economic system from where it was
in 1980, for a billion plus people. I wish them success.
If you are an economist who believes that the nongovt financial system is basically the only
functionary that there should be for the handling the creation of credit in society, you are a
shill, not a thoughtful analyst. I doubt you can think outside your blinders.
...Specifically, the Triffin dilemma is usually cited to articulate the problems with the role
of the U.S. dollar as the reserve currency under the Bretton Woods system. John Maynard Keynes
had anticipated this difficulty and had advocated the use of a global reserve currency called
'Bancor'. Currently the IMF's SDRs are the closest thing to the proposed Bancor but they have
not been adopted widely enough to replace the dollar as the global reserve currency.
In the wake of the financial crisis of 2007–2008, the governor of the People's Bank of China
(YES - CHINA) explicitly named the reserve currency status of the US dollar as a contributing
factor to global savings and investment imbalances that led to the crisis. As such the Triffin
Dilemma is related to the Global Savings Glut hypothesis because the dollar's reserve currency
role exacerbates the U.S. current account deficit due to heightened demand for dollars...
...
Implication in 2008 meltdown
In the wake of the financial crisis of 2007–2008, the governor of the People's Bank of China
explicitly named the Triffin Dilemma as the root cause of the economic disorder, in a speech titled
Reform the International Monetary System. Zhou Xiaochuan's speech of 29 March 2009 proposed strengthening
existing global currency controls, through the IMF.[1][2]
This would involve a gradual move away from the U.S. dollar as a reserve currency and towards
the use of IMF special drawing rights (SDRs) as a global reserve currency.
Zhou argued that part of the reason for the original Bretton Woods system breaking down was
the refusal to adopt Keynes' bancor which would have been a special international reserve currency
to be used instead of the dollar...
Thanks for sharing. I think the speech was intended to message about the US being part of the
problem not to give credit to Triffin. But of course I dont know.
I simply want people to put on different thinking caps, so to speak.
Something like that sure enough, but a bit more formalized in the area of exchange rates and maybe
capital controls as well. In any case a pipe dream in my lifetime. What we are attempting to get
that old teaming masses of uneducated voting majority to realize first is that they have been
duped. There are tons of alternatives, too many almost. Sovereigns make their own currencies for
the most part, tax if they will, and regulate. There are a great many ways to play the game. The
idea that industrial policy and capital controls violate some pre-ordained laws of economics is
rubbish. OTOH, no nation is free of the external consequences of their economic and currency policies
if they must depend upon exchange for any of their necessities.
Review of the economics troops
Comment on Noah Smith on 'Keynesian Economics Is Hot Again'
There is Orthodoxy with Walrasian microfoundations and it has been nicely defined by Krugman:
" most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium
world as a starting point."
There is Keynesianism with macrofoundations and they have been nicely defined by Keynes: "Income
= value of output = consumption + investment. Saving = income - consumption. Therefore saving
= investment."
Both, Walrasian microfoundations and Keynesian macrofoundations are provable false. Methodologically
speaking, micro and macro is axiomatically false. It holds, when the premises/axioms/foundational
propositions are false or contain nonentities the WHOLE theory/model/analytical superstructure
is false. This includes ALL variants of IS-LM from Hicks to Krugman.#1
The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually
contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic
concept profit wrong. Because economists lack the true theory their economic policy guidance has
NO sound scientific foundation since Adam Smith/Karl Marx.
There is NO use to combine axiomatically false approaches or to periodically alternate between
them. What Krugman or Christiano are doing is cargo cultic show biz.
Noah Smith maintains: "The right way forward for macro isn't to go all-in on a hot new theory,
or to passionately embrace old paradigms either. The best approach is to adopt more public humility
and caution about their theories, while working to understand microeconomics better."
In view of the fact that the profit theory is false since 200+ years, microfoundations are
false since 140+ years, and macrofoundations are false since 80+ years, the right way forward
for Walrasians and Keynesians is to retire.
Keynesian Economics Is Hot Again
By Noah Smith - Bloomberg
To the growing list of famous mainstream macroeconomists who have publicly criticized their
discipline, add another: In a recent essay, * Lawrence Christiano of Northwestern University argues
that the Great Recession was an "earthquake" that dramatically changed how researchers think about
the U.S. economy.
Christiano is known as a scholar who straddles macroeconomics' great divide. His models adopt
the basic form and some of the bedrock assumptions of the New Classicals, the economists who insisted
in the 1980s that monetary and fiscal policy can't fight recessions. But he also incorporates
some elements of Keynesianism, the idea that aggregate demand shortages exist and can be corrected
by the government stimulus. Perhaps as a result of their centrist take on that long-running debate,
theories inspired by Christiano's have won pride of place in central banks around the world.
But after the Great Recession, Christiano says, the pendulum should swing decisively in the
Keynesian direction:
"The Great Recession was the response of the economy to a negative shock to the demand for
goods all across the board. This is very much in the spirit of the traditional macroeconomic paradigm
captured by the [simple Keynesian] model The Great Recession seems impossible to understand without
invoking shocks in aggregate demand. As a consequence, the modern equivalent of the IS-LM model-the
New Keynesian model-has returned to center stage."
Another way of putting this is that Paul Krugman was right. Krugman has long advocated that
macroeconomists learn to once again think in terms of simple simple Keynesian theory. And when
more fully developed, complex models are needed, Krugman uses the kind of models that Christiano
endorses.
As Christiano mentioned, the New Keynesian revolution isn't so new. Even in the 1990s, economists
like Greg Mankiw and Olivier Blanchard were arguing that monetary policy had real effects on demand.
And at the same time, international macroeconomists were realizing that Japan's post-bubble experience
of slow growth, low interest rates and low inflation implied that demand shortages could last
for a very long time unless the government rode to the rescue. Krugman, Adam Posen, Lars Svensson,
and others were already referring to a Japan-type stagnation as a liquidity trap in the late 1990s,
and warning that standard monetary policy of cutting interest rates wouldn't work in that sort
of situation.
But the profession didn't listen, and only the smallest deviations from the New Classical orthodoxy
were accepted into the mainstream. The idea of fiscal stimulus was still largely taboo. Nobel
prizes were awarded to the economists who made theories in which demand shortages can't exist,
while no Nobels were given to New Keynesians for suggesting otherwise. When the Great Recession
hit, some prominent macroeconomists pooh-poohed the idea that stimulus could help.
Christiano's essay should serve as a needed rebuke to the profession for resisting Keynesian
ideas just when they were needed most. But it also raises an uncomfortable question: Why didn't
macroeconomists catch on until years after disaster struck?
One explanation is sociological. Perhaps the influence of legendary figures like Robert Lucas,
Thomas Sargent and Edward Prescott -- all anti-Keynesians who now have big gold medals from Sweden
-- was enough to scare younger economists away Keynesian ideas. Some of macroeconomics' internal
critics, such as World Bank chief economist Paul Romer, have suggested as much. Political considerations
might have played a role as well -- to many economists on the free-market end of the ideological
spectrum, Keynesianism represents unacceptable government meddling.
But these explanations, by themselves, are unsatisfying. In most scientific fields -- biology
or astronomy, for example -- the weight of evidence is enough to overcome social fads and political
bias. Even in most areas of economics, empirical results gradually push the profession in one
direction or another. For example, relatively few economists now believe a $15 minimum wage is
likely to reduce employment very much; a plurality is uncertain. The steady drumbeat of papers
showing small or zero job losses from minimum-wage hikes probably played a role in altering the
expert consensus.
If economists gravitated toward anti-Keynesian theories, it was at least in part because evidence
wasn't strong enough to push them in the right direction. It's just very hard to assess the impacts
of fiscal stimulus. For example, Japan's tremendous government spending binge in the 1990s looks
to a casual observer like it had no effect, since the economy didn't recover until years later
-- but government spending might have been the only thing saving the country from a deeper recession.
For a great explanation of why macroeconomic evidence is so weak and subject to multiple interpretations,
read this excellent post ** by the University of Oregon's Mark Thoma....
"This perversion isn't Arrow's fault. He merely helped to prove a mathematical theorem, and was
no blind advocate for markets. Indeed, he actually thought the theorem illustrated the limitations
of capitalism"
This quote illustrates that there is some difference between neoliberalism and neo-classical
economics. Neoliberals do not care about applicability of neo-classical economics or the validity
of generalized stochastic equilibrium.
They used neo-classical theories as a ram to destroy New Deal Capitalism and paid "useful idiots"
outsized amount of money to keep them in power in economics departments.
There is a well known historical narrative which supports your assertion surrounding Austrian
economics and the University of Chicago although as you suggest it goes much deeper than that.
In my view neoliberals are like republicans, in that they make no secret of their allegiances.
I see neoclassicals as even more despicable, because they pretend to be Keynesians and in favor
of the working class, while promoting "free market" solutions.
Neoliberals come right up and punch you in the face. Neoclassicals slink around and stab you
in the back.
Re: The ideas of Kenneth Arrow - Steven Durlauf
...............
"Yet the theorem trails a dense cloud of caveats, which Arrow himself recognized could be more
important than the proof itself. For one, it worked only in a perfect world, far removed from
the one humans actually inhabit. Equilibrium is merely one of many conceivable states of that
world; there's no particular reason to believe that the economy would naturally tend toward it.
Beautiful as the math may be, actual experience suggests that its magical efficiency is purely
theoretical, and a poor guide to reality."
...................
"Remarkably, academic macroeconomists have largely ignored these limitations, and continue
to teach the general equilibrium model -- and more modern variants with same fatal weaknesses
-- as a decent approximation of reality. Economists routinely use the framework to form their
views on everything from taxation to global trade -- portraying it as a value-free, scientific
approach, when in fact it carries a hidden ideology that casts completely free markets as the
ideal."
...........................
"This perversion isn't Arrow's fault. He merely helped to prove a mathematical theorem, and
was no blind advocate for markets. Indeed, he actually thought the theorem illustrated the limitations
of capitalism, and he was prescient in understanding how economic inequality might come to impair
the workings of democratic government. Perhaps it would be best to use his own words: "In a system
where virtually all resources are available for a price, economic power can be translated into
political power by channels too obvious for mention. In a capitalist society, economic power is
very unequally distributed, and hence democratic government is inevitably something of a sham.""
......................
https://www.bloomberg.com/view/articles/2017-03-09/the-misunderstanding-at-the-core-of-economics
"This perversion isn't Arrow's fault. He merely helped to prove a mathematical theorem, and was
no blind advocate for markets. Indeed, he actually thought the theorem illustrated the limitations
of capitalism"
This quote illustrates that there is some difference between neoliberalism and neo-classical
economics. Neoliberals do not care about applicability of neo-classical economics or the validity
of generalized stochastic equilibrium.
They used neo-classical theories as a ram to destroy New Deal Capitalism and paid "useful idiots"
outsized amount of money to keep them in power in economics departments.
"... The inevitable failure of economics started with Jevons/Walras/Menger but Arrow gave the final
push with this fundamental methodological specification: "It is a touchstone of accepted economics that
all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging
economic research, in peer review of papers and research, and in promotions, includes the criterion
that in principle the behavior we explain and the policies we propose are explicable in terms of individuals,
not of other social categories." (Arrow, 1994) ..."
"... The definition of the subject matter translates into the following hard core propositions,
a.k.a. axioms: "HC1 economic agents have preferences over outcomes; HC2 agents individually optimize
subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant
knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium
states." (Weintraub, 1985) ..."
"... Obviously, this axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii)
rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains a nonentity is
A PRIORI false. By consequence, General Equilibrium theory of the Arrow-Debreu type and its offspring
until DSGE/RBC/New Keynesianism is scientifically worthless. ..."
How Arrow pushed economics over the cliff
Comment on Steven Durlauf on 'Kenneth Arrow and the golden age of economic theory'
The inevitable failure of economics started with Jevons/Walras/Menger but Arrow gave
the final push with this fundamental methodological specification: "It is a touchstone of accepted
economics that all explanations must run in terms of the actions and reactions of individuals.
Our behavior in judging economic research, in peer review of papers and research, and in promotions,
includes the criterion that in principle the behavior we explain and the policies we propose
are explicable in terms of individuals, not of other social categories." (Arrow, 1994)
The definition of the subject matter translates into the following hard core propositions,
a.k.a. axioms: "HC1 economic agents have preferences over outcomes; HC2 agents individually
optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4
agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed
with reference to equilibrium states." (Weintraub, 1985)
Obviously, this axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2),
(ii) rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains
a nonentity is A PRIORI false. By consequence, General Equilibrium theory of the Arrow-Debreu
type and its offspring until DSGE/RBC/New Keynesianism is scientifically worthless.
Re: The ideas of Kenneth Arrow - Steven Durlauf
...............
"Yet the theorem trails a dense cloud of caveats, which Arrow himself recognized could be more
important than the proof itself. For one, it worked only in a perfect world, far removed from
the one humans actually inhabit. Equilibrium is merely one of many conceivable states of that
world; there's no particular reason to believe that the economy would naturally tend toward
it. Beautiful as the math may be, actual experience suggests that its magical efficiency is
purely theoretical, and a poor guide to reality."
...................
"Remarkably, academic macroeconomists have largely ignored these limitations, and continue
to teach the general equilibrium model -- and more modern variants with same fatal weaknesses
-- as a decent approximation of reality. Economists routinely use the framework to form their
views on everything from taxation to global trade -- portraying it as a value-free, scientific
approach, when in fact it carries a hidden ideology that casts completely free markets as the
ideal."
...........................
"This perversion isn't Arrow's fault. He merely helped to prove a mathematical theorem,
and was no blind advocate for markets. Indeed, he actually thought the theorem illustrated
the limitations of capitalism, and he was prescient in understanding how economic inequality
might come to impair the workings of democratic government. Perhaps it would be best to use
his own words: "In a system where virtually all resources are available for a price, economic
power can be translated into political power by channels too obvious for mention. In a capitalist
society, economic power is very unequally distributed, and hence democratic government is inevitably
something of a sham.""
......................
https://www.bloomberg.com/view/articles/2017-03-09/the-misunderstanding-at-the-core-of-economics
"I Suspect the Major Reason for the Rise in Concentration Is Technological Change, Particularly
in IT"
Posted on April 7, 2017 by ProMarket writers
In this installment of ProMarket's interview series on concentration in America, Chicago
Booth professor Steven Kaplan discusses the reasons for the rise in concentration. "Overall,
the increases in concentration from technology and regulation are positive while the increase
from rent seeking is a negative."
[The article linked above entirely misses "how economic inequality might come to impair the
workings of democratic government." Kaplan is very tentative about linking inequality to concentration
and is generally less concerned with inequality per se than monopoly rent seeking. As long
as all the sharks in the tank are free then everything is OK.]
Walmart, Home Depot and various chains/licensees are examples of concentration that didn't
arise because of network effects. Rather, they used their advantage of overwhelming amounts
of capital backing to under-price and/or outlast smaller competitors.
As a result we have wealth moving from the top 20% to the top 0.1%, wealth less geographically
disbursed and fly-over country deteriorating.
Gee - I heart what? Maybe you missed my Econospeak post where I noted how they abused transfer
pricing. Something to do with Hong Kong sourcing affiliates. I'd explain it to you all over
again but you would get angry as you usually do when you cannot grasp simple concepts.
Network effects? How about economy of scale, not least management at scale enabled by IT? Not
just in retail, IT has significantly increased management efficiency, i.e. raised the thresholds
of size and complexity where an organization becomes unmanageable (which I would define as
taking on more size or complexity leads to a *reduction* or at least no increment in output/profit).
According to a number of claims I read long ago, Walmart's power over suppliers derived in
large part from the volume they could command. Capital or not, they will not order more volume
than they can sell - so they have to be able to sell that much stuff, and profitably, to begin
with.
For classical economists, it was a factor of production, and the source of "rent."
..............
In reality, however, land and capital are fundamentally distinctive phenomena. Land is permanent,
cannot be produced or reproduced, cannot be 'used up' and does not depreciate. None of these features
apply to capital. Capital goods are produced by humans, depreciate over time due to physical wear
and tear and innovations in technology (think of computers or mobile phones) and they can be replicated.
In any set of national accounts, you will find a sizeable negative number detailing physical
capital stock 'depreciation': net, not gross capital investment is the preferred variable used
in calculating a nations's output. When it comes to land, net and gross values are equal.
machines coal mines hay fields rain forests
glacial lakes these are physical constructs
that society
ie acting at the social level
can capitalize
By adding labor
produces product that exchanges
on markets for more then the labor
costs
Noah Smith says important things in his post. Economists have hidden behind "forecasting is not
our job" defense for too long. I would like to add that as with any model, in sample and out of
sample testing is very important. Economists never do that. The latest attempt to add variables
to explain the events of the last decade is another exercise in over fitting models. Pathetic.
"Macroeconomists typically respond that forecasting isn't their job. The economy has all kinds
of things going on at any given time, they say -- too much randomness and noise to allow a reliable
forecast. The best they can do, macroeconomists will say, is to predict the effects of specific
policies.
This defense is weak. If the economy is dominated by random noise, that noise will also permeate
the data that is used to validate macroeconomic models. If forecasting is impossible, then picking
the right policy-evaluation model will also be impossible. Also, the inability to forecast is
often a clue that a model is just plain wrong."
Can I try another tack? People expect us to be good forecasters. We're not. The old adage applies
- "why do economists forecast? To make the weather man look good".
"My favorite paper in this literature is by Refet Gurkaynak, Burcin Kisacikoglu, and Barbara Rossi.
In 2013, they took some of the most advanced modern macroeconomic models then available -- called
DSGE, for dynamic stochastic general equilibrium -- and tested them against some very simple models
called autoregressive (AR) models."
Noah and I share one thing in common - a certain disdain for these overly complex and highly
unrealistic DSGE models. Of course they missed the Great Recession. Many of them rely on assumptions
that markets are perfect and instantly clear. If one ignore an issue - that issue can come back
to bite you fast.
I share your skepticism of the DSGE models. However, the problems are more basic and applies across
model types.
1) very few papers come up with models to forecast. instead of testing the ability to forecast,
they quantify how well past data is fit. Then they will produce some bogus looking charts of impulse
responses to one variable holding all else equal. The impulse response charts are the most useless
output in econ papers.
2) It is far easier to produce a model with good in sample forecasts. It is far more difficult
to produce true good out of sample forecasts. I have really not seen economists do out of sample
forecasting in an honest way.
Forecasting markets is a fools task
As a scientist
Like alchemy its goal is gold
out of lead
when market systems
are inherently historistic
and thus radically uncertain
at time intervals long enough
to be meaningful
to macro forecasting
"... "Trust in institutions generally has taken a body blow over the past few years. The Edelman global survey suggests that public trust in businesses, government, NGOs and the media has fallen sharply. In 2016, only around half of the general public trusted these bodies. ..."
"... ... What is true of institutions appears to be true too of the economics profession. A recent poll by YouGov in the UK asked the general public how much they trusted various professions. Economists were towards the bottom of this list, well below scientists, historians, weather forecasters and even sports commentators." ..."
"... While the net approval of economic policy fell sharply in the Great Recession, it had been moving down since the early 2000s. In the past few years, households' assessment of economic policy got back to around its average historical level. Yet that still leaves slightly more people saying economic policy is doing a poor job than a good job. The large gap between today and the late-1990s sure looks like more than a messaging problem. ..."
... "how central banks could regain the public's trust by changing the way they communicate."
Well worth a read. It also fits in the avalanche of commentary on how economists should engage with
the public as experts and how much trust economists deserve. Some examples online from just the past
few days
here and
here.
I can see many reasons why central banks and economists should engage with the public. (And that's
even without getting into communication policy tools, like forward guidance, a topic I'll leave to
the
experts
.) I wrote in an earlier post about
a Fed Up event hosted by
the Kansas City Fed. And as
Steve Williamson
points out in his post on Haldane's speech, Reserve Banks in the United States do many forms
of community outreach. (A point Haldane does acknowledge too.) What's less clear to me is whether
better communication is sufficient for raising trust. Nowhere in his speech does Haldane
show that a lack of communication caused the reduced trust in central banks. In fact, central-bank
communication has dramatically risen. So was it the wrong kind or too little, too late? Even so,
I struggle to imagine the community round table, social media campaign, or gaming app that would
have convinced regular folks that the AIG bailout was a winner. And wouldn't it have been more bizarre
if the public's confidence in central banks and economists had not taken a hit in the financial
crisis? I get it that technocratic credibility and the independence it allows are crucial ingredients
to monetary policy, but isn't that earned by outcomes not words?
Trust slipping away? ...
How much has trust in central banks declined? Haldane's
Chart 12 shows trends across various countries since 1999, though the down-trending measure for
the United States is about its economic leadership in general. This reminded me of
analysis done by
Richard Curtin with the Michigan Survey. That survey asked U.S. households how their confidence
in the Federal Reserve had changed after some major events: stock market crash of 1987, financial
crisis/early recovery, and then later in this recovery. At each point, more people said their confidence
in the Fed had fallen relative to five years earlier than had increased, but the net decline in confidence
was sharpest around the financial crisis. Curtin also noted, not surprisingly, that individuals'
confidence in the Fed (or the lack thereof) and their outlook for the economy were strongly correlated.
Even so, I don't have a sense from any of these data what is the appropriate level of trust or
confidence in central banks and how far we are from it now. Maybe with Greenspan, or as his biographer
dubbed him, "
The Man Who Knew ," the public put too much trust in the Fed? And for an institution that got
its start on a
fake duck hunt
in 1910, the complicated relationship with trust and transparency goes way back.
A bigger problem? ...
Are the concerns now about damaged trust only limited to central banks? Haldane argues that institutions,
experts, and economists have all lost ground:
"Trust in institutions generally has taken a body blow over the past few years. The Edelman
global survey suggests that public trust in businesses, government, NGOs and the media has fallen
sharply. In 2016, only around half of the general public trusted these bodies.
... What is true of institutions appears to be true too of the economics profession.
A recent poll by YouGov in the UK asked the general public how much they trusted various professions.
Economists were towards the bottom of this list, well below scientists, historians, weather forecasters
and even sports commentators."
Central banks, which are institutions full of economists, are thus in for it. It is worth pointing
out that politicians scored even lower than economists in trust and civil servants only a bit better,
so economic policy, in general, faces a confidence deficit. But is this really new? Since 1970, the
Michigan survey has asked households:
"As to the economic policy of the government - I mean steps taken to fight inflation or unemployment
- would you say the government is going a good job, only fair, or a poor job?"
While the net approval of economic policy fell sharply in the Great Recession, it had been
moving down since the early 2000s. In the past few years, households' assessment of economic policy
got back to around its average historical level. Yet that still leaves slightly more people saying
economic policy is doing a poor job than a good job. The large gap between today and the late-1990s
sure looks like more than a messaging problem.
What can words achieve? ...
Much of Haldane's speech focuses on how inaccessible the communications of central banks, including
the media coverage of monetary policy, are for the general public. Seems like this tells us something
about central banks as well as who finds central banks interesting. An FOMC statement via tweetstorm
(shudder, at that canoe) might be more accessible but that doesn't guarantee a wider audience.
Attention
is a scarce resource. Plus simpler words could make it harder not easier to get the intended
message across.
Finally, pivoting back to how economists communicate in general ... a while ago I got interested
in the econ-blogosphere and econ-Twitter. Has reading economics with the technical jargon stripped
off and more personal views added on raised my confidence in economists? No, not really, but that
wasn't my goal. I went online to sample from a wider range of views about what was not working in
the economy. I was also interested in economics for a larger audience. Last year on staff at the
Council of Economic Advisers I got the chance to do a lot more writing, largely for non-economists.
It's hard to filter through research and convey findings in an accessible way ... and don't forget
the tradeoffs. Accessible often means trimming off nuance and taking a reasoned stand on debates
far from settled among economists. Even after all that simplifying, I once heard our economic reports
referred to as "vegetables" by White House staff ... as in good for you, but not necessarily what
you want to eat. Initially, I was a bit deflated but being good for people seems to me like a more
important goal for experts than being the next Elvis.
PS: Haldane refers to Elvis several times, including his title. On that fun note, I'll add that
Jessie J's Price Tag in 2011 struck me as a good Fed song: "Why is everybody so serious;
Acting so damn mysterious ... It's not about the money money money; We don't need your money money
money; We just wanna make the world dance ..."
"... In the 1960's Mr. Tobin's sophisticated Keynesianism made him the best-known intellectual opponent
of Milton Friedman, then the advocate of a rival (and rather naïve) doctrine known as monetarism ..."
James Tobin -- Yale professor, Nobel laureate and adviser to John F. Kennedy -- died yesterday.
He was a great economist and a remarkably good man; his passing seems to me to symbolize the passing
of an era, one in which economic debate was both nicer and a lot more honest than it is today.
Mr. Tobin was one of those economic theorists whose influence reaches so far that many people
who have never heard of him are nonetheless his disciples. He was also, however, a public figure,
for a time the most prominent advocate of an ideology we might call free-market Keynesianism --
a belief that markets are fine things, but that they work best if the government stands ready
to limit their excesses. In a way, Mr. Tobin was the original New Democrat; it's ironic that some
of his essentially moderate ideas have lately been hijacked by extremists right and left.
Mr. Tobin was one of the economists who brought the Keynesian revolution to America. Before
that revolution, there seemed to be no middle ground in economics between laissez-faire fatalism
and heavy-handed government intervention -- and with laissez-faire policies widely blamed for
the Great Depression, it was hard to see how free-market economics could survive. John Maynard
Keynes changed all that: with judicious use of monetary and fiscal policy, he suggested, a free-market
system could avoid future depressions.
What did James Tobin add? Basically, he took the crude, mechanistic Keynesianism prevalent
in the 1940's and transformed it into a far more sophisticated doctrine, one that focused on the
tradeoffs investors make as they balance risk, return and liquidity.
In the 1960's Mr. Tobin's sophisticated Keynesianism made him the best-known intellectual
opponent of Milton Friedman, then the advocate of a rival (and rather naïve) doctrine known as
monetarism . For what it's worth, Mr. Friedman's insistence that changes in the money supply
explain all of the economy's ups and downs has not stood the test of time; Mr. Tobin's focus on
asset prices as the driving force behind economic fluctuations has never looked better. (Mr. Friedman
is himself a great economist -- but his reputation now rests on other work.) ...
Why Were Economists as a Group as Useless Over 2010 -2014 as Over 1929-1935?
by J. Bradford DeLong
April 01, 2017 at 07:04 AM
Let us start with two texts this morning:
Paul Krugman: Don't Blame Macroeconomics (Wonkish And Petty): "Robert Skidelsky... argues,
quite correctly in my view, that economists have become far too inward-looking...
...But his prime examples of economics malfeasance are, well, terrible.... [The] more or less
standard model of macroeconomics when interest rates are near zero [is] IS-LM in some form....
[And] policy had exactly the effects it was "supposed to." Now, policymakers chose not to believe
this.... And yes, some economists gave them cover. But that's a very different story from the
claim that economics failed to offer useful guidance...
Simon Wren-Lewis: Misrepresenting Academic Economists: "The majority of academic macroeconomists
were always against austerity...
...Part of the problem is a certain disregard for consensus among economists. If you ask most
scientists how a particular theory is regarded within their discipline, you will generally get
a honest and fairly accurate answer.... Economists are less likely to preface a presentation of
their work in the media with phrases like 'untested idea' or 'minority view'.... Part of Brad's
post it seems to me is simply a lament that Reinhart and Rogoff are not even better economists
than they already are. But there is also a very basic information problem: how does any economist,
let alone someone who is not an economist, know what the consensus among economists is? How do
we know that the people we meet at the conferences we go to are representative or not?...
"Mainstream", "academic", and "majority" are doing an awful lot of work here for both Paul
and Simon. So let me repeat something I wrote last December, in response to Paul's liking to say
that macroeconomics has done fine since 2007. Certainly Jim Tobin's macroeconomics has. John Maynard
Keynes's macroeconomics has. Walter Bagehot, Hyman Minsky, and Charlie Kindleberger's macroeconomics
has done fine.
But Bagehot and Minsky influenced the then top-five American economics departments--Chicago,
MIT, Harvard, Princeton, Yale--only through Kindleberger. Charlie went emeritus from MIT in 1976
and died in 1991, and MIT made a decision--a long series of repeated decisions, in fact--that
there was no space on its faculty for anybody like Charlie.
When Robert Skidelsky says "macroeconomics", he means the macroeconomics of RBC and DSGE and
ratex and the Great Moderation.
And he is right: Alesina and Ardagna and Reinhart and Rogoff each had more influence on what
policymakers and journalists thought about the effects of fiscal policy than did Paul Krugman
and company, (including me). While the Federal Reserve went full-tilt into quantitative easing
(but not stamped money or helicopter money), it did so in the face of considerable know-nothing
opposition. And the ECB lagged far behind in terms of even understanding its mission. Why? Because
economists Taylor, Boskin, Calomiris, Lucas, Fama, and company had almost as much or even more
impact as did Paul Krugman and company.
"Basic macro" did fine. But basic macro was not the really-existing macro that mattered.
And let me repeat part of my public intellectuals paper: In the last days before the coming
of the Roman Empire, Marcus Tullius Cicero in Rome wrote to his BFF correspondent Titus Pomponius
Atticus in Athens:
You cannot love our dear [Marcus Porcius] Cato any more than I do; but the man–although employing
the finest mind and possessing the greatest trustworthiness–sometimes harms the Republic. He speaks
as if we were in the Πολιτεια of Plato, and not in the sewer of Romulus
I like this blogger Campbell. Stephen Williamson should be excommunicated from the Economics Guild.
He should receive a letter of reproach from former CEA Chairs. (I'm thinking about the DeLong-SWL
debate.)
"Thus it's worth peering into [Williamson's] intellectual journey. First, after QE, despite
high unemployment and a weak economy, he repeatedly predicted that inflation would rise. When
it didn't happen, he changed his mind, which is what one should do. Only, he couldn't concede
that standard Keynesian liquidity trap analysis was largely correct. That would be equivalent
to surrendering his army to the evil of evils, Paul Krugman. Much easier to venture into the wilderness,
and instead conclude, not that inflation wasn't rising despite low interest rates because the
economy was still depressed, and banks were just sitting on newly printed cash, but rather that
inflation was low because interest rates were low!
Fortunately, not all of Macro went in this direction, as Larry Christiano, a mainstream economist,
discusses the Keynesian Revival* due to the Great Recession."
Lawrence J. Christiano Northwestern University Federal Reserve Bank of Minneapolis
February 2017
EXECUTIVE SUMMARY
The Great Recession was particularly severe and has endured far longer than most recessions.
Economists now believe it was caused by a perfect storm of declining home prices, a financial
system heavily invested in house-related assets and a shadow banking system highly vulnerable
to bank runs or rollover risk. It has lasted longer than most recessions because economically
damaged households were unwilling or unable to increase spending, thus perpetuating the recession
by a mechanism known as the paradox of thrift. Economists believe the Great Recession wasn't foreseen
because the size and fragility of the shadow banking system had gone unnoticed.
The recession has had an inordinate impact on macroeconomics as a discipline, leading economists
to reconsider two largely discarded theories: IS-LM and the paradox of thrift. It has also forced
theorists to better understand and incorporate the financial sector into their models, the most
promising of which focus on mismatch between the maturity periods of assets and liabilities held
by banks.
"... Ironic that Krugman is cited as a voice for reform - he represents the neo-Keynesian hell we've got stuck in. ..."
"... I'm an economics student at the University of Glasgow, in second year as part of a compulsory course we were taught about alternative economic theories in comparison to Neoclassical models. ..."
"... The course has only been running for a few years but in response students have set up a very similar society to promote alternative thinking on economics. Even just half a semester on Post-Keynesian Economic theory has really opened our eyes to the alternatives within economics. ..."
"... I studied neoclassical 'economics' (it really isn't economics, just garbage) for five years. Began to take my graduate degree in the autumn of 2008 when everything was falling apart and I had no idea why. No clue whatsoever. After my masters degree in neoclassical 'economics' I still had no clue what had happened. ..."
"... Orthodox economics: Ignore money. Hence, ignore debt. Let the overall leverage of the economy increase until Ponzi finance fails and financial crisis begins. The debt deflation that follows means money gets even more concentrated towards the financial/political elite than before the crisis. Neo-feudalism makes way - finally war. ..."
"... Orthodox economists don't understand capitalism. They can't. The long time failed axioms underlying everything else in their theories don't allow them to do that. ..."
I'm an economics student at the University of Glasgow, in second year as part of a compulsory
course we were taught about alternative economic theories in comparison to Neoclassical models.
The course has only been running for a few years but in response students have set up a
very similar society to promote alternative thinking on economics. Even just half a semester on
Post-Keynesian Economic theory has really opened our eyes to the alternatives within economics.
I studied neoclassical 'economics' (it really isn't economics, just garbage) for five years.
Began to take my graduate degree in the autumn of 2008 when everything was falling apart and I
had no idea why. No clue whatsoever. After my masters degree in neoclassical 'economics' I still
had no clue what had happened.
Then I stumbled across Post-Keynesian economics and it took me about six months to dismiss
the neoclassical garbage. If I hadn't studied that garbage for five years it would have taken
me a few days.
Orthodox economics: Ignore money. Hence, ignore debt. Let the overall leverage of the economy
increase until Ponzi finance fails and financial crisis begins. The debt deflation that follows
means money gets even more concentrated towards the financial/political elite than before the
crisis. Neo-feudalism makes way - finally war.
Then the cycle starts again.
Orthodox economists don't understand capitalism. They can't. The long time failed axioms
underlying everything else in their theories don't allow them to do that.
"... This has echoes of a protest by students in 2011 at Harvard when a group of students walked out of the lectures by Dr Gregory Manilow. What has happened to them? ..."
"... Good for them. The economics profession has been dominated by neoliberal theoreticians for far too long. It needs bringing back to the real world. ..."
"... i went to the LSE to study maths and statistics with a sprinkling of economics (my first taste of it at the time). after a few months i was of the opinion it is based on terrible assumptions. e.g. the needs of the average consumer, which are then blown up into fantastical macroeconomical proportions which only led to flawed arguments. The subsequent financial crisis only backed this up. ..."
What a ghastly indictment of Manchester, and other economics departments - obviously being
very economic with their subject. Sounds a bit like the Natural Sciences departments being run
by creationists.
This should be the first class for the whole students in economics.
What are the limits in ecology ecosystem? And what are the needs/capacities for human flourishing?
Adventures in New Economics 2: Donut Economics, Kate Raworth
This is an open/complex map with a compass in values that I've built trying to go through both
main concepts. It's valid for personal development / companies / communities / nations / whole
planet.
This has echoes of a protest by students in 2011 at Harvard when a group of students walked
out of the lectures by Dr Gregory Manilow. What has happened to them?
I personally have observed in other disciplines that teaching tends to be a generation behind
current thinking, Particularly when it has more to do with ideology than science.
Some ten years ago, a movement called the Post-Autistic Ecomoncs Movement had a considerable
influence in Europe but has no doubt disappeared in the face of the greed which is central supporting
feature of today's neoliberalism.
i went to the LSE to study maths and statistics with a sprinkling of economics (my first
taste of it at the time). after a few months i was of the opinion it is based on terrible assumptions.
e.g. the needs of the average consumer, which are then blown up into fantastical macroeconomical
proportions which only led to flawed arguments. The subsequent financial crisis only backed this
up.
I commend this thinking by the students but if I was one of their parents forking out 27k i
would probably tell them to pass the exams they need to and get out and start earning.
LSE is a godawful uni also, unless you have given spawn to gordon gekko dont bother with it.
Alternative theories and models??? Well they are currently practiced by North Korea and these
students will be more than welcomed by the Kim family to ply their trade there.
Actually, "alternative theories" were practiced by South Korea, which has been quite a success
story. It's not either the status quo or state communism, you know.
For an understanding of how we came to have thrust upon us the "Dismal Science" of neo-classical
economics, which took shape in the 1880's - 1890's, I recommend reading "The Corruption of Economics"
by Mason Gaffney.
Essentially, economic thinking was hijacked by the robber barons who through building and funding
universities were able to subvert the teaching of economics to suit their own agenda. Classical
economics with a sound basis of three factors of production was replaced by voodhoo economics
which reduced the three factors of production to only two. Whereas once "land" was a factor of
production in its own right alongside "capital" and "labour", it was magicked away to be incorporated
as "capital" for the purpose of the land owning robber barons.
As anyone with a few braincells would know, "land" is a distinct factor of production in its
own right, and not only that, it is the primary factor since neither "capital" or "labour" would
exist without it. But "land" can exist without both the other two factors which makes it unique
and makes it primary and yet voodhoo economics has managed to hide this fact so well through the
employment of clever mathematics to create an illusion of being a solid discipline.
Neoclassical economics is the idiom of most economic discourse today. It is the paradigm
that bends the twigs of young minds. Then it confines the florescence of older ones, like chicken-wire
shaping a topiary. It took form about a hundred years ago, when Henry George and his reform
proposals were a clear and present political danger and challenge to the landed and intellectual
establishments of the world. Few people realize to what a degree the founders of Neoclassical
economics changed the discipline for the express purpose of deflecting George, discomfiting
his followers, and frustrating future students seeking to follow his arguments. The stratagem
was semantic: to destroy the very words in which he expressed himself.
To most modern readers, probably George seems too minor a figure to have warranted such an
extreme reaction. This impression is a measure of the neo-classicals' success: it is what they
sought to make of him. It took a generation, but by 1930 they had succeeded in reducing him
in the public mind. In the process of succeeding, however, they emasculated the discipline,
impoverished economic thought, muddled the minds of countless students, rationalized free-riding
by landowners, took dignity from labor, rationalized chronic unemployment, hobbled us with
today's counterproductive tax tangle, marginalized the obvious alternative system of public
finance, shattered our sense of community, subverted a rising economic democracy for the benefit
of rent-takers, and led us into becoming an increasingly nasty and dangerously divided plutocracy.
Not one economics graduate have I met that has heard of Henry George but yet they have all
heard of Karl Marx. The robber barons and their useful idiots have certainly achieved what they
set out to do.
As clarification the two paragraphs in italics are excerpts from the "Corruption of Economics"
by Mason Gaffney. The link to Henry George's "Progress and Poverty" is,
http://www.henrygeorge.org/pcontents.htm
"... Then Economic History was virtually withdrawn from university Economics and other courses so that only the"lies" would be taught backed up by unquestioned (i.e. purely deductive) Mathematics. It is an academic crime ..."
If a viable economic solution emerged from the universities - one which remedied the classical
models and trumped the broken neo-liberal systems, how would we recognise it?
To provide some context - and I am in no way qualified to discuss this topic really but, the
first machines to produce logic emerging from Bletchley park were not fully recognised for their
potential - the computer revolution took place elsewhere. The UK is absolute rubbish at recognising
innovation!
Good luck to the students. I hope many more get involved in this debate.
I taught Economics for forty years and over 30 of those to Singaporean scholars destined to
Oxford, Cambridge and Ivy League universities; in all those years I was aware of the lies I had
to teach in order to pass university entrance exams.
I attempted to follow the thesis that every economic theory however old or new was attempting
to answer a unique contemporary economic problem and therefore only Economic History was of relevance
in understanding a theory be Adam Smith or Keynes or even (unacademically) Thatcherism.
My students found all such information useless to passing Economics exams but interesting for
"life".
Then Economic History was virtually withdrawn from university Economics and other courses
so that only the"lies" would be taught backed up by unquestioned (i.e. purely deductive) Mathematics.
It is an academic crime.
"... Neoliberal economics not only led to the crash of 2007/8 it is continuing to wreak havoc. A
good current example is pension schemes - something we will depend on one day. They are valued using
the purest form of free market thinking: the efficient markets hypothesis - the idea that asset markets
always perfectly embody all relevant information. It is akin to belief in magic. ..."
"... It is amazing to read how narrow economics education is in modern Britain. It is not only intellectually
unenlightened and literally dangerous, given the power many economics graduates can wield, amplified
by the extraordinary sums and resources they manage, it also does a great disservice to people who are
entitled to a proper education which, clearly, they are not receiving in this monotheistic model. ..."
"... It reminds me precisely of the so-called "religious education" I received in Ireland which
was nothing of the sort. All I got was instruction in Catholic doctrine and ethics; there was no instruction
in the beliefs of any other Christian sects, let alone what goes on in the other major world religions
such as Hinduism, Judaism, or Islam. What I know about them I taught myself in later life. ..."
"... It seems that the same shameful parochial narrowness, intellectual provincialism, and "one
true religion" ethic prevails in British economic so-called "education". ..."
"... On another matter, the revelation that economists "ignore empirical evidence that contradicts
mainstream theories" destroys any notion that economics is a science, a silly claim I have always opposed.
All that it reveals is that economists have no idea what science is. ..."
Neoliberal economics not only led to the crash of 2007/8 it is continuing to wreak havoc.
A good current example is pension schemes - something we will depend on one day. They are valued
using the purest form of free market thinking: the efficient markets hypothesis - the idea that
asset markets always perfectly embody all relevant information. It is akin to belief in magic.
Yet many professionals who run pension schemes and the government regulator all support it's
use because it suits them - it deflects responsibility from them while they continue to be paid.
It's effects on society are disastrous as it leads us to believe are insolvent. The government
and actuarial profession accepted all this and enshrined it in law.
A topical example is the universities pension scheme the USS which BBC Newsnight and Radio
4 have just told us has a 'black hole' of a deficit.
Many of us thought that the EMH would ditched after its spectacular failure but no. Zombie
theories continue on their path of destruction.
It is amazing to read how narrow economics education is in modern Britain. It is not only
intellectually unenlightened and literally dangerous, given the power many economics graduates
can wield, amplified by the extraordinary sums and resources they manage, it also does a great
disservice to people who are entitled to a proper education which, clearly, they are not receiving
in this monotheistic model.
It reminds me precisely of the so-called "religious education" I received in Ireland which
was nothing of the sort. All I got was instruction in Catholic doctrine and ethics; there was
no instruction in the beliefs of any other Christian sects, let alone what goes on in the other
major world religions such as Hinduism, Judaism, or Islam. What I know about them I taught myself
in later life.
It seems that the same shameful parochial narrowness, intellectual provincialism, and "one
true religion" ethic prevails in British economic so-called "education". Intellectuals ought
to be utterly ashamed to propagate such blinkered views. Anyone who has never heard of Keynes
is culturally illiterate; that an economics student, in particular, has never heard of Keynes
is a disgrace.
On another matter, the revelation that economists "ignore empirical evidence that contradicts
mainstream theories" destroys any notion that economics is a science, a silly claim I have always
opposed. All that it reveals is that economists have no idea what science is.
Delong is a typical neoliberal stooge, not that different from Mankiw, or Summers
Note that the terms "neoliberalism", "neo-classical economics" and "financial oligarchy" were
never used...
Notable quotes:
"... "DeLong's takeaway is that economists do need to recognize that they operate in a political environment (the sewers of Romulus) in which their work will be seized upon by interested groups, with real practical outcomes. " ..."
"... UE's conclusion is that mainstream economics needs to be taken down several notches, which would open more space for alternative approaches to economics and, indeed, alternative approaches to policy that place more weight on human outcomes, broadly understood, than the formalistic criteria of efficiency, etc. ..."
"... Simon-Wren Lewis (SWL) and Chris Dillow have both recently argued that criticising economics for the 2008 financial crisis distracts from the real source of the blame, which is banks, and therefore undermines the progressive cause. While I don't disagree that the banks deserve blame, I want to push back a bit on their argument that economics as a discipline has little to do with regressive ideas. ..."
"... Consider the case of monopoly. The economics textbooks may be against monopoly, but this is largely on the grounds that it reduces consumer welfare by increasing prices. Building on this logic, the Chicago School of anti-trust regulation has shifted the focus of anti-trust law to lowering prices for consumers. As this recent article on Amazon details, this has hidden other forms of monopoly abuse such as predatory pricing, market dominance and reduced bargaining power for workers, consumers and smaller companies. ..."
"... Or consider Reinhart and Rogoff's famous '90% debt threshold', where their statistics purportedly showed that after a country reaches 90% of sovereign debt, its growth would stall. This was used by many politicians, including George Osborne, to justify austerity - until it was revealed to be based on 'statistical errors'. Sure, R & R received a fair amount of flak for this, but they have been incredibly stubborn about the result. Where was the formal, institutional denunciation of such a glaring error from the economics profession, and of the politicians who used it to justify their regressive policies? Why are R & R still allowed to comment on the matter with even an ounce of credibility? The case for austerity undoubtedly didn't hinge on this research alone, but imagine if a politician cited faulty medical research to approve their policies - would institutions like the BMA not feel a responsibility to condemn it? (Answer: yes, even when the politician was in another country). ..."
"... There are many more examples like this, such as Andrei Shleifer, who despite being prosecuted for fraud in post-Soviet Russia was awarded the John Bates Clark medal, probably the second most prestigious prize in the discipline, was subsequently allowed to publish papers in respected journals about how well privatisation went in Russia, and was eventually bailed out of the case by his incredibly wealthy university to the tune of $26 million. This is not to mention the disastrous Russian privatisation as a whole and the role of certain economists/economic ideas in it. ..."
"... Even worse were the Chicago boys, who advised Augusto Pinochet's horrific economic policies (and no, they were not just humble advisors, they were knee deep in the absolute worst excesses of the regime.) Without any substantive ethical code and without procedures for weeding out corrupt, dishonest or discredited work, the profession creates an environment where people can act like this and get away with it, all under the banner of the intellectual credibility 'economics' seems to confer on people. ..."
"... Mainstream economists have used mathematics to hide ideology. ..."
"... They have cherry-picked mathematical constructions with highly restrictive, idealized properties and then wedged-in economic parameters to fit their purposes. That is the case with the neoclassical production function and with the Arrow-Debreu general equilibrium model. The objective was to "prove" that economies free from government control were "natural" and best. They have been sophists from their first emergence. ..."
"... Science is not capable of devising a theory that adequately explains all the human elements and serendipitous effects of an economy - and may never be capable. However, humans are capable of organizing a society according to their needs and wants. They do it on a corporate scale all the time. It isn't perfect but it works pretty well. ..."
"... Mainstream economists have fought against a managed economy because it would reduce the influence of themselves and their plutocrat sponsors. ..."
"DeLong's takeaway is that economists do need to recognize that they operate in a political
environment (the sewers of Romulus) in which their work will be seized upon by interested groups,
with real practical outcomes. "
Economics: Part of the Rot, Part of the Treatment, or Some of Each?
Is mainstream economics, with its false certitudes and ideological biases, one of the reasons
for the dismal state of policy debate in countries like the UK and the US, or are its rigorous
methods an important antidote to the ruling political foggery? That's being debated right now,
live online.
Our starting point is a post on Unlearning Economics, dated March 5, which argues that the
flaws of mainstream economics contribute to lousy policy on several fronts: downplaying the role
of monopoly, cheerleading for the shareholder value imperative in the corporate world, knee-jerk
support for trade agreements under the banner of comparative advantage, and regressive macroeconomic
policy, among others. A particularly pointed paragraph brought up the Reinhart-Rogoff 90% affair
and accused the economics profession of dereliction of duty by not taking action to rebuke the
wrongdoers:
Where was the formal, institutional denunciation of such a glaring error from the economics
profession, and of the politicians who used it to justify their regressive policies?
UE's conclusion is that mainstream economics needs to be taken down several notches, which
would open more space for alternative approaches to economics and, indeed, alternative approaches
to policy that place more weight on human outcomes, broadly understood, than the formalistic criteria
of efficiency, etc.
Simon Wren-Lewis responded by arguing that UE has it exactly backwards. Restricting himself
to UE's critique of macroeconomics, SWL says, yes, reactionary politicians have invoked "economics"
to support austerity, but "real" economists for the most part have not gone along. True, there
were a few, like Reinhart and Rogoff and those in the employ of the British financial sector ("City
economists") who took a public stand against sensible Keynesian policies in the wake of the financial
crisis, but they were a minority, and, in any case, what would you want to do about them? Economists,
like professionals in any field, will disagree sometimes, and having a centralized agency to enforce
a false consensus would ultimately work against progressives and dissenters, not for them. Let's
put the blame where it really belongs, says SWL-on the politicians and pundits who have brushed
aside decades of theoretical and empirical work to promulgate a reactionary, fact-free discourse
on economic policy.
Yes-but, adds Brad DeLong. He largely agrees with SWL, but delves more deeply into the Reinhart-Rogoff
affair. He shows that, even without the famed Excel glitch, a cursory look would reveal that R-R
were trumpeting nonexistent results:
The 90% debt cliff was an artifact of the way R-R set up their bins. Replace binning with
a continuous relationship between growth and debt and the cliff disappears.
The correlation between growth and debt supported no particular causal interpretation,
and R-R provided no other evidence to support their particular causal argument.
The correlation itself was so weak that the practical implication of R-R's claim was nil.
Fiscal stimulus that could make or break a recovery was being rejected on the basis of future
economic growth effects that would be too small to measure.
So the R-R claim that fiscal consolidation was necessary and urgent was unfounded from the
get-go, and these two were both respected mainstream economists, so what can we infer? DeLong's
takeaway is that economists do need to recognize that they operate in a political environment
(the sewers of Romulus) in which their work will be seized upon by interested groups, with real
practical outcomes. In this situation, the profession as a whole has a responsibility to assess
high profile but dubious work. Although he isn't explicit, my reading is that DeLong wants some
sort of professional quality control, but not institutionalized in the way UE seems to call for.
"reactionary politicians have invoked "economics" to support austerity, but "real" economists
for the most part have not gone along. True, there were a few, like Reinhart and Rogoff and those
in the employ of the British financial sector ("City economists") who took a public stand against
sensible Keynesian policies in the wake of the financial crisis, but they were a minority, and,
in any case, what would you want to do about them? Economists, like professionals in any field,
will disagree sometimes, and having a centralized agency to enforce a false consensus would ultimately
work against progressives and dissenters, not for them. Let's put the blame where it really belongs,
says SWL-on the politicians and pundits who have brushed aside decades of theoretical and empirical
work to promulgate a reactionary, fact-free discourse on economic policy."
Simon-Wren Lewis (SWL) and Chris Dillow have both recently argued that criticising economics
for the 2008 financial crisis distracts from the real source of the blame, which is banks, and
therefore undermines the progressive cause. While I don't disagree that the banks deserve blame,
I want to push back a bit on their argument that economics as a discipline has little to do with
regressive ideas.
But firstly, it is my view that criticising economics needn't have an ideological motivation.
Many critics, myself included, simply believe that neoclassical economics has severe shortcomings
and that in order to understand the economic system properly we need better ideas. In many cases
criticisms of neoclassical economics are so abstract that it's not even clear to me what the political
implications of either side would be (e.g. the fact that Arrow-Debreu equilibrium might be unstable
has no bearing on my view of whether capitalism itself is). I respect both SWL and Dillow immensely,
but taken alone I consider this line of argument a rather feeble attempt to shut down an important
scientific and philosophical debate.
Despite this, the point has some force to it: why devote so much intellectual effort to criticising
economics when we could be devoting it to getting the big banks and other corporate wrongdoers?
And here I think SWL and Dillow both paper over the extent to which economics has served those
in power, as I will try to illustrate with a number of examples. To be clear, I'm not 'blaming'
economists for all of these occurrences, but I do think the discipline seems to eschew responsibility
for them, and that progressive economists have a blind spot when it comes to the practical consequences
of their discipline.
Economics in Practice
I've always acknowledged that economists themselves are probably more progressive than they're
usually given credit for. Nevertheless, the absence of things like power, exploitation, poverty,
inequality, conflict, and disaster in most mainstream models - centred as they are around a norm
of well-functioning markets, and focused on banal criteria like prices, output and efficiency - tends
to anodise the subject matter. In practice, this vision of the economy detracts attention from
important social issues and can even serve to conceal outright abuses. The result is that in practice,
the influence of economics has often been more regressive than progressive.
Consider the case of monopoly. The economics textbooks may be against monopoly, but this
is largely on the grounds that it reduces consumer welfare by increasing prices. Building on this
logic, the Chicago School of anti-trust regulation has shifted the focus of anti-trust law to
lowering prices for consumers. As this recent article on Amazon details, this has hidden other
forms of monopoly abuse such as predatory pricing, market dominance and reduced bargaining power
for workers, consumers and smaller companies.
Similarly, textbook ideas about profit maximisation and rational agents responding to incentives
featured prominently in the promotion of shareholder value by Milton Friedman and other economists,
which has been dominant over the past few decades and has been instrumental in increasing inequality
and corporate short-termism. The potential macroeconomic impacts of corporate concentration have
also been ignored by discipline until very recently - a consequence, perhaps, of the narrowing
of particular subfields and the neglection of more critical systemic analysis (something similar
could perhaps be said for the 2016 Prize in contract theory, though I am no expert in this area).
One type of institution which is dominated by economic ideas is central banks, yet many of
their policies have had regressive elements. For instance, SWL praises economists at the Bank
of England for implementing Quantitative Easing, but forgets that the Bank itself admitted that
this has disproportionately benefited the wealthy. This problem goes even deeper: as J W Mason
has argued, inflation targeting - a key central bank policy across the world - in practice results
in workers' wages being kept down and their jobs being made more insecure in the name of combating
inflation. In both cases what is painted as a relatively benign process - reducing interest rates
and managing inflation, respectively - actually has quite serious social consequences, which generally
aren't discussed in class or by policymakers.
In the realm of international trade, economists have been all too inclined to support trade
deals - often quite vociferously - on the basis of simple ideas like comparative advantage, while
ignoring (a) the actual details of the trade deals, which as Dean Baker frequently points out,
tend to favour the rich and corporations and (b) their own more complex economic models, which
as Dani Rodrik frequently points out, do imply that trade will harm some people while benefitting
others. Uneven and unfair international trade has been a key element of the harm to workers over
the past few decades, and was undoubtedly a factor in the election of Trump.
Global trade institutions like the IMF and World Bank have been dominated by economics since
their inception, and using economics they inflicted massive pain through their free market 'structural
adjustment' policies, which can only be described as regressive but which were fundamentally based
on context-free neoclassical ideas about markets. True, these institutions may have softened somewhat
in recent years, but that doesn't undo the harm they have caused. In fact, even their more recent
'bottom up' policies such as microcredit and Randomised Control Trials - both inspired by economic
ideas - often seem to have benefited global and local elites at the expensive of the poorest.
As Jamie Galbraith once noted in the context of the financial crisis, the discipline just has
a blind spot for how ideas interact with power to produce unfair outcomes, sometimes taking the
form of outright abuse and fraud. Which leads me nicely to my next argument.
Abusing Economics
Economists may complain that economic ideas have been misused by vested interests, and that
this isn't their responsibility. But a huge problem with the discipline of economics is that it
has virtually no institutional shields against mistakes and wrongdoing. Merton and Scholes won
the biggest prize in the profession for their model of financial markets - which had become commonly
adopted in options trading - in 1997. A year later those same economists required a hefty bailout
when the use of their model was implicated in the collapse of the hedge fund Long-Term Capital
Management, where they were both partners. Was the prize revoked? No. Were they discredited? No.
Actually, even the model is still widely used, despite massively underestimating fat tails and
therefore being implicated in a number of other financial crises, including 2008.
Or consider Reinhart and Rogoff's famous '90% debt threshold', where their statistics purportedly
showed that after a country reaches 90% of sovereign debt, its growth would stall. This was used
by many politicians, including George Osborne, to justify austerity - until it was revealed to
be based on 'statistical errors'. Sure, R & R received a fair amount of flak for this, but they
have been incredibly stubborn about the result. Where was the formal, institutional denunciation
of such a glaring error from the economics profession, and of the politicians who used it to justify
their regressive policies? Why are R & R still allowed to comment on the matter with even an ounce
of credibility? The case for austerity undoubtedly didn't hinge on this research alone, but imagine
if a politician cited faulty medical research to approve their policies - would institutions like
the BMA not feel a responsibility to condemn it? (Answer: yes, even when the politician was in
another country).
There are many more examples like this, such as Andrei Shleifer, who despite being prosecuted
for fraud in post-Soviet Russia was awarded the John Bates Clark medal, probably the second most
prestigious prize in the discipline, was subsequently allowed to publish papers in respected journals
about how well privatisation went in Russia, and was eventually bailed out of the case by his
incredibly wealthy university to the tune of $26 million. This is not to mention the disastrous
Russian privatisation as a whole and the role of certain economists/economic ideas in it.
Even worse were the Chicago boys, who advised Augusto Pinochet's horrific economic policies
(and no, they were not just humble advisors, they were knee deep in the absolute worst excesses
of the regime.) Without any substantive ethical code and without procedures for weeding out corrupt,
dishonest or discredited work, the profession creates an environment where people can act like
this and get away with it, all under the banner of the intellectual credibility 'economics' seems
to confer on people.
And this leads me to my last point, which is the rhetorical power that invoking 'economics'
has in contemporary politics. 'You don't understand economics' is - rightly or wrongly - a common
refrain of those attacking progressive policies such as Ed Miliband's proposed energy price freeze,
the minimum wage, or fiscal expansion. As with the above abuses of economics, those such as SWL
complain (perhaps correctly) that these are inaccurate representations of the field.
But these same economists then invoke 'economics' in a similar way to justify their own policies.
In my opinion, this only reinforces the dominance of economics and narrows the debate, a process
which is inherently regressive. The case against austerity does not depend on whether it is 'good
economics', but on its human impact. Nor does the case for combating climate change depend on
the present discounted value of future costs to GDP. Reclaiming political debate from the grip
of economics will make the human side of politics more central, and so can only serve a progressive
purpose.
Think about how Republicans use "Science" and scientists fight back against their misuse. In recent
decades Republicans have left the field and now "scientist" has become a bad word for them.
Mainstream economists have used mathematics to hide ideology.
They have cherry-picked mathematical constructions with highly restrictive, idealized properties
and then wedged-in economic parameters to fit their purposes. That is the case with the neoclassical
production function and with the Arrow-Debreu general equilibrium model. The objective was to
"prove" that economies free from government control were "natural" and best. They have been sophists
from their first emergence.
In the 1950s, Arrow and others proved a theorem that, many economists believe, put a rigorous
mathematical foundation beneath Adam Smith's idea of the invisible hand. The theorem shows --
in a highly abstract model -- that producers and consumers can match their desires perfectly,
given a particular set of prices.
In this rarified atmosphere of "general equilibrium," economic activity might take place efficiently
without any central coordination, simply as a result of people pursuing their self-interest.
It's an insight that economists have used to argue for de-unionization, globalization and financial
deregulation, all in the name of removing various frictions or distortions that prevent markets
from achieving the elusive equilibrium.
Yet the theorem trails a dense cloud of caveats, which Arrow himself recognized could be more
important than the proof itself. For one, it worked only in a perfect world, far removed from
the one humans actually inhabit.
Equilibrium is merely one of many conceivable states of that world; there's no particular reason
to believe that the economy would naturally tend toward it. Beautiful as the math may be, actual
experience suggests that its magical efficiency is purely theoretical, and a poor guide to reality.
Remarkably, academic macroeconomists have largely ignored these limitations, and continue to
teach the general equilibrium model -- and more modern variants with same fatal weaknesses --
as a decent approximation of reality.
Economists routinely use the framework to form their views on everything from taxation to global
trade -- portraying it as a value-free, scientific approach, when in fact it carries a hidden
ideology that casts completely free markets as the ideal.
Thus, when markets break down, the solution inevitably entails removing barriers to their proper
functioning: privatize healthcare, education or social security, keep working to free up trade,
or make labor markets more "flexible."
Those prescriptions have all too often failed, as the 2008 financial crisis eloquently demonstrated.
The result is widespread distrust of economic experts and rejection of globalization.
In his recent book "Economism: Bad Economics and the Rise of Inequality," James Kwak credits
conservative think tanks funded by corporations and the wealthy for spreading the oversimplified
belief in markets as wise machines for producing optimal social outcomes. He certainly has a point,
yet such propaganda stemmed from an intellectual model that had been lurking at the center of
economics all along -- and remains there now, still widely revered.
This perversion isn't Arrow's fault. He merely helped to prove a mathematical theorem, and
was no blind advocate for markets. Indeed, he actually thought the theorem illustrated the limitations
of capitalism, and he was prescient in understanding how economic inequality might come to impair
the workings of democratic government.
Perhaps it would be best to use his own words: "In a system where virtually all resources are
available for a price, economic power can be translated into political power by channels too obvious
for mention. In a capitalist society, economic power is very unequally distributed, and hence
democratic government is inevitably something of a sham."
Comment on Simon Wren-Lewis on 'On criticizing the existence of mainstream economics'
There is no such thing as economics, there are FOUR economixes and they are constantly played
against each other. First, there is theoretical and political economics. The crucial distinction
within theoretical economics is true/false, the crucial distinction within political economics
good/bad. Economics exhausts itself since 200+ years in crossover discussion, that is, by NOT
keeping science and politics properly apart. As a result, it got neither science nor politics
right.
Heterodox economists say that orthodox economics is false and in this very general sense they
are right. Heterodox economists have debunked much of Orthodoxy but this has not enabled them
to work out a superior alternative. The proper task of Heterodoxy is not the repetitive critique
of Orthodoxy but to fully replace it, that is, to perform a paradigm shift: "The problem is not
just to say that something might be wrong, but to replace it by something ― and that is not so
easy." (Feynman)
Because Heterodoxy has never developed a valid alternative it advocates pluralism, more precisely,
the pluralism of false theories. The argument boils down to: if Orthodoxy is allowed to sell their
rubbish in the curriculum, Heterodoxy must also be allowed to sell their rubbish. Economics is
not so much a heroic struggle about scientific truth but about a better place at the academic
trough.
The fact of the matter is that neither Orthodoxy nor Heterodoxy has the true theory and that,
by consequence, the political arguments of BOTH sides have NO sound scientific foundation.
Traditional Heterodoxy knows quite well that it has nothing to offer in the way of progressive
science and therefore argues for dumping scientific standards altogether and to focus on politics
pure and simple: "The case against austerity does not depend on whether it is 'good economics',
but on its human impact. Nor does the case for combating climate change depend on the present
discounted value of future costs to GDP. Reclaiming political debate from the grip of economics
will make the human side of politics more central, and so can only serve a progressive purpose."
This is a good idea, economists should no longer pretend to do science but openly push their
respective political agendas, after all, this is what they have actually done the past 200+ years.
Neither Orthodoxy nor traditional Heterodoxy satisfies the scientific criteria of material and
formal consistency. So, both, orthodox and heterodox economists have to get out of science because
of incurable incompetence.
It was John Stuart Mill who told economists that they must decide themselves between science
and politics: "A scientific observer or reasoner, merely as such, is not an adviser for practice.
His part is only to show that certain consequences follow from certain causes, and that to obtain
certain ends, certain means are the most effectual. Whether the ends themselves are such as ought
to be pursued, and if so, in what cases and to how great a length, it is no part of his business
as a cultivator of science to decide, and science alone will never qualify him for the decision."
Both, orthodox and heterodox economists violate the principle of the separation of science
and politics on a daily basis. Economics is what Feynman famously called cargo cult science and
neither right wing nor left wing economic policy guidance has a sound scientific foundation since
Adam Smith/Karl Marx. It is high time that economics frees itself from the corrupting grip of
politics.
Science is not capable of devising a theory that adequately explains all the human elements
and serendipitous effects of an economy - and may never be capable. However, humans are capable
of organizing a society according to their needs and wants. They do it on a corporate scale all
the time. It isn't perfect but it works pretty well.
Mainstream economists have fought against a managed economy because it would reduce the
influence of themselves and their plutocrat sponsors.
"The story of inequality they tell is also one which is essentially technology based (IT and
outsourcing), as they find that inequality is almost entirely driven by changes in between firm
inequality. They deserve credit for presenting an interesting set of facts.
However, while intriguing, I'm not yet totally convinced this is the key to understanding inequality.
Macromon [sic] also had an excellent discussion of this research awhile back...
...
I took issue with this comment "Since 1980, income inequality has risen sharply in most developed
economies". As my blog readers know, income inequality has not risen dramatically in Germany,
France, Japan, or Sweden according to Alvaredo et al.. Thus, this comment threw me: "This means
that the rising gap in pay between firms accounts for the large majority of the increase in income
inequality in the United States. It also accounts for at least a substantial part in other countries,
as research conducted in the UK, Germany, and Sweden demonstrates." Right, but the increases in
inequality in Germany and Sweden have been quite minor relative to the US, and are also associated
with changes in top marginal tax rates. So, between firm inequality isn't actually explaining
much is what I'm hearing.
"the profession as a whole has a responsibility to assess high profile but dubious work."
As in that awful paper by Gerald Friedman. Peter Dorman ripped it. I ripped. And yes the Romers
ripped it.
That is what economists are suppose to do. But you have whined about this for the last 14 months.
Reply Monday, March 27, 2017 at 07:47 AM
Yes it was a priority to demonize Friedman b/c he was coming from the left and was supposedly
supporting Bernie Sanders. It was a way for the center-left to discredit Bernie Sanders and call
him "unPresidential" and "unserious" as Hillary did.
Meawhile PGL continuously name-drops Mankiw as if he has a man crush on him.
"... You don't need to look very far to see the neoliberal ideal; it is all around us: everything a commodity, including human beings; massive differentials in life chances; sweat shops for producers juxtaposed with unimaginable wealth for the owners of capital; everybody on their own, the rolling back of collective provision and no such thing as society. ..."
"... Instead, the neoliberals talk of freedom and choice, but in reality it is freedom for the few to exploit the many and the choice to take whatever crumbs are offered to you or starve. ..."
"... Agree, but it's not that they don't talk about it. The use mathematics as a way to underscore what is essentially an ideological position. It gives them an aura of objectivity, impartiality and scientific truth which, given their prepositions about utility maximization and unbounded growth, they frankly don't have. ..."
Keynes viewed economics as a branch of philosophy. At its heart are two questions - What is
the nature of man? and What sort of society should we create? The focus on mathematical models,
based upon free-market theories, has long been a victory for ivory towers over reality. Sure,
they have an important role to play, but when they are at the centre of what is taught at universities
something has gone wrong.
The neoliberals also have strong views on the kind of society they would like to create, but
they don't talk about it often, because very few people would vote for it.
You don't need to look very far to see the neoliberal ideal; it is all around us: everything
a commodity, including human beings; massive differentials in life chances; sweat shops for producers
juxtaposed with unimaginable wealth for the owners of capital; everybody on their own, the rolling
back of collective provision and no such thing as society.
Instead, the neoliberals talk of freedom and choice, but in reality it is freedom for the
few to exploit the many and the choice to take whatever crumbs are offered to you or starve.
Agree, but it's not that they don't talk about it. The use mathematics as a way to underscore
what is essentially an ideological position. It gives them an aura of objectivity, impartiality
and scientific truth which, given their prepositions about utility maximization and unbounded
growth, they frankly don't have.
"... Few mainstream economists predicted the global financial crash of 2008 and academics have been accused of acting as cheerleaders for the often labyrinthine financial models behind the crisis. Now a growing band of university students are plotting a quiet revolution against orthodox free-market teaching, arguing that alternative ways of thinking have been pushed to the margins. ..."
"... Our starting point is a post on Unlearning Economics, dated March 5, which argues that the flaws of mainstream economics contribute to lousy policy on several fronts: downplaying the role of monopoly, cheerleading for the shareholder value imperative in the corporate world, knee-jerk support for trade agreements under the banner of comparative advantage, and regressive macroeconomic policy, among others. A particularly pointed paragraph brought up the Reinhart-Rogoff 90% affair and accused the economics profession of dereliction of duty by not taking action to rebuke the wrongdoers: ..."
"... Simon Wren-Lewis responded by arguing that UE has it exactly backwards. Restricting himself to UE's critique of macroeconomics, SWL says, yes, reactionary politicians have invoked "economics" to support austerity, but "real" economists for the most part have not gone along. True, there were a few, like Reinhart and Rogoff and those in the employ of the British financial sector ("City economists") who took a public stand against sensible Keynesian policies in the wake of the financial crisis, but they were a minority, and, in any case, what would you want to do about them? Economists, like professionals in any field, will disagree sometimes, and having a centralized agency to enforce a false consensus would ultimately work against progressives and dissenters, not for them. Let's put the blame where it really belongs, says SWL-on the politicians and pundits who have brushed aside decades of theoretical and empirical work to promulgate a reactionary, fact-free discourse on economic policy. ..."
So true; "SWL has never addressed what is happening in the real world."
And that's the reason UK economics students revolted: "Few mainstream economists predicted
the global financial crash of 2008 and academics have been accused of acting as cheerleaders for
the often labyrinthine financial models behind the crisis. Now a growing band of university students
are plotting a quiet revolution against orthodox free-market teaching, arguing that alternative
ways of thinking have been pushed to the margins.
Economics undergraduates at the University of Manchester have formed the Post-Crash Economics
Society, which they hope will be copied by universities across the country. The organisers criticise
university courses for doing little to explain why economists failed to warn about the global
financial crisis and for having too heavy a focus on training students for City jobs."
https://www.theguardian.com/business/2013/oct/24/students-post-crash-economics
pgl is a classic example. He regularly preaches what theory says but is clueless to explain
what's really happening.
Economics: Part of the Rot, Part of the Treatment, or Some of Each?
Is mainstream economics, with its false certitudes and ideological biases, one of the reasons
for the dismal state of policy debate in countries like the UK and the US, or are its rigorous
methods an important antidote to the ruling political foggery? That's being debated right now,
live online.
Our starting point is a post on Unlearning Economics, dated March 5, which argues that
the flaws of mainstream economics contribute to lousy policy on several fronts: downplaying the
role of monopoly, cheerleading for the shareholder value imperative in the corporate world, knee-jerk
support for trade agreements under the banner of comparative advantage, and regressive macroeconomic
policy, among others. A particularly pointed paragraph brought up the Reinhart-Rogoff 90% affair
and accused the economics profession of dereliction of duty by not taking action to rebuke the
wrongdoers:
Where was the formal, institutional denunciation of such a glaring error from the economics
profession, and of the politicians who used it to justify their regressive policies?
UE's conclusion is that mainstream economics needs to be taken down several notches, which
would open more space for alternative approaches to economics and, indeed, alternative approaches
to policy that place more weight on human outcomes, broadly understood, than the formalistic criteria
of efficiency, etc.
Simon Wren-Lewis responded by arguing that UE has it exactly backwards. Restricting himself
to UE's critique of macroeconomics, SWL says, yes, reactionary politicians have invoked "economics"
to support austerity, but "real" economists for the most part have not gone along. True, there
were a few, like Reinhart and Rogoff and those in the employ of the British financial sector ("City
economists") who took a public stand against sensible Keynesian policies in the wake of the financial
crisis, but they were a minority, and, in any case, what would you want to do about them? Economists,
like professionals in any field, will disagree sometimes, and having a centralized agency to enforce
a false consensus would ultimately work against progressives and dissenters, not for them. Let's
put the blame where it really belongs, says SWL-on the politicians and pundits who have brushed
aside decades of theoretical and empirical work to promulgate a reactionary, fact-free discourse
on economic policy.
Yes-but, adds Brad DeLong. He largely agrees with SWL, but delves more deeply into the Reinhart-Rogoff
affair. He shows that, even without the famed Excel glitch, a cursory look would reveal that R-R
were trumpeting nonexistent results:
The 90% debt cliff was an artifact of the way R-R set up their bins. Replace binning with
a continuous relationship between growth and debt and the cliff disappears.
The correlation between growth and debt supported no particular causal interpretation,
and R-R provided no other evidence to support their particular causal argument.
The correlation itself was so weak that the practical implication of R-R's claim was nil.
Fiscal stimulus that could make or break a recovery was being rejected on the basis of future
economic growth effects that would be too small to measure.
So the R-R claim that fiscal consolidation was necessary and urgent was unfounded from the
get-go, and these two were both respected mainstream economists, so what can we infer? DeLong's
takeaway is that economists do need to recognize that they operate in a political environment
(the sewers of Romulus) in which their work will be seized upon by interested groups, with real
practical outcomes. In this situation, the profession as a whole has a responsibility to assess
high profile but dubious work. Although he isn't explicit, my reading is that DeLong wants some
sort of professional quality control, but not institutionalized in the way UE seems to call for.
"... It was an eye opener that Universities are teaching only the neo-liberal model as the core syllabus. This is not education but indoctrination. Fair play to the group then who were passionate about the need for change and realise that it is up to them to effect that change. Good luck to them, I hope that they are successful in re-claiming education as a means of furthering understanding through questioning prevailing orthodoxy. ..."
"... Good luck. You may need it. You will be surprised at how much opposition you encounter and how remorseless and relentless it is. Look up the book "Political economy now!", about the experience at the University of Sydney. ..."
"... Economics is so discredited a subject that even students who have barley started studying realise that - with a few exceptions like Stiglitz or Schiller - it is total fabricated bullshit paid for by people with enough money to benefit from the lies it spreads. ..."
"... One of the biggest lies ever told the free market, as its never ever been a reality. ..."
"... Economists, like scientists and the rest of us, are always employed by someone and therein lies the problem: the conflict between what we believe to be the truth and what we are paid to do (or teach) to keep our job. Many economists (like investors & politicians) knew the crash would burst at some point but only those who enjoyed a seat outside the system would benefit from its prediction. ..."
Few mainstream economists predicted the global financial crash of 2008 and academics have been accused
of acting as cheerleaders for the often labyrinthine financial models behind the crisis. Now a growing
band of university students are plotting a quiet revolution against orthodox free-market teaching,
arguing that alternative ways of thinking have been pushed to the margins.
Economics undergraduates at the University of Manchester have formed the
Post-Crash Economics Society ,
which they hope will be copied by universities across the country. The organisers criticise university
courses for doing little to explain why economists failed to warn about the global financial crisis
and for having too heavy a focus on training students for City jobs.
A growing number of top economists, such as Ha-Joon Chang, who teaches economics at Cambridge
University, are backing the students.
Next month the society plans to publish a manifesto proposing sweeping reforms to the University
of Manchester's curriculum, with the hope that other institutions will follow suit.
Joe Earle, a spokesman for the Post-Crash
Economics Society and
a final-year undergraduate, said academic departments were "ignoring the crisis" and that, by neglecting
global developments and critics of the free market such as Keynes and Marx, the study of economics
was "in danger of losing its broader relevance".
Chang, who is a reader in the political economy of development at Cambridge, said he agreed with
the society's premise. The teaching of economics was increasingly confined to arcane mathematical
models, he said. "Students are not even prepared for the commercial world. Few [students] know what
is going on in China and how it influences the global economic situation. Even worse, I've met American
students who have never heard of Keynes."
In June a network of young economics students, thinkers and writers set up
Rethinking Economics , a campaign group
to challenge what they say is the predominant narrative in the subject.
Earle said students across Britain were being taught neoclassical economics "as if it was the
only theory".
He said: "It is given such a dominant position in our modules that many students aren't even aware
that there are other distinct theories out there that question the assumptions, methodologies and
conclusions of the economics we are taught."
Multiple-choice and maths questions dominate the first two years of economics degrees, which Earle
said meant most students stayed away from modules that required reading and essay-writing, such as
history of economic thought. "They think they just don't have the skills required for those sorts
of modules and they don't want to jeopardise their degree," he said. "As a consequence, economics
students never develop the faculties necessary to critically question, evaluate and compare economic
theories, and enter the working world with a false belief about what economics is and a knowledge
base limited to neoclassical theory."
In the decade before the 2008 crash, many economists dismissed warnings that property and stock
markets were overvalued. They argued that markets were correctly pricing shares, property and exotic
derivatives in line with economic models of behaviour. It was only when the US sub-prime mortgage
market unravelled that banks realised a collective failure to spot the bubble had wrecked their finances.
In his 2010 documentary Inside Job, Charles Ferguson highlighted how US academics had produced
hundreds of reports in support of the types of high-risk trading and debt-fuelled consumption that
triggered the crash.
Some leading economists have criticised university economics teaching, among them Paul Krugman,
a Nobel prize winner and professor at Princeton university who has attacked the complacency of economics
education in the US.
In an article for the New York Times in 2009,
Krugman wrote
: "As I see it, the economics profession went astray because economists, as a group, mistook
beauty, clad in impressive-looking mathematics, for truth."
Adam Posen, head of the Washington-based thinktank the Peterson Institute, said universities ignore
empirical evidence that contradicts mainstream theories in favour of "overly technical nonsense".
City economists attacked Joseph Stiglitz, the former World Bank chief economist, and Olivier Blanchard,
the current International Monetary Fund chief economist, when they criticised western governments
for cutting investment in the wake of the crash.
A Manchester University spokeman said that, as at other university courses around the world, economics
teaching at Manchester "focuses on mainstream approaches, reflecting the current state of the discipline".
He added: "It is also important for students' career prospects that they have an effective grounding
in the core elements of the subject.
"Many students at Manchester study economics in an interdisciplinary context alongside other social
sciences, especially philosophy, politics and sociology. Such students gain knowledge of different
kinds of approaches to examining social phenomena many modules taught by the department centre
on the use of quantitative techniques. These could just as easily be deployed in mainstream or non-mainstream
contexts." Since you're here
we've got a small favour to ask. More people are reading the Guardian than ever, but far fewer
are paying for it. Advertising revenues across the media are falling fast. And unlike many news organisations,
we haven't put up a paywall – we want to keep our journalism as open as we can . So you can see why
we need to ask for your help. The Guardian's independent, investigative journalism takes a lot of
time, money and hard work to produce. But we do it because we believe our perspective matters – because
it might well be your perspective, too.
If everyone who reads our reporting, who likes it, helps to support it, our future would be much
more secure.
I particularly like: Anyone who believes exponential growth can go on forever in a finite
world is either a madman or an economist. and
Economists are like computers. They need to have facts punched into them.
But my favourite is Mathematics brought rigor to Economics. Unfortunately, it also brought
mortis.
Good luck to this group. They are on the right lines.
Agreed, but they are fighting an uphill battle. Just look at how few (accademic) heterodox economists
actually work in economics departments. I think almost every heterdox economist I know works in
an non-economics school/faculty (i.e. schools/facultues of the environment, sustainability, sociology,
land use etc).
I spoke with some of the Post Crash group at a Peoples Assembly meeting recently. It was an
eye opener that Universities are teaching only the neo-liberal model as the core syllabus. This
is not education but indoctrination. Fair play to the group then who were passionate about the
need for change and realise that it is up to them to effect that change. Good luck to them, I
hope that they are successful in re-claiming education as a means of furthering understanding
through questioning prevailing orthodoxy.
Well said that man. Very well said. Unquestioning indoctrination has led us (all countries in
the world be they active participants or 'victims) to this sorry pass.
Basic economics should include the very basic idea that money is no more and no less than a
tool. If you strip money / the tool away from folk then they will either try and take your tool
from you or, if life becomes savage enough, they will fall by the wayside.
Does this generation and successive ones really want to walk over the bodies of others?
Without a profound readjustment and realignment of economic thinking, that is precisely what
is in store. Indeed, it is what has been set in motion already. Time for an urgent re-think before
more bodies litter the highways.
I heard recently about one man who had had such a re-think.
He was an American financial executive who was asked why he was taking early retirement and
going off to live in a little valley in the hills.
He replied: "Well, it is a lovely property with great scenery, fertile land and its own microhydroelectricity-----but
the really big attraction is that it puts 300 miles of armed hillbillies between me and the nearest
city"!!.
I do hope the chap in question doesn't end up regretting that he has deliberately placed himself
into a situation where there are 300 miles of armed hillbillies between himself and the nearest
city.
Good luck. You may need it. You will be surprised at how much opposition you encounter and
how remorseless and relentless it is. Look up the book "Political economy now!", about the experience
at the University of Sydney.
Exactly - the clue is in this statement from the University authorities...
It is also important for students' career prospects that they have an effective grounding
in the core elements of the subject.
Or in other words...
Students should be familar with the free market fair tales thrown up by rich, greedy bankers
and the right wing in order to earn money pandering the "correct" line
Economics is so discredited a subject that even students who have barley started studying
realise that - with a few exceptions like Stiglitz or Schiller - it is total fabricated bullshit
paid for by people with enough money to benefit from the lies it spreads.
One of the biggest lies ever told the free market, as its never ever been a reality.
Restrictions or prejudices ensure this, so such a philosophy deserves tearing up just like
their supporters who believe community and care are bad ideals. They call it socialism but it
is far from being a dirty word as it is about looking after all people on a more equal level,
so as to ensure the most vulnerable people in society are not left in a helpless and hopeless
position.
I heard recently about one man who had had such a re-think.
He was an American financial executive who was asked why he was taking early retirement and going
off to live in a little valley in the hills.
He replied: "Well, it is a lovely property with great scenery, fertile land and its own microhydroelectricity-----but
the really big attraction is that it puts 300 miles of armed hillbillies between me and the nearest
city"!!.
Thatcherist 'Reaganomics' was their response to the hissy fit Maggie threw at the 'grubby little
terrorist' Nelson Mandela when he started to put the kibosh on the elites cash cow of South African
apartheid, 4 decades of 'starving the beast' and media complicity in pushing the benefits of supply
side while pruning demand to the core by cutting back public investment which is the only source
of high velocity currency in a debt based economy where cash is simply printed to commission public
gods, services and infrastructure for a civilised society and withdrawn through tax to mitigate
inflation.
Only as we approach their ideology of fiscal apartheid do the courtiers perceive that without
demand a bleak future awaits everyone but the very few already excessively wealthy.
Economists, like scientists and the rest of us, are always employed by someone and therein
lies the problem: the conflict between what we believe to be the truth and what we are paid to
do (or teach) to keep our job. Many economists (like investors & politicians) knew the crash would
burst at some point but only those who enjoyed a seat outside the system would benefit from its
prediction.
"... Lately certain unrepentant members of that disgraced profession, some of whom claim to be the consciences of the liberal establishment, have been expressing concern about the disrepute of the 'experts' and the need to allow the technocrats to take control of policy and the economy. ..."
"... Brad DeLong, by the way, banned me from his site comments noting, 'Alan Greenspan never made a decision with which I disagreed.' Since then even Alan Greenspan has admitted he does not agree with some of his decisions, in a sniveling and sneaky kind of a non-apologetic way. ..."
"... But the specific factual point from Brad's piece that got me going was this: ..."
"... "Merton and Scholes's financial math was correct, and the crash of their hedge fund did not require any public-money bailout" ..."
"... I think it is less than trivial to know where and how the B-S risk model fails as math, as illustrated so well by Benoit Mandelbrot in his book The Misbehaviour of Markets. The math fails in its selection choice of variables and assumptions. Naseem Taleb has made a cottage industry and a personal fortune understanding this error. ..."
Ok I have to admit that the title alone got me into a cranky mood. Lately certain unrepentant
members of that disgraced profession, some of whom claim to be the consciences of the liberal establishment,
have been expressing concern about the disrepute of the 'experts' and the need to allow the technocrats
to take control of policy and the economy.
Granted, they may look like the lesser of two evils in some cases, as in the current nascent administration,
and in their own minds. But their policy consensus and economic recommendations of the past
thirty years or so, starting with the Fed chairmanship of Alan Greenspan at least, only look good
in their own selective memories. Brad DeLong, by the way, banned me from his site comments noting,
'Alan Greenspan never made a decision with which I disagreed.' Since then even Alan Greenspan
has admitted he does not agree with some of his decisions, in a sniveling and sneaky kind of a non-apologetic
way.
For everyone else this cycle of growing inequality, policy skews to the wealthy few, and asset
bubbles and bust that serve as wealth transfer mechanisms has been particularly trying.
But the specific factual point from Brad's piece that got me going was this:
"Merton and Scholes's financial math was correct, and the crash of their hedge fund did not
require any public-money bailout"
Yeah, right. Let's put aside the nicety of a Fed brokered bailout of LTCM by Wall Street money
as technically not requiring public bailout money, in order to save the financial system from an
epic overleveraged mispricing of risk based on that correct math.
I think it is less than trivial
to know where and how the B-S risk model fails as math, as illustrated so well by Benoit Mandelbrot
in his book The Misbehaviour of Markets. The math fails in its selection choice of variables
and assumptions. Naseem Taleb has made a cottage industry and a personal fortune understanding this
error.
And what makes it most egregious is that the error hs been known among those with mathematical
minds for some time. I myself read Mandelbrot's book in 2001 and said, 'holy shit.'
Let's be clear. This was not some dumb error on the part of these fellows, or some sneaky
trick. They could not resolve their math without making a certain assumption, and they did
it openly and consciously. And as the write of the essay below notes, there has not been anything
better produced yet to his knowledge.
It is not the theory itself that is 'bad.' It is the use and misuse to which it is put by
opportunists and financial predators in misrepresenting it.
But the people who use the assumptions on risk contained in the model don't care. Like
the efficient market hypothesis, it is an intellectual fig leaf that covers an epic era of
looting and plundering bases on what is essentially a con game. If you assume that risk is a rare
event, you can persuade the regulators and the very important people to let you run on leverage at
extreme levels, especially if you can use other people's money.
Like some of the other accepted truths from the turn of the century greed is good crowd, it is
a meme with which to silence the protests and permit the widespread mispricing of risk in order to
reap enormous short term profits for a very few wealthy insiders. This had been going on for
so long that it is almost accepted as a normal way of doing business.
Here is what an essay in
Criticality had to say about the Merton-Scholes math. I suppose that the sophist would
say that the math was indeed right. It was just the assumptions they used to construct the
model was wrong. So 3+5 does equal 8. Its just that in the real world case there
were three more factors that were tossed aside and ignored because they messed up the path to the
more easily determined and reassuring result.
"This implies that rather than extreme market moves being so unlikely that they make little contribution
to the overall evolution, they instead come to have a very significant contribution. In a normally
distributed market, crashes and booms are vanishingly rare, in a pareto-levy one crashes occur
and are a significant component of the final outcome.
It has taken years for this to be taken
seriously, and in the mean time financial theory has gone on using the assumption of normally
distributed returns to derive such results as the Black-Scholes option pricing equation, ultimately
winning an Nobel Prize in Economics for the discoverers Scholes and Merton (Black having already
died), not to mention Modern Portfolio theory (also winning Nobels). That modern finance ignored
Mandelbrot's discovery and went onto honor those working under assumptions shown to be false has
clearly annoyed Mandelbrot immensely and as mentioned previously he spends much of the book telling
us of his prior discoveries and how he was ignored.
It is like allowing tobacco companies to widely distribute their products while a bevy of hired gun
experts and media pundits and PR organizations promote the theory that tobacco is not a highly addictive
substance that causes a wide range of debilitating diseases, including cancer. They know
damn well that it is and it does, but they do not give a damn as long as the money is rolling in.
And pity the fool who tries to stand up and tell the truth.
And so to has it been with the Banks.
Indeed, the PR campaign and political donations they handled through their intermediaries during
the 1990s to deregulate and overturn Glass-Steagal has to be one of the great propaganda accomplishments
of the twentieth century. And the follow on campaign for the US to invade Iraq in retribution
for 9/11 is not far behind it for the twenty first.
The greater point is not that the B-S model is based on faulty assumptions that greatly diminish
the potential risks. Rather it is how such 'laws' of economics are so often of a dodgy, optionated
and theoretical nature such that taking them as a given in forming public policy is a huge mistake
in judgement.
Why? Because they may embody assumptions about what is true, and what is a priority, and
what our principles and objectives may be, and propagate those assumptions (biases) into a general
policy of our society that ends up causing great harm to many innocent participants. Indeed,
as Obama said, there is a great need to discussion and understanding. It is just that it cannot
be monopolized by a particular group of insiders who adhere to certain assumptions and professional
courtesies of their own, dare I say it, class.
So there are my two corrections to the mainstream media and their writing of the public record-
to suit themselves and their wealthy patrons. It seems like modern America spends an
enormous amount of its intellectual capital and time on finding ways to scam the public. If
we could somehow reorder the paybacks on financial corruption to even a third of what it is today
we could probably cure cancer in five years or less. That is what it would take to 'make
America great again,' for real and not just in the funny papers.
I would like to again stress that I am not finding fault with either of the two bloggers involved,
both of whom I enjoy and admire for what they do. Mark Thoma is a class act, and even when
he disagrees is very fair and open minded about it. And he keeps this site in his blogroll
despite some special interests who have argued for its removal. That is more than I can say
for some others.
Rather, I am trying to correct a couple of things from the broader media that seem to be factually
wrong, purposely, and further, to help caution the reader that things that appear in the mainstream
media written by bona fide members of the certified and qualified professional establishment
cannot always be taken at face value.
The deterioration of the quality of the news is startling. I think it has a lot to do with
the takeover of the media by a relatively few number of large corporations (thank you Slick Willy)
Yeah, there is a lot of nutty stuff on the internet and in blogs. I spend a lot of time assessing
it and avoiding it where I can. But to say that the mainstream is somehow authoritative, objective
and pure is self-serving baloney at best, and a thin veneer for official propaganda when it serves
the purpose at worst.
36%-40% going to "financial institutions"
51%-52% going to "individuals", i.e. mostly "rich individuals"
5%-9% going to "manufacturing/productive industry".
It's hardly surprising we're such an unproductive - fiancialised and individualised nation is
it? Nor is it surprising that London generally "flourishes" as one of the most financialised and
individualised cities in the world.
This isn't 'freedom'. It's reaping what we have sowed for the last thirty plus years of neoliberal
politics and economics. It's as centrally planned as anything under the Soviet Union, only with capitalist
distribution, i.e. it is pure state capitalism, or engineered capitalism, and yet they tell us society
cannot be 'engineered', or 'structured', and that this is utopian dreaming. They are the utopian
dreamers.
London is the financial arm of the Washington consensus - a part of the EU, and a part of the
UK, but barely so - or semi-detached. The City of London from which all financial capital flows is
effectively a tax haven, no different to the Channel Islands. It's all a huge political and social
mess - exactly what the economic elite want.
Brad DeJong is staunch despicable neoliberal, but something he has the courage to admit obvious
things...
Notable quotes:
"... Simon needs to face that fact squarely, rather than to dodge it. The fact is that the "mainstream
economists, and most mainstream economists" who were heard in the public sphere were not against austerity,
but rather split, with, if anything, louder and larger voices on the pro-austerity side. ..."
"... When Unlearning Economics seeks the destruction of "mainstream economics", he seeks the end
of an intellectual hegemony that gives Reinhart and Rogoff's very shaky arguments a much more powerful
institutional intellectual voice by virtue of their authors' tenured posts at Harvard than the arguments
in fact deserve. ..."
and then there is Reinhart and Rogoff, where I think Unlearning Economics is right.
So Unlearning Economics is batting 0.170 in their examples of "mainstream economics considered
harmful". But there is that one case. And I do not think that Simon Wren-Lewis handles that one
case well. And he needs to--I need to. And, since neither he nor I have, this is a big problem.
Let me put it this way: Carmen Reinhart and Ken Rogoff are mainstream economists.
The fact is that Carmen Reinhart and Ken Rogoff were wrong in 2009-2013. Yet they had much
more influence on economic policy in 2009-2013 than did Simon Wren-Lewis and me. They had influence.
And their influence was aggressively pro-austerity. And their influence almost entirely destructive.
Simon needs to face that fact squarely, rather than to dodge it. The fact is that the "mainstream
economists, and most mainstream economists" who were heard in the public sphere were not against
austerity, but rather split, with, if anything, louder and larger voices on the pro-austerity
side. (In my humble opinion, Simon Wren-Lewis half admits this with his denunciations of
"City economists".)
When Unlearning Economics seeks the destruction of "mainstream economics", he seeks the
end of an intellectual hegemony that gives Reinhart and Rogoff's very shaky arguments a much more
powerful institutional intellectual voice by virtue of their authors' tenured posts at Harvard
than the arguments in fact deserve.
Simon Wren-Lewis, in response, wants to claim that strengthening the "mainstream" would somehow
diminish the influence of future Reinharts and Rogoffs in analogous situations. But the arguments
for austerity that turned out to be powerful and persuasive in the public sphere came from inside
the house!
Next American Economics Association meeting should be held in Youngstown so economists can admire
the fruit of their labors. See all the destroyed buildings, the raging heroin epidemic and mass
poverty your support of de-industrialization and free trade brought to America.
Every regional meeting should be held in any number of America's thousands of destroyed dilapidated
cities - E. St. Louis, Rochester, Cleveland, Greensboro NC, San Bernadino - there are so many
de-industrialized ghettoes from which to choose!
Tom aka Rusty -> Next AEA meeting should be held in Youngstown so economists can admire the fruit
of their labors... ,
March 26, 2017 at 09:41 AM
I've been recommending Detroit for years.
libezkova -> Tom aka Rusty ... March 26, 2017 at 03:34 PM
That might not help. Those guy have no morals. Simply none. Nothing is left from 10 commandment
in their brains. They have only "Greed is good" etched in it.
Just look at Mankiw. Noting can stop him from cashing in on all this neoclassical crap.
Or, for a change, Krugman's behavior during elections. What a despicable neoliberal stooge
he proved to be. His dirty attacks on Sanders should probably be re-printed as a leaflet and distributed
nationwide -- as a warning.
It is so difficult to understand that "when nothing left on the left, working class and lower
middle class turns to far right." ?
What a despicable stooge of financial oligarchy. Another Rubin's boy, much like Summers...
And now he has the audacity to criticize Trump, the person he was working to put in power for
more then a decade. I do not defend Trump, but it is important to ask a simple question: Are the
members of the criminal Clinton gang (who essentially practiced racketeering via Clinton Foundation)
and "over-connected" to intelligence services Obama paragons of virtue?
Are they conceptually any different from Trump ?
In the past they practices the same dirty neoliberal tricks as Trump tying to squeeze the majority
of population in favor of financial oligarchy (Obama "non-prosecution" after 2008 is a telling
example, and shows who he really is), but probably with more polish and better PR. That's the
only difference.
Discussions of neoliberalism, on both the left and the right, suffer from what Paul Krugman and
others have called "zombie" ideas. These are economic concepts that have been long discredited,
but continue to shamble on. On the right, a central zombie idea is that reduced state regulation
of markets leads to sustainable economic growth. If you believe this, then the rise of neoliberalism
is a no-brainer.
Neoliberalism is simply the economic philosophy that works. But why should anyone believe this?
The idea that unleashing free markets then leads to good economic times should never have survived
the Great Depression, and should surely be killed for good by the Great Recession and its aftermath.
"... My main problem with the site, though, isn't aesthetic. It's the idea that the public will buy a "just the facts" approach. Many readers will suspect that what they're getting is not a simple recounting of incontrovertible facts, but a mix of received wisdom, theory, and carefully cloaked ideology. And they won't entirely be wrong about that. ..."
EconoFact is a non-partisan publication designed to bring key facts and incisive analysis to the
national debate on economic and social policies. It is written by leading academic economists from
across the country who belong to the EconoFact Network...
Our mission at EconoFact is to provide data, analysis and historical experience in a dispassionate
manner...Our guiding ethos is a belief that well meaning people emphasizing different values can
arrive at different policy conclusions. However, if in the debate we as a society can't agree on the
relevant facts, then the nation itself loses a common base for constructive debate and policy will
suffer.
EconoFact does not represent any partisan, personal or ideological point of view...Our network of
economists might disagree with each other on policy recommendations, but all will similarly rely on
widely agreed upon facts in their analysis.
My main problem with the site, though, isn't aesthetic. It's the idea that the public will
buy a "just the facts" approach. Many readers will suspect that what they're getting is not a simple
recounting of incontrovertible facts, but a mix of received wisdom, theory, and carefully cloaked
ideology. And they won't entirely be wrong about that.
"... "Equitable Growth in Conversation" is a recurring series where we talk with economists and other social scientists to help us better understand whether and how economic inequality affects economic growth and stability. ..."
"... In this installment, Equitable Growth's Research Director John Schmitt talks with economist William A. Darity Jr. ("Sandy"), the Samuel DuBois Cook Professor of Public Policy at Duke University's Sanford School of Public Policy, about the importance of stratification economics in understanding U.S. economic growth and inequality. Read their conversation below. ..."
"Equitable Growth in Conversation" is a recurring
series where we talk with economists and other social scientists to help us better
understand whether and how economic inequality affects economic growth and stability.
In this installment, Equitable Growth's Research
Director John Schmitt talks with economist William A. Darity Jr. ("Sandy"), the
Samuel DuBois Cook Professor of Public Policy at Duke University's Sanford School of
Public Policy, about the importance of stratification economics in understanding U.S.
economic growth and inequality. Read their conversation below.
John Schmitt: I have not too many questions,
but hopefully we'll have a good conversation. You are the founder of stratification
economics, which you pioneered with a group that includes Darrick Hamilton, James
Stewart, Gregory Price, and others. How would you describe the main features of
stratification economics? And how would you differentiate them from the kind of
standard, neoclassical economics that most of us were taught in graduate school or in
undergraduate economics classes?
Sandy Darity:
So, I think the core of
stratification economics offers a structural rather than a behavioral explanation for
economic inequality between socially identified groups-whether they're racial groups,
ethnic groups, gender groups, or groups that are differentiated on some other basis
such as religious affiliation, for that matter. Stratification economics goes against
the grain of trying to argue that the kinds of differences that we observe and
economic outcomes are attributable to cultural practices or some forms of
dysfunctional behavior on the part of the group that's in the relatively inferior
position.
We argue instead that economists and other social
scientists have to look at social structures and policies to really explain why those
differences exist. What might be unique about stratification economics is the
particular way in which it offers the structural analysis of these kinds of
inequalities, and that particular way is by focusing on the importance of
relative group position
from the standpoint of participants in our social world.
That persons compare themselves against others is based
on research on happiness, which suggests that the major factor in determining whether
a person reports feeling happy is actually their perception of their position in
comparison with others-not their absolute position, but their relative position. What
stratification economics brings on the scene is a specific view of exactly with whom
individuals are comparing themselves.
Not only are folks making comparisons with individuals
who they perceive as being part of their own social group, but they also are making
comparisons about
their group's
position.
The cross-group comparisons are made against the social
groups that are "the other" for them. It's those two sets of comparisons that drive
behavior and drive people to actually act in ways that are supportive of the status
of their relevant social group. I think traditional economics doesn't pay much
attention to the comparative dimension, and it certainly doesn't pay much attention
to the comparative dimension in terms of an individual's sense of group identity or
group affiliation.
I do want to add that a lot of this work is deeply
collaborative. And I think it's important that my collaborators be recognized,
particularly [associate professor of economics and urban policy] Darrick Hamilton at
the New School, Mark Paul, who is a postdoctoral fellow here at the Cook Center at
Duke, and Khai Zaw, who is a statistical researcher at the Cook Center, who all have
worked very closely with me.
And there's a string of folks who have been involved in
various dimensions of the development of stratification economics as a field, among
them economists Greg Price [Morehouse College], James Stewart [Pennsylvania State
University], Patrick Mason [Florida State University], Marie Mora [University of
Texas at Rio Grande Valley], Alberto Dávila [University of Texas at Rio Grande
Valley], Sue Stockly [Eastern New Mexico University], and Stephanie Seguino
[University of Vermont].
So even though I don't think stratification economics
is sweeping the economics profession, there's actually a significant core of folks
who are embracing the approach, and, hopefully, the numbers will grow.
Schmitt: So, you make the comment about where
conventional economics falls short. Can you give an example or two of a social or
economic problem where you think that the tools developed in stratification economics
give a better explanation for an economic or social phenomenon than the standard
economics view?
Darity:
One example would be the
persistence of discrimination under competitive conditions. In standard economics,
there's very little room or terrain for trying to explain why we might observe
sustained discriminatory practices by one group toward the other, particularly
discriminatory practices that have economic content.
In stratification economics, it's fairly
straightforward to try to come up with an explanation that makes some sense. Because
of the emphasis in stratification economics on what we might call tribal
affiliation-or team affiliation or group affiliation-to the extent that people value
those kinds of affiliations and the position of their team, group, or tribe, then
they will engage in collaborative ways, whether those collaborative ways are fully
conscious or whether they are implicit.
They'll engage in collaborative ways to preserve the
position of their group. And so discrimination can be something that's sustained. And
even more strongly than that, stratification economics would suggest that if the
difference between the two groups narrows, the group on top will intensify its
discriminatory practices. If it becomes harder to exclude the out-group because the
out-group is becoming better educated or has other kinds of indicators that suggest
that it is comparably productive to members of the in-group, then the in-group will
intensify the degree of discrimination that it practices toward the out-group. I
think that conventional economics would never actually see that phenomenon.
Schmitt: You've described stratification
economics as combining influences from economics, sociology, and social psychology,
and it's obvious in a lot of what you just described about the persistence of
discrimination. What led you to blend those things together? What are the influences
or the ways that brought you to piece the various parts of this together?
Darity:
You said at the outset that I
was the founder of stratification economics-I think it's maybe more accurate to say
that I'm the person who gave this set of ideas a label. But I don't think that these
ideas originated with me, and I think that to a large extent, I've synthesized ideas
from others. But I do think that these ideas from others are extremely powerful and
influenced the way in which I began to think about this. I've long been wanting to
bypass arguments for intergroup inequality that are predicated on the notion that
there's something fundamentally inferior about one of the two groups.
So from economics, for example, you could draw upon the
work of the idiosyncratic early 20th century economist Thorstein Veblen, who, for
example, in
The Theory of the Leisure Class
, talks about the significance of
comparisons within your group versus comparisons vis-a-vis the group that is supposed
to be outside of yours. And that translated into the forgotten theory of
consumption-aggregate consumption in economics-that the late economist James
Duesenberry developed, called the relative income hypothesis. People frequently
discard that one when they think about theories of aggregate consumption, but that's
a body of work that influenced my way of thinking about some of these issues.
From sociology, I think that the most important
contribution probably is Herbert Blumer's 1958 essay on prejudice as a function of
relative group position. He challenged the view that prejudice is something that we
can identify as some sort of individual defect, arguing instead that prejudice is
really something that's functional for preserving or extending the relative position
of an advantaged social group. That, to me, is very much stratification economics,
without the label.
Then there's a whole body of work about notions of
individual productivity being influenced by the context in which people are
performing tasks. This might include employment in a hostile workplace environment
for an individual from a group that is subjected to stigma, which will affect the
individual's capacity to perform. And it's not just the question of what educational
credentials they have, or what kind of training they have, or what kind of motivation
they have. It's also a question of the atmosphere in which they are functioning. And
so from social psychology, I took the phenomenon that has been developed by
researchers such as Claude Steele [emeritus professor at Stanford and former vice
chancellor and provost at the University of California, Berkeley] of stereotype
threat as another dimension, or angle, for thinking about how individual productivity
can be distorted or reduced as a consequence of the social climate that they face. In
short, in the jargon we frequently use in economics, individual productivity is
endogenous.
Schmitt: In a lot of your recent work, you've
turned your attention to the issue of wealth inequality. What led you to make that a
focus? And what do you think are the most important findings from that research?
Darity:
My turn to the focus on wealth
inequality came about for two reasons. One is because of an increasing recognition
that these types of disparities are the most important indicator of differences in
economic well-being. The second reason is because the work that I have begun to do on
reparations kept pointing me back to the racial wealth gap as the most important
manifestation of the effects of racism and discrimination over time in the United
States.
Those two considerations kept directing me toward an
emphasis on wealth inequality. But it is also my sense that all economic
inequalities-particularly group-based economic inequalities unfortunately-have been
assigned to be the purview of labor economists.
Of course, the work that labor economists do can point
us toward some explanations for disparities that are associated with earnings and
occupational status, but their perspective doesn't take us very far in explaining
wealth inequalities.
Stratification economics offered a relatively simple
but, I think, much more powerful explanation for why we observe wealth inequality in
general but also wealth inequality by race. One of the big findings that has emerged
from our work, which is now being replicated in other people's research, is a very
simple but important conclusion that education in and of itself does not eliminate
racial economic disparity.
There are tons of people who focus on education as the
answer. I certainly think improving education for everyone is a great idea, but it's
not going to close the racial wealth gap. Thus far, it has not eliminated
discriminatory differences in wages or in unemployment rates. Simply put, education
is far from enough to solve the kinds of disparities that we are concerned about.
Schmitt: You did your Ph.D. at the
Massachusetts Institute of Technology in the late 1970s, so you've been in the
business for a little while. What's your take on how the economics profession has
developed, say over the past 30 years or so? Do you think that it is moving in a good
direction, bad direction, indifferent? Do you think it is more or less open to some
of the ideas that we've been talking about right now?
Darity:
That's a tough one. I don't
know that in my experience it's been particularly open to any of these ideas. I think
that there's been a greater receptiveness or interest in these ideas from scholars in
other disciplines. To be frank, I think that the economics profession has a certain
anti-intellectualism. That's a pretty strong statement, but I mean that in the sense
that if you think about intellectual activity as involving wide-ranging curiosity and
also wide-ranging interests in research unbounded by disciplinary lines, I think the
economists are very, very inclined to be somewhat incurious and to treat every
problem from the standpoint of a fixed package of ideas.
In that sense, I think there's a certain
anti-intellectualism, and therefore, very little receptiveness to ideas that go
outside of the standard box. I'm not sure the conditions are a lot different now in
the economics profession; I mean, there's a sense in which I think it's long been
that way, particularly ever since the quantification revolution in economics that
largely was spearheaded by one of my mentors, [the late Nobel Laureate] Paul
Samuelson. The process of making economics appear to be more of a mathematical
science was accompanied by driving out some of the more interesting ideas and
approaches, rather than incorporating them into the process of making it a
mathematical science.
Schmitt: Do you take any comfort from the rise
of informational economics, or search models, or the rise of the importance of
behavioral economics?
Darity:
If you are talking about
search models that are associated with search and employment, I'm not a real
enthusiast for imperfectionism. Because the implication is that if we did not have
those frictions, if we did not have those imperfections, then everything would be
glorious. But it is my view that a smoothly functioning market economy would still
generate high degrees of inequality, and certain kinds of inequities, because those
processes pay very little attention to inherited advantages and disadvantages. I
don't necessarily see imperfectionist approaches as providing a solution. I
particularly don't like search theories of unemployment because I think what they say
is people are out of work because they are looking for work, rather than people are
looking for work because they are out of work.
Stratification economics actually attempts to be
somewhat of a departure from behavioral economics. Behavioral economics, to my way of
understanding it, suggests that people actually behave irrationally, and so it's
trying to explore and understand irrational behavior, whereas the whole historical
thrust of much of economics has been oriented toward suggesting that there is
rationality to people's behavior. Stratification economics accepts the premise that
there's a rationality to behavior, but it also presumes that there is rationality to
the behavior of social groups, as well as individuals. It's a rationality that's
predicated on the notion that these groups frequently, or typically, act as if they
view themselves as being in competition with one another.
Schmitt: One of the things that's important for
us at the Washington Center for Equitable Growth is to look at the rise of inequality
from a high level, beginning at the end of the 1970s to an extremely high level now,
based on almost any metric you want to use. Do you have a working model in your mind
for what explains that big increase in inequality over this period? And do you have
any guidance as to what policymakers could do to turn things around?
Darity:
One of the things that I
mentioned at the start of our conversation was the importance of social structures
and policies. And I think that the run-up in inequality that we've observed in recent
years is closely tied to a set of social policies that have produced virtually
unlimited capacity to generate extraordinary levels of wealth. One is a form of
profit sharing, which is what we call super salaries for high-level executives at the
nation's most highly resourced corporations. Another is the deregulation of the
financial markets, while maintaining a moral hazard problem, in the sense that the
investment bankers can anticipate that they'll be bailed out in the event of a
crisis. And a third is the reform of the tax system, where we've moved from having
marginal tax rates for folks at the upper end of the income distribution, in the
vicinity of 90 percent to less than 30 percent today. The Great Recession also
contributed to a greater explosion or extension of inequality, both in wealth and in
income.
In short, I think we can look directly at a set of
policies and, more recently, at the advent of the Great Recession to understand the
rise in economic inequality.
Schmitt: So my last question: Do you have any
advice for a young person who wants to get a Ph.D. in economics? Or a Ph.D. in a
social science? In particular, do you recommend studying economics?
Darity:
I definitely don't want to
forsake the economics profession. I still have hope that there will be other, younger
economists who will try to bring very fresh perspectives to the way in which we
conduct economic research. I would encourage folks to go into the field, but I'd want
them to have their eyes open. I think that they need to be very selective about which
institutions they choose to attend to try to do their work.
If graduate students have ideas that are not
conventional or are unorthodox, then they need to have their eyes set on trying to
identify departments that have the flexibility and open-mindedness to allow them to
pursue the kind of approaches that they want to undertake. There are some, and it's
not just departments that we view as being explicitly heterodox. I think that there
are some departments that are more conventional, where there are faculty members who
are extremely open-minded, in comparison with other places.
A new graduate student really has to make a very
careful choice about which department to go to, and once there, who they should work
with in that department. I would say that's the research that needs to be done
carefully, rather than telling people they shouldn't go into economics.
Schmitt: Thank you so much, Sandy, for your
time.
Darity:
Thanks for inviting me to do
this. Take care.
"... Of course, I should admit that I am not an entirely disinterested observer of this engagement, because in the early 1970s, long before I discovered the Samuelson article that Nick is challenging, Earl Thompson had convinced me that Hume's account of PSFM was all wrong, the international arbitrage of tradable-goods prices implying that gold movements between countries couldn't cause the relative price levels of those countries in terms of gold to deviate from a common level, beyond the limits imposed by the operation of international commodity arbitrage. ..."
I think Nick Rowe is a great economist; I really do. And
on top of that, he recently has shown himself to be a very
brave economist, fearlessly claiming to have shown that Paul
Samuelson's classic 1980 takedown ("A Corrected Version of
Hume's Equilibrating Mechanisms for International Trade") of
David Hume's classic 1752 articulation of the
price-specie-flow mechanism (PSFM) ("Of the Balance of
Trade") was all wrong. Although I am a great admirer of Paul
Samuelson, I am far from believing that he was error-free.
But I would be very cautious about attributing an error in
pure economic theory to Samuelson. So if you were placing
bets, Nick would certainly be the longshot in this match-up.
Of course, I should admit that I am not an entirely
disinterested observer of this engagement, because in the
early 1970s, long before I discovered the Samuelson article
that Nick is challenging, Earl Thompson had convinced me that
Hume's account of PSFM was all wrong, the international
arbitrage of tradable-goods prices implying that gold
movements between countries couldn't cause the relative price
levels of those countries in terms of gold to deviate from a
common level, beyond the limits imposed by the operation of
international commodity arbitrage.
And Thompson's reasoning
was largely restated in the ensuing decade by Jacob Frenkel
and Harry Johnson ("The Monetary Approach to the Balance of
Payments: Essential Concepts and Historical Origins") and by
Donald McCloskey and Richard Zecher ("How the Gold Standard
Really Worked") both in the 1976 volume on The Monetary
Approach to the Balance of Payments edited by Johnson and
Frenkel, and by David Laidler in his essay "Adam Smith as a
Monetary Economist," explaining why in The Wealth of Nations
Smith ignored his best friend Hume's classic essay on PSFM.
So the main point of Samuelson's takedown of Hume and the PSFM was not even original. What was original about
Samuelson's classic article was his dismissal of the
rationalization that PSFM applies when there are both
non-tradable and tradable goods, so that national price
levels can deviate from the common international price level
in terms of tradables, showing that the inclusion of
tradables into the analysis serves only to slow down the
adjustment process after a gold-supply shock.
So let's follow Nick in his daring quest to disprove
Samuelson, and see where that leads us.
Q: The neoclassical theory of the firm does not consider political engagement by corporations.
How big of an omission do you think this is?
The problems in expanding the theory of the firm to consider political engagements are considerable.
Of course, political engagement by firms can be viewed as merely rent-seeking. Unavoidably, this
produces waste... (and possibly also corrupt[s] the political system).
But before one jumps to the conclusion that therefore corporations should be denied the right
to influence political decisions in the interests of efficiency, more must be considered. For
example, this week, over one hundred public corporations, most of them high-tech firms, filed
a brief opposing the legality of the executive order signed by President Trump barring various
immigrants. 1) This can be viewed as collective action by firms in defense of capitalism
and the free flow of goods and services. Those opposed to firms lobbying regulatory agencies would
probably approve this defense by corporations of human rights. Nor was this case unique. Corporations,
like Apple, Facebook, and Google, have regularly defended human rights.
What this implies is that any absolute, prophylactic rule against political engagement may be
undesirable. How then should we distinguish between "good" and "bad" political engagements by
corporations? One approach might be to refine the rules of corporate governance and give shareholders
greater rights in the process. To the extent that shareholders are diversified, they should rationally
oppose rent-seeking by competing firms, as such activity just raises the costs for both sides.
Conversely, however, in concentrated industries where collusion is more likely than competition,
diversified shareholders might rationally support rent-seeking (and even reduced competition)
by the firms in which they invest. Some empirical evidence suggests that investors in the highly
concentrated airline industry have behaved this way. Hence, stronger corporate governance may
supply a partial answer sometimes, but hardly always. At best, it can add transparency to the
process, thereby making rent-seeking less feasible.
Theorists of the firm who wish to restrict political engagements by firms face a serious problem
that they have not yet recognized: at least in the United States, corporate political engagement
may be protected by the First Amendment. This means that reforms such as disclosure are possible
(and, I think, desirable), but stricter, prophylactic rules are probably not. ...
It seems to me that the problem is this direct political intervention by corporations. They should
be allowed to make donations to charities specifically set up to support civil liberties, human
rights etc. (e.g. Amnesty, ACLU) and to allow those organizations to list their support. It is
not clear that they should be allowed to act politically in their own right.
So, medical provider corporations should not be allowed to oppose the repeal of Obamacare because
they want to keep getting paid by patients getting needed medical care at their clinics and hospitals
by doctors and nurses?
Should the AMA be allowed to oppose repeal because it's doctor members want to continue to
get paid?
Should nurses unions be allowed to oppose repeal because they want to continue getting paid?
Perhaps you seek a return of slavery to cut living costs by forcing doctors and nurses, farmers,
cooks, to work for nothing to benefit consumers?
Or do you believe government can charge nothing while paying those delivering government services
good middle class incomes that defined the American Dream in the 60s?
In the 60s, everyone understood good incomes required high prices and taxes. Conservatives
sold everyone, including 99% of economists on the free lunch of high incomes and low prices and
taxes. TANSTAAFL. Since Reagan, 90% are either no better off or worse off from low prices and
taxes.
And that applies to businesses. 90% of businesses are worse off or just holding their own as
a result of the political economics of low prices and low taxes.
The modern small business startup is the guy who signs up with Uber and Lyft and then struggles
to find ways to be paid by customers without paying the rent seekers more than he might get in
business profit.
But again, small businesses have been brainwashed into supporting the policies that hurt them
but benefit just 10% of businesses, mostly rentier businesses.
The problem I see is with the education of the people, including people in business, that free
lunches are possible. That cutting prices, and taxes are prices, will increase incomes, whether
workers or businesses.
Eliminating business lobbying while individuals continue seeking free lunch government will
not make anyone better off. TANSTAAFL
There are plenty of individuals involved (and employee organizations as well). Companies do not
need to be involved. The key point here should always be non-profit and public purpose.
"Conversely, however, in concentrated industries where collusion is more likely than competition,
diversified shareholders might rationally support rent-seeking (and even reduced competition)
by the firms in which they invest. Some empirical evidence suggests that investors in the highly
concentrated airline industry have behaved this way."
The airline industry has lost money since deregulation, and that is after hundreds of billions
in government bailouts and confiscation of shareholder "value".
Yes, there are a number of rent seekers who have profited, but those are the M&A rent seekers,
bankruptcy rent seekers, the restructuring rent seekers, ...
While the aircraft industry has consolidated to be dominated by only two, neither Boeing nor
Airbus reap economic profit, and their business profits are not stellar, and that is due to strong
government support keeping them from insolvency.
"corporate political engagement may be protected by the First Amendment"
Corporations are created by state law (with just a few federal exceptions), so surely at the
state level it would be possible to alter incorporation statutes so that corporations clearly
do not have a right to political engagement.
Paul Krugman is taking some guff for this column where he argues that the US economy is now
at potential, or full employment, so any shift in the federal budget toward deficit will just
crowd out private demand.
Whether higher federal spending (or lower taxes) could, in present conditions, lead to higher
output is obviously a factual question, on which people may read the evidence in different ways.
As it happens, I don't agree that current output is close to the limits of current productive
capacity. But that's not what I want to write about right now. Instead I want to ask: What concretely
would crowding out even mean right now?
Below, I run through six possible meanings of crowding out, and then ask if any of them gives
us a reason, even in principle, to worry about over-expansionary policy today. (Another possibility,
suggested by Jared Bernstein, is that while we don't need to worry about supply constraints for
the economy as a whole, tax cuts could crowd out useful spending due to some unspecified financial
constraint on the federal government. I don't address that here.) Needless to say, doubts about
the economic case for crowding-out are in no way an argument for the specific deficit-boosting
policies favored by the new administration.
The most straightforward crowding-out story starts from a fixed supply of private savings.
These savings can either be lent to the government, or to business. The more the former takes,
the less is left for the latter. But as Keynes pointed out long ago, this simple loanable-funds
story assumes what it sets out to prove. The total quantity of saving is fixed only if total income
is fixed. If higher government spending can in fact raise total income, it will raise total saving
as well. We can only tell a story about government and business competing for a given pool of
saving if we have already decided for some other reason that GDP can't change.
The more sophisticated version, embodied in the textbook ISLM model, postulates a fixed supply
of money, rather than saving. [1] In Hicks' formulation, money is used both for transactions and
as the maximally liquid store of wealth. The higher is output, the more money is needed for transactions,
and the less is available to be held as wealth. By the familiar logic of supply and demand, this
means that wealthholders must be paid more to part with their remaining stock of money. The price
wealthholders receive to give up their money is interest; so as GDP rises, so does the interest
rate.
Unlike the loanable funds story with fixed saving, this second story does give a logically
coherent account of crowding out. In a world of commodity money, if such ever was, it might even
be literally true. But in a world of bank-created credit money, it's at best a metaphor. Is it
a useful metaphor? That would require two things. First, that the interest rate (whichever one
we are interested in) is set by the financial system. And second, that the process by which this
happens causes rates to systematically rise with demand. The first premise is immediately rejected
by the textbooks, which tell us that "the central bank sets the interest rate." But we needn't
take this at face value. There are many interest rates, not just one, and the spreads between
them vary quite a bit; logically it is possible that strong demand could lead to wider spreads,
as banks stretch must their liquidity further to make more loans. But in reality, the opposite
seems more likely. Government debt is a source of liquidity for private banks, not a use of it;
lending more to the government makes it easier, not harder, for them to also lend more to private
borrowers. Also, a booming economy is one in which business borrowers are more profitable; marginal
borrowers look safer and are likely to get better terms. And rising inflation, obviously, reduces
the real value of outstanding debt; however annoying this is to bankers, rationally it makes them
more willing to lend more to their now less-indebted clients. Wicksell, the semi-acknowledged
father of modern central banking theory, built his big book around the premise that in a credit-money
system, inflation would give private banks no reason to raise interest rates.
And in fact this is what we see. Interest rate spreads are narrow in booms; they widen in crises
and remain wide in downturns.
So crowding out mark two, the ISLM version, requires us to accept both that central banks cannot
control the economically relevant interest rates, and that private banks systematically raise
interest rates when times are good. Again, in a strict gold standard world there might something
to this - banks have to raise rates, their gold reserves are running low - but if we ever lived
in that world it was 150 or 200 years ago or more.
A more natural interpretation of the claim that the economy is at potential, is that any further
increase in demand would just lead to inflation. This is the version of crowding out in better
textbooks, and also the version used by MMT folks. On a certain level, it's obviously correct.
Suppose the amount of money-spending in an economy increases. Then either the quantity of goods
and services increases, or their prices do. There is no third option: The total percent increase
in money spending, must equal the sum of the percent increase in "real" output and the percent
increase in average prices. But how does the balance between higher output and higher prices play
out in real life? One possibility is that potential output is a hard line: each dollar of spending
up to there increases real output one for one, and leaves prices unchanged; each dollar of spending
above there increases prices one for one and leaves output unchanged. Alternatively, we might
imagine a smooth curve where as spending increases, a higher fraction of each marginal dollar
translates into higher prices rather than higher output. [2] This is certainly more realistic,
but it invites the question of which point exactly on this curve we call "potential". And it awakens
the great bane of postwar macro – an inflation-output tradeoff, where the respective costs and
benefits must be assessed politically.
Crowding out mark three, the inflation version, is definitely right in some sense - you can't
produce more concrete use values without limit simply by increasing the quantity of money borrowed
by the government (or some other entity). But we have to ask first, positively, when we will see
this inflation, and second, normatively, how we value lower inflation vs higher output and income.
In the post-1980s orthodoxy, we as society are never supposed to face these questions. They
are settled for us by the central bank. This is the fourth, and probably most politically salient,
version of crowding out: higher government spending will cause the central bank to raise interest
rates. This is the practical content of the textbook story, and in fact newer textbooks replace
the LM curve - where the interest rate is in some sense endogenous - with a straight line at whatever
interest rate is chosen by the central bank. In the more sophisticated textbooks, this becomes
a central bank reaction function - the central bank's actions change from being policy choices,
to a fundamental law of the economic universe. The master parable for this story is the 1990s,
when the Clinton administration came in with big plans for stimulus, only to be slapped down by
Alan Greenspan, who warned that any increase in public spending would be offset by a contractionary
shift by the federal reserve. But once Clinton made the walk to Canossa and embraced deficit reduction,
Greenspan's fed rewarded him with low rates, substituting private investment in equal measure
for the foregone public spending. In the current contest, this means: Any increase in federal
borrowing will be offset one for one by a fall in private investment - because the Fed will raise
rates enough to make it happen.
This story is crowding out mark four. It depends, first, on what the central bank reaction
function actually is - how confident are we that monetary policy will respond in a direct, predictable
way to changes in the federal budget balance or to shifts in demand? (The more attention we pay
to how the monetary sausage gets made, the less confident we are likely to be.) And second, on
whether the central bank really has the power to reliably offset shifts in fiscal policy. In the
textbooks this is taken for granted but there are reasons for doubt. It's also not clear why the
actions of the central bank should be described as crowding out by fiscal policy. The central
bank's policy rule is not a law of nature. Unless there is some other reason to think expansionary
policy can't work, it's not much of an argument to say the Fed won't allow it. We end up with
something like: "Why can't we have deficit-financed nice things?" "Because the economy is at potential
– any more public spending will just crowd out private spending." "How will it be crowded out
exactly?" "Interest rates will rise." "Why will they rise?" "Because the federal reserve will
tighten." "Why will they tighten?" "Because the economy is at potential."
Suppose we take the central bank out of the picture. Suppose we allow supply constraints to
bind on their own, instead of being anticipated by the central planners at the Fed. What would
happen as demand pushed up against the limits of productive capacity? One answer, again, is rising
inflation. But we shouldn't expect prices to all rise in lockstep. Supply constraints don't mean
that production growth halts at once; rather, bottlenecks develop in specific areas. So we should
expect inflation to begin with rising prices for inputs in inelastic supply - land, oil, above
all labor. Textbook models typically include a Phillips curve, with low unemployment leading to
rising wages, which in turn are passed on to higher prices.
But why should they be passed on completely? It's easy to imagine reasons why prices don't
respond fully or immediately to changes in wages. In which case, as I've discussed before, rising
wages will result in an increase in the wage share. Some people will object that such effects
can only be temporary. I'm not sure this makes sense - why shouldn't labor, like anything else,
be relatively more expensive in a world where it is relatively more scarce? But even if you think
that over the long-term the wage share is entirely set on the supply side, the transition from
one "fundamental" wage share to another still has to involve a period of wages rising faster or
slower than productivity growth - which in a Phillips curve world, means a period above or below
full employment.
We don't hear as much about the labor share as the fundamental supply constraint, compared
with savings, inflation or interest rates. But it comes right out of the logic of standard models.
To get to crowding out mark five, though, we have to take one more step. We have to also postulate
that demand in the economy is profit-led - that a distributional shift from profits toward wages
reduces desired investment by more than it increases desired consumption. Whether (or which) real
economies display wage-led or profit-led demand is a subject of vigorous debate in heterodox macro.
But there's no need to adjudicate that now. Right now I'm just interested in what crowding out
could possibly mean.
Demand can affect distribution only if wage increases are not fully passed on to prices. One
reason this might happen is that in an open economy, businesses lack pricing power; if they try
to pass on increased costs, they'll lose market share to imports. Follow that logic to its endpoint
and there are no supply constraints - any increase in spending that can't be satisfied by domestic
production is met by imports instead. For an ideal small, open economy potential output is no
more relevant than the grocery store's inventory is for an individual household when we go shopping.
Instead, like the household, the small open economy faces a budget constraint or a financing constraint
- how much it can buy depends on how much it can pay for.
Needless to say, we needn't go to that extreme to imagine a binding external constraint. It's
quite reasonable to suppose that, thanks to dependence on imported inputs and/or demand for imported
consumption goods, output can't rise without higher imports. And a country may well run out of
foreign exchange before it runs out of domestic savings, finance or productive capacity. This
is the idea behind multiple gap models in development economics, or balance of payments constrained
growth. It also seems like the direction orthodoxy is heading in the eurozone, where competitiveness
is bidding to replace inflation as the overriding concern of macro policy.
Crowding out mark six says that any increase in demand from the government sector will absorb
scarce foreign exchange that will no longer be available to private sector. How relevant it is
depends on how inelastic import demand is, the extent to which the country as a whole faces a
binding budget or credit constraint and, what concrete form that constraint faces - what actually
happens if international creditors are stiffed, or worry they might be? But the general logic
is that higher spending will lead to a higher trade deficit, which at some point can no longer
be financed.
So now we have six forms of crowding out:
1. Government competes with business for fixed saving.
2. Government competes with business for scarce liquidity.
3. Increased spending would lead to higher inflation.
4. Increased spending would cause the central bank to raise interest rates.
5. Overfull employment would lead to overfast wage increases.
6. Increased spending would lead to a higher trade deficit.
The next question is: Is there any reason, even in principle, to worry about any of these outcomes
in the US today? We can decisively set aside the first, which is logically incoherent, and confidently
set aside the second, which doesn't fit a credit-money economy in which government liabilities
are the most liquid asset. But the other four certainly could, in principle, reflect real limits
on expansionary policy. The question is: In the US in 2017, are higher inflation, higher interest
rates, higher wages or a weaker balance of payments position problems we need to worry about?
Are they even problems at all?
First, higher inflation. This is the most natural place to look for the costs of demand pushing
up against capacity limits. In some situations you'd want to ask how much inflation, exactly,
would come from erring on the side of overexpansion, and how costly that higher inflation would
be against the benefits of lower unemployment. But we don't have to ask that question right now,
because inflation is by conventional measures, too low; so higher inflation isn't a cost of expansionary
policy, but an additional benefit. The problem is even worse for Krugman, who has been calling
for years now for a higher inflation target, usually 4 percent. You can't support higher inflation
without supporting the concrete action needed to bring it about, namely, a period of aggregate
spending in excess of potential. [2] Now you might say that changing the inflation target is the
responsibility of the Fed, not the fiscal authorities. But even leaving aside the question of
democratic accountability, it's hard to take this response seriously when we've spent the last
eight years watching the Fed miss its existing target; setting a new higher target isn't going
to make a difference unless something else happens to raise demand. I just don't see how you can
write "What do we want? Four percent! When do we want it? Now!" and then turn around and object
to expansionary fiscal policy on the grounds that it might be inflationary.
OK, but what if the Fed does raise rates in response to any increase in the federal budget
deficit, as many observers expect? Again, if you think that more expansionary policy is otherwise
desirable, it would seem that your problem here is with the Fed. But set that aside, and assume
our choice is between a baseline 2018-2020, and an alternative with the same GDP but with higher
budget deficits and higher interest rates. (This is the worst case for crowding out.) Which do
we prefer? In the old days, the low-deficit, low-interest world would have been the only respectable
choice: Private investment is obviously preferable to whatever government deficits might finance.
(And to be fair, in the actual 2018-2020, they will mostly be financing high-end tax cuts.) But
as Brad DeLong points out, the calculation is different today. Higher interest rates are now a
blessing, not a curse, because they create more running room for the Fed to respond to a downturn.
[3] In the second scenario, there will be some help from conventional monetary policy in the next
recession, for whatever it's worth; in the first scenario there will be no help at all. And one
thing we've surely learned since 2008 is the costs of cyclical downturns are much larger than
previously believed. So here again, what is traditionally considered a costs of pushing past supply
constraints turns out on closer examination to be a benefit.
Empirical studies reporting false reports are an unfortunate
fact of life. I'm surprised that Noah Smith did not cite John
Ioannnidis's paper on biomedical studies: "Why most published
research findings are false." journals.plos.org/plosmedicine/article?id=10.1371/journal.pmed.0020124
Usually the problem is misuse of statistical methods, for
example by data dredging or other data-dependent activities,
rather than say misinterpreting the results of a significance
test.
He spent the primary railing against Bernie Sanders, who polled much better against Trump than
Hillary and who had much better policy proposals than Hillary. Now he complains about what he
himself promoted.
So now the Republicans and Democrats can go back to playing Good Cop/Bad Cop - just like the
last 30 or so years. And Krugman can go back to pretending to fight the right wing while at the
same time guarding against any success of the left wing.
Neoliberal Democrats seem impervious about killing jobs (or driving down wages) with "free" trade
agreements. But now you want us to bleed for the health-insurance industry.
Why should the average American family pay $10,000/year (your 5% of GDP) to support a completely
useless industry (health-care insurance)? And you wonder why Hillary lost the election.
If you're concerned about jobs, there are plenty more useful things to do, like renewable energy,
energy-conservation, refurbishing the electrical grid to support renewable energy, not to mention
traditional infrastructure; then there's water conservation, scientific research etc.
You can advocate all you want. There is going to be another four years of Republican majorities
in the house and they are not going to go for Medicare For All. There are plenty of issues where
the majority of people want things:
1. Taxing the rich
2. Not increasing the military budget
3. Keeping abortion legal
4. Medicare for all
Failing to advocate for MFA just blatantly demonstrates, to the Average American, that the Democratic
Party is beholden to Wall Street (and keep people away from the voting-booth.
Until Pk (and the Democratic party-establishment) understands this simple truth, they will
keep flounder in the desert. And the more "Bernie-bashing" they do (especially quoting MFA), the
more they will alienate the average American.
"This is a guy who has a prestigious academic record and a huge international reader base. He
could do or go pretty much anywhere he wants."
You're absolutely correct, Paul, and many other "prominent" people (some I know personally)
that I used to respect, went "all in" on Hillary Clinton (and what she represents, i.e. neoliberal
wisdom).
All of them are very well off, and seem to be isolated from us "workin' stiffs". They seem
to all get their information from the corporate media.
Only Paul can explain his decision to crusade against (in spite of earlier writings) Medicare-For-All
and anything else proposed by Bernie.
Krugman mocked Sanders for promoting the idea of medicare-for-all in the primary debates. This
was unadulterated partisan hippy bashing that contradicted his earlier columns.
He is paying attention. He is not blocking it out. Show us one article from Krugman where he said
single payer was bad policy. Just one. It does not exist.
Paul Krugman, Bernie Sanders, and Medicare for All
By DEAN BAKER
Paul Krugman weighs in * this morning on the debate between Bernie Sanders and Hillary Clinton
as to whether we should be trying to get universal Medicare or whether the best route forward
is to try to extend and improve the Affordable Care Act. Krugman comes down clearly on the side
of Hillary Clinton, arguing that it is implausible that we could get the sort of political force
necessary to implement a universal Medicare system.
Getting universal Medicare would require overcoming opposition not only from insurers and drug
companies, but doctors and hospital administrators, both of whom are paid at levels two to three
times higher than their counterparts in other wealthy countries. There would also be opposition
from a massive web of health-related industries, including everything from manufacturers of medical
equipment and diagnostic tools to pharmacy benefit managers who survive by intermediating between
insurers and drug companies.
Krugman is largely right, but I would make two major qualifications to his argument. The first
is that it is necessary to keep reminding the public that we are getting ripped off by the health
care industry in order to make any progress at all. The lobbyists for the industry are always
there. Money is at stake if they can get higher prices for their drugs, larger compensation packages
for doctors or hospitals, or weaker regulation on insurers.
The public doesn't have lobbyists to work the other side. The best we can hope is that groups
that have a general interest in lower health care costs, like AARP, labor unions, and various
consumer groups can put some pressure on politicians to counter the industry groups. In this context,
Bernie Sanders' push for universal Medicare can play an important role in energizing the public
and keeping the pressure on.
Those who think this sounds like stardust and fairy tales should read the column by Krugman's
fellow New York Times columnist, health economist Austin Frakt. Frakt reports ** on a new study
that finds evidence that public debate on drug prices and measures to constrain the industry had
the effect of slowing the growth of drug prices. In short getting out the pitchforks has a real
impact on the industry's behavior.
The implication is that we need people like Senator Sanders to constantly push the envelope.
Even if this may not get us to universal Medicare in one big leap, it will create a political
environment in which we can move forward rather than backward.
The other point has to do with an issue that Krugman raises in his blogpost *** on the topic.
He argues that part of the story of lower health care costs in Canada and other countries involves
saying "no," by which he means refusing to pay for various drugs and treatments that are considered
too expensive for the benefit they provide.
While there is some truth to this story, it is important to step back for a moment. In the
vast majority of cases, the drugs in question are not actually expensive to manufacture. The way
the drug industry justifies high prices is that they must recover their research costs. While
the industry does in fact spend a considerable amount of money on research (although they likely
exaggerate this figure), at the point the drug is being administered this is a sunk cost. In other
words, the resources devoted to this research have already been used; the economy doesn't somehow
get back the researchers' time and the capital expended if fewer people take a drug that is developed
from their work.
Ordinarily economists treat it as an absolute article of faith that we want all goods and services
to sell at their marginal cost without interference from the government, like a trade tariff or
quota. However in the case of prescription drugs, economists seem content to ignore the patent
monopolies granted to the industry, which allow it to charge prices that are often ten or even
a hundred times the free market price. (The hepatitis C drug Sovaldi has a list price in the United
States of $84,000. High quality generic versions are available in India for a few hundred dollars
per treatment.) In this case, we are effectively looking at a tariff that is not the 10-20 percent
that we might see in trade policy, but rather 1,000 percent or even 10,000 percent.
This sort of gap between price and marginal cost leads to exactly the sort of distortions that
economists predict when the government intervenes in a market with trade tariffs, except the distortions
are hugely larger with drugs. Companies have incentive to engage in massive marketing efforts,
they push their drugs for conditions for which they may not be appropriate, and they conceal evidence
suggesting their drugs may be less effective than advertised, or possibly even harmful. They also
lobby politicians for ever longer and stronger patent protection, and they use the legal system
to harass potential competitors, both generic and brand. Even research is distorted by this incentive
structure, with large portions of the industry's budget being devoted to developing copycat drugs
to gain a share of a competitor's patent rents.
Perhaps the worst part of this story is that the patent monopolies put us in a situation where
we might have to say no. The industry's monopoly allows it to say that it will not turn over a
life-saving drug for less than $100,000, $200,000, or whatever price tag it chooses. However,
if there was no patent monopoly, we would be looking at buying this drug at its cost of production.
That will rarely be more than $1,000 and generally much less. At those prices, it will rarely
make sense to say no. (The same issue arises with most medical equipment – once we have the technology,
producing a magnetic resonance imaging scanner is relatively cheap, as would be the cost of an
individual screening.)
We do have to pay for the research, but the way we are now doing it is incredibly backward.
It is like paying the firefighters when they show up at the burning house with our family inside.
Of course we would pay them millions to save our family (if we had the money), but it is nutty
to design a system that puts us in this situation.
We should be looking for a system that pays for the research upfront. There are various mechanisms
to accomplish this goal. (Here's **** my plan for a system of publicly funded clinical trials.)
Obviously overhauling our system for financing drug research is not something that is done overnight,
but it is an issue that needs attention. The current system is incredibly wasteful and it needlessly
puts in a situation where we have to say no in contexts where the costs to society of administering
treatment are actually very low.
This doesn't mean that we would pay for everything for everybody. There are some procedures
that actually are very expensive, for example surgeries requiring many hours of the time of highly
skilled surgeons. But we should be trying to design a system that minimizes these sorts of situations,
rather than making them an everyday occurrence.
My column * and Bernie Sanders' plan crossed in the mail. But the Sanders plan in a way reinforces
my point that calls for single-payer in America at this point are basically a distraction. Again,
I say this as someone who favors single-payer - but it's just not going to happen anytime soon.
Put it this way: for all the talk about being honest and upfront, even Sanders ended up delivering
mostly smoke and mirrors - or as Ezra Klein says, puppies and rainbows. ** Despite imposing large
middle-class taxes, his "gesture toward a future plan", as Ezra puts it, relies on the assumption
of huge cost savings. If you like, it involves a huge magic asterisk.
Now, it's true that single-payer systems in other advanced countries are much cheaper than
our health care system. And some of that could be replicated via lower administrative costs and
the generally lower prices Medicare pays. But to get costs down to, say, Canadian levels, we'd
need to do what they do: say no to patients, telling them that they can't always have the treatment
they want.
Saying no has two cost-saving effects: it saves money directly, and it also greatly enhances
the government's bargaining power, because it can say, for example, to drug producers that if
they charge too much they won't be in the formulary.
But it's not something most Americans want to hear about; foreign single-payer systems are
actually more like Medicaid than they are like Medicare.
And Sanders isn't coming clean on that - he's promising Medicaid-like costs while also promising
no rationing. The reason, of course, is that being realistic either about the costs or about what
the system would really be like would make it a political loser. But that's the point: single-payer
just isn't a political possibility starting from here. It's just a distraction from the real issues.
"... Sociologists spend their careers trying to understand how societies work. And some of the most pressing problems in big chunks of the United States may show up in economic data as low employment levels and stagnant wages but are also evident in elevated rates of depression, drug addiction and premature death. In other words, economics is only a piece of a broader, societal problem. So maybe the people who study just that could be worth listening to. ..."
"... "Once economists have the ears of people in Washington, they convince them that the only questions worth asking are the questions that economists are equipped to answer," said Michèle Lamont, a Harvard sociologist and president of the American Sociological Association. "That's not to take anything away from what they do. It's just that many of the answers they give are very partial." ..."
"... For starters, while economists tend to view a job as a straightforward exchange of labor for money, a wide body of sociological research shows how tied up work is with a sense of purpose and identity. ..."
"... "Wages are very important because of course they help people live and provide for their families," said Herbert Gans, an emeritus professor of sociology at Columbia. "But what social values can do is say that unemployment isn't just losing wages, it's losing dignity and self-respect and a feeling of usefulness and all the things that make human beings happy and able to function. ..."
"... That seems to be doubly true in the United States. For example, Ofer Sharone, a sociologist at the University of Massachusetts, Amherst, studied unemployed white-collar workers and found that in the United States, his subjects viewed their ability to land a job as a personal reflection of their self-worth rather than a matter of arbitrary luck. They therefore took rejection hard, blaming themselves and in many cases giving up looking for work. In contrast, in Israel similar unemployed workers viewed getting a job as more like winning a lottery, and were less discouraged by rejection. ..."
"... By and large, 'librul' economists ignore distribution...preferring to concentrate on growth from policies like corporate-negotiated 'free' trade and trickle down monetary policy that favors the Wall Street banking cartel. ..."
"... BTW what happened to Krugman's perfunctory twice a year column on inequality? ..."
"... The nicotine addict cares about as much about 'risk under uncertainty' as Harford. ..."
What if Sociologists Had as Much Influence as
Economists? https://nyti.ms/2m9yDHL via
@UpshotNYT
NYT - NEIL IRWIN - MARCH 17, 2017
Walk half a city block in downtown Washington, and there is a good chance that you will pass an
economist; people with advanced training in the field shape policy on subjects as varied as how
health care is provided, broadcast licenses auctioned, or air pollution regulated.
Turn on cable news, and the guests who opine on the weighty public policy questions of the
day quite often have some title like "chief economist" underneath their name. And there are economists
sprinkled throughout the government - there is an entire council of them advising the president
in most administrations, if not yet in this one.
But as much as we love economics here - this column is named Economic View, after all - there
just may be a downside to this one academic discipline having such primacy in shaping public policy.
They say when all you have is a hammer, every problem looks like a nail. And the risk is that
when every policy adviser is an economist, every problem looks like inadequate per-capita gross
domestic product.
Another academic discipline may not have the ear of presidents but may actually do a better
job of explaining what has gone wrong in large swaths of the United States and other advanced
nations in recent years.
Sociologists spend their careers trying to understand how societies work. And some of the most
pressing problems in big chunks of the United States may show up in economic data as low employment
levels and stagnant wages but are also evident in elevated rates of depression, drug addiction
and premature death. In other words, economics is only a piece of a broader, societal problem.
So maybe the people who study just that could be worth listening to.
"Once economists have the ears of people in Washington, they convince them that the only questions
worth asking are the questions that economists are equipped to answer," said Michèle Lamont, a
Harvard sociologist and president of the American Sociological Association. "That's not to take
anything away from what they do. It's just that many of the answers they give are very partial."
As a small corrective, I took a dive into some sociological research with particular relevance
to the biggest problems facing communities in advanced countries today to understand what kinds
of lessons the field can offer. In 1967, Senator Walter Mondale actually proposed a White House
Council of Social Advisers that he envisioned as a counterpart to the well-entrenched Council
of Economic Advisers. It was never created, but if it had been, this is the sort of advice it
might have been giving recent presidents.
For starters, while economists tend to view a job as a straightforward exchange of labor for
money, a wide body of sociological research shows how tied up work is with a sense of purpose
and identity.
"Wages are very important because of course they help people live and provide for their families,"
said Herbert Gans, an emeritus professor of sociology at Columbia. "But what social values can
do is say that unemployment isn't just losing wages, it's losing dignity and self-respect and
a feeling of usefulness and all the things that make human beings happy and able to function.
That seems to be doubly true in the United States. For example, Ofer Sharone, a sociologist
at the University of Massachusetts, Amherst, studied unemployed white-collar workers and found
that in the United States, his subjects viewed their ability to land a job as a personal reflection
of their self-worth rather than a matter of arbitrary luck. They therefore took rejection hard,
blaming themselves and in many cases giving up looking for work. In contrast, in Israel similar
unemployed workers viewed getting a job as more like winning a lottery, and were less discouraged
by rejection.
It seems plausible that this helps explain why so many Americans who lost jobs in the 2008
recession have never returned to the labor force despite an improved job market. Mr. Sharone is
working with career counselors to explore how to put this finding to work to help the long-term
unemployed. ...
By and large, 'librul' economists ignore distribution...preferring to concentrate on growth from
policies like corporate-negotiated 'free' trade and trickle down monetary policy that favors the
Wall Street banking cartel.
BTW what happened to Krugman's perfunctory twice a year column on inequality?
Why
Mainstream Economists' Theory of Finance is Useless
by Ismael Hossein-Zadeh
"A major reason for these economists' bewilderment in the
face of financial bubbles and bursts is that, according to
their theoretical shibboleth, expansion of finance/fictitious
capital on a macro or national level is not supposed to
deviate much from that of industrial/real capital, as the
magnitude of the former is essentially determined or limited
by the requirements of the real sector of the economy.
The theory maintains that there is an auspicious synergy
between the financial and real sectors of an economy: finance
capital tends to shadow industrial capital as if its main
function is to grease the wheels of the real sector, that is,
of manufacturing and commercial undertakings -just as it was
more or less the case in the early stages of capitalism, when
there was not yet a large, independent financial sector.
Oh that is my sin. I'm an economist and PeterK hates people
who can actually do analysis. That explains a lot.
libezkova -> pgl...
, -1
The real question is: can quasi religious analysis from the
positions of neoclassical economics be called analysis. Or is
this a new type of Lysenkoism?
"... it is only because mean spirited supply side economists show up on tv and in the media all
the time ..."
"... this is because these are the people the billionairs want to see quoted all the time as they
think it serves their bottom line ..."
"... the one mistake this article makes is assuming that the ones it identifies as economists are
representatives of the true science of economics ..."
"... those economists who do so need to be ashamed of themselves ..."
"What if Sociologists Had as Much Influence as Economists? - NYTimes"
it is only because mean spirited supply side economists show up on tv and in the media
all the time
this is because these are the people the billionairs want to see quoted all the time as
they think it serves their bottom line
however I do not believe they portray the truth about economics and in a just society they
wouldn't even get through their courses
so there is no conflict between economics and sociology
the one mistake this article makes is assuming that the ones it identifies as economists
are representatives of the true science of economics
if economics is involved in maximizing "utility" for everyone, how can so called "economists"
justify policies that harm large portions of the population, harm the environment, deplete natural
resources, keep people in poverty, deny healthcare, propagate wars, advance demagoguery
those economists who do so need to be ashamed of themselves
Making a combined comment on the links about sociological
explanation (NYTimes, Understanding Society, and Tim
Harford):
I want to point out that monocausal explanation in society
is fairly useless, especially in a society-in-crisis, for at
least two very DIFFERENT reasons: 1. complexities, which are
analytical things about lots of specifics, and 2. common
emergence of agreement, a central moral thing about trust.
These sound high-falutin', but they are just shorthand for
two different things which keep coming up in our
conversations everywhere:
there are so many connections and relationships, that
people can find ways to get around certain policies, and
the real determiner of decisions is what everybody
AGREES to be true, -- or has voted upon under majority
rules -- even though what everybody agrees to be true, may
be false.
So therefore, the vested interests of the status quo, at
any moment, are engaged in two very different efforts:
providing so much complicated information and false
information that most people stay confused, and
buying votes, buying elections, buying lobbyists.
Any operating political hack knows this, will tell you
this is his/her job.
This has been going on since the middle of the 18th
Century, perhaps longer. And of course, we see where all this
has led us.
My point in making the distinction, the distinction about
finding 2. common agreement to get anything done under 1.
conditions of complexity & uncertainty, is to get it out of
the way, to clear the floor, to make a very different point:
A majority of the people don't ever have the analytical
skills to sort it out. As follows:
A majority of the people don't have the analytical skills to
sort out the lies. How do we deal with this?
First, realize has little to do with the level of
intelligence or education.
It appears to be a difference in HOW people take
"information" into themselves. There is a big difference
between "orality" and "literacy" cultures. Trump's speeches
give a very good illustration of this, perhaps a perfect
example.
The distinction was first emphasized by Walter Ong in his
perennial book Orality and Literacy (1982). Here is an
adaptation of his list of some traits of "oral" culture:
1. Sounded word is itself power, an action-event. Words
are not taken in as mere signs.
2. Your knowledge is limited to what you can personally
recall: To retain & retrieve information, without reading &
writing, you must think in mnemonic patters shaped for ready
oral recurrence. Thus, heavily rhythmic, balanced,
repetitious. Use of antitheses, alliterations & assonances,
epithetic or other formulary expressions, standard thematic
settings ("the assembly, the meal, the duel, the hero's
helper", etc.) proverbs, etc. This even determines syntax.
3. The logic of argument is additive rather than
subordinative. Use of the conjunction "and", instead of
dependent clauses.
4. The discourse is aggregative rather than analytic:
Elements of thought are clusters, parallel terms, antithetic
terms, recurrent epithets such as "brave" soldier,
"beautiful" princess, etc., and these couplings are rarely
dismantled.
5. Redundant or "copious": Heavy use of repetition because
spoken words evaporate, which would prevent the continuity
that is required for thinking. It also helps overcome the
problem that members of the same audience have different
comprehension levels; and helps overcome acoustical lapses in
the assembly hall.
6. The resulting culture tends to conservative or
traditionalist: Use of repetition accentuates the learning of
ages, to the detriment of new discoveries and innovations.
7. Close to the human lifeworld.
8. Agonistically toned: Knowledge is situated within a
context of STRUGGLE in the lifeworld. Use of challenges,
riddles, proverbs, struggles, descriptions of violence. The
flip-side of this is heavy use of extreme praise: "fantastic,
beautiful", etc.
9. Empathetic & participatory, rather than objectively,
scientifically distanced.
10. Homeostatic: Oral societies live in a present which
keeps itself in equilibrium by sloughing off memories which
no longer have present relevance.
11. Situational rather than abstract.
12. Verbomotor lifestyle: In oral society, courses of
action and attitudes toward issues depend significantly more
on effective use of words and thus on human interaction, and
significantly less on non-verbal, often largely visual input
from the "objective" world of print or things. In addition,
oral folk commonly manifest their schizoid tendencies by
extreme external confusion, leading often to violent action,
including mutilation of self and others: going "berserk,
amok".
13. Noetic role of heroic "heavy" figures, and of the
fantastic & bizarre.
14. Orality, community and the sacred: it is all combined.
Note that Ong's brilliant list describes the cognitive
style of Trump's speeches, of Fox News reportage, and
describes the thought processes and speech-styles of many
voters.
"... Economist James K. Galbraith disputes these claims of the benefit of comparative advantage. He states that "free trade has attained the status of a god" and that ". . . none of the world's most successful trading regions, including Japan, Korea, Taiwan, and now mainland China, reached their current status by adopting neoliberal trading rules." He argues that ". . . comparative advantage is based upon the concept of constant returns: the idea that you can double or triple the output of any good simply by doubling or tripling the inputs. But this is not generally the case. For manufactured products, increasing returns, learning, and technical change are the rule, not the exception; the cost of production falls with experience. With increasing returns, the lowest cost will be incurred by the country that starts earliest and moves fastest on any particular line. Potential competitors have to protect their own industries if they wish them to survive long enough to achieve competitive scale."[42] ..."
"... Galbraith, as always, is very succinct and readable. I well remember sitting in an economics lecture in the 1980's when the Professor mentioned Galbraith and described him as with distain someone 'who's ideas were more popular with the public than with economists'. The snigger of agreement that ran around the students in the hall made me realise just how ingrained the ideology of economics was as I'm pretty sure I was the only one of the students who'd actually read any Galbraith. ..."
"... I'd also recommend Ha-Joon Chang as someone who is very readable on the topic of the many weaknesses of conventional ideas on comparative advantage. ..."
"... "The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness." ..."
"... I've noticed many experts are especially bad at verbosity. Maybe they think somehow that quantity of words is a form of potency. Maybe that's it. Also individuals with a grievance who write posts about their grievance. I know when I have a grievance it's hard to shut up. I'm just being honest. I'll keep rambling and rambling, repeating myelf and fulminating. Thankfully I know better than to write like that. ..."
"... Thing 13: Making rich people richer doesn't make the rest of us richer. Trickle down economics doesn't work because wealth doesn't trickle down. It trickles up, which is why the rich are the rich in the first place ..."
"... Thing 23: Good economic policy does not require good economists. Most of the really important economic issues, the ones that decide whether nations sink or swim, are within the intellectual reach of intelligent non-economists. Academic Economics with a capital "E" has remarkably little to say about the things that really matter. Concerned citizens need to stop being intimidated by the experts here. ..."
"... Although Ha Joon Chang is an excellent economist, I would also strongly recommend Michael Hudson, Michael Perelman, Steve Keen and E. Ray Canterbery - they are really great, along with Samir Amin of Senegal. ..."
"... A major issue is that those incapable politicians do rely upon experts, but they have consistently selected experts not on their track record (such as how good economists were at predicting the evolution of the economy, or how good political scientists were at predicting the evolution of communist or Arab societies), but on whether pronouncements of experts corresponded to their ideological preconceptions and justified their intended policies. ..."
"... A bit like rejecting physicians' diagnoses when they do not suit you and preferring the cure of a quack. ..."
"... This is not restricted to economists, it pervasive in science in general. I can't remember how many times I got a paper for peer review where I couldn't figure out what the person was trying to say because they layered the jargon ten levels deep. ..."
"... I think it is as simple as: if you create something that justifies the behaviors of the rich and powerful, you have something to sell and willing buyers. If you create something that delegitimizes the behaviors of the rich and powerful, you not only have no willing patrons but you have made powerful enemies. ..."
"... It is the law of supply and demand for pretentious bullshit. ..."
"... Leave workers exposed to starvation long enough and they'll work for next- to-nothing. The solution to James O'Connor's Fiscal Crisis of the State is to clean house in a big way, a very big way. Put everyone out on the street and start all over again. (Everyone but the 1% of course.) ..."
"... It's Andrew Mellon's advice for getting out of the Depression: "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people." ..."
"... The Reserve Army of Labor saves the Capitalist Day, once again. (Except for the little problem that the 1% won't accept their own liquidation, so Goldman Sachs and the rest must be exempted from the purging–which means that the purging can't work.) ..."
"... Not too long before he died, Paul Samuelson said: "Maybe I was wrong on the subject of jobs offshoring." (I.e., maybe offshoring all the jobs and dismantling the US economy wasn't so intelligent after all!) ..."
"... C. Wright Mills called them "crackpot realists." ..."
"... It's all a part and parcel of the meritocracy. If you don't have a degree in Econ, your opinion doesn't matter about why your job moved to China. If you don't have a degree in Urban Planning, you don't get to comment on how the city wants to tear down the park and put up condos. ..."
"... Their advice helped lead to this 2008 Financial Crisis. The promise of neoliberalism was faster growth. It did not happen. Quite the opposite. It gave the rich intellectual cover to loot society. That"s what this was always about. ..."
"... Then there's the matter of the Iraq War. Another example. Many foreign policy "experts", particularly affiliated with the neoconservative assured the American people that invading Iraq would be easy to do and lead to lots of long term benefits. Others insisted, despite evidence to the contrary, that Saddam was developing weapons of mass destruction. Now look at where we are. No WMDs, long and cost war, with no long-term solutions. Many of said "experts" later endorsed Clinton. ..."
"... We do not need pro-Establishment experts who sell themselves out to enrich themselves. We need experts who act in the public interest. ..."
First, to explain our basic concepts and most important insights in plain English. Famously,
Paul Samuelson, the founder of modern macroeconomics, was asked whether economics told us anything
that was true but not obvious. It took him a couple of years, but eventually he gave an excellent
and topical example – simply the theory of comparative advantage.
Similarly, I often say that the most useful thing I did in my 6 years as Chief Economist at
DWP was to explain the lump of labour fallacy – that there isn't a fixed number of jobs in the
economy, and increased immigration or more women working adds to both labour demand and labour
supply – to six successive Secretaries of State. So that's the first.
Second is to call bullshit.
O.K. I call bullshit. What Portes explained "to six successive Secretaries of State" was
a figment of the imagination of a late 18th century Lancashire magistrate, a self-styled "
friend
to the poor " who couldn't understand why poor people got so upset about having their wages cut
or losing their jobs - to the extent they would go around throwing rocks through windows, breaking
machines and burning down factories - when it was obvious to him that it was all for the best
and in the long run we would all be better off or else dead.
I call bullshit because what Portes explained to six successive Secretaries of State was
simply the return of the repressed - the obverse of "Say's Law" (which was neither Say's nor a Law)
that "supply creates its own demand," which John Maynard Keynes demolished in The General Theory
of Employment, Interest and Money and that John Kenneth Galbraith subsequently declared "
sank without trace " in the wake of Keynes's demolition of it.
I call bullshit because when Paul Samuelson resurrected the defunct fallacy claim that
Portes explained to six successive Secretaries of State, he did so on the condition that governments
pursued the sorts of "Keynesian" job-creating policies that the discredited principle of "supply
creates its own demand" insisted were both unnecessary and counter-productive.
But the lump of labor argument implies that there is only so much useful remunerative work
to be done in any economic system, and that is indeed a fallacy . If proper and sound
monetary, fiscal, and pricing policies are being vigorously promulgated , we need not resign
ourselves to mass unemployment. And although technological unemployment is not to be shrugged
off lightly, its optimal solution lies in offsetting policies that create adequate job
opportunities and new skills.
[Incidentally, as Robert Schiller has noted, the promised prevention of mass unemployment by vigorous
policy intervention did not imply the preservation of wage levels. Schiller cited the following passage
from the Samuelson textbook, " a decrease in the demand for a particular kind of labor because of
technological shifts in an industry can he adapted to - lower relative wages and migration of labor
and capital will eventually provide new jobs for the displaced workers."]
I call bullshit because what Portes explained to six successive Secretaries of State was
not even Paul Samuelson's policy-animated zombie lump-of-labour fallacy but a supply-side, anti-inflationary
retrofit cobbled together by Richard Layard and associates and touted by Tony Blair and Gerhard Schroeder
as the Third Way " new supply-side
agenda for the left. " Central to that agenda were tax cuts to promote economic growth and
"active labour market policies" to foster non-inflationary expansion of employment by making conditions
more "flexible" and lower-waged:
Part-time work and low-paid work are better than no work because they ease the transition from
unemployment to jobs.
Encourage employers to offer 'entry' jobs to the labour market by lowering the burden of tax
and social security contributions on low-paid jobs.
Adjustment will be the easier, the more labour and product markets are working properly. Barriers
to employment in relatively low productivity sectors need to be lowered if employees displaced
by the productivity gains that are an inherent feature of structural change are to find jobs elsewhere.
The labour market needs a low-wage sector in order to make low-skill jobs available.
I call bullshit because in defending the outcomes of supply-side labour policies, Portes soft-pedaled
the stated low-wage objectives of the Third Way agenda. In a
London Review of Books review, Portes admitted that "it may drive down wages for the low-skilled,
but the effect is small compared to that of other factors (technological change, the national minimum
wage and so on)." In the Third Way supply-side agenda, however, a low-wage sector was promoted as
a desirable feature - making more low-skill jobs available - not a trivial bug to be brushed aside.
In other words, in "driving down wages for the low skilled" the policy was achieving exactly what
it was intended to but Portes was "too discreet" to admit that was the stated objectives of the policy.
Economist James K. Galbraith disputes these claims of the benefit of comparative advantage.
He states that "free trade has attained the status of a god" and that ". . . none of the world's
most successful trading regions, including Japan, Korea, Taiwan, and now mainland China, reached
their current status by adopting neoliberal trading rules." He argues that ". . . comparative
advantage is based upon the concept of constant returns: the idea that you can double or triple
the output of any good simply by doubling or tripling the inputs. But this is not generally
the case. For manufactured products, increasing returns, learning, and technical change are
the rule, not the exception; the cost of production falls with experience. With increasing
returns, the lowest cost will be incurred by the country that starts earliest and moves fastest
on any particular line. Potential competitors have to protect their own industries if they
wish them to survive long enough to achieve competitive scale."[42]
Galbraith also contends that "For most other commodities, where land or ecology places limits
on the expansion of capacity, the opposite condition – diminishing returns – is the rule. In
this situation, there can be no guarantee that an advantage of relative cost will persist once
specialization and the resultant expansion of production take place. A classic and tragic example,
studied by Erik Reinert, is transitional Mongolia, a vast grassland with a tiny population
and no industry that could compete on world markets. To the World Bank, Mongolia seemed a classic
case of comparative advantage in animal husbandry, which in Mongolia consisted of vast herds
of cattle, camels, sheep, and goats. Opening of industrial markets collapsed domestic industry,
while privatization of the herds prompted the herders to increase their size. This led, within
just a few years in the early 1990s, to overgrazing and permanent desertification of the subarctic
steppe and, with a slightly colder than normal winter, a massive famine in the herds."
Galbraith, as always, is very succinct and readable. I well remember sitting in an economics
lecture in the 1980's when the Professor mentioned Galbraith and described him as with distain
someone 'who's ideas were more popular with the public than with economists'. The snigger of agreement
that ran around the students in the hall made me realise just how ingrained the ideology of economics
was as I'm pretty sure I was the only one of the students who'd actually read any Galbraith.
I'd also recommend Ha-Joon Chang
as someone who is very readable on the topic of the many weaknesses of conventional ideas on comparative
advantage.
James K Galbraith is the son of the famous New Deal economist John K Galbraith.
John K G:
"The modern conservative is engaged in one of man's oldest exercises in moral philosophy;
that is, the search for a superior moral justification for selfishness."
"In the case of economics there are no important propositions that cannot be stated in plain
language."
"I was an editor of Fortune under Henry Luce, the founder of Time, Inc., who was one of the
most ruthless editors that I have ever known, that anyone has ever known. Henry could look over
a sheet of copy and say, "This can go, and this can go, and this can go," and you would be left
with eight to ten lines which said everything that you had said in twenty lines before.
And I can still, to this day, not write a page without the feeling that Henry Luce is looking
over my shoulder and saying, "That can go." That illuminate one "problem" in our age of internet,
unlimited space to be verbose and no editors that de-obscure the writers "thoughts".
I wonder if this phenomenon – the desirability succinct communication -- was a holdover of
earlier times, when accurate communication made the difference between life and death. Settling
and developing a continent would place a high value on such purposeful human exchanges.
Today, we are awash in branding and marketing intended to maintain the current order. The language
is used to obfuscate, not clarify experience or goals.
An expert in any field that has the ability to communicate in a general , popular mode, is
of great value to society. Truth and understanding is its main function. Knowledge, or insight
that cannot be shared is more often than not just an excuse to hide methods of control and exploitation.
If citizens can't get the generalities right, the specifics will be impossible to comprehend.
Almost everything can go. I remember seeing a video of the photographer William Klein saying
a master photographer is remembered for just a handfull of images. Maybe 10 or 15, tops. Out of
probably at least 100,000 serious photos.
Of course what goes is necessary fertilizer for what doesn't go. You can't avoid it. Hahahah.
But you have to let it go anyway. Or your editor has to be williing to cut.
I've noticed lots and lots of posts here could be a lot better if the post author had said
the same thing in half as many words. Most wouldn't lose any persuasion, if they had any to begin
with. And they'd gain reader attention for the pruning.
I've noticed many experts are especially bad at verbosity. Maybe they think somehow that
quantity of words is a form of potency. Maybe that's it. Also individuals with a grievance who
write posts about their grievance. I know when I have a grievance it's hard to shut up. I'm just
being honest. I'll keep rambling and rambling, repeating myelf and fulminating. Thankfully I know
better than to write like that.
Having saidd all that, Say was rite. If the supply of labor increases, that createes its
own demand for jobs! How is that not completely obvious.
Huffington Post review has a synopsis of the Ha-Joon Change book.
http://www.huffingtonpost.com/ian-fletcher/a-review-of-ha-joon-chang_b_840417.html
My favorite: Thing 13: Making rich people richer doesn't make the rest of us richer. Trickle down economics
doesn't work because wealth doesn't trickle down. It trickles up, which is why the rich are the
rich in the first place
Thanks for the tip PK & thank you fd for the link to the review. I'm going to check this fellow
out; sounds like he has some interesting things to say. One of the "things" that may apply to
the above article:
Thing 23: Good economic policy does not require good economists. Most of the really important
economic issues, the ones that decide whether nations sink or swim, are within the intellectual
reach of intelligent non-economists. Academic Economics with a capital "E" has remarkably little
to say about the things that really matter. Concerned citizens need to stop being intimidated
by the experts here.
Although Ha Joon Chang is an excellent economist, I would also strongly recommend Michael
Hudson, Michael Perelman, Steve Keen and E. Ray Canterbery - they are really great, along with
Samir Amin of Senegal.
A word of warning from the UK. Denigrate experts too much and you end up like us with government
by people who really are inexpert. That is not an improvement.
Ha! I think an anti brexiter just rolled the white eye.
Strange that the awful things that the experts told us all would happen haven't and don't look
like happening since the people called bullshit on the EU mess. Britain with or without those
blokes in dresses up north will do just fine as they steer themselves out of the EU quagmire.
I'll take the people anytime anonymous – they have more common sense than the experts. Didn't
you read the article?
I remember back in the 1980s, when so-called "experts" were prattling about such nonsense as
. . .
"Computers don't make mistakes, humans make mistakes !"
Which was surely untrue as anyone with any real IT expertise back then would have explained
that 97% or more of hardware crashes generate software problems (for obvious reasons).
A major issue is that those incapable politicians do rely upon experts, but they have consistently
selected experts not on their track record (such as how good economists were at predicting the
evolution of the economy, or how good political scientists were at predicting the evolution of
communist or Arab societies), but on whether pronouncements of experts corresponded to their ideological
preconceptions and justified their intended policies.
A bit like rejecting physicians' diagnoses when they do not suit you and preferring the
cure of a quack.
This is not restricted to economists, it pervasive in science in general. I can't remember
how many times I got a paper for peer review where I couldn't figure out what the person was trying
to say because they layered the jargon ten levels deep. This is in chemistry, so things are
typically straightforward, no need for convoluted explanations and massaging of the data.
But people still do it because that's the culture that they've been educated in, a scientific
paper has to be high-brow, using obscure words and complicated sentences.
I think it is as simple as: if you create something that justifies the behaviors of the
rich and powerful, you have something to sell and willing buyers. If you create something that
delegitimizes the behaviors of the rich and powerful, you not only have no willing patrons but
you have made powerful enemies.
It is the law of supply and demand for pretentious bullshit.
So in the end, we wind up with Say's Law anyway, since creating a "low wages" sector is exactly
how Say's Law functions–supply creates its own demand because declining wages means investment
spending can increase, which keeps aggregate demand where it needs to be for full employment.
This is the solution, we are told, to Keynes "sticky prices." Jim Grant makes this very argument
in his book about the "short-lived" crisis of the early 1920s. Leave workers exposed to starvation
long enough and they'll work for next- to-nothing. The solution to James O'Connor's Fiscal Crisis
of the State is to clean house in a big way, a very big way. Put everyone out on the street and
start all over again. (Everyone but the 1% of course.)
It's Andrew Mellon's advice for getting out of the Depression: "liquidate labor, liquidate
stocks, liquidate farmers, liquidate real estate it will purge the rottenness out of the system.
High costs of living and high living will come down. People will work harder, live a more moral
life. Values will be adjusted, and enterprising people will pick up from less competent people."
The Reserve Army of Labor saves the Capitalist Day, once again. (Except for the little
problem that the 1% won't accept their own liquidation, so Goldman Sachs and the rest must be
exempted from the purging–which means that the purging can't work.)
Not too long before he died, Paul Samuelson said: "Maybe I was wrong on the subject of
jobs offshoring." (I.e., maybe offshoring all the jobs and dismantling the US economy wasn't so
intelligent after all!)
Just finished a book called, The Death of Expertise , by a professor of national security
(oh give me a frigging break!!!!), Tom Nichols.
Biggest pile of crapola I have ever read! The author was also yearning for the days when "experts"
were blindly followed!
It's all a part and parcel of the meritocracy. If you don't have a degree in Econ, your
opinion doesn't matter about why your job moved to China. If you don't have a degree in Urban
Planning, you don't get to comment on how the city wants to tear down the park and put up condos.
The answer is that said "experts" have failed the general public miserably.
Their advice helped lead to this 2008 Financial Crisis. The promise of neoliberalism was
faster growth. It did not happen. Quite the opposite. It gave the rich intellectual cover to loot
society. That"s what this was always about.
Now people wonder, why they don't trust "experts"?
Then there's the matter of the Iraq War. Another example. Many foreign policy "experts",
particularly affiliated with the neoconservative assured the American people that invading Iraq
would be easy to do and lead to lots of long term benefits. Others insisted, despite evidence
to the contrary, that Saddam was developing weapons of mass destruction. Now look at where we
are. No WMDs, long and cost war, with no long-term solutions. Many of said "experts" later endorsed
Clinton.
We do not need pro-Establishment experts who sell themselves out to enrich themselves.
We need experts who act in the public interest.
Reporting on cutting-edge advances in economics, this book presents a selection of commentaries
that reveal the weaknesses of several core economics concepts. Economics is a vigorous and progressive
science, which does not lose its force when particular parts of its theory are empirically invalidated;
instead, they contribute to the accumulation of knowledge.
By discussing problematic theoretical assumptions and drawing on the latest empirical research,
the authors question specific hypotheses and reject major economic ideas from the "Coase Theorem"
to "Say's Law" and "Bayesianism." Many of these ideas remain prominent among politicians, economists
and the general public. Yet, in the light of the financial crisis, they have lost both their relevance
and supporting empirical evidence.
This fascinating and thought-provoking collection of 71 short essays written by respected economists
and social scientists from all over the world will appeal to anyone interested in scientific progress
and the further development of economics.
Introduction
Ideas are the drivers behind innovation, may they be political, economic, in the arts or in
science. "Nothing is as powerful as an idea whose time has come" is a popular quote attributed
to Victor Hugo. But what about ideas whose time has already passed? Ideas that might have had
value at a certain point in time but are still sticking around even though we should forget them?
In this book, we collect economic ideas whose time has passed and throw |them into the dustbin
of history. Economics has a sound base of theory supported by empirical research that is taught
the same way all over the world. Yet, according to Popper, we gain scientific progress only by
rejecting specific hypotheses within the theoretical framework. Economics is a vigorous and progressive
science, which does not lose its force when particular parts of its theory are empirically rejected.
Rather, they contribute to the accumulation of knowledge.
We bury ideas from the "Coase Theorem" to "Say's Law" to "Bayesianism". We let established
scientists and lesser known younger colleagues speak. We give voice not only to economists but
also to associates from other social sciences. We let economists from all fields speak and question
ideas. We say goodbye to the positive effects of an abundance of choice; we bid farewell to the
idea that economic growth increases people's well-being. We doubt that CEOs are paid so well merely
because of their talent and question the usefulness of home ownership. Doubting assumptions and
ideas is at the core of economics.
The essays do not idolize models or references and base their content on one single idea that
should be forgotten. They reflect entirely personal views; the book therefore only contains contributions
by single authors. This makes the content parsimonious and distinctive.
When Trump picked Pruitt to Head the EPA he picked a quack
Global Warming Climate Change denier AS WELL AS A Lobbyist
for Big Energy whose goal is antithetical to the mission of
the EPA
We can see that here, Big Energy focusing on State
legislatures, in addition to Congress, to slow or stop
Electric Cars to keep reliance upon petroleum based fuels
while they have friends in high offices to help them advance
their special interest agendas
"This was a period of secularization of US colleges.
Businessmen were replacing clergymen on boards.
They were displaced by others more exclusively attuned to the
Gospel of Wealth.
For example, Professor Allen Eaton was fired from the
University of Oregon for successfully pushing a series of
characteristically Georgist measures: municipal ownership of
the Eugene waterworks; taxation of waterpower sites; direct
election of US Senators; keeping valuable State-owned
timberlands from being given to the Southern Pacific.
Elisha Andrews was forced from Brown University for
favoring populists George and Bryan.
Scott Nearing was fired in 1915 from the University of
Pennsylvania.
Pennsylvania Trustee Joseph Rosengarten explained that
"men holding teaching positions in the Wharton School
introduce there doctrines wholly at variance with those of
its founder and... talk wildly and in a manner entirely
inconsistent with Mr. Wharton's well-known views and in
defiance of the conservative opinions of men of affairs".
His best-known "variant idea" was opposing child labor.
Life under Seelye could be perilous for the truly scholarly.
In 1884, Seelye peremptorily fired one of John B. Clark's
colleagues, the homonymic geologist John Clarke, for
"heterodoxy".
Did plutocrats insure that favorable theories dominated?:
Classicals vs Neoclassicals: Tax and Rent
Posted on 8 January 2011
"At the university I attended, a few of the academics were
strongly influenced by Classical Political Economy,
especially that of Smith and Ricardo. Prior to my student
days, one of them had published a paper in the Cambridge
Journal of Economics entitled "On the origins of the term
'neoclassical'" (no free link available), which is quite well
known in heterodox circles.
In it, he argued that the 'classical' in the term
'neoclassical' is a misnomer and that neoclassical and
classical economics actually have little in common, despite
attempts by neoclassicals to claim Smith, in particular, as
their forefather.
The classical-influenced economists at my university happened
to belong to the Sraffian School. This school attempts to
synthesize Classical value and distribution with Keynesian
output and employment determination, and is also known for
its key role and victory in the Cambridge Capital
Controversy. The school is named after Piero Sraffa, whose
interpretation of Classical Political Economy, particularly
Ricardo's work, has been highly influential.
Sraffians are not the only modern-day economists
influenced by Smith and Ricardo. Another prominent example is
Michael Hudson.
In a recent interview (h/t to Tom Hickey), Hudson
discusses one big difference between the Classical economists
and the neoclassicals: their analysis of taxation as applied
to economic rent.
Hudson touches on a number of noteworthy points during the
interview. He draws attention to a historical correspondence
that would probably surprise many, between high top tax rates
and strong economic growth, and observes that the top rates
were high in the period prior to WWII.
Importantly, the focus of taxation in Classical Political
Economy, which Hudson argues influenced US government policy
in the late 1800s and much of the first half of the 1900s,
was on confiscating economic rents. These rents include
income that derives from ownership of assets that appreciate
in value merely because of the growth in national income
and/or improved public infrastructure, and not due to any
participation in the production process (they arise
especially in the real estate and financial sectors).
It is not mentioned in the interview, but profit, of
course, is also income that derives from the mere ownership
of assets – the means of production.
However, the classical economists were engaged in a class
war with rentiers, not capitalists.
It was Marx who drew this reasoning out to its logical
conclusion, and this probably goes a long way to explaining
why neoclassical theory, rather than being a continuation of
classical economics (as was often claimed once it was
established), was an escape into a different
conceptualization of a capitalist economy that sought to
reframe the distribution of income as the result of marginal
contributions (an attempt that failed and was the chief
target and theoretical casualty of the Cambridge Capital
Controversy).
Even so, there does remain a significant distinction
between profit, which relates to assets employed in the
production process, and economic rents. For this reason, Marx
also distinguished between these two categories of income and
spent a great deal of space in volume 3 of Capital analyzing
the various forms of surplus value, including different types
of rent.
Hudson goes on to stress that the taxation imposed in the
late 1800s and first half of the 1900s was highly
progressive. Initially only the top 1 percent of income
earners were required to submit tax returns. The purpose of
this was to keep taxes on wages and profit low to promote
price competitiveness against lower wage countries.
This can be contrasted with neo-liberal policies of today
which seem to be designed almost with the opposite intent: to
tax wage and profit income (and also consumption) but provide
loopholes or tax breaks for the recipients of economic rents.
Above all, Hudson distinguishes between what the classical
economists meant by the term "free market" and what that term
has come to mean in the neo-liberal period.
Hudson emphasizes that, for the classical economists,
"free market" meant a market unencumbered by rent-based
claims on income that would draw economic activity away from
income production and toward speculation.
The aim of the classical economists was to incentivize
production. This is a very different notion than the
neo-liberal one of labor-market "deregulation" (meaning
regulation in favor of employers over employees), which is
really just code for union smashing and an attack on real
wages, or the neo-liberal deregulation of financial markets,
which is a euphemism for enabling financial parasitism.
Hudson makes another observation in passing. The
observation is not central to his argument in the interview,
but is relevant to current debates over deficits and public
debt, and consistent with MMT.
He notes that immediately prior to the commencement of the
only extended period of high capitalist growth (WWII until
the late 1960s), the US population was not in debt, and in
fact had pent up savings from the war that it was waiting to
spend.
By little or no debt, Hudson clarifies that he means
little or no private debt. There was, of course, a large
public debt – larger as a percentage of GDP than the current
US government "debt".
This public debt did not matter, in spite of the familiar
opposition to deficits and public debt, the echoes of which
can be heard today, simply because the budget deficit shrinks
endogenously once private-sector activity and income growth
resume. This is precisely what happened in the immediate
postwar period.
Today, with the US government the monopoly issuer of its
own flexible exchange-rate fiat currency, public "debt" is –
or rather should be – even less of an issue. Unlike in the
immediate postwar period, the government is not subject to
the constraints of Bretton Woods or a similar
commodity-backed money system. It is free to utilize its
fiscal capacity to the extent necessary to restore full
employment.
Government "debt" is nothing other than the accumulated
net financial wealth of the non-government.
Once the non-government is ready to spend, income growth
will deliver stronger revenues, reducing the deficit. But the
private sector needs to have its debt under control before it
will resume spending at levels sufficient to sustain strong
economic growth.
In addition to the absence of significant private debt at
the end of WWII, there were other factors that contributed to
the strong growth of the immediate postwar period, including
Keynesian demand-management policies, a progressive tax
system, and significant financial regulation.
All these beneficial features of the economy were
gradually undermined, and then exposed to outright attack
from the 1970s onwards.
Hudson discusses how, over time, much of the progressivity
in the tax system was removed, paving the way for the
construction of the inequitable and anti-productive monster
of today.
Keynesian demand-management policies were also largely
eschewed throughout the neo-liberal era on the basis of an
opportunistic misinterpretation of the stagflation of the
1970s. All this took place alongside deregulation of the
financial sector and an aggressive dismantling of worker
employment protections.
The result of this neo-liberal policy mix was an
increasing financialization and "rentification" of the
economy, widening income inequality, and an adherence to
fiscal austerity that directly corresponded, as a matter of
accounting, to an unsustainable build up in the only US debt
that matters – private debt – and culminated in the Global
Financial Crisis and Great Recession.
If the aim is to restore sustainable growth under
capitalism (which is not my preferred social system, but
presumably the one commanding the allegience of
policymakers), the insights obtained from the classical
economists in conjunction with the lessons of the postwar
period would seem to suggest some combination of the
following policy responses: tighter regulations of
speculative activities; a more steeply progressive tax system
targeted at the confiscation of economic rents and the
incentivization of production and consumption; stronger
worker protections; and the abandonment of the faulty
construct of a 'government budget constraint' and a return to
deficit expenditure sufficient to underpin non-government net
saving and full employment.
But the actual policy response has instead been to
manipulate financial markets to engineer a massive transfer
of wealth to the rentiers and exacerbate income and wealth
inequality; to continue with the approach of taxing wage and
profit income along with consumption rather than economic
rents; and possibly even to revert foolishly to austerity
while the private sector remains deeply indebted.
[Were they enticed by the allure of science and
mathematics?]:
Because I said so: the persistence of
mainstream policy advice
Nathaniel Cline Kirsten Ford Matías Vernengo
Abstract:
"The current global crisis has shown the limitations of
the mainstream approach.
We trace the origins of the limitations of the dominant
neoclassical views to the capital debates and to the rise to
dominance of intertemporal general equilibrium.
The limited use of the Arrow-Debreu model, which became
dominant after the capital debates, in terms of policymaking,
is central to understand the persistence of policy guided by
the aggregative model.
We use the International Monetary Fund (IMF) as a case
study of this perplexing continuity of policy advice.
Given our survey, we conclude that even though the economy
is in the midst of the worst capitalist crisis since the
Great Depression, a significant paradigmatic shift in
economics is extraordinarily unlikely."
"Economists have frequently argued in favor of laissez
faire policy, and the reasons underpinning this position have
more often than not been associated to their ideological
perspective.
Whenever the classical authors defended the free market,
however, it was never under the presumption that it would
lead to full utilization of resources or an equitable
distribution of income. The free market was typically
defended as an instrument of modernization, that is, an
institutional innovation of the rising bourgeoisie against
feudal obstacles to economic development.
It was only with the rise of the neoclassical paradigm
that the free market came to be considered a mechanism for
the determination of income shares of the same factors of
production and equated to efficiency in the use of factors of
production.
With this, the free market ceased to be defended as an
instrument of modernization, and instead hailed as a superior
institution in itself.
The Great Depression and the Keynesian Revolution sapped
the faith in free market policies, but did not attack the
core ideas behind the marginalist views of market efficiency.
The attack on the main tenets of neoclassical economics
that started with the Keynesian Revolution in the 1930s and
culminated with the capital debates in the 1960s, showed the
logical limitations of the marginalist approach, and forced
the mainstream into a defensive position.
With the abandonment of the old notion of long run
equilibrium, and the adoption of intertemporal equilibrium,
the efficiency of markets was not seen as the result of the
persistent forces of the economy.
If nothing else, the new notion of equilibrium provided a
logically coherent notion of market efficiency.
Absent solid theoretical foundation, and, oftentimes,
empirical support, the persistence of laissez-faire policy
could at least be anchored to the authority of intertemporal
equilibrium.
The limitations of such a strategy have become
increasingly evident.
The duplicity of a profession that teaches models known to
be logically incorrect, and uses these very models for policy
analysis – even when the actual outcomes do not correspond to
the expected results according to the prescription – is hard
to justify.
The role of the social conflicts of the 1960s, the
inflation of the 1970s, and the rise of several corporate
institutions in the rise of pro-market policies have been
extensively analyzed.
However, the role of the changing attitudes within the
economics profession have seldom emphasized the incisive
effect that the capital debates had in promoting the revival
of the defense of free markets for their own sake.
"The current global crisis has shown the limitations of
the pro-market liberalizing policies of the last few decades,
but from our perspective, it will not be sufficient to
promote a meaningful revision of the foundations of economic
analysis, and the timidity of the IMF rethinking of its
policy stance is a good example of what to expect.
"In the meantime, learning economics at least remains, as
Joan Robinson caustically put it, the best way to avoid being
deceived by economists.
Mainstream (neoclassical) economics originated as a reaction
and defense to the progressive reforms of the late 1800's.
It was sponsored and funded by plutocrats that endowed
private universities like Chicago, Columbia, etc.
Neoclassical economists selected specific mathematic
techniques to convince that free, competitive markets were
natural, efficient and optimal.
When their mathematics was shown to be defective, they
ignored the proof, revised their assumptions to evade or
developed new mathematics that, while not related to the real
world, could at least not be shown to be faulty.
It appears that neoclassical economists are basically
intellectual hit-men for the plutocracy.
If an economist writes a column in MSM, is employed at the
Fed, ECB, IMF, World Bank, or is a professor at an 'elite",
private university - chances are s/he is a neoclassicist and
a hit-wo/man.
Romer says they want to stay in the club, or the church:
Posted on
June 11, 2015
Euler's Theorem Denialism
Paul Romer
The U.S. Department of Energy employs physics Ph.D.s to
manage our nuclear weapons. How would you feel if some of
them wrote blog posts saying that it is possible to build a
perpetual motion machine?
What if they did this to signal their loyalty to some club
of physicists? Wouldn't you wonder why membership in this
club was important enough get them say that they do not
believe the second law of thermodynamics? And what kind of
physics club would use an endorsement of the perpetual motion
machine as a loyalty oath?
In a recent post, David Andolfatto, who is a Vice
President at the Federal Reserve Bank of St. Louis, gives a
brazen display of mathiness–brazen because he denies Euler's
theorem, which for economists is about the same as denying
the second law of thermodynamics is for physicists.
The type of mathiness that is hardest to root out is the
opaque mathiness illustrated by Lucas (2009). It combines
math that is hard to understand with verbal claims that can
be shown to be misleading, but only after a careful analysis
of the math.
By taking advantage of ambiguity and misdirection, its
verbal claims can mislead without saying anything that is
actually false.
Andolfatto's brazen mathiness involves a verbal statement
about a mathematical model that flies in the face of
an impossibility theorem. No model can do what he claims his
does. No model can have a competitive equilibrium with
price-taking behavior and partially excludable nonrival
goods.
If you are not an economist, this would be a model in which
someone who has a monopoly on an idea can charge for its use,
but somehow is unable to influence the price that users have
to pay, which should sound implausible at least.
If you are an economist, you know that there is a very
simple argument based on Euler's theorem that proves this
type of model is impossible. The proof goes back a long way.
I know that Karl Shell invoked it in the late 1960s. I
restated it in the AER article of mine that Andolfatto
quotes, so it was fresh in his memory. Dietz Vollrath has a
recent post that works through the logic again.
In its most general form, the proof relies on a step that
invokes a fact about production processes: If you double all
the rival inputs (the inputs you can touch or stub your toe
on) you double the output. Some economists try to evade the
theorem by denying the possibility of replication.
But Andolfatto's paper makes the required assumption about
production openly–constant returns to scale in rival inputs.
So he's got no wriggle room. I can't for the life of me see
how Andolfatto thinks he can evade Euler's theorem.
It is certainly possible that he is confused. But if you were
confused, wouldn't you try to understand the proof that says
what you want to claim has to be false before you go ahead
and claim it anyway?
So the only conjecture that makes sense to me is that this
is part of being in the club. But if so, there is an
interesting differentiation of roles by status. Lucas knows a
proof when he sees one and is careful to avoid getting caught
saying something that is provably false. He sticks to the
Marshallian framework where nonrival goods are nonexcludable.
Prescott, in his paper with McGrattan (AER 2010) least tries
to cover his tracks by inserting his imaginary input,
location. Then he can simply assert that it does not get
compensation and he can take the income that Euler's Theorem
allocates to location and transfer it to his nonrival inputs.
From Minnesotta types who are so preachy about avoiding free
parameters, you have to admire the audacity of adding an
entirely free variable. But Prescott, like Lucas, he is
careful not to deny Euler's Theorem.
But the next level down in the hierarchy, followers like
Boldrin and Levine are willing to just embarrass themselves:
It is widely believed that competitive equilibrium always
results in prices equal to marginal cost. Hence the belief
that competition is inconsistent with innovation. However
widespread this belief may be, it is not correct. It is true
only in the absence of capacity constraints, (2008, p. 436)
They say they can ignore Euler's Theorem, because in their
bizarro version of a competitive equilibrium, prices for
inputs do not equal marginal products.
But instead of presenting a competitive equilibrium of
this type, they present a model* with an innovator who turns
out to have market power. Their solution? The innovator has
to be a price taker because they say so:
Making the initial single innovator behave competitively
even in the very first period may be a source of
misunderstanding. Since, by necessity, she has a monopoly in
the initial period, why do we not take account of her
incentive to restrict the initial supply ? (Boldrin and
Levine, 2008, p. 438)
So in the analogy from physics, Boldrin and Levine say that
it is possible to build a perpetual motion machine, but to
their credit, at the last moment they back off and invoke the
can-opener joke: "Well we haven't actually built a perpetual
motion machine, so let's just assume that we have one." So
what to make of Andolfatto, who goes all in: "I built one
back in 1999 when I was in graduate school."
It is as if the prophets who lead the Mormon Church never
have to say anything specific about where the Book of Mormon
comes from. Officials at the next level down have to say that
Joseph Smith transcribed it from golden plates that he found
in upstate New York. Regular church members have to say that
it is a literal fact that the gold plates were written in 400
AD by Mormon and Moroni, using a script called reformed
Egyptian, and were held together in a D-ring binder.
The provably false statements that economists like
Andolfatto make (and he is certainly not alone) may be more
than mere signals. They might be an irreversible commitment
to stay at an institution where his club is already in
control because they prevents someone from ever being
employable at a competitive institution where logic is still
valued.
Having a strong affiliation with other members of a
religion can be a good thing, so I would not be bothered to
learn that some of our nuclear physicists are Mormons. But I
would be worried to learn that some of them were members of
the perpetual motion club. And I am worried that some
outposts of the Fed have been permanently colonized by
economists who are on the record as Euler's-Theorem-deniers.
That's good thank you. I am thinking along the same lines:
In some way unregulated finance acts as cancer cells in human
body (while this analogy is definitely superficial it might
be stimulating for thinking about neoliberalism):
1. Uncontrollable growth detached from real economics
("casino capitalism" with its proliferation of hedge funds,
private equity firms, derivatives, credit default swaps and
similar instruments).
2. Suppression of immune system so that this
uncontrollable growth should not be checked (aka
deregulation, capture of economics departments, an army of
neoliberal think tanks)
3. Like cancel creates a blood network to stimulate its
own growth, finance also diverts lion share of resource in
the economy for its own consumption -- casino consumption.
4. Very difficult to fight and can reoccur if treatment
was insufficient or ineffective.
The Traditional analogy is to a parasite,
particularly the type that invades the brain of the host and
tricks the host into feeding the parasite ahead of itself,
even if the host starves itself to death in the process.
Strikes me that if your economic theory cannot deal with
political engagement by corporations, you need to scrap your
economic theory. Crony capitalism is the only sort that has
ever existed and corporations have always engaged in politics
to their own benefit.
While I agree with
you, the statement
that "Crony capitalism
is the only sort that
has ever existed"
might not be
completely true.
There were short
historical periods of
"deviations".
Napoleonic France
and Early New Deal
might well be
considered as
temporary departures
from crony capitalism
model.
Of source later
everything "returned
to normal", but what
was accomplished
initially was
definitely not crony
capitalism. Especially
legislation.
The New Deal was
probably one of the
few successful attempt
in history to reign on
financial sector.
Napoleon was also
extremely suspicious
of financial sector
(which is actually
typical for any
nationalist who just
got political power;
corruption comes later
on)
The New Deal
relegated financial
sector to the
secondary roles for
the next 30 years or
so. Only in 70th they
became reckless again.
Amazing achievement...
Also some
industries, especially
at early stages are
definitely "less
crony" then others. IT
industry probably such
an area after the
introduction of IBM
PCs (August 12, 1981)
till the dot-com boom.
As I have pointed out several times, the corporate form with
its very powerful advantage of limited liability is nothing
more than a license granted by the Sovereign. Once upon a
time it was a very sparingly granted privilege.
So, at a
very fundamental level I wonder if we have reached a point
where it should be granted at all - certainly beyond the
first 10 years of corporate existence.
The essence of the neo-classical theory is the constraint on
choice imposed by given and widely shared technology and
competitive markets for resources and vendors. Political
engagement derives from and is focused on seeking
monopolistic power. The various theories of monopolistic
competition are instructive but fall far short of the
standard sought by neoclassical theory....
-- Joseph Bower
[ Then where does an economist go from here? This is
fascinating. ]
There has been extensive writing about the power and scope of
corporations going back at least to Edward Mason and Carl Kaysen. In a
chapter I wrote,1) I explored the role of large corporations in terms
of their impact on factors other than the product market. Echoing
Kaysen I emphasized location, employment, product line choices,
vendors that because of their scale and scope give firms powers far
beyond those conceived in the neo-classical model and unconstrained by
traditional notions of price competition. The neo-classical model
simply does not comprehend the modern corporation.
But if we are talking about a theory carefully constructed on a set of
axioms, the theory really can't consider political engagements. The
essence of the neo-classical theory is the constraint on choice
imposed by given and widely shared technology and competitive markets
for resources and vendors. Political engagement derives from and is
focused on seeking monopolistic power. The various theories of
monopolistic competition are instructive but fall far short of the
standard sought by neoclassical theory. ...
Monopoly power? I thought 'libruls' didn't about monopoly
power! After all, it is of absolutely no concern to them that
the Fed colludes with the Wall Street banking cartel to
ration credit and low interest rates to their wealthy
clientele, who use the money to speculate, not make
productive investments.
Political Engagement by Corporations Derives from and is
Focused on Seeking Monopolistic Power
-- Joseph Bower
[ While this assertion seems obvious, how to construct a
countervailing response is surely not obvious though the need
seems to have been growing especially since labor unions lost
significance influence in the 1980s. ]
If that is what gets you to sleep at night keep deluding
yourself. Me thinks if you had your way corporate political
spending would be banned but corporate political spending by
organizations more equal than others - unions - would be
acceptable.
Strikes me that if your economic theory cannot deal with
political engagement by corporations, you need to scrap your
economic theory. Crony capitalism is the only sort that has
ever existed and corporations have always engaged in politics
to their own benefit.
As I have pointed out several times, the corporate form with
its very powerful advantage of limited liability is nothing
more than a license granted by the Sovereign. Once upon a
time it was a very sparingly granted privilege.
So, at a
very fundamental level I wonder if we have reached a point
where it should be granted at all - certainly beyond the
first 10 years of corporate existence.
Regulatory capture is an economic theory. The bread and
butter of this excellent blog. Now if you mean the economic
theory taught by Greg Mankiw in his overpriced books - yea,
they are weak narrow subsets of what actual economics do.
That would seem about right. Scrap it. Or at least abandon
mathematical pretense.
The situation in
"But if we are talking about a theory carefully
constructed on a set of axioms, the theory really can't
consider political engagements."
seems to be equivalent to a geometry where some class of
objects, say regular polygons, are empowered with the free
will to change the postulates of the geometry in mid-proof.
Without recognizing sudden rules changes, it seems
economic proofs go astray.
The really interesting stuff looks like it's in the
postulate changing and feedback business anyway.
"The various theories of monopolistic competition are
instructive but fall far short of the standard sought by
neoclassical theory."
I'm curious what he means by the
"standard sought by neoclassical theory". Joan Robinson
coined 'monopolistic competition' and her exposition of the
implications of this concept were well received by even
neoclassical types.
Not to criticize as his research is important. But let's
remember the contributions of the first great woman
economist.
The essence of the neo-classical theory is the constraint on
choice imposed by given and widely shared technology and
competitive markets for resources and vendors. Political
engagement derives from and is focused on seeking
monopolistic power. The various theories of monopolistic
competition are instructive but fall far short of the
standard sought by neoclassical theory....
-- Joseph Bower
[ Then where does an economist go from here? This is
fascinating. ]
That's not so much about Eurocentric modernism as America-centric neoliberalism
Notable quotes:
"... He first caught the scent that something was off as an economics student in India, wondering why, despite his mastery of the mathematics and technology of the discipline, the logic always escaped him. Then one day he had an epiphany: the whole thing was "cockeyed from start to finish." To his amazement, his best teachers agreed. "Then why are we studying economics?" demanded the pupil. "To protect ourselves from the lies of economists," replied the great economist Joan Robinson. ..."
"... Kanth realized that people are not at all like Adam Smith's homo economicus , a narrowly self-interested agent trucking and bartering through life. Smith had turned the human race - a species capable of wondrous caring, creativity, and conviviality - into a nasty horde of instinctive materialists: a society of hustlers. ..."
"... how this way of thinking took hold of us, and how it delivered a society which is essentially asocial - one in which everybody sees everybody else as a means to their own private ends. ..."
"... he argues, consigned us to an endless and exhausting Hobbesian competition. For every expansion of the market, we found our social space shrunk and our natural environment spoiled. For every benefit we received, there came a new way to pit us against each other. Have the costs become too high? ..."
"... "That's our big dream," says Kanth. "Everyone and everything is a stepping stone to our personal glorification." When others get in our way, we end up with a grim take on life described succinctly by Jean Paul Sartre: "Hell is other people." ..."
"... Mr. Kanth makes some valid points, but his criticism of the European Enlightenment is mistaken. Many of the horrors of modernity had their origins in the Counter-Enlightenment and in the Church Inquisitions, not the Enlightenment. The modern police state is a refinement of and a descendant of the struggles against heresy. ..."
"... Agreed. Parramore's phrase 'history of a set of bad ideas' does seem a bit harsh for a description of the Enlightenment. ..."
"... Like most big ideas, the problem isn't with the original idea so much as the corruption of it over the years as it's put into practice. Massive reform is necessary for sure but I'll take the Enlightenment over nasty, brutish, and short any day. ..."
"... I read somewhere that some Native Americans looking down on the ruins of San Fransisco after the great quake of 1906, thought that at last the crazy white people would realize the folly of their ways, and become normal humans. ..."
"... So they were amazed that before the ruins even stopped smoking, the crazy white people, ignoring the obvious displeasure of the Great Spirit, were busy rebuilding the same mess that had just been destroyed. ..."
"... I have a strong suspicion that evil empires do not come to their senses, rather, one way or another, they get flattened. ..."
"... I can remember arguing over this in my philosophy classes way back in the 80's – that Objectivism and the Enlightenment were two sides of the same coin, and that those Enlightenment writers were writing tomes to justify their own greed and prejudices, while cloaking their greed and prejudices in "morality". ..."
"... At the time (I was young) it seemed to me that the Enlightenment was an attempt to destroy the basis of Jesus's and Buddha's philosophy – that the most moral position of humanity was to care for its members, just as clans, tribes, families, and other human societies did. ..."
"... "They didn't accomplish much" meaning they lost militarily to cultures with more aggression and better weapons. ..."
"... It seems to me that humans, as hierarchical mammals, really do have a desire to compete with each other for status and respect. The trouble is in organizing all of society around this one struggle, forcing everyone into explicit competition and making the stakes too high. When the losers can't afford to buy food, when they and their little children live on the street and die in the cold, when their kids can never compete on an equal field to improve their own status, things have gone too far. And in addition to material needs, humans also have a need for independence, an escape from being constantly ordered around by the winners and under someone else's thumb. ..."
"... Note, as an aside, how granting economic rights to outgroups like women and Blacks brought them into the same market competition. Well, a lot of men don't want to compete with women for status. They want to compete with each other. The more competitors you add the harder it is to win. But when all resources ..."
"... I think you're right about that and if we do ever manage to abolish capitalism and develop a less violent and more egalitarian society, there will need to be an outlet for that innate desire. I propose hockey. Beats starting a war . ..."
"... When President Trump defeated his rival in the last election, among the many ways in which the event was captured was a representation of the President as Perseus carrying the head of Medusa (Clinton) in his outstretched left hand. Medusa was a monster gorgon of the Greek mythology; a representation in this case by Clinton (a woman) who dared to take real power in this essentially male world and silenced for trying to participate in the public discourse (election). ..."
"... The point is that what passes as Modernism has never entered modern life. In support of my proposition I cite an encounter between a journalist and Mahatma Gandhi in 1930s: The journalist asked Gandhi, "Mr. Gandhi, what is your opinion of the western civilization?" Gandhi replied instantaneously "It would be a good idea". ..."
"... I think he's right about Eurocentric modernism being incompatible with human civilization. But it can't be just an evolutionary accident that civilization is so aggressive. It served a purpose. We refer to it as 'survival'. I used to tell my daughter not to make fun of those 'dorky little boys' too much because they all had a way of growing up to be very nice men. And I told her women are the reason we have all survived, but men have made it so much easier! And etc. ..."
"... I believe that one element of modern life that should be removed forever is the infinite search for maximizing profits. ..."
"... On more than one occasion I've compared the rent-seeking profit mongers to Molocks that cultivate us milder Eloi and cannabalize us. ..."
"... But the economics profession's problem isn't "blind faith in science." It's a massive failure to apply the scientific method, combined with an expectation that we all put our blind faith in THEM anyway. ..."
"... Essentially a post-modern critique of modernism without all the jargon of p-m critical theory (yay!!). I don't think we have enough data from the pre-modern huddling societies to determine if that's how we want to live. Yes, my boss at work exploits me, but on the other hand, I can walk into an air-conditioned supermarket and survey row after row of steaks that I can afford to buy. I love to drive cars. The cinema is enchanting. Dying of a plague is a very remote possibility. We could give it all up, but there's no guarantee our lives would be richer or fuller–just different, at best. ..."
"... Just how dark were the Dark Ages? Or, to borrow Churchill's phrase, how dark would a NEW Dark Age be? ..."
"... Two possibles: the cargo cult children of Mad Max: Beyond the Thunderdome, or the society depicted in Aldous Huxley's Ape and Essence. At least the Church in Rome and Constantinople provided some kind of lifeline of civilization during the collapse of the Roman Empire. What similar institution have we now? ..."
"... Sounds like bog-standard post-modernist tosh to me, just without the obscure ProfSpeak jargon that usually accompanies it. I fail to see how this is helpful. ..."
"... The only thing missing in this post is Bambi. Of course the Bushmen would kill Bambi dead with spears and roast her flesh over a fire. So would we, actually. hmmmm. ..."
"... I agree dude is right that the values now unraveling (democracy, pluralism, individualism, free speech, international-ism (in both the good and bad ways)) go all the way back to that time. ..."
"... But this article is a perfect example of throwing the baby out with the bathwater. Surely none of the third world cultures he praises got where they are by totally throwing out previous systems, the good parts and bad, every time they faced a crisis. ..."
"... IMO the problem is enlightenment values have been hollowed out, narrowed to only those superficial aspects of those values which benefit the marketplace. Like how real food got turned into Mosanto fast-food so gradually, nobody noticed that the nutrients are missing. ..."
"... Adam Smith had some good points that have been lost along the way, namely penalizing rent seeking. ..."
"... Smith has been seriously misrepresented. The Theory of Moral Sentiments shows a very different side to that presented by those who selectively quote from The Wealth of Nations. ..."
"... It's hard to tell from the rather incoherent summary of what looks like an incoherent argument, but the "everything went wrong after the Enlightenment" meme has been circulating for ages. It was speared pretty effectively by Domenico Losurdo in "War and Revolution" some years ago. The author seems to be jumbling all sorts of arguments together, some valid and some not, but the valid arguments are in general criticisms of liberalism, which is not the same of the Enlightenment. ..."
"... This is a very good point, as the Enlightenment was not merely a straight line connection to the blight of NeoLiberalism ..."
"... The naked embrace of selfishness, while never absent over these centuries, did have countervailing currents and forces with which to contend that were sometimes able to at least minimize the damage. But more recently, with supposedly scientific NeoLiberal economic thought sweeping the field throughout much of the first world, and with the overall decline of religious and moral systems as a counterpoise, things have reached an unlovely pass. ..."
"... homo economicus ..."
"... For further reading, I strongly recommend John Ralston Saul's "Voltaire's Bastards". ..."
"... I think that people who are interested in how the Enlightenment may or may not have contributed to the problems of modernity would do well to read Enemies of the Enlightenment: The French Counter-Enlightenment and the Making of Modernity , by Darrin McMahon. Another book of value is The Enlightenment: And Why It Still Matters , by Anthony Pagden. ..."
"... I should have mentioned that the full title is "Voltaire's Bastards: The Dictatorship of Reason in the West". ..."
Across the globe, a collective freak-out spanning the whole political system is picking up steam
with every new "surprise" election, rush of tormented souls across borders, and tweet from the star
of America's great unreality show, Donald Trump.
But what exactly is the force that seems to be pushing us towards Armageddon? Is it capitalism
gone wild? Globalization? Political corruption? Techno-nightmares?
Rajani Kanth, a political economist, social thinker, and poet , goes beyond any of these
explanations for the answer. In his view, what's throwing most of us off kilter - whether we think
of ourselves as on the left or right, capitalist or socialist -was birthed 400 years ago during the
period of the Enlightenment. It's a set of assumptions, a particular way of looking at the world
that pushed out previous modes of existence, many quite ancient and time-tested, and eventually rose
to dominate the world in its Anglo-American form.
We're taught to think of the Enlightenment as the blessed end to the Dark Ages, a splendid blossoming
of human reason. But what if instead of bringing us to a better world, some of this period's key
ideas ended up producing something even darker?
Kanth argues that this framework, which he calls Eurocentric modernism, is collapsing, and unless
we understand why and how it has distorted our reality, we might just end up burnt to a crisp as
this misanthropic Death Star starts to bulge and blaze in its dying throes.
A Mass Incarceration of Humanity
Kanth's latest book, Farewell to Modernism: On Human Devolution in the Twenty-First Century , tells the history
of a set of bad ideas. He first caught the scent that something was off as an economics student
in India, wondering why, despite his mastery of the mathematics and technology of the discipline,
the logic always escaped him. Then one day he had an epiphany: the whole thing was "cockeyed from
start to finish." To his amazement, his best teachers agreed. "Then why are we studying economics?"
demanded the pupil. "To protect ourselves from the lies of economists," replied the great economist
Joan Robinson.
Kanth realized that people are not at all like Adam Smith's homo economicus , a narrowly
self-interested agent trucking and bartering through life. Smith had turned the human race - a species
capable of wondrous caring, creativity, and conviviality - into a nasty horde of instinctive materialists:
a society of hustlers.
Using his training in history and cultural theory, Kanth dedicated himself to investigating
how this way of thinking took hold of us, and how it delivered a society which is essentially
asocial - one in which everybody sees everybody else as a means to their own private ends. Eurocentric
modernism, he argues, consigned us to an endless and exhausting Hobbesian competition. For every
expansion of the market, we found our social space shrunk and our natural environment spoiled. For
every benefit we received, there came a new way to pit us against each other. Have the costs become
too high?
The Creed of Capture
The Eurocentric modernist program, according to Kanth, has four planks: a blind faith in science;
a self-serving belief in progress; rampant materialism; and a penchant for using state violence to
achieve its ends. In a nutshell, it's a habit of placing individual self-interest above the welfare
of community and society.
To illustrate one of its signature follies, Kanth refers to that great Hollywood ode to the Western
spirit, "The Sound of Music." Early in the film, the Mother Superior bursts into song, calling on
the nun Maria to "climb every mountain, ford every stream."
Sounds exhilarating, but to what end? Why exactly do we need to ford every stream? From the Eurocentric
modernist viewpoint, Kanth says, the answer is not so innocent: we secretly do it so that we can
say to ourselves, "Look, I achieved something that's beyond the reach of somebody else." Hooray for
me!
"That's our big dream," says Kanth. "Everyone and everything is a stepping stone to our personal
glorification." When others get in our way, we end up with a grim take on life described succinctly
by Jean Paul Sartre: "Hell is other people."
Sounds bad, but didn't Eurocentric modernism also give us our great democratic ideals of equality
and liberty to elevate and protect us?
Maybe these notions are not really our salvation, suggests Kanth. He notes that when we replace
the vital ties of kinship and community with abstract contractual relations, or when we find that
the only sanctioned paths in life are that of consumer or producer, we become alienated and depressed
in spirit. Abstract rights like liberty and equality turn out to be rather cold comfort. These ideas,
however lofty, may not get at the most basic human wants and needs. .
... ... ...
Kanth, like many, senses that a global financial crisis, or some other equivalent catastrophe,
like war or natural disaster, may soon produce painful and seismic economic and political disruptions.
Perhaps only then will human nature reassert itself as we come to rediscover the crucial nexus of
reciprocities that is our real heritage. That's what will enable us to survive.
"The Eurocentric modernist program, according to Kanth, has four planks: a blind faith in science;
a self-serving belief in progress; rampant materialism; and a penchant for using state violence
to achieve its ends. In a nutshell, it's a habit of placing individual self-interest above the
welfare of community and society."
Kanth hasn't dealt much with the wild skepticism of Enlightenment and modernist thinkers: That
would put a strain on such simplistic thinking. He's never heard of Kant or Rousseau? Pascal?
He's never even read Matthew Arnold's "Dover Beach"? Dickens? A speech by Abraham Lincoln? The
novels of Jane Austen? Maybe some articles by Antonio Gramsci? The Leopard by Tomasi di Lampedusa?
Anything about Einstein? Or even Freud for that matter? Looked at a painting or etching or work
in ceramic by Picasso?
Just because economics has devolved into looting and excuse-making for looting isn't a critique
of the cultural and scientific flowering that were part of the Enlightenment and Modernism. Are
we really supposed to think that Milton Friedman and his delusions have destroyed all aspects
of the enormous changes since 1600 or so? And I, for one, don't want to backslide into the Baroque–when
states used their power for religious wars so virulent that Silesia and Alsace were depopulated.
Alienation is not the name of a river in Egypt BTW, Did any of your examples lead to anything
other than this?
The sum of individuals adds up to the bizarre creature we call "culture." A flower in the air,
to be sure.
They didn't even have food delivery! This post isn't the best evah in the history of NC - I
mean it shouldn't be censored or taken down or anything and everybody has a right to an opinion,
but "Oy Vey what a shock to a reader's delicate intellectual sensibilities."
You wonder if it's Beer Goggles that are being looked through or if this is a case of transference
and projection. The fact that the post author is a poet raises suspicion, since they aren't the
most reliable sources when it come so sober factual analysis.
Mr. Kanth makes some valid points, but his criticism of the European Enlightenment is mistaken.
Many of the horrors of modernity had their origins in the Counter-Enlightenment and in the Church
Inquisitions, not the Enlightenment. The modern police state is a refinement of and a descendant
of the struggles against heresy.
If one is going to criticize societies for lacking "moral economies", it's not just the European
(and American) based societies that need to be targeted. Other societies have deep failures that
extend back for millennia, such as the caste system of India.
Agreed. Parramore's phrase 'history of a set of bad ideas' does seem a bit harsh for a
description of the Enlightenment.
Been a while since I read Candide , but the end where he meets the world famous sage
and asks for the secret of happiness in a terrible world only to be told 'Tend your own garden'
and then having the gate slammed in his face has always stuck with me.
You could interpret that to mean isolate yourself from your fellow human beings and just look
out for yourself, but I don't think that's what Voltaire was getting at.
Like most big ideas, the problem isn't with the original idea so much as the corruption
of it over the years as it's put into practice. Massive reform is necessary for sure but I'll
take the Enlightenment over nasty, brutish, and short any day.
Perhaps, beyond anthropology, there are lessons in evolutionary biology. Individual humans
are fairly weak animals. Our ancestors were obligated to "huddle" to survive, or as Richard Dawkins
might suggest, huddling, banding together in families and groups, was an evolutionarily successful
strategy. Those well adapted to communal living were more likely to survive, so that tendency
was selected for. However, "cheaters" can also survive. That is, it is not uncommon in the natural
world to find individuals and groups of individuals who cheat the group – expend less energy to
reproduce, such as male sunfish that display the secondary sexual characteristics of females,
so are not driven off by nest building males, make a mad dash in to fertilize eggs when a real
female shows up, but provides no protection for the young – the adult male does that. In human
culture, there are also cheaters, those who provide little to the larger society, yet reap a disproportionate
level of resources.
So, learning more of our cultural roots and adopting positive measures for social cohesion
is a good idea, but much like Jesus' view that the poor will always be with us, cheaters, from
banksters to dictators, will too.
As Kanth sees it, most of our utopian visions carry on the errors and limitations born of
a misguided view of human nature. That's why communism, as it was practiced in the Soviet Union
and elsewhere, projected a materialist perspective on progress while ignoring the natural human
instinct for autonomy- the ability to decide for ourselves where to go and what to say and
create. On flip side, capitalism runs against our instinct to trust and take care of each other.
I think this paragraph speaks volumes for transitioning to a society with a BGI with libertarian
socialist leanings. Let people be free to create what they are passionate about while allowing
humans to express their innate desire to care for one another without it signifying weakness or
at their time own personal expense. I don't think this approach necessarily precludes rockets
to Mars either. The engineers who are passionate will still get together and build one. It may
take a little longer if they can't convince others to help but hopefully this will foster more
cooperative approaches and less viewing of other humans as consumables.
Libertarianism and libertarian socialism are two different things. Libertarianism is a less
authoritative conservatism while libertarian socialism is a less authoritative social democracy.
Think Chomsky, not Ron Paul. Or think of it as a more relaxed Bernie who thinks things should
be done on a smaller, more local scale.
Kanth, like many, senses that a global financial crisis, or some other equivalent catastrophe,
like war or natural disaster, may soon produce painful and seismic economic and political disruptions.
Perhaps only then will human nature reassert itself as we come to rediscover the crucial nexus
of reciprocities that is our real heritage. That's what will enable us to survive.
I read somewhere that some Native Americans looking down on the ruins of San Fransisco
after the great quake of 1906, thought that at last the crazy white people would realize the folly
of their ways, and become normal humans.
So they were amazed that before the ruins even stopped smoking, the crazy white people,
ignoring the obvious displeasure of the Great Spirit, were busy rebuilding the same mess that
had just been destroyed.
I have a strong suspicion that evil empires do not come to their senses, rather, one way
or another, they get flattened.
I can remember arguing over this in my philosophy classes way back in the 80's – that Objectivism
and the Enlightenment were two sides of the same coin, and that those Enlightenment writers were
writing tomes to justify their own greed and prejudices, while cloaking their greed and prejudices
in "morality".
At the time (I was young) it seemed to me that the Enlightenment was an attempt to destroy
the basis of Jesus's and Buddha's philosophy – that the most moral position of humanity was to
care for its members, just as clans, tribes, families, and other human societies did.
The most frequent response from professors and classmates to my thesis? But those clans, tribes,
families, etc., didn't accomplish much, did they? As if the only reason for humanity's existence
was to compete against itself
Needless to say, I didn't stick with Philosophy ..
And we need new syntheses, at which this is an attempt.
It's not a stretch to say the trend since the renaissance has been to exalt the individual.
Kanth is aiming for a communitarian philosophy. An interesting departure point for discussion.
I don't see what people find so offensive.
"They didn't accomplish much" meaning they lost militarily to cultures with more aggression
and better weapons.
It seems to me that humans, as hierarchical mammals, really do have a desire to compete
with each other for status and respect. The trouble is in organizing all of society around this
one struggle, forcing everyone into explicit competition and making the stakes too high. When
the losers can't afford to buy food, when they and their little children live on the street and
die in the cold, when their kids can never compete on an equal field to improve their own status,
things have gone too far. And in addition to material needs, humans also have a need for independence,
an escape from being constantly ordered around by the winners and under someone else's thumb.
Capitalism made the stakes too high. But it was designed by the winners.
You might argue that there were plenty of "hopeless losers" in the systems that preceded capitalism
- the orphans, elderly crones, and beggars without livelihoods who used to wander the hedgerows
in medieval times. We have more resources now which also means no excuses.
Note, as an aside, how granting economic rights to outgroups like women and Blacks brought
them into the same market competition. Well, a lot of men don't want to compete with women for
status. They want to compete with each other. The more competitors you add the harder it is to
win. But when all resources are restricted to the market, it's unjust to exclude any
group from access. Once again the stakes are too high. Social democracies are better places to
live for exactly this reason.
It seems to me that humans, as hierarchical mammals, really do have a desire to compete
with each other for status and respect.
I think you're right about that and if we do ever manage to abolish capitalism and develop
a less violent and more egalitarian society, there will need to be an outlet for that innate desire.
I propose hockey. Beats starting a war .
When President Trump defeated his rival in the last election, among the many ways in which
the event was captured was a representation of the President as Perseus carrying the head of Medusa
(Clinton) in his outstretched left hand. Medusa was a monster gorgon of the Greek mythology; a
representation in this case by Clinton (a woman) who dared to take real power in this essentially
male world and silenced for trying to participate in the public discourse (election).
I take this example to point out that both Lynn Parramore and Rajni Kanth declaring in a version
of mumbo-jumbo are sadly wrong-modernism has always been skin-deep excepting in accommodating
the technological element in the tone of life. Voltaire and Rousseau aside, both Kanth and Parramore
know which side of the mumbo-jumbo bread is their butter; even bemoaning the collapsing supposed
ruins of modernism they do not fail to take advantage! "Eurocentric modernism has unhinged us
from our human nature" asserts Kanth in his "book" but I would like to bluntly ask him: Please
define your "us" and "our" in that proposition and clarify if poor Indians like Yours Truly find
a dot in that set.
The point is that what passes as Modernism has never entered modern life. In support of
my proposition I cite an encounter between a journalist and Mahatma Gandhi in 1930s: The journalist
asked Gandhi, "Mr. Gandhi, what is your opinion of the western civilization?" Gandhi replied instantaneously
"It would be a good idea".
It does not at all. This is the price one pays as an innocent reader by reading social science
mumbo jumbo which is so irksome. It lacks the grace of the real mumbo jumbo too. Kanth is bluffing;
the author misunderstands his stupid linguistic constructions of Kanth and incomprehension and
chaos follow. The whole article seems to be a bluff about a bluff(the book).
I think he's right about Eurocentric modernism being incompatible with human civilization.
But it can't be just an evolutionary accident that civilization is so aggressive. It served a
purpose. We refer to it as 'survival'. I used to tell my daughter not to make fun of those 'dorky
little boys' too much because they all had a way of growing up to be very nice men. And I told
her women are the reason we have all survived, but men have made it so much easier! And etc.
We have been very successful as a species; surviving all of our own inquisitions, pogroms,
hallucinations and yes, this is a serious situation we are in. We might even try to guide ourselves
out of it, using science and technology, as we huddle.
I suspect there was a fatal error long, long ago: you lend me your ram so my ewe can have offspring.
If there are twins, we each get one; if not, we agree upon future breeding rights and grazing
areas. After generations of this sort of breeding activity, I have in my mind the notion that
there is a 'natural increase' from lending or swapping.
Along comes a scribe with a tablet, whom I have now hired to list the number of my flocks (wealth
on the hoof); I lend you forms of wealth (rams, ewes, oxen, axes, boats) , and the scribe assumes
there must be some 'natural increase' as the outcome of this lending and swapping. Consequently,
the scribe carves cuneiform markings to represent what we might call 'compound interest' that
result from lending and swapping of non-biological resources - despite the fact that if you sit
two clay tablets in the sun, they do not (and never will!) create an additional clay tablet. Ditto
heaps of dollar bills; it's not the money that creates increase; it's the assumption of 'increase'
(originating in breeding activity of flocks and herds) that makes the money generate surplus -
not any property of those scraps of paper themselves.
BTW: FWIW, double entry bookkeeping seems to trace the earliest period of modernism, which
IMVHO adds heft to Kanth's argument about something shifting probably earlier than 400 years
ago.
It's possible that Michael Hudson has covered this; if so, I've not had time to read it yet.
I hope to in future. David Graeber's work on redemption ('buying back' someone enslaved or indentured)
and his anthropological findings also lend heft to Kanth's analysis.
"He first caught the scent that something was off as an economics student in India, wondering
why, despite his mastery of the mathematics and technology of the discipline, the logic always
escaped him. Then one day he had an epiphany: the whole thing was "cockeyed from start to finish.""
But the economics profession's problem isn't "blind faith in science." It's a massive failure
to apply the scientific method, combined with an expectation that we all put our blind faith in
THEM anyway.
I think our problems do not stem from any theories or ideologies, they are the predictable
result of human nature – specifically of the fact that the balance between the loving side of
human nature and the aggressive side is not evenly distributed among individuals. It is precisely
the most aggressive among us who most desire, and work the hardest, to dominate and control others.
I had the same experience as he had with economics with law, ok I only studied it when studying
business and that does not a lawyer make, but it made no sense for me. But I do think I maybe
just have the wrong kind of brain for it, expect a logic that isn't there.
Essentially a post-modern critique of modernism without all the jargon of p-m critical theory
(yay!!). I don't think we have enough data from the pre-modern huddling societies to determine
if that's how we want to live. Yes, my boss at work exploits me, but on the other hand, I can
walk into an air-conditioned supermarket and survey row after row of steaks that I can afford
to buy. I love to drive cars. The cinema is enchanting. Dying of a plague is a very remote possibility.
We could give it all up, but there's no guarantee our lives would be richer or fuller–just different,
at best.
Just how dark were the Dark Ages? Or, to borrow Churchill's phrase, how dark would a NEW Dark
Age be? I don't think you can get rid of Modernism very easily, for certain parts would survive.
Science and tech, for example. Ideas of surveillance and control. But along with this, new prejudices,
new superstitions, perhaps? What perverse new form of religion or philosophy might arise from
the ashes of our civilization?
Two possibles: the cargo cult children of Mad Max: Beyond the Thunderdome,
or the society depicted in Aldous Huxley's Ape and Essence. At least the Church in Rome and Constantinople
provided some kind of lifeline of civilization during the collapse of the Roman Empire. What similar
institution have we now?
Sounds like bog-standard post-modernist tosh to me, just without the obscure ProfSpeak jargon
that usually accompanies it. I fail to see how this is helpful.
The only thing missing in this post is Bambi. Of course the Bushmen would kill Bambi dead with
spears and roast her flesh over a fire. So would we, actually. hmmmm.
To illustrate one of its signature follies, Kanth refers to that great Hollywood ode to
the Western spirit, "The Sound of Music." Early in the film, the Mother Superior bursts into
song, calling on the nun Maria to "climb every mountain, ford every stream."
Sounds exhilarating, but to what end? Why exactly do we need to ford every stream? From
the Eurocentric modernist viewpoint, Kanth says, the answer is not so innocent: we secretly
do it so that we can say to ourselves, "Look, I achieved something that's beyond the reach
of somebody else." Hooray for me!
Many would part company with Kanth over the above characterization. There are many reasons
why people climb mountains and ford streams that do not include, or even consider, that element
of exclusive personal achievement. Some might even aver that climbing and fording and so many
other human activities are done "because it is there", while others appreciate a spiritual or
other inspirational aspect.
Will we climbers and forders be told that we are selfish or otherwise deficient or on the wrong
side of history or whatever the mal du jour is because we like a little bit of hygge
or Gemütlichkeit as we live our lives?
Quite that is indeed the point where I stopped reading and started skimming someone who mistakes
metaphors in a musical for physical actions is not going to enlighten my world (no matter how
much I dislike the film).
climbing every mountain and fording every stream is probably impossible in the literal sense
(aren't there way too many streams for this? and mountains probably too), and certainly it is
impossible in the metaphoric one.
I don't see why poor Julie Andrews, of all people, has to be singled out here as exemplifying
malign post-Enlightenment discourses of proprietorship and exploitation. That's just mean
. Surely those ideologies are better examined through a close reading of the Shamen's inexcusable
'90s electro hit "Move Every Mountain"?
I agree dude is right that the values now unraveling (democracy, pluralism, individualism,
free speech, international-ism (in both the good and bad ways)) go all the way back to that time.
But this article is a perfect example of throwing the baby out with the bathwater. Surely none
of the third world cultures he praises got where they are by totally throwing out previous systems,
the good parts and bad, every time they faced a crisis.
IMO the problem is enlightenment values have been hollowed out, narrowed to only those superficial
aspects of those values which benefit the marketplace. Like how real food got turned into Mosanto
fast-food so gradually, nobody noticed that the nutrients are missing.
While it's obvious how this thesis deflates modern capitalism, it would also appear to me that
the idea of refocusing on "kinship and community" would present a challenge to the "global solidarity"
mentality underlying most leftist thinking as well. You cannot simultaneously have an emphasis
on the huddled community, while also arguing that workers worldwide have a deeper and more important
connection than the business owner and his or her employees (assuming both are from within the
same community, natch). Either you assume humans have a universal commonness, which effectively
obliterates the notion of community, or you accept humans tend towards tribalism, which both discounts
any notion of creating a global, uniform leftist economics, but also suggests a troubling tendency
towards xenophobia.
Good point, "kinship and community" are analogous to tribalism and nationalism on a larger
scale unless you rephrase it to mean kinship with your family and neighbors on the local level,
and with humanity on a national/global level. Unfortunately, some of our current liberal globalists
seem to be forgetting the part about local kinship and community while embracing global humanity.
I dunno, may have something to do with cheaper labor abroad.
Partly, but there's also an association in the minds of many liberals and leftists of localized
control and thinking equating with oppression, historically. Things like segregation, discrimination,
violations of the separation of church and state, anti-labor employment & worksite laws, etc.
I think Kanth is quick to criticize materialism and scientific progress for all our ills while
seeming to have missed the horrid standards of living in his anthropological studies prior to
scientific progress with enlightenment principles over theocracy. I'd like to know what the longevity
of per-enlightenment citizens was compared to today. In fact, longevity in this country around
1900 was still in the mid 40's for most.
What I find would have been a better argument is to focus his critique not on scientific progress,
but on how there always seems to be a certain small minority of the population which seems to
have an out sized voice in how we choose to self govern. What we seem to be losing today is the
silent majority of voices who are for universal health care, not eroding further entitlements,
bodily security as well as economic security while still being able to encourage those who chose
to take risks and put themselves through more work and strain to be fairly rewarded.
The problem as I see it today, is that the pendulum, both politically, and socially, has swung
too far towards the selfish individualist.
The problem with how science is seen in a modernist context is two-fold. The "blind faith"
leads people to see it as all-encompassing, all-powerful, and not recognizing its scope and where
that scope ends. Ergo, anything that is successfully sold to the public and TPTB as "science"
gets said treatment and is viewed as being unquestionable (like, say, neoclassical economics).
Bruno Latour has been on this for decades in 1991 the book "We Have Never Been Modern" This has been followed by many other books, prizes, invited lectures, and thought exhibition
called Reset Modernity. The book, published last year, is related to the exhibition with that
title. Published by MIT press with 60 authors.
Reset Modernity
Reset Modernity!
Edited by Bruno Latour and Christophe Leclerc
Overview
Modernity has had so many meanings and tries to combine so many contradictory sets of attitudes
and values that it has become impossible to use it to define the future. It has ended up crashing
like an overloaded computer. Hence the idea is that modernity might need a sort of reset. Not
a clean break, not a "tabula rasa," not another iconoclastic gesture, but rather a restart
of the complicated programs that have been accumulated, over the course of history, in what
is often called the "modernist project." This operation has become all the more urgent now
that the ecological mutation is forcing us to reorient ourselves toward an experience of the
material world for which we don't seem to have good recording devices.
Reset Modernity! is organized around six procedures that might induce the readers to reset
some of those instruments. Once this reset has been completed, readers might be better prepared
for a series of new encounters with other cultures. After having been thrown into the modernist
maelstrom, those cultures have difficulties that are just as grave as ours in orienting themselves
within the notion of modernity. It is not impossible that the course of those encounters might
be altered after modernizers have reset their own way of recording their experience of the
world.
At the intersection of art, philosophy, and anthropology, Reset Modernity! has assembled
close to sixty authors, most of whom have participated, in one way or another, in the Inquiry
into Modes of Existence initiated by Bruno Latour. Together they try to see whether such a
reset and such encounters have any practicality. Much like the two exhibitions Iconoclash and
Making Things Public, this book documents and completes what could be called a "thought exhibition:"
Reset Modernity! held at ZKM | Center for Art and Media Karlsruhe from April to August 2016.
Like the two others, this book, generously illustrated, includes contributions, excerpts, and
works from many authors and artists.
Seems to me that the insight into the relevancy of anthropology vis a vis economics is a product
of science. And Adam Smith had some good points that have been lost along the way, namely penalizing rent
seeking.
Smith has been seriously misrepresented. The Theory of Moral Sentiments shows a very different
side to that presented by those who selectively quote from The Wealth of Nations.
It's hard to tell from the rather incoherent summary of what looks like an incoherent argument,
but the "everything went wrong after the Enlightenment" meme has been circulating for ages. It
was speared pretty effectively by Domenico Losurdo in "War and Revolution" some years ago. The
author seems to be jumbling all sorts of arguments together, some valid and some not, but the
valid arguments are in general criticisms of liberalism, which is not the same of the Enlightenment.
This is a very good point, as the Enlightenment was not merely a straight line connection to
the blight of NeoLiberalism. Rather, there were those, such as Burke, or some of our "Founding
Fathers" who were students of history, and while discriminating observers of the deleterious elements
of human nature, they were also cognizant of the more helpful elements of that same human nature.
They, however, tended toward the view that those helpful elements required deliberate nurturance
in order to come to the fore. Some of this nurturance could be achieved by partially neutralizing
the deleterious elements by balancing interests (you weren't going to get rid of the propensities,
but you could limit the scope of their play by pitting societal forces one against the other in
political structures, vide the doctrine of separation of powers), while nurturance could
also be achieved through perpetuation of those societal institutions that address the individual
conscience and behaviors like religious doctrine and examples.
The naked embrace of selfishness, while never absent over these centuries, did have countervailing
currents and forces with which to contend that were sometimes able to at least minimize the damage.
But more recently, with supposedly scientific NeoLiberal economic thought sweeping the field throughout
much of the first world, and with the overall decline of religious and moral systems as a counterpoise,
things have reached an unlovely pass.
But it would be incorrect to solely blame Enlightenment themes for where we are today. Much
of what was presumed to be necessary to the proper, humane functioning of the ideal Enlightenment
society has been pushed aside in favor of the degraded every-man-for-himself, homo economicus
scourge that holds sway.
Joseph de Maistre, the conservative critic of Enlightenment values, deserves far more blame
for the horrors of modernity than do Voltaire or his like minded colleagues. And I can't even
find de Maistre mentioned in the index of Saul's book.
Thanks for mentioning Joseph de Maistre. I have never heard of him. I think you'd enjoy this
book, nonetheless. Saul doesn't actually "blame" Voltaire. He blames those who came after Voltaire.
For that matter, the bulk of the book is about the 20th century's (mis)interpretation of the Enlightment
project. I should have mentioned that the full title is "Voltaire's Bastards: The Dictatorship
of Reason in the West".
Interesting story Waring told when I heard her speak in Toronto – As she boarded a bus at the
airport to travel to her hotel, and a young man (20s) recognized her because the film is shown
to high school students throughout Canada.
And Capital Institute's John Fullerton
FIELD GUIDE TO A REGENERATIVE
ECONOMY Primarily due to reading George Monbiot's inane rejection of the work of Allan Savory
and Capital Institute's work with Grasslands LLC. Brought to me this morning by Nicole Foss and
the Guardian.
And for farmer's and lovers of the land, I couldn't help but hear Wendell Berry, "It all turns
on affection."
Interesting to have these things intersect with this morning's coffee. Thank you.
Please note that Hudson refers to "internal" debt -- debt that is hold by Us citizents. This debt
probally does not matter. But the US debt to china is completly different story. it matters.
Notable quotes:
"... In it, he argued that the 'classical' in the term 'neoclassical' is a misnomer and that neoclassical and classical economics actually have little in common, despite attempts by neoclassicals to claim Smith, in particular, as their forefather. ..."
"... In a recent interview (h/t to Tom Hickey), Hudson discusses one big difference between the Classical economists and the neoclassicals: their analysis of taxation as applied to economic rent. ..."
"... Hudson touches on a number of noteworthy points during the interview. He draws attention to a historical correspondence that would probably surprise many, between high top tax rates and strong economic growth, and observes that the top rates were high in the period prior to WWII. ..."
"... Importantly, the focus of taxation in Classical Political Economy, which Hudson argues influenced US government policy in the late 1800s and much of the first half of the 1900s, was on confiscating economic rents. These rents include income that derives from ownership of assets that appreciate in value merely because of the growth in national income and/or improved public infrastructure, and not due to any participation in the production process (they arise especially in the real estate and financial sectors). ..."
"... However, the classical economists were engaged in a class war with rentiers, not capitalists. ..."
"... It was Marx who drew this reasoning out to its logical conclusion, and this probably goes a long way to explaining why neoclassical theory, rather than being a continuation of classical economics (as was often claimed once it was established), was an escape into a different conceptualization of a capitalist economy that sought to reframe the distribution of income as the result of marginal contributions (an attempt that failed and was the chief target and theoretical casualty of the Cambridge Capital Controversy). ..."
"... Above all, Hudson distinguishes between what the classical economists meant by the term "free market" and what that term has come to mean in the neo-liberal period. ..."
"... Hudson emphasizes that, for the classical economists, "free market" meant a market unencumbered by rent-based claims on income that would draw economic activity away from income production and toward speculation. ..."
"... The aim of the classical economists was to incentivize production. This is a very different notion than the neo-liberal one of labor-market "deregulation" (meaning regulation in favor of employers over employees), which is really just code for union smashing and an attack on real wages, or the neo-liberal deregulation of financial markets, which is a euphemism for enabling financial parasitism. ..."
"... He notes that immediately prior to the commencement of the only extended period of high capitalist growth (WWII until the late 1960s), the US population was not in debt, and in fact had pent up savings from the war that it was waiting to spend. ..."
"... By little or no debt, Hudson clarifies that he means little or no private debt. There was, of course, a large public debt – larger as a percentage of GDP than the current US government "debt". ..."
"... This public debt did not matter, in spite of the familiar opposition to deficits and public debt, the echoes of which can be heard today, simply because the budget deficit shrinks endogenously once private-sector activity and income growth resume. This is precisely what happened in the immediate postwar period. ..."
"... Government "debt" is nothing other than the accumulated net financial wealth of the non-government. ..."
"... Once the non-government is ready to spend, income growth will deliver stronger revenues, reducing the deficit. But the private sector needs to have its debt under control before it will resume spending at levels sufficient to sustain strong economic growth. ..."
"... In addition to the absence of significant private debt at the end of WWII, there were other factors that contributed to the strong growth of the immediate postwar period, including Keynesian demand-management policies, a progressive tax system, and significant financial regulation. ..."
"... Hudson discusses how, over time, much of the progressivity in the tax system was removed, paving the way for the construction of the inequitable and anti-productive monster of today. ..."
"... The result of this neo-liberal policy mix was an increasing financialization and "rentification" of the economy, widening income inequality, and an adherence to fiscal austerity that directly corresponded, as a matter of accounting, to an unsustainable build up in the only US debt that matters – private debt – and culminated in the Global Financial Crisis and Great Recession. ..."
"... But the actual policy response has instead been to manipulate financial markets to engineer a massive transfer of wealth to the rentiers and exacerbate income and wealth inequality; to continue with the approach of taxing wage and profit income along with consumption rather than economic rents; and possibly even to revert foolishly to austerity while the private sector remains deeply indebted. ..."
"At the university I attended, a few of the academics were strongly influenced by Classical
Political Economy, especially that of Smith and Ricardo. Prior to my student days, one of them
had published a paper in the Cambridge Journal of Economics entitled "On the origins of the term
'neoclassical'" (no free link available), which is quite well known in heterodox circles.
In it, he argued that the 'classical' in the term 'neoclassical' is a misnomer and that
neoclassical and classical economics actually have little in common, despite attempts by neoclassicals
to claim Smith, in particular, as their forefather.
The classical-influenced economists at my university happened to belong to the Sraffian School.
This school attempts to synthesize Classical value and distribution with Keynesian output and
employment determination, and is also known for its key role and victory in the Cambridge Capital
Controversy. The school is named after Piero Sraffa, whose interpretation of Classical Political
Economy, particularly Ricardo's work, has been highly influential.
Sraffians are not the only modern-day economists influenced by Smith and Ricardo. Another prominent
example is Michael Hudson.
In a recent interview (h/t to Tom Hickey), Hudson discusses one big difference between
the Classical economists and the neoclassicals: their analysis of taxation as applied to economic
rent.
Hudson touches on a number of noteworthy points during the interview. He draws attention
to a historical correspondence that would probably surprise many, between high top tax rates and
strong economic growth, and observes that the top rates were high in the period prior to WWII.
Importantly, the focus of taxation in Classical Political Economy, which Hudson argues
influenced US government policy in the late 1800s and much of the first half of the 1900s, was
on confiscating economic rents. These rents include income that derives from ownership of assets
that appreciate in value merely because of the growth in national income and/or improved public
infrastructure, and not due to any participation in the production process (they arise especially
in the real estate and financial sectors).
It is not mentioned in the interview, but profit, of course, is also income that derives from
the mere ownership of assets – the means of production.
However, the classical economists were engaged in a class war with rentiers, not capitalists.
It was Marx who drew this reasoning out to its logical conclusion, and this probably goes
a long way to explaining why neoclassical theory, rather than being a continuation of classical
economics (as was often claimed once it was established), was an escape into a different conceptualization
of a capitalist economy that sought to reframe the distribution of income as the result of marginal
contributions (an attempt that failed and was the chief target and theoretical casualty of the
Cambridge Capital Controversy).
Even so, there does remain a significant distinction between profit, which relates to assets
employed in the production process, and economic rents. For this reason, Marx also distinguished
between these two categories of income and spent a great deal of space in volume 3 of Capital
analyzing the various forms of surplus value, including different types of rent.
Hudson goes on to stress that the taxation imposed in the late 1800s and first half of the
1900s was highly progressive. Initially only the top 1 percent of income earners were required
to submit tax returns. The purpose of this was to keep taxes on wages and profit low to promote
price competitiveness against lower wage countries.
This can be contrasted with neo-liberal policies of today which seem to be designed almost
with the opposite intent: to tax wage and profit income (and also consumption) but provide loopholes
or tax breaks for the recipients of economic rents.
Above all, Hudson distinguishes between what the classical economists meant by the term
"free market" and what that term has come to mean in the neo-liberal period.
Hudson emphasizes that, for the classical economists, "free market" meant a market unencumbered
by rent-based claims on income that would draw economic activity away from income production and
toward speculation.
The aim of the classical economists was to incentivize production. This is a very different
notion than the neo-liberal one of labor-market "deregulation" (meaning regulation in favor of
employers over employees), which is really just code for union smashing and an attack on real
wages, or the neo-liberal deregulation of financial markets, which is a euphemism for enabling
financial parasitism.
Hudson makes another observation in passing. The observation is not central to his argument
in the interview, but is relevant to current debates over deficits and public debt, and consistent
with MMT.
He notes that immediately prior to the commencement of the only extended period of high
capitalist growth (WWII until the late 1960s), the US population was not in debt, and in fact
had pent up savings from the war that it was waiting to spend.
By little or no debt, Hudson clarifies that he means little or no private debt. There was,
of course, a large public debt – larger as a percentage of GDP than the current US government
"debt".
This public debt did not matter, in spite of the familiar opposition to deficits and public
debt, the echoes of which can be heard today, simply because the budget deficit shrinks endogenously
once private-sector activity and income growth resume. This is precisely what happened in the
immediate postwar period.
Today, with the US government the monopoly issuer of its own flexible exchange-rate fiat currency,
public "debt" is – or rather should be – even less of an issue. Unlike in the immediate postwar
period, the government is not subject to the constraints of Bretton Woods or a similar commodity-backed
money system. It is free to utilize its fiscal capacity to the extent necessary to restore full
employment.
Government "debt" is nothing other than the accumulated net financial wealth of the non-government.
Once the non-government is ready to spend, income growth will deliver stronger revenues,
reducing the deficit. But the private sector needs to have its debt under control before it will
resume spending at levels sufficient to sustain strong economic growth.
In addition to the absence of significant private debt at the end of WWII, there were other
factors that contributed to the strong growth of the immediate postwar period, including Keynesian
demand-management policies, a progressive tax system, and significant financial regulation.
All these beneficial features of the economy were gradually undermined, and then exposed to
outright attack from the 1970s onwards.
Hudson discusses how, over time, much of the progressivity in the tax system was removed,
paving the way for the construction of the inequitable and anti-productive monster of today.
Keynesian demand-management policies were also largely eschewed throughout the neo-liberal
era on the basis of an opportunistic misinterpretation of the stagflation of the 1970s. All this
took place alongside deregulation of the financial sector and an aggressive dismantling of worker
employment protections.
The result of this neo-liberal policy mix was an increasing financialization and "rentification"
of the economy, widening income inequality, and an adherence to fiscal austerity that directly
corresponded, as a matter of accounting, to an unsustainable build up in the only US debt that
matters – private debt – and culminated in the Global Financial Crisis and Great Recession.
If the aim is to restore sustainable growth under capitalism (which is not my preferred social
system, but presumably the one commanding the allegience of policymakers), the insights obtained
from the classical economists in conjunction with the lessons of the postwar period would seem
to suggest some combination of the following policy responses: tighter regulations of speculative
activities; a more steeply progressive tax system targeted at the confiscation of economic rents
and the incentivization of production and consumption; stronger worker protections; and the abandonment
of the faulty construct of a 'government budget constraint' and a return to deficit expenditure
sufficient to underpin non-government net saving and full employment.
But the actual policy response has instead been to manipulate financial markets to engineer
a massive transfer of wealth to the rentiers and exacerbate income and wealth inequality; to continue
with the approach of taxing wage and profit income along with consumption rather than economic
rents; and possibly even to revert foolishly to austerity while the private sector remains deeply
indebted.
That's good thank you. I am thinking along the same lines:
In some way unregulated finance acts as cancer cells in human body (while this analogy is definitely
superficial it might be stimulating for thinking about neoliberalism):
Uncontrollable growth detached from real economics ("casino capitalism" with its proliferation
of hedge funds, private equity firms, derivatives, credit default swaps and similar instruments).
Suppression of immune system so that this uncontrollable growth should not be checked (aka
deregulation, capture of economics departments, an army of neoliberal think tanks)
Like cancel creates a blood network to stimulate its own growth, finance also diverts lion
share of resource in the economy for its own consumption -- casino consumption.
Very difficult to fight and can reoccur if treatment was insufficient or ineffective.
1. Study reports results which reinforce the dominant,
politically correct, narrative.
2. Study is widely cited in other academic work, lionized in the
popular press, and used to advance real world agendas.
3. Study fails to replicate, but no one (except a few careful and
independent thinkers) notices.
#1 is spot-on for economics. Woe be to she who bucks the dominant
narrative. In economics, something else happens. Following the study,
there are 20 piggy-back papers which test for the same results on
other data. The original authors typically get to referee these
papers, so if you're a young researcher looking for a publication,
look no further. You've just guaranteed yourself the rarest of gifts
-- a friendly referee who will likely go to bat for you. Just make
sure your results are similar to theirs. If not, you might want to
shelve your project, or else try 100 other specifications until you
get something that "works". One trick I learned: You can bury a
robustness check which overturns the main results deep in the paper,
and your referee who is emotionally invested in the benchmark result
for sure won't read that far. ...
Most researchers in Economics go their entire careers without
criticizing anyone else in their field, except as an anonymous
referee, where they tend to let out their pent-up aggression. Journals
shy away from publishing comment papers, as I
found out first-hand
. In fact, much if not a majority of the
papers published in top economics journals are probably wrong, and yet
the field soldiers on like a drunken sailor. Often, many people "in
the know" realize that many big papers have fatal flaws, but have
every incentive not to point this out and create enemies, or to waste
their time writing up something which journals don't really want to
publish (the editor doesn't want to piss a colleague off either). As a
result, many of these false results end up getting taught to
generations of students. Indeed, I was taught a number of these flawed
papers as both an undergraduate and a grad student.
Intertrial priming allows an accumulation of effects from
iterations of trials. ceu
If we see fed governors
repeatedly drop rates when dollar becomes 22% stronger, we
could soon assume that rates and dollar strength are
indirectly related. Are new import taxes about to increase
the $ strength by 22%? will this retard FG hawks? What will
the shake out be for investments? For treasuries vs. common
stock?
But it would
seem that fields that don't rely heavily on controlled
experiments, as in the "hard" sciences, might be more
vulnerable to this kind of issue. But only marginally so,
because bad controlled experimental data does also exist.
Either way, it's a bit of a comic irony that the field of
economics hasn't found good ways to address this. Isn't
identifying in clear-eyed terms and addressing market
failures kind of your thing, Econ?
Actually, the seminal paper on this issue is Ioannidis (2005)
"Why most published research findings are false," PloS
Medicine, vol 2, issue 8, e124, is about biomedical research.
However, Andrew Gelman has lots to say on the topic regarding
social sciences.
"In fact, much if not a majority of the papers published in
top economics journals are probably wrong, and yet the field
soldiers on like a drunken sailor."
It's possible I have a
new hero. Unless writing from Moscow he's a Putin plant.
"1. Study reports results which reinforce the
dominant, politically correct, narrative.
2. Study is widely cited in other academic work, lionized in
the popular press, and used to advance real world agendas.
3. Study fails to replicate, but no one (except a few careful
and independent thinkers) notices."
Leave it to Cato to write "Do Budget Deficits Raise
Long-Term Interest Rates?" which is a great example of (2).
That's right – Evans got this intellectual garbage
published in the American Economic Review in 1985 over the
objections of many sensible economists. But Barro-Ricardian
equivalence was the politically correct view among the
anti-Keynesian New Classical types who ruled back then. Evans
wanted us to believe that the Reagan fiscal stimulus would
not raise real interest rates as the rich people who got
those massive tax cuts would not consume their new after-tax
income. Of course, consumption as a share of national income
soared as they did spend their tax cuts. So what was Evans
evidence? Interest rates did not rise as the deficit soared?
Wait real interest rates did rise from around 2% to 6%. Evans
measured the wrong interest rate (nominal) and he overstated
fiscal stimulus by using the actual deficit during a period
of overall weak aggregate demand. But the AER published this
intellectual garbage anyway. At least people have noticed
that this stupid paper was not replicated (#3).
If it is not replicable it is religion, not science.
People have deep need for a belief system. The right has
an invisible being in the sky. The left has math models that
cannot be verified, aka social science and economic.
If there is not a double blind clinical trial or similarly
replicable result, don't bet your career or legacy on it.
It might be interesting to look at history of neoclassical
economics from this perspective.
Hyman Minsky critique of
neoclassical economics remains relevant -- it is a junk
science. There no place of any math equations connecting of
supply and demand without taking into account the existence
of financial system and its dominant influence on markets. In
this sense book-bust cycle under capitalism is an immanent
feature due to positive feedback loop introduced by financial
system.
another important issue to reconsider is the role of
banks. If it is difficult to make private banks profitable if
they operate under strict regulation it might be no place for
private banks at all.
Current "private banks" are actually corrupt and criminal
private-public partnerships acting on the principle
"privatize profits -- shift to public all the debts".
"... Keynesianism offered important tools for overcoming the economic crisis, but its application by Obama's government was too half-hearted and misdirected (going to banks rather than households) to effectively reduce the recession. Clinton paid the price. ..."
"... We need to work towards a post-capitalist system that aims at promoting equality, enhances instead of destroys the environment, is based on cooperation, and is engaged in planning to achieve short term, medium term, and long-term goals. ..."
"... "The Labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money." ..."
"... "But the rate of profit does not, like rent and wages, rise with the prosperity and fall with the declension of the society. On the contrary, it is naturally low in rich and high in poor countries, and it is always highest in the countries which are going fastest to ruin." ..."
Keynesianism offered important tools for overcoming the economic crisis,
but its application by Obama's government was too half-hearted and misdirected
(going to banks rather than households) to effectively reduce the recession.
Clinton paid the price.
This interview with Walden Bello is based on the article "Keynesianism in
the Great Recession:
Right Diagnosis, Wrong Cure," available here from the Trans National Institute.
Q: What were the main ways in which neoliberalism created the Great
Recession?
A: Neoliberalism sought to remove the regulatory constraints that the state
was forced to impose on capitalist profitability owing to the pressure of the
working class movement.
But it had to legitimize this ideologically. Thus it came out with two very
influential theories, the so-called efficient market hypothesis (EMH) and
rational expectations hypothesis (REH). EMH held that without
government-induced distortions, financial markets are efficient because they
reflect all the available information available to all market participants at
any given time. In essence, EMH said, it is best to leave financial markets
alone since they are self-regulating. REH provided the theoretical basis for
EMH with its assumption that individuals operate on the basis of rational
assessments of economic trends.
These theories provided the ideological cover for the deregulation or "light
touch" regulation of the financial sector that took place in the 1980s and
1990s. Due to a common neoliberal education and close interaction, bankers and
regulators shared the assumptions of this ideology. This resulted in the
loosening of regulation of the banks and the absence of any regulation and very
limited monitoring of the so-called "shadow banking" sector where all sorts of
financial instruments were created and traded among parties.
With so little regulation, there was nothing to check the creation and
trading of questionable securities like subprime mortgage-based securities. And
with no effective monitoring, there were no constraints on banks' build-up of
unsustainable balance sheets with a high debt to equity ratios.
Without adult supervision, as it were, a financial sector that was already
inherently unstable went wild. When the subprime assets were found to be toxic
since they were based on mortgages on which borrowers had defaulted, highly
indebted or leveraged banks that had bought these now valueless securities had
little equity to repay their creditors or depositors who now came after them.
This quickly led to their bankruptcy, as in the case of Lehman Brothers, or to
their being bailed out by government, as was the case with most of the biggest
banks. The finance sector froze up, resulting in a recession-a big one-in the
real economy.
Q: So how did these banks get to be so big and powerful? What drove the
"financialization boom" that triggered the recession?
A: Financialization or an increasing preference for speculative activity
instead of production as a source of profit was driven by four developments.
The first was the abolition, during the Clinton Administration, of the
Glass-Steagall Act that had served as a Chinese Wall between commercial or
retail banking and investment banking, as a result of tremendous pressure from
the big banks felt left out of the boom in trading. The second was the
expansive monetary policy promoted by the Federal Reserve to counter the
downturn following the piercing of the dot.com bubble in the first years of the
new century. Third was the government and business' move to shore up effective
demand by substituting household indebtedness for real wage increases. Fourth
was the lifting of capital controls on the international flow of finance
capital, following the era of financial repression during the post-war period.
These developments acted in synergy, first to produce a speculative boom in the
housing and stock markets, then feeding on one another to accelerate an
economic nose-dive during the bust.
Q: What was the worst impact of the crisis, and upon whom?
A: With unemployment hitting 10 per cent in 2010, working people suffered
the most. Although the unemployment rate is now down to five per cent, that
fall has been driven less by improved labor market conditions than a falling
rate of participation, as discouraged workers withdrew from the labor force.
More than 4 million homes were foreclosed. Lower income households, the main
victims of aggressive loan sharks, suffered most.
As far as growth was concerned, the recovery was tepid, with average GDP
growth barely 2 per cent per annum between 2011 and 2013, less than half the
pace of the typical post-World War II expansion. In terms of inequality, the
statistics were clear: 95% of income gains from 2009 to 2012 went to the top
1%; median income was $4,000 lower in 2014 than in 2000; concentration of
financial assets increased after 2009, with the four largest banks owning
assets that came to nearly 50% of GDP.
An Economic Policy Institute study summed up the trends: "[T]he gains of the
top 1 percent have vastly outpaced the gains for the bottom 99 percent as the
economy has recovered."
At the individual and household level, the economic consequences of being laid
off were devastating; with one study finding that workers laid off during
recessions "lose on average three full years of lifetime income potential." One
estimate showed that the income of the United States would have been $2
trillion higher had there been no crisis, or $17,000 per household.
Q: What did Keynesianism offer as a way of responding to the crisis?
A: Keynesianism offered two major weapons for overcoming the crisis. The
first and most important was a fiscal stimulus, or deficit spending by
government. The second was monetary expansion. Essentially, these were forms of
government intervention designed to revive the economy after a collapse of
investment on the part of the private sector. They are called "countercyclical"
since they are designed to counter the recessionary pressures brought about by
the crisis of the private sector.
Q: How were Keynesian policies and strategies applied in the wake of the
onset of the recession?
A: The Keynesian interventions were in the right direction. Unfortunately,
they were applied half-heartedly by the Obama administration. For instance, the
size of the fiscal stimulus $787 billion might have been enough to prevent the
recession from getting worse, but it was not enough to trigger an early
recovery, which would have demanded at least $1.8 trillion, according to
Cristina Romer, the head of Obama's Council of Economic Advisers.
Expansive monetary policy was always a second best solution and was not as
effective as a fiscal stimulus. Yes, cutting interests to zero and quantitative
easing-or providing banks with infusions of money-did have some impact, but
this was rather small since, for the most part, individuals and corporations
did not want to go further into debt but wanted to focus on lessening their
debt.
Q: What three things could have been done, "truer" to the spirit of
Keynesianism, that would have reduced the recession?
A: First of all, there should have been a much bigger stimulus, one along
the lines of Cristina Romer's proposal of $1.8 trillion. Second, instead of
focusing on saving the banks, the government should have devoted resources to
assisting the millions of troubled homeowners, a move which would have raised
effective demand. Third, the insolvent banks should have been taken over or
nationalized and the billions spent on recapitalizing them or guaranteeing
their borrowing should have been devoted to creating jobs to absorb the
unemployed.
Q: Is financialization still a threat?
A: Yes, even conservative analysts say that the so-called Dodd-Frank reform
encourages moral hazard or reckless behavior by banks owing to their belief
that when they get into trouble, the government will bail them out.
Derivatives-which Warren Buffet called "weapons of mass destruction"-are
still virtually unregulated. And so is the shadow banking sector. The
non-transparent derivatives market is now estimated to total US$707 trillion,
or significantly higher than the US$548 billion in 2008.
As one analyst puts it, "The market has grown so unfathomably vast, the
global economy is at risk of massive damage should even a small percentage of
contracts go sour. Its size and potential influence are difficult just to
comprehend, let alone assess." Former U.S. Securities and Exchange Commission
Chairman Arthur Levitt, the former chairman of the SEC, says that none of the
post-2008 reforms has "significantly diminished the likelihood of financial
crises."
Q: What has been the legacy of the crisis on U.S. politics?
A: One can say that the Obama administration's failure to reinvigorate the
economy after eight years and to reform the banks was the central factor that
lost the elections for Hillary Clinton. If there's one certainty that emerged
in the 2016 elections, it was that Clinton's unexpected defeat stemmed from her
loss of four so-called "Rust Belt" states: Wisconsin, Michigan, and
Pennsylvania, which had previously been Democratic strongholds, and Ohio, a
swing state that had twice supported Barack Obama.
The 64 Electoral College votes of those states, most of which hadn't even
been considered battlegrounds, put Donald Trump over the top. Trump's numbers,
it is now clear, were produced by a combination of an enthusiastic turnout of
the Republican base, his picking up significant numbers of traditionally
Democratic voters, and large numbers of Democrats staying home.
But this wasn't a defeat by default. On the economic issues that motivate many
of these voters, Trump had a message: The economic recovery was a mirage,
people were hurt by the Democrats' policies, and they had more pain to look
forward to should the Democrats retain control of the White House.
The problem for Clinton was that the opportunistic message of this demagogue
rang true to the middle class and working class voters in these states, even if
the messenger himself was quite flawed. These four states reflected, on the
ground, the worst consequences of the interlocking problems of high
unemployment and deindustrialization that had stalked the whole country for
over two decades owing to the flight of industrial corporations to Asia and
elsewhere. Combined with the financial collapse of 2007-2008 and the widespread
foreclosure of the homes of millions of middle class and poor people who'd been
enticed by the banks to go into massive indebtedness, the region was becoming a
powder keg of resentment.
True, these working class voters going over to Trump or boycotting the polls
were mainly white. But then these were the same people that placed their faith
in Obama in 2008, when they favored him by large margin over John McCain. And
they stuck with him in 2012, though his margins of victory were for the most
part narrower. By 2016, however, they'd had enough, and they would no longer
buy the Democrats' blaming George W. Bush for the continuing stagnation of the
economy.
Clinton bore the brunt of their backlash, since she made the strategic mistake
of running on Obama's legacy-which, to the voters, was one of failing to
deliver the economic relief and return to prosperity that he had promised eight
years earlier.
Q: In what ways do we need to go beyond Keynesianism to address current
economic and ecological problems?
A: I think Keynesianism has valuable insights into how a capitalist economy
operates and can be steadied so its inherent instability and contradictions can
be mitigated. But, as Minsky says, these solutions do not address the inherent
instability of the system. A new equilibrium contains the seeds of
disequilibrium. With its focus on growth propelled by effective demand,
Keynesianism also has problems addressing the problem of ecological
disequilibrium brought about by growth.
The real issue is capitalism's incessant search for profit that severely
destabilizes both society and the environment. I think there is no longer any
illusion, even among its defenders, that capitalism is prone to crises, and
these days, these are crises that not only stem from the dynamics of production
but from the dynamics of finance.
We need to work towards a post-capitalist system that aims at promoting
equality, enhances instead of destroys the environment, is based on
cooperation, and is engaged in planning to achieve short term, medium term, and
long-term goals. In this scheme, finance would function to link savings to
investment and savers to investors, instead of becoming an autonomous force
whose dynamics destabilizes the real economy. A post-capitalist society does
not mean the elimination of the market. But it does mean making use of the
market to achieve democratically decided social goals rather than having the
market drive society in an anarchic fashion.
But Yobs! EMH is more than just a hypothesis. It's really, really true
stuff. Say Paris Hilton or even some squillionaire heir dude decides to spend a
little pocket change on a brand new pair of self driving, artificial
intelligence, rocket powered yoga pants.
An enterprising Silicon Valley startup will emerge and, with the help of IPO
financing, supply the product 'cause there is demand. It's that simple!
But can they patent their invention, monopolize the market, and defend
their obscene profits with an army of New York and D.C. lawyers circling
around the money machine? If so, count me in!
We need to work towards a post-capitalist system that aims at promoting
equality, enhances instead of destroys the environment, is based on
cooperation, and is engaged in planning to achieve short term, medium term, and
long-term goals.
Not going to happen because there is no long-term goal. That pile of
derivative crap will keep growing forestalling the day the nothing cancer it's
based on metastasis and brings it down, quantitative easing is a placebo.
That's the medium term. In the short term there's Silicon Valley's
monopolization model, run by selfish man-boy innovators stroking the egos of
old greedy politicians who look down on indebted, seduced spend happy
deplorables. The latest video of insecure man-boy Travis Kalanick arguing with
and dismissing the views of one of his drivers "Some people don't like to take
responsibility for their own shit." shows the attitude of the ruling classes
toward the 90% deplorable suckers they're working to con with new
"Innovations".
https://www.youtube.com/watch?v=gTEDYCkNqns
The long-term our elites have given up on, smart people they are and as
Chris Hedges has said "know what's coming" as today's news brings warnings of
permafrost gas release. What are our elites solutions? Do as Peter Thiel and
buy citizenship to an island nation, or like those smart people who purchased a
condo in some mid-western abandoned missile silo? Why they have a doctor and
dentist on the condo board has me confused, what no butcher, baker,
candle-stick maker? And then what? After Bannon's apocalyptic melt down come
back home and take an Uber ride to your AirBnB where the doctor's serve up a
delicious gourmet feast?
The Best and Brightest, the ruling class. Time is running out, as the planet
burns.
When you have a finance dominated economy, the uber ceo is the standard
for what the "best and brightest" will become. That youtube video captures
the immaturity, selfishness, and arrogance of this child masquerading as a
man.
If you want things biased in your favour, bias the economics that
everything runs on.
The Classical Economists looked out on a world of small state, basic
capitalism in the 18th and 19th Centuries and observed it. It is nothing like
our expectations today because they are just made up.
Adam Smith in the 18th century:
"The Labour and time of the poor is in civilised countries sacrificed to
the maintaining of the rich in ease and luxury. The Landlord is maintained in
idleness and luxury by the labour of his tenants. The moneyed man is supported
by his extractions from the industrious merchant and the needy who are obliged
to support him in ease by a return for the use of his money."
We still have a UK aristocracy that is maintained in luxury and leisure and
can see associates of the Royal Family that are maintained in luxury and
leisure by trust funds. As these people are doing nothing productive, nothing
can be trickling down, the system is trickling up to maintain them.
Adam Smith in the 18th century:
"But the rate of profit does not, like rent and wages, rise with the
prosperity and fall with the declension of the society. On the contrary, it is
naturally low in rich and high in poor countries, and it is always highest in
the countries which are going fastest to ruin."
Exactly the opposite of today's thinking, what does he mean?
When rates of profit are high, capitalism is cannibalising itself by:
1) Not engaging in long term investment for the future
2) Paying insufficient wages to maintain demand for its products and services
Today's problems with growth and demand.
Amazon re-invested its profits and didn't suck them out as dividends and
look how big it's grown. Ignoring today's economics can work wonders.
The Classical Economists direct observations come to some very unpleasant
conclusions for the ruling class; they are parasites on the economic system
using their land and capital to collect rent and interest to maintain
themselves in luxury and ease (Adam Smith above).
What can these vested interests do to maintain their life of privilege that
stretches back centuries?
Promote a bottom-up economics that has carefully crafted assumptions that hide
their parasitic nature. It's called neoclassical economics and it's what we use
today.
The distinction between "earned" and "unearned" income disappears and the
once separate areas of "capital" and "land" are conflated. The landowners,
landlords and usurers are now just productive members of society and not
parasites riding on the back of other people's hard work.
Unearned income is so easy, it's the UK favourite today.
Most of the UK now dreams of giving up work and living off the "unearned"
income from a BTL portfolio, extracting the "earned" income of generation rent.
The UK dream is to be like the idle rich, rentier, living off "unearned"
income and doing nothing productive.
Powerful vested interests come up with neoclassical economics so that it works
in their favour and only bottom-up economics can be easily corrupted. Top-down
economics is based on real world observation.
Their neoclassical economics blows up in 1929 due to its own internal flaws
but the powerful vested interests still love it as they designed it to work in
their favour.
Keynes comes up with new ideas that herald the New Deal and a way out of the
Great Depression.
The powerful vested interests don't want to lose their beloved neoclassical
economics and fuse it with Keynes ideas to roll out after the war. This gives
them the opportunity to get rid of some of Keynes's more unpleasant
conclusions, generally tone it down and remove all the really obvious conflicts
with their neoclassical economics. The only real Keynesian economics was in the
New Deal.
When the Keynesian synthesis fails in the 1970s, they seize the opportunity
to bring back their really biased neoclassical economics.
It still doesn't work of course.
It's reliance on debt based consumption and debt based speculation, tend to
end in debt deflation, e.g. the Great Depression, today's secular stagnation.
Today's secular stagnation is only being achieved by the Central Banker's
pumping in their trillions to stave off debt deflation and there are plenty of
asset bubbles still to burst.
Supply side economics – when inflation is too high and demand
exceeds supply
Demand side economics – when inflation is too low and supply exceeds demand
Today's economics was a solution to what went before it, as Keynesian
capitalism had ended in the stagflation of the 1970s, but it was far too
extreme.
Looking back with two assumptions:
1) Money at the top is mainly investment capital as those at the top can
already meet every need, want or whim. It is supply side capital.
2) Money at bottom is mainly consumption capital and it will be spent on goods
and services. It is demand side capital.
Pre-1930s – Supply side economics leading to:
Too much investment capital leading to rampant speculation and a Wall Street
crash
Too little consumption capital and demand is maintained with debt.
Leads to Great Depression and the debt deflation of an economy mired in debt
Post-1930s – Demand side economics leading to:
Too little investment capital compared to demand, supply constrained.
Too much consumption capital, leading to very high inflation.
Imbalance causes stagflation.
Post-1980s – Supply side economics leads to:
Too much investment capital leading to rampant speculation and a Wall Street
crash, asset bubbles all over the place.
Too little consumption capital and demand is maintained with debt. Global
aggregate demand is suffering and with such subdued demand there are few places
for real investment leading to more speculation.
Leads to the secular stagnation of the new normal, the assert bubbles have
yet to burst.
Maybe it's just the balance between supply and demand necessary to
achieve that happy medium.
Pre-1930s – Supply side economics – Runs into the debt deflation
of the Great Depression.
Post-1930s – Demand side economics – Runs into stagflation.
Post-1980s – Supply side economics – Runs into the new normal of
secular stagnation as the Central Bankers manage to stave off the
under-lying debt deflation.
Separate money and credit. We have a ridiculous system that requires
credit creation in order to create money, eventually too much credit is
created, but instead of that just being a banking crisis it's also a
monetary and economic crisis. Free your mind a little. Just separate the
two.
German Capitalism was State-sponsored. Siemens & Halske were based in Berlin
and lived off State contracts for railways, telegraphs. French Capitalism was
State-sponsored. English Capitalism was sponsored by Discrimination against
Congregationalists, Quakers, Unitarians, Baptists who were outside the Church
of England and could not therefore go to University or enter Professions under
Test & Corporation Acts 1665. They had to enter Trade. Hence Cadbury, Rowntree,
James Barclay, Samuel Lloyd were Quakers – the latter two forming banks.
Siemens created Deutsche Bank. As for Finance in Germany, Bleichroeder was
Bismarck's banker – the Bauer Family of Frankfurt became Rothschild. The
Finance in London was largely German immigrants – Kleinwort Benson, Sassoons,
Cassel etc.
Britain ultimately lacked investment opportunities because of Free Trade
letting competitors export goods into the UK market but tariffs preventing UK
exports to USA, Germany, Russia, France etc. Hence Capital was exported
building huge foreign investment portfolio through The City – liquidated in 1st
World War
'When the subprime assets were found to be toxic since they were based on
mortgages on which borrowers had defaulted, highly indebted or leveraged banks
that had bought these now valueless securities had little equity to repay their
creditors or depositors who now came after them.'
Interesting interpretation. Unfortunately it bears little relationship to
what actually happened. The financial crisis was a repo crisis. Most
collateralized mortgage obligations had plenty of equity to cover default
losses. Unfortunately, they were by nature opaque and hard to analyze quickly,
and like a murmuration of birds, everyone zigged at the same time, so there
were no buyers. The repo aspect of the crisis was what really counted. Suddenly
repo lenders refused to lend. Investment banks once had longer term financing
in place, but this eroded over the several years prior to the crisis. See Cohan
'House of Cards.' Also Ed Conard's 'Unintended Consequences.'
Anonymous, you are forgetting the role of the massive sub-prime mortgage
fraud that the banks initiated and then the banks foreclosed on those who
had bought the offered mortgages rather than re-negotiate new mortgages.
Forget repo; remember the fraud: forget opaque and hope for transparency
which was in short supply during the crisis. It's all about
the fraud
, you know.
Hmmmm ..let's see if I understand you correctly. It appears that when
everyone thought they were buying lunch, they were buying sh*t sandwiches.
So the problem wasn't that they were being sold sh*t under another name, the
problem was that they weren't willing to buy that sh*t? So if they'd have
been willing to eat sh*t instead of what they thought they were going to
get, everything would have been hunky dory? Ah ..lunch, sh*t, but it's all
the same, huh? Anything for a buck?
This is not correct. I wrote about this in sordid detail in ECONNED, with
the details of the structures, the amounts, and who was exposed.
Subprime CDOs (more accurately, asset backed CDOs, which at the time
happened to consist heavily of BBB- RMBS exposures) were a significant
portion of repo collateral. They went almost without exception to zero.
Those exposures wound up disproportionately at heavily leveraged,
systemically important, and tightly coupled financial institutions. The
Eurobanks loaded up on ABS CDOs because their trader bonus formulas highly
incentivized it (see discussion of "negative basis trade"). AIG and the
monolines were as we know heavily exposed. US investment banks were heavily
exposed by virtue of either being stupidly heavily involved in subprime CDOs
at the worst moment (Citi and Merrill, I explain why/how), Lehman and Bear
by simply being weakly capitalized second tier investment banks that tried
getting to be first tier by going way overweight in total risk terms in RMBS
and doing a bad job of risk management (Bear by extending too much in its
warehouse lines to originators like IndyMac and New Century as well as being
a large CDS player; Lehman by taking on too much risk everywhere, witness
its obvious balance sheet problems in 2008). Morgan Stanley also had a weak
balance sheet and big CDO/RMBS exposures, see AIG trial for details; Goldman
was heavily exposed to ABS CDOs by having too cleverly trying to pick up
extra margin by brokering them to Middle Eastern investors, leaving them
exposed when their AIG hedge was gonna fail.
Yes. repo was the proximate cause, but contrary to your claim, a lot of
the collateral was no good and that was why the repos were not rolled.
People who advocate reindustrialization and manufacturing are out of their
minds. Manufacturing margins are shrinking everywhere. China and Germany are
going to be in deep trouble. Bruce Greenwald, of Columbia Business School, says
that in fifty years most of the things that you buy will be made within fifty
miles of your home. Actually, they may be made in your garage, by you, and you
may not 'buy' them, per se, so much as buy the raw materials and make them.
What's that likely to do for manufacturing jobs?
That 50 mile radius is not only true; it's obvious. Fifty years from
now, all of our roadways and bridges will have crumbled, and so the
transport of finished goods beyond 50 miles of their manufacture will be
nigh on impossible.
Of course the transport of raw materials from their origins to their
points of refinement will also be similarly limited, which means that
most of what most of us use will be made out of sticks.
I'm sitting in my kitchen looking at all the things that are
manufactured, from my fridge, to my clothes, to my car, to my floors, to the
farm equipment I can see outside my window, etc. And heaven knows none of
these things last as long as they used to, so yes, I am going to have to
replace all this some day as is the farmer ..
So yes, there will be manufacturing jobs in the future, and not just within
a 50 mile radius. Perhaps when the actual economy gets better for people in
the lower 90%, they will be more willing to spend money on manufactured
products. But in order for their economy to get better, they are going to
have to be the ones doing the manufacturing, aren't they?
Derivatives are the biggest threat to the financial system.
James Rickards in Currency Wars gives some figures for the loss
magnification of complex financial instruments/derivatives in 2008.
Losses from sub-prime – less than $300 billion
With derivative amplification – over $6 trillion
It was the derivatives that really did the damage; derivatives were the
mechanism that allowed a housing bust in one nation to infect the global
economy.
Derivatives were used as leverage to increase bonuses on the way up and
losses on the way down.
The derivatives market is now bigger than ever, no sensible regulations have
been put in place since 2008.
Where does the real danger come from with derivatives?
Jim Rickards was at the top of LTCM when it collapsed in 1998 and saw how the
collapse in a link of the derivative chains turns losses, from nett to gross
within the system.
Everyone panicked as it was impossible to gauge the size of the losses.
When Lehman Brothers collapsed in 2008, everyone panicked as it was
impossible to gauge the size of the losses.
The same problem ten years later and the same problem will happen next time
as no regulations are in place. Everyone still believes the risk with
derivatives only comes from their nett value as they have learnt nothing from
experience.
Credit Default Swaps are an unregulated insurance product that bought down
AIG in 2008, the largest insurance company in the world. They took the
insurance premiums and didn't put anything aside in case these insurance
policies had to pay out as they weren't regulated.
CDSs are the most dangerous of the derivative products, they bought down AIG
and it all happened in a division in Curzon Street, Mayfair in the UK.
They are zero sum bets, so why do bankers love them?
Both sides think they are taking the right side of the bet and both sides can
post profits until that future bet is realised. They are great for bonuses.
They don't incur any costs up front and allow for enormous leverage, they
are great for bonuses.
Derivatives are the transmission mechanism for crises in one part of the
world to infect the whole global economy.
They interconnect the major banks in a way that has devastating consequences
should one of them fail, this has already been demonstrated by LTCM in 1998 and
Lehman Brothers in 2008.
The nett losses turn to gross losses within the derivatives chains and the
losses are incalculable as these chains are opaque and hard to trace.
We know the biggest threat to the financial system; will anyone do
anything about it?
First of all, there should have been a much bigger stimulus, one along
the lines of Cristina Romer's proposal of $1.8 trillion.
I was just reading accounts of the events leading up to the stimulus
package, and it seems Ms. Tomer was told time and time again that her stimulus
proposals were politically impossible. Is there actual evidence that Obama ever
saw that 1.8 trillion figure? According to Scheiber's book, Summers kept
brushing off Romer's numbers.
If so, the important economic advisors never wanted to fight for what was
necessary at a time when a majority of the US public would have gone along with
anything. They really are just a bunch of careerists.
I have a hard time taking anything said by Christina Romer seriously.
After all, she was one of the authors of the infamous ARRA justification
report that predicted a 10% peak unemployment rate without the stimulus and
a 8% peak unemployment rate with it. That prediction assumed $800 billion in
spending and tax cuts, and
we got
that $800 billion. The
unemployment rate shot past 10% anyway. [Additionally, the return to a 6%
unemployment rate took twice as long as predicted and only reached that
level because of a plummeting labor force participation rate.] The failure
of the predictions in the ARRA justification report were truly
epic
.
Competence matters. The economists working for the White House (Romer
among them) didn't have it.
This is part of why Trump won. The ARRA justification report promised a
glorious V-shaped recovery with 300k to 500k jobs per month. We didn't even
average 200k per month. The ACA promised cheaper health insurance by $2000
per year. Premium rose sharply instead. When you implement grand new plans,
those plans need to ACTUALLY WORK!!
It sounds like Ms. Romer wrote a report which matched the exact amount
that her bosses were going to get from Congress. So she was giving cover
for something that was already decided.
And the ACA is a pile of crap that anyone being involved with should
be ashamed of. Unfortunately since the Federal government is completely
captured by the renter's there is zero chance of reform without a
complete political revolution.
Summers agreed that Romer's analysis was correct, and Summers is the
last person to say that sort of thing. It's in Ron Suskind's book
Confidence Men. He nixed it for political reasons, not economic ones.
Is it not hard to imagine that Romer was pressured to create a model
to sell the deal? Why would her second model be so different from her
earlier one otherwise? That happens all the time in the private sector.
If you haven't seen it, you haven't been looking.
People keep forgetting that a large portion of that $781 billion was in the
form of tax credits weighted towards the usual suspects.
And since the MOTU never let an emergency go to waste, the scrum at the
trough resulted in the actual stimulus being even more anemic than it is
portrayed.
Here in Illinois, which received the second or third highest amount of
stimulus dollars, most of the money was spent on bridge and road repairs.
Yes, those repairs provided some construction jobs, but, otherwise hardly
served to promote the economy for ordinary people. The only really large
project to receive stimulus money here was the destruction of a massive,
abandoned Outboard Marine plant sitting right on the shores of Lake
Michigan. The building was dangerous–and an eyesore–and occupied prime real
estate. Unfortunately, what remains on the site is a low level of rubble.
Apparently, there isn't enough money, or interest, in developing the land to
provide jobs, recreational space, new living accommodations–anything that
might improve people's lives. In other words, the stimulus was used to
repair the old and crumbling, but not to generate new opportunities.
Here's a conundrum which baffles me: Bello writes (as have many before):
"These developments acted in synergy, first to produce a speculative boom in
the housing and stock markets, then feeding on one another to accelerate an
economic nose-dive during the bust."
So we did have our bust in the real estate market, here in California. My
own property, purchased in 2005, dropped about 30% in value in 2008 from its
market high in 2007.
It's nine years later - and my property value is now back up to its 2007
value. So is Los Angeles (and other cities no doubt) back in a "boom" that is
inevitably headed again for a "bust"? It seems to me the economy is worse now
than it was in 2007, and if these prices were an unsupportable boom then, why
wouldn't they be now? And yet we are (so I'm told) in a period of rising
interest rates and tight credit, two things absent the last "boom." I'm
befuddled.
I think Picketty Capitalism has been going on so long that the GFC was
caused by the labor classes being deprived too long, then the banksters
realized it and tried to resuscitate them but it was too late and because
the stimulus was too small even the cure got caught in the implosion
All of the desirable neighborhoods in LA are now well above their 2007
valuations. It seems like pure madness. The way-out exurbs of the Antelope
Valley and the Inland Empire are still lower but almost everything in LA
city limits is considerably higher now than in 2007. Median income for
normal Americans is still lower than in the year 2000, but yet no one seems
to think the market is in another bubble? I share your befuddlement. I
live/rent in LA and I am sitting on a good chunk of cash I would like to put
towards purchasing a home, but I can't bring myself to pay $600k for a 2
bedroom, 1 bath, 1200 square foot, 1950's shit box that some jerk is trying
to flip for a $200,000 profit. I'm still hoping for another housing crash.
The fundamentals of this market are rotten and prices need to come down
before I consider tethering myself to a large, long period mortgage.
Housing is not just about fulfilling our basic human need for security
and warmth, but also our innate powerful tendencies toward aspiration and
speculation.
Sure it is our house, our home, our security etc but for most of us mere
mortals it is our biggest financial outlay and has increasingly come to be
seen in investment terms.
Thus over time property has gradually displaced gold as the major store
of wealth, and this fixation has clearly been exploited accordingly.
Crucially it is also one of the biggest and most effective means for the
debt creation, through mortgages and their numerous spin offs, that
underwrites and drives most modern economies.
So apart from its obvious practical uses, property fulfils many other
functions within economies, many of which used to be filled by gold ie asset
backed promises to pay, but without its numerous obvious limitations. We
can't keep finding or creating more gold to keep up with debt/credit
expansion, but we can keep building more houses, or creating or exploiting
more desirable environments for them for example.
Equally as important, and unlike gold, government can regulate supply.
This ensures that demand ideally outstrips supply to pump the sometimes
apparently illogical price inflation that keeps people chasing the horizon
and thus keep feeding debt/money into the system.
Seems like there should be the discussion that there are two competing
theories running simultaneously here in the US and much of the EU. My
understanding of JMK's theory is that after the expansion of debt and other
financial stimulus to get us out of a recession, that after the recovery Keynes
called for paying off debt through generating surplus that we retire debt in
the form of higher taxes until we reach equilibrium. But that never happened.
You overlay the Neoliberial macro ideology and voila we get tax cuts to the
wealthy instituted by Reagan and Bush43 and austerity for everybody else,
exactly the wrong medicine. Compound the growth of debt by trillions of dollars
spent on never ending wars. The partial embrace of supply-side policy for 35
years accelerated growing government debt, thus causing subsequent economic
crisis.
It is as if our economic policy leaders are bipolar or schizophrenic.
Between this mishmash of conflicting policy and accelerating the uncoupling of
labor from capital and wealth creation, inequality has become endemic and
without change will become much, much worse. Just wait till the BLS U-6
participation number drops to 40% as millions of jobs cease to exist in the
next 20 years while 80% of the wealth will be held by a handful of people. In
this "free market" casino capitalist system with its insider trading, zero sum
wars, and disregard for collateral damage, survival will only happen for a few.
It will be ugly for those trapped in the Kansas silo. Little did George Miller
realize in the late 70's that his Mad Max movie would be a documentary.
Let's see – A gambling addict makes reckless bets using credit and loses
big. His Uncle Sam bails him out and admonishes him to never do it again but
does nothing else to deter future bad behavior.
The casino is still open for business, offering unlimited chips on credit.
Is Walden Bello an Argentinian by any chance? He sounds like my ancient
boyfriend Ezekiel who was the smartest, funniest guy I ever. And he always made
fun of me, my idiocy, and the USA for thinking we were the only answer for
humanity. I loved him, but I was a dummy and I loved him too late. As for this
delightful article, it's better than butter dumplings, I loved it too. I won't
elaborate all the points. It was great. I'm pondering how wise it seems to
demand a post capitalist society which uses the market to achieve democracy and
environmental justice – but I definitely do think it's time has come and we are
ready to go forward with this idea. Thank you for posting this. (versus both
financial and industrial capitalism which both fail to address the shitstorm we
are facing).
Another excellent, very succinct and up to the point expose of Keynesianism,
a condemned by corporate economists, out of fashion economic theory with plenty
of experimental foundations. Mostly the so-called " direct government
investments into the mainstream economy as a methods of increasing an aggregate
economic demand was hypocritically criticized as detrimental to free markets
and free trade, while the same investment in Wall Street financial instruments
was welcomed.
Here is another interesting unique, take what is or may be so-called demand
side economics in the context of Keynesianism which only deals with a fraction
of the issues of the economy in a deflationary spiral.
IS THE END GAME FOR THE SSE RADICALISM NEAR? MAY BE.
"The Supply Side Economics (SSE) did us all. Yes. Under this benign name the
SSE represent an extreme radical and dangerous ideology based on the unfounded
(or rather borrowed) believe that "If we build, they will come" supply side
fantasy that implicitly assumes that the real demand (nominal demand minus
weighted debt incurred while producing the demand) does not need not be of any
concern to the economic, financial and political decision makers, spelling the
decades of doom to the people who work for living and created a paradise for
the parasitic rent seekers, financial oligarchs and their government cronies.
The SSE (Supply Side Economic) was presented in the early seventies as an
alternative to the Keynesian Theory that supposedly was concerned about the
Demand Side Economics (DSE) but in fact it was not [only tangentially]. It
cared mostly about the so-called aggregate demand stimulation initiated
generally through the government investment policies leaving the task of "real
demand" creation on the shoulders of the working people through the organized
labor actions and leftist political movements lobbying the government and
imparting on the government fiscal policies in a way beneficial to the labor
and restricting the power of economic elites.
For the true demand side economic we would need a set of fiscal and economic
and trade policies that would build up the institutional support for completely
different, non financial, assets classes such as: the labor asset class (LAC)
and the natural environment assets class (NRAC) [and more]. The economic,
fiscal and monetary policies of the government in the DSE are [suppose to be]
dedicated to maintain the fair value and stable growth of the above asset
classes while leaving the other financial assets classes exposed to the global
free markets. The true DSE guaranties demand and adjust the supply to fit the
real demand hence no deflationary death spiral is ever possible, and if
value-based [not debt based] monetary system is imposed, no inflationary
pressures may ever develop."
"The non-transparent derivatives market is now estimated to total US$707
trillion, or significantly higher than the US$548 billion in 2008."
Wow! Is this figure real? Not that 548 billion is small sum but I thought
the derivative market in pre-crash '08 was in the neighborhood of 8 trillion?
It's now 707 trillion? That's nearly a hundred-fold increase in 9 years.
Anyone knowledgeable enough on the world derivative market to comment?
$548 trillion – the billion is likely a transcription mistake.
Note the fatuous accuracy, down to the trillion where in the next
paragraph is this.
>As one analyst puts it, "The market has grown so unfathomably vast, the
global economy is at risk of massive damage should even a small percentage
of contracts go sour. Its size and potential influence are
difficult
just to comprehend, let alone assess
."
Basically, no one knows. It could be over a quadrillion (1000 X 1
trillion) or a 1 followed by 15 zeros.
To give these figures a faint wisp of reality, I like using Nimitz class
aircraft carriers as coins of the realm.
$707 trillion would buy 153,420 of them at their original cost of $4.6
billion each, and were they placed end to end would stretch 31,707 miles.
Bernie Sanders: The business of Wall Street is fraud and greed.
What an ironic fate for the ever elegant Czar of style and the chief chair
of the blue blooded aristocracy of Bloomsbury Lord Keynes to be first turned
into 'keynesianism' and then as if it is not enough, to be 'discussed' by low
caste nincompoops in crude English. Alas. The author should not call Trump
opportunistic, pray tell me which capitalistic harlot is not one? He is
constitutionally elected please.
Edward Dodson
10
months ago
The first presenter (Professor Skidensky?) has
described very clearly my own experience as a
student and subsequently as a teacher. Decades ago
when I began my work on a master's degree I
initially chose economics but soon became very
disillusioned by the reliance on mathematics and the
absence of investigation into historical experience
and societal norms. Nor was there any serious
investigation into the validity of propositions put
forward as economic theory. At once time in class I
engaged my economics professor in a long exchange
over the impact of land hoarding and land
speculation in the U.S. economy. After about twenty
minutes he simply ended our exchanged exasperated
because he could not counter the observations made
by evidence offered by real world observations.
Fortunately, my university offered an
interdisciplinary alternative, a Master of Liberal
Arts degree and I switched programs. My course of
study permitted me to read and study the great
political economists, who were all historians and
all moral philosophers. They examined markets,
market forces, and government as a primary
externality, and they reached moral judgments based
on the principles of justice they embraced. Along
the way, I was introduced to the writings of the
great French school of political economists, the
Physiocrats, and to the American Henry George.
George's theory of the business cycle, based on the
classical three factor model of how economies and
societies function, provided to be quite useful in
my later work as a market analyst in the real estate
sector. When I retired from my professional work in
the mid-2000s I gave some thought to entering a
doctorate program in order to acquire the
credentials for college instruction. The very low
probablility of ever securing a full-time teaching
position pushed me in a different direction.
Instead, I developed two courses to teach to senior
adults in a non-credit environment. One is titled
"Understanding our Political Economy." The other is
"The History of Economic Thought." Although I do
introduce basic economic concepts, such as factor of
production and wealth distribution in these two
courses, my students are not required to know or use
mathematics in order to understand such concepts. I
found an introductory economics textbook written by
Professor Harry Gunnison Brown used to teach basic
economics without even one equation in the book.
Each course is two semesters in length is discussion
oriented. My view is that the more I am required to
lecture, the less the students are learning. I am
more than happy to share this course material with
any teacher who is attracted to the
interdisciplinary approach offered by the study of
political economy and by reliance on the classical
three factor model of wealth production and
distribution. I can be reached by email at
[email protected].
Over the weekend, Brigitte Nerlich published a piece on
the origin of the 'deficit model'.
My post from the weekend on trying to find the origins of the
'deficit model' in #scicomm
https://t.co/fhZk8bXUg2
- Brigitte Nerlich (@BNerlich) February 27, 2017The 'deficit
model' is the idea that if the public understood scientific
concepts they would accept the judgements of scientists. Or,
if scientists shout loud enough eventually people will agree
with them. Or, people don't like GMOs/fracking/climate change
science because they are dumb.
This is a hot-topic in the aftermath of the US Presidential
Election and theUK's EU Referendum, when 'experts' were
widely ignored and her contribution has been well received.
@BNerlich Very good.
1/ I think there are some roots in the "health belief model"
which dates to the 1950s -->
https://t.co/cPOdz0EcOd
- Roger Pielke Jr. (@RogerPielkeJr) February 27, 2017My
reaction to Brigitte's tweet was "Spinoza of course", but
there was no reference of the seventeenth century Dutch
philosopher in her piece.
My interest is as part of my remit as the RCUK Academic
Fellow for Financial Mathematics between 2006 and 2011 was
the 'publicunderstanding of Financial Mathematics', or at
least the 'public engagement with Financial Mathematics'.
This introduced me to the issue of the 'deficit model' over a
period in time dominated by the 'Great Financial Crisis,
which started 10 years ago yesterday.
For almost ten years I have been trying to figure out what
is the relationship between finance, mathematics and ethics.
To me, a significant contributor to the GFC was the belief
that 'science' had some how tamed financial risk. Therefore
to understand the GFC it was necessary to understand where
the faith in scientific determinism originated, and I think
the source (in European science at any rate) is in Spinoza.
The argument is presented in the book I am finishing off for
Palgrave
You can catch #Palgrave author Timothy Johnson speaking about
morality out of money at the @EdSciFest on 9 April
https://t.co/bQ2GzCOLRB
- Palgrave Finance (@PalgraveFinance) February 21, 2017and I
have extracted two relevant sections, separated by some
27,000 words and 125 years.
Baruch Spinoza would produce the most influential development
of Descartes' philosophy that incorporated ideas from de
Groot and Hobbes during the 'Dutch Golden Age'...
[Lengthy description along the framework of Western
philosophy that you must go to the link and read to get your
honest reaction to this explanation.]
...I suspect students of Spinoza and Hegel will object to
my caricature, but I think the essential point that "
Spinoza's contribution to western philosophy was in
suggesting that humans were capable of attaining a complete
picture of the universe that provided certain knowledge." is
important in understanding why 'science' believes in the
'deficit model'.
*
[I have a shorter version: Only crazy people will work
that hard to convince everyone else that they are really the
sane ones. If you were to study the private lives of
philosophers, none more than Nietzsche and Machiavelli, then
this MIGHT be apparent or maybe not. We also must overcome
our learned ignorance which imposes upon us the distinction
between private lives and public lives which disciplines us
to accept immoral behavior as respectable as long as the
wicked are deftly rational.]
Neoliberal take on Machiavelli... This crazy idea that the ruler is "political entrepreneur"
is definitely 100% neoliberal. Other then example of the neoliberal thinking this peace is junk.
Notable quotes:
"... Moreover, the ruler is a political entrepreneur: his job is no different from a job of a tailor, carpenter, teacher. He is after selfish objectives which are attained under constraints. The constraints for the ruler are of two kinds: he must somehow acquire the power and he must be able to keep it despite attempts of many people to prevent him from coming to power or trying to overthrow him. ..."
I was recently rereading The Discourses (as I periodically enjoy doing) and on Sunday I
read a
review of an interesting new book on Machiavelli -an inexhaustible topic indeed. So I thought
of writing down why I, and I would presume many economists, admire Machiavelli (and thus adding to
this inexhaustible topic yet another piece).
There is a clear affinity between economists and political scientists in the Machiavelli tradition.
For Machiavelli, the objective of a ruler or a politician is maximization of power in two dimensions,
at any point in time and over time. This is exactly the same as maximization of income or utility
over time. The ruler is a rational homo politicus in the same way that people, according to
economists, are rational homo economicuses .
Moreover, the ruler is a political entrepreneur: his job is no different from a job of a tailor,
carpenter, teacher. He is after selfish objectives which are attained under constraints. The constraints
for the ruler are of two kinds: he must somehow acquire the power and he must be able to keep it
despite attempts of many people to prevent him from coming to power or trying to overthrow him.
The ruler therefore must have the famous virtù which is indeed one of the rarest combination
of talents. He must fight off domestic foes, foreign enemies or adversaries, and must combine the
use of deception, violence and genuine concern for his subjects in the right proportions to be able
to stay in power. Machiavelli's politician is like a businessman. There are cases when the businessman
will gain more by lying and others when he would gain more by telling the truth. Similarly, the ruler
would sometimes gain more through violence, guile and ruse, and at other times through honesty and
improvements of his subjects' welfare. The attractiveness of Machiavelli to economists comes also
from the fact his ruler always remains a self-interested individual who might do well for his subjects
not because he cares about them but because he believes that doing well for them would be ultimately
good for himself. In that he is like Adam Smith's baker: he is selling us bread not because he is
concerned about our hunger but because he is concerned about his self-interest.
Throughout centuries Machiavelli has, of course, been accused of condoning many evils. Yet his
type of the politician is much more benign and better for the mankind that the types that have normally
ruled us. This is because the rulers who actually come to believe they are trying to accomplish good
things are most likely to create endless bloodsheds. Most of the killings in history have been motivated
by "goodness" and desire to be virtuous. Surely, all religious wars have been such. In recent past,
all communist exactions (most notably, the collectivization in the Soviet Union and the Great Leap
Forward in China) were motivated by the desire to lift people from their millennial poverty. George
W. Bush's invasion and occupation of Iraq cannot be explained otherwise since no economic or any
other rational objective was ever achieved or was even given serious consideration in the decision
to wage the war.
The most potentially destructive forces today are hidden under the banner of "goodness".
Whether this is done hypocritically or because the rulers believe in such professions of "goodness"
is immaterial; the latter is even worse. The terms under which such "goodness" is projected to the
heathens-"the American exceptionalism,", "the Third Rome", "Hindutva", "the new (old) Caliphate"-are
nothing but a self-license to impose own values and beliefs on those who dare disagree with them.
Such rulers are the most bloodthirsty because belief in own moral superiority renders them unconcerned
with reality.
Machiavelli's ruler will for sure also engage in deception and cruelty, but his objective will
never be to impose one form of government or religion, or more generally a set of beliefs as such,
on others. He might decide to impose a new government if he believes that this would increase his
dominion. This would be a rational objective, grounded in self-interest. Ideological puritans who
want to bring happiness to others would engage in such operations more frequently and fully. Disengaging
from them implies for the ideological zealots a destruction of their own intimate world of beliefs;
never so with Machiavelli's ruler who would give up the operation once its costs outweigh the benefits.
The world ruled by politicians who follow own interest like Adam Smith's baker, and leave the
rest of the world in peace, may be the best world we can hope for.
Looks like Donald Trump did not win because he is great politician,
but because of previous 30 years of dominance of neoliberalism.
Blame Margaret Thatcher.
A utopian ideology that failed to deliver on its promise
"in a long run" (it can very long run like Flat Earth theory)
is unsustainable.
People who now do not consider Milton Friedman to be a sad
joke are very rare. "Free market" ideology is devalued considerably
from late 60th. Probably more then dollar.
Neoliberal Jesuits (aka academic economists who still adhere
to neoliberal ideology) still are trying to stem or reverse the
slide. Much like the previous generation of Jesuits tried to
defend flat Earth hypothesis. We see their efforts in this blog
too.
IMHO modern neoliberal Jesuits nave even less chances to persuade
the audience now. At least 17 years of neoliberal bubbles and
neoliberal excesses like outsourcing and offshoring speak for
themselves. And lemmings no longer want to march to the cliff
under the banners of this failed religion.
After let's say of 30 years of complete dominance they also lost
control of the language (with at the peak was comparable with
the Bolshevism dominance in language in the USSR). With all those
pseudo-religious terms like NAIRU, GDP, U3, core inflation and
such.
Look at fiasco of neoliberal MSM during recent Presidential
elections. The fact the sitting president openly calls neoliberal
MSM "fake news" tells that neoliberalism is in trouble.
And all those very emotional laments against Trump (Trump this,
Trump that) is just the result of failure to understand
the problems, that the US society faces due to collapse of neoliberalism
and its promises.
Desperation of defenders of ideology (like Jesuits fight with
heretics ) is just another sign that the time for neoliberal
dominance is probably over.
And that it was neoliberal politicians like Bill Clinton and
Obama who hatched Trump. Much like Roman republic hatched its
own transition to Julius Caesar. So instead or along with indignation,
we should ask yourself a simple question: how neoliberalism created
Trumpism.
BTW Neoliberalism has very little to do with classic liberalism
(being, in reality, a flavor of corporatism) much like Neoconservatism
has almost nothing to do with Conservatism (being a flavor of
Trotskyism).
Bolshevism proved that a discredited utopian ideology can
exist in a zombie state for a couple of decades; so we might
have 10-20 years or so in which some new ideology will emerge
that will replace neoliberalism. I hope that it will not be neofascism.
Trump was not an accident (in the sense of confluence-of-random-events
freak accident).
I wouldn't blame Ms. Thatcher for it either.
Her ascendancy was likewise an expression of (the same) social
dynamics. Her perhaps-counterpart was Reagan, but the situation
and the general dynamics in the US were different at the time,
so it (he) didn't lead to the same outcomes.
With the US still "the" technology leader (perhaps not in
*all* aspects academically but in most, and certainly commercially
and thus dominating academia) - and also probably because of
"less (or more favorable?) regulation" and more easily available
VC money in the US (USD hegemony?), the new technology industries
took off in the US predominantly.
This has (in part) carried the US economy for about 2-3 decades,
but a reversion to mean is plausible even if I don't really see
it yet.
The US is still a formidable, capable, and yes, meritorious
entity, if it doesn't "collectively" (or rather by elite misjudgment?)
undermines itself.
"Debs was arrested and sentenced to ten years in Atlanta Penitentiary.
He was still in prison when as the presidential candidate of
the Socialist Party, he received 919,799 votes in 1920. His program
included proposals for improved labour conditions, housing and
welfare legislation and an increase in the number of people who
could vote in elections. President Warren G. Harding pardoned
Debs in December, 1921."
"With all those pseudo-religious terms like NAIRU, GDP, U3, core
inflation and such. "
Of those terms only NAIRU could in any
way be called "pseudo-religious". All the others are empirical
measures (however flawed) with clear definitions. An empirical
measure by itself can do no harm. People giving too much weight
to a single measure can do harm, but that is something completely
different.
Chris Edwards
says
the privatizations started by Thatcher "transformed the
British economy" and boosted productivity. This raises an
under-appreciated paradox.
The thing is that privatization
isn't the only thing to have happened since the 1980s which
should have raised productivity, according to (what I'll loosely
call) neoliberal ideology. Trades unions have weakened, which
should have reduced "restrictive practices". Managers have
become better paid, which should have attracted more skilful
ones, and better incentivized them to increase productivity. And
the workforce has more human capital: since the mid-80s, the
proportion of workers with a degree has quadrupled from 8% to
one-third.
Neoliberal ideology, then,
predicts that productivity growth should have accelerated. But
it
hasn't
.
In fact, Bank of England
data
show that productivity growth, averaged over 20 years,
has trended down since the 1970s.
Why?
It could be that neoliberal
reforms did give a short-lived boost to productivity. I'm not
sure. As Dietz Vollrath
says
, economies are usually slow to respond to a rise in
potential output. If there had been a big rise in potential
output, therefore, it should show up in the data on 20-year
growth. It hasn't.
Another possibility is that the
productivity-enhancing effects of neoliberalism have been
outweighed by the forces of secular stagnation – the dearth of
innovations and profitable investment projects.
But there's another possibility –
that neoliberalism has in fact contributed to the productivity
slowdown.
I'm thinking of three different
ways in which this is possible.
One works through macroeconomic
policy. In tight labour markets of the sort we had in the
post-war years, employers had an incentive to raise productivity
because they couldn't so easily reply upon suppressing wages to
raise profits. Also, confidence that aggregate demand would
remain high encouraged firms to invest and so raise capital-labour
ratios. In the post-social democracy years, these spurs to
productivity have been weaker.
Another mechanism is that
inequality can
reduce
productivity. For example, it
generates (pdf
)
distrust
which
depresses
growth by
worsening
the quality of policy; exacerbating "markets for
lemons" problems; and by diverting resources towards
low-productivity
guard
labour.
A third mechanism is that
neoliberal management itself can reduce productivity. There are
several pathways here:
- Good management can be bad for
investment and innovation. William Nordhaus has shown that the
profits from innovation are
small
. And Charles Lee and Salman Arif have shown that
capital spending is often motivated by
sentiment
rather than by cold-minded appraisal with the
result that it often leads to falling profits. We can interpret
the slowdowns in innovation and investment as evidence that
bosses have
wised
up to these facts. Also, an emphasis upon
cost-effectiveness, routine and best practice can
deny
employees the space and time to experiment and
innovate. Either way, Joseph Schumpeter's point seems valid:
capitalist growth requires a buccaneering spirit which is killed
off by rational bureaucracy.
- As Jeffrey Nielsen has
argued
, "rank-based" organizations can demotivate more
junior staff, who expect to be told what to do rather than use
their initiative.
- The high-powered incentives
offered to bosses can
backfire
. They can incentivize rent-seeking, office politics
and jockeying for the top job rather than getting on with one's
work. They can
crowd
out intrinsic
motivations
such as professional pride. And they can
divert (pdf)
managers towards doing tasks that are easily
monitored rather than ones which are important to an
organization but harder to measure: for example, cost-cutting
can be monitored and incentivized but maintaining a healthy
corporate culture is less easily measured and so can be
neglected by crude incentive schemes.
- Empowering management can
increase opposition to change. As McAfee and Brynjolfsson have
shown
, reaping the benefits of technical change often
requires
organizational change. But well-paid bosses have
little reason to want to rock the boat by undertaking such
change. The upshot is that we are stuck in what van Ark
calls (pdf)
the "installation phase" of the digital economy
rather
than the deployment phase. As Joel Mokyr has
said
, the forces of conservatism eventually suppress
technical creativity.
All this is consistent with the
Big Fact – that aggregate productivity growth has been lower in
the neoliberal era than it was in the 1945-73 heyday of social
democracy.
I'll concede that this is only
suggestive and that there might be another possibility – that
the strong growth in productivity in the post-war period was an
aberration caused by firms catching up and taking advantage of
pre-war innovations. This, though, still leaves us with the
possibility that slow growth is a feature of normal capitalism.
Most such 200 year graphs, you can see historical events like
WWII and Thatcher. This is clearly not random noise, but doesn't
seem to tie obviously into the historical narrative either.
Maybe it is more to do with globalism; the first peak at 1870 is
the start of 'new imperialism'. Imperial lands were for the
first time things you could invest in as a regular capitalist
(as opposed to a 'venture state' like the East India company).
And 1970 is the date when the end of the war in Vietnam made the
same true of much of the third world.
That's how I've been thinking about productivity.
Tight labor marktets and social democratic macro. Unfortunately
economists are trained not to think in these terms.
Also since the Reagan/Thatcher revolution, productivity
increase have coincided with financial bubbles like the Dot.com
tech stock and epic housing bubbles. Massive leveraged ponzi
schemes are "increasing productivity" or profits.
There is another explanation. The proportion of service
industries in the economy has grown rapidly and accelerated with
globalisation. It is difficult to squeeze productivity gains out
of hairdressers and care workers.
The slowing technical change
hypothesis has been proposed many times in the past, e.g. James
Galbraith and seems to make more sense than just trying to blame
it on capitalism. If it was just neo-liberalism I would expect
to see weaker effects in countries with different models. I
think that there is too much ideology in your arguments.
Do
you link any of the productivity slowdown with the 'orthodox'
Marxist analysis of the Tendential Fall in the Rate of Profit?
The fall begins at the end of the period of productivity growth
and has not recovered as the rate of profit hasn't either
(depending on which analysis you use).
One of the most plausible explanations for the continued fall
even with the moderating factors of neoliberalism is the
increase in the moral depreciation of capital. This has arguably
accelerated with the information technology revolution. More and
more firms seeking to gain advantage by replacing hard and
software at greater and greater rates but with no actual
increase in productivity (or profitability). This suggests even
more technology in an installation phase (possibly an endless
one). (On a similar vein David Harvey cites Brian Arthur's
analysis that the evolution of technology is often largely
driven by trying to solve problems the technology itself has
created: better touchscreen phones, more than how we use the
existing technology for productive gain.)
Thus, the surplus capital absorption problem is addressed by:
rent seeking in property; increasing investment into fictitious
capital (novel financial instruments); investment in new
technology with little productivity gain, other than by
increasing the productivity in the technology sector itself. All
of which results in little genuine investment.
I am not sure the economic policy response to this (if you
accept the analysis, but don't believe in the imminent socialist
revolution)? Two policy elements being to deliberately target
higher inflation (as a means of deleveraging debt) and taxing
non-productive wealth holding (such as a land tax))?
I
found the opening paragraphs hilarious. These days, those
arguments can only be parody -- nicely refuted by the rest of
the article.
I have noticed a general misunderstanding of
"productivity". One way to increase "productivity" is to lay off
workers while keeping production unchanged. Overall, that tends
to backfire because the workers buy fewer things, but it
benefits the firms that do it. (It's "the Prisoner's Dilemma",
"the tragedy of the commons", "the race to the bottom", etc.)
If you've introduced a self-checkout system that eliminates
ten jobs and replaces them with one job, you've greatly improved
productivity.
For reasons like this, I think that "productivity" and
"economic growth" should be decoupled.
I won't dispute the accolades (and not only because it's in bad taste),
especially the long-standing consensus that he was "a very good guy."
All the same, I'm inclined to believe that Arrow's undoubtedly clever if
not brilliant "impossibility theorem" (Amartya Sen describes it as a 'result
of breathtaking brilliance and power') had, and speaking generally, a
pernicious effect on the discipline of economics, captured in part by
Deirdre (né Donald) McCloskey's comment that it, along with other
qualitative general theorems in the discipline, "do not, strictly speaking,
relate to anything an economist would actually want to know," in other
words, "axiomatizing economics" (which Arrow alone cannot be held
responsible for) was a turn for the worse, no doubt motivated by a desire to
bring (natural) scientific respectability and putative "rigor" (of the sort
believed to characterize physics) to a field not amenable to same (to put it
bluntly if not mildly).
For a different sort of critique of his work in this regard in economics
and the "social choice" literature, see Hausman and McPherson's Economic
Analysis, Moral Philosophy, and Public Policy (Cambridge University Press,
2nd ed., 2006).
There is also a vigorous critique of the use of this theorem by
professional economists and political scientists in S.M. Amadae's
Rationalizing Capitalist Democracy: The Cold War Origins of Rational Choice
Liberalism (University of Chicago Press, 2003).
Sen has a decidedly more favorable assessment of the "impossibility
theorem" in his book, Neoliberal_rationality/ and Freedom (Belknap Press of Harvard
University Press, 2002).
Alas, it was mischievous interpretations and application of his famous
"impossibility theorem" that unequivocally did enormous harm to the
discipline of political science, particularly with regard to democratic
theory (and by implication, praxis as well): see Gerry Mackie's Democracy
Defended (Cambridge University Press, 2003).
Donald A. Coffin
02.22.17 at 4:16 pm
(
5
)
"Information" has different definitions in different disciplines. One of
Arrow's last lectures explains his use of the word, and also his view of the
current state of many other things. Only 9 pages, no math:
Tyler Cowen: There are a few reasons, but the internet may be the biggest. It is easier to
have fun while unemployed. That's a social problem for some people.
Noah Smith: If that's true -- if we're seeing a greater preference for leisure -- why are we
not seeing wages go up as a result? Is that market also broken?
Cowen: Maybe employers just aren't that keen to hire those males who prefer to live at home,
watch porn and not get married. Is that more of a personal failure on the part of the worker than
a market failure?
Our situation with neoliberalism reminds me lines from the "Hotel California " ;-)
http://www.azlyrics.com/lyrics/eagles/hotelcalifornia.html
== quote ==
Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
"Relax, " said the night man,
"We are programmed to receive.
You can check-out any time you like,
But you can never leave! "
"... Yet, a return to protectionism is not likely to solve the problems of those who have lost ground due to globalisation without appropriate compensation of its 'losers', and is bound to harm growth especially in emerging economies. The world rather needs a more inclusive model of globalisation. ..."
"... From an energy point of view globalisation is a disaster. The insane level of fossil fuels that this current world requires for transportation of necessities (food and clothing) is making this world an unstable world. Ipso Facto. ..."
"... Those who believe that globalisation is bringing value to the world should reconsider their views. The current globalisation has created both monopolies on a geopolitical ground, ie TV make or shipbuilding in Asia. ..."
"... Do you seriously believe that these new geographical and corporate monopolies does not create the kind bad outcomes that traditional – country-centric ones – monopolies have in the past? ..."
"... Then there is the practical issue of workers having next to no bargaining power under globalization. Do people really suppose that Mexican workers would be willing to strike so that their US counterparts, already making ficew times as much money, would get a raise? ..."
"... Basically our elite sold us a bill of goods is why we lost manufacturing. Greed. Nothing else. ..."
"... So proof is required to rollback globalization, but no proof was required to launch it or continue dishing it out? It's good to be the King, eh? ..."
"... America hasn't just gotten rid of the low level jobs. It has also gotten rid of supervisors and factory managers. Those are skills you can't get back overnight. For US plants in Mexico, you might have US managers there or be able to get special visas to let those managers come to the US. But US companies have shifted a ton, and I meant a ton, to foreign subcontractors. Some would put operations in the US to preserve access to US customers, but their managers won't speak English. How do you make this work? ..."
"... The real issue is commitment. Very little manufacturing will be re-shored unless companies are convinced that it is in their longterm interest to do so. ..."
"... There is also what I've heard referred to as the "next bench" phenomenon, in which products arise because someone designs a new product/process to solve a manufacturing problem. Unless one has great foresight, the designer of the new product must be aware there is a problem to solve. ..."
"... When a country is involved in manufacturing, the citizens employed will have exposure to production problems and issues. ..."
"... After his speech he took questions. I asked "Would Toyota ever separate design from manufacturing?" as HP had done, shipping all manufacturing to Asia. "No" was his answer. ..."
"... In my experience, it is way too useful to have the line be able to easily call the designer in question and have him come take a look at what his design is doing. HP tried to get around that by sending part of the design team to Asia to watch the startup. Didn't work as well. And when problems emerged later, it was always difficult to debug by remote control. ..."
"... How about mass imports of cheap workers into western countries in the guise of emigrants to push down worker's pay and gut things like unions. That factor played a decisive factor in both the Brexit referendum and the US 2016 elections. Or the subsidized exportation of western countries industrial equipment to third world countries, leaving local workers swinging in the wind. ..."
"... The data sets do not capture some of the most important factors in what they are saying. It is like putting together a paper on how and why white men voted in the 2016 US elections as they did – and forgetting to mention the effect of the rest of the voters involved. ..."
"... I had a similar reaction. This research was reinforcing info about everyone's resentment over really bad distribution of wealth, as far as it went, but it was so unsatisfying ..."
"... "Right to work" is nothing other than a way to undercut quality of work for "run-to-the-bottom competitive pay." ..."
"... I've noticed that the only people in favor of globalization are those whose jobs are not under threat from it. ..."
"... First off, economic nationalism is not necessarily right wing. I would certainly classify Bernie Sanders as an economic nationalist (against open borders and against "free" trade). Syriza and Podemos could arguably be called rather ineffective economic nationalist parties. I would say the whole ideology of social democracy is based on the Swedish nationalist concept of a "folkhem", where the nation is the home and the citizens are the folk. ..."
"... So China is Turmpism on steroids. Israel obviously is as well. Why do some nations get to be blatantly Trumpist while for others these policies are strictly forbidden? ..."
"... One way to look at Globalization is as an updated version of the post WW1 Versailles Treaty which imposed reparations on a defeated Germany for all the harm they caused during the Great War. The Globalized Versailles Treaty is aimed at the American and European working classes for the crimes of colonialism, racism, slavery and any other bad things the 1st world has done to the 3rd in the past. ..."
"... And yes, this applies to Bernie Sanders as well. During that iconic interview where Sanders denounced open borders and pushed economic nationalism, the Neoliberal interviewer immediately played the global guilt card in response. ..."
"... During colonialism the 3rd world had a form of open borders imposed on it by the colonial powers, where the 3rd world lost control of who what crossed their borders while the 1st world themselves maintained a closed border mercantilist regime of strict filters. So the anti-colonialist movement was a form of Trumpist economic nationalism where the evil foreigners were given the boot and the nascent nations applied filters to their borders. ..."
"... Nationalism (my opinion) can do this – economic nationalism. And of course other people think oh gawd, not that again – it's so inefficient for my investments- I can't get fast returns that way but that's just the point. ..."
"... China was not a significant exporter until the 2001 inclusion in WTO: it cannot possibly have caused populist uprisings in Italy and Belgium in the 1990s. It was probably too early even for Pim Fortuyn in the Netherlands, who was killed in 2002, Le Pen's electoral success in the same year, Austria's FPOE in 1999, and so on. ..."
"... In the 1930s Keynes realized, income was just as important as profit as this produced a sustainable system that does not rely on debt to maintain demand. ..."
"... "Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system." ..."
"... The Romans are the basis. Patricians, Equites and Plebs. Most of us here are clearly plebeian. Time to go place some bets, watch the chariot races and gladiatorial fights, and get my bread subsidy. Ciao. ..."
"... 80-90% of Bonds and Equities ( at least in USA) are owned by top 10 %. 0.7% own 45% of global wealth. 8 billionaires own more than 50% of wealth than that of bottom 50% in our Country! ..."
"... Globalisation has caused a surge in support for nationalist and radical right political platforms. ..."
"... Trump's withdrawal from the Trans-Pacific Partnership seems to be a move in that direction. ..."
"... Yet, a return to protectionism is not likely to solve the problems of those who have lost ground due to globalisation without appropriate compensation of its 'losers' ..."
"... and is bound to harm growth especially in emerging economies. ..."
"... The world rather needs a more inclusive model of globalisation. ..."
Definitely a pleasant read but IMHO wrong conclusion: Yet, a return to protectionism is
not likely to solve the problems of those who have lost ground due to globalisation without appropriate
compensation of its 'losers', and is bound to harm growth especially in emerging economies. The
world rather needs a more inclusive model of globalisation.
From an energy point of view globalisation is a disaster. The insane level of fossil fuels
that this current world requires for transportation of necessities (food and clothing) is making
this world an unstable world. Ipso Facto.
We need a world where goods move little as possible (yep!) when smart ideas and technology
(medical, science, industry, yep that's essential) move as much as possible. Internet makes this
possible. This is no dream but a XXIth century reality.
Work – the big one – is required and done where and when it occurs. That is on all continents
if not in every country. Not in an insanely remote suburbs of Asia.
Those who believe that globalisation is bringing value to the world should reconsider their
views. The current globalisation has created both monopolies on a geopolitical ground, ie TV make
or shipbuilding in Asia.
Do you seriously believe that these new geographical and corporate monopolies does not
create the kind bad outcomes that traditional – country-centric ones – monopolies have in the
past?
Yves Smith can have nasty words when it comes to discussing massive trade surplus and policies
that supports them. That's my single most important motivation for reading this challenging blog,
by the way.
Another thing is that reliance on complex supply chains is risky. The book 1177 B.C.: The Year
Civilization Collapsed describes how the ancient Mediterranian civilization collapsed when the
supply chains stopped working.
Then there is the practical issue of workers having next to no bargaining power under globalization.
Do people really suppose that Mexican workers would be willing to strike so that their US counterparts,
already making ficew times as much money, would get a raise?
Is Finland somehow supposed to force the US and China to adopt similar worker rights and environmental
protections? No, globalization, no matter how you slice it,is a race to the bottom.
I do not agree with the article's conclusion either.
Reshoring would have 1 of 2 outcomes:
Lots of manufacturing jobs and a solid middle class. We may be looking at more than 20
percent total employment in manufacturing and more than 30 percent of our GDP in manufacturing.
If the robots take over, we still have a lot of manufacturing jobs. Japan for example has
the most robots per capita, yet they still maintain very large amounts of manufacturing employment.
It does not mean the end of manufacturing at all, having worked in manufacturing before.
Basically our elite sold us a bill of goods is why we lost manufacturing. Greed. Nothing
else.
The conclusion is the least important thing. Conclusions are just interpretations, afterthoughts,
divagations (which btw are often just sneaky ways to get your work published by TPTB, surreptitiously
inserting radical stuff under the noses of the guardians of orthodoxy).
The value of these reports is in providing hardcore statistical evidence and quantification
for something for which so many people have a gut feeling but just cann't prove it (although many
seem to think that just having a strong opinion is sufficient).
Yes, correct. Intuition is great for coming up with hypotheses, but it is important to test
them. And while a correlation isn't causation, it at least says the hypothesis isn't nuts on its
face.
In addition, studies like this are helpful in challenging the oft-made claim, particularly
in the US, that people who vote for nationalist policies are bigots of some stripe.
You are missing the transition costs, which will take ten years, maybe a generation.
America hasn't just gotten rid of the low level jobs. It has also gotten rid of supervisors
and factory managers. Those are skills you can't get back overnight. For US plants in Mexico,
you might have US managers there or be able to get special visas to let those managers come to
the US. But US companies have shifted a ton, and I meant a ton, to foreign subcontractors. Some
would put operations in the US to preserve access to US customers, but their managers won't speak
English. How do you make this work?
The only culture with demonstrated success in working with supposedly hopeless US workers is
the Japanese, who proved that with the NUMMI joint venture with GM in one of its very worst factories
(in terms of the alleged caliber of the workforce, as in many would show up for work drunk). Toyota
got the plant to function at better than average (as in lower) defect levels and comparable productivity
to its plants in Japan, which was light years better than Big Three norms.
I'm not sure any other foreign managers are as sensitive to detail and the fine points of working
conditions as the Japanese (having worked with them extensively, the Japanese hear frequencies
of power dynamics that are lost on Westerners. And the Chinese do not even begin to have that
capability, as much as they have other valuable cultural attributes).
That is really interesting about the Japanese sensitivity to detail and power dynamics. If
anyone has managed to describe this in any detail, I would love to read more, though I suppose
if their ability is alien to most Westerners the task of describing it might also be too much
to handle.
I lean more to ten years than a generation. And in the grand scheme of things, 10 years is
nothing.
The real issue is commitment. Very little manufacturing will be re-shored unless companies
are convinced that it is in their longterm interest to do so. Which means having a sense
that the US government is serious, and will continue to be serious, about penalizing off-shoring.
Regardless of Trump's bluster, which has so far only resulted in a handful of companies halting
future offshoring decisions (all to the good), we are nowhere close to that yet.
There is also what I've heard referred to as the "next bench" phenomenon, in which products
arise because someone designs a new product/process to solve a manufacturing problem. Unless one
has great foresight, the designer of the new product must be aware there is a problem to solve.
When a country is involved in manufacturing, the citizens employed will have exposure to
production problems and issues.
Sometimes the solution to these problems can lead to new products outside of one's main
business, for example the USA's Kingsford Charcoal arose from a scrap wood disposal problem that
Henry Ford had.
If one googles for "patent applications by countries" one gets these numbers, which could be
an indirect indication of some of the manufacturing shift from the USA to Asia.
Patent applications for the top 10 offices, 2014
1. China 928,177
2. US 578,802
3. Japan 325,989
4. South Korea 210,292
What is not captured in these numbers are manufacturing processes known as "trade secrets"
that are not disclosed in a patent. The idea that the USA can move move much of its manufacturing
overseas without long term harming its workforce and economy seems implausible to me.
While a design EE at HP, they brought in an author who had written about Toyota's lean design
method, which was currently the management hot button du jour. After his speech he took questions.
I asked "Would Toyota ever separate design from manufacturing?" as HP had done, shipping all manufacturing
to Asia. "No" was his answer.
In my experience, it is way too useful to have the line be able to easily call the designer
in question and have him come take a look at what his design is doing. HP tried to get around
that by sending part of the design team to Asia to watch the startup. Didn't work as well. And
when problems emerged later, it was always difficult to debug by remote control.
And BTW, after manufacturing went overseas, management told us for costing to assume "Labor
is free". Some level playing field.
Oh gawd! The man talks about the effects of globalization and says that the solution is a "a
more inclusive model of globalization"? Seriously? Furthermore he singles out Chinese imports
as the cause of people being pushed to the right. Yeah, right.
How about mass imports of cheap workers into western countries in the guise of emigrants
to push down worker's pay and gut things like unions. That factor played a decisive factor in
both the Brexit referendum and the US 2016 elections. Or the subsidized exportation of western
countries industrial equipment to third world countries, leaving local workers swinging in the
wind.
This study is so incomplete it is almost useless. The only thing that comes to mind to say
about this study is the phrase "Apart from that Mrs. Lincoln, how was the play?" And what form
of appropriate compensation of its 'losers' would they suggest? Training for non-existent jobs?
Free moving fees to the east or west coast for Americans in flyover country? Subsidized emigration
fees to third world countries where life is cheaper for workers with no future where they are?
Nice try fellas but time to redo your work again until it is fit for a passing grade.
Aw jeez, mate – you've just hurt my feelings here. Take a look at the actual article again.
The data sets do not capture some of the most important factors in what they are saying. It
is like putting together a paper on how and why white men voted in the 2016 US elections as they
did – and forgetting to mention the effect of the rest of the voters involved.
Hey, here is an interesting thought experiment for you. How about we apply the scientific method
to the past 40 years of economic theory since models with actual data strike your fancy. If we
find that the empirical data does not support a theory such as the theory of economic neoliberalism,
we can junk it then and replace it with something that actually works then. So far as I know,
modern economics seems to be immune to scientific rigour in their methods unlike the real sciences.
Not all relevant factors need to be included for a statistical analysis to be valid, as long
as relevant ignored factors are randomized amongst the sampling units, but you know that of course.
Thanks for you kind words about the real sciences, we work hard to keep it real, but once again,
in all fairness, between you and me mate, is not all rigour, it is a lot more Feyerabend than
Popper.
What you say is entirely true. The trouble has always been to make sure that that statistical
analysis actually reflects the real world enough to make it valid. An example of where it all
falls apart can be seen in the political world when the pundits, media and all the pollsters assured
America that Clinton had it in the bag. It was only after the dust had settled that it was revealed
how bodgy the methodology used had been.
By the way, Karl Popper and Paul Feyerabend sound very interesting so thanks for the heads
up. Have you heard of some of the material of another bloke called Mark Blyth at all? He has some
interesting observations to make on modern economic practices.
I had a similar reaction. This research was reinforcing info about everyone's resentment
over really bad distribution of wealth, as far as it went, but it was so unsatisfying and
I immediately thought of Blyth who laments the whole phylogeny of economics as more or less serving
the rich.
The one solution he offered up a while ago was (paraphrasing) 'don't sweat the deficit spending
because it is all 6s in the end' which is true if distribution doesn't stagnate. So as it stands
now, offshoring arms, legs and firstborns is like 'nothing to see here, please move on'. The suggestion
that we need a more inclusive form of global trade kind of begs the question. Made me uneasy too.
"Gut things like unions." How so? In my recent interaction with my apartment agency's preferred
contractors, random contractors not unionized, I experienced a 6 month-long disaster.
These construction workers bragged that in 2 weeks they would have the complete job done -
a reconstructed deck and sunroom. Verbatim quote: "Union workers complete the job and tear it
down to keep everyone paying." Ha Ha! What a laugh!
Only to have these same dudes keep saying "next week", "next week", "next week", "next week".
The work began in August and only was finished (not completely!) in late January. Sloppy crap!
Even the apartment agency head maintenance guy who I finally bitched at said "I guess good work
is hard to come by these days."
Of the non-union guys he hired.
My state just elected a republican governor who promised "right to work." This was just signed
into law.
Immigrants and Mexicans had nothing to do with it. They're not an impact in my city. "Right
to work" is nothing other than a way to undercut quality of work for "run-to-the-bottom competitive
pay."
Now I await whether my rent goes up to pay for this nonsense.
They look at the labor cost, assume someone can do it cheaper. They don't think it's that difficult.
Maybe it's not. The hard part of any and all construction work is getting it finished. Getting
started is easy. Getting it finished on time? Nah, you can't afford that.
I've noticed that the only people in favor of globalization are those whose jobs are not
under threat from it. Beyond that, I think the flood of cheap Chinese goods is actually helping
suppress populist anger by allowing workers whose wages are dropping in real value terms to maintain
the illusion of prosperity. To me, a more "inclusive" form of globalization would include replacing
every economist with a Chinese immigrant earning minimum wage. That way they'd get to "experience"
how awesome it is and the value of future economic analysis would be just as good.
I'm going to question a few of the author's assumptions.
First off, economic nationalism is not necessarily right wing. I would certainly classify
Bernie Sanders as an economic nationalist (against open borders and against "free" trade). Syriza
and Podemos could arguably be called rather ineffective economic nationalist parties. I would
say the whole ideology of social democracy is based on the Swedish nationalist concept of a "folkhem",
where the nation is the home and the citizens are the folk.
Secondly, when discussing the concept of economic nationalism and the nation of China, it would
be interesting to discuss how these two things go together. China has more billionaires than refugees
accepted in the past 20 years. Also it is practically impossible for a non Han Chinese person
to become a naturalized Chinese citizen. And when China buys Boeing aircraft, they wisely insist
on the production being done in China. A close look at Japan would yield similar results.
So China is Turmpism on steroids. Israel obviously is as well. Why do some nations get
to be blatantly Trumpist while for others these policies are strictly forbidden?
One way to look at Globalization is as an updated version of the post WW1 Versailles Treaty
which imposed reparations on a defeated Germany for all the harm they caused during the Great
War. The Globalized Versailles Treaty is aimed at the American and European working classes for
the crimes of colonialism, racism, slavery and any other bad things the 1st world has done to
the 3rd in the past.
Of course during colonialism the costs were socialized within colonizing states and so it was
the people of the colonial power who paid those costs that weren't borne by the colonial subjects
themselves, who of course paid dearly, and it was the oligarchic class that privatized the colonial
profits. But the 1st world oligarchs and their urban bourgeoisie are in strong agreement that
the deplorable working classes are to blame for systems that hurt working classes but powerfully
enriched the wealthy!
And so with the recent rebellions against Globalization, the 1st and 3rd world oligarchs are
convinced these are nothing more than the 1st world working classes attempting to shirk their
historic guilt debt by refusing to pay the rightful reparations in terms of standard of living
that workers deserve to pay for the crimes committed in the past by their wealthy co-nationals.
And yes, this applies to Bernie Sanders as well. During that iconic interview where Sanders
denounced open borders and pushed economic nationalism, the Neoliberal interviewer immediately
played the global guilt card in response.
Interesting. Another way to look at it is from the point of view of entropy and closed vs open
systems. Before globalisation the 1st world working classes enjoyed a high standard of living
which was possible because their system was relatively closed to the rest of the world. It was
a high entropy, strongly structured socio-economic arrangement, with a large difference in standard
of living between 1st world and 3rd world working classes. Once their system became more open
by virtue (or vice) of globalisation, entropy increased as commanded by the 2nd Law of Thermodynamics
so the 1st world and 3rd world working classes became more equalised. The socio-economic arrangements
became less structured. This means for the Trumpening kind of politicians it is a steep uphill
battle, to increase entropy again.
Yes, I agree, but if we step back in history a bit we can see the colonial period as a sort
of reverse globalization which perhaps portends a bit of optimism for the Trumpening.
I use the term open and closed borders but these are not precise. What I am really saying is
that open borders does not allow a country to filter out negative flows across their border. Closed
borders does allow a nation to impose a filter. So currently the US has more open borders (filters
are frowned upon) and China has closed borders (they can filter out what they don't want) despite
the fact that obviously China has plenty of things crossing its border.
During colonialism the 3rd world had a form of open borders imposed on it by the colonial
powers, where the 3rd world lost control of who what crossed their borders while the 1st world
themselves maintained a closed border mercantilist regime of strict filters. So the anti-colonialist
movement was a form of Trumpist economic nationalism where the evil foreigners were given the
boot and the nascent nations applied filters to their borders.
So the 3rd world to some extent (certainly in China at least) was able to overcome entropy
and regain control of their borders. You are correct in that it will be an uphill struggle for
the 1st world to repeat this trick. In the ideal world both forms of globalization (colonialism
and the current form) would be sidelined and all nations would be allowed to use the border filters
they think would best protect the prosperity of their citizens.
Another good option would be a version of the current globalization but where the losers are
the wealthy oligarchs themselves and the winners are the working classes. It's hard to imagine
it's easy if you try!
What's interesting about the concept of entropy is that it stands in contradiction to the concept
of perpetual progress. I'm sure there is some sort of thesis, antithesis, synthesis solution to
these conflicting concepts.
To overcome an entropy current requires superb skill commanding a large magnitude of work applied
densely on a small substratum (think of the evolution of the DNA, the internal combustion engine).
I believe the Trumpening laudable effort and persuasion would have a chance of success in a country
the size of The Netherlands, or even France, but the USA, the largest State machinery in the world,
hardly. When the entropy current flooded the Soviet system the solution came firstly in the form
of shrinkage.
We need to think more about it, a lot more, in order to succeed in this 1st world uphill struggle
to repeat the trick. I am pretty sure that as Pierre de Fermat famously claimed about his alleged
proof, the solution "is too large to fit in the margins of this book".
My little entropy epiphany goes like this: it's like boxes – containers, if you will, of energy
or money, or trade goods, the flow of which is best slowed down so everybody can grab some. Break
it all down, decentralize it and force it into containers which slow the pace and share the wealth.
Nationalism (my opinion) can do this – economic nationalism. And of course other
people think oh gawd, not that again – it's so inefficient for my investments- I can't get fast
returns that way but that's just the point.
Don't you mean "It was a LOWER entropy (as in "more ordered"), strongly structured socio-economic
arrangement, with a large difference in standard of living between 1st world"?
The entropy increased as a consequence of human guided globalization.
Of course, from a thermodynamic standpoint, the earth is not a closed system as it is continually
flooded with new energy in the form of solar radiation.
The Globalized Versailles Treaty -- Permit me a short laughter . The terms of the crippling
treaty were dictated by the victors largely on insecurities of France.
The crimes of the 1st against the 3rd go on even now- the only difference is that some of the
South like China and India are major nuclear powers now.
The racist crimes in the US are even more flagrant- the Blacks whose labour as slaves allowed
for cotton revolution enabling US capitalists to ride the industrial horse are yet to be rehabilitated
, Obama or no Obama. It is a matter of profound shame.
The benefits of Globalization have gone only to the cartel of 1st and 3rd World Capitalists.
And they are very happy as the lower classes keep fighting. Very happy indeed.
The gorgon cry of the past is all over the present , including in " unsuspecting" paying folks
of today! Blacks being brought to US as slave agricultural labour was Globalisation. Their energy
vibrated the machinery of Economics subsequently. What Nationalism and where is it hiding pray?
Bogus analysis here , yes.
The reigning social democratic parties in Europe today are not the Swedish traditional parties
of yesteryear they have morphed into neoliberal austerians committed to globalization and export
driven economic models at any cost (CETA vote recently) and most responsible for the economic
collapse in the EU
I wonder they chose Chinese imports as the cause of the right-wing shift, when they themselves
admit that the shift started in the 1990s. At that time, there were few Chinese imports and China
was not even part of the WHO.
If they are thinking of movements like the Lega Nord and Vlaams Blok, the reasons are clearly
not to be found in imports, but in immigration, the welfare state and lack of national homogeneity,
perceived or not.
And the beginnings of the precariat.
So it is not really the globalization of commerce that did it, but the loss of relevance of
national and local identities.
Correlation does not imply causation, but lack of correlation definitely excludes it.
The Lega was formed in the 1980s, Vlaams Blok at the end of the '70s. They both had their best
days in the 1990s. Chinese imports at the time were insignificant.
I cannot find the breakdown of Chinese imports per EU country, but here are the total Chinese
exports since 1983:
China was not a significant exporter until the 2001 inclusion in WTO: it cannot possibly
have caused populist uprisings in Italy and Belgium in the 1990s. It was probably too early even
for Pim Fortuyn in the Netherlands, who was killed in 2002, Le Pen's electoral success in the
same year, Austria's FPOE in 1999, and so on.
The timescales just do not match. Whatever was causing "populism", it was not Chinese imports,
and I can think of half a dozen other, more likely causes.
Furthermore, the 1980s and 1990s were something of an industrial renaissance for Lombardy and
Flanders: hardly the time to worry about Chinese imports.
And if you look at the map. the country least affected by the import shock (France) is the
one with the strongest populist movement (Le Pen).
People try to conflate Trump_vs_deep_state and Brexit with each other, then try to conflate this "anglo-saxon"
populism with previous populisms in Europe, and try to deduce something from the whole exercise.
That "something" is just not there and the exercise is pointless. IMHO at least.
European regionalism is often the result of the rise of the EU as a new, alternative national
government in the eyes of the disgruntled regions. Typically there are three levels of government,
local, regional (states) and national. With the rise of the EU we have a fourth level, supra-national.
But to the Flemish, Scottish, Catalans, etc, they see the EU as a potential replacement for the
National-level governments they currently are unhappy being under the authority of.
Capitalism should be evolving but it went backwards. Keynesian capitalism evolved from the
free market capitalism that preceded it. The absolute faith in markets had been laid low by 1929
and the Great Depression.
After the Keynesian era we went back to the old free market capitalism of neoclassical economics.
Instead of evolving, capitalism went backwards. We had another Wall Street Crash that has laid
low the once vibrant global economy and we have entered into the new normal of secular stagnation.
In the 1930s, Irving Fisher studied the debt deflation caused by debt saturated economies. Today
only a few economists outside the mainstream realise this is the problem today.
In the 1930s, Keynes realized only fiscal stimulus would pull the US out of the Great Depression,
eventually the US implemented the New Deal and it started to recover. Today we use monetary policy
that keeps asset prices up but cannot overcome the drag of all that debt in the system and its
associated repayments.
In the 1920s, they relied on debt based consumption, not realizing how consumers will eventually
become saturated with debt and demand will fail. Today we rely on debt based consumption again,
Greece consumed on debt. until it maxed out on debt and collapsed.
In the 1930s Keynes realized, income was just as important as profit as this produced a
sustainable system that does not rely on debt to maintain demand. Keynes was involved with
the Bretton-Woods agreement after the Second World War and recycled the US surplus to Europe to
restore trade when Europe lay in ruins. Europe could rebuild itself and consume US products, everyone
benefitted.
Today there are no direct fiscal transfers within the Euro-zone and it is polarizing. No one
can see the benefits of rebuilding Greece, to allow it to carry on consuming the goods from surplus
nations and it just sinks further and further into the mire. There is a lot to be said for capitalism
going forwards rather than backwards and making the same old mistakes a second time.
The ECB didn't listen and killed Greece with austerity and is laying low the Club-Med nations.
Someone who knows what they are doing, after studying the Great Depression and Japan after 1989.
Let's keep him out of the limelight; he has no place on the ship of fools running the show.
DEBT on Debt with QEs+ ZRP ( borrowing from future) was the 'solution' by Bernanke to mask
the 2008 crisis and NOT address the underlying structural reforms in the Banking and the Financial
industry. He was part of the problem for housing problem and occurred under his watch! He just
kicked the can with explosive credit growth ( but no corresponding growth in the productive Economy!)and
easy money!
We have a 'Mother of all bubbles' at our door step. Just matter of time when it will BLOW and
NOT if! There is record levels of DEBT ( both sovereign, public and private) in the history of
mankind, all over the World.
DEBT has been used as a panacea for all the financial problems by CBers including Bernanke!
Fed's balance sheet was than less 1 Trillion in 2008 ( for all the years of existence of our Country!)
but now over 3.5 Trillions and climbing!
Kicking the can down the road is like passing the buck to some one (future generations!). And
you call that solution by Mr. Bernanke? Wow!
Will they say again " No one saw this coming'? when next one descends?
The independent Central Banks that don't know what they are doing as can be seen from their
track record.
The FED presided over the dot.com bust and 2008, unaware that they were happening and of their
consequences. Alan Greenspan spots irrational exuberance in the markets in 1996 and passes comment.
As the subsequent dot.com boom and housing booms run away with themselves he says nothing.
The money supply is flat in the recession of the early 1990s.
Then it really starts to take off as the dot.com boom gets going which rapidly morphs into
the US housing boom, courtesy of Alan Greenspan's loose monetary policy.
When M3 gets closer to the vertical, the black swan is coming and you have an out of control
credit bubble on your hands (money = debt).
We can only presume the FED wasn't looking at the US money supply, what on earth were they
doing?
The BoE is aware of how money is created from debt and destroyed by repayments of that debt.
"Although commercial banks create money through lending, they cannot do so freely without
limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive
banking system."
The BoE's statement was true, but is not true now as banks can securitize bad loans and get
them off their books. Before 2008, banks were securitising all the garbage sub-prime mortgages,
e.g. NINJA mortgages, and getting them off their books. Money is being created freely and without
limit, M3 is going exponential before 2008.
Bad debt is entering the system and no one is taking any responsibility for it. The credit
bubble is reflected in the money supply that should be obvious to anyone that cares to look.
Ben Bernanke studied the Great Depression and doesn't appear to have learnt very much.
Irving Fisher studied the Great Depression in the 1930s and comes up with a theory of debt
deflation. A debt inflated asset bubble collapses and the debt saturated economy sinks into debt
deflation. 2008 is the same as 1929 except a different asset class is involved.
1929 – Margin lending into US stocks
2008 – Mortgage lending into US housing
Hyman Minsky carried on with his work and came up with the "Financial Instability Hypothesis"
in 1974.
Steve Keen carried on with their work and spotted 2008 coming in 2005. We can see what Steve
Keen saw in 2005 in the US money supply graph above.
The independent Central Banks that don't know what they are doing as can be seen from their
track record.
Good to see studies confirming what was already known.
This apparently surprised:
On the contrary, as globalisation threatens the success and survival of entire industrial
districts, the affected communities seem to have voted in a homogeneous way, regardless of
each voter's personal situation.
It is only surprising for people not part of communities, those who are part of communities
see how it affects people around them and solidarity with the so called 'losers' is then shown.
Seems like radical right is the preferred term, it does make it more difficult to sympathize
with someone branded as radical right . The difference seems to be between the radical liberals
vs the conservative. The radical liberals are too cowardly to propose the laws they want, they
prefer to selectively apply the laws as they see fit. Either enforce the laws or change the laws,
anything else is plain wrong.
Socialism for the upper classes, capitalism for the lower classes? That will turn out well.
Debt slaves and wage slaves will revolt. That is all the analysis the OP requires. The upper class
will respond with suppression, not policy reversal every time. Socialism = making everyone equally
poor (obviously not for the upper classes who benefit from the arrangement).
Regrettably today we have socialism for the wealthy, with all the benefits of gov regulations,
sympathetic courts and legislatures etc. etc.
Workers are supposed to take care for themselves and the devil take the hind most. How many
workers get fired vs the 1%, when there is a failure in the company plan?
The Romans are the basis. Patricians, Equites and Plebs. Most of us here are clearly plebeian.
Time to go place some bets, watch the chariot races and gladiatorial fights, and get my bread
subsidy. Ciao.
Globalization created winners and losers throughout the world. The winners liked it, the losers
didn't. Democracy is based on the support of the majority.
The majority in the East were winners. The majority in the West were losers.
The Left has maintained its support of neoliberal globalisation in the West. The Right has
moved on. There has been a shift to the Right. Democracy is all about winners and losers and whether
the majority are winning or losing. It hasn't changed.
Globalization( along with communication -internet and transportation) made the Labor wage arbitration,
easy in favor of capital ( Multi-Nationals). Most of the jobs gone overseas will NEVER come back.
Robotic revolution will render the remaining jobs, less and less!
The 'new' Economy by passed the majority of lower 80-90% and favored the top 10%. The Losers
and the Winners!
80-90% of Bonds and Equities ( at least in USA) are owned by top 10 %. 0.7% own 45% of
global wealth. 8 billionaires own more than 50% of wealth than that of bottom 50% in our Country!
The Rich became richer!
The tension between Have and Have -Nots has just begun, as Marx predicted!
I think it's about time that we stopped referring to opposition to globalization as a product
or policy of the "extreme right". It would be truer to say that globalization represents a temporary,
and now fading, triumph of certain ideas about trade and movement of people and capital which
have always existed, but were not dominant in the past. Fifty years ago, most mainstream political
parties were "protectionist" in the sense the word is used today. Thirty years ago, protectionism
was often seen as a left)wing idea, to preserve standards of living and conditions of employment
(Wynne Godley and co). Today, all establishment political parties in the West have swallowed neoliberal
dogma, so the voters turn elsewhere, to parties outside the mainstream. Often, it's convenient
politically to label them "extreme right", although in Europe some left-wing parties take basically
the same position. If you ignore peoples' interests, they won't vote for you. Quelle surprise!
as Yves would say.
Yes, there are many reasons to be skeptical of too much globalization such as energy considerations.
I think another interesting one is exchange rates.
One of the important concepts of MMT is the importance of having a flexible exchange rate to
have full power over your currency. This is fine as far as it goes but tends to put hard currencies
against soft currencies where a hard currency can be defined as one that has international authority/acceptance.
Having flexible exchange rates also opens up massive amounts of financial speculation relative
to fluctuations of these currencies against each other and trying to protect against these fluctuations.
""Keynes' proposal of the bancor was to put a barrier between national currencies, that is
to have a currency of account at the global level. Keynes warned that free trade, flexible exchange
rates and free movement of capital globally were incompatible with maintaining full employment
at the local level""
""Sufficiency provisioning also means that trade would be discouraged rather than encouraged.""
Local currencies can work very well locally to promote employment but can have trouble when
they reach out to get resources outside of their currency space especially if they have a soft
currency. Global sustainability programs need to take a closer look at how to overcome this sort
of social injustice. (Debt or Democracy)
As has already been pointed out so eloquently here in the comments section, economic nationalism
is not necessarily the preserve of the right, nor is it necessarily the same thing as nationalism.
In the UK the original, most vociferous objectors to EEC membership in the 70s (now the EU)
were traditionally the Left, on the basis that it would gradually erode labour rights and devalue
the cost of labour in the longer term. Got that completely wrong obviously .
In the same way that global trade has become synonymous with globalisation, the immigration
debate has been hijacked and cynically conflated with free movement of (mainly low cost, unskilled)
labour and race when they are all VERY different divisive issues.
The other point alluded to in the comments above is the nature of free trade generally. The
accepted (neoliberal) wisdom being that 'collateral damage' is unfortunate but inevitable, but
it is pretty much an unstoppable or uncontrollable force for the greater global good, and the
false dichotomy persists that you either embrace it fully or pull up all the drawbridges with
nothing in between.
One of the primary reasons that some competing sectors of some Western economies have done
so badly out of globalisation is that they have adhered to 'free market principles' whilst other
countries, particularly China, clearly have not with currency controls, domestic barriers to trade,
massive state subsidies, wage suppression etc
The China aspect is also fascinating when developed nations look at the uncomfortable 'morality
of global wealth distribution' often cited by proponents of globalisation as one of their wider
philanthropic goals. Bless 'em. What is clear is that highly populated China and most of its people,
from the bottom to the top, has been the primary beneficiaries of this global wealth redistribution,
but the rest of the developing world's poor clearly not quite so much.
The map on it's own, in terms of the English one time industrial Midlands & North West being
shown as an almost black hole, is in itself a kind of " Nuff Said ".
It is also apart from London, where the vast bulk of immigrants have settled.
The upcoming bye-election in Stoke, which could lead to U-Kip taking a once traditionally always
strong Labour seat, is right in the middle of that dark cloud.
The problem from the UK 's position, I suggest, is that autarky is not a viable proposition
so economic nationalism becomes a two-edged sword. Yes, of course, the UK can place restrictions
on imports and immigration but there will inevitably be retaliation and they will enter a game
of beggar my neighbour. The current government talks of becoming a beacon for free trade. If we
are heading to a more protectionist world, that can only end badly IMHO.
Unless we get some meaningful change in thinking on a global scale, I think we are heading
somewhere very dark whatever the relative tinkering with an essentially broken system.
The horse is long gone, leaving a huge pile of shit in it's stable.
As for what might happen, I do not know, but I have the impression that we are at the end of
a cycle.
This is quite interesting, but only part of the story. Interestingly the districts/provinces
suffering the most from the chinese import shock are usually densely populated industrial regions
of Europe. The electoral systems in Europe (I think all, but I did not check) usually do not weight
equally each district, favouring those less populated, more rural (which by the way tend to be
very conservative but not so nationalistic). These differences in vote weigthing may have somehow
masked the effect seen in this study if radical nationalistic rigth wing votes concentrate in
areas with lower weigthed value of votes. For instance, in Spain, the province of Soria is mostly
rural and certainly less impacted by chinese imports compared with, for instance, Madrid. But
1 vote in Soria weigths the same as 4 votes in Madrid in number of representatives in the congress.
This migth, in part, explain why in Spain, the radical rigth does not have the same power as in
Austria or the Netherlands. It intuitively fits the hypothesis of this study.
Nevertheless, similar processes can occur in rural areas. For instance, when Spain entered
the EU, french rural areas turned nationalistic against what they thougth could be a wave of agricultural
imports from Spain. Ok, agricultural globalization may have less impact in terms of vote numbers
in a given country but it still can be politically very influential. In fact spanish entry more
that 30 years ago could still be one of the forces behind Le Penism.
All this statistical math and yada yada to explain a rise in vote for radical right from 3%
in 1985 to 5% now on average? And only a 0.7% marginal boost if your the place really getting
hammmered by imports from China? If I'm reading it right, that is, while focusing on Figure 2.
The real "shock" no pun intended, is the vote totals arent a lot higher everywhere.
Then the Post concludes with reference to a "surge in support" - 3% to 5% or so over 30 years
is a surge? The line looks like a pretty steady rise over 3 decades.
Maybe I'm missing sommething here.
Also what is this thing they're callling an "Open World" of the past 30 years? And why is that
in danger from more balanced trade? It makes no sense. Even back in the 60s and 70s people could
go alll over the world for vacations. Or at least most places they coould go. If theh spent their
money they'd make friends. Greece even used to be a goood place people went and had fun on a beach.
I think this one is a situation of math runing amuck. Math running like a thousand horses over
a hill trampling every blade of grass into mud.
I bet the China factor is just a referent for an entire constellatio of forces that probably
don't lend themselves (no pun intended) partiicularly well to social science and principal component
analysis - as interesting as that is for those who are interested in that kind of thing (which
I am acctually).
Also, I wouldn't call this "free trade". Not that the authors do either, but trade means reciprocity
not having your livelihood smashed the like a pinata at Christmas with all your candy eaten by
your "fellow countrymen". I wouldn't call that "trade". It's something else.
Regarding your first point, it is a small effect but it is all due to the China imports impact,
you have to add the growth of these parties due to other reasons such as immigration to get the
full picture of their growth. Also I think the recent USA election was decided by smaller percentage
advantages in three States?
Globalisation is nothing but free trade extended to the entire world. Free trade is a tool
used to prevent competition. By flooding countries with our cheaper exports, they do not develop
the capacity to compete with us by making their own widgets. So, why are we shocked when those
other countries return the favor and when they get the upper hand, we respond in a protectionist
way? It looks to me that those countries who are now competing with us in electronics, automobiles,
etc. only got to develop those industries in their countries because of protectionism.
Refugees in great numbers are a symptom of globalization, especially economic refugees but
also political and environmental ones. This has strained the social order in many countries that
have accepted them in and it's one of the central issues that the so-called "right" is highlighting.
It is no surprise there has been an uproar over immigration policy in the US which is an issue
of class as much as foreign policy because of the disenfranchisement of large numbers of workers
on both sides of the equation - those who lost their jobs to outsourcing and those who emigrated
due to the lack of decent employment opportunities in their own countries.
We're seeing the tip of the iceberg. What will happen when the coming multiple environmental
calamities cause mass starvation and dislocation of coastal populations? Walls and military forces
can't deter hungry, desperate, and angry people.
The total reliance and gorging on fossil energy by western countries, especially the US, has
mandated military aggression to force compliance in many areas of the world. This has brought
a backlash of perpetual terrorism. We are living under a dysfunctional system ruled by sociopaths
whose extreme greed is leading to world war and environmental collapse.
Who created the REFUGEE PROBLEMS in the ME – WEST including USA,UK++
Obama's DRONE program kept BOMBING in SEVEN Countries killing innocents – children and women!
All in the name of fighting Terrorism. Billions of arms to sale Saudi Arabia! Wow!
Where were the Democrats and the Resistance and Women's march? Hypocrites!
Globalisation has caused a surge in support for nationalist and radical right political
platforms.
Just a reminder that nationalism doesn't have to be associated with the radical right. The left
is not required to reject it, especially when it can be understood as basically patriotism, expressed
as solidarity with all of your fellow citizens.
Trump's withdrawal from the Trans-Pacific Partnership seems to be a move in that direction.
Well, that may be true as far as Trump's motivations are concerned, but a major component (the
most important?) of the TPP was strong restraint of trade, a protectionist measure, by intellectual
property owners.
Yet, a return to protectionism is not likely to solve the problems of those who have lost
ground due to globalisation without appropriate compensation of its 'losers'
Japan has long been 'smart' protectionist, and this has helped prevent the 'loser' problem, in
part because Japan, being nationalist, makes it a very high priority to create/maintain a society
in which almost all Japanese are more or less middle class. So, it is a fact that protectionism
has been and can be associated with more egalitarian societies, in which there are few 'losers'
like we see in the West. But the U.S. and most Western countries have a long way to go if they
decide to make the effort to be more egalitarian. And, of course, protectionism alone is not enough
to make most of the losers into winners again. You'll need smart skills training, better education
all around, fewer low-skill immigrants, time, and, most of all strong and long-term commitment
to making full employment at good wages national priority number one.
and is bound to harm growth especially in emerging economies.
Growth has been week since the 2008, even though markets are as free as they've ever been. Growth
requires a lot more consumers with willingness and cash to spend on expensive, high-value-added
goods. So, besides the world finally escaping the effects of the 2008 financial crisis, exporting
countries need prosperous consumers either at home or abroad, and greater economic security. And
if a little bit of protectionism generates more consumer prosperity and economic stability, exporting
countries might benefit overall.
The world rather needs a more inclusive model of globalisation.
Well, yes, the world needs more inclusivity, but globalization doesn't need to be part of the
picture. Keep your eyes on the prize: inclusivity/equality, whether latched onto nationally, regionally,
'internationally' or globally, any which way is fine! But prioritization of globalization over
those two is likely a victory for more inequality, for more shoveling of our wealth up to the
ruling top 1%.
"Larry sees the coming of globalization as bringing with it a
sharp reduction in the market power of American blue-collar
workers in mass-production industries, and thus as exerting
significant downward pressure on middle class wages and
upward pressure on inequality. The live question, he thinks,
is how large and significant these pressures have been."
As
if this was natural and ordained by God. Can't argue with
economics.
It looks like there should strict external "moral"
constrains on economic activity, like they were most of human
history. For some activities which are now legal you can
spend life in jail even in rather relaxed 30th ( for example,
credit cards interest rates are usury rates, no question
about it)
All this mathiness junk and operating with unreliable and
politically fudged (as in employment numbers and GDP)
statistics (as in "There are three kinds of lies: lies,
damned lies, and statistics."
We already saw to what economic outcomes neoliberals have
led us. While neoliberal were eating the carcass of New Deal
things were not that bad.
Now it's over and they are in deep trouble. Election of
Trump is just the fist sign of troubles ahead. One swallow
does not a summer make.
The problem is that financial oligarchy does not want to
part with their illicit gains.
In the past this dilemma, especially in case Jewish
bankers, was resolved by killing some part and exiling
another part. It would be nice for our Masters of the
Universe to remember this historical fact.
"... Privilege: still exorbitant. Here's a nice analysis of the international role of the dollar. This is the same argument I tried to make in my Roosevelt Institute piece on trade policy last summer. The Economist* says it better: ..."
"... "Unlike other aspects of American hegemony, the dollar has grown more important as the world has globalised, not less. As economies opened their capital markets in the 1980s and 1990s, global capital flows surged. Yet most governments sought exchange-rate stability amid the sloshing tides of money. They managed their exchange rates using massive piles of foreign-exchange reserves Global reserves have grown from under $1trn in the 1980s to more than $10trn today. ..."
"... Dollar-denominated assets account for much of those reserves. Governments worry more about big swings in the dollar than in other currencies; trade is often conducted in dollar terms; and firms and governments owe roughly $10trn in dollar-denominated debt. the dollar is, on some measures, more central to the global system now than it was immediately after the second world war. ..."
"... America wields enormous financial power as a result. It can wreak havoc by withholding supplies of dollars in a crisis. When the Federal Reserve tweaks monetary policy, the effects ripple across the global economy. Hélène Rey of the London Business School argues that, despite their reserve holdings, many economies have lost full control over their domestic monetary policy, because of the effect of Fed policy on global appetite for risk. ..."
"... America's return on its foreign assets is markedly higher than the return foreign investors earn on their American assets That flow of investment income allows America to run persistent current-account deficits -- to buy more than it produces year after year, decade after decade." ..."
Privilege: still exorbitant. Here's a nice analysis of the international role of the dollar.
This is the same argument I tried to make in my Roosevelt Institute piece on trade policy last
summer. The Economist* says it better:
"Unlike other aspects of American hegemony, the dollar has grown more important as the
world has globalised, not less. As economies opened their capital markets in the 1980s and 1990s,
global capital flows surged. Yet most governments sought exchange-rate stability amid the sloshing
tides of money. They managed their exchange rates using massive piles of foreign-exchange reserves
Global reserves have grown from under $1trn in the 1980s to more than $10trn today.
Dollar-denominated assets account for much of those reserves. Governments worry more about
big swings in the dollar than in other currencies; trade is often conducted in dollar terms; and
firms and governments owe roughly $10trn in dollar-denominated debt. the dollar is, on some
measures, more central to the global system now than it was immediately after the second world
war.
America wields enormous financial power as a result. It can wreak havoc by withholding
supplies of dollars in a crisis. When the Federal Reserve tweaks monetary policy, the effects
ripple across the global economy. Hélène Rey of the London Business School argues that, despite
their reserve holdings, many economies have lost full control over their domestic monetary policy,
because of the effect of Fed policy on global appetite for risk.
During the heyday of Bretton Woods, Valéry Giscard d'Estaing, a French finance minister (later
president), complained about the "exorbitant privilege" enjoyed by the issuer of the world's reserve
currency. America's return on its foreign assets is markedly higher than the return foreign
investors earn on their American assets That flow of investment income allows America to run
persistent current-account deficits -- to buy more than it produces year after year, decade after
decade."
Exactly right. You can have free capital mobility, or you can have a balanced trade for the
US. But you can't have both, as long as the world depends on dollar reserves."
"... As we discussed long form in ECONNED, orthodox economics rests on the assumption that economies have a natural propensity to equilibrium, and that equilibrium is full employment. ..."
"... their mathematical exposition enables them to dismiss lay critics. ..."
I hate to come off like a nay-sayer, because I have no doubt that the underlying methodology
is useful. But this sounds an awful lot like a new improved version of system dynamics, which the
economics profession successfully beat back in the 1970s.
As we discussed long form in ECONNED, orthodox economics rests on the assumption that
economies have a natural propensity to equilibrium, and that equilibrium is full employment.
As Paul Samuelson stressed, that assumption is necessary for economics to be science, as in
mathed up, and the dominance that economists have achieved is due to their scientific appearances
and the fact that their mathematical exposition enables them to dismiss lay critics.
"... They focused on Dennis Carlton , a professor at the University of Chicago's Booth School of Business, and a senior managing director at the consulting firm Compass Lexecon . According to Eisinger and Elliott, Carlton has been paid more than $100 million from consulting activities during his career. ..."
"... Mergers can hurt consumers by giving companies increased market power. The less competitive an industry is, the more the big companies can raise prices, which not only makes life more painful for consumers, but limits the size of the market itself, reducing economic productivity. ..."
"... Obviously, if consultants like Carlton are being paid by the companies that want to merge, they have an incentive to use economics to predict a rosy outcome instead of a bad one. But how easy is that? In an ideal world, it would be very difficult to get away with using economic models to make slanted forecasts. If a certain type of model repeatedly got things wrong in biology or electrical engineering, professors would toss it out, and it would probably no longer be used in most court cases. ..."
"... Does this mean that the theoretical models used by merger consultants like Carlton are wrong? Not necessarily. It just means that it's very hard to know either way. As Eisinger and Elliott demonstrate, however, the models have been known to make some pretty big mistakes. One example they cite is the merger of appliance makers Maytag Corp. and Whirlpool Corp. in 2005. Carlton, hired by those companies, wrote that international competition would prevent the new super-company from raising prices. But he was wrong, and prices went up. ..."
"... The threat of excessive industrial concentration is worth paying more attention to. Economists increasingly are focusing on the harms that monopoly power might be causing. In addition to the well-known effect of higher prices, industrial concentration might exacerbate inequality and decrease labor's share of national income. It might also be reducing business dynamism, which has taken a dive since 2000. ..."
Amid the blizzard of election news last November, two writers at the nonprofit news organization
ProPublica came out with a startling
investigative report . Jesse Eisinger and Justin Elliott wrote about a small but very wealthy
group of American economists who make millions of dollars helping companies deal with the federal
government on antitrust cases.
They focused on
Dennis
Carlton , a professor at the University of Chicago's Booth School of Business, and a senior managing
director at the consulting firm Compass
Lexecon . According to Eisinger and Elliott, Carlton has been paid more than $100 million from
consulting activities during his career.
That's an astounding sum, and it demonstrates how lucrative the economics profession can be for
those who reach the top echelons. But the ProPublica reporters suggest that much of this fortune
may have been made at the public's expense. Carlton and economists like him are mostly hired by companies
that want to do big mergers and acquisitions. This basically involves convincing the government --
which reviews all large corporate acquisitions -- that the merger won't hurt consumers.
Mergers can hurt consumers by giving companies increased market power. The less competitive an
industry is, the more the big companies can raise prices, which not only makes life more painful
for consumers, but limits the size of the market itself, reducing economic productivity. Any time
two companies want to merge, there's the possibility that the result could be a more efficient company,
which would lead to lower prices as production costs decline. But there's also the possibility of
a less efficient market, where prices rise because of increased monopoly power. You need economics
to predict which of these will happen.
Obviously, if consultants like Carlton are being paid by the companies that want to merge, they
have an incentive to use economics to predict a rosy outcome instead of a bad one. But how easy is
that? In an ideal world, it would be very difficult to get away with using economic models to make
slanted forecasts. If a certain type of model repeatedly got things wrong in biology or electrical
engineering, professors would toss it out, and it would probably no longer be used in most court
cases.
Econ is different. Despite a recent turn away from pure theory and toward empirical work, the
profession doesn't always insist on the most rigorous standards of evidence. Economists Joshua Angrist
and Jörn-Steffen Pischke have criticized the field of industrial organization, which deals with competition
and monopoly power. They say that
it still relies on obsolete theoretical models laden with questionable assumptions.
Does this mean that the theoretical models used by merger consultants like Carlton are wrong?
Not necessarily. It just means that it's very hard to know either way. As Eisinger and Elliott demonstrate,
however, the models have been known to make some pretty big mistakes. One example they cite is the
merger of appliance makers Maytag Corp. and Whirlpool Corp. in 2005. Carlton, hired by those companies,
wrote that international competition would prevent the new super-company from raising prices. But
he was wrong, and prices went up.
This sort of result seems to be the norm in recent years. Northwestern University economist John
Kwoka has written
an entire book in which he documents how lax U.S. antitrust policy has resulted in less competition
and higher prices -- the kind of thing the high-flying consultants are paid to say won't happen.
The threat of excessive industrial concentration is worth paying more attention to. Economists
increasingly are focusing on the harms that monopoly power might be causing. In addition to the well-known
effect of higher prices, industrial concentration might exacerbate inequality and decrease
labor's share of national income. It might also be reducing business dynamism, which has
taken a dive since 2000.
So it probably makes sense to take a harder look at antitrust policy in general and merger consultants
more specifically. The U.S. system may simply be too lenient. It may rely too much on the testimony
of well-paid experts, who are able to use their models to reach the desired conclusion. One solution
might be for the government to review the predictions of expert consultants, and see whether they
end up being right or wrong -- something that Eisinger and Elliott say isn't done now. The results
of these follow-up studies could be made public, so courts and regulators know the track record of
a given model or consultant.
That's just one possibility. Any solution to this problem, though, should follow the principle
of greater empiricism. The more weight is given to evidence, and the less to theoretical assumptions,
the better it will be for the American consumer. Economics is becoming more empirical, and the lucrative
world of legal consulting should follow suit.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and
its owners.
To contact the author of this story:
Noah Smith at [email protected]
"These Professors Make More Than a Thousand Bucks an Hour
Peddling Mega-Mergers - The economists are leveraging their
academic prestige with secret reports justifying corporate
concentration. Their predictions are often wrong and
consumers pay the price."
That is just the headline. Way down in the discussion
comes the most damning statement:
"These complex mathematical formulations carry weight with
the government because they purport to be objective. But a
ProPublica examination of several marquee deals found that
economists sometimes salt away inconvenient data in footnotes
and suppress negative findings, stretching the standards of
intellectual honesty to promote their clients' interests."
Of course the government is supposed to hire its own world
class economists to review the evidence as well. The problem,
however, is that these government agencies are often
underfunded. It is hard to compete with the mega-firms who
pay $1000 an hour for a consultant when the entire budget for
the government review agency is only $100,000. Penny wise,
pound foolish.
"... John Kenneth Galbraith laid out the problem of companies with too much market/political power back in the 1950s and 60s. I never read Galbraith in an economics course, only on my own. Economists were not interested...not enough mathematics and marginal this equals marginal that. ..."
John Kenneth Galbraith laid out the problem of companies with
too much market/political power back in the 1950s and 60s. I
never read Galbraith in an economics course, only on my own.
Economists were not interested...not enough mathematics and
marginal this equals marginal that.
Nothing like
overlooking the elephant is the room...something that
economists are better at doing than trying to do their jobs.
by Yoram Bauman [1]
University of Washington, Seattle, Washington
The cornerstone of Harvard professor N. Gregory Mankiw's introductory economics textbook, Principles
of Economics, is a synthesis of economic thought into Ten Principles of Economics (listed in the
first table below). A quick perusal of these will likely affirm the reader's suspicions that
synthesizing economic thought into Ten Principles is no easy task, and may even lead the reader to
suspect that the subtlety and concision required are not to be found in the pen of N. Gregory Mankiw.
I have taken it upon myself to remedy this unfortunate situation. The second table below summarizes
my attempt to translate Mankiw's Ten Principles into plain English, and in doing so to provide the
uninitiated with an invaluable glimpse of the economic mind at work. Explanations and details can be
found in the pages that follow, but the average reader is advised to simply cut out the table below
and carry it around for assistance in the (hereafter unlikely) event of confusion about the basic
Principles of Economics.
#1. People face tradeoffs.
#2. The cost of something is what you give up to get it.
#3. Rational people think at the margin.
#4. People respond to incentives.
#5. Trade can make everyone better off.
#6. Markets are usually a good way to organize economic activity.
#7. Governments can sometimes improve market outcomes.
#8. A country's standard of living depends on its ability to produce goods and services.
#9. Prices rise when the government prints too much money.
#10. Society faces a short-run tradeoff between inflation and unemployment.
#1. Choices are bad.
#2. Choices are really bad.
#3. People are stupid.
#4. People aren't that stupid.
#5. Trade can make everyone worse off.
#6. Governments are stupid.
#7. Governments aren't that stupid.
#8. Blah blah blah.
#9. Blah blah blah.
#10. Blah blah blah.
At first glance, the reader cannot but be impressed by the translation's simplicity and clarity.
Accessibility, however, should not be mistaken for shallowness: further study will reveal hidden
depths and subtleties that will richly reward the attentive student. Indeed, a moment's reflection
will identify any number of puzzles and mysteries. Chief among them is probably this: Why do
Principles #8, #9, and #10 have identical translations?
The immediately obvious explanation is that these are macro-economic principles, and that I, as a
micro-economist, am ill equipped to understand them, let alone translate them.[2] As is often the
case in this complex world we live in, this immediately obvious explanation is also wrong. The true
reason I have provided identical translations of "Blah blah blah" for Principles #8, #9, and #10 is
that these principles say exactly the same thing, namely, "Blah blah blah." Sometime when you've got
a few hours to spare, go and ask an economist -- preferably a macro-economist -- what he or she
really means by "standard of living" or "goods and services" or "inflation" or "unemployment" or
"short-run" or even "too much." You will soon realize that there is a vast difference between, say,
what Principle #10 says -- "Society faces a short-run tradeoff between inflation and unemployment"
-- and what Principle #10 means: "Society faces blah between blah and blah." My translations are
simply concise renderings of these underlying meanings.
Having cleared up that issue, let us go back to Mankiw's
PRINCIPLE #1
People face tradeoffs.
TRANSLATION: Choices are bad.
The reasoning behind this translation is obvious. For example, imagine that somebody comes up to you
and offers you a choice between a Snickers bar and some M&Ms. You now have a tradeoff, meaning that
you have to choose one or the other. And having to trade one thing off against another is bad;
President Truman supposedly asked for a one-armed economics advisor because his two-armed economics
advisors were always saying, "On the one hand...but on the other hand..."
People who have not received any economics education might be tempted to think that choices are
good. They aren't. The (mistaken) idea that choices are good perhaps stems from the (equally
mistaken) idea that lack of choices is bad. This is simply not true, as Mancur Olson points out in
his book, The Logic of Collective Action: "To say a situation is 'lost' or hopeless is in one sense
equivalent to saying it is perfect, for in both cases efforts at improvement can bring no positive
results."
Hence my translation of Mankiw's first principle of economics: Choices are bad. This concept can be
a little difficult to grasp -- nobody ever said economics was easy -- but the troubled reader will
undoubtedly gain clarity from Mankiw's
PRINCIPLE #2
The cost of something is what you give up to get it.
TRANSLATION: Choices are really bad.
Beyond transforming Mankiw's semantic deathtrap into simplicity itself, this translation has the
advantage of establishing a connection between Principle #1 (Choices are bad) and Principle #2
(Choices are really bad).
To continue to deepen the reader's understanding of why choices are bad -- really bad -- let's
return to our previous example, in which somebody offers you a choice between a Snickers bar and a
package of M&Ms. Suppose, for the sake of argument, that you take the M&Ms. According to Mankiw, the
cost of those M&Ms is the Snickers bar that you had to give up to get the M&Ms. Your gain from this
situation -- what economists call "economic profit" -- is therefore the difference between the value
you gain from getting the M&Ms (say, $.75) and the value you lose from giving up the Snickers bar
(say, $.40). In other words, your economic profit is only $.35. Although you value the M&Ms at $.75,
having the choice of the Snickers bar reduces your gain by $.40. Hence Principle #2: Choices are
really bad.
Indeed, the more choices you have, the worse off you are. The worst situation of all would be
somebody coming up to you and offering you a choice between two identical packages of M&Ms. Since
choosing one package (which you value at $.75) means giving up the other package (which you also
value at $.75), your economic profit is exactly zero! So being offered a choice between two
identical packages of M&Ms is in fact equivalent to being offered nothing.
Now, a lay person might be forgiven for thinking that being offered a choice between two identical
packages of M&Ms is in fact equivalent to being offered a single package of M&Ms. But economists
know better. Being offered a single package of M&M effectively means having to choose between a
package of M&Ms (which you value at $.75) and nothing (which you value at $0). Choosing the M&Ms
gives you an economic profit of $.75, which is $.75 more than your economic profit when you are
offered a choice between two identical packages of M&Ms.
At this point it is worth acknowledging that (1) there may be readers who have failed to grasp the
above subtleties in their entirety, and (2) such readers may well be beginning to wonder whether
they are, in a word, stupid. Any lingering doubts should be eliminated by the Mankiw's
PRINCIPLE #3
Rational people think at the margin.
TRANSLATION: People are stupid.
One point that is immediately obvious to the most casual observer with the meanest intelligence is
that most people do not think at the margin. For example, most people who buy oranges at the grocery
store think like this: "Hmmm, oranges are $.25 each. I think I'll buy half a dozen." They do not
think like this: "Hmmm, oranges are $.25 each. I'm going to buy one, because my marginal value
exceeds the market price. Now I'm going to buy a second one, because my marginal value still exceeds
the market price..." We know most people don't think like this because most people don't fill their
shopping baskets one orange at a time!
But we are now led inexorably toward a most unhappy conclusion. If -- as Mankiw says -- rational
people think at the margin, and if -- as we all know -- most people do not think at the margin, then
most people are not rational. Most people, in other words, are stupid. Hence my translation of the
third principle of economics: People are stupid.
Before sinking into despair for the fate of the human race, however, the reader would be wise to
consider Mankiw's
PRINCIPLE #4
People respond to incentives.
TRANSLATION: People aren't that stupid.
The dictionary says that incentive, n., is 1. Something that influences to action; stimulus;
encouragement. SYN. see motive.
So what Mankiw is saying here is that people are motivated by motives, or that people are influenced
to action by things that influence to action. Now, this may seem to be a bit like saying that
tautologies are tautological -- the reader may be thinking that people would have to be pretty
stupid to be unmotivated by motives, or to be inactive in response to something that influences to
action. But remember Principle #3: People are stupid. Hence the need for Principle #4, to clarify
that people aren't that stupid.
Only truly stupid people can fail to understand my translation of Mankiw's
PRINCIPLE #5
Trade can make everyone better off.
TRANSLATION: Trade can make everyone worse off.
But, the reader may well be asking, isn't the translation of the fifth principle the exact opposite
of the principle itself? Of course not.
To see why, first note that "trade can make everyone better off" is patently obviously: if I have a
Snickers bar and want M&Ms and you have M&Ms and want a Snickers bar, we can trade and we will both
be better off. Surely Mankiw is getting at something deeper than this? Indeed, I believe he is. To
see what it is, compare the following phrases:
A: Trade can make everyone better off.
B: Trade will make everyone better off.
Now, Statement B is clearly superior to Statement A. Why, then, does Mankiw use Statement A? It can
only be because Statement B is false. By saying that trade can make everyone better off, Mankiw is
conveying one of the subtleties of economics: trade can also not make everyone better off. It is a
short hop from here to my translation, "Trade can make everybody worse off." (A numerical example
can be found in Note #3, below.)
The subtlety evident in Principle #5 is even more clearly visible in the next two principles.
PRINCIPLE #6
Markets are usually a good way to organize economic activity.
TRANSLATION: Governments are stupid.
and
PRINCIPLE #7
Governments can sometimes improve market outcomes.
TRANSLATION: Governments aren't that stupid.
To see the key role that Principle #5 plays in both of these statements, note that the original
phrasing of Principle #5 ("Trade can make everyone better off") leads to Principle #6 ("Governments
are stupid"). After all, if trade can make everyone better off, what do we need government for? But
the translation of Principle #5 ("Trade can make everyone worse off") leads to Principle #7
("Governments aren't that stupid"). After all, if trade can make everyone worse off, we better have
a government around to stop people from trading!
Like the first five principles, Principles #6 and #7 demonstrate the fine distinctions inherent in
the economic way of thinking. People are stupid, but not that stupid; trade can make everyone better
off, but it can also make everyone worse off; governments are stupid, but not that stupid.
Exploring, refining, and delineating these distinctions is the subject matter of upper-level
economics classes, doctoral dissertations in economics, and the vast majority of papers in the
American Economic Review and other scholarly journals. Should the reader decide to follow this path,
the fundamental principles described on the first page of this article will provide invaluable
guidance.
Acknowledgement
Thank you to Ivars Skuja for assistance in taking and preparing the photographs[4] that accompany
this article.
Notes
1. My own microeconomics text, Quantum Microeconomics, can be found online at <http://www.smallparty.org/quantum>.
2. The exact meanings of the terms "micro" and "macro" may be lost on the reader -- or, more likely,
may never have been found in the first place. This should not be cause for concern: absence of these
terms from Mankiw's Ten Principles indicates that they are not of fundamental economic importance.
3. Many non-economists (and some economists) are intimidated by numerical examples. To make it
easier for those people to recognize that the following is a numerical example, it is formatted in
very small type.
Consider a small town with three families. It just so happens that Family #1 needs a snowblower,
Family #2 needs a leafblower, and Family #3 needs a lawnmower; each family values their particular
need at $200. Fortune appears to be smiling on this town, because it also just so happens that
Family #1 owns a leafblower, Family #2 owns a lawnmower, and Family #3 owns a snowblower. These sit
unused in their respective garages; each family has no use for its current piece of equipment, and
therefore values it at $0.
The situation appears ripe for gains from trade: Family #1 could buy a snowblower from Family #3 for
$100, Family #2 could buy a leafblower from Family #1 for $100, and Family #3 could buy a lawnmower
from Family #2 for $100. Each family would be $200 better off.
Unfortunately, life in this small town is not so simple; the town is located in a valley that is
susceptible to severe air pollution problems. Blowers and mowers emit large quantities of air
pollutants, and in fact each blower or mower that is used will make air pollution so bad that
hospital bills (for asthma, etc.) will increase by $80 for each family. Three additional blowers and
mowers will therefore increase each family's bills by $240.
Two results follow. First, the trades will still take place. For example, Family #1 and Family #3
will both be better off by $100 - $80 = $20 if Family #3 sells Family #1 its snowblower for $100.
Second, the three trades together make everyone worse off: each family gains $200 from buying and
selling, but loses $240 in hospital bills, for a net loss of $40.
4. To accommodate schools that teach micro and macro separately, Mankiw's Principles of Economics is
also published in separate pieces; the accompanying photographs are of the micro piece, Principles
of Microeconomics. Note that the same Ten Principles of Economics (some micro, some macro) appear in
all versions of the book.
"... Yes economists are diverse as a group, but the opinions of the majority of that group might be described as having moved to the right since 1970. ..."
Economists are enormously diverse as a group. Any piece that
explicitly or implicitly describes them as being homogeneous
is being reductionist at best.
But Noah makes good points.
Though it's probably worth emphasizing that if there exists a
problem of communication between professionals and the
public, there is probably mutual blame to be assigned.
Economists should talk better to the general public, but as
citizens we don't serve ourselves well when we expect the
world to cater to our lack of knowledge and interest in
complex but important issues.
I have to disagree. It is the professionals who need to do a
better job of educating the public. It is ridiculous to
assume that the general public has the time or resources to
discover this for themselves.
Yes economists are diverse as a group, but the opinions
of the majority of that group might be described as having
moved to the right since 1970.
And often certain types
of economists are described as fringe and there is a
reluctance to discuss their ideas. That is somewhat
understandable because any one economist has only so much
time, but it seems to go deeper than that very often. Trade
has been one of those areas, and I am happy to see many
economists doing some re-evaluation of the free trade mantra,
among other things. I would include Paul Krugman in that
group.
As far as being a knowledge lacking citizen- well we
all are. Ain't no economist got it all completely figured out
as far as I know. That's how I read Noah Smith's article, as
a call to re-examine some previously sacred ideas with maybe
a goal of keeping in mind their effects on different segments
of society. And economists or anyone else who wants to impact
public policy in a democracy certainly should expect to cater
somewhat to those who are less knowledgeable about their
theories.
I have come around to the idea to the idea that the people
and the left have been ill-served by economists. Whether on
trade or on other issues, they are used for their supposed
expertise to argue against "populist" solutions. "Populist"
solutions aren't efficient. Most center-left economists
attacked Sanders for being unserious.
People no longer
trust them after being played.
Krugman and others want it just to be about the blue time
versus the red team, Keynesianism versus neoclassical. That's
the acceptable frame of debate.
But as the election of Trump has shown, it's more
complicated than that.
The left needs better economists. It's nice to see Piketty
join the campaign of France's Bernie Sanders, who just beat
their center-left Hillary in the Socialist primary. He knows
things need to change.
If he had joined Bernie Sanders campaign he would have
been attacked by the center-left economists as "unserious"
and "populist."
Economists mostly argue from authority and people no
longer trust their authority. Smith is suggesting they can
fall back on empirics and science to boost their legitimacy
only if their science backs the truth. Unfortunately
economics is too political.
Really? Offhand, I can
think of Dr Krugman and Joe Stiglitz having won Nobel prizes.
How many right wing economists have won a nobel in, say the
last 25 years?
Peter K is absolutely correct here in his criticism. Krugman
made the transition in the 90s with the Clinton/Rubin
economic regime. Their day is over. Obama embraced the same
and we are all paying the price. By shooting down Bernie,
they killed their chances in the election. We need a change.
and yes, I agree with Noah. Economists should hold their head
in shame. Not for not predicting the crisis. But for doing
little afterwards than boosting asset prices.
Repeat after me - High stock prices do NOT cure cancer.
pgl's usual denial: "Care to provide a link to where Krugman
declared no one would be hurt by a movement to free trade?"
pgl intentionally ignores the link I posed many times wherein
Krugman stated that labor would benefit from China's
accession to WTO...3 million jobs lost later, Krugman finally
started to rethink his full throated embrace of 'free' trade,
but not pgl!
All too often, economists posing as leftists, like PK,
champion investor friendly policies, claiming that they will
help labor. And then, when people finally start to catch onto
the bait and switch, they wonder why people don't trust
economists!
Tom has no idea how much of the loss of blue collar labor
demand in recent decades was due to trade policy vs
non-policy related trade trends vs technology shifts.
Further, he has no interest in even beginning to attempt to
assess the issue.
So I don't think he has any room to talk about who was
"wrong" about the impact of trade on workers.
To the extent that he actually was wrong (he did minimize
distributional effects in much of his earlier work), he has
admitted it and changed his ways.
"...How many right wing economists have won a nobel in, say
the last 25 years?"
[Economists don't designate
conservative or liberal when they hand up their shingle, so
one must use supply side, Austrian School, and neoclassical
orientations as a proxy for conservative ideology. New
Keynesian is a little on the fence, say centrist.]
Ronald Coase - 1991
Gary Becker - 1992
Robert Fogel (jointly with Douglass North, but North can
only be definitively classified as eclectic with a whiff of
neoclassical general equilibrium) -1993
John Harsanyi, John Nash, and Reinhard Selten won jointly
in 1994. They were the game theory guys, which along with
their theory of non-cooperative games made considerable
contributions to utilitarian ethics, which do no always lead
to happy endings for broadly shared social welfare. They were
NOT conservatives themselves by any stretch of the
imagination, but they were not notably liberals either. Crazy
people in search of impossible perfection but willing to cut
off a few limbs to get there is my impression.
Robert Lucas - 1995 ('nuff said)
Praise the lord, holy Jesus in 1996 William Vickrey and
James Mirrlees who ARE actual liberals were award the Nobel
"for their fundamental contributions to the economic theory
of incentives under asymmetric information," a topic of great
interest to conservatives.
Robert Merton (a social scientist) and Myron Sholes (a
financial economist) won in 1997 "for a new method to
determine the value of derivatives."
I almost had a heart attack when I got to this one.
Amartya Sen won in 1998 "for his contributions to welfare
economics." Of course he is from India.
Robert Mundell won in 1999 "for his analysis of monetary
and fiscal policy under different exchange rate regimes and
his analysis of optimum currency areas." Yep, this is the
supply sider that gave the world the EU crisis.
James Heckman "for his development of theory and methods
for analyzing selective samples" and Daniel McFadden "for his
development of theory and methods for analyzing discrete
choice" won jointly in 2000, another case of two liberals
getting awarded for research that was of interest to
conservatives while being almost entirely unrelated to their
own major contributions.
Similarly in 2001, George Akerlof, Michael Spence, and
Joseph Stiglitz won jointly "for their analyses of markets
with asymmetric information." This one actually had liberal
application, but my guess is they got it because
conservatives were scratching their heads about where they
went wrong with the dot-com bubble.
OK, I got other stuff to do now, but you can take the link
and figure it out for yourself. Clearly winning a Nobel still
does not make an economists a champion of the liberal
political cause. Still to go is Ed Prescott in 2004 if you
get my drift.
There is actually a book that discusses this in far greater
detail that I only discovered well into my own analysis with
Google and Wikipedia, but where I looked the experts that
wrote the book had the same judgements and misgivings as I
did.
I agree with Peter K.
...........
The "Nobel prize" was established as 'The Swedish National
Bank's Prize in Economic Sciences in Memory of Alfred Nobel".
Some critics argue that the prestige of the Prize in
Economics derives in part from its association with the Nobel
Prizes, an association that has often been a source of
controversy.
Among them is the Swedish human rights lawyer Peter Nobel,
a great-grandson of Ludvig Nobel.[27] Nobel criticizes the
awarding institution of misusing his family's name, and
states that no member of the Nobel family has ever had the
intention of establishing a prize in economics.[28]
According to Samuel Brittan of the Financial Times, both
of the former Swedish ministers of finance, Kjell-Olof Feldt
and Gunnar Myrdal, wanted the prize abolished, saying,
"Myrdal rather less graciously wanted the prize abolished
because it had been given to such reactionaries as Hayek (and
afterwards Milton Friedman)."[25]
Avner Offer's and Gabriel Söderberg's The Nobel factor:
the prize in economics, social democracy, and the market turn
(Princeton University Press 2016) argues that there has been
a dramatic shift in the dominant macroeconomic theories among
the academia, and that the creation of the Nobel in 1969 was
the cause of this, as it enhanced the prestige of free market
ideology and conferred upon it the status of science.
Governments today in both Europe and the United States have succeeded in casting government spending
as reckless wastefulness that has made the economy worse. In contrast, they have advanced a policy
of draconian budget cuts--austerity--to solve the financial crisis. We are told that we have all
lived beyond our means and now need to tighten our belts. This view conveniently forgets where all
that debt came from. Not from an orgy of government spending, but as the direct result of bailing
out, recapitalizing, and adding liquidity to the broken banking system. Through these actions private
debt was rechristened as government debt while those responsible for generating it walked away scot
free, placing the blame on the state, and the burden on the taxpayer.
That burden now takes the form of a global turn to austerity, the policy of reducing domestic
wages and prices to restore competitiveness and balance the budget. The problem, according to political
economist Mark Blyth, is that austerity is a very dangerous idea. First of all, it doesn't work.
As the past four years and countless historical examples from the last 100 years show, while it makes
sense for any one state to try and cut its way to growth, it simply cannot work when all states try
it simultaneously: all we do is shrink the economy. In the worst case, austerity policies worsened
the Great Depression and created the conditions for seizures of power by the forces responsible for
the Second World War: the Nazis and the Japanese military establishment. As Blyth amply demonstrates,
the arguments for austerity are tenuous and the evidence thin. Rather than expanding growth and opportunity,
the repeated revival of this dead economic idea has almost always led to low growth along with increases
in wealth and income inequality. Austerity demolishes the conventional wisdom, marshaling
an army of facts to demand that we austerity for what it is, and what it costs us.
An interesting Keynesian view of the current EU austerity programs
" I found this to be a very interesting and thought provoking book. The author makes his viewpoint
very clear with the book's subtitle "The History of a Dangerous Idea". The essence of the author's
argument is that austerity is unfair because it makes workers pay for the mistakes of banks, and
even more importantly, dangerous because it does not lead to prosperity, but only to decreased
economic growth and increased unemployment. This thesis is backed up by an analysis of the banking
crisis of 2008, how it spread from the US to the EU, why the single currency Euro has made the
problem worse for the EU and why using austerity to solve the problems will not work. It also
discusses the history of the idea of austerity, both in terms of the economic theory that promotes
it and the economic history that does not. Conservatives, who find Keynesian economics to be not
only wrong, but also the road to economic ruin, will likely be turned off by the book's subtitle
and many of the arguments that Professor Blyth utilizes. However, there is a lot of data in this
book that they should look at, if only to criticize it. I found this book very enlightening and
while I do not agree with all of Professor Blyth's ideas (particularly those of the last chapter),
I learned a lot, so for me it was 5-stars.
What is in the book?
The book is divided into 7 chapters, which cover the following:
Chapter 1 - A Primer on Austerity. This is a short chapter that summarizes the main thesis of
the book (mentioned above), and sets the stage for the more detailed discussions in subsequent
chapters.
Chapter 2 - America: To Big to Fail? This is an excellent chapter that summarizes the origins
and unfolding of the 2008-banking crisis in the US. This is a very complicated story, which Professor
Blyth tells in a clear manner. The story revolves around repurchase agreements (Repos), mortgage
backed securities (MBS), collateralized debt obligations (CDO), credit default swaps (CDS), and
how all these interacted in a climate of deregulation to produce the crisis. Professor Blyth does
a good job of explaining these terms and how the interaction worked.
Chapter 3 - Europe: Too Big to Bail? This is another very illuminating chapter. It shows how Europe,
which first believed it was not going to be affected by the US banking crisis, became a major
casualty of it and their own internal banking problems. All these factors were compounded by the
single currency Euro, which has removed devaluation as a solution to the crisis, instead fostering
the idea that governmental austerity was the only way to correct a problem produced by the private
banking sector.
Chapter 4 - Intellectual History of a Dangerous Idea 1692-1942. This chapter goes back to the
writings of John Locke, David Hume and Adam Smith to see how the idea of austerity developed.
It also covers the idea in the early 20th century and the development of anti-austerity Keynesian
economic theory. It is a nice primer on classical economic ideas.
Chapter 5 - Intellectual History of a Dangerous Idea 1942-2012. This chapter carries the story
of the idea of austerity into the present time. It shows how the idea of austerity, discredited
by the Great Depression and the success of the Keynesian solution (although conservatives would
argue these successes were illusory and set the stage for future economic problems), has been
resurrected by economists writing in the latter part of the 20th century and early 21st.
Chapter 6. Austerity's Natural History 1914-2012. Blyth presents a lot of data that shows that,
contrary to the theories presented in the previous chapter, austerity has not worked in practice.
Much of the chapter is spent it refuting the writings of several economists that say that the
recent historical data does support the idea. Blyth contends that in general it does not and if
is does in a few cases it either does not when all the data is considered, or worked only marginally
under a very limited set of conditions.
Chapter 7 - The End of Banking, New Tales and a Taxing Time Ahead. This is a very short eleven-page
chapter, but perhaps the most controversial on in the book. Blyth, initially a supporter of bank
bailouts as absolutely necessary to prevent a complete collapse of the banking system and with
it the whole capitalist economic system and with it democratic society as a whole, now questions
whether in might not have been better to let the banks fail. He cites the case of Iceland where
the banks were allowed to fail and society has recovered. This was done by making the bank's creditors
bear the cost of failure, instead of all of Iceland's citizens. He notes that most of this loss
was borne by foreign creditors of a very small country, whose banking system was an immense part
of the country's economy, but was small compared to the economies of the US or the EU. Unfortunately,
he fails to say how a banking collapse in the US or EU could be handled when the systems are huge
compared to Iceland's and where the creditors are largely internal. He does not explain how the
failure of these huge banking systems, with their internal creditors, would not result in the
scenario he originally envisioned. I found this analysis to be poor and not in keeping with the
thoroughness of the rest of the book. Blyth also floats the idea of huge tax increases, either
through a one-time tax on assets or a very large increase in higher bracket tax rates. Conservatives,
and many not quite so conservative, will likely blanch at these ideas. There is no discussion
of the political difficulties of doing this or very much development of the idea, which is contained
in only the last four pages of the book.
David
Lindsay on September 25, 2016 Format: Paperback Verified Purchase
Brilliant Overview
" Mark Blyth is a professor at Brown University and he explains why austerity doesn't work.
He points out that whenever austerity has been tried in the past it has usually proven to be disastrous.
What its supporters often seem to forget is that one person's spending is another's income and
demand in the economy would collapse if everyone stopped spending. The book is a sobering read
because Blyth is not optimistic about the future. However, the book is well written and is often
funny.
Blyth shows that the case for austerity does not add up. The US did not pursue austerity during
the recession and its economy has been growing. US GDP is 10% higher than it was in 2007. The
EU has pursued austerity with vigor, but GDP in the euro zone is still lower than it was in 2007.
Blyth shows that countries that cut the most have had lower rates of growth. Blyth claims that
all the countries that cut public spending in response to the financial crises had significantly
more debt in 2012 than when they started. For example, Ireland's debt to GDP ratio more than quadrupled,
from 24.8% in 2007 to 106.4% in 2012. The other problem is that austerity increased unemployment.
Throughout southern Europe, unemployment has been at levels not seen since the Great Depression.
It is still over 20% in Spain and Greece. As a result of cutting public expenditure Greece's GDP
dropped by 30% in four years. There is no evidence that austerity improves growth.
Blyth spends a lot of time trashing the pro-austerity thinking that took place in Europe. Germany
is driving economic policy for the euro zone and they have never believed in Keynesian economics.
Keynes advised that austerity was a bad idea during a recession. German politicians seem to believe
that all nations could have trade surpluses if only they tried hard enough, despite the fact that
it is impossible for all countries to have a surplus. Only one European country can be Germany.
The Germans have often advocated the sort of solutions that failed in the 1930s. They argue that
budget deficits and government debt have to be kept under strict control. The Maastricht Treaty,
which established the EU, required that national debt should not exceed 60% of GDP and the deficit
should not exceed 3.0%. Entry to the euro also requires a budget deficit of 3.0%.
Blyth points out that when you have a deficit, you can either raise taxes or cut spending to fill
the gap. The British government of David Cameron favored the latter in 2010. The British deficit
had reached 10% in 2010. However, UK government debt went up, not down, despite the cuts, from
52.3% of GDP in 2009 to 90.7% in 2013. The same pattern was repeated throughout the euro zone.
Cutting public expenditure shrank the underlying economy.
The German argument is that running large deficits increases the risk of high inflation. Blyth
points out that the Germans have selective amnesia about their past. It was the Wall Street Crash
in 1929 not hyper-inflation in 1924 that led to Hitler. Before the crash, 1.25 million people
were unemployed in Germany. Hitler was an accidental Keynesian and by 1937 German unemployment
had fallen from six million to one million. Unfortunately, much of his spending involved preparing
for war. Blyth argues that Germany's continuing insistence on austerity is the biggest threat
to the euro zone.
According to Blyth, the current version of the austerity argument was created by a group of Italian
economists, originating from Bocconi University, in Milan. He explains why their arguments are
deeply flawed. Blyth argues that, apart from Greece, public sector debt in the euro zone countries
was not out of control before the financial crises. Blyth rubbishes the theory of "expansionary
austerity," that cutting spending will lead to higher economic growth. The "austerians" believed
that large spending cuts would be followed by expansion rather than contraction. The reason, they
suggested, was that decisive fiscal austerity created confidence in the private sector. Keynesians
agreed that insufficient private spending was the cause of the problem, but only governments could
stimulate demand on the scale needed. Austerity failed to stimulate demand in Europe. Blyth also
argues that everybody cannot cut their way to growth at the same time. The IMF once went along
with austerity but it has recently concluded that austerity has had major adverse economic effects.
Blyth is worried that inequality could become a serious problem in the US. The 400 richest Americans
own more assets than the poorest 150 million. He argues that both major parties have written off
the bottom 30% of society. He claims that the American working class has not had a pay rise since
1979, and globalization has failed them. He believes this explains the anger behind the Trump
phenomenon. Blyth points out that rich Americans and the country's biggest companies are reluctant
to pay tax, so government borrowing has had to go up. Blyth claims that he pays more tax than
GE.
Blyth is critical of Republicans who advocated austerity. Republicans in the US also favored balancing
the budget and cutting taxes. Keynesians, like Paul Krugman, argued that this is what Herbert
Hoover tried to do in the early 1930s and the result was a 25% unemployment rate. Obama inherited
an 11.4% budget deficit in 2009. The Republicans wanted to cut government expenditure but Blyth
argues the reason the US has recovered faster than Europe is because it cut less. He makes it
clear that it is poorer people who usually rely on government services to make ends meet that
are the hardest hit when public expenditure is cut. He believes that the rich and corporate America
need to start paying more tax. He also argues that the US government should probably have let
its banks go bankrupt – as the Icelandic government did – rather than bail them out.
Blyth reminds us that 2008 was a private sector crisis. The debts of the banks landed on the balance
sheet of the public sector through bank bailouts and quantitative easing. In other words, taxpayers
bailed out the bankers. He calls this the "greatest bait-and-switch in modern history." The EU
is imposing austerity on southern Europe and dismantling the welfare state in Greece in order
to protect German banks that made stupid decisions.
Blyth in recent interviews has argued that the EU may have a sinister agenda and it really wants
to drag wages in Western Europe down to East European levels so that it can better compete with
China. I assumed this must be an exaggeration but it might not be. The Guardian mapped labor costs
across the euro zone from 1999 to 2013. What they found is that German workers have barely seen
wages rise for that 14-year stretch, despite Germany having massive trade surpluses. We could
be in for real trouble.
Fangon September 27, 2016 Format: Paperback Verified Purchase
The Richness of Austerity
" Mark Blyth tries to convey a simple message: austerity simply does not work. Defining austerity
as "voluntary deflation in which the economy adjusts through the reduction of wages, prices and
public spending to restore competitiveness .best achieved by cutting the state's budget, debts
and deficits" (p.2), Blyth argued that austerity's fallacies lies in the impossibility of having
everybody to be thrift at the same time and the cyclical nature of debt (pp.7 and 12).
Blyth also suggests that austerity efforts unevenly hurt the lower strata of societies (p.8),
and conflates debt and financialization problems in private sector (primarily referring to bank
and financial institutions) into state (sovereign) issues (p.6 and p.23). In the first three chapters,
Blyth strives to demonstrate that the financial and economic turmoil since 2008 is largely a crisis
of financialization, lack of regulation, slow growth and imbalance between monetary policy and
final creditor of printing press (in the case of Europe), not that of austerity (save the marginal
case of Greece). Blyth argues that it is a mentality of treating these crises as endogenous and
private actors as "rational" that underlay the bad policy choices in America and Europe (pp.91-93).
In chapters 4 through 6, Blyth provides an intellectual and practical history of austerity.
It is suggested that a spirit of thrift and aversion towards state and state spending runs through
the vein of economic liberalism, ranging from classical liberalism to neoclassical economics and
to the Austrian school. In more contemporary era, it is public choice theory, neoliberalism and
Milton Friedman's monetarism that carries this tradition forward to construct a pro-market and
private-sector-favoring package that turns public spending into a corporate calculation of costs
and benefits. Blyth goes on to illustrate the history of austerity in practice, arguing that it
is usually the Keynesian expansionary policies that couple austerity that reinvigorated economy
amid crises; austerity, carried out on its own, constitutes massive redistribution consequences.
Blyth obviously attempts to engage as wide an audience as possible in the public intellectual
realm. As much as he is successful in his empirical chapters, Blyth appears to fight a deflationary
economic policy with his own inflationary writing strategy. From chapters 4 to 5, he constantly
conflates the moral teaching of thrift and financial prudence from Adam Smith to avoidance of
debt, the Ordoliberalism's quest for order and proper state function to aversion of democratic
politics, the methodological insights of public choice to a general fear of bureaucracy and government,
and so on. These inflations, while sometimes credited, are bound to subject to scrutiny and questions.
Moreover, by glossing over the details of this rich intellectual history, Blyth dodges
some key questions that his empirical chapters also fail to articulate: what is the distinction
between private and public debt, and personal thrift and public austerity, when we talk about
austerity, and how significant is it? How does this distinction play out in more classical economic
philosophy?
And amid crisis, who should be considered the "ultimate creditor" or "final guarantor" of debt
(and money)? There questions certainly exceeds the scope and intention of Blyth's book, but they
should be instrumental in deepening our understanding of austerity.
I originally tried to post this comment
on Mainly Macro. It is in reply to some critical comments I received when I posted a comment suggesting
economists themselves were largely responsible for the unpleasant political consequences typified
by Trump and Brexit. I argued there has been a failure to properly communicate the serious distributional
implications of trade and globalization. This has led people to become disillusioned with stagnant
living standards and growing inequality. For some reason, my reply was disallowed, making it appear
as though I had no answer to my critics. As my reply addresses issues of concern here I am hoping
it will be published .
Thankyou for your replies to my comment.
Stéphane, I did not say trade gain arises from price convergence; neither do trade gains arise
from differences in opportunity costs (I think that is what you meant). Trade gain can arise from
several sources, these include relative differences in productive efficiency (Ricardian comparative
advantage), differences in relative factor abundance (HO theory), from tradeable goods where production
exhibits increasing returns to scale and from monopolistic competition (Krugman).
When trade gain is exhausted it is possible to derive further gains from factor mobility. For
example, shifting capital from a capital abundant region to a capital poor region will typically
result in further gains. An example of this process is off-shoring, where a firm shifts production
to another country where wages are lower and rent (the return on capital invested) is higher.
So why are potential gains from globalization a problem? The challenge is the sheer size of the
population industrializing from a very low capital base. Economically big regions with abundant labour
and scarce capital mean low wages and high rents extending into the long term. For a developed economy,
adopting a policy of free trade without capital controls with these regions will have two significant
consequences:
1. There is a trade induced shift to more capital intensive production driven by the factor advantage
of having a relative abundance of capital. This lowers the domestic labour share of GDP.
2. Capital abundance implies a capital drain as domestic saving is increasingly used to finance
foreign investment in productive capacity, driven by the higher foreign return. This correspondingly
lowers domestic investment which also slows growth. Labour now has less capital applied to it, reducing
labour productivity and also wages.
What are called "magnification effects" virtually guarantee wage earners are big losers in these
scenarios, whereas, capital owners are big winners; hence the rise in inequality.
The theoretical support for this view is very robust. I became interested in the debate when such
effects showed up strongly in the numerical trade models I develop. Economists, generally, have not
supported this basic theoretical perspective, preferring a grab bag of miscellaneous empirically
based models. Rapid technological change, too little technological change, skills biased technological
change, union demise, banks unwilling to lend, demographics, austerity, labour hoarding, financialization,
shift in consumer preference to services and on and on. Personally, I prefer basic economic theory
and regard all of these thought bubbles as garbage.
In answer to Anonymous, it is true; many economists assert automation is the principle cause of
our economic woes. This is theoretically baseless. I cannot describe a model of how technological
improvement is supposed to give rise to the above effects, because no such model exists. Improved
technology means we get more goods and services from the same resources of capital and labour, boosting
growth and wages and rents.
Why voting for Article 50 * may ruin an MP's career
The last time I did something like this was to urge Labour party members to vote for Smith
rather than Corbyn, knowing full well that Corbyn was almost certain to win. Being proved right
on that occasion is no consolation, because I would rather have been wrong. This is even more
futile, but now as then I feel a decision is about to be made that is both disastrous and irreversible.
I also want to say something about the longer term interests of MPs that I have not seen said
elsewhere.
There are so many principled reasons for MPs to vote against triggering Article 50. Let
me summarise what I see as the main ones here, but this is far from comprehensive....
Article 50 of the Treaty on European Union is a part of European Union law that sets out
the process by which member states may withdraw from the European Union.
1. Neoliberal economists are stooges of financial oligarchy
(much like Soviet economists were stooges of Communist Party)
and if they do not promote Washington consensus on trade and
globalization they would be ostracized and replaced by other
no less talented puppets. They all are replaceable and they understand
that perfectly well and behave accordingly. Being puppets they
have no degrees of freedom to express the discontent with neoliberalism.
2. The author himself is still in completely under the spell
of neoclassical economic framework. that's why his critique is
so superficial. As in "There is a trade induced shift to more
capital intensive production driven by the factor advantage of
having a relative abundance of capital. This lowers the domestic
labour share of GDP. " What a "neoliberal speak." Reminds me
1984 Newspeak. That was a political decision to shift capital
to developing countries in order to destroy union power and decimate
"trade unionism" as political force opposing to neoliberalism.
As simple as that.
"... More than any other economist of his century, Marx tied together the three major kinds of crisis that were occurring. His Theories of Surplus Value explained the two main forms of crises his classical predecessors had pointed to, and which the bourgeois revolutions of 1848 were fought over. These crises were the result of survivals from Europe's feudal epoch of landed aristocracy and banking fortunes. ..."
"... Financially, Marx pointed to the tendency of debts to grow exponentially, independently of the economy's ability to pay, and indeed faster than the economy itself. The rise in debt and accrual of interest was autonomous from the industrial capital and wage labor dynamics on which Volume I of Capital focused. Debts are self-expanding by purely mathematical rules – the "magic of compound interest." ..."
"... Industrial companies profit from labor not only by employing it, but by lending to customers. General Motors made most of its profits for many years by its credit arm, GMAC (General Motors Acceptance Corp.), as did General Electric through its financial arm. Profits made by Macy's and other retailers on their credit card lending sometimes accounted for their entire earnings. ..."
"... This privatization of rents and their transformation into a flow of interest payments (shifting the tax burden onto wage income and corporate profits) represents a failure of industrial capitalism to free society from the legacies of feudalism. ..."
"... Marx expected economies to act in their long-term interest to increase the means of production and avoid unproductive rentier income, underconsumption and debt deflation. Believing that every mode of production was shaped by the technological, political and social needs of economies to advance, he expected banking and finance to become subordinate to these dynamics. ..."
"... It seemed that the banking system's role as allocator of credit would pave the way for a socialist organization of economies. Marx endorsed free trade on the ground that industrial capitalism would transform and modernize the world's backward countries. Instead, it has brought Western rentier finance and privatization of the land and natural resources, and even brought the right to use these country's currencies and financial systems as casinos. And in the advanced creditor nations, failure of the U.S. and European economies to recover from their 2008 financial crisis stems from leaving in place the reckless "junk mortgage" debts, whose carrying charges are absorbing income. Banks were saved instead of industrial economies, whose debts were left in place. ..."
"... No observer of Marx's epoch was so pessimistic as to expect finance capital to overpower industrial capitalism, engulfing economies as the world is seeing today. Discussing the 1857 financial crisis, Marx showed how unthinkable anything like the 2008-09 Bush-Obama bailout of financial speculators seemed to be in his day. "The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values." [6] ..."
"... Marx wrote this reductio ad absurdum not dreaming that it would become the Federal Reserve's policy in autumn 2008. The U.S. Treasury paid off all of A.I.G.'s gambles and other counterparty "casino capitalist" losses at taxpayer expense, followed by the Federal Reserve buying junk mortgage packages at par. ..."
"... The failure to socialize banking (or even to complete its industrialization) has become the most glaring economic tragedy of Western industrial capitalism. It became the tragedy of post-Soviet Russia after 1991, letting its natural resources and industrial economy be financialized while failing to tax land and natural resource rent. The commanding heights were sold to domestic oligarchs and Western investors buying on credit with their own banks or in association with Western banks. This bank credit was simply created on computer keyboards. Such credit creation should be a public utility, but it has broken free from public regulation in the West. That credit is now reaching out to China and the post-Soviet economies as a means of appropriating their resources. ..."
"... Note: Marx described productive capital investment by the formula M–C–M´, signifying money (M) invested to produce commodities (C) that sell for yet more money (M´). But the growth of "usury capital" – government bond financing for war deficits, and consumer lending (mortgages, personal loans and credit card debt) – consist of the disembodied M–M´, making money simply from money in a sterile operation. ..."
The Paradox of Financialized Industrialization
By Michael Friday, October 16, 2015
These remarks were made at the World Congress on Marxism, 2015, at the School of Marxism, Peking
University, October 10, 2015. The presentation was part of a debate with Bertell Ollman (NYU).
I was honored to be made a permanent Guest Professor at China's most prestigious university.
When I lectured here at the Marxist School six years ago, someone asked me whether Marx was
right or wrong. I didn't know how to answer this question at the time, because the answer is so
complex. But at least today I can focus on his view of crises.
More than any other economist of his century, Marx tied together the three major kinds
of crisis that were occurring. His Theories of Surplus Value explained the two main forms of crises
his classical predecessors had pointed to, and which the bourgeois revolutions of 1848 were fought
over. These crises were the result of survivals from Europe's feudal epoch of landed aristocracy
and banking fortunes.
Financially, Marx pointed to the tendency of debts to grow exponentially, independently
of the economy's ability to pay, and indeed faster than the economy itself. The rise in debt and
accrual of interest was autonomous from the industrial capital and wage labor dynamics on which
Volume I of Capital focused. Debts are self-expanding by purely mathematical rules – the "magic
of compound interest."
We can see in America and Europe how interest charges, stock buybacks, debt leveraging and
other financial maneuverings eat into profits, deterring investment in plant and equipment by
diverting revenue to economically empty financial operations. Marx called finance capital "imaginary"
or "fictitious" to the extent that it does not stem from within the industrial economy, and because
– in the end – its demands for payment cannot be met. Calling this financial accrual a "void form
of capital."
[1] It was fictitious because it consisted of bonds, mortgages, bank loans and other rentier
claims on the means of production and the flow of wages, profit and tangible capital investment.
The second factor leading to economic crisis was more long-term: Ricardian land rent. Landlords
and monopolists levied an "ownership tax" on the economy by extracting rent as a result of privileges
that (like interest) were independent of the mode of production. Land rent would rise as economies
became larger and more prosperous. More and more of the economic surplus (profits and surplus
value) would be diverted to owners of land, natural resources and monopolies. These forms of economic
rent were the result of privileges that had no intrinsic value or cost of production. Ultimately,
they would push up wage levels and leave no room for profit. Marx described this as Ricardo's
Armageddon.
These two contributing forces to crisis, Marx pointed out, were legacies of Europe's feudal
origins: landlords conquering the land and appropriating natural resources and infrastructure;
and banks, which remained largely usurious and predatory, making war loans to governments and
exploiting consumers in petty usury. Rent and interest were in large part the products of wars.
As such, they were external to the means of production and its direct cost (that is, the value
of products).
Most of all, of course, Marx pointed to the form of exploitation of wage labor by its employers.
That did indeed stem from the capitalist production process. Bertell Ollman has just explained
that dynamic so well that I need not repeat it here.
Today's economic crisis in the West: financial and rent extraction, leading to debt deflation
Bertell Ollman has described how Marx analyzed economic crisis stemming from the inability of
wage labor to buy what it produces. That is the inner contradiction specific to industrial capitalism.
As described in Volume I of Capital, employers seek to maximize profits by paying workers as little
as possible. This leads to excessive exploitation of wage labor, causing underconsumption and
a market glut.
I will focus here on the extent to which today's financial crisis is largely independent of
the industrial mode of production. As Marx noted in Volumes II and III of Capital and Theories
of Surplus Value, banking and rent extraction are in many ways adverse to industrial capitalism.
Our debate is over how to analyze the crisis the Western economies are in today. To me, it
is first and foremost a financial crisis. The banking crisis and indebtedness stems mainly from
real estate mortgage loans – and also from the kind of massive fraud that Marx found characteristic
of the high finance of his day, especially in canal and railroad financing.
So to answer the question that I was asked about whether Marx was right or wrong, Marx certainly
provided the tools needed to analyze the crises that the industrial capitalist economies have
been suffering for the past two hundred years.
But history has not worked out the way Marx expected. He expected every class to act in its
own class interest. That is the only way to reasonably project the future. The historical task
and destiny of industrial capitalism, Marx wrote in the Communist Manifesto, was to free society
from the "excrescences" of interest and rent (mainly land and natural resource rent, along with
monopoly rent) that industrial capitalism had inherited from medieval and even ancient society.
These useless rentier charges on production are faux frais, costs that slow the accumulation of
industrial capital. They do not stem from the production process, but are a legacy of the feudal
warlords who conquered England and other European realms to found hereditary landed aristocracies.
Financial overhead in the form of usury-capital is, to Marx, a legacy of the banking families
that built up fortunes by war lending and usury.
Marx's concept of national income differs radically from today's National Income and Product
Accounts (NIPA). Every Western economy measures "output" as Gross National Product (GNP). This
accounting format includes the Finance, Insurance and Real Estate (FIRE) sector as part of the
economy's output. It does this because it treats rent and interest as "earnings," on the same
plane as wages and industrial profits – as if privatized finance, insurance and real estate are
part of the production process. Marx treated them as external to it. Their income was not "earned,"
but was "unearned." This concept was shared by the Physiocrats, Adam Smith, John Stuart Mill and
other major classical economists. Marx was simply pressing classical economics to its logical
conclusion.
The interest of the rising class of industrial capitalists was to free economies from this
legacy of feudalism, from the unnecessary faux frais of production – prices in excess of real
cost-value. The destiny of industrial capitalism, Marx believed, was to rationalize economies
by getting rid of the idle landlord and banking class – by socializing land, nationalizing natural
resources and basic infrastructure, and industrializing the banking system – to fund industrial
expansion instead of unproductive usury.
If capitalism had achieved this destiny, it would have been left primarily with the crisis
between industrial employers and workers discussed in Volume I of Capital: exploiting wage labor
to a point where labor could not buy its products. But at the same time, industrial capitalism
would be preparing the way for socialism, because industrialists needed to conquer the political
stranglehold of the landed aristocracy and the financial power of banking. It needed to promote
democratic political reform to overcome the vested interests in control of Parliaments and hence
the tax system. Labor's organization and voting power would press its own self-interest and turn
capitalism into socialism.
China has indeed exemplified this path. But it has not occurred in the West.
All three kinds of crisis that Marx described are occurring. But the West is now in a chronic
depression – what has been called Debt Deflation. Instead of banking being industrialized as Marx
expected, industry is being financialized. Instead of democracy freeing economies from land rent,
natural resource rent and monopoly rent, the rentiers have fought back and taken control of Western
governments, legal systems and tax policy. The result is that we are seeing a lapse back to the
pre-capitalist problems that Marx described in Volumes II and III of Capital and Theories of Surplus
Value.
This is where the debate between Bertell Ollman and myself centers. My focus is on finance
and rent overwhelming industrial capitalism to impose a depression stemming from debt deflation.
This over-indebtedness is making the labor/capital problem worse, by weakening labor's political
and economic position. To make matters worse, labor parties in the West no longer are fighting
over economic issues, as they were prior to World War I.
My differences with Ollman and Roemer: I focus on non-production costs
Bertell follows Marx in focusing on the production sector: hiring labor to produce products, but
trying to get as much markup as possible – while underselling rivals. This is Marx's great contribution
to the analysis of capitalism and its mode of production – employing wage labor at a profit. I
agree with this analysis.
However, my focus is on the causes of today's crisis that are independent and autonomous from
production: rentier claims for economic rent, for income without work – "empty" pricing without
value. This focus on rent and interest is where I differ from that of Ollman, and also of course
from that of Roemer. Any model of the crisis must tie together finance, real estate (and other
rent-seeking) as well as industry and employment.
The rising debt overhead can be traced mathematically, as can the symbiosis of the Finance,
Insurance and Real Estate (FIRE) sector. But the interactions are too complex to be made into
a single economic "model." I am especially worried that Roemer's model might be followed here
in China, because it overlooks the most dangerous tendencies threatening China today: Western
financial practice and its pro-rentier tax policy.
China has spent the last half-century solving Marx's "Volume I" problem: the relations between
labor and its employers, recycling the economic surplus into new means of production to provide
more output, higher living standards, and most obviously, more infrastructure (roads, railways,
airlines) and housing.
But right now, it is experiencing financial problems from credit creation going into the stock
market instead of into tangible capital formation and rising consumption standards. And of course,
China has experienced a large real estate boom. Land prices are rising in China, much as they
are in the West.
What would Marx have said about this? I think that he would have warned China not to relapse
into the pre-capitalist problems of finance funding real estate – turning the rising land rent
into interest – and into permitting housing prices to rise without taxing them away.
Soviet planning failed to take the rent-of-location into account when planning where to build
housing and factories. But at least the Soviet era did not force labor or industry to pay interest
or for rising housing prices. Government banks simply created credit where it was needed to expand
the means of production, to build factories, machinery and equipment, homes and office buildings.
What worries me about the political consequences of Roemer's model is that it focuses only
on what Marx said about the production sector and employer-labor relations. It does not ask how
"endowments" come into being – or how China has changed so radically in the past generation. It
therefore neglects the danger of industrial capitalism lapsing back into a rent-and-interest economy.
And by the same token, it underplays the threat to China and other socialist economies of adopting
the West's surviving pre-feudal practices of predatory Bubble Finance (debt leveraging to raise
prices) and wealth in the form of land-rent charges.
These two dynamics – interest and rent – represent a privatization of banking and land that
rightly are public utilities. Marx expected industrial capitalism to achieve this transition.
Certainly socialist economies must achieve it!
China has no need of foreign bank credit – except to cover the cost of imports and the foreign-exchange
cost of investment in other countries. But China's foreign exchange reserves already are large
enough to be basically independent of the U.S. dollar and euro. Meanwhile, the American and European
economies are suffering from chronic debt deflation and depression that will reduce their ability
to serve as markets – for their own producers as well as for China.
Today's debt-wracked economies throw into question just what kind of crisis the capitalist
countries are experiencing. Marx's analysis provides the tools to analyze its financial, banking
and rent-extraction problems. However, most Marxists still view the 2008 financial and junk mortgage
crash as resulting ultimately from industrial employers squeezing wage labor. Finance capital
is viewed as a derivative of this exploitation, not as the autonomous dynamic Marx described.
The costs of carrying the rising debt burden (interest, amortization and penalties) deflate
the market for commodities by absorbing a growing wedge of disposable business and personal income.
This leaves less to be spent on goods and services, causing gluts that lead to crises in which
businesses scramble for money. Banks fail as bankruptcy spreads. By depleting markets, finance
capital is antithetical to the expansion of profits and tangible physical capital investment.
Despite this sterility, finance capital has achieved dominance over industrial capital. Transfers
of property from debtors to creditors – even privatizations of public assets and enterprises –
are inevitable as the growth of financial claims surpasses the ability of productive power and
earnings to keep pace. Foreclosures follow in the wake of crashes, enabling finance to take over
industrial companies and even governments.
China has largely solved the "Volume I" problem – that of expanding its internal market for
labor, investing the economic surplus in capital formation and rising living standards. It is
confronted by Western economies that have failed to solve this problem, and also have failed to
solve the "Volumes II and III" problem: finance and land rent. Yet few Western Marxists have applied
his theories to the present downturn and its rentier problem. Following Marx, they view the task
of solving this problem to be solved by industrial capitalism, starting with the bourgeois revolutions
of 1848.
Already in 1847, Marx's Poverty of Philosophy described the hatred that capitalists felt for
landlords, whose hereditary rents siphoned off income to an idle class. Upon being sent copies
of Henry George's Progress and Poverty a generation later, in 1881, he wrote to John Swinton that
taxing land rent was "a last attempt to save the capitalist regime." He dismissed the book as
falling under his 1847 critique of Proudhon: "We understand such economists as Mill, Cherbuliez,
Hilditch and others demanding that rent should be handed over to the state to serve in place of
taxes. That is a frank expression of the hatred the industrial capitalist bears towards the landed
proprietor, who seems to him a useless thing, an excrescence upon the general body of bourgeois
production."
[2]
As the program of industrial capital, the land tax movement stopped short of advocating labor's
rights and living standards. Marx criticized Proudhon and other critics of landlords by saying
that once you get rid of rent (and usurious interest by banks), you will still have the problem
of industrialists exploiting wage labor and trying to minimize their wages, drying up the market
for the goods they produce. This is to be the "final" economic problem to be solved – presumably
long after industrial capitalism has solved the rent and interest problems.
Industrial capitalism has failed to free economies from rentier interest and rent extraction
In retrospect, Marx was too optimistic about the future of industrial capitalism. As noted above,
he viewed its historical mission as being to free society from rent and usurious interest. Today's
financial system has generated an overgrowth of credit, while high rents are pricing American
labor out of world markets. Wages are stagnating, while the One Percent have monopolized the growth
in wealth and income since 1980 – and are not investing in new means of production. So we still
have the Volume II and III problems, not just a Volume I problem.
We are dealing with multiple organ failure.
Instead of funding new industrial capital formation, the stock and bond markets to transfer
ownership of companies, real estate and infrastructure already in place. About 80 percent of bank
credit is lent to buyers of real estate, inflating a mortgage bubble. Instead of taxing away the
land's rising rental and site value that John Stuart Mill described as what landlords make "in
their sleep," today's economies leave rental income "free" to be pledged to banks. The result
is that banks now play the role that landlords did in Marx's day: obtaining for themselves the
land's rising rental value. This reverses the central thrust of classical political economy by
keeping such rent away from government, along with natural resource and monopoly rents.
Industrial economies are being stifled by financial and other rentier dynamics. Rising mortgage
debt, student loans, credit card debt, automobile debt and payday loans have made workers afraid
to go on strike or even to protest working conditions. To the extent that wages do rise, they
must be paid increasingly to creditors (and now to privatized health insurance and drug monopolies),
not to buy the consumer goods they produce. Labor's debt dependency thus aggravates the "Volume
I" problem of labor's inability to purchase the products it produces. To top matters, when workers
seek to join the middle class "homeowner society" by purchasing their homes on mortgage instead
of paying rent, the price entails locking themselves into debt serfdom.
Industrial companies profit from labor not only by employing it, but by lending to customers.
General Motors made most of its profits for many years by its credit arm, GMAC (General Motors
Acceptance Corp.), as did General Electric through its financial arm. Profits made by Macy's and
other retailers on their credit card lending sometimes accounted for their entire earnings.
This privatization of rents and their transformation into a flow of interest payments (shifting
the tax burden onto wage income and corporate profits) represents a failure of industrial capitalism
to free society from the legacies of feudalism.
Marx expected industrial capitalism to act in its own self-interest by industrializing banking,
as Germany was doing along the lines that the French reformer Saint-Simon had urged. However,
industrial capitalism has failed to break free of pre-industrial usurious banking practice. And
in the sphere of tax policy, it has not shifted taxes away from land and natural resource rent.
It has inverted the classical reformers' idea of "free markets" as being free from economic rent
and predatory moneylending. The slogan now means economies free for the rentier class to extract
interest and rent.
Mode of production or mode of parasitism?
Instead of serving industrial capitalism, today's financial sector is bleeding it to death.
Instead of seeking profits by employing labor to produce goods at a markup, it doesn't even want
to hire labor or engage in the process of production and develop new markets. The epitome of this
postindustrial economics is Enron: its' managers wanted no capital at all – no employment, only
traders at a desk (and crooked accountants).
Today's characteristic mode of accumulating wealth is more by financial than industrial means:
riding the wave of debt-financed asset-price inflation to reap "capital" gains. This seemed unlikely
in Marx's era of the gold standard. Yet today, most academic Marxists still concentrate on his
"Volume I" crisis, neglecting finance capitalism's failure to free economies from the rentier
dynamics surviving from European feudalism and the colonial lands conquered by Europe.
Marxists who went into Wall Street have learned their lessons from Volumes II and III. But
academic Marxism has not focused on the FIRE sector – Finance, Insurance and Real Estate. It is
as if interest and rent extraction are secondary problems to the dynamics of wage labor.
The great question today is whether post-feudal rentier capitalism will stifle industrial capitalism
instead of serving it. The aim of finance is not merely to exploit labor, but to conquer and appropriate
industry, real estate and government. The result is a financial oligarchy, neither industrial
capitalism nor a tendency to evolve into socialism.
Marx's optimism that industrial capital would subordinate finance to serve its own needs
Having provided a compendium of historical citations describing how parasitic "usury capital"
multiplied at compound interest, Marx announced in an optimistic Darwinian tone that the destiny
of industrial capitalism was to mobilize finance capital to fund its economic expansion, rendering
usury an obsolete vestige of the "ancient" mode of production. It is as if "in the course of its
evolution, industrial capital must therefore subjugate these forms and transform them into derived
or special functions of itself." Finance capital would be subordinated to the dynamics of industrial
capital rather than growing to dominate it. "Where capitalist production has developed all its
manifold forms and has become the dominant mode of production," Marx concluded his draft notes
for Theories of Surplus Value, "interest-bearing capital is dominated by industrial capital, and
commercial capital becomes merely a form of industrial capital, derived from the circulation process."
[3]
Marx expected economies to act in their long-term interest to increase the means of production
and avoid unproductive rentier income, underconsumption and debt deflation. Believing that every
mode of production was shaped by the technological, political and social needs of economies to
advance, he expected banking and finance to become subordinate to these dynamics. "There is no
doubt," he wrote, "that the credit system will serve as a powerful lever during the transition
from the capitalist mode of production to the production by means of associated labor; but only
as one element in connection with other great organic revolutions of the mode of production itself."
[4]
The financial problem would take care of itself as industrial capitalism mobilized savings
productively, subordinating finance capital to serve its needs. This already was happening in
Germany and France.
It seemed that the banking system's role as allocator of credit would pave the way for a socialist
organization of economies. Marx endorsed free trade on the ground that industrial capitalism would
transform and modernize the world's backward countries. Instead, it has brought Western rentier
finance and privatization of the land and natural resources, and even brought the right to use
these country's currencies and financial systems as casinos. And in the advanced creditor nations,
failure of the U.S. and European economies to recover from their 2008 financial crisis stems from
leaving in place the reckless "junk mortgage" debts, whose carrying charges are absorbing income.
Banks were saved instead of industrial economies, whose debts were left in place.
Irving Fisher coined the term debt deflation in 1933. He described it as occurring when debt
service (interest and amortization) to pay banks and bondholders diverts income from being spent
on consumer goods and new business investment.
[5] Governments use their tax revenues to pay bondholders, cutting back public spending and
infrastructure investment, education, health and other social welfare.
No observer of Marx's epoch was so pessimistic as to expect finance capital to overpower industrial
capitalism, engulfing economies as the world is seeing today. Discussing the 1857 financial crisis,
Marx showed how unthinkable anything like the 2008-09 Bush-Obama bailout of financial speculators
seemed to be in his day. "The entire artificial system of forced expansion of the reproduction
process cannot, of course, be remedied by having some bank, like the Bank of England, give to
all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated
commodities at their old nominal values."
[6]
Marx wrote this reductio ad absurdum not dreaming that it would become the Federal
Reserve's policy in autumn 2008. The U.S. Treasury paid off all of A.I.G.'s gambles and other
counterparty "casino capitalist" losses at taxpayer expense, followed by the Federal Reserve buying
junk mortgage packages at par.
Socialist policy regarding financial and tax reform
Marx described the historical destiny of industrial capitalism as being to free economies from
unproductive and predatory finance – from speculation, fraud and a diversion of income to pay
interest without funding new means of production. On this logic, it should be the destiny of socialist
economies to treat bank credit creation as a public function, to be used for public purposes –
to increase prosperity and the means of production to give populations a better life. Socialist
nations have freed their economies from the internal contradictions of industrial capitalism that
stifle wage labor.
China has solved the "Volume I" problem. But it still must deal with the West's unsolved "Volume
II and III" problem of privatized finance, land rent and natural resource rent. Western economies
seek to extend these neoliberal practices to use finance as a lever to pry away the economic surplus,
to finance the transfer of property at interest, and to turn profits, rent, wages and other income
into interest.
The failure to socialize banking (or even to complete its industrialization) has become
the most glaring economic tragedy of Western industrial capitalism. It became the tragedy of post-Soviet
Russia after 1991, letting its natural resources and industrial economy be financialized while
failing to tax land and natural resource rent. The commanding heights were sold to domestic oligarchs
and Western investors buying on credit with their own banks or in association with Western banks.
This bank credit was simply created on computer keyboards. Such credit creation should be a public
utility, but it has broken free from public regulation in the West. That credit is now reaching
out to China and the post-Soviet economies as a means of appropriating their resources.
The eurozone seems incapable of saving itself from debt deflation, and the United States and
Britain likewise are limping along as they de-industrialize. That is what leads them to hope that
perhaps socialist China can save them – as long as it remains free of the financial disease. asset
stripping and debt deflation. Western neoliberal economists claim that this financialization of
erstwhile industrial capitalism is "progress," and even the end of history. Yet having watched
China grow while their economies have remained stagnant since 2008 (except for the One Percent),
their hope is that socialist China's market can save their financialized economies driven too
deeply into debt to recover on their own.
Note: Marx described productive capital investment by the formula M–C–M´, signifying money
(M) invested to produce commodities (C) that sell for yet more money (M´). But the growth of "usury
capital" – government bond financing for war deficits, and consumer lending (mortgages, personal
loans and credit card debt) – consist of the disembodied M–M´, making money simply from money
in a sterile operation.
Footnotes
[1] In Volume III of Capital (ch. xxx; Chicago 1909: p. 461) and Volume III of Theories of
Surplus Value.
[2] Karl Marx, The Poverty of Philosophy [1847] (Moscow, Progress Publishers, n.d.): 155.
[3] Karl Marx, Theories of Surplus Value III: 468
[4] Capital III (Chicago, 1905), p. 713.
[5] See Irving Fisher, "The Debt-Deflation Theory of the Great Depression," Econometrica (1933),
p. 342. Online at http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf. He used the term to
refer to bankruptcies wiped out bank credit and spending power, and hence the ability of economies
to invest and hire new workers. I provide a technical discussion in Killing the Host (ISLET 2015),
chapter 11, and "Saving, Asset-Price Inflation and Debt Deflation," in The Bubble and Beyond,
ch. 11 (ISLET 2012), pp. 297-319.
[6] Capital III (Moscow: Foreign Languages Publishing House, 1958), p. 479.
"... The 1970s stagflation hit these companies particularly hard, with the result that the whole was worth less than the sum of the parts. This made for an easy formula for takeover artists: buy a conglomerate with as much debt as possible, break it up and sell off the pieces. ..."
"... But CEOs recognized how the newly-installed leaders of LBO acquisitions got rich through stock awards or option-type compensation. They wanted a piece of the action. ..."
"... It produces short-termism, underinvestment, and a preoccupation with image management . We wrote in 2005 for the Conference Board Review about how the preoccupation with quarterly earnings led companies to underinvest on a widespread basis . Richard Davies and Andrew Haldane of the Bank of England demonstrated that companies were using unduly high discount rates, which punished long-term investment. Pearlstein provides more confirmation: ..."
"... Obliquity gives rise to the profit-seeking paradox: the most profitable companies are not the most profit-oriented. ICI and Boeing illustrate how a greater focus on shareholder returns was self-defeating in its own narrow terms. Comparisons of the same companies over time are mirrored in contrasts between different companies in the same industries. In their 2002 book, Built to Last: Successful Habits of Visionary Companies, Jim Collins and Jerry Porras compared outstanding companies with adequate but less remarkable companies with similar operations. ..."
"... It is our social capital that is now badly depleted. This erosion manifests in the weakened norms of behavior that once restrained the most selfish impulses of economic actors and provided an ethical basis for modern capitalism. ..."
"... A capitalism in which Wall Street bankers and traders think peddling dangerous loans or worthless securities to unsuspecting customers is just "part of the game," a capitalism in which top executives believe it is economically necessary that they earn 350 times what their front-line workers do, a ..."
"... I think that you seriously underestimate Trump. Napoleon excelled in an environment where military success was primary; Trump excels in a mediated environment where PR and imagery are primary. IMVHO, there are some eerie parallels between the two men; whether you like them or not, both men could be characterized by: ambition, vision, vindictiveness, and a willingness obliterate traditional social and political boundaries. ..."
"... Many elite professionals are deeply upset with Trump's win. Yet the ideology that he represents is very much in line with the logic of corporate raiders, many of whom, like him, went to Wharton Business School. And many elite professionals, in particular lawyers and consultants, profited handsomely from the adoption of the buccaneer capitalist view of the world and actively enabled much of its questionable thinking and conduct. ..."
"... That Wharton Business School model is oblivious to the human needs for: fairness, reciprocity, culture, and the need to penalize duplicity. (I would argue that the Wharton model exalts duplicity, if only to pass it off as some kind of exceptional superpower wielded only by Business Elites.) When you corrode trust, you damage economies. ..."
"... Trump is the apotheosis of neoliberal economics + junk-bond fueled casino empires in a media environment that worships 'shareholder value' and has lost sight of what genuinely creates sustainable value over the long term. ..."
"... did Friedman capture the growing political aggressiveness of capital, as capital gradually overcame the Great Fear of the 30s and prepared to mount, as Streeck has argued, a counteroffensive against the constraints of welfare capitalism? Likely all of the above, but in what proportions? ..."
"... It is that acme of Liberalism, Warren Buffett that created this fad. At a time when corporate dividends were taxed as ordinary income, whereas a stock price bump would be tax deferred - and ultimately taxed at long term capital gains rates - the scheme was merely tax avoidance. Warren Buffett's entire empire is based on this and other tax avoidence schemes. ..."
"... The maximize shareholder value ideology in practice looks like maximize CEO compensation and to heck with the company's long term prospects. imo. ..."
"... Considering relationship between share's liquidity and short-termism , any measure which reduces share's liquidity, for example a high tax on short term capital gain, will greatly reduce both short-termism and corporate governance issues as share holders will be forced to assume the risk they were supposed to bear in exchange of supermacy of their interest. ..."
"... While it has damaged corporate social responsibilities and banks' and corporations' long-term financial stability, actions taken pursuant to the Shareholder Value optimization model have served well many individuals on Wall Street, at private equity firms, CEOs of large publicly traded corporations, hedge funds, networked board members, their academic and professional servicers, and the political elite ..."
"... Reflecting back on developments like the dotcom bubble of 1999-2000; the underlying causes of the financial collapse of 2007-09; massive debt-leveraged corporate stock buybacks; socially damaging private equity LBOs; the current volumes of opaque OTC derivatives at large financial institutions; repeated episodes of environmental damage caused by firms in extractive industries seeking short-term financial returns; and the license it provides to exert power over legislation and regulation by those who own and control these corporations in a Citizens United legal framework; etc., it is difficult to see much in the way of redeeming social value in this corporate governance model. ..."
"... Is it simple greed, stupidity, cynicism, groupthink, false consciousness, sociopathy, the 'attractions' of a certain lifestyle, daddy-didn't-love-them-enough or what that leads certain types to behave the ways they do and seek to justify it? ..."
From the early days of this website, we've written from time to time about why the "shareholder
value" theory of corporate governance was made up by economists and has no legal foundation. It has
also proven to be destructive in practice, save for CEO and compensation consultants who have gotten
rich from it.
Further confirmation comes from a must-read article in American Prospect by Steven Pearlstein,
When Shareholder Capitalism Came to Town. It recounts how until the early 1990s, corporations
had a much broader set of concerns, most importantly, taking care of customers, as well as having
a sense of responsibility for their employees and the communities in which they operated. Equity
is a residual economic claim. As we wrote in 2013:
Directors and officers, broadly speaking, have a duty of care and duty of loyalty to the corporation.
From that flow more specific obligations under Federal and state law. But notice: those responsibilities
are to the corporation , not to shareholders in particular ..Equity holders are at the
bottom of the obligation chain. Directors do not have a legal foundation for given them preference
over other parties that legitimately have stronger economic interests in the company than shareholders
do.
And even in the early 1980s, common shares were regarded as a speculative instrument. And rightly
so, since shares are a weak and ambiguous legal promise: "You have a vote that we the company can
dilute whenever we feel like it. And we might pay you dividends if we make enough money and are in
the mood."
However, 1900s raiders who got rich by targeting companies that had gotten fat, defended their
storming of the corporate barricades by arguing that their success rested on giving CEOs incentives
to operate in a more entrepreneurial manner. In reality, most of the 1980s deals depended on financial
engineering rather than operating improvements. Ironically, it was a form of arbitrage that reversed
an earlier arb play in the 1960s. Diversified corporations had become popular in the 1960s as a borderline
stock market scam. Companies like Teledyne and ITT, that looked like high-fliers and commanded lofty
PE multiples, would buy sleepy unrelated businesses with their highly-valued stock. Bizzarely, the
stock market would value the earnings of the companies they acquired at the same elevated PE multiples.
You can see how easy it would be to build an empire that way.
The 1970s stagflation hit these companies particularly hard, with the result that the whole
was worth less than the sum of the parts. This made for an easy formula for takeover artists: buy
a conglomerate with as much debt as possible, break it up and sell off the pieces.
But CEOs recognized how the newly-installed leaders of LBO acquisitions got rich through stock
awards or option-type compensation. They wanted a piece of the action.
One of their big props to this campaign was the claim that companies existed to promote shareholder
value. This had been a minority view in the academic literature in the 1940s and 1950s. Milton Friedman
took it up an
intellectually incoherent New York Times op-ed in 1970 . Michael Jensen of Harvard Business School
and William Meckling of the University of Rochester argued in 1976 that corporate managers needed
to have their incentives better aligned with those of shareholders, and the way to do that was to
have most of their pay be equity-linked. In the late 1980s, Jensen in a seminal Harvard Business
Review article, claimed that executives needed to be paid like entrepreneurs. Jensen has since renounced
that view.
Why The Shareholder Value Theory Has No Legal Foundation
Why do so many corporate boards treat the shareholder value theory as gospel? Aside from the power
of ideology and constant repetition in the business press, Pearlstein, drawing on the research of
Cornell law professor Lynn Stout, describes how a key decision has been widely misapplied:
Let's start with the history. The earliest corporations, in fact, were generally chartered
not for private but for public purposes, such as building canals or transit systems. Well into
the 1960s, corporations were broadly viewed as owing something in return to the community that
provided them with special legal protections and the economic ecosystem in which they could grow
and thrive.
Legally, no statutes require that companies be run to maximize profits or share prices. In
most states, corporations can be formed for any lawful purpose. Lynn Stout, a Cornell law professor,
has been looking for years for a corporate charter that even mentions maximizing profits or share
price. So far, she hasn't found one. Companies that put shareholders at the top of their hierarchy
do so by choice, Stout writes, not by law
For many years, much of the jurisprudence coming out of the Delaware courts-where most big
corporations have their legal home-was based around the "business judgment" rule, which held that
corporate directors have wide discretion in determining a firm's goals and strategies, even if
their decisions reduce profits or share prices. But in 1986, the Delaware Court of Chancery ruled
that directors of the cosmetics company Revlon had to put the interests of shareholders first
and accept the highest price offered for the company. As Lynn Stout has written, and the Delaware
courts subsequently confirmed, the decision was a narrowly drawn exception to the business–judgment
rule that only applies once a company has decided to put itself up for sale. But it has been widely-and
mistakenly-used ever since as a legal rationale for the primacy of shareholder interests and the
legitimacy of share-price maximization.
How the Shareholder Value Theory Has Been Destructive
The shareholder value theory has proven to be a bust in practice. Here are some of the reasons:
It produces short-termism, underinvestment, and a preoccupation with image management . We
wrote in 2005 for the Conference Board Review about
how the preoccupation with quarterly earnings led companies to underinvest on a widespread basis
. Richard Davies and Andrew Haldane of the Bank of England demonstrated that companies were using
unduly high discount rates, which punished long-term investment. Pearlstein provides more confirmation:
A recent study by McKinsey & Company, the blue-chip consulting firm, and Canada's public pension
board found alarming levels of short-termism in the corporate executive suite. According to the
study, nearly 80 percent of top executives and directors reported feeling the most pressure to
demonstrate a strong financial performance over a period of two years or less, with only 7 percent
feeling considerable pressure to deliver strong performance over a period of five years or more.
It also found that 55 percent of chief financial officers would forgo an attractive investment
project today if it would cause the company to even marginally miss its quarterly-earnings target.
As we've stated before, we've been hearing this sort of thing from McKinsey contacts for more
than a decade. And the "55 percent" figure likely understates the amount of short-termism. First,
even in a presumably anonymous survey, some CFOs might be loath to admit that. Second, for any project
big enough to impact quarterly earnings, the CFO is almost certain not to have the final say. So
even if his team approves it, it could be nixed by the CEO out of concern for earnings impact.
It empirically produces worse results . We've written from time to time about the concept of obliquity,
that in a complex system that is affected by interactions with it, it is impossible to map out a
simple path to a goal. As a result, other approaches are typically more successful. From
a 2007 Financial Times article by John Kay , who later wrote a book about the concept:
Obliquity gives rise to the profit-seeking paradox: the most profitable companies are not
the most profit-oriented. ICI and Boeing illustrate how a greater focus on shareholder returns
was self-defeating in its own narrow terms. Comparisons of the same companies over time are mirrored
in contrasts between different companies in the same industries. In their 2002 book, Built to
Last: Successful Habits of Visionary Companies, Jim Collins and Jerry Porras compared outstanding
companies with adequate but less remarkable companies with similar operations.
Merck and Pfizer was one such comparison. Collins and Porras compared the philosophy of George
Merck ("We try never to forget that medicine is for the people. It is not for the profits. The
profits follow, and if we have remembered that, they have never failed to appear. The better we
have remembered it, the larger they have been") with that of John McKeen of Pfizer ("So far as
humanly possible, we aim to get profit out of everything we do").
Collins and Porras also paired Hewlett Packard with Texas Instruments, Procter & Gamble with
Colgate, Marriott with Howard Johnson, and found the same result in each case: the company that
put more emphasis on profit in its declaration of objectives was the less profitable in its financial
statements.
Some more commonly-cited reasons for why a focus on shareholder value hurts performance is that
it dampens innovation. Pearlstein describes another, how it demotivates workers:
Perhaps the most ridiculous aspect of shareholder–über-alles is how at odds it is with every
modern theory about managing people. David Langstaff, then–chief executive of TASC, a Virginia–based
government-contracting firm, put it this way in a recent speech at a conference hosted by the
Aspen Institute and the business school at Northwestern University: "If you are the sole proprietor
of a business, do you think that you can motivate your employees for maximum performance by encouraging
them simply to make more money for you?" Langstaff asked rhetorically. "That is effectively what
an enterprise is saying when it states that its purpose is to maximize profit for its investors."
And on a societal level, it erodes social capital and trust, which are the foundations for commerce:
It is our social capital that is now badly depleted. This erosion manifests in the weakened
norms of behavior that once restrained the most selfish impulses of economic actors and provided
an ethical basis for modern capitalism.
A capitalism in which Wall Street bankers and traders think peddling dangerous loans
or worthless securities to unsuspecting customers is just "part of the game," a capitalism in
which top executives believe it is economically necessary that they earn 350 times what their
front-line workers do, a capitalism that thinks of employees as expendable inputs, a capitalism
in which corporations perceive it as both their fiduciary duty to evade taxes and their constitutional
right to use unlimited amounts of corporate funds to purchase control of the political system-that
is a capitalism whose trust deficit is every bit as corrosive as budget and trade deficits.
As economist Luigi Zingales of the University of Chicago concludes in his recent book, A Capitalism
for the People, American capitalism has become a victim of its own success. In the years after
the demise of communism, "the intellectual hegemony of capitalism, however, led to complacency
and extremism: complacency through the degeneration of the system, extremism in the application
of its ideological premises," he writes. "'Greed is good' became the norm rather than the frowned-upon
exception. Capitalism lost its moral higher ground."
Many elite professionals are deeply upset with Trump's win. Yet the ideology that he represents
is very much in line with the logic of corporate raiders, many of whom, like him, went to Wharton
Business School. And many elite professionals, in particular lawyers and consultants, profited handsomely
from the adoption of the buccaneer capitalist view of the world and actively enabled much of its
questionable thinking and conduct. As CEO pay rose, so to did the pay of top advisers. They couldn't
be all that good, after all, if they were in a wildy different income strata.
So as Lambert has warned, unless we hear a different economic and social vision from The Resistance,
which looks troubling to have more failed Democratic party influence behind it than either of us
like, the best we are likely to get is a restoration. And if you remember the French Revolution,
strongman Napoleon was succeeded by the Bourbon Restoration, which then led to the Second Empire
under his nephew. So if we want better outcomes, status quo ante is not good enough.
I beg to differ. First, you ignore the fact that equity is a residual claim. Everyone else comes
first. Every party that holds more senior instruments than equity, along with other parties that
have enforceable claims, like the IRS and those with solid contracts that would give them the rights
to damages in certain circumstances, have rights that are more enforceable under the law. You can't
overturn that via exchange rules.
Second, Amar Bhide explained in the Harvard Business Review in 1994 why public companies will
always have deficient governance. My recap of his main points:
Disenfranchised shareholders are an inherent feature of liquid stock markets. In 1994, Amar
Bhide argued in a Harvard Business Review article that efficient equity markets inevitably led
inevitably to deficient corporate governance. Bhide explained that an ambiguous promise like equity
is not suitable to be traded on an arm's length basis. Historically, equity investors typically
acted like venture capitalists: they knew the owners personally and were involved in the company's
affairs. The securities laws of 1933 and 1934 tried to make it safe for distant, transient shareholders
to invest by providing for timely, audited financial statements, disclosure of information about
top executives and board members, and prohibiting insider trading and other forms of market manipulation.
But that turns out to be inadequate. No outsider can be told enough to make an informed judement
about a company's prospects; critical information, like acquisition and plans for new products,
must be kept secret until well advanced because they are competitively sensitive. Boards are protected
from liability by directors' and officers' insurance (plus hardly anyone even bothers pursuing
board members. For instance, have any Lehman board members been sued?). Moreover, only a comparatively
small cohort of people are deemed public-company-board worthy. Their incentives are to make nice
in their community and not rock the boat, which means not making life difficult for the CEOs,
since a nominating committee (of the current board) is responsible for nominating directors, which
means the entire process is incestuous.
This system has been fairly impervious to outside challenge. Once in a while, a company is
so abysmally run that an activist investor will take up a proxy fight. But that dog seldom catches
the car; instead, they might get a bad CEO to exit or force a restructuring. The stock trades
up and the rabble-rousers take their winnings and depart. More polite efforts, even by large,
powerful shareholders, are much less effective. For instance, some major institutional investors
met with Goldman to object to the idea that the firm would pay lavish bonuses for 2009. The session
appears to have had no impact.
Main categories of complain about "Maximize Shareholder Value":
Category 1 – Other things should get more weight alongside shareholder value – e.g. societal
responsibility – this is valid, but not our current topic/issue.
Category 2- Current practices aren't leading to the election of smart, capable BOD members
acting primarily for shareholder value in their decision-making including hiring/fire of executives
and voting on their proposals. This shown by, among other things, the very high levels of executive
compensation relative to profit, the lack of correlation between executive compensation and profit,
and the huge severance packages for released executives. This is my topic – what would improve
that.
Your points don't seem to fall in those categories. Seniority of debtto equity is a respected
feature of the common business landscape, not normally thought of as a problem. Lack of complete
information when voting on corporate actions is also a feature of the corporate setup – representational
government. It doesn't stand in the way of the possibility of smart, conscientious executives.
Other issues like cronyism, bad BODs, etc. are in the way, poor rules, poor communication, lack
of interest by short term stakeholders, etc. are viewed as much more problematic.
You are omitting a key point in the post, which is that seeking to maximize shareholder value
results in lower returns for shareholders. It is empirically a bad idea.
There are many views as to why this is so, but the biggest are likely the short-termism and
obliquity. Electing more outspoken board members won't solve that.
My narrower point was addressing why this notion had never been enshrined in any corporate
charter: it would be seen as created undue conflicts regarding directors making sure clearly senior
obligations are met. Again, under very well settled law, directors and officers have duties of
loyalty and care to the corporation, and those take precedence to serving shareholders. Go read
any law firm guide to director duties.
One picky point: the analogy to Bonaparte really doesn't hold up. We haven't had our French
Revolution yet. And I'm rusty on my nineteenth century French history, but I don't think there's
much of a valid comparison between him and Trump anyway. "Strong man" is way too vague. Whatever
is going on with Trump, he's not a brilliant military tactician and strategist moving into a power
vacuum from inside the existing government.
Agree about the "Resistance." But I don't see how the corporate Democrats return to power at
this point - I mean real, governing power. Whatever comes next, it won't be that.
I don't know yet whether to hope for oaths on tennis courts or not. That's a really, really
last resort, obviously. These people running around punching alt-right Teen Beat cover boys and
breaking windows are either fools or something worse.
Also, it's nice to have data to go with my loathing of this "theory." I feel like we need a
different word for this stuff, though. All these intersecting economic beliefs that are not based
in facts and are easily repudiated by facts can't really be called theories, can they? They're
more like belief systems. They were never really about figuring out something about reality. They
were always about manipulating behavior through assertion to get desired outcomes, weren't they?
I think that you seriously underestimate Trump. Napoleon excelled in an environment where military success was primary; Trump excels in a mediated
environment where PR and imagery are primary. IMVHO, there are some eerie parallels between the
two men; whether you like them or not, both men could be characterized by: ambition, vision, vindictiveness,
and a willingness obliterate traditional social and political boundaries.
I thought this was particularly brilliant:
Many elite professionals are deeply upset with Trump's win. Yet the ideology that he
represents is very much in line with the logic of corporate raiders, many of whom, like him,
went to Wharton Business School. And many elite professionals, in particular lawyers and consultants,
profited handsomely from the adoption of the buccaneer capitalist view of the world and actively
enabled much of its questionable thinking and conduct.
That Wharton Business School model is oblivious to the human needs for: fairness, reciprocity,
culture, and the need to penalize duplicity. (I would argue that the Wharton model exalts duplicity,
if only to pass it off as some kind of exceptional superpower wielded only by Business Elites.)
When you corrode trust, you damage economies.
Trump is the apotheosis of neoliberal economics + junk-bond fueled casino empires in a media
environment that worships 'shareholder value' and has lost sight of what genuinely creates sustainable
value over the long term.
Isn't this just a side effect of optimization for one variable? And which variable to optimize
is a question of governance? Since the invention of quantifiable economy, and the move from haggling
to fixed price, particularly since the invention of monetary valuation in place of barter the
mathematics becomes relentless to get the last drop of blood out of whatever turnip you are
squeezing. And the invention of spreadsheets makes it that much easier to lean toward the quantitative,
over the qualitative. We saw a similar process in "value engineering" in automotive engineering
in that case to get the last ounce of weight out of the car, in order to optimize mileage, regardless
of less quantifiable values.
Awesome article. Great explanation of how wall street orchestrated casino capitalism controls
today's economy, and in a manner that is detrimental to everyone but the casino operators. Milton
Friedman's perverse views on "free markets", have turned the economy into a casino, first by destroying
the controls on the money supply, and then by destroying corporate governance and responsibility.
And we all know who makes all the money in any casino operation.
Agree, awesome article. And interesting Clearpoint addition that the Street has every incentive
to orchestrate volatility, to the detriment of many firms' greatest stakeholders, the neglected
employees.
This question is of central importance, I only wish you'd find reason to bring it up more often.
It raises another important question, although one that cannot be addressed so neatly: why has
the capitalist project tended to turn away from long term commitments to profit-seeking through
the production of (material) commodities?
Was Friedman's short-termist view simply foolish, a
mistake that has had very damaging impact but which can be reversed?
Or, was it an idea that somehow
picked up on declining opportunities for profit via sales of commodities, as writers like Amin
and Harvey variously argue?
Or - and the article skips over this - did Friedman capture the growing
political aggressiveness of capital, as capital gradually overcame the Great Fear of the 30s and
prepared to mount, as Streeck has argued, a counteroffensive against the constraints of welfare
capitalism? Likely all of the above, but in what proportions?
A lot of corporate governance is controlled by legal decisions.
These legal decisions are rendered by judges.
Future judges are well-socialized into free market views long before they ever hear cases or render
judgments. We are seeing this trend continue with the current SCOTUS nomination in the hands of
a GOP controlled Congress.
Some of these people truly believe that 'free markets' can somehow 'improve and perfect' Human
Nature. (See also: Ayn Rand, 'John Galt', Alan Greenspan) In other words, it's has more than a
whiff of Nietzsche's 'Uber-man' ideology in the mix. It's an ideal system for equating human worth
with net worth, and justifying vast inequalities in money and power.
Thus does the snake swallow its tail.
These judges fail to notice there is a large bump somewhere in the snake's body; at some point,
it ate the Golden Goose, and is slowly digesting.
This does not directly mention the "increase shareholder value" action of a company buying
its own stock.
That should be viewed as a red-flag admission from the senior executives that the company doing
a share buyback does not see a way to grow its markets, does not see suitable investments for
R&D. sees no pressing need to improve corporate infrastructure, sees no reason to train their
workers, and can't find suitable acquisitions that would enhance their business.
Effectively, the management team has scoured the globe searching for the best use of their
spare cash, and, surprisingly, determined that one financial security, THEIR own company's stock,
was the best use of the corporation's cash.
A share buyback plan could be viewed as a warning shot indicating that management lacks ideas
and is poorly managing the corporation.
Instead it falls under a "increase shareholder value" tactic.
+1. Used as an attempt to ward off a hostile takeover stock buybacks might be justifiable.
Mostly, however, this usually looks like a simple attempt to prop up prices.
It is that acme of Liberalism, Warren Buffett that created this fad. At a time when corporate dividends were taxed as ordinary income, whereas a stock price bump
would be tax deferred - and ultimately taxed at long term capital gains rates - the scheme was
merely tax avoidance. Warren Buffett's entire empire is based on this and other tax avoidence schemes.
Then, coupled with stock options for corporate management, the path was set.
Common criticisms of "Maximize Shareholder Value: 1) Should give more weight to something else
– e.g. societal concerns. 2) Execs – prioritize other things; 3) BOD's prioritize other things,
including their personal relationship to execs. Improving corporate governance can, in theory,
setup procedures and rules to fix 2) and 3) by making sure BOD's in publicly listed corporations
really have the legal power, and by making elections more open, including the selection of the
initial selection of BOD candidates. However, this still requires interest from a majority of
voting shareholders – it would be better to ask people not interested to not vote at all. (I tried
to thread this comment as a reply above but it repeatedly disappeared).
For a UK example of a company choosing not to maximise shareholder value, the disastrous acquisition
of HBOS by Lloyds is instructive. Management claimed to be looking through the (ridiculously underestimated)
short-term issues to the resulting long-term competitive advantages which the government assured
them (falsely) wouldn't subsequently be challenged.
Of the c95% acceptances supporting this lunatic
deal, some proportion of the institutional shareholders must have been idiots, a few must have
feared for the stability of the banking system were the deal rejected, and a great many must also
have been HBOS bondholders
"But CEOs recognized how the newly-installed leaders of LBO acquisitions got rich through stock
awards or option-type compensation. They wanted a piece of the action. "
The maximize shareholder value ideology in practice looks like maximize CEO compensation and
to heck with the company's long term prospects. imo.
I doubt that any of the CEOs which have said that they are being pressurized to short-termism
are actually willing this stupid concept to be removed considering they are the prime benefactor
of this.
I believe that supermacy of shareholders interest was originally adopted because they were bearing
risk. Shares being an illiquid asset were supposed to be a source of income not capital gain.
Due to this shareholders were forced to ensure that short-termism is avoided and corporate governance
is adequate. Things started to reverse slowly as liquidity of shares increased gradually.
Presently,
when shares can be sold in seconds of owning them, risk a share-holder bear is greatly lower
than they beared a century ago. Also , shares are bought for capital gain not income.
Considering
relationship between share's liquidity and short-termism , any measure which reduces share's liquidity,
for example a high tax on short term capital gain, will greatly reduce both short-termism and
corporate governance issues as share holders will be forced to assume the risk they were supposed
to bear in exchange of supermacy of their interest.
1. Profit – Objective: to achieve sufficient profit to finance our company growth and to provide
the resources we need to achieve our other objectives
2. Customers- Objective: To provide products and services of the greatest possible value to
our customers, thereby gaining and holding their respect and loyalty.
3. Fields of Interest- Objective: To enter new fields only when the ideas we have, together
with our technical, manufacturing and marketing skills, assure that we can make a needed and profitable
contribution to the field.
4. Growth – Objective: To let our growth be limited only by our profits and our ability to
develop and produce technical products that satisfy real customer needs.
5. Our people: Objective: To help HP people share in the company's success, which they make
possible; to provide job security based on their performance; to recognize their individual achievements;
and to insure the personal satisfaction that comes from a sense of accomplishment in their work
6. Management- Objective: To foster initiative and creativity by allowing the individual great
freedom of action in attaining well-defined objectives,
7. Citizenship – Objective: To honor our obligations to society by being an economic, intellectual
and social asset to each nation and each community in which we operate.
*****
Note, Hewett and Packard, themselves, may have owned 40-50% of the company stock at this time,
so they had great control of the company's direction at this time.
No corporate objective about shareholder value even though they were very large shareholders.
Yes, but. I remember someone from UMichigan business school (Gary Hamel, I think) speaking
to a group of top 2% Ford Motor Co. execs in the late 1980s. He asked, "Come on, guys how many
of you were thinking about shareholder value in the shower this morning?" The room laughed, but
one pudgy hand in the back went up. It belonged to Edsel Ford.
This takes us back, HP was so honest it almost sounds quaint. And 1974 was just before Reagan's
supply side economics stuff in the aftermath of the awful stagflation that hit us after Vietnam.
According to Paul Craig Roberts, supply side was embraced because it was thought to prevent inflation
(wage price spiral) and still provide sufficient jobs and products.
He goes on to say that supply-side/trickle-down
was a reasonable idea but it was hijacked by Wall Street who took it to heart and then used it
to justify offshoring jobs to enhance corporate profits, and eventually shareholder value. Because,
as PCR puts it, Wall Street forced companies to get lean and competitive and if they didn't nobody
invested in them: aka no shareholders if no timely shareholder value. So it was almost an extortion
racket. This was accompanied by all the corporate raiders and the real prosperity of the country
was quickly retarded and siphoned off. Great post, thanks Yves.
I have a rather naive question which I should have asked long ago in my one and only finance
class at college. Why does it matter if a share price drops all other things being equal? A company
sells shares, effectively handing out "residual claims" against cold, hard cash. If the cash is
invested in a business – and assuming the business is at least "break-even" plus the risk-free
rate of return- other than investor panic and CEO's getting "refreshed" stock options, why would
this matter?
Some reasons are frequently given for preferring a high stock price.
1. A low share price encourages others to acquire the company
2. A high price is good when stock is used as currency to buy other companies.
3. Executive compensation schemes are sometimes tied to stock price.
But if a company is not selling stock to fund current operations, then the stock price could
go to zero with no operational effect. The employees who own stock would not be pleased. However,
an apparent artificially low price could help with hiring new employees who may be granted low
priced options.
Occasionally I see someone claiming a company is being killed by short sellers driving the
stock price down. I don't see how this could damage the ongoing operations or cash flow EXCEPT
if the company is selling stock to fund operations or is trying to make a truly worthwhile acquisition
with their stock.
If a company is doing well and cash flow positive and short sellers drive the stock price down
too low, the company should use their cash to buy their shares and squeeze the shorts.
In the case of Hewlett-Packard there was no official stock price set by the investment community
for years, as the company waited a few years before doing an IPO.
The company was founded in 1939 and IPO'ed eighteen years later in 1957.
Imagine, operating for 18 years without Wall Street supervision.
Agreed with your point and John Wright's explanation. The idea that a stock price must be high
is dogma that is never questioned. The big reason is for concern re a low stock price is it is
seen as the market voting against management and an invitation for raiders to take the company
over.
But otherwise, if a company can raise enough money to fund expansion through its own cash flow
(which is the biggest source of investment fund) and debt (the next biggest source), there is
no reason to issue more stock (save your point re employee/executive stock options) and hence
no reason to care regarding the price.
Equity is a form of HPM these days, for C-corps, which can be used as a tool of pleasure [c-suite
bonuses et al] or a weapon of destruction [excuse for diminishing labour and the enviroment].
disheveled . the religion of free markets has become the dominate meme in society and those
that benefit the most from it . wellie see history .
I'm struggling with the short termism argument. The cash flows from equity don't have a maturity.
Bonds due. If a company sought to maximize bond holder value, they would minimize risk (and R&D)
to make sure sufficient funds were available to pay the bond holders. Equity maximization should
be longer term focused than the maximization of limited life securities.
While it has damaged corporate social responsibilities and banks' and corporations' long-term
financial stability, actions taken pursuant to the Shareholder Value optimization model have served
well many individuals on Wall Street, at private equity firms, CEOs of large publicly traded corporations,
hedge funds, networked board members, their academic and professional servicers, and the political
elite
Reflecting back on developments like the dotcom bubble of 1999-2000; the underlying causes
of the financial collapse of 2007-09; massive debt-leveraged corporate stock buybacks; socially
damaging private equity LBOs; the current volumes of opaque OTC derivatives at large financial
institutions; repeated episodes of environmental damage caused by firms in extractive industries
seeking short-term financial returns; and the license it provides to exert power over legislation
and regulation by those who own and control these corporations in a Citizens United legal
framework; etc., it is difficult to see much in the way of redeeming social value in this corporate
governance model.
Topical article highlighting a way to subvert corporate governance: Corrupt US govt. supports
secret oil company payments/bribes to corrupt foreign govts., whose autocratic leaders may be
major shareholders in the oil company too.
Not by usury maybe, but wealth came to Renaissance Italy through use of interest , hitherto
prohibited. And advances in book keeping. This wealth financed the great artists mentioned by
Pound.
Thanks for this post. I always found the notion of "maximizing shareholder value" to be very
strange, and counter to common sense. The concept of "stakeholders" always made more sense. For
a company to be managed with a focus on the wellbeing of workers, customers, and community, in
addition to owners, struck me as being obviously the way it should work. (And sometimes does.)
The idea that parties who happen to own a share of the company should have their interests
served above all is counter intuitive, as employees will almost always have a greater stake in
the company than any individual owner, if shares are widely distributed.
If you think of an sole proprietor who ventures forth to do business who has made clear to
all that his interests are paramount in any transaction, I do not envision customers flocking
to such an individual.
The apparent lack of basic decency in corporate/management decisions that we see so often is
just hard to reconcile with how most of us intuitively feel about how we see ourselves in the
context of our community: most people have a significant level of self interest, but we are always
aware of the need to consider the interests of others when we act. Even for something as basic
as waiting in line for something.
Somehow people at the elite levels of, finance for example, feel quite OK about heavily prioritizing
their own interest above all.
As someone not privy to this social realm, I am just mystified about the social dynamics that,
if not encourage this, at least consider it a fine way to do business.
In a small example, from my personal experience, I am a professional user of audio software
from Avid. Avid has been losing money year after year. Over the past five years the company as
taken actions that have outraged the user base, far more than any other software company I know
of. Their forum is over run with vitriolic ranting, from longtime customers. (In fairness, this
has abated a bit, as the company has finally been making moves that are sensible, and that meet
the needs of the users.)
There have been several rounds of significant layoffs, and the frontline workers bear the brunt
of the customers wrath. Morale has been low.
In conversation, a previous employee told me he considered management to be white collar criminals,
who were looting the company.
This type of product has a unique feature of having very strong platform lock-in effects. In
few other product categories would you see such angry customers continue to buy the products.
Yet the board has been approving generous compensation increases for C level management, and
for themselves for the past few years.
I'm fascinated from an everyday, social point of view, how the board and management make these
decisions. Do they really think they are doing a good job? From the outside, it appears to me
that they do it simply because they can, and have little concern for the long term well being
of any of the other stakeholdes.
Does anyone here have insight about the social dynamics that enable this behavior?
This is something I'd welcome some insights on too as I find certain behaviours and attitudes
impossible to understand.
Is it simple greed, stupidity, cynicism, groupthink, false consciousness, sociopathy, the
'attractions' of a certain lifestyle, daddy-didn't-love-them-enough or what that leads certain
types to behave the ways they do and seek to justify it? If they acted with a degree
of shame or embarrassment, or even full on chutzpah , I'd understand them more, but it's
the ordinary types, those who outwardly seem to be of the same species as oneself and otherwise
appear to be perfectly normal people that I just don't understand. I can believe almost anything
of them, except for the possibility that they actually, genuinely, believe that they are on the
right side of things.
I have similar brain fade when it comes to much of what politicians of the Right have to say
on most things. So often, and try as I might, I just can't understand how supposedly sentient
beings can honestly believe the drivel they come out with, still less have the brass-neck to stand
up in public and display just how effing stupid and cynical they are. Feel much the same about
all shades of politician but it's far worse on the Right.
"... General equilibrium thinking is the enemy of understanding - it requires as the interview shows (and he seems unaware of) a cascade of absurd assumptions. He also seems unaware that a series of unreal assumptions can't cancel out - their effects multiply. ..."
"... One of my finds in economic efficiency is to not read articles by George Farmer. Unlike Greg Mankiw, whom I never read, it is not a hard fast prohibitive rule. I sometimes allow myself to get sucked into reading George Farmer by an enticing title but such actions always come with a pang of guilt. ..."
He shouldn't humor such complete nonsense with so much respect.
General equilibrium thinking is the enemy of understanding - it requires as the interview
shows (and he seems unaware of) a cascade of absurd assumptions. He also seems unaware that a
series of unreal assumptions can't cancel out - their effects multiply.
One of my finds in economic efficiency is to not read articles by George Farmer. Unlike Greg
Mankiw, whom I never read, it is not a hard fast prohibitive rule. I sometimes allow myself to
get sucked into reading George Farmer by an enticing title but such actions always come with a
pang of guilt.
One can argue that reading Mankiw or Farmer is useful just to see what others are saying, what
other people read, and preventing oneself from isolation in the bubble chamber, but I don't buy
that argument. I get enough open mindedness just from Dani Rodrik, Dean Baker, Jared Bernstein,
and Menzie Chinn. I used to read Krugman, but that is mostly in the past now with exceptions a
little less rare than Farmer. I also skip reading most of the comments once the day gets going.
I am planting my last 25 daffodil bulbs today. It's a bit late. I already have over a dozen
coming up from earlier planting. I get up every morning to fix my wife coffee and the just wait
around doing this until the sun rises. Practicing good economics is worth more to me now that
reading bad economics.
Ron, what about these consecutive sentences from Duy- "That said, the central bank tends to react
fairly nimbly to changing economic conditions. It has repeatedly delayed action in response to
deteriorating economic or financial conditions."
Which one is it? Act nimble, or fail to act? I know what Duy means but I find the sentences
contradictory in a humorous way.
What Peter K said, at least in the terms that Duy would consider realistic. One can also posit
that the Fed failed to do enough or react soon enough in 2006-2007 or a host of other criticisms,
but all those criticisms would be out of bounds for central bank behavioral expectations in general
and Fed-watcher Tim Duy in specific. Market monetarists are less generous in that respect.
Economists are not noted for their sense of humor and I have a theory that exposure to economists
impairs the sense of humor in normal people. I am afraid mine has been badly damaged at this point.
Anyone here a lawyer? Maybe we can do a class action suit?
Jerry, you and Ron just made my day! My wife and are in lake Placid celebrating out 47th wedding
anniversary, and during our pre-dinner cocktail hour were depressing one another with excerpts
from today's news, and then I came across your Ron's comments. We nearly fell of our chairs laughing!
Thanks guys, we really needed this!
Darn it, you wont be able to join as a plaintiff if you keep that up Chris. Falling out of your
chair laughing does not demonstrate impaired humor- you will ruin my case! Perhaps you can maintain
that you were being very sarcastic? Sarcasm is the last bit of humor to be affected by economism
in my theory...
He neglected to bring illumination to his mention of cash replacing the maturing bond, and where
this cash comes from and what happens with the cash in light if the remittance requirements (where
excess cash is swept into the Treasury's accounts).
They cannot destroy the cash. The redeeming cash will come, in the case of a Treasury bond,
from Treasury who must borrow this amount to pay the Fed. If they are permitted to hokd the cash
on their books, and not remit, we still have borrowing by the public (and this sweeps excess off
of the books of buyers of this new debt) fir it to be placed somewhere if not remitted.
As I have said for quite some time it makes basic common sense to have a mature bond redeemed
via an accounting offset with Treasury as this avoids the need to borrow the money just to then
have it remitted back to Treasury. And why would the Fed and Treasury not do this??? I would like
someone to explain.
For example, why is the Fed doing this now when it could have been redeeming by offset during
the Obama administration (lowering the amount of public borrowing but financing the same nominal
spending).
This piece by Duy misses the absolutely most critical part of the redemption story.
Not what I meant. I have limited time and limited interest. Economics is secondary to politics
as it stands. I don't have sufficient means to become more politically involved yet though. So,
this is something rather than just nothing, but I cut my losses short. You are younger and apparently
more involved in this aspect of thought about the political economy. I am older and more intent
on positive action in my remaining time. There is not much new for me to think about that will
matter at all to me.
Well the other day Farmer said he rejects the Keynesian concept of Aggregate Demand and the consumption
function based on income. And provides no evidence except a recommendation to go and buy his book
to find out. That about does it for me.
No, no, no, no, I don't do it no more. Sometimes in the mornings waiting for the sun to rise then
I actually miss my work in SAS language programming. I was always a bigger fan of PROC FASTCLUS
than PROC REG, but definitely PROC FASTCLUS with PROC GPLOT presentation color coding the cluster
group number assignments in an overlay scatter plot. That is because I could estimate the expected
degree of change in activity from the expected change in natural business units or hardware or
software making historical data of use only for establishing a baseline, hopefully a clean baseline,
rather than for estimating the degree of change itself. I used PROC REG to generate 95% confidence
intervals around the linear regression means of predicted data points.
In my cases the heteroskedasticity was merely considered in the application of outliers from the
central cluster(s). Outliers that constituted some type of risk had to be considered discretely,
one by one, but only those that with predicted change would overshoot capacity limits. Undershooting
was just an isolated outage or collapse in demand and certainly not a capacity risk.
Outlier detection is a whole other kettle of fish. Once upon a time I spent most of my time finding
outliers in multivariate data and trying to figure out more effective methods for finding them.
(Turns out the world isn't multivariate-normal distributed. Who knew?)
For system performance data, which was my domain, an outlier could be an effect on the response
variable at the extreme range of the independent variable, or just an unordinary event. The heteroskedasticity
type outliers were things like increased CPU overhead at high utilizations, a feature of the MVS
IBM mainframe operating system, or elongated service times for Fiber channels and Ethernet or
elongated response times for a device having excessive utilization and queueing delays. Outliers
could also be bugs or system recovery events as well as work scheduled outside its normal window
of operation including systems programmers screwing around in production logical partitions. The
heteroskedasticity type outliers were actually my job to prevent and I did a good job of that.
My occasional undoing was almost always because of application changes that exceeded the developers
expected resource requirements. A couple of times my system programmer coworker that controlled
MVS performance misinterpreted a software constraint until it manifested itself in extreme ways
for long enough until I was consulted for analysis.
So what I am getting at is that all exceptions to normal expectations can be considered as
outliers, but then those that demonstrate only a difference in the reaction function of the response
variable accorded by the range of the independent variable can also be considered heteroskedasticity.
In any case, I am about at the end of my analysis of outliers on my daffodil bulb planting
now. I sure hope that I don't encounter any heteroskedasticity with the chain saw later this week.
The authors are using a study of heteroskedasticity to inform their forecasting ability. In such
a case outliers would be very different from heteroskedasticity in the response variable over
certain ranges of the independent variable. In other applications, such as large computer system
performance, heteroskedasticity exists as something to be avoided because elongation of response
variables follow a hyperbolic curve and we don't want to be kneed by the curve. Classic outliers
are to ignored for forecasting even if not solved by protective measures but heteroskedasticity
occurs as a response to demand in excess to expected and provisioned. Either resources per business
unit of work must be reduced or more resources must be provisioned. In the former case then the
historical baseline must be readjusted and in the later capacity limits must be increased.
Neoliberals seem very concerned not to have a label. I posit this is because the founders of the
malign ideology didn't want their victims be able to reliably identify them. The deliberately and misleadingly
promote the view of the economy as an isolated scientific subject, like the interior of a test tube,
and treat politics and policy as a sort of exterior force, that can be isolated from the world of the
chemist and pushed off-to-one side. Neoclassic economists consistently and deliberately blinds itself
to politics and the dynamics of power, despite the deep entanglement of politics with everything economic.
"I look at politics and the economy and see one thing, not two things, and I am astonished at the extent
to which economists focus on the part they like to play with intellectually, while deliberately looking
away from what is probably the more important part. "
Notable quotes:
"... when left-wing people say that economists are defenders and supporters of the current order of things, they have a point: ignoring power relationships and their impact on the world supports the continued existence of those relationships. ..."
"... Neoliberalism may have been in part so successful because it appeals to (and tries to explain many things in terms of) a narrative of competition (and assignment of reward and acknowedlgement) by merit. ..."
"... Most people, esp. when young (still largely sheltered) or (still) successful, probably have an exaggerated assessment of their own merit (absolute and relative) - often actively instilled and encouraged by an "enabling" environment. ..."
"... It promises a lake Wobegon of sorts where everybody (even though not all!) are above average, and it is finally recognized. ..."
What Wren-Lewis misses, I think, is that something I've noticed in my roughly a decade of reading
economic blogs on the Internet. Economists have blinkers on. They want to view the economy as an
isolated scientific subject, like the interior of a test tube, and treat politics and policy as a
sort of exterior force, that can be isolated from the world of the chemist and pushed off-to-one
side. It seems fairly clear to me that the two elements--politics and the economy--are obviously
continuously co-mingled, and have all sorts of feedback loops running between them.
The discipline really consistently and deliberately blinds itself to politics and the dynamics
of power, despite the deep entanglement of politics with everything economic. Wren-Lewis admits that
macroeconomists "missed" the impacts of very high financial sector leverage, but finds that now that
economists have noticed it, and suggested remedies, that the power of bank lobby prevents those remedies
from being enacted. But shouldn't the political power of the finance lobby been a part of economic
analysis of the world along with the dangers of the financial sector's use of extreme leverage? Does
he think the two phenomena are unrelated?
Shouldn't economics pay more attention to the ongoing attempts of various groups to orient government
policy in their favor, just like they pay attention to the trade deficit and GDP numbers?
I look at politics and the economy and see one thing, not two things, and I am astonished at the
extent to which economists focus on the part they like to play with intellectually, while deliberately
looking away from what is probably the more important part. Its like economists obsessively focus
on the part that can be studied via numbers (money) and don't' want to think about the part that
is harder to look quantify (political policy). And there is a political issue there, which Mr. Wren-Lewis,
keeps ignoring in his defense of "mainstream economics."
The neoclassical economics tendency of not looking at power relationships makes power imbalances
and their great influence on economics seem like "givens" or "natural endowments", which is clearly
an intellectual sin of omission.
Many people, even within the halls of mainstream economics, note economists are "uncomfortable"
with distributional issues.
Whether they like the implication or not, economists need to acknowledge that this discomfort
has a profoundly conservative intellectual bias, in the sense that it make the status quo arrangement
of society seem "natural" and "normal", when it is obviously humanly constructed and not in any sense
"natural." So when left-wing people say that economists are defenders and supporters of the current
order of things, they have a point: ignoring power relationships and their impact on the world supports
the continued existence of those relationships.
Mr. Wren-Lewis seems like a nice guy, but he needs to take that simple home truth in. I'm not
sure why he seems to struggle so with acknowledging it.
Oh you mean the success of being able to raise asset prices without the growth in wages, make
education costly and unaffordable without student loans, not chargeable under bankruptcy, spruce
up employment figures by not counting the people who have stopped look for jobs because they cannot
find one, make people debt serfs, make savers miserable by keeping interest rates at zero and
making them take risks that they may not want to take though it is picking pennies in front of
a steamroller, keeping wages stagnant for decades and thus impoverishing people.
The list of successes is endless and you should be glad we are NOT talking about them. Because
if we do, the clan called economists might well be torched.
Neoliberalism may have been in part so successful because it appeals to (and tries to explain
many things in terms of) a narrative of competition (and assignment of reward and acknowedlgement)
by merit.
Most people, esp. when young (still largely sheltered) or (still) successful, probably
have an exaggerated assessment of their own merit (absolute and relative) - often actively instilled
and encouraged by an "enabling" environment.
A large part is probably the idea that "markets" are "objective" or at least "impartial" in
bringing out and rewarding merit - also technology and "data driven" technocratic management,
which are attributed "objectivity". All in the explicitly stated or implied service of impartially
recognizing merit and its lack.
It promises a lake Wobegon of sorts where everybody (even though not all!) are above average,
and it is finally recognized.
"Neoliberalism may have been in part so successful because it appeals to (and tries to explain
many things in terms of) a narrative of competition (and assignment of reward and acknowedlgement)
by merit."
"... Starting with three classic papers in the same 1982 issue of the Journal of Economic Theory, a large literature in economics has dealt with the implications for rational behavior of interacting with parties who, with small likelihood, may not be rational." ..."
"... It's why many non-experts believe academic economists' pretensions to science and accuracy is BS. ..."
"Similarly, in bargaining situations, "the sophisticated
negotiator may find it difficult to seem as obstinate as a
truly obstinate man." And when faced with a threat, it may be
profitable to be known to possess "genuine ignorance,
obstinacy or simple disbelief, since it may be more
convincing to the prospective threatener."
Starting with three classic papers in the same 1982 issue
of the Journal of Economic Theory, a large literature in
economics has dealt with the implications for rational
behavior of interacting with parties who, with small
likelihood, may not be rational."
It's why many non-experts believe academic economists'
pretensions to science and accuracy is BS.
Like Simon Wren-Lewis's blog-post the other day defending
mainstream economics.
It's like they come up with the political answer they want
and then rationalize it via math and rhetoric in a way that
would make Kellyanne Conway proud.
Simon Wren-Lewis does not understand (or more correctly does not want to understand) that
there is no economics, only political economy and that neoclassical economics are stooges and
propagandists of the Grand neoliberal Party, which pay them handsomely for role they are playing.
Hiding ideology under the smoke screen of economics is not new, but under neoliberalism it is became
status quo.
Notable quotes:
"... I have had a sense that during the 1970s conservative economists, "Chicago School" economists, become distinctly influential both in the field of economics and for policy makers. ] ..."
"... Economists have blinkers on. They want to view the economy as an isolated scientific subject, like the interior of a test tube, and treat politics and policy as a sort of exterior force, that can be isolated from the world of the chemist and pushed off-to-one side. ..."
"... It seems fairly clear to me that the two elements--politics and the economy--are obviously continuously co-mingled, and have all sorts of feedback loops running between them. The discipline really consistently and deliberately blinds itself to politics and the dynamics of power, despite the deep entanglement of politcs with everything economic. ..."
"... Wren-Lewis admits that macroeconomists "missed" the impacts of very high financial sector leverage, but finds that now that economists have noticed it, and suggested remedies, that the power of bank lobby prevents those remedies from being enacted. But shouldn't the political power of the finance lobby been a part of economic analysis of the world along with the dangers of the financial sector's use of extreme leverage? Does he think the two phenomena are unrelated? Shouldn't economics pay more attention to the ongoing attempts of various groups to orient government policy in their favor, just like they pay attention to the trade deficit and GDP numbers? ..."
"... I look at politics and the economy and see one thing, not two things, and I am astonished at the extent to which economists focus on the part they like to play with intellectually, while deliberately looking away from what is probably the more important part. Its like economists obsessively focus on the part that can be studied via numbers (money) and dont' want to think about the part that is harder to look quantify (political policy). And there is a political issue there, which Mr. Wren-Lewis, keeps ignoring in his defense of "mainstream economics." ..."
"... The neoclassical economics tendency of not looking at power relationships makes power imbalances and their great influence on economics seem like "givens" or "natural endowments", which is clearly an intellectual sin of omission. Many people, even within the halls of mainstream economics, note economists are "uncomfortable" with distributional issues. ..."
"... I don't see it as attacking economics as science tied to nature, as much as attacking economists who pick one "natural law" and apply it generally far outside the limits for which it applies, ignoring all the other laws that constrain it. ..."
"... "...but failing to ignore their successes,..." ..."
"... Oh you mean the success of being able to raise asset prices without the growth in wages, make education costly and unaffordable without student loans, not chargeable under bankruptcy, spruce up employment figures by not counting the people who have stopped look for jobs because they cannot find one, make people debt serfs, make savers miserable by keeping interest rates at zero and making them take risks that they may not want to take though it is picking pennies in front of a steamroller, keeping wages stagnant for decades and thus impoverishing people. The list of successes is endless and you should be glad we are NOT talking about them. Because if we do, the clan called economists might well be torched. ..."
7. So given all this, why do some continue to attack economists? On the left there are
heterodox economists who want nothing less than revolution, the
overthrow of mainstream economics. It is the same revolution that
their counterparts were saying was about to happen in the early 1970s
when I learnt my first economics. They want people to believe that the
bowdlerised version of economics used by neoliberals to support their
ideology is in fact mainstream economics.
8. The right on the other hand is uncomfortable when evidence
based economics conflicts with their politics. Their response is to
attack economists. This is not a new phenomenon, as I
showed
in connection with the famous letter from 364
economists. With austerity they cherry picked the minority of
economists who supported it, and then implemented a policy that even
some of them would have disagreed with. (Rogoff did not support the
cuts in public investment in 2010/11 which did most of the damage to
the UK economy.) The media did the rest of the job for them by hardly
ever talking about the majority of economists who did not support
austerity.
So given all this, why do some continue to attack economists?
On the left there are heterodox economists who want nothing
less than revolution, the overthrow of mainstream economics.
It is the same revolution that their counterparts were saying
was about to happen in the early 1970s when I learnt my first
economics. They want people to believe that the bowdlerised
version of economics used by neoliberals to support their
ideology is in fact mainstream economics.
-- Simon
Wren-Lewis
[ This is an important criticism that as such can surely
be further explained and analyzed at length.
The reference to the work of "heterodox economists" in the
1970s is completely unknown to me and I would be interested
in knowing more. After all, I have had a sense that during
the 1970s conservative economists, "Chicago School"
economists, become distinctly influential both in the field
of economics and for policy makers. ]
On the left there are heterodox economists who want nothing
less than revolution, the overthrow of mainstream
economics....
[ Since my understanding of heterodox
economics is that it ranges from cultural to ecological
perspectives to various degrees of institutional planning, I
do not understand what revolution Simon Wren-Lewis has in
mind. Also, again I do not understand what heterodox
economics was in the 1970s. ]
"heterodox economists" is sort of like "neoliberal". We are
talking what political types call a Big Tent. Alas the hyper
political types here cast this tent over everyone they might
disagree with. Which is sort of Simon's point.
What Wren-Lewis misses, I think, is that something I've
noticed in my roughly a decade of reading economic blogs on
the Internet. Economists have blinkers on. They want to view
the economy as an isolated scientific subject, like the
interior of a test tube, and treat politics and policy as a
sort of exterior force, that can be isolated from the world
of the chemist and pushed off-to-one side.
It seems fairly
clear to me that the two elements--politics and the
economy--are obviously continuously co-mingled, and have all
sorts of feedback loops running between them. The discipline
really consistently and deliberately blinds itself to
politics and the dynamics of power, despite the deep
entanglement of politcs with everything economic.
Wren-Lewis
admits that macroeconomists "missed" the impacts of very high
financial sector leverage, but finds that now that economists
have noticed it, and suggested remedies, that the power of
bank lobby prevents those remedies from being enacted. But
shouldn't the political power of the finance lobby been a
part of economic analysis of the world along with the dangers
of the financial sector's use of extreme leverage? Does he
think the two phenomena are unrelated? Shouldn't economics
pay more attention to the ongoing attempts of various groups
to orient government policy in their favor, just like they
pay attention to the trade deficit and GDP numbers?
I look at
politics and the economy and see one thing, not two things,
and I am astonished at the extent to which economists focus
on the part they like to play with intellectually, while
deliberately looking away from what is probably the more
important part. Its like economists obsessively focus on the
part that can be studied via numbers (money) and dont' want
to think about the part that is harder to look quantify
(political policy). And there is a political issue there,
which Mr. Wren-Lewis, keeps ignoring in his defense of
"mainstream economics."
The neoclassical economics tendency
of not looking at power relationships makes power imbalances
and their great influence on economics seem like "givens" or
"natural endowments", which is clearly an intellectual sin of
omission. Many people, even within the halls of mainstream
economics, note economists are "uncomfortable" with
distributional issues.
Whether they like the implication or
not, economists need to acknowledge that this discomfort has
a profoundly conservative intellectual bias, in the sense
that it make the status quo arrangement of society seem
"natural" and "normal", when it is obviously humanly
constructed and not in any sense "natural."
So when left-wing
people say that economists are defenders and supporters of
the current order of things, they have a point: ignoring
power relationships and their impact on the world supports
the contined existence of those relationships. Mr. Wren-Lewis
seems like a nice guy, but he needs to take that simple home
truth in. I'm not sure why he seems to struggle so with
acknowledging it.
The sense that the study of
economics is a political-economic study appears as a
rejection of what is supposed to be technocratic, supposed to
be the study of the mechanics of capitalism in a pure frame
as though capitalist mechanics were not continually defined.
The mechanics of pure capitalism dictates a technocratic
politics:
The point being we cannot ignore the politics? Simon gets the
politics but he still tries to get the analysis straight. I
find this to be a very important thing to do but then the
hyper political types call getting the analysis right lying.
Or something like that.
No, you pretty much seem to be missing my point completely.
It's not about getting the economics right and the politics
right as two separate exercises, it's about taking seriously
the interactions between the two. Who knows, maybe if someone
had modelled the positive feedback loops between lobbying
expenditures, industry-friendly public policy, and industry
profits for, say, the financial industry, someone might have
correctly predicted the financial crisis of 2008, and perhaps
even predicted that it would also be almost impossible for
the government to take the necessary action to correct the
problem politically, and that this would result in a sluggish
economy post-crisis. Whereas, keeping these issues separate
as we currently do makes it pretty much a sure bet that no
one will have a very good insight into how the real world
will unfold in the future.
Former Top British Official to Join BlackRock as an
Adviser
By CHAD BRAY
Other recent moves from Westminster, where Britain's
government is based, to the City, as the historical London
financial district is known, include:
William Hague, the former British foreign minister, who
this week announced that he was joining Citigroup as a senior
adviser.
Alistair Darling, a former member of Parliament and the
chancellor before Mr. Osborne, joined Morgan Stanley's board
of directors last year.
Gordon Brown, the former British prime minister, joined a
global advisory board at Pimco last year. The advisory
board's members include Ben Bernanke, the former Federal
Reserve chairman.
Tony Blair, the British prime minister before Mr. Brown,
joined JPMorgan Chase as a part-time senior adviser in 2008.
You think what's needed is a perfect plan. You are so wrong
because you lack life experience.
Tip for the neoliberal
pgl from the world of business, engineering, war and
politics.
A bad plan executed well beats a good plan executed badly.
You want to know why economists are being attacked.
The
Yellen Fed is rapidly digressing into a political entity.
The Fed is allegedly independent of politics, but Janet
Yellen's latest statements leave no doubt that she is more of
a political operative than an economist.
Three months ago, on October 14 2016, Yellen stated the
following:
Yellen Cites Benefits to Running Economy Hot for Some Time
Federal Reserve Chairwoman Janet Yellen offered an argument
for running the U.S. economy hot for a period to ensure
moribund growth doesn't become an entrenched feature of the
business landscape. That would mean letting unemployment fall
lower and spurring faster growth to boost consumer spending
and business investment.
Source: Wall Street Journal
Compare this language to Yellen's statement from last
week.
Federal Reserve Chair Janet Yellen backed a strategy for
gradually raising interest rates, arguing that the central
bank wasn't behind the curve in containing inflation
pressures but nevertheless can't afford to allow the economy
to run too hot. Still, she saw dangers in permitting the
economy to overheat and inflation expectations to get out of
control. "Allowing the economy to run markedly and
persistently 'hot' would be risky and unwise," she said.
Source: Bloomberg.
So three months ago, running the economy "hot" was a good
idea. But today, it's a massive risk that we cannot afford to
take.
What changed in those three months?
Core inflation rose 0.1%. And the US closed 2016 with a
sub-2% growth rate for the year. Neither of those would
qualify as remotely "hot."
The main change? The GOP took the House, Senate, and White
House.
Bear in mind, Yellen's statement came a mere 24 hours
after then President-elect Donald Trump commented that the US
Dollar was "too strong."
So we have a Fed chair performing a 180% on running a
"hot" economy within three months and openly defying the new
administration's views on the US Dollar at a time when the
data doesn't support any of her claims.
Yellen may be seeing something everyone else is not, but
it is difficult to see this as anything other than political
hackery.
Uh dude, CPI is running at 2.1% yry and will rise further
when the 2016 oil "mirage" is removed unless we can get
another price collapse. Inflation was firming right under
your noise.
The economy from a monetary pov is indeed running hot.
This is what you do not understand. The structural issues
deal with the plutocratic tyranny that began under Reagan and
the zionist Trump cabal want to take to another level. Jack
London called it the Iron Heel.
First of all, core CPI (which according to the Fed is a
better measure) has been above 2% level since Nov 2015. So
CPI inflation around 2% level is NOT NEW NEWS. If rates
should rise because of inflation, then why did she not raise
them a lot before? Answer - because Obama was in office. The
plan was to get HRC into office and run a high pressure
economy with low unemployment and high inflation. That all
changed when the GOP won. Those are the facts. Yellen is
nothing but a disgusting political operative.
Your handle
is offensive. But hey, this is a free country. Or was, till
the liberal left decided that the first amendment only
applies if you agree with them.
Yet again, bad economics are behind most Fed related policy
proclamations justifying and criticizing Fed policy.
Do
don't think even Milton Friedman would accept any of it,
unless he let politics blind him to what was clear to him in
the 50s and 60s.
In the 50s and 60s, he would be debating the cratering
velocity, it's causes, and remedies. He would not be blindly
calling for increasing or decreasing the growth in money
supply.
Scott summer is calling blindly for higher growth in money
supply by blindly advocating "NGDP targeting" while ignoring
the exporting of "capital" and importing of labor, and
ignoring the falling velocity of money.
The two are likely closely tied, in that money created
that flows out of the US as "capital" where is pays no
workers in the US, thus never adding to US GDP, means the Fed
can't boost NGDP.
The reality is the Fed can have no significant impact on
the economy by any normal policy moves. Changing the interest
rates by purchase and repo trades to US Treasuries at 4%
would not impact the economy because of the new market
interest rates, but the reaction of interest payers will
impact the economy. Everyone assumes higher interest payments
will mean less paid to workers, because the way to cut the
burden of interest payments is to cut revenue so interest
becomes a higher share of revenue. In reality, what is cut is
buying goods with future wages and working hard to repay
borrowed labor costs. Keynes notes that the individual self
interest reaction is both collectively and individually
harmful.
The high level of debt from consumption in a growing
economy is extremely harmful, yet Fed policy has been
promoting job killing debt funded consumption by doing less
of what Scott Summer advocates it should do to create jobs.
Fair enough. I think we are in agreement that monetary policy
should be based on the state of the economy and not politics
even if we have a genuine disagreement about the state of the
economy. But at least you and I are having a principled
discussion. Something others here should emulate.
Heterodox economics refers to methodologies or schools of
economic thought that are considered outside of "mainstream
economics", often represented by expositors as contrasting
with or going beyond neoclassical economics. "Heterodox
economics" is an umbrella term used to cover various
approaches, schools, or traditions. These include socialist,
Marxian, institutional, evolutionary, Georgist, Austrian,
feminist, social, post-Keynesian (not to be confused with New
Keynesian), and ecological economics among others.
Mainstream economics may be called orthodox or
conventional economics by its critics. Alternatively,
mainstream economics deals with the
"rationality–individualism–equilibrium nexus" and heterodox
economics is more "radical" in dealing with the
"institutions–history–social structure nexus". Many
mainstream economists dismiss heterodox economics as "fringe"
and "irrelevant", with little or no influence on the vast
majority of academic economists in the English-speaking
world.
It seems
mainstream to argue that a high tax rate and costly
regulations kill jobs, and that cutting taxes and regulations
will create jobs because rewarding higher profits from
reducing labor costs far below prices, and eliminating all
the labor costs to comply with regulations will create jobs,
because lower labor costs mean more workers being paid higher
wages.
But can someone explain the mainstream economic theory of
reducing labor costs resulting in more workers getting paid
more??? Looks like voodoo to me.
I don't see it
as attacking economics as science tied to nature, as much as
attacking economists who pick one "natural law" and apply it
generally far outside the limits for which it applies,
ignoring all the other laws that constrain it.
For example demand price theory and elasticity is sound
natural law. It's like Boyles Law of gases. Boyles law
applies over a range of pressures and temperature for which
the gas remains a gas. It has limits, the point the "gas"
becomes liquid or solid.
The idea that lower prices will create jobs applies only
for a limited range of prices and quantities, but once
outside those bound, lower prices MUST KILL JOBS.
The Laffer curve is an elasticity curve that covers the
entire range of tax rates. A carbon tax works by moving up
the curve to the point zero tax revenue is generated. The
higher the tax, the cheaper it is to pay workers to build
substitutes that do not burn fossil fuels, and instead of
paying taxes, you pay the cheaper payroll of more workers.
Likewise, a high tax rate on economic aka monopoly
profits, and on rents, the cheaper paying workers to build
tax dodging depreciating capital becomes, which in the long
run increases the capital stock, the product quantity, and
thus prices are driven to cost eliminating economic profit
and economic rents.
The point of high tax rates, tax rates of 50% and up, is
not to raise revenue but to cause paying workers for
substitutes.
On the other hand, government is a product, the general
welfare, so, to increase the quantity of general welfare, tax
rates need to be high enough to pay workers. The cost of
general welfare is certainly much less than 50% of the
economy in the long run, so tax rates are at all points in
the lower part of the Laffer curve so lowering rates will
reduce the quantity of general welfare that can be produced.
And the general welfare is always from paying workers.
So, economists across the board are pretty universally
wrong about tax rates and about prices levels, and the impact
of raising and lowering them.
At the micro level, the theory is clear. At the micro
level, the principle of zero sum is held as a natural law
constraint.
Moving to macro does not eliminate any of the natural laws
of micro, but instead moves economics from the micro theory
of the two body problem, two bodies of mass rotating about
each other, to macro theory of the n-body problem of sun,
planets, solar systems, galaxies all rotating around each
other. At this level, many natural laws come into play, like
general relativity in its many forms including imputing mass
to energy, going far beyond Newtonian physics, yet not
discarding it.
Macro economists have either blindly and wishfully
forgotten or ignored fundamental micro laws, or intentionally
eliminated them from the macro proclamations to deceive.
When Bernie Sanders argues a carbon tax can pay for vast
welfare state benefits, is he intentionally lying, or has he
been deceived by self deceiving economists who wishfully seek
a free lunch economic system where money comes from nothing?
When Milton Friedman argued in 1970 lower tax rates would
generate the same tax revenue and create more jobs and
output, was he intentionally lying, or self deceiving
himself?
Milton Friedman in arguing against high tax rates made a
point of all the jobs and wage income that resulted from the
high tax rates, jobs and income he considered wasteful
spending promoted by the tax policy. He even noted that the
high wage income increased demand for goods and services,
consumption he considered wasteful.
So, as the father of the macro economic policy of tax
(rate) cuts, how can it be a policy to boost gdp and jobs to
cut taxes as Friedman argued?
Trump seems to latch onto simplified macro economic half
baked policy ideas an run with them to the max. The
economists who crafted the policy statements he has extracted
his proclamations from are horrified by what he is doing with
their policy proclamations. Proclamations that are half baked
and thus violate natural law.
Take the economists at Econlog from which Trump gets a lot
of his economics. They are horrified. Yet their economic
"theory" clearly does not work. Trade theory in particular.
The micro theory of trade exchanges labor for labor, ie, your
labor makes goods traded for goods I make with my labor. But
trade today swaps labor for capital, so jobs are moved from
one nation to another in exchange for reducing the wealth of
the other.
Saudi Arabia is the simplest example. It sells it's
natural capital and then imports labor goods at prices lower
than Saudi workers can hope to produce them, thus killing
jobs in Saudi Arabia. The crisis in Saudi Arabia is a lack of
opportunity for the Saudi people who are multiplying as if it
were still an undeveloped nation with high mortality rate.
Since Reagan, the US has become more like Saudi Arabia,
selling off capital to buy cheap goods from less developed
economies where labor is relatively cheaper and sending back
capital, killing jobs in the process and eliminating economic
opportunity to Trump voters.
Milton Friedman argued that this was a good policy because
we as a nation were better off from China effectively gifting
us cheap goods and that on the whole, the US is better off
from jobs lost in the US. He hinted at using the consumer
surplus of cheap imports to pay welfare to those who lost
jobs, but those advocating job killing trade imbalance also
condemn welfare payments, blaming those who lost jobs as
being at fault.
So, Trump is going back to micro economics and promising
to make sure trade is going to create jobs in the US. But he
also grabs onto and clings to the cheap price concept that
requires killing jobs. Trump is going to ensure energy is
cheap, which means he will never ban oil imports or put a $50
a barrel tariff on oil imports.
What policy could Trump do to create jobs quickly? A $50 a
barrel tariff on imported oil, say phase it in over a year,
$20 starting April 1, $30 July 1, $40 Oct 1, $50 Jan 1 2018.
This time, ExxonMobil will not have high profits from $4
gasoline and heating oil because they will be paying 25,000
more direct workers to drill baby frack, plus ten times as
many supporting jobs, as they build assets they can rapidly
depreciate or expense to wipe out taxable profits. At the
same time, incumbents drillers will return to high gear. If
Trump rebates a tariff on exported refined oil products, it
would delay NAFTA sanctions as oil products consumed in
Mexico and Canada will be cheaper but exports will not be
reduced much. On the global market, the results will be
devastating with oil prices crashing. Putin would likely
target Trump for going to war on the Russian people and
economy.
Bernie would likely attack Trump for his policy hiking the
price of heating oil to the working poor of Vermont. But you
can't pay more American workers without higher energy prices.
Vermont's working poor will end up with better pay if energy
efficiency investments are made in Vermont because neither
Chinese nor Saudi workers can eliminate the need for oil to
keep housing warm in Vermont.
And the $50 a barrel tariff on imported oil will generate
no revenue for government to spend by 2020 if oil product
exports get tariff rebates.
The financial crisis in the UK was the result of losses by
banks on overseas assets, originating from the collapse in
the US subprime market. It was not a result of excessive
borrowing by UK consumers, firms or our government. As the
Bank's Ben Broadbent points out, "Thanks to the international
exposure of its banks the UK has been, in some sense, a "net
importer" of the financial crisis." This overseas lending
caused a crisis because banks were far too highly levered,
and so could not absorb these losses and had to be bailed out
by the government.
This is why UK macroeconomists failed to pick up the
impending crisis. They did routinely monitor personal,
corporate and government borrowing, but not the amount of
bank leverage. Macroeconomists generally acknowledge that
they were at fault in ignoring the crucial role that
financial sector leverage can play in influencing the
macroeconomy. There has been a huge increase in the amount of
research on these finance-macro linkages since the crisis.
But supposing economists had ensured that they knew about
the increase in bank leverage and had collectively warned of
the dangers of excessive risk taking that this represented.
Would it have made any difference? There are good reasons for
thinking it would not.
The main evidence for this is what has happened after the
crisis. Admati and Hellweg have written persuasively that we
need a huge increase in bank capital requirements to bring
the 'too big to fail' problem to an end and avoid a future
banking crisis, and the work of David Miles in the UK has a
similar message. I have not come across an academic economist
who seriously dissents from this analysis, but it has no
impact on policy at all. The power of the banking lobby is
just too strong....
Oh you mean
the success of being able to raise asset prices without the
growth in wages, make education costly and unaffordable
without student loans, not chargeable under bankruptcy,
spruce up employment figures by not counting the people who
have stopped look for jobs because they cannot find one, make
people debt serfs, make savers miserable by keeping interest
rates at zero and making them take risks that they may not
want to take though it is picking pennies in front of a
steamroller, keeping wages stagnant for decades and thus
impoverishing people. The list of successes is endless and
you should be glad we are NOT talking about them. Because if
we do, the clan called economists might well be torched.
On monetary economics - he is closer to Krugman than to Phil Gramm. But some people here hate
Friedman as much as they hate Krugman and they have decided "neoliberal" is the ultimate put down.
Even though they have no working definition of "neoliberal".
"... I seriously question the assumption of FOREX adjustments perfectly offsetting policy changes such that the balance of trade remains unchanged. It seems like an article of faith that things work this way, based on logic, intelligence, and economic analysis based on various models of how the world works. ..."
"... Do economists have solid models that accurately predict the movement of FOREX rates in the first place? I mean, all else being equal, and given no policy changes at all, can economists accurately forecast the exchange rates between, say, Canada and the US over the next 10 years? And, if so, why do these economists have to work for a living? Shouldn't they be enormously wealthy people by now if they possess this level of predictive capabilities? ..."
"... My personal thinking on the matter is to take a more humble approach. Given some solid reasons to believe the proposed border adjustment tax will increase the value of the dollar, but lacking a way to accurately predict FOREX, I would guess that exchange rates would adjust to cancel out only half the policy change. I'll assume trade flows adjust a bit and FOREX rates adjust a bit. And since it is just a guess, I'd be quite cautious in drawing any strong conclusions. ..."
"border adjustability. In the eurozone, where there is a fixed exchange rate of 1 between
the member countries, relying more heavily on a value-added tax-for which international rules
allow taxing imports while exempting exports from the tax-and less on other taxes, is understood
as a way to get the same effect as devaluing to an exchange rate that makes foreign goods more
expensive to people in a country and domestic goods cheaper to foreigners. But in a floating
exchange rate setup as the US has, most of the effects of border adjustment can be canceled
out by an explicit appreciation in the dollar that cancels out the implicit devaluation from
the tax shift. And indeed, such an appreciation of the dollar is exactly what one should expect."
The architect of this Destination Based Cash Flow Tax with "Border Adjustments" (is that
like sprinkles on top) is Alan Auerbach and even he admits this. Miles moves onto something
else I have been saying:
"A way to push down the value of the dollar and stimulate net exports for a much longer
time is to increase saving rates in the US As greater saving pushed down US rates of return,
some of that extra saving would wind up in foreign assets, putting extra US dollars in the
hands of folks abroad, so they would have US dollars to buy US goods. This effect can be enhanced
if the regulations for automatic enrollment are favorable to a substantial portion (say 30%)
of the default investment option being in foreign assets. Note that an increase in US saving
would tend to push down the natural interest rate, and so needs to be accompanied by the elimination
of the zero lower bound in order to avoid making it hard for monetary policy to respond to
recessions."
OK – it might not be so easy to lower the natural rate now but back in 1981, real interest
rates soared as the Reagan tax cuts lowered national savings. This led to a massive dollar appreciation
and a large drop in net exports.
I seriously question the assumption of FOREX adjustments perfectly offsetting policy changes
such that the balance of trade remains unchanged. It seems like an article of faith that things
work this way, based on logic, intelligence, and economic analysis based on various models of
how the world works.
But while this view seems to be held by intelligent people with far more economic education
that I will ever have, I am wondering if there is any empirical evidence that supports this reasoning?
I am sceptical.
Do economists have solid models that accurately predict the movement of FOREX rates in
the first place? I mean, all else being equal, and given no policy changes at all, can economists
accurately forecast the exchange rates between, say, Canada and the US over the next 10 years?
And, if so, why do these economists have to work for a living? Shouldn't they be enormously wealthy
people by now if they possess this level of predictive capabilities?
My personal thinking on the matter is to take a more humble approach. Given some solid
reasons to believe the proposed border adjustment tax will increase the value of the dollar, but
lacking a way to accurately predict FOREX, I would guess that exchange rates would adjust to cancel
out only half the policy change. I'll assume trade flows adjust a bit and FOREX rates adjust a
bit. And since it is just a guess, I'd be quite cautious in drawing any strong conclusions.
I welcome comments that would help educate me on this subject. Best wishes to all.
Before the opportunity-window slams shut, harvest your data from the market! You need to record
a baseline from the last moments of the O'Bummer World. Sure!
You will wish him back, but that is beside the point. We are scientists not wishers.
Hello. Thank you for this link. I found this comment by Peter Dornman to be interesting: "And
also, yes, any theory that implies a known relationship between macro variables and forex rates
is *very* counter-empirical."
If his comment is correct, it makes me wonder about the reliability of Miles Kimball's analysis.
There are certain types of problems we just can't reliably analyze, as they are too complicated,
or the underlying physics is subject to extreme sensitivity to accuracy of the inputs (chaos theory,
basically). For instance, our ability to make meaningful forecasts of the weather is limited to
a few days. Maybe FOREX predictions are like that? If so, we should be cautious about making any
strong statements about FOREX adjustments precisely offsetting policy changes.
I mean, doesn't it seem like hubris when you can't predict what a variable will do given no
changes to current conditions, but you decide that you can predict *precisely* what it will do
if we make changes to current conditions?
"Do economists have solid models that accurately predict the movement of FOREX rates in the first
place?"
Meese-Rogoff showed that exchange rates are disconnected from fundamentals. It's called the
'foreign exchange puzzle.'
Yet pgl keeps insisting on an 'if x then y' approach to most problems. His key variable is
interest rates, which are at the root of most every change in pglian universe.
I'm actually surprised that he departs from his rate-centric universe to suggest that Trump
might be responsible for something like the fall of the peso, though he stridently rejects the
idea that Trump's bully pulpit might shame American companies into keeping more jobs at home.
If there is Fake News, is there such
a thing as Fake Economics? I thought
about this as a result of two studies
that have received considerable
publicity in the press and broadcast
media over the last few weeks. Both,
needless to say, involve Brexit. The
first are two bits of analysis by
'Change Britain', saying Brexit would
generate
400,000
new jobs
and
"boost the UK
by £450 million a week". The second
is a more substantial piece of
work
by economists
at the Centre for Business Research (CBR)
in Cambridge, which was both very
critical of the Treasury's own
analysis of the long term costs of
Brexit and came up with much smaller
estimates of its own for these costs.
Defining exactly what Fake News is
can be
difficult
, although
we can point to examples which
undoubtedly are fake, in the sense of
reporting things to be true when it
is clear they are not. Fake News
often constitutes made up facts that
are designed for a political purpose.
You could define Fake economics in a
similar way: economic analysis or
research that is obviously flawed but
whose purpose is to support a
particular policy. (Cue left wing
heterodox economists to say the whole
of mainstream economics is fake
economics.) We can equally talk about
evidence based policy and its fake
version, policy based evidence.
Current U-6 Unemployment Rate is 9.1% (BLS) or 13.7% (Gallup)
Current U-6 Unemployment Rate:
Unemployment U6 vs U3 For December 2016 the official Current U-6 unemployment rate was 9.1%
up from last month's 9.0% but still below the recent low of 9.3% in April and September and October's
9.2%.
On the other hand the independently produced Gallup equivalent called the "Underemployment
Rate" was up to 13.7 in December from 13.0% in November nearing the 13.8% of April. The current
differential between Gallup and BLS on supposedly the same data is 4.6%!
"The labor market remains near its sustainable, full employment level."
This is a hope not a fact
There is plenty of slack if the underemployed move into jobs and we return the 20-50 yr olds to
pre-recession participation rates.
nope,nope,nope. you don't get how employment to population ratio is calculated. it can't rise
and should not rise unless the calculations are adjusted.
Let's see:
SUPPORTING the belief that we are "close" to full employment is the U-3 measure of unemployment,
a measure with an arbitrary cut-off that excludes from the official labor force as many people
as possible who are not employed but do want jobs -- by requiring (1) an "active" search effort
only within the last four weeks, based on (2) a definition of "active" that probably does not
fit rational behavior by the unemployed who now have access to comprehensive Internet jobs databases
that did not exist 20 years ago. (It is not terribly hard to surmise the institutional interests
that are served by keeping the size of the labor force for purposes of determining the official
unemployment rate as small as possible.)
NOT SUPPORTING the belief that we are close to full employment:
(1) the lowest employment-to-population ratio in almost half a century;
(2) negating the intellectually-lazy demographic excuse that invariably gets raised to point No.
1, the lowest employment-to-population ratio in 30 years in the prime working age group (25-54),
a group that is 99.99% unaffected by the phenomenon of voluntary retirement;
(3) a U-6 (that counts many more of the unemployed in the labor force) that is still three percentage
points higher than the low point reached in 2000 (three percentage points is a lot, representing
about 7.5 million people who want jobs but are not counted in the labor force for calculating
the U-3);
(4) an aggregate growth in full-time jobs of only 9% since the relative high point in 2000 even
though the working age population has grown by 20%;
(5) average weeks unemployed among those who are counted as part of the labor force (26 weeks)
that is still more than twice as high as it was in 2000 (under 13 weeks) and is still 10 weeks
higher than it was before the Great Recession;
(6) involuntary part-time employment still 75% higher than it was in 2000, 33% higher than before
the Great Recession;
(7) whereas in 2000, the U.S. was near the top in employment rate among the OECD countries, in
2017 it is close to the bottom; most OECD countries have recovered in their employment rates since
the depths of the Great Recession, and many have moved to new levels (even supposedly sick France
has a higher employment rate in the 25-54 prime working age group than te U.S.).
With this array of negative date to overcome, it takes a lot of wise monkeys who neither speak,
hear nor see any evil to expound a belief that we are close to full employment.
RW said... January 18, 2017 at 07:05 AM
Inflation for the 4th quarter of 2016 is zero -- no change Oct through Dec -- and real interest
rates remain near the zero boundary. Republican history WRT governing particularly as it pertains
to the economy is sufficiently poor that optimism appears entirely unwarranted. I hear a lot of
investors are adjusting their portfolio allocations to favor equities over bonds. Two years ago
that was a smart move; now, not so much.
mulp said...
"All else equal, tax cuts boost household and business income."
In 2001, I was rif'd from my 100K++ job and got a $20,000 tax cut.
That tax cut did not boost my household income.
That economists have been bamboozled into thinking this way is beyond my comprehension.
Economies are zero sum. For every action, there is a reaction. Tax cuts mean revenue cuts which
means spending cuts and spending cuts mean lower household income.
Very few sectors of the economy are subject to demand price elasticity that results in higher
revenue from price reduction due to the quantity increasing explosively from a small reduction
in price.
For example, cutting the profit tax by 30% on $100 oil so gasoline falls from $4.05 to $4.00
and thus doubles the quantity of gasoline sold to boost profit taxes is an impossibility.
And cutting the tax on economic profits from restricting oil production to drive up prices
and profits can only increase tax revenue if oil production is cut further by cutting jobs so
gasoline prices can be increased from $4 to $5 to $6 per gallon.
Since Reagan, economists seem to have self lobotomized so they spout totally illogical nonsense
like "All else equal, tax cuts boost household and business income."
Might as well say "if you believe, you can fly when tinker bell hits you with pixie dust."
I know I will completely offside with my view on this, but I
think the behavioural/rational expectations debate is rather
besides the point. The much bigger issues are uncertainty and
disequilibrium.
As I noted the other day, and Johnnny Bakho refers to below,
the essence of this problem is that the thing being observed,
observes back and adapts.
The only kind of model that might
work in the long run, is a model that works even after
everybody becomes aware of it and adapts their behavior to
it.
As to the issue of uncertainty, if we assume that most
people operate with formal or informal budgets, anything that
causes them to think that their budget is about to increase
or decrease is going to change their consumption. And since
people *hate* to sustain and realise losses, the change is
going to be disproportionately intense if the uncertainty
include an possible increase to the downside.
No that isn't enough. Sure people might change their behavior
as their understanding changes. But other things are changing
as well as the behavior. In particular, technology and
available resources change.
As I said the system is
evolutionary (which means an adaptive system - which includes
behavior changes), and evolution is never easy to anticipate,
which implies uncertainty. And the existence of uncertainty
leads to persistent disequilibrium (as people adopt defensive
contingent strategies to cope with uncertainty). The big
errors in macro are all associated with the general
equilibrium paradigm and the assumptions that come with it.
Point taken re technology and resources, although behavioral
adaptation is a big part of why models fail.
I had a big
long response worked out re the biggest endemic problem with
"the assumptions that come with" macro's paradigm. Then my
iPad decided to randomly pop up a keyboard screen and when I
touched to get rid of it, deleted the entire comment!
The screaming at crapified Apple has passed now. I am zen
again.
P.S. Rational expectations IS an attempt to build in
behavioral adaptation. It is just that it turns out not very
useful (it is empirically a complete flop).
So there is 'uncertainty' and 'uncertainty.' Which kind of
uncertainty leads to a slower economy? Why wouldn't unknown
after-shocks from repealing Obamacare have current economic
repercussions?
Republicans used to claim that the roll-out
of Obamacare was causing economic uncertainty and hurting the
economy.
Seems to me that the whole foundation of 'economic
uncertainty' is rather shaky, particularly if the promised,
disruptive actions of Trump don't cause economic
repercussions.
Uncertainty (as for instance PK pointed out) can work in
different ways in the short and long terms. In the short term
it can result in hedging behavior which might actually
promote some investment. In the longer term it will push up
risk margins which will probably push growth rates down.
Humans evolved as social animals.
If rational expectations focuses on the individual and
ignores that humans act as members of groups, not
individuals, then it will not accurately predict human
behavior or outcomes.
Perhaps your comment is similar to supposing that perhaps
"equilibrium" is a not always useful concept when the modeled
surface may have multiple local maxima, minima and saddles.
Nope. I think we are trying to model a system converging to
an equilibrium that is changing faster than the system can
possibly adapt. We should forget all about equilibrium in
macro-economics. It only misdirects.
I once tried to explain this with an analogy to flying a
plane - the plane is always sinking and rising and net path
the outcome of the sum of different (constantly varying)
forces. This is quite distinct for instance, from the way
that a boat floats on the ocean (which is much closer to how
we are trying to model things today). The stochastic shocks
in economic models are like waves on the sea - where the net
effect in the end is that the average position remains the
same. I don't think the economy is like that.
The idea of equilibrium is a neoclassical fallacy. financial
sector introduced in the system systemic instability, the
positive feedback loop.
Cassidy called it "Utopian economics".
As you wrote in 2015
reason :
The problem in thinking here is the equilibrium paradigm.
Equilibrium NEVER exists. If there is a glut the price falls
below the marginal cost/revenue point, if the seller is
desperate enough it falls to zero!
Ignoring disequilibrium dynamics means this obvious (it
should be obvious) point is simply ignored. The assumption of
general equilibrium leads to the assumption of marginal
productivity driving wages. You are not worth what you
produce, you are worth precisely what somewhat else would
accept to do your job.
All those notions like "full employment" (when employment
metrics are completely screwed) are very questionable indeed.
And role of federal reserve in enforcing neoliberal policies
is often underestimated. Greenspan was a neoliberal stooge. A
servant of Wall Street.
What Does Crowding Out Even Mean?
by J.W. Mason
Posted on January 16, 2017
Paul Krugman is taking some guff for this column where he
argues that the US economy is now at potential, or full
employment, so any shift in the federal budget toward deficit
will just crowd out private demand.
...
...In the more sophisticated textbooks, this becomes a
central bank reaction function - the central bank's actions
change from being policy choices, to a fundamental law of the
economic universe. The master parable for this story is the
1990s, when the Clinton administration came in with big plans
for stimulus, only to be slapped down by Alan Greenspan, who
warned that any increase in public spending would be offset
by a contractionary shift by the federal reserve. But once
Clinton made the walk to Canossa and embraced deficit
reduction, Greenspan's fed rewarded him with low rates,
substituting private investment in equal measure for the
foregone public spending. In the current contest, this means:
Any increase in federal borrowing will be offset one for one
by a fall in private investment - because the Fed will raise
rates enough to make it happen."
"... But the application is broader. There are two types of economics: positive economics vs. normative economics. Basically, " here is what people do" vs. "here is what people *should* do." The better economics gets at explaining what people actually do, the more people can adapt their behavior based on the accuracy of economics. ..."
"... "War is regarded as nothing but the continuation of state policy with other means." ..."
The Stumbling and Mumbling article raises a fundamental point
about economics: forecasting *must* inevitably be generally
wrong.
The reason is that you are predicting human
behavior, but the humans under observation also get to
observe back! They can and will adapt their behavior based on
your forecasts. For example, let's say that everyone knows
that I am a 100% accurate economic prognosticator. I forecast
that while the economy is doing well now, one year from now
there will be a recession.
What do you as a producer or consumer do? Since you know I
am 100% accurate, you alter your behavior because you know a
recession is coming in one year. Result: the recession comes
now! Because you curtailed production or consumption in
anticipation of the recession you knew was coming.
But the application is broader. There are two types of
economics: positive economics vs. normative economics.
Basically, " here is what people do" vs. "here is what people
*should* do." The better economics gets at explaining what
people actually do, the more people can adapt their behavior
based on the accuracy of economics.
Result: the better
positive and normative economics get, the more positive and
to some extent* normative economics must fail!
(*I think there are some normative concepts that would be
correct even if everyone knew about them and acted on them,
e.g., efficiently allocating time.)
P.S.: As an aside and a real-world example, I am just
finishing a dense 800 page tome on Napoleon. It has been a
godsend since the election! As a young general, Napoleon was
brilliant, adopting and using the newest and novel tactics
and formations advocated by military scholars against his
geriatric and monarchically-connected opponents.
But over time his adversaries, especially Tsar Alexander,
learned. They appointed more military generals and
strategists on merit, adopted Napoleon's reforms, and in a
strategy that the Chinese and Japanese (and Karl Rove) would
have approved, actually used his strengths against him.
Humans are remarkably cunning chimpanzees. When enough of
them learn a strategy, it loses its effectiveness.
'Napoleon: A Life,' by Andrew Roberts
By DUNCAN KELLY
On July 22, 1789, a week after the storming of the
Bastille in Paris, Napoleon Bonaparte wrote to his older
brother, Joseph, that there was nothing much to worry about.
"Calm will return. In a month." His timing was off, but
perhaps he took the misjudgment to heart because he spent the
rest of his life trying to bring glory and order to France by
building a new sort of empire. By the time he was crowned
emperor on Dec. 2, 1804, he could say, "I am the Revolution."
It was, according to the historian Andrew Roberts's epically
scaled new biography, "Napoleon: A Life," both the ultimate
triumph of the self-made man, an outsider from Corsica who
rose to the apex of French political life, and simultaneously
a "defining moment of the Enlightenment," fixing the "best"
of the French Revolution through his legal, educational and
administrative reforms. Such broad contours get at what
Napoleon meant by saying to his literary hero Goethe at a
meeting in Erfurt, "Politics is fate."
Napoleon didn't mean fatalism by this, rather that
political action is unavoidable if you want personal and
national glory. It requires a mastery of fortune, and a
willingness to be ruthless when necessary. If this sounds
Machiavellian, that's because it is - Machiavelli's arguments
about politics informed Napoleon's self-consciousness,
whether in appraising fortune as a woman or a river to be
tamed and harnessed, or assuming that in politics it is
better to be feared than loved. Such views went hand in hand
with the grand visions of politics outlined in the ancient
histories and biographies Napoleon revered as a young man.
"Bloodletting is among the ingredients of political medicine"
was Napoleon's cool if brutal reminder of an ever-present
item on his exhausting schedule.
His strategy always included dashing off thousands of
letters and plans, in a personal regime calling for little
sleep, much haste and a penchant for being read to while
taking baths so as not to waste even a minute. He
compartmentalized ruthlessly, changing tack between lobbying
for more shoes and brandy for the army at one minute, to
directing the personal lives of his siblings or writing love
letters to the notorious Josephine at another; here ensuring
extravagant financial "contributions" from those whom he had
vanquished, there discussing the booty to send back to Paris,
particularly from the extraordinary expedition in Egypt where
his "savants had missed nothing." The personal and the
political ran alongside each other in his mind.
Yet when his longtime collaborator but fair-weather
political friend, the diplomat Charles-Maurice de Talleyrand,
suggested that Napoleon try to make those he conquered learn
to love France, Napoleon replied that this was an
irrelevance. "Aimer: I don't really know what this means when
applied to politics," he said. Still, if grand strategy and
national interest lay behind foreign affairs, there were
nevertheless personal rules of conduct to uphold. Talleyrand
was a party to Napoleon's strategy since supporting his coup
d'état against the French Directory in 1799. That was O.K.
And by short-selling securities he made millions for himself.
But he was called out by Napoleon and dismissed as vice grand
elector when found facing both ways politically at a crucial
moment.
Napoleon understood those temptations because he was also
flexible enough to tilt toward the winning side, regularly
supporting any form of local religion that could help him
militarily. Nonetheless, Roberts's Napoleon is a soldier,
statesman and "bona fide intellectual," who rode his luck for
longer than most intellectuals in politics ever do....
Duncan Kelly teaches political thought at the University of
Cambridge.
Basil Halperin on the logic behind NGDP targeting
by Scott Sumner
Jan. 13, 2017
James Alexander directed me to a recent post by Basil
Halperin, which is one of the best blog posts that I have
read in years. (I was actually sent this material before
Christmas, but it sort of fell between the cracks.)
Basil starts off discussing a program for distributing
excess food production from manufacturers to food banks.
The problem was one of distributed versus centralized
knowledge. While Feeding America had very good knowledge of
poverty rates around the country, and thus could measure need
in different areas, it was not as good at dealing with
idiosyncratic local issues.
Food banks in Idaho don't need a truckload of potatoes,
for example, and Feeding America might fail to take this into
account. Or maybe the Chicago regional food bank just this
week received a large direct donation of peanut butter from a
local food drive, and then Feeding America comes along and
says that it has two tons of peanut butter that it is sending
to Chicago.
To an economist, this problem screams of the Hayekian
knowledge problem. Even a benevolent central planner will be
hard-pressed to efficiently allocate resources in a society
since it is simply too difficult for a centralized system to
collect information on all local variation in needs,
preferences, and abilities.
One option would simply be to arbitrarily distribute the
food according to some sort of central planning criterion.
But there is a better way:
This knowledge problem leads to option two: market
capitalism. Unlike poorly informed central planners, the
decentralized price system – i.e., the free market – can
(often but not always) do an extremely good job of
aggregating local information to efficiently allocate scarce
resources. This result is known as the First Welfare Theorem.
Such a system was created for Feeding America with the
help of four Chicago Booth economists in 2005. Instead of
centralized allocation, food banks were given fake money –
with needier food banks being given more – and allowed to bid
for different types of food in online auctions. Prices are
thus determined by supply and demand. . . .
By all accounts, the system has worked brilliantly. Food
banks are happier with their allocations; donations have gone
up as donors have more confidence that their donations will
actually be used. Chalk one up for economic theory.
Basil points out that while that solves one problem, there
is still the issue of determining "monetary policy", i.e. how
much fake money should be distributed each day?
Here's the problem for Feeding America when thinking about
optimal monetary policy. Feeding America wants to ensure that
changes in prices are informative for food banks when they
bid. In the words of one of the Booth economists who helped
design the system:
"Suppose I am a small food bank; I really want a truckload
of cereal. I haven't bid on cereal for, like, a year and a
half, so I'm not really sure I should be paying for it. But
what you can do on the website, you basically click a link
and when you click that link it says: This is what the
history of prices is for cereal over the last 5 years. And
what we wanted to do is set up a system whereby by observing
that history of prices, it gave you a reasonable instinct for
what you should be bidding."
That is, food banks face information frictions: individual
food banks are not completely aware of economic conditions
and only occasionally update their knowledge of the state of
the world. This is because obtaining such information is
time-consuming and costly.
Relating this to our question of optimal monetary policy
for the food bank economy: How should the fake money supply
be set, taking into consideration this friction?
Obviously, if Feeding America were to randomly double the
supply of (fake) money, then all prices would double, and
this would be confusing for food banks. A food bank might go
online to bid for peanut butter, see that the price has
doubled, and mistakenly think that demand specifically for
peanut butter has surged.
This "monetary misperception" would distort decision
making: the food bank wants peanut butter, but might bid for
a cheaper good like chicken noodle soup, thinking that peanut
butter is really scarce at the moment.
Clearly, random variation in the money supply is not a
good idea. More generally, how should Feeding America set the
money supply?
One natural idea is to copy what real-world central banks
do: target inflation.
Basil then explains why NGDP targeting is likely to be
superior to inflation targeting, using a Lucas-type monetary
misperceptions model.
III. Monetary misperceptions
I demonstrate the following argument rigorously in a formal
mathematical model in a paper, "Monetary Misperceptions:
Optimal Monetary Policy under Incomplete Information," using
a microfounded Lucas Islands model. The intuition for why
inflation targeting is problematic is as follows.
Suppose the total quantity of all donations doubles.
You're a food bank and go to bid on cheerios, and find
that there are twice as many boxes of cheerios available
today as yesterday. You're going to want to bid at a price
something like half as much as yesterday.
Every other food bank looking at every other item will
have the same thought. Aggregate inflation thus would be
something like -50%, as all prices would drop by half.
As a result, under inflation targeting, the money supply
would simultaneously have to double to keep inflation at
zero. But this would be confusing: Seeing the quantity of
cheerios double but the price remain the same, you won't be
able to tell if the price has remained the same because
(a) The central bank has doubled the money supply
or
(b) Demand specifically for cheerios has jumped up quite a
bit
It's a signal extraction problem, and rationally you're
going to put some weight on both of these possibilities.
However, only the first possibility actually occurred.
This problem leads to all sorts of monetary
misperceptions, as money supply growth creates confusions,
hence the title of my paper.
Inflation targeting, in this case, is very suboptimal.
Price level variation provides useful information to agents.
IV. Optimal monetary policy
As I work out formally in the paper, optimal policy is
instead something close to a nominal income (NGDP) target.
Under log utility, it is exactly a nominal income target.
(I've written about nominal income targeting before more
critically here.)
. . . Feeding America, by the way, does not target
constant inflation. They instead target "zero inflation for a
given good if demand and supply conditions are unchanged."
This alternative is a move in the direction of a nominal
income target.
V. Real-world macroeconomic implications
I want to claim that the information frictions facing food
banks also apply to the real economy, and as a result, the
Federal Reserve and other central banks should consider
adopting a nominal income target. Let me tell a story to
illustrate the point.
Consider the owner of an isolated bakery. Suppose one day,
all of the customers seen by the baker spend twice as much
money as the customers from the day before.
The baker has two options. She can interpret this
increased demand as customers having come to appreciate the
superior quality of her baked goods, and thus increase her
production to match the new demand. Alternatively, she could
interpret this increased spending as evidence that there is
simply more money in the economy as a whole, and that she
should merely increase her prices proportionally to account
for inflation.
Economic agents confounding these two effects is the
source of economic booms and busts, according to this model.
This is exactly analogous to the problem faced by food banks
trying to decide how much to bid at auction.
To the extent that these frictions are quantitatively
important in the real world, central banks like the Fed and
ECB should consider moving away from their inflation
targeting regimes and toward something like a nominal income
target, as Feeding America has.
The paper he links to contains a rigorous mathematical
model that shows the advantages of NGDP targeting. He doesn't
claim NGDP targeting is always optimal, but any paper that
did would actually be less persuasive, as it would mean the
model was explicitly constructed to generate that result.
Instead the result flows naturally from the Lucas-style
archipelago model, where each trader is on their own little
island observing local demand conditions before aggregate (NGDP
conditions). This is the sort of approach I used in my first
NGDP futures targeting paper, where futures markets
aggregated all of this local demand (i.e. velocity)
information. However Basil's paper is light years ahead of
where I was in 1989.
I can't recommend him highly enough. I'm told he recently
got a BA from Chicago, which suggests he may be another
Soltas, Wang or Rognlie, one of those people who makes a mark
at a very young age. He seems to combine George Selgin-type
economic intuition (even citing a lovely Selgin metaphor at
the end of his post) with the sort of highly technical skills
required in modern macroeconomics.
Commenters often ask (taunt?) me with the question, "Where
is the rigorous model for market monetarism". I don't believe
any single model can incorporate all of the insights from any
half decent school of thought, but Basil's model certainly
provides the sort of rigorous explanation of NGDP targeting
that people seem to demand.
Basil has lots of other excellent posts, and over the next
few weeks and months I will have more posts responding to
some of the points he makes (which to his credit, include
criticism of NGDP targeting–he's no ideologue.)
Jerry Brown -> Peter K....
, -1
I like Scott Sumner's blog The Money Illusion and think his
idea of NGDP level targeting is a good idea as far as
monetary policy. I don't share his supreme confidence in the
ability of monetary policy by itself to solve problems in
deficient aggregate demand. But he is always interesting to
read.
"... But I think it's also important to note that Friedman was all wrong about Japan - and that you can argue that he was also wrong about the Great Depression, for the same reason. ..."
"... For what Friedman argued, both for Japan in the 1990s and America in the 1930s, was that all the central bank needed to do was more - push out those reserves into the banking system. This would raise the money supply, and a higher money supply would have the usual effects. ..."
"... But the Bank of Japan tried that - and found that pushing more reserves into the banks didn't even lead to rapid growth in the money supply, let alone end the problem of deflation." ..."
"... A central bank can make matters worse by tightening. But they cannot fight fiscal austerity at the ZLB. Fiscal and monetary policy need to be pushing in the same direction. ..."
"... "when data contradicts theory, physics throws out the theory. Econ throws out the data.") ..."
"... Friedman largely believed his own BS, and turned a blind eye to most moral arguments. This, to me, is the heartless neoliberal that some our fellow posters are so oft to mention. ..."
What Friedman got wrong is not
including current income.
People with high income spend a fraction of that income and save the rest.
Their demand is met, so the additional income mostly goes to savings.
People with low income spend everything and still have unmet demands
Additional income for them will go to meet those unmet demands (like fixing a toothache or
replacing bald tires).
Friedman was biased against fiscal intervention in an economy and
sought evidence to argue against such policies
Our model for funding infrastructure is broken. Federal funding means project that are most
needed by cities can be overlooked while projects that would destroy cities are funded. Federal
infrastructure funding destroyed city neighborhoods leaving the neighboring areas degraded.
Meanwhile, necessary projects such as a new subway tunnel from NJ to Manhattan are blocked
by States who are ok if the city fails and growth moves to their side of the river. Money should
go directly to the cities. Infrastructure should be build to serve the people who live, walk
and work there, not to allow cars to drive through at high speeds as the engineers propose.
This infrastructure harms cities and becomes a future tax liability that cannot be met if the
built infrastructure it encourages is not valuable enough to support maintenance. We are discovering
that unlike our cities where structures can increase in value, strip malls decline in value,
often to worthlessness. Road building is increasingly mechanized and provides less employment
per project than in the past. Projects such as replacing leaking water pipes require more labor.
"Friedman was biased against
fiscal intervention in an economy and sought evidence to argue against such policies". You
get this from his permanent income hypothesis??? It is the same basic idea as Modligiani's
life cycle model who certainly was not biased against fiscal interventions.
No, from the whole of Friedman's
work.
Finding alternatives to fiscal tools for economic management is a central theme.
His permanent income hypothesis was used as a bludgeon against fiscal policy use.
Economic management by monetary policy has hit its limits.
"Economic management by monetary
policy has hit its limits."
If you want to bring up his entire body of work - you might note
what he said about Japan's period at the zero lower bound. Same thing Krugman has said. So
are you going to tell us Krugman opposed the use of fiscal stimulus?
"I had some graphics problems with my previous post on this subject - it turns out that what
looks like a permanent link at the BOJ website isn't; plus I had some more to say about the
subject.
So: David Wessel quoted what Milton Friedman said about Japan in 1998, and interpreted
it as meaning that Friedman would favor quantitative easing now. I think that's right. And
just to be clear, I also favor QE - largely because it might help some, and seems to be just
about the only policy lever still available in the face of political reality.
But I think it's also important to note that Friedman was all wrong about Japan - and that
you can argue that he was also wrong about the Great Depression, for the same reason.
For what Friedman argued, both for Japan in the 1990s and America in the 1930s, was that
all the central bank needed to do was more - push out those reserves into the banking system.
This would raise the money supply, and a higher money supply would have the usual effects.
But the Bank of Japan tried that - and found that pushing more reserves into the banks didn't
even lead to rapid growth in the money supply, let alone end the problem of deflation."
A central bank can make matters worse by tightening. But they cannot fight fiscal austerity
at the ZLB. Fiscal and monetary policy need to be pushing in the same direction.
I thought Noah Smith's article
was excellent, for once. Clearly and concisely lays out the data and its implications for theory.
Even if I accept that your criticism that he doesn't accurately state the underlying theory
is valid.
We will now see if the adage about Econ vs. physics is true ("when data contradicts
theory, physics throws out the theory. Econ throws out the data.")
I think the data can be explained by taking regency and hedging one's bets into account.
People on average tend to spend what they think is sustainable (they budget!) but they hedge
their bets against being wrong. Either a positive or negative shock will not just change the
ability to spend short-term, but may also effect how they calculate long term sustainability.
Thus - in hindsight - people may overreact to a short term shock. James Hamilton has found
this with regard to sudden changes in gas prices. The report Smith discusses finds it with
regard to both unemployment and the termination of unemployment insurances. When the shock
hits, you don't know if it is permanent or not. So you recalibrate. Btw, this also works for
positive shocks. People don't spend gas price savings until about a year into lower prices,
when they begin to believe the windfall might be more long-lasting.
Milton is almost as controversial
as Marx. Marx had a more realistic, a more grounded world-view. Marx knew damn-well that his
ideals were just that. That we should all share in the fruits of our combined labor was to
Marx, a way of achieving perfection. Pure idealism and he knew.
Friedman largely believed his own BS, and turned a blind eye to most moral arguments. This,
to me, is the heartless neoliberal that some our fellow posters are so oft to mention.
I have no data and no theory
to offer against Friedman's hypothesis, but it sure feels like there is good reason to doubt
it.
The reason I say so is that this mental behavior of converting income and expense streams
into present value sums, making long term assets and liabilities on the current personal balance
sheet, is extremely rare in my experience.
I'm not talking about just among regular working Joe's either. I'm talking about people
with plenty of excess income: fund managers and CEOs. If anyone should be able to habitually
do the math it should be these guys. But let me assert, if you want to rub elbows in that crowd,
a nearly certain way to distinguish yourself is to walk into the room with these PVs at your
fingertips. You may be totally alone.
The idea that less endowed people will do it is just giggles.
Further, it does not take much thought in this direction to analyze the expected net worth
position of people along the existing income distribution. It would appear the income level
at which one may be able to expect to fund lifetime liabilities is near the 80th percentile.
That people below that level may be able to smooth their required consumption though temporary
borrowing is just more giggles.
What's curious here is that while
Friedman (and many policymakers) may assume that most people's consumption isn't affected by
how much they earn, they are totally convinced that their spending levels are immediately and
dramatically affected by changes in their wealth!
The wealth effect is one of the pillars
of trickle down monetary policy. Proponents claim that lower interest rates drive asset prices
up, making the wealthy FEEL wealthier again...and presto they start consuming again, igniting
economic growth.
It would be very interesting to chart the course of wealthy people's spending in response
to changes in income and wealth. The results may prove Friedman right at the upper end of the
income scale--the wealthy, having more than they know what to do with, may well ride out stormy
periods by maintaining their consumption via borrowing and sale of some assets.
If Friedman's theory does apply to wealthy people, it would undermine a fundamental justification
for trickle down monetary policy and help explain why the economic recovery has been so anemic---policy
decisions where targeted at the wrong end of the income scale...at people who wouldn't boost
consumption (the wealthy) instead of at those who would boost consumption.
Once again, it would appear that deeply entrenched economic 'theories' are designed to help
the wealthy...without much empirical evidence.
Simon Wren Lewis leaves open
the possibility that an increase in aggregate demand can increase real GDP as we may not be
at full employment (I'd change that from "may not be" to "are not") but still comes out against
tax cuts for the rich with this:
"There is a very strong case for more public sector investment
on numerous grounds. But that investment should go to where it is most needed and where it
will be of most social benefit"
A little off topic, but I've
taken a further look at whether and by how much a decline in the unemployment rate coaxes people
back into the labor force. I think we can make a good back of the envelope estimate. Also:
further evidence of the importance of the cost of daycare. I will probably post next week.
Yep. As the economy gets stronger,
it does seem the labor force participation rate goes up. This is why I focus more on the employment
to population ratio and less on the unemployment rate.
Isn't there a scale issue here?
The unemployment rate is an attribute of populations, but the unemployed mostly look for work
locally, and for work they think they can do. That is, they respond more at the level of individual
opportunity
New Deal democrat -> John Williams...
, -1
When I put up my posts I will
link to them here. That will probably give you a better feel for questions to ask.
"... What is full employment is also debatable issue. For example, if workers or a good portion of workers are not earning a living wage, is that full employment? ..."
"... If production is reduced because people cannot afford the products, when in fact we have the capacity and people have the appetites and time to get utility out of the consumption is that full employment? ..."
"... Central bankers today irresistibly bring to mind the Wizard of Oz. It's the characters' missing virtues that grab me: a heart, a brain, and courage. Central bankers today lack all three. ..."
"... The Fed took risks to save the banking system, but is already telling us we are close to full employment and professing to be alarmed about "inflation," when anyone can see that banks, insurers, and pension funds are clamoring for rate rises, just as in the 1930s. Both institutions need to start thinking about someone besides the financial community. If they don't, I do not doubt that we will not have seen the last of the anger that Donald Trump and Senator Bernie Sanders mobilized in such disparate ways in the United States..." ..."
Really what SWL is saying he and Krugman
are against fiscal expansion because the Fed will negate it with higher interest rates.
"Paul Krugman
and I say no, using the following logic. The Fed thinks we are close to full employment, if we use
the term to denote the level of employment that keeps inflation constant. Generalised tax cuts (rather
than just tax cuts to the very rich) will tend to raise aggregate demand, which will lead inflation
to increase. The Fed will therefore raise interest raise rates further to offset this increase in
demand before it happens. As a result, the tax cuts will have no impact on demand, but simply make
funding investment more expense."
Maybe Trump will then fire Yellen? Did the clever little progressive neoliberals ever consider
that?
(Probably not since Obama never mad filling open slots on the FOMC a priority.)
Or he'll swamp her with reflationary nominations to the FOMC.
djb -> Peter
K....
What is full employment is also
debatable issue. For example, if workers or a good portion of workers are not earning a living
wage, is that full employment?
If production is reduced because people cannot afford the products, when in fact we have
the capacity and people have the appetites and time to get utility out of the consumption is that full employment?
So full employment definition is a whole field in itself
Thomas Ferguson: "Central bankers today irresistibly bring to
mind the Wizard of Oz. It's the characters' missing virtues
that grab me: a heart, a brain, and courage. Central bankers
today lack all three.
First, the brain. Two generations
ago, almost every economist knew what a catastrophe a
deficiency of effective demand could create. And in a real
crunch, they knew what to do about that. They realized you
couldn't push on a string, so somebody - the government - had
to borrow and spend when private markets would not. From the
1980s on, though, the fundamental Keynesian point - the
Principle of effective Demand -disappeared in a cloud of
statistical double-talk that, when you deconstruct it, turns
out to imply estimating potential output as a lagged function
of whatever foolish policy is being pursued.
Central bankers didn't take this giant step backwards to
pre-Keynesian economics by themselves. In that sense, it's
unfair to say they have only themselves to blame. But they
swallowed it whole, helped subsidize it, and cheered it on.
Now that they have rediscovered that monetary policy can't
levitate a broken economy, except by beggaring the neighbors,
it's time they admitted their errors and stopped acting like
they could control everything...
Next, courage. In the good old days, central bankers were
given to heady talk about "taking away the punch bowl" before
the party really got going. That may have been mostly
rhetoric, but it at least paid lip service to some value
bigger than banking...
The Fed took risks to save the banking system, but is
already telling us we are close to full employment and
professing to be alarmed about "inflation," when anyone can
see that banks, insurers, and pension funds are clamoring for
rate rises, just as in the 1930s. Both institutions need to
start thinking about someone besides the financial community.
If they don't, I do not doubt that we will not have seen the
last of the anger that Donald Trump and Senator Bernie
Sanders mobilized in such disparate ways in the United
States..."
Meanwhile 'liberal' worshippers of unsubstantiated
'crowding out' theories are eager to stifle fiscal stimulus
by having the Fed take away the punch bowl before the party
starts.
"... Our model for funding infrastructure is broken. Federal funding means project that are most needed by cities can be overlooked while projects that would destroy cities are funded. ..."
"... The neo in neoliberalism, however, establishes these principles on a significantly different analytic basis from those set forth by Adam Smith, as will become clear below. Moreover, neoliberalism is not simply a set of economic policies; it is not only about facilitating free trade, maximizing corporate profits, and challenging welfarism. ..."
"... But in so doing, it carries responsibility for the self to new heights: the rationally calculating individual bears full responsibility for the consequences of his or her action no matter how severe the constraints on this action-for example, lack of skills, education, and child care in a period of high unemployment and limited welfare benefits. ..."
"... A fully realized neoliberal citizenry would be the opposite of public-minded; indeed, it would barely exist as a public. The body politic ceases to be a body but is rather a group of individual entrepreneurs and consumers . . . ..."
"... consider the market rationality permeating universities today, from admissions and recruiting to the relentless consumer mentality of students as they consider university brand names, courses, and services, from faculty raiding and pay scales to promotion criteria. ..."
"... The extension of market rationality to every sphere, and especially the reduction of moral and political judgment to a cost-benefit calculus, would represent precisely the evisceration of substantive values by instrumental rationality that Weber predicted as the future of a disenchanted world. Thinking and judging are reduced to instrumental calculation in Weber's "polar night of icy darkness"-there is no morality, no faith, no heroism, indeed no meaning outside the market. ..."
There is nothing common between articles of Zingales and Schiller.
My impression is that Schiller might lost his calling: he might achieve even greater success
as a diplomat, if he took this career. He managed to tell something important about incompatibility
of [the slogan] "Make America Great Again" with neoliberalism without offending anybody. Which
is a pretty difficult thing to do.
Zingalles is just another Friedman-style market fundamentalist. Nothing new and nothing interesting.
Noah Smith is wrong here: "This idea is important because it meant that we shouldn't expect fiscal
stimulus to have much of an effect. Government checks are a temporary form of income, so Friedman's
theory predicts that it won't change spending patterns, as advocates such as John Maynard Keynes
believed."
Friedman's view about consumption demand is the same as the Life Cycle Model (Ando and Modligiani).
OK - these models do predict that tax rebates should not affect consumption. And yes there are
households who are borrower constrained so these rebates do impact their consumption.
But this is not the only form of fiscal stimulus. Infrastructure investment would increase
aggregate demand even under the Friedman view of consumption. This would hold even under the Barro-Ricardian
version of this theory. OK - John Cochrane is too stupid to know this. And I see Noah in his rush
to bash Milton Friedman has made the same mistake as Cochrane.
What Friedman got wrong is not including current income. People with high income spend a fraction
of that income and save the rest. Their demand is met, so the additional income mostly goes to
savings.
People with low income spend everything and still have unmet demands. Additional income for
them will go to meet those unmet demands (like fixing a toothache or replacing bald tires).
Friedman was biased against fiscal intervention in an economy and sought evidence to argue
against such policies
Our model for funding infrastructure is broken. Federal funding means project that are
most needed by cities can be overlooked while projects that would destroy cities are funded.
Federal infrastructure funding destroyed city neighborhoods leaving the neighboring areas degraded.
Meanwhile, necessary projects such as a new subway tunnel from NJ to Manhattan are blocked by
States who are ok if the city fails and growth moves to their side of the river.
Money should go directly to the cities. Infrastructure should be build to serve the people
who live, walk and work there, not to allow cars to drive through at high speeds as the engineers
propose. This infrastructure harms cities and becomes a future tax liability that cannot be met
if the built infrastructure it encourages is not valuable enough to support maintenance.
We are discovering that unlike our cities where structures can increase in value, strip malls
decline in value, often to worthlessness. Road building is increasingly mechanized and provides
less employment per project than in the past. Projects such as replacing leaking water pipes require
more labor.
Simon Wren Lewis leaves open the possibility that an increase in aggregate demand can increase
real GDP as we may not be at full employment (I'd change that from "may not be" to "are not")
but still comes out against tax cuts for the rich with this:
"There is a very strong case for more public sector investment on numerous grounds. But that
investment should go to where it is most needed and where it will be of most social benefit"
Re: Milton Friedman's Cherished Theory Is Laid to Rest - Bloomberg View
Friedman was not simply wrong. The key for understanding Friedman is that he was a political
hack, not a scientist.
His main achievement was creation (partially for money invested in him and Mont Pelerin Society
by financial oligarchy) of what is now called "neoliberal rationality": a pervert view of the
world, economics and social processes that now still dominates in the USA and most of Western
Europe. It is also a new mode of "govermentability".
Governmentality is distinguished from earlier forms of rule, in which national wealth is measured
as the size of territory or the personal fortune of the sovereign, by the recognition that national
economic well-being is tied to the rational management of the national population. Foucault defined
governmentality as:
"the ensemble formed by the institutions, procedures, analyses, and reflections, the calculations
and tactics that allow the exercise of this very specific albeit complex form of power, which
has as its target population, as its principle form of knowledge political economy and as its
technical means, apparatuses of security"
A liberal political order may harbor either liberal or Keynesian economic policies -- it
may lean in the direction of maximizing liberty (its politically "conservative" tilt) or of
maximizing equality (its politically "liberal" tilt), but in contemporary political parlance,
it is no more or less a liberal democracy because of one leaning or the other.
Indeed, the American convention of referring to advocates of the welfare state as political
liberals is especially peculiar, given that American conservatives generally hew more closely
to both the classical economic and the political doctrines of liberalism -- it turns the meaning
of liberalism in the direction of liberality rather than liberty.
For our purposes, what is crucial is that the liberalism in what has come to be called neoliberalism
refers to liberalism's economic variant, recuperating selected pre-Keynesian assumptions about
the generation of wealth and its distribution, rather than to liberalism as a political doctrine,
as a set of political institutions, or as political practices. The neo in neoliberalism,
however, establishes these principles on a significantly different analytic basis from those
set forth by Adam Smith, as will become clear below. Moreover, neoliberalism is not simply
a set of economic policies; it is not only about facilitating free trade, maximizing corporate
profits, and challenging welfarism.
Rather, neoliberalism carries a social analysis that, when deployed as a form of
governmentality, reaches from the soul of the citizen-subject to education policy to practices
of empire. Neoliberal rationality, while foregrounding the market, is not only or even primarily
focused on the economy; it involves extending and disseminating market values to all institutions
and social action, even as the market itself remains a distinctive player.
... ... ...
1. The political sphere, along with every other dimension of contemporary existence,
is submitted to an economic rationality; or, put the other way around, not only is the human
being configured exhaustively as homo economicus, but all dimensions of human life are cast
in terms of a market rationality. While this entails submitting every action and policy
to considerations of profitability, equally important is the production of all human and institutional
action as rational entrepreneurial action, conducted according to a calculus of utility, benefit,
or satisfaction against a microeconomic grid of scarcity, supply and demand, and moral value-neutrality.
Neoliberalism does not simply assume that all aspects of social, cultural, and political life
can be reduced to such a calculus; rather, it develops institutional practices and rewards
for enacting this vision. That is, through discourse and policy promulgating its criteria,
neoliberalism produces rational actors and imposes a market rationale for decision making in
all spheres.
Importantly, then, neoliberalism involves a normative rather than ontological claim about
the pervasiveness of economic rationality and it advocates the institution building, policies,
and discourse development appropriate to such a claim. Neoliberalism is a constructivist project:
it does not presume the ontological givenness of a thoroughgoing economic rationality for all
domains of society but rather takes as its task the development, dissemination, and institutionalization
of such a rationality. This point is further developed in (2) below.
2. In contrast with the notorious laissez-faire and human propensity to "truck and barter"
stressed by classical economic liberalism, neoliberalism does not conceive of either the market
itself or rational economic behavior as purely natural. Both are constructed-organized
by law and political institutions, and requiring political intervention and orchestration.
Far from flourishing when left alone, the economy must be directed, buttressed, and protected
by law and policy as well as by the dissemination of social norms designed to facilitate competition,
free trade, and rational economic action on the part of every member and institution of society.
In Lemke's account, "In the Ordo-liberal scheme, the market does not amount to a natural
economic reality, with intrinsic laws that the art of government must bear in mind and respect;
instead, the market can be constituted and kept alive only by dint of political interventions.
. . . [C]ompetition, too, is not a natural fact. . . . [T]his fundamental economic mechanism
can function only if support is forthcoming to bolster a series of conditions, and adherence
to the latter must consistently be guaranteed by legal measures" (193).
The neoliberal formulation of the state and especially of specific legal arrangements and decisions
as the precondition and ongoing condition of the market does not mean that the market is controlled
by the state but precisely the opposite. The market is the organizing and regulative principle
of the state and society, along three different lines:
The state openly responds to needs of the market, whether through monetary and fiscal
policy, immigration policy, the treatment of criminals, or the structure of public education.
In so doing, the state is no longer encumbered by the danger of incurring the legitimation
deficits predicted by 1970s social theorists and political economists such as Nicos Poulantzas,
Jürgen Habermas, and James O'Connor.6 Rather, neoliberal rationality extended to the state
itself indexes the state's success according to its ability to sustain and foster the market
and ties state legitimacy to such success. This is a new form of legitimation, one that
"founds a state," according to Lemke, and contrasts with the Hegelian and French revolutionary
notion of the constitutional state as the emergent universal representative of the people.
As Lemke describes Foucault's account of Ordo-liberal thinking, "economic liberty produces
the legitimacy for a form of sovereignty limited to guaranteeing economic activity . . .
a state that was no longer defined in terms of an historical mission but legitimated itself
with reference to economic growth" (196).
The state itself is enfolded and animated by market rationality: that is, not simply
profitability but a generalized calculation of cost and benefit becomes the measure of all
state practices. Political discourse on all matters is framed in entrepreneurial terms;
the state must not simply concern itself with the market but think and behave like a market
actor across all of its functions, including law. 7
Putting (a) and (b) together, the health and growth of the economy is the basis of
state legitimacy, both because the state is forthrightly responsible for the health of the
economy and because of the economic rationality to which state practices have been submitted.
Thus, "It's the economy, stupid" becomes more than a campaign slogan; rather, it expresses
the principle of the state's legitimacy and the basis for state action-from constitutional
adjudication and campaign finance reform to welfare and education policy to foreign policy,
including warfare and the organization of "homeland security."
3. The extension of economic rationality to formerly noneconomic domains and institutions
reaches individual conduct, or, more precisely, prescribes the citizen-subject of a neoliberal
order. Whereas classical liberalism articulated a distinction, and at times even a tension,
among the criteria for individual moral, associational, and economic actions (hence the striking
differences in tone, subject matter, and even prescriptions between Adam Smith's Wealth of
Nations and his Theory of Moral Sentiments), neoliberalism normatively constructs and interpellates
individuals as entrepreneurial actors in every sphere of life.
It figures individuals as rational, calculating creatures whose moral autonomy is measured
by their capacity for "self-care"-the ability to provide for their own needs and service their
own ambitions. In making the individual fully responsible for her- or himself, neoliberalism
equates moral responsibility with rational action; it erases the discrepancy between economic
and moral behavior by configuring morality entirely as a matter of rational deliberation about
costs, benefits, and consequences.
But in so doing, it carries responsibility for the self to new heights: the rationally
calculating individual bears full responsibility for the consequences of his or her action
no matter how severe the constraints on this action-for example, lack of skills, education,
and child care in a period of high unemployment and limited welfare benefits.
Correspondingly, a "mismanaged life," the neoliberal appellation for failure to navigate
impediments to prosperity, becomes a new mode of depoliticizing social and economic powers
and at the same time reduces political citizenship to an unprecedented degree of passivity
and political complacency.
The model neoliberal citizen is one who strategizes for her- or himself among various social,
political, and economic options, not one who strives with others to alter or organize these
options. A fully realized neoliberal citizenry would be the opposite of public-minded;
indeed, it would barely exist as a public. The body politic ceases to be a body but is rather
a group of individual entrepreneurs and consumers . . . which is, of course, exactly how
voters are addressed in most American campaign discourse.8
Other evidence for progress in the development of such a citizenry is not far from hand:
consider the market rationality permeating universities today, from admissions and recruiting
to the relentless consumer mentality of students as they consider university brand names, courses,
and services, from faculty raiding and pay scales to promotion criteria. 9
Or consider the way in which consequential moral lapses (of a sexual or criminal nature)
by politicians, business executives, or church and university administrators are so often apologized
for as "mistakes in judgment," implying that it was the calculation that was wrong, not the
act, actor, or rationale.
The state is not without a project in the making of the neoliberal subject. It attempts
to construct prudent subjects through policies that organize such prudence: this is the basis
of a range of welfare reforms such as workfare and single-parent penalties, changes in the
criminal code such as the "three strikes law," and educational voucher schemes.
Because neoliberalism casts rational action as a norm rather than an ontology, social policy
is the means by which the state produces subjects whose compass is set entirely by their rational
assessment of the costs and benefits of certain acts, whether those acts pertain to teen pregnancy,
tax fraud, or retirement planning. The neoliberal citizen is calculating rather than rule abiding,
a Benthamite rather than a Hobbesian.
The state is one of many sites framing the calculations leading to social behaviors that
keep costs low and productivity high. This mode of governmentality (techniques of governing
that exceed express state action and orchestrate the subject's conduct toward himor herself)
convenes a "free" subject who rationally deliberates about alternative courses of action, makes
choices, and bears responsibility for the consequences of these choices. In this way, Lemke
argues, "the state leads and controls subjects without being responsible for them"; as individual
"entrepreneurs" in every aspect of life, subjects become wholly responsible for their well-being
and citizenship is reduced to success in this entrepreneurship (201).
Neoliberal subjects are controlled through their freedom-not simply, as thinkers from the
Frankfurt School through Foucault have argued, because freedom within an order of domination
can be an instrument of that domination, but because of neoliberalism's moralization of the
consequences of this freedom. Such control also means that the withdrawal of the state from
certain domains, followed by the privatization of certain state functions, does not amount
to a dismantling of government but rather constitutes a technique of governing; indeed, it
is the signature technique of neoliberal governance, in which rational economic action suffused
throughout society replaces express state rule or provision.
Neoliberalism shifts "the regulatory competence of the state onto 'responsible,' 'rational'
individuals [with the aim of] encourag[ing] individuals to give their lives a specific entrepreneurial
form" (Lemke, 202).
4. Finally, the suffusion of both the state and the subject with economic rationality
has the effect of radically transforming and narrowing the criteria for good social policy
vis-à-vis classical liberal democracy. Not only must social policy meet profitability tests,
incite and unblock competition, and produce rational subjects, it obeys the entrepreneurial
principle of "equal inequality for all" as it "multiples and expands entrepreneurial forms
with the body social" (Lemke, 195). This is the principle that links the neoliberal governmentalization
of the state with that of the social and the subject.
Taken together, the extension of economic rationality to all aspects of thought and activity,
the placement of the state in forthright and direct service to the economy, the rendering of
the state tout court as an enterprise organized by market rationality, the production of the
moral subject as an entrepreneurial subject, and the construction of social policy according
to these criteria might appear as a more intensive rather than fundamentally new form of the
saturation of social and political realms by capital. That is, the political rationality of
neoliberalism might be read as issuing from a stage of capitalism that simply underscores Marx's
argument that capital penetrates and transforms every aspect of life-remaking everything in
its image and reducing every value and activity to its cold rationale.
All that would be new here is the flagrant and relentless submission of the state and the
individual, the church and the university, morality, sex, marriage, and leisure practices to
this rationale. Or better, the only novelty would be the recently achieved hegemony of rational
choice theory in the human sciences, self-represented as an independent and objective branch
of knowledge rather than an expression of the dominance of capital. Another reading that would
figure neoliberalism as continuous with the past would theorize it through Weber's rationalization
thesis rather than Marx's argument about capital.
The extension of market rationality to every sphere, and especially the reduction of
moral and political judgment to a cost-benefit calculus, would represent precisely the evisceration
of substantive values by instrumental rationality that Weber predicted as the future of a disenchanted
world. Thinking and judging are reduced to instrumental calculation in Weber's "polar night
of icy darkness"-there is no morality, no faith, no heroism, indeed no meaning outside the
market.
Julio -> Libezkova...
I agree with this. But I think it's extraordinarily wordy, and fails to emphasize the deification
of private property which is at the root of it.
Brown - who I haven't read much of but like what I have - sounds a lot like Lasch.
Brown:
"The extension of market rationality to every sphere, and especially the reduction of
moral and political judgment to a cost-benefit calculus, would represent precisely the evisceration
of substantive values by instrumental rationality that Weber predicted as the future of a disenchanted
world. Thinking and judging are reduced to instrumental calculation in Weber's "polar night
of icy darkness"-there is no morality, no faith, no heroism, indeed no meaning outside the
market."
Lasch in Revolt of the Elites:
"... Individuals cannot learn to speak for themselves at all, much less come to an intelligent
understanding of their happiness and well-being, in a world in which there are no values except
those of the market.... The market tends to universalize itself. It does not easily coexist
with institutions that operate according to principles that are antithetical to itself: schools
and universities, newspapers and magazines, charities, families. Sooner or later the market
tends to absorb them all. It puts an almost irresistible pressure on every activity to justify
itself in the only terms it recognizes: to become a business proposition, to pay its own way,
to show black ink on the bottom line. It turns news into entertainment, scholarship into professional
careerism, social work into the scientific management of poverty. Inexorably it remodels every
institution in its own image."
"... "The idea of a wealth effect doesn't stand up to economic data. The stock market boom in the late 1990s helped increase the wealth of Americans, but it didn't produce a significant change in consumption, according to David Backus, a professor of economics and finance at New York University. Before the stock market reversed itself, "you didn't see a big increase in consumption," says Backus. "And when it did reverse itself, you didn't see a big decrease." ..."
"... Yet that didn't stop Bernanke from citing the Wealth Effect as one of the justifications for trickle down monetary policy: "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion." https://www.federalreserve.gov/newsevents/other/o_bernanke20101105a.htm ..."
"... The 'wealth effect' is just more poppycock, neoliberal theory designed to enrich the wealthy and deprive others of prosperity. ..."
Milton is almost as controversial as Marx. Marx had a more
realistic, a more grounded world-view. Marx knew damn-well
that his ideals were just that. That we should all share in
the fruits of our combined labor was to Marx, a way of
achieving perfection. Pure idealism and he knew.
Friedman largely believed his own BS, and turned a blind eye
to most moral arguments. This, to me, is the heartless
neoliberal that some our fellow posters are so oft to
mention.
I have no data and no theory to offer against Friedman's
hypothesis, but it sure feels like there is good reason to
doubt it.
The reason I say so is that this mental behavior of
converting income and expense streams into present value
sums, making long term assets and liabilities on the current
personal balance sheet, is extremely rare in my experience.
I'm not talking about just among regular working Joe's
either. I'm talking about people with plenty of excess
income: fund managers and CEOs. If anyone should be able to
habitually do the math it should be these guys. But let me
assert, if you want to rub elbows in that crowd, a nearly
certain way to distinguish yourself is to walk into the room
with these PVs at your fingertips. You may be totally alone.
The idea that less endowed people will do it is just
giggles.
Further, it does not take much thought in this direction
to analyze the expected net worth position of people along
the existing income distribution. It would appear the income
level at which one may be able to expect to fund lifetime
liabilities is near the 80th percentile. That people below
that level may be able to smooth their required consumption
though temporary borrowing is just more giggles.
What's curious here is that while Friedman (and many
policymakers) may assume that most people's consumption isn't
affected by how much they earn, they are totally convinced
that their spending levels are immediately and dramatically
affected by changes in their wealth!
The wealth effect is
one of the pillars of trickle down monetary policy.
Proponents claim that lower interest rates drive asset prices
up, making the wealthy FEEL wealthier again...and presto they
start consuming again, igniting economic growth.
It would be very interesting to chart the course of
wealthy people's spending in response to changes in income
and wealth. The results may prove Friedman right at the upper
end of the income scale--the wealthy, having more than they
know what to do with, may well ride out stormy periods by
maintaining their consumption via borrowing and sale of some
assets.
If Friedman's theory does apply to wealthy people, it
would undermine a fundamental justification for trickle down
monetary policy and help explain why the economic recovery
has been so anemic---policy decisions where targeted at the
wrong end of the income scale...at people who wouldn't boost
consumption (the wealthy) instead of at those who would boost
consumption.
Once again, it would appear that deeply entrenched
economic 'theories' are designed to help the
wealthy...without much empirical evidence.
I think the fundamental pillar of such "thinking" is:
-
Poor people are motivated to work and be virtuous by their
lack of money, so they must be kept hungry;
- Rich people are motivated to work and be virtuous by money,
so they must be kept rich.
"The idea of a wealth effect doesn't stand up to economic
data. The stock market boom in the late 1990s helped increase
the wealth of Americans, but it didn't produce a significant
change in consumption, according to David Backus, a professor
of economics and finance at New York University. Before the
stock market reversed itself, "you didn't see a big increase
in consumption," says Backus. "And when it did reverse
itself, you didn't see a big decrease."
http://www.slate.com/articles/news_and_politics/hey_wait_a_minute/2008/06/debunking_the_wealth_effect.html
Yet that didn't stop Bernanke from citing the Wealth
Effect as one of the justifications for trickle down monetary
policy: "higher stock prices will boost consumer wealth and
help increase confidence, which can also spur spending.
Increased spending will lead to higher incomes and profits
that, in a virtuous circle, will further support economic
expansion."
https://www.federalreserve.gov/newsevents/other/o_bernanke20101105a.htm
The 'wealth effect' is just more poppycock, neoliberal
theory designed to enrich the wealthy and deprive others of
prosperity.
Yet pgl subscribes to the theory!
As expected, promoters of trickle down monetary policy defend
the debunked wealth effect as an primary tool for stimulating
economic growth...but reject Noah Smith's point that poor
people reduce consumption during recessions, making them a
more reasonable policy target for restoring consumption
during demand deficient times.
"... "The idea of a wealth effect doesn't stand up to economic data. The stock market boom in the late 1990s helped increase the wealth of Americans, but it didn't produce a significant change in consumption, according to David Backus, a professor of economics and finance at New York University. Before the stock market reversed itself, "you didn't see a big increase in consumption," says Backus. "And when it did reverse itself, you didn't see a big decrease." ..."
"... Yet that didn't stop Bernanke from citing the Wealth Effect as one of the justifications for trickle down monetary policy: "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion." https://www.federalreserve.gov/newsevents/other/o_bernanke20101105a.htm ..."
"... The 'wealth effect' is just more poppycock, neoliberal theory designed to enrich the wealthy and deprive others of prosperity. ..."
Milton is almost as controversial as Marx. Marx had a more
realistic, a more grounded world-view. Marx knew damn-well
that his ideals were just that. That we should all share in
the fruits of our combined labor was to Marx, a way of
achieving perfection. Pure idealism and he knew.
Friedman largely believed his own BS, and turned a blind eye
to most moral arguments. This, to me, is the heartless
neoliberal that some our fellow posters are so oft to
mention.
I have no data and no theory to offer against Friedman's
hypothesis, but it sure feels like there is good reason to
doubt it.
The reason I say so is that this mental behavior of
converting income and expense streams into present value
sums, making long term assets and liabilities on the current
personal balance sheet, is extremely rare in my experience.
I'm not talking about just among regular working Joe's
either. I'm talking about people with plenty of excess
income: fund managers and CEOs. If anyone should be able to
habitually do the math it should be these guys. But let me
assert, if you want to rub elbows in that crowd, a nearly
certain way to distinguish yourself is to walk into the room
with these PVs at your fingertips. You may be totally alone.
The idea that less endowed people will do it is just
giggles.
Further, it does not take much thought in this direction
to analyze the expected net worth position of people along
the existing income distribution. It would appear the income
level at which one may be able to expect to fund lifetime
liabilities is near the 80th percentile. That people below
that level may be able to smooth their required consumption
though temporary borrowing is just more giggles.
What's curious here is that while Friedman (and many
policymakers) may assume that most people's consumption isn't
affected by how much they earn, they are totally convinced
that their spending levels are immediately and dramatically
affected by changes in their wealth!
The wealth effect is
one of the pillars of trickle down monetary policy.
Proponents claim that lower interest rates drive asset prices
up, making the wealthy FEEL wealthier again...and presto they
start consuming again, igniting economic growth.
It would be very interesting to chart the course of
wealthy people's spending in response to changes in income
and wealth. The results may prove Friedman right at the upper
end of the income scale--the wealthy, having more than they
know what to do with, may well ride out stormy periods by
maintaining their consumption via borrowing and sale of some
assets.
If Friedman's theory does apply to wealthy people, it
would undermine a fundamental justification for trickle down
monetary policy and help explain why the economic recovery
has been so anemic---policy decisions where targeted at the
wrong end of the income scale...at people who wouldn't boost
consumption (the wealthy) instead of at those who would boost
consumption.
Once again, it would appear that deeply entrenched
economic 'theories' are designed to help the
wealthy...without much empirical evidence.
I think the fundamental pillar of such "thinking" is:
-
Poor people are motivated to work and be virtuous by their
lack of money, so they must be kept hungry;
- Rich people are motivated to work and be virtuous by money,
so they must be kept rich.
"The idea of a wealth effect doesn't stand up to economic
data. The stock market boom in the late 1990s helped increase
the wealth of Americans, but it didn't produce a significant
change in consumption, according to David Backus, a professor
of economics and finance at New York University. Before the
stock market reversed itself, "you didn't see a big increase
in consumption," says Backus. "And when it did reverse
itself, you didn't see a big decrease."
http://www.slate.com/articles/news_and_politics/hey_wait_a_minute/2008/06/debunking_the_wealth_effect.html
Yet that didn't stop Bernanke from citing the Wealth
Effect as one of the justifications for trickle down monetary
policy: "higher stock prices will boost consumer wealth and
help increase confidence, which can also spur spending.
Increased spending will lead to higher incomes and profits
that, in a virtuous circle, will further support economic
expansion."
https://www.federalreserve.gov/newsevents/other/o_bernanke20101105a.htm
The 'wealth effect' is just more poppycock, neoliberal
theory designed to enrich the wealthy and deprive others of
prosperity.
Yet pgl subscribes to the theory!
As expected, promoters of trickle down monetary policy defend
the debunked wealth effect as an primary tool for stimulating
economic growth...but reject Noah Smith's point that poor
people reduce consumption during recessions, making them a
more reasonable policy target for restoring consumption
during demand deficient times.
Andy Haldane
, Chief Economist and Executive Director, Monetary Analysis &
Statistics, Bank of England
It would be easy to become very depressed at the
state of economics in the current environment. Many experts, including economics
experts, are simply being ignored. But the economic challenges facing us could not be
greater: slowing growth, slowing productivity, the retreat of trade, the retreat of
globalisation, high and rising levels of inequality. These are deep and diverse
problems facing our societies and we will need deep and diverse frameworks to help
understand them and to set policy in response to them. In the pre-crisis environment
when things were relatively stable and stationary, our existing frameworks in
macroeconomics did a pretty good job of making sense of things.
But the world these days is characterised by features such as discontinuities,
tipping points, multiple equilibria, and radical uncertainty. So if we are to make
economics interesting and the response to the challenges adequate, we need new
frameworks that can capture the complexities of modern societies.
We are seeing increased interest in using complexity theory to make sense of the
dynamics of economic and financial systems. For example, epidemiological models have
been used to understand and calibrate regulatory capital standards for the largest,
most interconnected banks, the so-called "super-spreaders". Less attention has been
placed on using complexity theory to understand the overall architecture of public
policy – how the various pieces of the policy jigsaw fit together as a whole in
relation to modern economic and financial systems. These systems can be characterised
as a complex, adaptive "
system
of systems
", a nested set of sub-systems, each one itself a complex web. The
architecture of a complex system of systems means that policies with varying degrees
of magnification are necessary to understand and to moderate fluctuations. It also
means that taking account of interactions between these layers is important when
gauging risk.
Although there is no generally-accepted definition of complexity, that proposed by
Herbert Simon in
The Architecture of Complexity
– "one made up of a
large number of parts that interact in a non-simple way" – captures well its everyday
essence. The whole behaves very differently than the sum of its parts. The properties
of complex systems typically give rise to irregular, and often highly non-normal,
statistical distributions for these systems over time. This manifests itself as much
fatter tails than a normal distribution would suggest. In other words, system-wide
interactions and feedbacks generate a much higher probability of catastrophic events
than Gaussian distributions would imply.
For evolutionary reasons of survival of the fittest, Simon posited that
"decomposable" networks were more resilient and hence more likely to proliferate. By
decomposable networks, he meant organisational structures which could be partitioned
such that the resilience of the system as a whole was not reliant on any one
sub-element. This may be a reasonable long-run description of some real-world complex
systems, but less suitable as a description of the evolution of socio-economic
systems. The efficiency of many of today's networks relies on their
hyper-connectivity. There are, in the language of economics, significantly increasing
returns to scale and scope in a network industry. Think of the benefits of global
supply chains and global interbank networks for trade and financial risk-sharing.
This provides a powerful secular incentive for non-decomposable socio-economic
systems.
Moreover, if these hyper-connected networks do face systemic threat, they are
often able to adapt in ways which avoid extinction. For example, the risk of social,
economic or financial disorder will typically lead to an adaptation of policies to
prevent systemic collapse. These adaptive policy responses may preserve
otherwise-fragile socio-economic topologies. They may even further encourage the
growth of connectivity and complexity of these networks. Policies to support
"super-spreader" banks in a crisis for instance may encourage them to become larger
and more complex. The combination of network economies and policy responses to
failure means socio-economic systems may be less Darwinian, and hence decomposable,
than natural and biological systems.
Andy Haldane addresses OECD New Approaches to Economic Challenges (NAEC)
Roundtable
What public policy implications follow from this complex system of systems
perspective? First, it underscores the importance of accurate data and timely mapping
of each layer in the system. This is especially important when these layers are
themselves complex. Granular data is needed to capture the interactions within and
between these complex sub-systems.
Second, modelling of each of these layers, and their interaction with other
layers, is likely to be important, both for understanding system risks and dynamics
and for calibrating potential policy responses to them.
Third, in controlling these risks, something akin to the Tinbergen Rule is likely
to apply: there is likely to be a need for at least as many policy instruments as
there are complex sub-components of a system of systems if risk is to be monitored
and managed effectively. Put differently, an under-identified complex system of
systems is likely to result in a loss of control, both system-wide and for each of
the layers.
In the meantime, there is a crisis in economics. For some, it is a threat. For
others it is an opportunity to make a great leap forward, as Keynes did in the 1930s.
But seizing this opportunity requires first a re-examination of the contours of
economics and an exploration of some new pathways. Second, it is important to look at
economic systems through a cross-disciplinary lens. Drawing on insights from a range
of disciplines, natural as well as social sciences, can provide a different
perspective on individual behaviour and system-wide dynamics.
The NAEC initiative does so, and the OECD's willingness to consider a complexity
approach puts the Organisation at the forefront of bringing economic analysis
policy-making into the 21
st
century.
The OECD organised a Workshop on Complexity and Policy, 29-30 September, OECD HQ,
Paris, along with the European Commission and INET. Watch the webcast:
29/09
morning
;
29/09
afternoon
;
30/09
morning
Re Wolfers: Having an opinion is not the same as being able to predict or infer accurately. (Nominally)
informed opinion hasn't performed particularly well with respect to either at the macro level
and many see no connection with their lives at the micro level. If people see "expert" opinion
as either wrong or irrelevant then they will ignore it. Nature abhors a vacuum so rather adopt
experts' stories they'll create their own narrative. Confidence of small business owners that
their lot will improve? That's what they'd like to believe and what evidence do they have that
it won't? (Stories matter more to most people than facts or models. We ignore that at our peril.)
Small business is optimistic based on current trends with demand improving and people having more
money to spend. Their optimism has nothing to do with Trump
Wall Street sees opportunity for profits. Big Tax cuts for the wealthy will inflate stock prices.
It reflects the opportunity for short term gains, not long term economic improvement
Economist influence on policy is overrated
Since when have our ruling elites followed advice?
Medical research can thrive in spite of a government of short earth creationists
A key battle is giving cities more control over spending
Local control can better direct infrastructure spending than state agencies concerned with freeways
It is a mistake to look to the Federal Government as savior. Urbanization is the future. Let the
cities invest in themselves and stop subsidizing the unsustainable suburban and exurban development.
Peter K. -> jonny bakho... , -1
"It is a mistake to look to the Federal Government as savior. Urbanization is the future. Let
the cities invest in themselves and stop subsidizing the unsustainable suburban and exurban development."
Why Most Economists Are So Worried About Trump http://nyti.ms/2ij9VRP via @UpshotNYT
NYT - Justin Wolfers - January 11
I feared that I might have been talking with an unrepresentative group until I stumbled upon
a recent survey of leading academic economists showing a similar pattern. Of the 31 respondents
to the University of Chicago's IGM Economic Experts Panel, 28 disagreed with the claim that the
"seven actions to protect American workers" in Mr. Trump's 100-day plan would improve the economic
prospects of middle-class Americans. The dissenters were two economists who were uncertain, and
one who had no opinion.
The pervasive pessimism among professional economists stands in stark contrast with the judgment
of financial markets, which rose strongly in the wake of Mr. Trump's election, and have remained
buoyant since.
It also puts economists at odds with the judgments of small-business owners. According to the
latest survey from the National Federation of Independent Businesses, the balance of members who
expect general business conditions to improve has moved drastically. In October, the pessimists
who saw business conditions as likely to worsen outnumbered the optimists by seven percentage
points; the latest survey from December shows that the optimists now outnumber the pessimists
by 50 percentage points. It's an extraordinary shift - one the association described as "stratospheric."
I'm not quite sure how to reconcile these conflicting signals. One possibility is that Mr.
Trump remains something of an unknown, and each group is filling in the blanks differently. Small
businesses, pleased to see a businessman in the White House, might be tempted to believe the best.
By contrast, there's a reason that economics is called the dismal science, and few economists
trust politicians - of either stripe - to get things right. Greater uncertainty gives economists
a broader canvas upon which to project their pessimism. ...
JW: ... 'According to the latest survey from the National Federation of Independent Businesses,
the balance of members who expect general business conditions to improve has moved drastically.'
...
"Expect Better Business Conditions" rises dramatically
Small business optimism rocketed to its highest level since 2004, with a stratospheric 38-point
jump in the number of owners who expect better business conditions, according to the monthly National
Federation of Independent Business (NFIB) Index of Small Business Optimism, released today.
"We haven't seen numbers like this in a long time," said NFIB President and CEO Juanita Duggan.
"Small business is ready for a breakout, and that can only mean very good things for the U.S.
economy."
The Index reached 105.8, an increase of 7.4 points. Leading the charge was "Expect Better Business
Conditions," which shot up from a net 12 percent in November to a net 50 percent last month. ...
"Confidence of small business owners that their lot will improve?
"
Could *small business confidence index* work same as *odd lot investor's confidence*? Odd lot
buying index? The little people registering their wrong opinions? A contrary indicator? Do you
see how small business confidence curve has begun to raise a red flag?
"... By Philip Pilkington, a macroeconomist working in asset management and author of the new book The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory . The views expressed in this interview are not those of his employer ..."
"... The Reformation in Economics ..."
"... Once the theory is assumed to be true it can then be applied everywhere and anywhere in an entirely uncritical manner. Anything can then be interpreted in terms of utility-maximisation. This is most obvious in popular publications like Freakonomics: A Rogue Economist Explores the Hidden Side of Everything ..."
"... To paraphrase from Yes Minister, real economists don't sully their elevated minds with anything as sordid as data. It's much easier to make a a bunch of unrealistic assumptions, for example "trade deals don't affect trade balance and employment", and just to build their model from there. The fact that these kind of missteps are not stamped out by the profession shows that fire is the only answer. ..."
"... I abandoned Econ. as a major when I was a senior in college (mid 70's) because what was being taught had little to no relationship to what I observed in the real world of human beings (as opposed to the "Homo Economicus" that econ. theory depended on). ..."
In my book
The Reformation in Economics
I take the position that modern
economics is more similar to phrenology than it is to, say, physics. This is
not at all surprising as it grew up in the same era and out of remarkably
similar ideas. But what is surprising is that this is not widely noticed today.
What is most tragic, however, is that there is much in economics that can and
should be salvaged. While these positive aspects of economics probably do not
deserve the title of 'science' they at least provide us with a rational toolkit
that can be used to improve political and economic governance in our societies.
The Ideology at the Heart of Modern Economics
The curious thing about modern economics is its almost complete insularity.
Its proponents appear to have very little notion of how it applies to the real
world. This is not the case in normal sciences. Take physics, for example. It
is extremely clear how, say, the inverse squares law applies to experienced
reality. In the case of gravitation, for example, the inverse squares law makes
experimentally testable predictions about the force exerted by, say, the
gravitational pull between the sun and the earth.
Modern economics – by which I mean neoclassical or marginalist economics
which relies on the notion of utility-maximisation as its central pillar –
completely lacks this capacity to map itself onto the real world.
As philosophers of science like Hans Albert have pointed out
, the theory of
utility-maximisation rules out such mapping
a priori
, thus rendering
the theory completely untestable. Since the theory is untestable it cannot be
falsified and this allows economists to simply
assume
that it is true.
Once the theory is assumed to be true it can then be applied everywhere and
anywhere in an entirely uncritical manner. Anything can then be interpreted in
terms of utility-maximisation. This is most obvious in popular publications
like
Freakonomics: A Rogue Economist Explores the Hidden Side of Everything
.
Such books read in an almost identical way to the fashionable books of 19
th
century phrenology. The economists address everything from parenting to crime
to the Ku Klux Klan by filtering it through the non-experimental theory of
utility-maximisation – a theory that has not and cannot be verified and so the
author and reader alike take it entirely on trust.
Such systems of ideas are ideological to the core. They are cooked up
independently of the evidence and are then imposed upon the material of
experienced reality. We are encouraged to 'read' the world through the
interpretive lens of economics – and when we ask for evidence that this lens
uncovers factually accurate information we are confounded with circular
arguments from the economists.
Large-scale public policy is also filtered through this lens. This is done
by constraining the study of macroeconomics – that is, GDP growth,
unemployment, inflation and so on – by tying it to the theories of
utility-maximisation. All macroeconomics today must be 'microfounded'. This
means that it must have microeconomic – read: 'utility-maximising' –
foundations. In reality, as I show in the book, these foundations are anything
by 'micro'. Rather, what is done is that the entire economy is seen to be
dominated by a single uber-utility-maximiser and all the conclusions flow from
there.
This may seem like odd stuff but it is built into the theory as a sort of
foundational delusion. The arbitrary, non-empirical theory of
utility-maximisation assumes primacy to all considerations of actual
statistical facts, intuitions about human motivations and even basic
assumptions about what should constitute a properly moral view of man. What we
end up with is not just a crushing, anti-inquiry ideology but also a lumbering
failure of a system of ideas that has no hope in extracting relevant
information about the real world.
What Is To Be Done?
Is economics then to be thought of as a failure? Must we scrap economics and
try to find other ways to describe and address our economic and political
problems? In this regard, my book claims to lay out a new path – albeit one
that has been intuitively followed by some economists, most notably those in
the heterodox camp. This new path is based on two key interrelated premises.
The first is that we have little insight into what actually motivates human
beings. For this reason theories that rest on assumptions about human
motivation – like utility-maximisation – must be thrown out and the study of
the economy must be undertaken by examining large economic aggregates. In
short, micro must be tossed off the throne and the crown must be handed to
macro. The second premise is that we must not be overly concerned with highly
precise 'models' of the economy. Instead we must take what I have come to call
a 'schematic' approach. A schematic approach involves building tools that can
be integrated into how we understand the world around us without assuming that
these tools provide us with an exact description of this world. This schematic
toolkit – which I begin to lay out in the later chapters of the book – can then
be used to approach the study of actual economies.
These may seem like rather simple rules. But when applied to economic theory
they generate rather radical results. At the same time they greatly constrain
the amount of wisdom that we can assume economists to have; given these
premises no book like
Freakonomics
should ever be taken seriously and
should probably even be written in the first place. In that sense, they may
appear to militate against Enlightenment optimism. This may well be so, but I
would argue that they are arrived at through rational Enlightenment-style
inquiry and so should be taken seriously even by proponents of Enlightenment
Progress. After all, phrenology eventually fell in the face of rationalistic
criticism.
In the book some of the issues around uncertainty and free will are also
explored. Implicit in some of the book's central criticisms is that societies
are not to be understood in a deterministic manner. Unlike billiard balls,
social forces are not subject to deterministic laws. In one sense this is
unfortunate as it means that our understandings of social and economic
processes must always be of a contingent and not-too-precise nature. But on the
other hand it is optimistic in the sense that it attributes an agency to human
beings to create the world around them that mainstream marginalist economics
stripped away by imposing the limited utility-maximiser framework on everyone
from Mother Theresa to Hitler.
This also creates an opening for a proper discussion of ethics and morality.
Although this is not dealt with directly in the book – it would surely require
another ten volumes – the framework does reopen awkward questions surrounding
morality and ethics. Some self-professed social scientists, nervous that these
questions have been passed to us from the world religions, would prefer to do
away with any moral and ethical questions. But this was always a fantasy – even
the most hardened anti-ethicist, unless they are serving life for
serial-killing, has a system by which they determine right from wrong.
All that I have said here is rather abstract. But a good portion of the book
is not and I do not want to give that impression. It contains chapters that
deal with inflation, profits, income distribution, income determination,
financial markets, interest rates, investment and employment. It is not simply
a book of methodology but rather one that tries to also provide the basic
building blocks of a theory that can be applied to understand really-existing
economies. In this sense, I hope that it is again more optimistic than many
mainstream economics books that leave the reader without any capacity to apply
the supposed ideas that they have absorbed by reading them beyond mere
chest-puffing at dinner parties and moral condemnations of the social safety
net.
We dont have Departments of Astrology. Just dump it call it business data
and stick it in business schools or departments. It is not science or social
science it is the worst ever pseudoscience with blood all over its hands see
previous post.
You could call it a branch of political "science" (also not a science).
At least it would be honest. Everything proposed or concluded in economics
classes will be known to simply be political preferences or ideas, not real
or valuable beyond that.
A holistic understanding of the natural world is needed, therefore I believe
the first rule of economics that should override all others is one that would
correct the false assumption that humans are separate from our environment and
superior to all other species. That separation and illusion of independence,
particularly endemic to the European mentality, has caused us to denigrate
nature as though we must dominate and subdue it to satisfy our needs and
desires, and the result now in full evidence is the wholesale destruction of
habitat and ecocide that inevitably lead to omnicide. We have allowed our
population to exceed the carrying capacity of the earth and have used
technology without regard for the consequences, thus contradicting the meaning
of homo sapiens and assuring our extinction.
Phillip's comments regarding the "Great Chain of Being" are apropo.
This is "Western" in a sense, "Christian" more particularly. It tells
the underclass they are special while at the same time justifying and
encouraging their subservience (i.e., the underclass is told they are
disconnected on the one hand, but totally "connected" (that is, have a
"place") on the other hand (which they should not try to rise above)).
The implication that other societies where greater "connection" is
somehow recognized are somehow immune to stratification and dominance
by a ruling elite, somehow more "wholesome" or "gentle" or "sane", has
very little evidence in its favor that I have ever seen. It's rather
faddish to criticize "the West" for all the ills of the world. And
"the West" certainly has left a trail of suffering and destruction
across the face of the planet. But other societies have their own
mechanisms for justifying and encouraging subservience. And a
religious "feeling" of the connectedness of all things is not a
substitute for the scientific insights of the discipline of ecology,
brought to us by a "Western" mode of thought and enquiry.
No matter what society we live in, the problem of just governance,
the aggrandizement of the elite and the suffering of the masses,
remains the same.
What passes for the science of economics has become politicized and
scientifically compromised to the point that the only thing that makes sense is
to burn it with fire. Data has stopped playing a role in development of
economic theory and selected snippets of it are occasionally dragged out only
if they support the latest concoction that comes to their mind.
To paraphrase from Yes Minister, real economists don't sully their elevated
minds with anything as sordid as data. It's much easier to make a a bunch of
unrealistic assumptions, for example "trade deals don't affect trade balance
and employment", and just to build their model from there. The fact that these
kind of missteps are not stamped out by the profession shows that fire is the
only answer.
Economics is to ecology as phrenology is to neuroscience?
Always thought the problem was that economics should be descriptive, not
prescriptive. Maybe a parallel in how science came out of "natural philosophy".
In the book some of the issues around uncertainty and free will are also
explored. Implicit in some of the book's central criticisms is that
societies are not to be understood in a deterministic manner. Unlike
billiard balls, social forces are not subject to deterministic laws.
This seems to me to be an over reaction to the specious nature of current
mainstream economics, compounded by a misunderstanding of the role of
determinism and uncertainty in physics. What most characterizes physics is not
the absence of uncertainty, but the specification of it. Just because the
current dominant economic dogma has it wrong is no reason to throw out
determinism.
The analogy to billiard balls is a poor analogy to social systems. The
physical forces that determine an earthquake, for example, may not allow us to
precisely predict the moment in time when the quake will trigger, but that
doesn't make earthquakes "non-deterministic". OK, the point is taken that
societies are not billiard balls. There is still plenty of room to hope that
social forces may be sufficiently specified to allow useful predictions.
Throwing out determinism is not a royal road to morality. The moral quandary of
the present day is how to reconcile determinism and morality, each of us as
individuals and all of us as a society, not to force a choice between them.
Because we are not billiard balls, we do not have to accept that the
morality of society is merely the sum of all the individual moralities of all
the individuals composing it ("market" morality). We can allow for the social
construction of a moral code and the imposition of that code on society's
constituent individuals. None of that necessarily takes us outside of
determinism. Because previous generations got some of the laws of physics wrong
does not mean the laws of physics did not exist at that time. Because current
economists make absurd assumptions does not mean no science of economy is
possible. But a "non-deterministic" 'science' is no science at all.
I abandoned Econ. as a major when I was a senior in college (mid 70's)
because what was being taught had little to no relationship to what I observed
in the real world of human beings (as opposed to the "Homo Economicus" that
econ. theory depended on).
My father made the money that paid for my tuition & books through sales. As
a sales manager for a major insurance co. he was always looking for recruits
who could "sell air conditioners to Eskimos". If, in fact, the "information
symmetry" that econ. theory depends on existed, then his job could not have
existed.
I was also influenced by an econ. prof. who told me that an econ. degree was
worthless unless I wanted to teach it or work for the gov't.
I think most NC readers will understand the "shorthand" phrase "First, assume a
can opener"
Elites always invent ideologies, which are like operating systems, in order
to maintain control over the minds of their subjects. Economics, great chains
of being, Mandate of Heaven. It's all the same.
Does he not understand Science and the Scientific method?
Hypothesis
Thesis
Experiment – Repeatable by independent parties, Experiments.
Proof.
That's Science, That's physics. Read Joule's biography to understand the
method.
Economics is NO science because there is no way to conduct an experiment, a
repeatable experiment.
In addition the mathematicians have discovered and codified Chaos or
Catastrophe Theory, and the attendant Black Swans, in the last 50 years, which
provides a solid foundation to understand economics, and its absolute
unpredictability.
Because us humans are driven by fear and greed, consequently:
Presume a rational actor
(economics 101) is invalid.
There is not ONE mention of chaos in this article, which is the governing
mathematics behind Economics in the world we inhabit, work, play, are born and
die.
There is an old expression:
Before putting pen to paper, please
engage mind.
In an even larger sense, we have substituted ideology for religion. Consider
capitalism, privatization, democracy, the profit motive, materialism, utility
maximisation, and, yes, even the scientific method. We worship these just as
ardently as we did the Grecian or Egyptian pantheon of gods in the years b.c.e.,
and the Christian, Jewish, and Islamic characterizations of god/Allah up to the
present era.
The unquestioning acceptance of these belief systems filters our perceptions
of reality and blinds us to the infinite number of possibilities that exist
outside of those frames of reference. In fact, those systems have indeed become
our religion and stepping outside of them frequently incurs the same stigma and
scorn formerly accorded to religious heretics who were often burned at the
stake. One doesn't need to spend more than a day reading a layperson's guide to
quantum mechanics to get an idea of what happens when you set your mind free of
those confining boxes.
I highly recommend Morris Berman's book,
Coming to Our Senses
, where he traces western history from the beginnings
of Christendom to the modern day in the context of heresy. (That's a simplistic
but reasonably accurate synopsis.) It's a dense read and when I first sat down
with it in the early 90s, I could only manage a few pages at a time and then
had to take two or three days to digest before coming back for more. I read it
again ten years later and it made even more of an impact the second time
around. Without exaggerating, I can honestly say that it profoundly shaped my
world view to the point that I now view all belief systems skeptically and try
to place them in a larger context.
Pilkington's description of economics as an unassailable belief system rings
true to me. Not unlike religion (the Crusades, the Inquisition, the
Conquistadors, right on up to ISIS), economics has wreaked and is wreaking
havoc across the globe. Who knows what wonders await us when we start thinking
out of that box.
A schematic approach involves building tools that can be integrated into
how we understand the world around us without assuming that these tools
provide us with an exact description of this world.
I am perhaps most interested in this. Will look for the book. I always get
something from reading Pilkington's posts.
"... reduced competition can also give employers power to dictate wages-so- called "monopsony" power in the labor market. ..."
"... While monopoly in product markets and monopsony in labor markets can be related and share some common causes, the latter has some distinct causes and policy implications. ..."
"... This issue brief explains how monopsony, or wage-setting power, in the labor market can reduce wages, employment, and overall welfare ..."
A growing literature has documented several
indicators of declining] competition in the United
States, and economists have begun to explore the
links between these trends and rising income
inequality (Furman and Orzag 2015). While recent
discussions have highlighted rising concentration
among producers and monopoly pricing in sellers
markets (The Economist 2016), reduced competition
can also give employers power to dictate wages-so-
called "monopsony" power in the labor market.
While monopoly in product markets and monopsony
in labor markets can be related and share some
common causes, the latter has some distinct causes
and policy implications.
This issue brief explains how monopsony, or wage-setting power, in the labor market can reduce wages,
employment, and overall welfare...
P8 Keynesian Complexity
................
"But no one appears to have understood the fundamental
insights of Keynesian complexity: the system as whole does
not act as a simple aggregate of the actions of the
individual agents within the system. Pre-Keynesian
macroeconomics was based centrally on the misunderstanding
that the macroeconomy can be understood by scaling up the
microeconomic behaviors of individual agents. While Keynes
forcefully rejected this thesis, and created a complex system
view of the macroeconomy, simple-minded followers failed to
understand complexity, and went back to the pre-Keynesian
views."
........................
https://weapedagogy.wordpress.com/2017/01/07/p8-keynesian-complexity/
RGC -> RGC...
, -1
Paul Samuelson on Keynes (same link):
Ironically, failure
to understand Keynes led to dismissal and contempt "Paul
Samuelson felt he could say that "it is remarkable that so
active a brain would have failed to make any contribution to
economic theory . .." (cited in John Foster 2006).
Because Samuelson could not understand the complexity of
Keynesian theory, he wrote that: "[The General Theory] is a
badly written book, poorly organized; any layman who,
beguiled by the author's previous reputation, bought the book
was cheated of his 5 shillings. It is not well suited for
classroom use. It is arrogant, bad-tempered, polemical, and
not overly generous in its acknowledgements. It abounds with
mares' nests and confusions: involuntary unemployment, wage
units, the equality of savings and investment, the timing of
the multiplier, interactions of marginal efficiency upon the
rate of interest, forced savings, own rates of interest, and
many others. In it the Keynesian system stands out
indistinctly, as if the author were hardly aware of its
existence or cognizant of its properties; and certainly he is
at his worst when expounding its relations to its
predecessors."
Samuelson's arrogance in believing that he understood the
Keynesian system better than Keynes created the biggest
barrier to understanding Keynes for 20th Century economists.
Because of his stature, he became the authorized interpreter
of Keynes, and very few went back to original writings to try
to understand them. Those who did also failed to come to
grips with complexity, and as a result, it is impossible to
count the variety of interpretations of Keynes - see for
example, Backhouse and Bateman. The Keynesian elephant has a
huge number of parts, it seems.
Brad DeLong * catches John Cochrane ** being remarkably
dense:
"Paul Krugman recommended, with refreshing clarity, that
the US government fake an alien invasion so we could spend
trillions of dollars building useless defenses. (I'm not
exactly sure why he does not call for real defense spending.
After all, if building aircraft carriers saved the economy in
1941, and defenses against imaginary aliens would save the
economy in 2013, it's not clear why real aircraft carriers
have the opposite effect. But I'm still working on the
nuances of new-Keynesianism, so I'll let him explain the
difference. I'm not a big fan of huge defense spending
anyway.)"
As I've explained before, *** the alien thing was a modern
riff on Keynes's coalmine thought experiment. **** It's worth
quoting that one in full:
"It is curious how common sense, wriggling for an escape
from absurd conclusions, has been apt to reach a preference
for wholly 'wasteful' forms of loan expenditure rather than
for partly wasteful forms, which, because they are not wholly
wasteful, tend to be judged on strict 'business' principles.
For example, unemployment relief financed by loans is more
readily accepted than the financing of improvements at a
charge below the current rate of interest; whilst the form of
digging holes in the ground known as gold-mining, which not
only adds nothing whatever to the real wealth of the world
but involves the disutility of labour, is the most acceptable
of all solutions.
"If the Treasury were to fill old bottles with banknotes,
bury them at suitable depths in disused coalmines which are
then filled up to the surface with town rubbish, and leave it
to private enterprise on well-tried principles of
laissez-faire to dig the notes up again (the right to do so
being obtained, of course, by tendering for leases of the
note-bearing territory), there need be no more unemployment
and, with the help of the repercussions, the real income of
the community, and its capital wealth also, would probably
become a good deal greater than it actually is. It would,
indeed, be more sensible to build houses and the like; but if
there are political and practical difficulties in the way of
this, the above would be better than nothing."
In a way, I'm amazed by economists who find this sort of
thing absurd on its face. Leave macroeconomics on one side:
what about the theory of the second best? This theory - which
is just basic micro - says that when some markets are
distorted, for whatever reason, social costs and benefits
across the economy don't correspond to private costs, so that
unprofitable, even seemingly wasteful activities can
sometimes be beneficial. And an economy in which millions of
willing workers can't find work is surely one with massive
distortions of some kind.
Oh, and let's always remember that Keyensians like me
don't believe that thing like the paradox of thrift and the
paradox of flexibility are the way the economy normally
works. They're very much exceptional, applying only when
interest rates are up against the zero lower bound.
Unfortunately, that happens to be the world we're currently
living in.
"... Credit creation and the financialization above the consumer level of this new-money creation is an unlimited privlege held by financial system actors, we saw this blatantly in 2000-2006, so IS is demonstrably not true, the amount of available Investment funds Is unlimited. There is no such thing as loanable funds at the macro level, the financial system can make financial positions then manages the cash liquidity (until ... .). ..."
"... Defining currency as a liability on a set of books for a thing called a central bank and talking about Quantity Theories of Money, are all demonstrably weak notions, at keast in huge economies. The approach by China ignores a lot of this theory in practice as they Spend to improve the economic potential of their people, a ka Keynes. They do care about closing the supply gaps in housing and transport, and clean power, sure, but they care more about helping more and more and more chinese to get a connection to a modernizing economy. Sure wish Krugman cared the same way rather than caring fir the cloture of the ISLM theory. He may have been kinder to Sanders and more challenging of Clinton too. ..."
"... Krugman is willing to explain that the US can borrow at low rates to build public goods and other assets and get it paid for by returns, but somehow direct Spending, even using phoney debt processes to push the financing outward as the chinese do (which is simply helicopter money) cant do the same. ..."
Krugman believes deeply in the ISLM model and cant seem to admit that there are stunning implications
to the following :
Credit creation and the financialization above the consumer level of this new-money
creation is an unlimited privlege held by financial system actors, we saw this blatantly in
2000-2006, so IS is demonstrably not true, the amount of available Investment funds Is unlimited.
There is no such thing as loanable funds at the macro level, the financial system can make
financial positions then manages the cash liquidity (until ... .).
Defining currency as a liability on a set of books for a thing called a central bank
and talking about Quantity Theories of Money, are all demonstrably weak notions, at keast in
huge economies. The approach by China ignores a lot of this theory in practice as they Spend
to improve the economic potential of their people, a ka Keynes. They do care about closing
the supply gaps in housing and transport, and clean power, sure, but they care more about helping
more and more and more chinese to get a connection to a modernizing economy. Sure wish Krugman
cared the same way rather than caring fir the cloture of the ISLM theory. He may have been
kinder to Sanders and more challenging of Clinton too.
Krugman is willing to explain that the US can borrow at low rates to build public goods
and other assets and get it paid for by returns, but somehow direct Spending, even using phoney
debt processes to push the financing outward as the chinese do (which is simply helicopter money)
cant do the same.
Right now I see the chinese approaches as undermining credulity to monetary theories while
it is consistent with Keynes not so the extended theories.
And of course I hope I am right for the chinese, no surprise to me if this is the case.
The sky is falling view does come to mind if you believe some of the economic theories, oh
look, so much debt. But as Adair wrote this week,and I commented upon it a year or so ago probably,
if you dont believe in these theoretic tales you can just erase the 'debt' held by the chinese
people via their government when it makes sense, no harm, almost all good.
But I have to say, without the US as its major buyer and without their ability to accumulate
dollar-asset in reserve to the level they have, one wonders if there would be less lattitude.
This raises the question about why Trump continues to voice that the rug will be pulled out soon.
Why? I am pretty sure it isnt because he wants to prove the economic theorests to be right.
China's Market Crash Means Chinese Supergrowth Could Have Only 5 More Years to Run
By Brad DeLong
Now that 90 days have passed, from the Huffington Post from Last August: China's Market Crash
Means Chinese Supergrowth Could Have Only 5 More Years to Run *
Ever since I became an adult in 1980, I have been a stopped clock with respect to the Chinese
economy. I have said--always--that Chinese supergrowth has at most ten more years to run, and
more probably five or less. There will then, I have said, come a crash--in asset values and expectations
if not in production and employment. After the crash, China will revert to the standard pattern
of an emerging market economy without successful institutions that duplicate or somehow mimic
those of the North Atlantic: its productivity rate will be little more than the 2%/year of emerging
markets as a whole, catch-up and convergence to the North Atlantic growth-path norm will be slow
if at all, and political risks that cause war, revolution, or merely economic stagnation rather
than unexpected but very welcome booms will become the most likely sources of surprises....
If you want to put money in China given their still extant massive imbalances ... go right ahead.
I'm still predicting a massive slowdown, if not a crash.
The central government in China has a big warchest and a lot of catchup growth that can keep
it afloat, but at a macro level there simply must be big adjustments (i.e., investment to consumption
demand), which can be put off but not avoided entirely.
Why should an adjustment from investment to consumption cause a massive slowdown or a crash?
[ No matter, after 40 years of an average 9.7% yearly real Gross Domestic Product growth and
8.6% yearly per capita GDP growth, Western analysts been all but unconcerned with how such growth
was managed, especially since no other developing country came anywhere close. Why no other developing
country has come close to matching China in growth, I would think, would make for an important
extensive study, but evidently not. ]
"... If the Fed were to buy treasuries directly, then Wall Street would be losing a big fat paycheck for the horrendous work of two keystrokes. That is why Wall Streets little sock puppets in Congress has not done anything. ..."
"... Academics at least theoretically seek to discourage group think while politicians seek to cultivate group think. Nonetheless, peer review processes instill group think in academics regardless of intentions. Elite groups only think that they are better when in fact they are hardly any different in essential and existential ways, just in customs, habits, and aesthetics. Individual results may vary though in the general population and among elites. ..."
"... In a democratically electoral republic if the mainstream or status quo is the result of majority opinion then how can the opposition be characterized as populist? ..."
"... When we pursue technocrats, elitists, and oligarchs to advance the cause of socialism we do not get social democracy, but we may get liberal policy aimed at quelling discontent when necessary to prevent a popular uprising. That was the catch-22 omitted from Schumpeter's "Capitalism, Socialism and Democracy". Corporatism does not naturally lead to socialism in republican governments as Joseph Schumpeter said that it would. If we want social democracy then we must start by pursuing the electorate to advance the cause of democracy first. ..."
"... But there's a good case for arguing that Friedmanism, in the end, went too far, both as a doctrine and in its practical applications. ..."
"... Still, nothing regarding the monopoly over the money supply. Not addressed. Ignored. That the Treasury can inject debt free money into the money supply, is ignored! That we could have a job guaranteed program is ignored. That we never needed to produce debt for deficit financing is ignored. What the hell! ..."
David Glasner * has been making a series of posts on the legacy of Milton Friedman, some of
them in response to Scott Sumner; they're interesting if you want to delve into the intellectual
history. I'm not personally big on such things - in general, what people thought Keynes or Friedman
meant ends up being more important than what they turn out, on close reading, to (maybe, possibly)
actually have meant. For what it's worth, I think Glasner makes a good case that Friedman was
indeed more or less a Keynesian, or maybe Hicksian - certainly that was the message everyone took
from his "Monetary Framework," which was disappointingly conventional. And Friedman's attempts
to claim that Keynes added little that wasn't already in a Chicago oral tradition don't hold up
well either.
But never mind. What I think is really interesting is the way Friedman has virtually vanished
from policy discourse. Keynes is very much back, even if that fact drives some economists crazy;
Hayek is back in some sense, even if one has the suspicion that many self-proclaimed Austrians
bring little to the table but the notion that fiat money is the root of all evil - a deeply anti-Friedmanian
position. But Friedman is pretty much absent.
This is hardly what you would have expected not that long ago, when Friedman's reputation bestrode
the economic world like a colossus, when Greg Mankiw ** declared Friedman, not Keynes, the greatest
economist of the 20th century, when Ben Bernanke concluded a speech praising Friedman *** with
the famous line,
"Let me end my talk by abusing slightly my status as an official representative of the Federal
Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right,
we did it. We're very sorry. But thanks to you, we won't do it again.
"Best wishes for your next ninety years."
So what happened to Milton Friedman?
Part of the answer is that at this point both of Friedman's key contributions to macroeconomics
look hard to defend.
First, on monetary policy: Even if you give him a pass on the 3 percent growth in M2 thing,
which was abandoned by almost everyone long ago, Friedman was still very much associated with
the notion that the Fed can control the money supply, and controlling the money supply is all
you need to stabilize the economy. In the wake of the 2008 crisis, this looks wrong from soup
to nuts: the Fed can't even control broad money, because it can add to bank reserves and they
just sit there; and money in turn bears little relationship to GDP. And in retrospect the same
was true in the 1930s, so that Friedman's claim that the Fed could easily have prevented the Great
Depression now looks highly dubious.
Second, on inflation and unemployment: Friedman's success, with Phelps, in predicting stagflation
was what really pushed his influence over the top; his notion of a natural rate of unemployment,
of a vertical Phillips curve in the long run, became part of every textbook exposition. But it's
now very clear that at low rates of inflation the Phillips curve isn't vertical at all, that there's
an underlying downward nominal rigidity to wages and perhaps many prices too that makes the natural
rate hypothesis a very bad guide under depression conditions.
So Friedman's economic analysis has taken a serious hit. But that's not the whole story behind
his disappearance; after all, all those economists who have been predicting runaway inflation
still have a constituency after being wrong year after year.
Friedman's larger problem, I'd argue, is that he was, when all is said and done, a man trying
to straddle two competing world views - and our political environment no longer has room for that
kind of straddle.
Think of it this way: Friedman was an avid free-market advocate, who insisted that the market,
left to itself, could solve almost any problem. Yet he was also a macroeconomic realist, who recognized
that the market definitely did not solve the problem of recessions and depressions. So he tried
to wall off macroeconomics from everything else, and make it as inoffensive to laissez-faire sensibilities
as possible. Yes, he in effect admitted, we do need stabilization policy - but we can minimize
the government's role by relying only on monetary policy, none of that nasty fiscal stuff, and
then not even allowing the monetary authority any discretion.
At a fundamental level, however, this was an inconsistent position: if markets can go so wrong
that they cause Great Depressions, how can you be a free-market true believer on everything except
macro? And as American conservatism moved ever further right, it had no room for any kind of interventionism,
not even the sterilized, clean-room interventionism of Friedman's monetarism.
So Friedman has vanished from the policy scene - so much so that I suspect that a few decades
from now, historians of economic thought will regard him as little more than an extended footnote.
It seems that many people misunderstood my post * on Milton Friedman. It was not intended as
Friedman-bashing, as a claim that MF was a bad economist; in fact, I'm on record ** declaring
Friedman a "great economists' economist". His work aimed primarily at a professional audience
- the permanent income theory of consumption, the case for flexible exchange rates, the natural
rate (even if it does break down at low inflation), the optimum quantity of money - was often,
maybe even usually, brilliant, and will live on.
What isn't living on, however, is Friedman's role as a guiding light for conservative economic
policy.
Think about Paul Ryan, who is, like it or not, the leading economic intellectual of the modern
GOP. Ryan sometimes drops Friedman's name - but when he does, it's to cite "Capitalism and Freedom,"
not "A Monetary History of the United States." When it comes to monetary policy, Ryan has said
that his views are based on fictional characters in "Atlas Shrugged." No, really.
Or think about the economics rap video of "Keynes versus Hayek" everyone had fun with. Never
mind that back in the 30s nobody except Hayek would have considered his views a serious rival
to those of Keynes; the real shock should be, what happened to Friedman?
Partly this disappearance reflects real problems with Friedman's analysis. His views on the
omnipotence of monetary policy,let alone the adequacy of a simple quantity-of-money rule, haven't
withstood the test of time. As far as stabilization policy is concerned, he was indeed, as Brad
DeLong archly puts it, a minor post-Hicksian. ***
But the bigger issue, I'd argue, is that modern conservatives can't accept the things Friedman
was right about. Take, in particular, his essay on flexible exchange rates, in which he argued
that a country that finds its wages and prices out of line should devalue its currency rather
than rely on unemployment to push wages down, "until the deflation has run its sorry course."
Contrast this with Ryan's declaration that "There is nothing more insidious that a country can
do to its citizens than debase its currency."
The point is that Friedman was, when all is said and done, a pragmatist; he leaned right ideologically,
but was willing to make room for awkward realities. And these days reality has a well-known liberal
bias. Hence, Friedman has become an unperson.
"What's odd about Friedman's absolutism on the virtues of markets and the vices of government
is that in his work as an economist's economist he was actually a model of restraint."
What's ironic is if you read Krugman pre-2000 his work as an economist was actually a model
of restraint. Then BDS (Bush Derangement Syndrome) kicked in and he turned into a political "science"
crank.
2000 was when George W. Bush lied his way into office. Krugman called out Bush's lies and was
tagged as the Shrill One. Over time - a lot of progressives began to wear being shrill as a badge
of honor.
Kind of like Obama, Clinton and the likes lied to intervene in Libya? They hate us for our freedom?
No they hate us because we fight proxy wars in their territory and kill innocent civilians. As
long as Assad is around Obama can drone bomb innocent people in Yemen and Proggers hail him as
a saint.
Does anyone have any comments about the constitutional monopoly over the money supply awarded
to the Treasury? I don't understand what an economist means when he uses the word 'monetarist'
to describe a set of ideas, but I do understand what it would mean if the Treasury (or a national
Central Bank) stopped issuing debt for net government spending. Why we do issue this debt is beyond
my comprehension. It's incredibly expensive, and there are no guidelines that make any sense to
me when it comes to what is paid for by deficit spending. That we have piled up $17 trillion or
whatever amount of debt when most of it was unnecessary is astonishing.
Kenneth D. Garbade Federal Reserve Bank of New York
Abstract
Until 1935, Federal Reserve Banks from time to time purchased short-term securities directly from
the United States Treasury to facilitate Treasury cash management operations. The authority to
undertake such purchases provided a robust safety net that ensured Treasury could meet its obligations
even in the event of an unforeseen depletion of its cash balances. Congress prohibited direct
purchases in 1935, but subsequently provided a limited wartime exemption in 1942. The exemption
was renewed from time to time following the conclusion of the war but ultimately was allowed to
expire in 1981. This paper addresses three questions: 1) Why did Congress prohibit direct purchases
in 1935 after they had been utilized without incident for eighteen years, 2) why did Congress
provide a limited exemption in 1942 instead of simply removing the prohibition, and 3) why did
Congress allow the exemption to expire in 1981?
Paul Krugman
Be Ready To Mint That Coin
January 7, 2013 9:05 am
.....................
For those new to this, here's the story. First of all, we have the weird and destructive institution
of the debt ceiling; this lets Congress approve tax and spending bills that imply a large budget
deficit - tax and spending bills the president is legally required to implement - and then lets
Congress refuse to grant the president authority to borrow, preventing him from carrying out his
legal duties and provoking a possibly catastrophic default.
And Republicans are openly threatening to use that potential for catastrophe to blackmail the
president into implementing policies they can't pass through normal constitutional processes.
Enter the platinum coin. There's a legal loophole allowing the Treasury to mint platinum coins
in any denomination the secretary chooses. Yes, it was intended to allow commemorative collector's
items - but that's not what the letter of the law says. And by minting a $1 trillion coin, then
depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling
- while doing no economic harm at all.
If the Fed were to buy treasuries directly, then Wall Street would be losing a big fat paycheck
for the horrendous work of two keystrokes. That is why Wall Streets little sock puppets in Congress
has not done anything.
Rule number one for a populist (popular) communicator of complicated issues is that you lose any
and all doubt or granularity. The peeps will immediately lose interest in you and think you know
nothing, if you fail to say things with great certainty and great simplicity.
This is the exact opposite of how you communicate in an academic environment. If a scientist
give a talk and fail to acknowledge the weaknesses in the narrative they present; the scientists
listening will dismiss him/her as ignorant or a BS artist (and confront them with those weaknesses).
Academics at least theoretically seek to discourage group think while politicians seek to
cultivate group think. Nonetheless, peer review processes instill group think in academics regardless
of intentions. Elite groups only think that they are better when in fact they are hardly any different
in essential and existential ways, just in customs, habits, and aesthetics. Individual results
may vary though in the general population and among elites.
In a democratically electoral republic if the mainstream or status quo is the result of majority
opinion then how can the opposition be characterized as populist?
"Elite groups only think that they are better when in fact they are hardly any different"
A case of false equivalency. There is a huge difference between a process that is constructed
to reach a correct conclusion (but fails when inappropriately applied) and a process that has
less of a chance of reaching the correct conclusion than a random number pick. Yes there are many
examples where the scientific process has failed to reach the correct conclusion (and we know
that because eventually it cleansed itself of those conclusions). However there are many more
times when the scientific process got things right. That is in contrast to the FoxBot blowhards
who seems almost incapable of getting anything right.
Intellectual conclusions only matter when they influence real world policy decisions. Real world
policy decisions are not governed by science regardless of political control and economics is
not deterministic science and often is not even probabilistic science. Of course that is why real
world policy decisions are not governed by science. The political influence of wealth, custom
and habit, heuristic guidelines obtained from the random walk of history, and popular memes all
have more influence over public policy decisions than science.
When we pursue technocrats, elitists, and oligarchs to advance the cause of socialism we do not
get social democracy, but we may get liberal policy aimed at quelling discontent when necessary
to prevent a popular uprising. That was the catch-22 omitted from Schumpeter's "Capitalism, Socialism
and Democracy". Corporatism does not naturally lead to socialism in republican governments as
Joseph Schumpeter said that it would. If we want social democracy then we must start by pursuing
the electorate to advance the cause of democracy first.
DeDude -> RC AKA Darryl, Ron... , -1
"Real world policy decisions are not governed by science regardless of political control"
Another false equivalency...
The real world is not yes/no, black/white. Just because science sometimes get
corrupted doesn't mean it always is corrupted. Just because one of our main parties have become
addicted to refusing facts and evidence against their narratives doesn't mean that everybody all
the time refuse to listen to facts and evidence. I know that the corruption narrative is what
keeps you alive and thinking you got it all figured out, but it also is what leads you astray
on a regular basis.
Milton Friedman once tried to explain to doctors why their precious cartel known as the AMA was
a bad idea. One would have thought the doctors would have shot him on the spot. But no - Friedman
pitched this as a way to keep away "socialism" aka things like Medicare. The doctors loved it.
Of course I thought this was one of his lower moments. BTW - never tell a doctor we should have
Medicare for all unless you want to endure a tirade of why they don't make all that much.
Yes, you got to give Friedman that he was a good salesman. Scientist and economists: mediocre
- just to easily addicted to his own narratives. But he was a brilliant salesman.
MF proposal to manage economies with monetary policy only and to sideline fiscal and regulatory
policy found favors with free market conservatives.
Free market rules mean that the greedy are free to market their get rich quick scams to the
harm of the rest of us and their own personal enrichment.
Monetary policies such as Volcker's job killing interest rates in 1980 are praised. Fiscal
and regulatory policies such as the CAFE standards and subsidies to move away from oil created
the Great Moderation, yet are dismissed or worse vilified.
Monetary policy is not saving us from climate change. Fiscal incentives for clean energy and
regulation of carbon emissions are the tools that can be applied effectively.
The reformation we need is Post-Monetary with a strong emphasis on the fiscal and regulatory...
The free markets do hate fiscal policy or almost anything else that is sensible policy. But if
they ever really understood what Friedman was saying about monetary policy - they would turn on
him as being some of sort of communist.
Still, nothing regarding the monopoly over the money supply. Not addressed. Ignored. That the
Treasury can inject debt free money into the money supply, is ignored! That we could have a job
guaranteed program is ignored. That we never needed to produce debt for deficit financing is ignored.
What the hell!
anne -> Chris Herbert... , -1
Monopolization of the money supply:
I have been wondering about "demonetization" in India and what that might mean but I have read
no convincing analysis so far:
"... So, if the period when he was a good econometrician exists it is limited to pre-war and war years. As he was born in 1912, he was just 33 in 1945. His "A Theory of the Consumption Function" was published in 1957. And "A Monetary History of the United States, 1867–1960" in 1963, when he was already completely crooked. ..."
"... Mont Pelerin Society was founded in 1947 with the explicit political goal of being hatching place for neoliberal ideology as alternative to communist ideology. He served as a President of this Society from 1970 to 1972. ..."
"... So what Krugnam is saying is a myth. And he is not an impartial observer. He is a neoliberal himself. I still remember Krugman despicable attacks on John Kenneth Galbraith and his unhealthy fascination with the usage of differential equations in economic modeling, the epitome of mathiness. ..."
Ironic isn't it? "Why didn't ... exhibit the same restraint in his role as a public intellectual?
The answer, I suspect, is that he got caught up in an essentially political role. Milton Friedman the great economist could
and did acknowledge ambiguity. But Milton Friedman the great champion of free markets was expected to preach the true faith, not
give voice to doubts. And he ended up playing the role his followers expected. As a result, over time the refreshing iconoclasm
of his early career hardened into a rigid defense of what had become the new orthodoxy."
Krugman should have stuck to economics...
likbez -> JohnH...
Yes, this is pretty nasty verdict for Krugman too.
But, in reality, Milton Friedman was an intellectual prostitute of financial oligarchy most of his long life, starting from
his days in Mont Pelerin Society ( https://en.wikipedia.org/wiki/Mont_Pelerin_Society)
, where he was one of the founders.
So, if the period when he was a good econometrician exists it is limited to pre-war and war years. As he was born in 1912,
he was just 33 in 1945. His "A Theory of the Consumption Function" was published in 1957. And "A Monetary History of the United
States, 1867–1960" in 1963, when he was already completely crooked.
Mont Pelerin Society was founded in 1947 with the explicit political goal of being hatching place for neoliberal ideology
as alternative to communist ideology. He served as a President of this Society from 1970 to 1972.
Capitalism and Freedom that many consider to be neoliberal manifesto similar to Marx and Engels "Manifesto of the Communist
Party" was published in 1962.
So what Krugnam is saying is a myth. And he is not an impartial observer. He is a neoliberal himself. I still remember
Krugman despicable attacks on John Kenneth Galbraith and his unhealthy fascination with the usage of differential equations in
economic modeling, the epitome of mathiness.
Ironic isn't it? "Why didn't ... exhibit the same restraint in his role as a public intellectual?
The answer, I suspect, is that he got caught up in an essentially political role. Milton Friedman the great economist could
and did acknowledge ambiguity. But Milton Friedman the great champion of free markets was expected to preach the true faith, not
give voice to doubts. And he ended up playing the role his followers expected. As a result, over time the refreshing iconoclasm
of his early career hardened into a rigid defense of what had become the new orthodoxy."
Krugman should have stuck to economics...
likbez -> JohnH...
Yes, this is pretty nasty verdict for Krugman too.
But, in reality, Milton Friedman was an intellectual prostitute of financial oligarchy most of his long life, starting from
his days in Mont Pelerin Society ( https://en.wikipedia.org/wiki/Mont_Pelerin_Society)
, where he was one of the founders.
So, if the period when he was a good econometrician exists it is limited to pre-war and war years. As he was born in 1912,
he was just 33 in 1945. His "A Theory of the Consumption Function" was published in 1957. And "A Monetary History of the United
States, 1867–1960" in 1963, when he was already completely crooked.
Mont Pelerin Society was founded in 1947 with the explicit political goal of being hatching place for neoliberal ideology
as alternative to communist ideology. He served as a President of this Society from 1970 to 1972.
Capitalism and Freedom that many consider to be neoliberal manifesto similar to Marx and Engels "Manifesto of the Communist
Party" was published in 1962.
So what Krugnam is saying is a myth. And he is not an impartial observer. He is a neoliberal himself. I still remember
Krugman despicable attacks on John Kenneth Galbraith and his unhealthy fascination with the usage of differential equations in
economic modeling, the epitome of mathiness.
"... My criticism of Krugman is far more fundamental. I do not believe the profit motive is superior to the mutual benefit motive
when it comes to organizing economies. ..."
1. His refusal to acknowledge the central role of consumption in our economy. As Keynes said, ""Consumption - to repeat
the obvious - is the sole end and object of all economic activity." The General Theory, p. 104.
And Adam Smith agreed: "Consumption is the sole end and purpose of all production." The Wealth of Nations, Book IV Chapter
VIII, v. ii, p. 660, para. 49.
2. Krugman's refusal to endorse fiscal stimulus unless the economy is at ZLB. That is not only anti-Keynesian, it plays
directly into the hands of the debt fear mongers. (Krugman is also worried about the debt.)
"Krugman's refusal to endorse fiscal stimulus unless the economy is at ZLB."
That is a strawman, and a bad one.
PS: My criticism of Krugman is far more fundamental. I do not believe the profit motive is superior to the mutual benefit
motive when it comes to organizing economies.
An Inquiry into the Nature and Causes of The Wealth of Nations
By Adam Smith
On Systems of Political Economy
Conclusion of the Mercantile System
Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so
far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self evident that it would be absurd
to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the
producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.
The General Theory of Employment, Interest and Money
By John Maynard Keynes
The Propensity to Consume: The Objective Factors
Consumption - to repeat the obvious - is the sole end and object of all economic activity. Opportunities for employment are
necessarily limited by the extent of aggregate demand. Aggregate demand can be derived only from present consumption or from present
provision for future consumption. The consumption for which we can profitably provide in advance cannot be pushed indefinitely
into the future. We cannot, as a community, provide for future consumption by financial expedients but only by current physical
output. In so far as our social and business organisation separates financial provision for the future from physical provision
for the future so that efforts to secure the former do not necessarily carry the latter with them, financial prudence will be
liable to diminish aggregate demand and thus impair well-being, as there are many examples to testify. The greater, moreover,
the consumption for which we have provided in advance, the more difficult it is to find something further to provide for in advance,
and the greater our dependence on present consumption as a source of demand. Yet the larger our incomes, the greater, unfortunately,
is the margin between our incomes and our consumption. So, failing some novel expedient, there is, as we shall see, no answer
to the riddle, except that there must be sufficient unemployment to keep us so poor that our consumption falls short of our income
by no more than the equivalent of the physical provision for future consumption which it pays to produce to-day.
anne -> Paul Mathis... , -1
Krugman's refusal to endorse fiscal stimulus unless the economy is at zero lower bound. That is not only anti-Keynesian, it plays
directly into the hands of the debt fear mongers. (Krugman is also worried about the debt.)
[ Only correct to a degree, economic weakness is recognized. ]
"What's odd about Friedman's absolutism on the virtues of markets and the vices of government is that in his work as an economist's
economist he was actually a model of restraint. As I pointed out earlier, he made great contributions to economic theory by emphasizing
the role of individual rationality-but unlike some of his colleagues, he knew where to stop. Why didn't he exhibit the same restraint
in his role as a public intellectual?
The answer, I suspect, is that he got caught up in an essentially political role. Milton Friedman the great economist could
and did acknowledge ambiguity. But Milton Friedman the great champion of free markets was expected to preach the true faith, not
give voice to doubts. And he ended up playing the role his followers expected. As a result, over time the refreshing iconoclasm
of his early career hardened into a rigid defense of what had become the new orthodoxy.
In the long run, great men are remembered for their strengths, not their weaknesses, and Milton Friedman was a very great man
indeed-a man of intellectual courage who was one of the most important economic thinkers of all time, and possibly the most brilliant
communicator of economic ideas to the general public that ever lived. But there's a good case for arguing that Friedmanism, in
the end, went too far, both as a doctrine and in its practical applications. When Friedman was beginning his career as a public
intellectual, the times were ripe for a counterreformation against Keynesianism and all that went with it. But what the world
needs now, I'd argue, is a counter-counterreformation."
In an interview with Public Broadcasting System on Oct. 1, 2000, Dr. Milton Friedman said, "Let me emphasize [that] I think
Keynes was a great economist. I think his particular theory in The General Theory of Employment, Interest, and Money is a fascinating
theory. It's a right kind of a theory. It's one which says a lot by using only a little. So it's a theory that has great potentiality."
Brilliant economist? Not exactly. For monetarists who believe as Dr. Friedman did that "inflation is always and everywhere
a monetary phenomenon," the nearly $4 trillion added to the money supply by the Fed since 2008 should have produced raging hyper-inflation.
For Friedman, the answer was not debatable: "A steady rate of monetary growth at a moderate level can provide a framework under
which a country can have little inflation and much growth." The Counter-Revolution in Monetary Theory (1970).
this graph, which should have been labelled but was not, depicts the monetary base from October 2012 to December 2015 for reasons
that are a mystery to me.
So Friedman has vanished from the policy scene - so much so that I suspect that a few decades from now, historians of economic
thought will regard him as little more than an extended footnote.
Who Was Milton Friedman?
By Paul Krugman - New York Review of Books
1.
The history of economic thought in the twentieth century is a bit like the history of Christianity in the sixteenth century.
Until John Maynard Keynes published The General Theory of Employment, Interest, and Money in 1936, economics-at least in the English-speaking
world-was completely dominated by free-market orthodoxy. Heresies would occasionally pop up, but they were always suppressed.
Classical economics, wrote Keynes in 1936, "conquered England as completely as the Holy Inquisition conquered Spain." And classical
economics said that the answer to almost all problems was to let the forces of supply and demand do their job.
But classical economics offered neither explanations nor solutions for the Great Depression. By the middle of the 1930s, the
challenges to orthodoxy could no longer be contained. Keynes played the role of Martin Luther, providing the intellectual rigor
needed to make heresy respectable. Although Keynes was by no means a leftist-he came to save capitalism, not to bury it-his theory
said that free markets could not be counted on to provide full employment, creating a new rationale for large-scale government
intervention in the economy.
Keynesianism was a great reformation of economic thought. It was followed, inevitably, by a counter-reformation. A number of
economists played important roles in the great revival of classical economics between 1950 and 2000, but none was as influential
as Milton Friedman. If Keynes was Luther, Friedman was Ignatius of Loyola, founder of the Jesuits. And like the Jesuits, Friedman's
followers have acted as a sort of disciplined army of the faithful, spearheading a broad, but incomplete, rollback of Keynesian
heresy. By the century's end, classical economics had regained much though by no means all of its former dominion, and Friedman
deserves much of the credit.
I don't want to push the religious analogy too far. Economic theory at least aspires to be science, not theology; it is concerned
with earth, not heaven. Keynesian theory initially prevailed because it did a far better job than classical orthodoxy of making
sense of the world around us, and Friedman's critique of Keynes became so influential largely because he correctly identified
Keynesianism's weak points. And just to be clear: although this essay argues that Friedman was wrong on some issues, and sometimes
seemed less than honest with his readers, I regard him as a great economist and a great man....
It's one of Ben Bernanke's most memorable quotes: at a conference honoring Milton Friedman on his 90th birthday, he said: *
"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say
to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do
it again."
He was referring to the Friedman-Schwartz argument that the Fed could have prevented the Great Depression if only it has been
more aggressive in countering the fall in the money supply. This argument later mutated into the claim that the Fed caused the
Depression, but its original version still packed a strong punch. Basically, it implied that no fundamental reforms of the economy
were necessary; all it takes to avoid depressions is for central banks to do their job.
But can we say that recent events appear to disprove that claim? (So did Japan's experience in the 1990s, but that lesson failed
to sink in.) What we have now is a Fed that is determined not to "do it again." It has been very aggressive about monetary expansion.
Here's one measure of that aggressiveness, banks' excess reserves:
[Bank excess reserves, 1990-2009]
And yet the world economy is still falling off a cliff.
Preventing depressions, it turns out, is a lot harder than we were taught.
"... Popular pre-financial crisis versions of the model excluded banking and finance, taking as given that finance and asset prices were merely a by-product of the real economy. ..."
"... The centre-piece of Paul Romer's scathing attack on these models is on the 'pretence of knowledge' ..."
"... he is critical of the incredible identifying assumptions and 'pretence of knowledge' in both Bayesian estimation and the calibration of parameters in DSGE models. ..."
"... A further symptom of the 'pretence of knowledge' is the assumed 'knowledge' that these parameters are constant over time. A milder critique by Olivier Blanchard (2016) points to a number of failings of DSGE models and recommends greater openness to more eclectic approaches. ..."
"... The equation is based on the assumption of inter-temporal optimising by consumers and that every consumer faces the same linear period-to-period budget constraint, linking income, wealth, and consumption. ..."
"... In the basic form, consumption every period equals permanent non-property income plus permanent property income defined as the real interest rate times the stock of wealth held by consumers at the beginning of each period. Permanent non-property income converts the variable flow of labour and transfer incomes a consumer expects over a lifetime into an amount equally distributed over time. ..."
"... However, consumers actually face idiosyncratic (household-specific) and uninsurable income uncertainty, and uncertainty interacts with credit or liquidity constraints. ..."
"... The 2000 Commodity Futures Modernization Act (CFMA) made derivatives enforceable throughout the US with priority ahead of claims by others (e.g. workers) in bankruptcy. ..."
"... 2004 SEC decision to ease capital requirements on investment banks increased gearing to what turned out to be dangerous levels ..."
"... Similar measures to lower required capital on investment grade PMBS increased leverage at commercial banks. These changes occurred in the political context of pressure to extend credit to poor. ..."
"... The importance of debt was highlighted in the debt-deflation theory of the Great Depression of Fisher (1933). 5 Briefly summarised, his story is that when credit availability expands, it raises spending, debt, and asset prices; irrational exuberance raises prices to vulnerable levels, given leverage; negative shocks can then cause falls in asset prices, increased bad debt, a credit crunch, and a rise in unemployment. ..."
"... In the financial accelerator feedback loops that operated in the US sub-prime crisis, falls in house prices increased bad loans and impaired the ability of banks to extend credit. As a result, household spending and residential investment fell, increasing unemployment and reducing incomes, feeding back further into lower asset prices and credit supply. ..."
"... The transmission mechanism that operated via consumption was poorly represented by the Federal Reserve's FRB-US model and similar models elsewhere. ..."
"... Reminds me of a young poseur at engineering school, who exclaimed during a group study session, "I've got it all jocked out. Now I just need the equations!" ..."
"... I have been aware of that for a few years now, but I doubt that one person in a hundred (or a thousand) knows when they listen to some economist on a news program or a business channel that the person speaking thinks that how much debt people have does not substantively affect their spending. ..."
"... If I used or invented an econ model that left out the "consumer", and modeled it with a "consumption agent object" having a single independent input variable being the Fed zero term, zero risk interest rate, I'd be too embarrassed to admit it. I would probably just very quietly make a career change into one of the softer sciences. Maybe writing fictional romance novels, or some such thing. ..."
"... The worst thing about these types of mea culpas from the mainstream is the cited criticisms from other mainstream economists only. It can only be a valid criticism if it was published in a mainstream journal ..."
"... That 'political pressure' turned out to be the bait and switch for a system that shifted power via debt creation. ..."
"... What we have not yet come to terms with are the implications of David Graeber's anthropological insights: how does debt affect social relationships, alter social norms, and affect relationships among individuals? ..."
"... Debt is a form of power, but by failing to factor this into their equations, the Central Bankers are missing the social, political, and cultural consequences of the profound shifts in 'credit market architecture'. In many respects, this is not about 'money'; it's about power. ..."
"... The Central Bankers' models can include all the parameters they can dream up, but until someone starts thinking more clearly about the role and function of money, and the way that 'different kinds of money' create 'different kinds of social relationships', we are all in a world of hurt. ..."
"... Now, maybe it is just a coincidence, but it is hard for me not to notice that the explosion in consumer credit matches up nicely with the rise in inequality. ..."
"... " .. debt does not make society as a whole poorer: one person's debt is another person's asset. So total wealth is unaffected by the amount of debt out there. This is, strictly speaking true only for the world economy as a whole .. " Paul Krugman "End this Depression Now". ..."
By John Muellbauer, Professor of Economics, Oxford University. Originally published at
VoxEU
The failure of the New Keynesian dynamic stochastic general equilibrium models to capture interactions
of finance and the real economy has been widely recognised since the Global Crisis. This column argues
that the flaws in these models stem from unrealistic micro-foundations for household behaviour and
from wrongly assuming that aggregate behaviour mimics a fully informed 'representative agent'. Rather
than 'one-size-fits-all' monetary and macroprudential policy, institutional differences between countries
imply major differences for monetary policy transmission and policy.
The New Keynesian DSGE models that dominated the macroeconomic profession and central bank thinking
for the last two decades were based on several principles.
The first was formal derivation from micro-foundations, assuming optimising behaviour of consumers
and firms with rational or 'model-consistent' expectations of future conditions. For such derivation
to result in a tractable model, it was assumed that the behaviour of firms and of consumers corresponded
to that of a 'representative' firm and a 'representative' consumer. In turn, this entailed the
absence of necessarily heterogeneous credit or liquidity constraints. Another important assumption
to obtain tractable solutions was that of a stable long-run equilibrium trend path for the economy.
If the economy was never far from such a path, the role of uncertainty would necessarily be limited.
Popular pre-financial crisis versions of the model excluded banking and finance, taking as
given that finance and asset prices were merely a by-product of the real economy.
Second, a competitive economy was assumed but with a number of distortions, including nominal
rigidities – sluggish price adjustment – and monopolistic competition. This is what distinguished
New Keynesian DSGE models from the general equilibrium real business cycle (RBC) models that preceded
them. It extended the range of stochastic shocks that could disturb the economy from the productivity
or taste shocks of the RBC model. Finally, while some models calibrated (assumed) values of the
parameters, where the parameters were estimated, Bayesian system-wide estimation was used, imposing
substantial amounts of prior constraints on parameter values deemed 'reasonable'.
The 'Pretence of Knowledge'
The centre-piece of Paul Romer's scathing attack on these models is on the 'pretence of knowledge'
(Romer 2016); echoing Caballero (2010), he is critical of the incredible identifying assumptions
and 'pretence of knowledge' in both Bayesian estimation and the calibration of parameters in DSGE
models. 1
A further symptom of the 'pretence of knowledge' is the assumed 'knowledge' that these parameters
are constant over time. A milder critique by Olivier Blanchard (2016) points to a number of failings
of DSGE models and recommends greater openness to more eclectic approaches.
Unrealistic Micro-Foundations
As explained in Muellbauer (2016), an even deeper problem, not seriously addressed by Romer or
Blanchard, lies in the unrealistic micro-foundations for the behaviour of households embodied in
the 'rational expectations permanent income' model of consumption, an integral component of these
DSGE models. Consumption is fundamental to macroeconomics both in DSGE models and in the consumption
functions of general equilibrium macro-econometric models such as the Federal Reserve's FRB-US. At
the core of representative agent DSGE models is the Euler equation for consumption, popularised in
the highly influential paper by Hall (1978). It connects the present with the future, and is essential
to the iterative forward solutions of these models. The equation is based on the assumption of
inter-temporal optimising by consumers and that every consumer faces the same linear period-to-period
budget constraint, linking income, wealth, and consumption. Maximising expected life-time utility
subject to the constraint results in the optimality condition that links expected marginal utility
in the different periods. Under approximate 'certainty equivalence', this translates into a simple
relationship between consumption at time t and planned consumption at t +1 and in periods
further into the future.
Under these simplifying assumptions, the rational expectations permanent income consumption function
can be derived. In the basic form, consumption every period equals permanent non-property income
plus permanent property income defined as the real interest rate times the stock of wealth held by
consumers at the beginning of each period. Permanent non-property income converts the variable flow
of labour and transfer incomes a consumer expects over a lifetime into an amount equally distributed
over time.
However, consumers actually face idiosyncratic (household-specific) and uninsurable income
uncertainty, and uncertainty interacts with credit or liquidity constraints. The asymmetric
information revolution in economics in the 1970s for which Akerlof, Spence and Stiglitz shared the
Nobel prize explains this economic environment. Research by Deaton (1991,1992), 2 several
papers by Carroll (1992, 2000, 2001, 2014), Ayigari (1994), and a new generation of heterogeneous
agent models (e.g. Kaplan et al. 2016) imply that household horizons then tend to be both heterogeneous
and shorter – with 'hand-to-mouth' behaviour even by quite wealthy households, contradicting the
textbook permanent income model, and hence DSGE models. A second reason for the failure of these
DSGE models is that aggregate behaviour does not follow that of a 'representative agent'. Kaplan
et al. (2016) show that, with these better micro-foundations, quite different implications follow
for monetary policy than in the New Keynesian DSGE models. A third reason is that structural breaks,
as shown by Hendry and Mizon (2014), and radical uncertainty further invalidate DSGE models, illustrated
by the failure of the Bank of England's DSGE model both during and after the 2008-9 crisis (Fawcett
et al. 2015). The failure of the representative agent Euler equation to fit aggregate data 3
is further empirical evidence against the assumptions underlying the DSGE models, while evidence
on financial illiteracy (Lusardi 2016) is a problem for the assumption that all consumers optimise.
The Evolving Credit Market Architecture
Of the structural changes, the evolution and revolution of credit market architecture was the
single most important. In the US, credit card ownership and instalment credit spread between the
1960s and the 2000s; the government-sponsored enterprises – Fannie Mae and Freddie Mac – were recast
in the 1970s to underwrite mortgages; interest rate ceilings were lifted in the early 1980s; and
falling IT costs transformed payment and credit screening systems in the 1980s and 1990s. More revolutionary
was the expansion of sub-prime mortgages in the 2000s, driven by rise of private label securitisation
backed by credit default obligations (CDOs) and swaps.
The 2000 Commodity Futures Modernization Act (CFMA) made derivatives enforceable throughout
the US with priority ahead of claims by others (e.g. workers) in bankruptcy. This permitted
derivative enhancements for private label mortgage-backed securities (PMBS) so that they could be
sold on as highly rated investment grade securities. A second regulatory change was the deregulation
of banks and investment banks. In particular, the 2004 SEC decision to ease capital requirements
on investment banks increased gearing to what turned out to be dangerous levels and further
boosted PMBS, Duca et al (2016). Similar measures to lower required capital on investment grade
PMBS increased leverage at commercial banks. These changes occurred in the political context of pressure
to extend credit to poor.
The Importance of Debt
A fourth reason for the failure of the New Keynesian DSGE models, linking closely with the previous,
is the omission of debt and household balance sheets more generally, which are crucial for understanding
consumption and macroeconomic fluctuations. Some central banks did not abandon their large non-DSGE
econometric policy models, but these were also defective in that they too relied on the representative
agent permanent income hypothesis which ignored shifts in credit constraints and mistakenly lumped
all elements of household balance sheets, debt, liquid assets, illiquid financial assets (including
pension assets) and housing wealth into a single net worth measure of wealth. 4 Because
housing is a consumption good as well as an asset, consumption responds differently to a rise in
housing wealth than to an increase in financial wealth (see Aron et al. 2012). Second, different
assets have different degrees of 'spendability'. It is indisputable that cash is more spendable than
pension or stock market wealth, the latter being subject to asset price uncertainty and access restrictions
or trading costs. This suggests estimating separate marginal propensities to spend out of liquid
and illiquid financial assets. Third, the marginal effect of debt on spending is unlikely just to
be minus that of either illiquid financial or housing wealth. The reason is that debt is not subject
to price uncertainty and it has long-term servicing and default risk implications, with typically
highly adverse consequences.
The importance of debt was highlighted in the debt-deflation theory of the Great Depression
of Fisher (1933). 5 Briefly summarised, his story is that when credit availability expands,
it raises spending, debt, and asset prices; irrational exuberance raises prices to vulnerable levels,
given leverage; negative shocks can then cause falls in asset prices, increased bad debt, a credit
crunch, and a rise in unemployment.
In the 1980s and early 1990s, boom-busts in Norway, Finland, Sweden, and the UK followed this
pattern. In the financial accelerator feedback loops that operated in the US sub-prime crisis,
falls in house prices increased bad loans and impaired the ability of banks to extend credit. As
a result, household spending and residential investment fell, increasing unemployment and reducing
incomes, feeding back further into lower asset prices and credit supply.
The transmission mechanism that operated via consumption was poorly represented by the Federal
Reserve's FRB-US model and similar models elsewhere. A more relevant consumption function for
modelling the financial accelerator is needed, modifying the permanent income model with shorter
time horizons, 6 incorporating important shifts in credit lending conditions, and disaggregating
household balance sheets into liquid and illiquid elements, debt and housing wealth.
Implications for Macroeconomic Policy Models
To take into account all the feedbacks, a macroeconomic policy model needs to explain asset prices
and the main components of household balance sheets, including debt and liquid assets. This is best
done in a system of equations including consumption, in which shifts in credit conditions – which
have system-wide consequences, sometimes interacting with other variables such as housing wealth
– are extracted as a latent variable. 7 The availability of home equity loans, which varies
over time and between countries – hardly available in the US of the 1970s or in contemporary Germany,
France or Japan – and the also the variable size of down-payments needed to obtain a mortgage, determine
whether increases in house prices increase (US and UK) or reduce (Germany and Japan) aggregate consumer
spending. This is one of the findings of research I review in Muellbauer (2016). Another important
finding is that a rise in interest rates has different effects on aggregate consumer spending depending
on the nature of household balance sheets. Japan and Germany differ radically from the US and the
UK, with far higher bank and saving deposits and lower household debt levels so that lower interest
rates reduce consumer spending. A crucial implication of these two findings is that monetary policy
transmission via the household sector differs radically between countries – it is far more effective
in the US and UK, and even counterproductive in Japan (see Muellbauer and Murata 2011).
Such models, building in disaggregated balance sheets and the shifting, interactive role of credit
conditions, have many benefits: better interpretations of data on credit growth and asset prices
helpful for developing early warning indicators of financial crises; better understandings of long-run
trends in saving rates and asset prices; and insights into transmission for monetary and macro-prudential
policy. Approximate consistency with good theory following the information economics revolution of
the 1970s is better than the exact consistency of the New Keynesian DSGE model with bad theory that
makes incredible assumptions about agents' behaviour and the economy. Repairing central bank policy
models to make them more relevant and more consistent with the qualitative conclusions of the better
micro-foundations outlined above is now an urgent task.
Endnotes
[1] Part of the problem of identification is that the DSGE models throw away long-run information.
They do this by removing long-run trends with the Hodrick-Prescott filter, or linear time trends
specific to each variable. Identification, which rests on available information, then becomes more
difficult, and necessitates 'incredible assumptions'. Often, impulse response functions tracing out
the dynamic response of the modelled economy to shocks are highly sensitive to the way the data have
been pre-filtered.
[3] See Campbell and Mankiw (1989, 1990) and for even more powerful evidence from the UK, US and
Japan; Muellbauer (2010); and micro-evidence from Shea (1995).
[4] Net worth is defined as liquid assets minus mortgage and non-mortgage debt plus illiquid financial
assets plus housing assets, and this assumes that the coefficients are all the same.
[5] In recent years, several empirical contributions have recognised the importance of the mechanisms
described by Fisher (1933). Mian and Sufi (2014) have provided extensive micro-economic evidence
for the role of credit shifts in the US sub-prime crisis and the constraining effect of high household
debt levels. Focusing on macro-data, Turner (2015) has analysed the role of debt internationally
with more general mechanisms, as well as in explaining the poor recovery from the global financial
crisis. Jorda et al. (2016) have drawn attention to the increasing role of real estate collateral
in bank lending in most advanced countries and in financial crises.
[6] The FRB-US model does build in shorter average horizons than text-book permanent income. It
also has a commendable flexible treatment of expectations, Brayton et al (1997).
[7] The use of latent variables in macroeconomic modelling has a long vintage. Potential output,
and the "natural rate" of unemployment or of interest are often treated as latent variables, for
example in the FRB-US model and in Laubach and Williams (2003), and latent variables are often modelled
using state space methods. Flexible spline functions can achieve similar estimates. Interaction effects
of latent with other variables seem not to have been considered, however. We use the term 'latent
interactive variable equation system' (LIVES) to describe the resulting format.
'the omission of debt and household balance sheets more generally'
putting these eclownometric [sic] models at about the same level of technical sophistication
as the Newcomen steam engine of 1712, which achieved about one (1) percent thermodynamic efficiency.
'a macroeconomic policy model needs to explain asset prices and household balance sheets.
This is best done in a system of equations.'
Yes indeedy. Reminds me of a young poseur at engineering school, who exclaimed during a
group study session, "I've got it all jocked out. Now I just need the equations!"
' the omission of debt and household balance sheets more generally '
You beat me to it. I have been aware of that for a few years now, but I doubt that one
person in a hundred (or a thousand) knows when they listen to some economist on a news program
or a business channel that the person speaking thinks that how much debt people have does not
substantively affect their spending.
Really, 5 year olds describing how they get toys from Santa have a better grasp of economics
than most "economists"
If I used or invented an econ model that left out the "consumer", and modeled it with a
"consumption agent object" having a single independent input variable being the Fed zero term,
zero risk interest rate, I'd be too embarrassed to admit it. I would probably just very quietly
make a career change into one of the softer sciences. Maybe writing fictional romance novels,
or some such thing.
The worst thing about these types of mea culpas from the mainstream is the cited criticisms
from other mainstream economists only. It can only be a valid criticism if it was published in
a mainstream journal
Of the structural changes, the evolution and revolution of credit market architecture was
the single most important . In the US, credit card ownership and instalment credit spread between
the 1960s and the 2000s; the government-sponsored enterprises – Fannie Mae and Freddie Mac
– were recast in the 1970s to underwrite mortgages; interest rate ceilings were lifted in the
early 1980s; and falling IT costs transformed payment and credit screening systems in the 1980s
and 1990s. More revolutionary was the expansion of sub-prime mortgages in the 2000s, driven
by rise of private label securitisation backed by credit default obligations (CDOs) and swaps.
The 2000 Commodity Futures Modernization Act (CFMA) made derivatives enforceable throughout
the US with priority ahead of claims by others (e.g. workers) in bankruptcy. This permitted
derivative enhancements for private label mortgage-backed securities (PMBS) so that they could
be sold on as highly rated investment grade securities. A second regulatory change was the
deregulation of banks and investment banks . Similar measures to lower required capital on
investment grade PMBS increased leverage at commercial banks. These changes occurred in the
political context of pressure to extend credit to poor.
That 'political pressure' turned out to be the bait and switch for a system that shifted
power via debt creation.
What we have not yet come to terms with are the implications of David Graeber's anthropological
insights: how does debt affect social relationships, alter social norms, and affect relationships
among individuals?
Debt is a form of power, but by failing to factor this into their equations, the Central
Bankers are missing the social, political, and cultural consequences of the profound shifts in
'credit market architecture'. In many respects, this is not about 'money'; it's about power.
After Brexit, Trump, and the emerging upheaval in the EU, it's no longer enough to just 'build
better economic models'.
The Central Bankers' models can include all the parameters they can dream up, but until
someone starts thinking more clearly about the role and function of money, and the way that 'different
kinds of money' create 'different kinds of social relationships', we are all in a world of hurt.
At this point, Central Bankers should also ask themselves what happens - socially, personally
- when 'debt' (i.e., financialization) shifts from productivity to predation. That shift accelerated
from the 1970s, through the 1990s, into the 2000s.
Allowing anyone to charge interest that is usurious is the modern equivalent of turning a blind
eye to slavery.
By enabling outrageous interest, any government hands their hard working taxpayers over to
what is essentially unending servitude.
This destroys the political power of any government that engages in such blind stupidity.
Frankly, I'm astonished that it has taken so long for taxpayers to show signs of outrage and
revolt.
I think you have come up with a good insight – I very much agree its about power and not money.
Now, maybe it is just a coincidence, but it is hard for me not to notice that the explosion
in consumer credit matches up nicely with the rise in inequality.
And one other thing I would point out – it doesn't take usurious interest rates. If squillionaires
have access to unlimited, essentially cost free money in which the distributors of money are guaranteed
a profit, NO MATTER HOW MUCH THEY HAVE LOST, while the debts on non-squillionaires are collected
with fees, penalties, and to the last dime, than it doesn't matter if interest rates are essentially
zero.
Who gets bailed out is not due to logic or accounting that says that the banks' losses have
to be made whole, but not home owners – that is an ideology called economics .
I wouldn't downplay how cool the money part is, however. It's no fun making questionable, dodgy
loans unless you can charge fees up front and then sell the risk off to a large crowd of suckers.
Hence the importance of securitization and other "insurance" type derivatives. Then, if you run
out of willing suckers, you need a place to stuff it all, say pension plans and maybe even privatized
social security.
But if they allow this to happen in the real world, shouldn't the models have a piece reflecting
this behavior as well? Full circle of course, where the "consumer balance sheet" contains his
bad debt investment and savings assets* offsetting his liabilities. Then everyone would be more
like a bank?
* we still need to model bubble assets – like real estate and stocks. This sounds like it's
starting to get tricky!
"Another important finding is that a rise in interest rates has different effects on aggregate
consumer spending depending on the nature of household balance sheets".
This is a point that Warren Mosler and other MMTers have been making since the 1990s: depending
on circumstances, lower interest rates may well have contractionary effects and higher interest
rates may stimulate the economy.
The tool of choice to fight recessions and control inflation should thus be fiscal instead
of monetary policy.
Again, MMT had the analysis right long before mainstream theory started to admit there might
be serious problems with its favorite approaches (without ever giving appropriate credit to MMT,
of course!).
I think the Samarians knew that 5000 years ago. The Templars certainly knew it 1300 years ago.
And most definitely, "modern" European banking knew it 300 years ago.
of note to me is just how simplistic Keynesian statistics were/are, based on almost fantasy-assumptions.
And that was followed by Stiglitz et al's theory of asymmetric information models. And this above
does give us a dose of all the different variables involved in accurately analyzing an economy
– an economy that exploded with financialization, but nobody could keep up. As was proven in 2008.
It shouldn't be this confusing. "Repairing CB policies to make them more relevant is now an urgent
task." I think it is urgent enough to nationalize the banks and start over using a sovereign money
model.
Let's take an infinitely complex system (the economy) that is widely affected by human emotion,
then we'll leave out the mechanism by which money itself is created and distributed and then let's
"model" it.
We'll have two fans of Stalin's communist "command and control" economy (Keynes and Harry Dexter
White) pretend they could create a stable system based on Ph.Ds divining future economic and trade
flows and then "managing" them by price fixing the price of money. We'll set policy based on the
national conditions of the country with the global reserve currency despite the fact that 2/3
of that currency is outside that country. And with a system where trade never settles so massive
imbalances can persist indefinitely. Then let's put self-interested private institutions in charge
of all money creation and distribution .and we'll be sure their system operates in secret and
is never audited. When the system blows up we'll have these central overlords step in as uneconomic
buyers of assets with no consideration for asset quality or price, with no economic need to ever
sell, and with "unlimited" funds with which to buy more such assets. At the end we'll continue
to call the system "capitalism" and we'll continue to call the scrip "money" and hope nobody notices.
The money supply is flat in the recession of the early 1990s.
Then it really starts to take off as the dot.com boom gets going which rapidly morphs into
the US housing boom, courtesy of Alan Greenspan's loose monetary policy.
When M3 gets closer to the vertical, the black swan is coming and you have a credit bubble
on your hands (money = debt).
The mainstream are all trained in neoclassical economics which is spectacularly dismal.
Steve Keen sits outside the mainstream and saw the credit bubble forming in 2005, you can see
it in the
US money supply (money = debt).
In 2007, Ben Bernanke could see no problems ahead (dismal).
Irving Fisher looked at the debt inflated asset bubble after the 1929 crash when ideas that
markets reached stable equilibriums were beyond a joke.
Fisher developed a theory of economic crises called debt-deflation, which attributed the crises
to the bursting of a credit bubble.
Hyman Minsky came up with "financial instability hypothesis" in 1974 and Steve Keen carries
on with this work today. The theory is there outside the mainstream.
To understand the theory you have to understand money:
" .. debt does not make society as a whole poorer: one person's debt is another person's
asset. So total wealth is unaffected by the amount of debt out there. This is, strictly speaking
true only for the world economy as a whole .. " Paul Krugman "End this Depression Now".
This is the neoclassical economic view of money and it's totally wrong and will always leave
you blind to events like 2008, e.g.
1929 – US (margin lending into US stocks)
1989 – Japan (real estate)
2008 – US (real estate bubble leveraged up with derivatives for global contagion)
2010 – Ireland (real estate)
2012 – Spain (real estate)
2015 – China (margin lending into Chinese stocks)
Norway, Sweden, Canada and Australia have been letting their real estate bubbles inflate because
their mainstream economists and Central Bankers don't know what's coming.
Money and debt are opposite sides of the same coin.
If there is no debt there is no money.
Money is created by loans and destroyed by repayments of those loans.
Advanced:
"Where does money come from" available from Amazon
You need to understand how money works to understand why austerity doesn't work in balance
sheet recessions, the cause of the dire prediction from the IMF that I started with.
You can look at the money supply/debt levels (the same thing) to see how well the economy is
doing.
The money supply is contracting – the economy will be doing badly and the risk of this turning
into debt deflation is high, there is positive feedback tending to make the situation worse. Debt
repayments are larger than the new debt being taken out, the overall level of debt is decreasing.
The money supply is stable – this is stagnation, in the ideal world the money supply should
be growing at a steady pace.
The money supply is growing steadily – the ideal.
The money supply is growing very rapidly – you've got a credit bubble on your hands and the
"black swan" is near. The FED didn't understand money and debt before 2008 so they missed it.
Mario is still doing austerity now, no wonder those Italian banks are full of NPLs.
It's too late for Norway, Sweden, Canada and Australia's mainstream economists and Central
Bankers, but we need to get this dismal neoclassical economics updated before the whole world
descends into debt deflation.
It's almost here, there isn't much time.
Chuck another trillion in to keep this sinking ship afloat Central Bankers, we need to get
our technocrat elite up to speed.
Just look at the rate of change of the money supply/debt.
When it's rising rapidly you're in trouble as a credit bubble is forming.
A negative gradient is also a bad sign as it means your money supply is contracting, your economy
is in trouble and debt deflation could be on its way.
I am shocked, shocked I tell you, that a model with 'Equilibrium' right in the name fails to
predict crises. They could probably do better just aggregating results from a big multi-player
version of The Sims.
Better models should start from scratch, assuming non-linearity. They could take the Limits-to-Growth
system of nonlinear pde's as a starting point, for example, to get a good handle on long range
dynamics. Then add detailed submodels for money and debt, for different countries, for trade,
for different economic sectors, etc. Use realistic agent based models where standard models are
inadequate.
To do all, start by sending all those economics Ph.D.s back to school in other fields where
they know how to do modern applied mathematics.
"... I always laugh when Newt Gingrich says we need "rational regulation". His crew has as its prime agenda getting rid of any regulation that is actually rational. ..."
"... the greater the information asymmetry, the easier it is to loot. ..."
"... Gramm pushed the next round of stupid deregulation which led to the latest crisis. And it seems Team Trump is about to relive the same mistake. Studying overly simplified models that have historically failed us over and over is the height of stupidity. ..."
Jeb Hensarling and the Allure of Economism : The
Wall Street Journal has a profile up on Mike Crapo and Jeb Hensarling, the key committee
chairs (likely in Crapo's case) who will repeal or rewrite the Dodd-Frank Wall Street Reform and
Consumer Protection Act. It's clear that both are planning to roll back or dilute many of the
provisions of Dodd-Frank, particularly those that protect consumers from toxic financial products
and those that impose restrictions on banks (which, together, make up most of the act).
Hensarling is about as clear a proponent of
economism -the belief that the world operates exactly as described in Economics 101 models-as
you're likely to find. He majored in economics at Texas A&M, where one of his professors was none
other than Phil Gramm. Hensarling described his college exposure to economics
this way :
"Even though I had grown up as a Republican, I didn't know why I was a Republican until
I studied economics. I suddenly saw how free-market economics provided the maximum good to
the maximum number, and I became convinced that if I had an opportunity, I'd like to serve
in public office and further the cause of the free market."
This is not a unique story...
Introductory economics, and particularly the competitive market model, can be seductive that
way. The models are so simple, logical, and compelling that they seem to unlock a whole new way
of seeing the world. And, arguably, they do: there are real insights you can gain from a working
understanding of supply and demand curves.
The problem, however, is that the people ... forget that the power of a theory in the abstract
bears no relationship to its accuracy in practice. ...
Hensarling, who likes to quote market principles in the abstract, doesn't appear to have moved
on much from Economics 101. ... This ritual invocation of markets ignores the fact that there
is no way to design a contemporary financial system that even remotely resembles the textbook
competitive market: perfect information, no barriers to entry, a large number of suppliers such
that no supplier can affect the market price, etc. ...
Regulatory policy that presumes well-functioning markets that don't exist is unlikely to work
well in the real world. Actually, Bill Clinton and George W. Bush tried that already, and we got
the financial crisis. But to people who believe in economism, theory can never be disproved by
experience. Hensarling is "always willing to compromise policies to advance principles," he actually
said to the Journal . That's a useful trait in an ideologue. It's frightening in the man
who will write the rules for our financial system.
I always laugh when Newt Gingrich says we need "rational regulation". His crew has as its prime
agenda getting rid of any regulation that is actually rational.
That is required to cover all the common law complexities from civil suits on labor issues being
legislated from the Federal bench.
Businesses have resorted to getting judges to legislate their way once their lobbying failed
to get Congress to legalize slavery by other names.
Labor is a part of econ 101 that businesses do not understand.
Businesses see labor as black holes sucking all the money it can out of the economy. Consumers,
on the other hand, are infinite sources of spending as long as government does not require consumers
repay debts. But government does need to put more money in consumer pockets with more and bigger
tax cuts.
When I learned econ 1 in secondary school social studies, the money spent at businesses came
100% from wages businesses paid.
A more advanced concept was economic profits were bad because that meant monopoly power restricting
supply to consumers to take too much of their money and also pay them less than in an efficient
economy.
"Hensarling is about as clear a proponent of economism -- the belief that the world operates exactly
as described in Economics 101 models-as you're likely to find. He majored in economics at Texas
A&M, where one of his professors was none other than Phil Gramm."
Gramm never really got the economics of financial institutions. Milton Friedman did as he studies
their failures during the Great Depression. We sort of relived this during the 1980's S&L crisis
but on a smaller scale. That crisis was driven by ill advised financial deregulation.
Gramm pushed
the next round of stupid deregulation which led to the latest crisis. And it seems Team Trump
is about to relive the same mistake. Studying overly simplified models that have historically
failed us over and over is the height of stupidity.
"The Gramm–Leach–Bliley Act (GLBA), also known as the Financial Services Modernization Act of
1999, (Pub.L. 106–102, 113 Stat. 1338, enacted November 12, 1999) is an act of the 106th United
States Congress (1999–2001). It repealed part of the Glass–Steagall Act of 1933, removing barriers
in the market among banking companies, securities companies and insurance companies that prohibited
any one institution from acting as any combination of an investment bank, a commercial bank, and
an insurance company. With the bipartisan passage of the Gramm–Leach–Bliley Act, commercial banks,
investment banks, securities firms, and insurance companies were allowed to consolidate. Furthermore,
it failed to give to the SEC or any other financial regulatory agency the authority to regulate
large investment bank holding companies.[1] The legislation was signed into law by President Bill
Clinton.[2]"
a good read but i disagree with their suggested approach:
"Consideration needs to be given to approaches such as those suggested by Bulow and Klemperer
(2015) and
King (2016) that give more weight to market prices as indicators of asset values and that bring
automaticity to the restoration of bank capital when it starts to decline."
imo, small enough to fail institutions pose less system risk and are less likely to speculate.
I suspect over time we will disagree slightly here and there on specifics but it is a joy to have
someone here that gets down to real analysis.
In my view Sarin-Summers took too tiny a step into something fundamental but often overlooked.
The return to equity is a mix of the equity/asset ratio (which needs to go up) aka leverage risk
and the issue of operational risk which you are hinting at.
I bet Anne will demand more on what I'm saying here. Tiem to think about how best to present
this over at Econospeak as this is a really big deal. Even if it is something Trump's new CEA
(Lawrence Kudlow) does not get. Neither does PeterK so maybe he can work for Kudlow - the stupidest
man alive (almost).
Small enough to fail institutions like ... Bear and Lehman?
Theory aside, in the real life crisis we had risk built up across the entire system, not just
big banks, and when a few midsized firms went under it broke the buck and everything went to hell.
Perhaps more importantly though, it was *consumers'* overleveraging that caused the prolonged
depression. The big banks participated in that but didn't have central roles.
"Milton Friedman did as he studies their failures during the Great Depression."
So, how is it that he promised money market funds would ever be at risk of insolvency and need
Fed bailout of credit, and that money market funds would never face bank runs because no one would
ever question their safety and solvency?
How is it that he failed to predict Primary Reserve breaking the buck and triggering bank runs
on the shadow banks?
I remember the debate over Regulation Q and retail money market funds. I agreed with the big
government liberals that it was going to end badly. That it took 37 years is not a surprise to
me, but October 2008 was no surprise at all to me. It was forecast by my kind of economists in
1970 based on what happened multiple times before 1935 when sane bankers and economists developed
the bank regulation that produced half a century of no bank crisis.
Friedman, on the other hand, argued for deregulation that delivered bank crisis in the late
80s, the 90s multiple times deftly handled by bailouts by both government and by forcing Wall
Street banks to do Morgan bailouts, eg LTCM, and the IMF, and then yet again, the bank crisis
of the 00s.
Three decades of bank crisis in four decades is hardly evidence Friedman understood banking.
For Free Market Ideologues the Great Depression Never Happened
Simple question for Jeb H: Why was there a Great Depression when we had budget surpluses every
year during the 1920s?
How could the Free Market have failed so completely from 1929 to 1933? We had gold money and
regulations were minimal. It was the ideal context for the Free Market and yet the Dow lost 90%
of its value. Why has the Dow nearly tripled in value now with Dodd-Frank in force?
I'm with yuan on this one. But this is a long story. For today - let me applaud you and yuan for
bringing something new and needed here. Debates over actual economic analysis.
We got a lot more than the financial crisis from r lying on markets more than government. Yes,
regs are necessary (externalities, monopolies, etc) but "the more the merrrier" is not the underlying
principle. Read that D/F has > 20k "rules" with >300 "major" rules yet to be written after 6 years
of work. The world changes way faster than government can. Regulators need to find much simpler,
more general approaches ("less leverage") if they're going to continue to add value.
This is a problem of the teaching of contemporary economics, not of Jed Hensarling. Economists
tout simplified classical models as fundamentally correct, teach them in freshman Economics 101,
and only admit that they don't approximate reality in Econ 401, for seniors. But most students
never take another econ course after 101. The damage is done. Not surprisingly, most young Republicans
discover that economic reality is...Free Market and Republican!
Think maybe it's time to show them that the classical model doesn't really work when they are
freshmen, and not complain after they're already in Congress.
Agency's '04 Rule Let Banks Pile Up New Debt
It was unanimous. The decision, changing what was known as the net capital rule, was completed
and published in The Federal Register a few months later.
With that, the five big independent investment firms were unleashed.
In loosening the capital rules, which are supposed to provide a buffer in turbulent times,
the agency also decided to rely on the firms' own computer models for determining the riskiness
of investments, essentially outsourcing the job of monitoring risk to the banks themselves.
At Bear Stearns, the leverage ratio - a measurement of how much the firm was borrowing compared
to its total assets - rose sharply, to 33 to 1.
Ah, Texas the home of fundamentalism. Texas basically lives by sticking a big straw in the ground
and selling what comes out. That is great until it (as it will) stops working. Texas is a caricature
of all that is wrong with mankind.
Another way to look at Texas is as the Saudi Arabia of North America. All that is missing is a
King. The rest of the USA should get together and give it back to Mexico. Both countries would
be better off.
"... The New Keynesian agenda is the child of the neoclassical synthesis and, like the IS-LM model before it, New Keynesian economics inherits the mistakes of the bastard Keynesians. It misses two key Keynesian concepts: (1) there are multiple equilibrium unemployment rates and (2) beliefs are fundamental. My work brings these concepts back to center stage and integrates the Keynes of the General Theory with the microeconomics of general equilibrium theory in a new way. " ..."
" To complete the reconciliation of Keynesian economics
with general equilibrium theory, Paul Samuelson introduced
the neoclassical synthesis in 1955...
... In this view of the world, high unemployment is a
temporary phenomenon caused by the slow adjustment of money
wages and money prices. In Samuelson's vision, the economy is
Keynesian in the short run, when some wages and prices are
sticky. It is classical in the long run when all wages and
prices have had time to adjust....
... Although Samuelson's neoclassical synthesis was tidy,
it did not have much to do with the vision of the General
Theory...
... In Keynes' vision, there is no tendency for the
economy to self-correct. Left to itself, a market economy may
never recover from a depression and the unemployment rate may
remain too high forever. In contrast, in Samuelson's
neoclassical synthesis, unemployment causes money wages and
prices to fall. As the money wage and the money price fall,
aggregate demand rises and full employment is restored, even
if government takes no corrective action. By slipping wage
and price adjustment into his theory, Samuelson reintroduced
classical ideas by the back door-a sleight of hand that did
not go unnoticed by Keynes' contemporaries in Cambridge,
England. Famously, Joan Robinson referred to Samuelson's
approach as 'bastard Keynesianism.'
The New Keynesian agenda is the child of the
neoclassical synthesis and, like the IS-LM model before it,
New Keynesian economics inherits the mistakes of the bastard
Keynesians. It misses two key Keynesian concepts: (1) there
are multiple equilibrium unemployment rates and (2) beliefs
are fundamental. My work brings these concepts back to
center stage and integrates the Keynes of the General Theory
with the microeconomics of general equilibrium theory in a
new way. "
You could meanwhile contemplate Farmer's point that Samuelson
and his MIT colleagues "bastardized" Keynes' views when they
introduced them to the US.
" By slipping wage and price
adjustment into his theory, Samuelson reintroduced classical
ideas by the back door-a sleight of hand that did not go
unnoticed by Keynes' contemporaries in Cambridge, England.
Famously, Joan Robinson referred to Samuelson's approach as
'bastard Keynesianism."
And then you might contemplate Samuelson's (and MIT
colleagues) influence on Krugman, Blanchard, Summers and all
the well-publicized mainstream economists.
By slipping wage and price adjustment into his theory,
Samuelson reintroduced classical ideas by the back door-a
sleight of hand that did not go unnoticed by Keynes'
contemporaries in Cambridge, England. Famously, Joan Robinson
referred to Samuelson's approach as 'bastard Keynesianism'.
-- Roger Farmer
[ A fine place to start thinking. I knew this before and
read this again today, but did not think about the argument.
You might also wonder how it could happen that those "bastard
Keynesians", the ones who distorted Keynes' message, came to
be the ones who are well publicized, rather than more
accurate interpreters.
I think that is a good discussion. I also think the major
weakness of both Keynes and Marx is that they underestimated
the power and resilience of finance. They both thought logic
dictated the "euthanasia of the rentier", while we are seeing
the rentier growing ever stronger.
It's always with great diffidence that I write about
macroeconomics. Although I'm in good company in being
sceptical about much of macro (see this roundup from Bruegel
and this view from Noah Smith, for instance), I'm all too
well aware of the limits of my knowledge. So with that
warning, here's what I made of Roger Farmer's very
interesting new book, Prosperity for All: How To Prevent
Financial Crises....
"... Cahal Moran is a member of Rethinking Economics, the worldwide student movement to reform the teaching of economics. He is the co-author, with Joe Earle and Zach Ward-Perkins of the book ..."
"... The Econocracy: The Perils of Leaving Economics to the Experts ..."
"... the authors can be followed on their Twitter account ..."
"... @TheEconocracy ..."
"... . Interview conducted by Philip Pilkington, a macroeconomist working in asset management and author of the new book ..."
"... The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory ..."
"... . The views expressed in this interview are not those of his employer. ..."
"... In the book we give a formal definition of econocracy as "a society in which political goals are defined in terms of their effect on the economy, which is believed to be a distinct system with its own logic that requires experts to manage it. " ..."
"... Economists are wheeled out to comment on all sorts of public policy issues: in the news, on the TV, online and so forth. The deference to economic expertise is something that permeates our politics and, through the use of jargon, maths and statistics, serves to exclude non-expert citizens from conversations about issues that often have a direct impact on their lives. As you imply, it is something like an ancient priesthood. In fact, in an earlier draft of the book we made a comparison to ancient medical texts, which were only written in Latin and so created a huge asymmetry between experts and non-experts, which could have awful consequences for the latter. In some senses economics in modern times goes even further than this, because it affects policy on everything from incomes and jobs to healthcare and the environment. ..."
"... I suppose that leads us pretty tidily to the title of the second chapter of your book: 'Economics as Indoctrination'. Given that you have this view of economic language – one which I concur with in that I have concluded that maybe 60-80% of formal economic language is ideology – it pretty naturally follows that there will be some attempt to indoctrinate those who wish to speak the language. I guess the natural place to start is to ask you for a flavour of what this indoctrination looks like and then maybe we will move on to what its purposes are and what ends it serves. ..."
"... We call economics education indoctrination in the book not just because students are presented with only one set of ideas – neoclassical economics – but because they are taught to accept it in an uncritical manner, as if it is all there is to economics. ..."
"... Keynes said that the real challenge lies in escaping old ways of thinking, and this is something we've all noticed in ourselves after studying economics. ..."
"... This process is indeed the main way that the econocracy reproduces itself: as the economic experts of the present train the economic experts of the future, this shapes the way the latter approach economic problems when they go on to work at powerful institutions. Broadly speaking, this education shapes the perception of economic experts in two ways. Firstly, they tend to have mechanical view of the world, thinking of economic and social problems as clearly defined technical questions. This allows them to produce clear predictions when addressing even complex political issues. Secondly, they see economics as a separate, value-free sphere which does not require ethical and political debate. Their answers to policy questions have the air of objectivity about them. ..."
"... Economists predict disaster where none occurs. They deny the possibility of events that then happen. They oppose the most basic, decent, and sensible reforms, while offering placebos instead. They are always surprised when something untoward (like a recession) actually occurs. And when finally they sense that some position cannot be sustained, they do not re-examine their ideas. Instead, they simply change the subject. ..."
"... Making central banks independent from the political process, staffing them with economists and tasking them with using interest rates to manage inflation and growth, along with a fairly hands-off approach to the financial sector (which itself used economic models such as Black-Scholes) seemed to be working. That was, until the theoretical blind spots economists had in the housing market and financial sector was revealed by the near-collapse of both of them. ..."
"... I suppose this is a variant on the classic 'who governs the governors': who teaches the teachers. ..."
"... substantive ..."
"... If economics is to function as the medium of power than its students must be made to follow blindly. Critical thinking would allow them to undermine it or manipulate it to their own ends. ..."
"... The students must be made into strict adherents before being granted access to the highest levels of information. By erecting barriers at each level (be it specialized language that must be mastered or learning contigent on prior learning) we can separate the weak from the true adherents. ..."
"... Following Adler, economics is not a science, it's a philosophy. At least economics doesn't burn its heretics, it just ignores them. Science is neither immune. Gerald Pollack has written that he was advised to avoid water as a subject of inquiry, or it could kill his career. ..."
"... File under "the creative class" writers à la Toynbee ..."
"... When you think about it economics doesn't really exist. Society does. And when economics is talked about like society doesn't exist it gets pointless. Just like some stupid software language that does basically nothing. What we need is the courage of our human convictions. I think it was Blyth in an early clip who said more or less, "Just do it." Deficit spend as necessary and the solutions will appear. That's very Zen and I love it. I mean, here's the question, What is the worst that can happen? If there is sufficient money. Great interviewer and interviewee. Thanks NC for this post. ..."
"... "Economics doesn't really exist, society does": a super obvious statement that stands in starkest distinction to NeoLib ideology that insists we are all atomistic, isolated individuals. Math and language are epiphenomena to human being that have perverted our self perception nearly to oblivion. ..."
"... Interesting thing I heard the other day, Professor Richard Wolff says he studied economics at three elite universities (Yale, Harvard, and another notable I cannot remember) and never had a course in Karl Marx. Tunnel vision for sure in the field. ..."
"... Answer to question no 2: The jargon that is being used these days by presidents, economists, talk show hosts is beyond my understanding. I have a masters degree. ..."
"... An argot (English pronunciation: /ˈɑːrɡoʊ/; from French argot [aʁˈɡo] 'slang') is a secret language used by various groups-e.g., schoolmates, outlaws, colleagues, among many others-to prevent outsiders from understanding their conversations. The term argot is also used to refer to the informal specialized vocabulary from a particular field of study, occupation, or hobby, in which sense it overlaps with jargon. ..."
"... Is the economics profession simply following the "He who has the gold, makes the rules"? Many other professions service retail customers, such as attorneys and doctors. But how many ordinary citizens ever deal with an economist on any level? ..."
"... If paycheck dependent economists know that powerful politicians, wealthy corporate leaders and wealthy donors in academia are looking over their shoulders, one could expect economists' message to be justify what their "employers" want to do. ..."
"... "Keen was formerly an associate professor of economics at University of Western Sydney, until he applied for voluntary redundancy in 2013, due to the closure of the economics program at the university. ..."
"... You will eat, by and by, when you learn how to bake and how to fry. Chop some wood, It'll do ya good. And you'll eat in that sweet by and by. ..."
"... This interview articulates an extremely important insight when it states that the economy " is believed to be a distinct system with its own logic that requires experts to manage it." ..."
"... This seeming independence of the economic and political systems has largely deceived most of modern social science. This seeming independence is not real, and in fact these spheres are deeply intertwined. ..."
"... As people llike Karl Polyani and Philip Mirowski have maintained, markets are always organized through politics and institutions and one key to understanding this reality is to keep a focus on the promulgation of the rules and regulations of a powerful state that helps to create movements for both regulation and deregulation. ..."
"... It was notable that Cathal failed to mention Marx. I don't think he realizes yet quite how fully indoctrinated he's been – as that humdinger of an analogy (gay marriage – actually a redefinition to normalize surrogacy, a eugenics-by-stealth agenda, hence it's enormous funding by the plutocracy) indicates. The economic can never be separated from the socio-political. ..."
"... Mirowski describes how the "Neoliberal Economic thought collective" captured and now dominates economic doctrine by controlling what and who can publish in the major economic journals. As a result those aspects of Neoclassical Economics remaining are being re-shaped into a Neoliberal mold. I noticed the word "neoliberal" doesn't show up anywhere in this post yet Neoliberal economic policies and rationales dominate policy in the real world. ..."
"... Mirowski points out that Neoliberal economics designs policy to apply market models to every problem based on the doctrine that markets are the most powerful information processing system available to man - a strong form of the Efficient Markets Hypothesis. The Market is the ultimate epistemological device. If the market solution doesn't satisfy the needs of the common man then satisfying those needs is simply contrary to the wisdom of the market. For other problems like externalities they just need to be properly incorporated into the market model to obtain an optimal solution to whatever problem they present. ..."
"... . Putting fins and flashy hubcaps on Neoclassical economics as it morphs into Neoliberal economics is not the answer. ..."
"... The role of Economics is simple: it should inform people of the consequences of certain decisions we make about who gets what. ..."
"... You are right, that is what it should be, unfortunately neoclassical has failed horribly in that regard. It is based on assumptions that are demonstrably false and they are never revisited to see the effect of relaxing them. You might as well be counting angels on a pin. See Roamer's take down of it for starters. ..."
PP: Your book starts with a quote from Albert Camus that is, in some ways, rather pessimistic.
In it he says that most generations seek to reform the world but that his generation only sought
to ensure that the world does not destroy itself. You and I are both of the same generation broadly
speaking and I do not think it unfair that our generation is subject to some abuse and often portrayed
as narcissistic, video-game obsessed, layabouts. I have always felt that the 'problem generation'
are, in fact, the Baby Boomers who tag us with these clichés. It is this generation that rules the
world today and this generation that gave birth to The Econocracy. Before we get too much into what
The Econocracy is and how it operates, maybe you could briefly talk about this generational issue.
Is it something that you have given much thought to and do you identify more so with Camus' generation?
CM: We do not focus on the generational issue too much, but it is really at the heart of the book
and of the student movement more generally. Unlike the boomers, we have grown up in a world of economic
and political uncertainty, with the financial crisis being the most extreme example of this (yet).
The disconnect between this uncertainty and at times chaos and what we saw in the classroom really
sowed the seeds for societies like Post-Crash Economics. If the boom had simply continued, perhaps
we would have just shrugged our shoulders and got on with it. But we could not ignore what was going
on outside the lecture theatre. In this sense, Camus' feeling of a call of duty resonated with us
and that's why we chose that quote. However, we try to use this initial pessimism to build a positive
vision later on.
PP: Yeah, I know the feeling. It was very hard for me to not think that something was really,
really wrong with economics as I took undergraduate classes against the backdrop of the 2007-08 crisis.
For me there was a lot of cognitive dissonance. I found it really weird because it seemed to me pretty
obvious that economics was the language of power – the language through which our leaders communicated
their plans and goals to the rest of us. But what I was learning in class did not seem up to this
in any way, shape or form. I think that this is a theme in your book too. Could you explain what
you mean by 'The Econocracy' and how it functions?
CM: In the book we give a formal definition of econocracy as "a society in which political goals
are defined in terms of their effect on the economy, which is believed to be a distinct system with
its own logic that requires experts to manage it. " In other words, the idea of 'the
economy' as a separate sphere of life is dominant in politics, and this separate sphere has technical
properties which can only be understood through economic expertise. The results are twofold. First,
public debates about the economy are conducted in a language that most people simply do not speak
– we've tried to look at this this through undertaking polling with Yougov and one of the things
we found is that only 12% of respondents said they thought politicians and the media talk about economics
in an accessible language.
Second, many key areas of decision making – central banks, international institutions like the
IMF & World Bank, competition authorities – are delegated to people with economic expertise on the
grounds that they can find what is in some sense a technically 'right' answer to economic problems
in their respective domains. The rise of this idea of the economy is reflected in the increase in
mentions of 'the economy' in the winning UK political party's manifestos: it was only mentioned once,
for the first time, by the Conservatives in 1950, but 5 years later this rose to 10 and in the most
recent Conservative party manifesto 'the economy' was mentioned 59 times.
PP: I'm getting the sense that this goes beyond a simple criticism of technocracy and bureaucracy,
right? I mean a lot of aspects of society are run based on expertise of some sort or another. But
you seem to be getting at something else. Is this related to the fact that, like the Scholastics
of the Middle Ages, they have concocted an elite language?
CM: That's absolutely right. One could probably write a book critiquing the technocratic and bureaucratic
tendencies of say, lawyers or accountants, but where economics goes one step further is the place
it has in public debate. Economists are wheeled out to comment on all sorts of public policy issues:
in the news, on the TV, online and so forth. The deference to economic expertise is something that
permeates our politics and, through the use of jargon, maths and statistics, serves to exclude non-expert
citizens from conversations about issues that often have a direct impact on their lives. As you imply,
it is something like an ancient priesthood. In fact, in an earlier draft of the book we made a comparison
to ancient medical texts, which were only written in Latin and so created a huge asymmetry between
experts and non-experts, which could have awful consequences for the latter. In some senses economics
in modern times goes even further than this, because it affects policy on everything from incomes
and jobs to healthcare and the environment.
PP: Yes. I've also long thought this. My book is actually about trying to figure out what is pure
ideology and mysticism and what is not within the jargon. I suppose that leads us pretty tidily to
the title of the second chapter of your book: 'Economics as Indoctrination'. Given that you have
this view of economic language – one which I concur with in that I have concluded that maybe 60-80%
of formal economic language is ideology – it pretty naturally follows that there will be some attempt
to indoctrinate those who wish to speak the language. I guess the natural place to start is to ask
you for a flavour of what this indoctrination looks like and then maybe we will move on to what its
purposes are and what ends it serves.
CM: It sounds like there's some crossover between our books, and this is something I've noticed
with people across the movement. It's great that so many people are independently coming to similar
ideas and, I think, a sign that we may just have a point.
We call economics education indoctrination in the book not just because students are presented
with only one set of ideas – neoclassical economics – but because they are taught to accept it in
an uncritical manner, as if it is all there is to economics. The idea that there might be criticisms
of neoclassical economics, other schools of thought, and even the real world are evicted to such
an extent that after a while students may find it difficult to think any other way. Keynes
said that the real challenge lies in escaping old ways of thinking, and this is something we've all
noticed in ourselves after studying economics.
PP: I'd tend to agree. But what I found very interesting about the book was that you looked at
how economics education is structured. You paint the picture of a very odd discipline that does not
appear to be taught like other disciplines, whether natural or social science. Do you think that
there is something distinctly different in this regard and could you describe it briefly?
CM: Economics is definitely a law unto itself. In natural sciences, the culture is very much focused
on the empirics: theory has empirical motivations, and you always come back to falsifiable predictions
before too long. In other social sciences, the culture is instead focused on debate and the contested
nature of knowledge. You learn not to take any of your beliefs for granted. But entering an economics
degree feels a bit like being transported to another universe. Students are introduced to a fixed
body of knowledge that is presented as if – in the words of one student – it "fell from heaven in
an ever-true form". The focus is very much on learning this body of knowledge by rote, building up
the neoclassical world from abstract axioms and solving mathematical problems with at best vague
and stylised references to the real world they are supposed to represent. The commonly used phrase
'thinking like an economist' really captures the effort to indoctrinate students into this framework.
We did a curriculum review of the final exams and course outlines of 174 modules at 7 Russell
Group universities (considered the 'elite' of the UK) to look systematically into how economics students
are educated. Our main aim was to look for evidence of critical thinking, pluralism and real world
application, all of which we would consider vital to educating the experts of the future. The results
were deeply worrying: 76% of final exam questions showed no evidence of critical thinking – that
is, formulating an independent, reasoned argument. When only compulsory modules (namely micro and
macroeconomics) were included, this figure increased to a staggering 92%. Instead, the majority of
marks are given for what we call 'operate a model' questions: working through a model mathematically
without asking questions about its applicability. Of those questions which ask students to operate
a model, only 3% even attempted a link to the real world. The remainder of the marks were given for
simple description questions ('what is the Friedman k% rule?') or multiple choice questions, again
neither of which require any critical thinking. All of this is very worrying when you consider the
place economic expertise has in society.
PP: It is really very concerning. Although I would imagine that anyone who has actually taken
an economics class – as many of the educated public have at some time or other – will not be surprised
at what you have found. If you are correct then it seems to logically follow that the experts of
the future are being trained to think in a highly abstract manner but that these abstractions need
no link to the real world as it exists. What is more, if they are only being given one perspective
and are told that this perspective is as true and infallible as the most rigorous of the sciences
you are going to get a very high level of confidence in these abstractions by these experts. Have
you thought about what this means when these people flow into the elite institutions that control
important aspects of our societies? How do you think that it informs and shapes their judgements
and what implications do you think this has for the rest of us?
CM: This process is indeed the main way that the econocracy reproduces itself: as the economic
experts of the present train the economic experts of the future, this shapes the way the latter approach
economic problems when they go on to work at powerful institutions. Broadly speaking, this education
shapes the perception of economic experts in two ways. Firstly, they tend to have mechanical view
of the world, thinking of economic and social problems as clearly defined technical questions. This
allows them to produce clear predictions when addressing even complex political issues. Secondly,
they see economics as a separate, value-free sphere which does not require ethical and political
debate. Their answers to policy questions have the air of objectivity about them.
To make things more concrete consider cost-benefit analysis, an idea with its roots in economics
that's used extensively by major institutions like the Government Economic Service in the UK. This
calculates the 'costs' and 'benefits' of different policies by assigning a monetary value to each
of them, then provides a clear decision rule: if the benefits outweigh the costs, the policy is a
good one. Cost-benefit analysis is used even when the effects of a policy are not obviously monetary,
such as the number of trees in an area, or mortality rates, transforming what was a multifaceted
problem into a simple, seemingly objective mathematical problem. The result of this is that decisions
which could concern a large range of stakeholders are made in a centralised manner behind closed
doors, often without the consultation of these stakeholders (except in order to retrieve money values
from them, which raises problems in itself).
PP: Right. I see what you mean. So this goes far beyond, say, the blindnesses in the theories
that led to, say, economists largely missing the crisis and thinking, to quote Blanchard, that
the "state of macro was good" even in the face of such problems. Have you given any consideration
to these facts in the book? James Galbraith has a great quote where he says that:
Economists predict disaster where none occurs. They deny the possibility of events that then
happen. They oppose the most basic, decent, and sensible reforms, while offering placebos instead.
They are always surprised when something untoward (like a recession) actually occurs. And when
finally they sense that some position cannot be sustained, they do not re-examine their ideas.
Instead, they simply change the subject.
That seems to be another angle by which you might criticise the profession: namely, that they're
not actually very good at what they claim to be specialists in. Do you and your co-authors have anything
to say about that?
CM: Exactly – economics permeates our political process, from seemingly small examples like cost-benefit
analysis to catastrophic events such as the financial crisis. We open the book with the former but
later on we move on to several case studies of the latter, including the financial crisis but also
broadening our argument to other areas where we think neoclassical economics falls short, like the
environment and inequality. The kind of hubris illustrated by economists like Blanchard – as well
as Robert Lucas when he claimed "the central problem of depression prevention had been solved" in
2003 – seems quite remarkable to us now, but economists really had convinced themselves that they'd
found a simple, technical solution to the business cycle. Making central banks independent from the
political process, staffing them with economists and tasking them with using interest rates to manage
inflation and growth, along with a fairly hands-off approach to the financial sector (which itself
used economic models such as Black-Scholes) seemed to be working. That was, until the theoretical
blind spots economists had in the housing market and financial sector was revealed by the near-collapse
of both of them.
Quite clearly, the profession has yet to find definitive answers to major economic questions like
'what causes financial crises?' This is completely understandable in itself, as these are difficult
questions. But the fact that the profession also has the capacity to convince not only itself but
policymakers and politicians that it has solved these problems, and therefore
that its ideas should guide public policy, is extremely worrying when it can have such terrible consequences
for so many people. And it is worth mentioning those non-neoclassical economists – like Hyman Minsky,
Wynne Godley, and Steve Keen – who put the financial sector front and centre of their analysis and
made sometimes prescient warnings about crises like the one we've just experienced. Given these examples,
it actually puzzles and saddens me that the profession is not willing to accept more intellectual
diversity. Galbraith's quote touches on this intellectual inertia, and one of the things we discuss
in the book is macroeconomists' attempts to reassert themselves since the financial crisis, some
of which have involved some impressive mental gymnastics. One example is Tom Sargent denying altogether
that macroeconomists failed to foresee the crisis, which is ironic because he wrote a paper just
before the crisis arguing that investors weren't taking enough risk due to their memories of the
Great Depression. This kind of retrospective rewriting of history has to be fought if economics is
not to slip back into old habits.
PP: The mental contortions are absolutely fascinating. I've noticed three key trends in the profession
since the crisis. The first is to talk more about a phenomenon that mainstream economists call 'rational
bubbles'. I mean RATIONAL bubbles. That is manifestly a doublethink word, not unlike Orwell's blackwhite.
The second is to add Bayesian agents into economics models and saying that this will ensure that
these models are robust in future (an absurd claim given the backward-looking nature of Bayesian
agents). Bayesian agents, of course, update their beliefs in line with past events - not a bad allegory
for the how the modellers see themselves! The final, and most pronounced, is to try to sweep under
the carpet the fact that the Efficient Markets Hypothesis makes falsifiable (and falsified!) claims
that markets integrate all relevant information and instead try to draw attention to the fact that
it also states that no one can beat the markets. The idea seems to be to maintain the theory by saying
that it doesn't say what it in fact says and drawing attention to a secondary prediction that it
makes. What do you make of this sorry, but I have to say it dishonesty? And do you think that the
next generation are by and large swallowing it?
CM: I think the issue is that many economists are stuck in their ways. It's clear these economists
have been doing economics a certain way, using a certain framework, for their entire lives, so it's
perhaps unsurprising that they can't think any other way. Max Planck said that science advances one
funeral at a time, but the especially worrying thing given the research we've done for the book is
that the next generation of economic experts are being trained to think in the exact same way. In
fact, evidence we present suggests that economics education has actually become more, not less narrow
over the past few decades, so if things don't change the situation could get even worse in the future.
And as I mentioned earlier, that's nothing against economics students themselves – they have exams
to pass, and aren't really given much opportunity to read around and question what they're taught.
The positive thing is that we are seeing these student groups spring up across the world who are
all recognising the limitations of their education: the lack of pluralism, critical thinking and
empiricism come up again and again in students' complaints. What's more is that we have support from
big institutions like the Bank of England, Trade Union Congress and Government Economic Service,
who have voiced similar concerns. If you look at things like the movement for gay marriage in the
United States, it's clear the politicians were the last to change – when every other sector of civil
society had been convinced and they had no choice. Perhaps if change comes to economics, academia
will be the last to change – when everyone else demands it.
PP: But surely this is somewhat different from a political issue like gay marriage. Political
issues have to do with changing peoples' opinions on some matter or other. That just means putting
forward a persuasive argument and then waiting for it to get accepted. What we are dealing with seems
like something rather different. Sure, you could convince many that some change needs to come about
in the way economics is taught. But that does not produce the means by which to teach it. I think
that we saw what happens there with Wendy Carlin's CORE program (an INET-funded attempt at curriculum
reform). This was the economists' response to demands for a more integrated and pluralistic course
but I saw it - and I think the student movement saw it - as more of the same. Yet I have no doubt
that Carlin really did her best to put together something that she thought would address the concerns
being raised. The problem is that Carlin et al cannot actually put together something that meets
the concerns. I suppose this is a variant on the classic 'who governs the governors': who teaches
the teachers.
CM: You are absolutely right about that and the example of CORE is a good one, as it demonstrates
perfectly the type of limited reform which can serve as a safety valve against more radical opposition.
Carlin and CORE's other proponents view the problem as one with economics education, but not economics
itself – she has previously stated that "economics explains our world, economics degrees don't".
Interestingly, this rhetoric is similar to the response to calls for reform in economics graduate
programs in the US in the 1980s, where the need for more real world application was accepted but
it was argued that programs should retain the "core [which] should be regarded as the basic unit
in which those things common to all economists should be taught". We repeatedly see this disconnect
between the critic's idea of reform and the mainstream's, cemented by the fact that many neoclassical
economists simply do not know enough about non-neoclassical ideas to teach them. It is a vicious
circle which is inevitably going to reproduce a fundamentally similar education, even if some internal
attempts at reform are made along the way.
Thus in CORE the calls for history, real world applications and interdisciplinarity are all, to
some degree accepted (even if they are not pursued adequately), while the calls for pluralism and
critical thinking are not. The resulting education is perhaps an improvement, but the outcome is
similar: instead of saying 'here is neoclassical economics, learn and then (maybe) apply it', the
message of CORE is 'here is the real world, here is how neoclassical economics applies to it'. Once
more, the idea that the theory and even the history itself might be contested is thrown out of the
window and the result is still a narrow education. In fact, we reviewed the University College London
exams for the CORE course and found that they showed a slight increase in critical thinking, but
were still primarily about regurgitating models and theories. The need for pluralism is made especially
apparent here, as learning about alternative ideas immediately makes students re-evaluate what they
have already been taught. Students need to know more than one set of ideas if they are to judge which
ideas are best suited to explaining a particular situation.
PP: My impression from the book – and please, correct me if I'm wrong – is that you want to bypass
this structural constraint by making economics more democratically accessible. Personally, I think
that there is a lot of merit to this idea. In my book, as I said, I try to present an ideology-neutral
economics – which I think can be done to some limited extent – and what you find with such an economics
is that many different worlds are possible. Economics in this regard can be a helpful guide but it
cannot tell you much about where you want to go. For this reason I would much prefer to see more
democratic input on economic decision-making and much less pontifications from an over-heavy technocracy.
That said, however, economics is still a relatively difficult subject. It cannot be picked up without
some commitment to study it. How do you square this circle – by which I mean, how do you try to increase
the accessibility of economics without watering it down so much that it becomes analytically dysfunctional?
And a cheeky, but related question: in the book you rightly draw attention to the fact that economics
jargon is over represented in political discourse – how do you ensure that you are not increasing
the volume and weight of this jargon through attempts at popularisation?
CM: We definitely view the democratisation of economics as a necessary part of the renewal of
the discipline and indeed of politics, but your conception of it as a strategic way to bypass the
inertia of the discipline is an interesting idea and something I hadn't thought of explicitly. I
suppose this goes back to what I was saying about bottom-up approaches to reform and the value of
demanding change from different angles. Unfortunately and as we've seen, one of the main response
to Brexit and Trump by elites has simply been to view those who vote for it as ignorant or bigoted.
The simple fact is that many peoples' lived experience of 'the economy' is completely different to
the top-down, statistical and theoretical views of economists and pundits. Many have experienced
huge shifts and declines in their circumstances for decades, neither of which are obvious if you
only look at GDP and inflation statistics, or (worse) if you are completely lost in theory.
In the book we introduce the idea of the public interest economist, who has socially aware research
topics, a commitment to public engagement and education, and who looks to hold powerful public and
private institutions to account. Reconnecting economic experts with the public in this way would
be a great way to temper the former's technocratic, top-down tendencies and encourage the experts
to understand that people may have different, valid views to them – and this is a gateway to appreciating
other approaches more generally. Of course, this doesn't eliminate the need for expertise altogether:
our intuition can only go so far, and some things can only be revealed by systematic and empirical
study. Economics is difficult, as you point out. But a world in which economic experts are in touch
with and can be questioned by the public is one where economic expertise will naturally be more responsive
to the needs of said public. We sum it up by saying that we want experts to inform our decisions,
but not necessarily to make them for us.
Illustrating the magnitude of the challenge you raise about teaching economics without jargon,
I'm going to have to introduce some jargon. In the book we distinguish between formal
literacy, where people are taught a fixed body of knowledge; and substantive
literacy, where people are encouraged to question the subject matter and form their own independent
views. This is the basis for the other pillar of our proposals: citizen economists, non-experts who
nevertheless have some baseline level of substantive literacy and are able to engage in economic
debates. The starting point for citizen economics is to make connections between peoples' own lives
and broader economic problems, encouraging their own input from the start. And an important part
of being a citizen economist is not to accept the seeming authority bestowed by the use of jargon
and to ask experts to say what they mean in plain language. As a student movement we have already
started to put this into practice with citizens' crash courses (evening classes for adults), schools
workshops, the public education website ecnmy.org and by supporting the RSA's
Citizens' Economic Council, which is seeking to establish more democratic input into economic policy.
PP: Yeah, I think I see what you're saying. Anyway, I suppose we should wrap this up as it's pretty
long already. Where do you see this whole thing going from here? Are you optimistic about the future,
both in terms of opening up the discipline and in terms of fixing the incredibly serious economic
problems that have emerged in the past 30 years?
CM: I am cautiously optimistic about the future, as I think in many ways the debate has been won
over whether economics should change – the question is now what form this change should take. On
top of changes we have already discussed such as CORE and the position of the Bank of England, we
have seen the ESRC put aside a large pot of money for research in new ideas in macroeconomics (the
question is whether this money will be used to support CORE type research or more diverse and radical
ideas); Manchester council involving citizens more in the decision-making process; the director of
the IFS, Paul Johnson, admitting economists' failure to communicate during Brexit; and many more
emerging examples that the message is getting across to various sections of civil society. More must
certainly be done and it is up to everyone to make sure that the changes are fundamental rather than
incremental, but in my eyes it is starting to look possible that economics will evolve from an insular
and esoteric discipline into a vibrant, pluralistic public dialogue – and we think that can only
be a good thing
"In other social sciences, the culture is instead focused on debate and the contested nature
of knowledge. You learn not to take any of your beliefs for granted. But entering an economics
degree feels a bit like being transported to another universe. Students are introduced to a
fixed body of knowledge that is presented as if – in the words of one student – it "fell from
heaven in an ever-true form"."
How on earth did this happen?? Was the teaching of economics always this way? Or did something
happen at some point along the way (say, the influence of a particular school of thought, etc.)
to create a static curriculum where critical thinking is so undervalued?
"The deference to economic expertise is something that permeates our politics and, through
the use of jargon, maths and statistics, serves to exclude non-expert citizens from conversations
about issues that often have a direct impact on their lives."
Doesn't this sound exactly like the Clinton campaign? Technocrats all, who say to people like
me, "Trust us. We're the EXPERTS. Don't even try to stretch your silly little brains. We know
what's best."
If economics is to function as the medium of power than its students must be made to follow
blindly. Critical thinking would allow them to undermine it or manipulate it to their own ends.
The students must be made into strict adherents before being granted access to the highest
levels of information. By erecting barriers at each level (be it specialized language that must
be mastered or learning contigent on prior learning) we can separate the weak from the true adherents.
Following Adler, economics is not a science, it's a philosophy. At least economics doesn't burn its heretics, it just ignores them. Science is neither immune.
Gerald Pollack has written that he was advised to avoid water as a subject of inquiry, or it could
kill his career.
This article highlights why I take what positions Naked Capitalism assert seriously. For instance
getting input from Clive about the difficulty of the mechanics of Greece leaving the Euro. Or
Yves, having knowledge from her father's work about solving problems in the real world. This problem
is not just limited to economics. To get a Phd one must basically agree to what you have been
taught. To get published one must undergo peer review by people who almost always believe the
current mainstream ideas in that field. Remember how the nutrition experts told you margarine
was good for you – butter and eggs were bad. Climate science is a good example. Reliance on models
that can never be complete. In almost every conversation I have had as a climate skeptic, the
strongest believers in the alarmist position rely not on their own understanding but that of experts.
And those experts who are alarmist rely almost entirely on computer modeling results to buttress
their position. In fact, as a skeptic I could almost rewrite the above article using climate science.
In your own mind, try that. As a generalist (non climate scientist) I can read and understand
most climate papers if I take the time to learn and understand the jargon as every subfield has
its own. it does take a good while with considerable effort. Climate science proclaims to know
with certainty what the climate future holds so they should be the experts on public policy that
will affect the lives of everyone in the world. "The totally convinced and the totally stupid
have too much in common for the resemblance to be accidental." Robert Anton Wilson
Economists writing about climate change purport to define the optimal reduction in greenhouse
gases by tallying up the avoided damage, or the benefit in the cost-benefit analysis, then saying
that costs of emission reduction should go no higher than this benefit. Not sure if they are still
doing this, but in the past they used the ethically questionable and benefit-lessening assumption
that lives in poor countries, where most people would die, should be valued much less than lives
in rich countries. Worse, the entire exercise is absurd because the result of the calculation
is an emissions reduction that could have no effect on the climate, because emissions don't have
a simple effect as with traditional air pollutants for which the analysis was initially developed.
As a generalist who works for and with a climate scientist who is at the forefront of his field
I am not able to understand essential details of most of his papers because he and his co-authors
are in fact physicists and their analyses involve substantially more than modest calculus. Furthermore
neither he nor any other of his colleagues whose work I am exposed to have proclaimed that they
"know" what the future holds.
At the UI and when I was at Michigan, they simply don't. Anything remotely like that would
be taught in the History department, and then mostly for History grad students.
At Cambridge University it was a compulsory course representing 25% of the first year curriculum
(this was 1991-92). No idea if it has been downsized since then but given the "new blood" I remember
entering the faculty I am pessimistic.
I have to agree that when I studied economics, it was theory and barely any practical exercises.
Lots of maximization and other But I never took this as gospel. I understood that all these economic models were a product
of their time. A framework that would be adapted by those in power to fit their needs.
When my son was born with a disability, I had to turn many 15 minute errands into 2 hour adventures.
It became even more evident that efficiency is relative What are we really maximizing anyway?
THAT is the key question.
I guess many graduate without any critical thinking. But I tend to think that many graduates
of economics like the way the world is set and feel no compulsion to change it.
yes, absolutely. If it is good public policy do it. When you think about it economics doesn't
really exist. Society does. And when economics is talked about like society doesn't exist it gets
pointless. Just like some stupid software language that does basically nothing. What we need is
the courage of our human convictions. I think it was Blyth in an early clip who said more or less,
"Just do it." Deficit spend as necessary and the solutions will appear. That's very Zen and I
love it. I mean, here's the question, What is the worst that can happen? If there is sufficient
money. Great interviewer and interviewee. Thanks NC for this post.
"Economics doesn't really exist, society does": a super obvious statement that stands in starkest
distinction to NeoLib ideology that insists we are all atomistic, isolated individuals. Math and
language are epiphenomena to human being that have perverted our self perception nearly to oblivion.
Bayes allows an entry to qualifying bias and uncertainty in conditional probabilities (tree
diagrams). It allows an indication that the source is b.s., which is currently relevant.
It's unnecessary in terms of fudging models, we've been quite capable of that without Bayesian
modifiers.
The most important bias his theorem clarifies concerns false positives, for example if a drug
test is 95% accurate it can still be wrong more than half the time on a positive response.
Economics wil never progress until it has a clearer grasp on the phenomenon of money. Until
they do it's the same old GIGO using Newtonian metaphors prettied up with math (or let us say
"arithmetic", since it's just basic calculus, linear algebra or probability/statistics).
Not to be demeaning toward Eigenvectors and matrix theory. It's amazing how recent that was
in the history of math - I mean all the way back to the Greeks, Pythagoras, Archimedes, etc. It's
like it's still brand new!
However, you could say a drawing by Rembrandt is just "basic pen and ink". Indeed on one level
it is. On another level it's an entire self-consistent and revelatory conceptualization of infinite
physical reality. That's the kind of holistic and syntheticistic ideation that economics sorely
lacks.
Not only does it lack this, but the economists don't even know it's there!
whoa you guys rock! that was faster than a New Yoarke minite. Whoa Yves would be proud. I hope
you get a bonus! maybe a few million dollars.
They're not this fast in Denver. That's for sure. All those TV people and all that money they
have and they fkk something up so bad they have to apologize. Wow. that really is screwing up.
Not only that, They're stilll pointing a camera straight at a scene and failing to use cinematic
story telling techniques invented , oh, 80 or 90 years ago!
There should be awards for excellence in fake news. The best fake news is news that's true
in the most profound and highest sense of reality. it's news that captures a truth reality only
approximates. It's hard to avoid Plato even when you try. I didn't mention him, OK? he's just
there. He's usually there, but if you mention him every time it gets boring.
The WaPo is an example of largely fake news written and published by individuals who don't
realize what's true and what's fake. You'd like to think they qualify for a fake news award, given
the fakeiness of what they write (except Redskins coverage which is very good, they have some
good spowtswriters for sure), but they don't because they think they're writing real news. That
should be embarrasing.
Well then, how would somebody advise them to better distinguish fake news from real news? Well,
how does a hawk know what to do to hunt rodents? There's no hawk scientist or hawk school or hawk
instruction manual. they can't even read! But they know exactly what to do. It's like that. Everybody
knows but they pretend to themselves they don't know. That's when the faking starts,
[T]he irony is that for many upper-middle-class white gay men, the argument became that
legal and economic (yes, economic) privileges of marriage were being denied. Fortunately, many
people were able to keep the focus on equality and equal protection of the law, which is political
argument.
On the one hand, yes, absolutely, and it remains a point of contention to this day in the gay
community that the one major victory in recent memory was perfectly amenable to a patriarchal,
capitalist order. People like David Brock and what have you, who saw gay liberation not as a means
to transform society, which is the purpose for which the GLF was created, but rather as a means
to help people like themselves become elites like anyone else.
On the other hand, and perhaps it's just the vulgar Marxist in me, but I recoil at the notion
of separating economics from politics. This is why the phrase political economy even exists, to
represent the notion that all decisions regarding distribution of resources are inherently political.
I find it symptomatic of how entirely defanged class rhetoric is in the US (though the interviewee
is British, I presume) that even the well meaning and critical thinking among us can get away
with pretending that "economics" can somehow be sequestered from political decisions.
I realize that's not the point you're making, but there are moments in the interview when the
subject moves in that direction. As for statistics, Mark Twain reminds us there are three kinds
of lies: lies, damned lies, and statistics–or, as my spouse is fond of saying, "70% of all statistics
are made up."
One place where social needs interfere with monetary policy, aka economics, is deficit spending
wherein the underlying economy is not keeping up (because of economic malpractice usually). So
that's a conflict against the oligarchy because they prevented the necessary jobs and so makes
their money worth less. So, depending which side you are on, politics should have a say (force
the government not to devalue the currency by inflation/deficit spending without a proper economy)
or politics should serve the chronically neglected needs of the general public regardless of preliminary
"inflation" – the inflation here is the most dreaded form of inflation for the rich, of course,
wage inflation. I think the term 'wage inflation' qualifies as an oxymoron, but that's just me.
probably an apocryphal story;
so a guy is playing regularly in a rigged poker game. a friend asked him, "why do you play, you
know they're cheating you"? the guy shrugs, and replies "i don't have a choice, it's the only
game in town".
Interesting thing I heard the other day, Professor Richard Wolff says he studied economics
at three elite universities (Yale, Harvard, and another notable I cannot remember) and never had
a course in Karl Marx. Tunnel vision for sure in the field.
Yikes. I remember being taught Marx in the early 90s . But that was Cambridge ;-) and it was
clearly a dying course as they were struggling to find faculty members.
As one who is well past university age, I am excited to hear that those in the Millenial generation
are organizing this movement. The (intentional?) failure of K-12 education to develop critical
thinking skills and focus solely on standardized testing of fact knowledge has been deeply upsetting
to me as a parent. To see that others have made it through our education system with a well developed
BS detector and are not afraid to use it is welcome news.
I look forward to reading your books!
Answer to question no 2: The jargon that is being used these days by presidents, economists,
talk show hosts is beyond my understanding. I have a masters degree.
I believe Trump gained some
supporters who were angry about the disconnect with the way they talk and the way they needed
to be talked to. Simple language has its own good. That is what Trump did. Trump is just not a
person. There is more to Trump that what it is. He proved so many of these experts wrong and bought
back the simple language and easy straight talk to the forefront. Saying wrong things is attractive
to me. More people relate to Trump in ways that he can say bad things. I relate to him because
we say bad things in our every day life. We go about having a conversation after to correct them.
Its that simple.
After all we are all human beings with little better instincts and rational than animals. Just
because few people can speak politically correct, few can dress like they are supposed to doesn't
mean that every one has to conform. I am excited to read this book.
An argot
(English pronunciation: /ˈɑːrɡoʊ/; from French argot [aʁˈɡo] 'slang') is a secret language used
by various groups-e.g., schoolmates, outlaws, colleagues, among many others-to prevent outsiders
from understanding their conversations. The term argot is also used to refer to the informal specialized
vocabulary from a particular field of study, occupation, or hobby, in which sense it overlaps
with jargon.
Is the economics profession simply following the "He who has the gold, makes the rules"?
Many other professions service retail customers, such as attorneys and doctors. But how many ordinary citizens ever deal with an economist on any level?
While there may be some economists attached to labor unions, for the most part economists are
employed by government, the financial industry, academia or the media.
If paycheck dependent economists know that powerful politicians, wealthy corporate leaders
and wealthy donors in academia are looking over their shoulders, one could expect economists'
message to be justify what their "employers" want to do.
"Keen was formerly an associate professor of economics at University of Western Sydney, until
he applied for voluntary redundancy in 2013, due to the closure of the economics program at the
university.
But he did find another job. "In autumn 2014 he became a professor and Head of the School of Economics, History and Politics
at Kingston University in London." Is there a large job market for skeptical economists?
Nothing's changed in 100 + years. American Yale Professor Irving Fisher "financial transactions
aren't random": Yale Professor Irving Fisher – 1920 2nd edition: "The Purchasing Power of Money"
"If the principles here advocated are correct, the purchasing power of money - or its reciprocal,
the level of prices - depends exclusively on five definite factors:
(1)the volume of money in circulation;
(2) its velocity of circulation;
(3) the volume of bank deposits subject to check;
(4) its velocity; and
(5) the volume of trade.
"Each of these five magnitudes is extremely definite, and their relation to the purchasing
power of money is definitely expressed by an "equation of exchange."
"In my opinion, the branch of economics which treats of these five regulators of purchasing
power ought to be recognized and ultimately will be recognized as an EXACT SCIENCE, capable of
precise formulation, demonstration, and statistical verification."
And the Fed already validated the Fisherian theory: In 1931 a commission was established on
member bank reserve requirements. The commission completed their recommendations after a 7 year
inquiry on Feb. 5, 1938. The study was entitled "Member Bank Reserve Requirements - Analysis of
Committee Proposal"
It's 2nd proposal: "Requirements against debits to deposits"
After a 45 year hiatus, this research paper was "declassified" on March 23, 1983. By the time
this paper was "declassified", required reserves had become a "tax" [sic].
Monetary flows, our means-of-payment money times its transactions velocity of circulation:
Here's my suggestion for educating economists about the fallacy of their assumption that it
is in any way acceptable or even meaningful to put a monetary price on a human life.
Step 1: we ask the economist to place a monetary value on his or her own life in the same way
that they feel so comfortable doing for people who are not them.
Step 2: crowdfund that amount of money.
Step 3: give said money to their next of kin and ask them to kindly follow us out to the woodshed
Ok, so let's call it a thought experiment .but I think that should make clear one
of the many, many things wrong with monetizing the value of everything in existence, as is the
common practice.
Step 1: we ask the economist to place a monetary value on his or her own life . . .
Priceless, or in economist's terms, infinity.
Step 2: crowdfund that amount of money.
Borrow from the Fed. It's fantasy money.
Step 3: give said money to their next of kin and ask them to kindly follow us out to the
woodshed
That would be cruel. They always claim they are the smartest guys in the room, while also claiming
men in manufacturing are low skill or put bluntly, stupid. Can we put them all on an uninhabited
island with a few shovels so they can live the civilized life and dig their own latrine, after
which they can bootstrap themselves to imagined wealth by inventing their own can opener? They
can get there by recycling the shovels, but they would need fire for that.
This interview articulates an extremely important insight when it states that the economy " is
believed to be a distinct system with its own logic that requires experts to manage it."
This seeming independence of the economic and political systems has largely deceived most of
modern social science. This seeming independence is not real, and in fact these spheres are deeply
intertwined.
As people llike Karl Polyani and Philip Mirowski have maintained, markets are always organized
through politics and institutions and one key to understanding this reality is to keep a focus
on the promulgation of the rules and regulations of a powerful state that helps to create movements
for both regulation and deregulation.
It is now imperative that an alternative political movement finally take the time to carefully
examine the nature and role of the State in political and economic life.
As a pre-med student of the mid 1970s, I never took an economics course. Professionally, I
tried to fight the same kind of jargon that baffles the lay public in medicine. And I watched
in horror how my profession became captured.
I struggle to read NC when reading jargon-filled posts. For example, I read about economic
cycles and wonder why that is an acceptable concept.
But I do so because I know that ignorance is not bliss. I know the economy is rigged. Orwellian
economics-speak allows the elite to configure human and social capital in their favor.
Is it time to throw this baby out with the bath water? If so, how do we conceive a baby that
doesn't eventually suckle at the wrong teat?
It was notable that Cathal failed to mention Marx. I don't think he realizes yet quite how fully indoctrinated he's been – as that humdinger of
an analogy (gay marriage – actually a redefinition to normalize surrogacy, a eugenics-by-stealth
agenda, hence it's enormous funding by the plutocracy) indicates. The economic can never be separated from the socio-political.
I think its more general than that. Those that have been airbrushed out of the history of economic
thought are those who never thought of economics as a separate, largely technocratic, discipline
but always as political economy. Marx was just one of these following the tradition of Smith,
Ricardo, Mill etc. Veblen and, to a large extent, Keynes were also following this tradition.
So sad that they lost and Walrasian physics envy ended up splitting economics from its political
context.
."how do you try to increase the accessibility of economics without watering it down so much
that it becomes analytically dysfunctional?"
This question makes no sense in the context of this discussion around the fact that modern
"economics" (theory, courses and practice) is an ideological construct. The suggestion being the
discipline as currently manifested would only become "analytically dysfunctional" if it were "watered
down" ??????
This simplistic, patently failed dogma has become an almost totalitarian "pensee unique" simply
because in coincided perfectly with the interests of the rich and powerful (and therefore those
of their lackeys)
It`s politics stupid!!!!!
Sorry, I realise the (exceptional!) core NC community knows all this as well as anyone
Another quibble. ?technocrats? At the height of the crisis, Italy, for example, had a govt
of "technocrats" foisted on the it. Monti, connections with Goldman?. Technocratic indeed!!!
The last couple of days I've been listening to a series of lectures by Philip Mirowski available
on youtube. When I place Mirowski's ideas in opposition to the ideas expressed in this interview
- the result is very different from the trend I see in the other comments here.
Mirowski describes how the "Neoliberal Economic thought collective" captured and now dominates
economic doctrine by controlling what and who can publish in the major economic journals. As a
result those aspects of Neoclassical Economics remaining are being re-shaped into a Neoliberal
mold. I noticed the word "neoliberal" doesn't show up anywhere in this post yet Neoliberal economic
policies and rationales dominate policy in the real world.
The discussion in the post makes several statements about how economics fails to make predictions
about the real world and fails in designing economic policies to help the common man. Mirowski
points out that Neoliberal economics designs policy to apply market models to every problem based
on the doctrine that markets are the most powerful information processing system available to
man - a strong form of the Efficient Markets Hypothesis. The Market is the ultimate epistemological
device. If the market solution doesn't satisfy the needs of the common man then satisfying those
needs is simply contrary to the wisdom of the market. For other problems like externalities they
just need to be properly incorporated into the market model to obtain an optimal solution to whatever
problem they present.
I don't see how "democratization" of economics teaching or eliminating jargon or deprecating
experts or more emphasis on critical thinking or pointing out the abject failure of economics
in solving economic problems will do much to counter the Neoliberal attack on the economics discipline.
Putting fins and flashy hubcaps on Neoclassical economics as it morphs into Neoliberal economics
is not the answer.
Its a hair ball that needs untangling and not a blowtorch thingy . If you are familiar with Philips past contributions to NC, his blog, social democracy blog
and other media portals you would have a better understanding of the perspective forwarded.
Disheveled . Mirowski does do service here wrt the fundamental methodology and how that frames
the topic, wrt base assumptions [human descriptors] and the extension of them.
The role of Economics is simple: it should inform people of the consequences of certain decisions
we make about who gets what. So if you have a problem with classical economics, you really have
a more fundamental problem. Economics provides many good answers; but don't expect it to also
provide the right questions. A comment above asked 'maximising what?'. Good question, but not
an economics question.
You are right, that is what it should be, unfortunately neoclassical has failed horribly in
that regard. It is based on assumptions that are demonstrably false and they are never revisited
to see the effect of relaxing them. You might as well be counting angels on a pin. See Roamer's
take down of it for starters. https://paulromer.net/wp-content/uploads/2016/09/WP-Trouble.pdf
"... I had always thought Hayek made some good critical points about the illusions of socialists/utopians and then chose to ignore the fact that his criticism also applied to his ..."
"... So maybe Hayek didn't overlook the fact that his critique also applied to his utopia. Maybe he knew full well he was misrepresenting what he was selling, engaging in exactly the same propaganda techniques that he attributed to others. ..."
"... A Rovian strategy - conceal your weakness by attacking others on precisely that issue. ..."
"... The Road to Serfdom put out in the US after WWII, which was full of this inflammatory sort of thing that doing anything to ameliorate the harder edges of capitalism put one inexorably on the road to serfdom. ..."
"... In the actual RtS one finds Hayek himself supporting quite a few such amiliorations, most notably social insurance, especially national health insurance well beyond what we even have in the US now with ACA. ..."
"... The problem for lovers of Hayek, and arguably Hayek himself, is that he simply never repudiated this comic book version of his work, even as he and many of his followers got all worked up when people, such as Samuelson, would criticize Hayek for this comic book version of the RtS, pointing out his support for these ameliorations in the original non-comic book version. ..."
"... However, Samuelson in his last remarks on Hayek, which I published in JEBO some years ago, effectively said that Hayek had only himself to blame for this confusion. ..."
"... I have been thinking that maybe both "sides" in our mostly brainwashed America today could agree with the meme of "DRAIN-THE-SWAMP" and hope to see it carried proudly on protest signs by the non-zombies of both sides in the ongoing social upheaval. ..."
"... I agree that "accuse the other side of doing what you are doing" is a familiar ploy of the right. ..."
Sandwichman | December 10, 2016 12:51 am
In his neo-Confederate "Mein Kampf," Whither Solid South ,
Charles Wallace Collins quoted a full paragraph from Hayek's The Road to Serfdom
regarding the emptying out of the meaning of words. My instinct would be not to condemn Hayek
for the politics of those who quote him. Even the Devil quotes Shakespeare.
But after taking another look at the Look magazine
comic book edition of Hayek's tome, I realized that Collins's depiction of full employment
as a sinister Stalinist plot was, after all, remarkably faithful to the
comic-book version of Hayek's argument. With only a little digging, one can readily
infer that what the comic book refers to as "The Plan" is a policy also known as full employment
(or, if you want to get specific, William Beveridge's Full Employment in a Free Society
). "Planners" translates as cartoon Hayek's alias for Keynesian economists and their political
acolytes.
To be sure, Hayek's sole reference to full employment in the book is unobjectionable
- even estimable almost:
That no single purpose must be allowed in peace to have absolute preference over all others
applies even to the one aim which everybody now agrees comes in the front rank: the conquest of
unemployment. There can be no doubt that this must be the goal of our greatest endeavour; even
so, it does not mean that such an aim should be allowed to dominate us to the exclusion of everything
else, that, as the glib phrase runs, it must be accomplished "at any price". It is, in fact, in
this field that the fascination of vague but popular phrases like "full employment" may well lead
to extremely short-sighted measures, and where the categorical and irresponsible "it must be done
at all cost" of the single-minded idealist is likely to do the greatest harm.
Yes, single-minded pursuit at all costs of any
nebulous objective will no doubt be short-sighted and possibly harmful. But is that really
what "the planners" were advocating?
Hayek elaborated his views on full employment policy in a 1945 review of Beveridge's
Full Employment in a Free Society, in which he glibly characterized Keynes's theory of
employment as "all that was needed to maintain employment permanently at a maximum was to secure
an adequate volume of spending of some kind."
Beveridge, Hayek confided, was "an out-and-out planner" who proposed to deal with the difficulty
of fluctuating private investment "by abolishing private investment as we knew it." You see, single-minded
pursuit of any nebulous objective will likely be short-sighted and even harmful unless that
objective is the preservation of the accustomed liberties of the owners of private property, in
which case it must be done at all cost!
Further insight into Hayek's objection to Keynesian full-employment policy can be found in
The Constitution of Liberty . The problem with full employment is those damn unions. On this
matter, he quoted Jacob Viner with approval:
The sixty-four dollar question with respect to the relations between unemployment and full
employment policy is what to do if a policy to guarantee full employment leads to chronic upward
pressure on money wages through the operation of collective bargaining .
and
it is a matter of serious concern whether under modern conditions, even in a socialist country
if it adheres to democratic political procedures, employment can always be maintained at a high
level without recourse to inflation, overt or disguised, or if maintained whether it will not
itself induce an inflationary wage spiral through the operation of collective bargaining
Sharing Viner's anxiety about those damn unions inducing an inflationary wage spiral "through
the operation of collective bargaining" was Professor W, H, Hutt, author of the Theory of
Collective Bargaining, who "[s]hortly after the General Theory appeared
argued that it was a specific for inflation."
Hutt, whose earlier book on collective bargaining "analysed [and heralded] the position of the
Classical economists on the relation between unions and wage determination," had his own
plan for full employment . It appeared in The South African Journal
of Economics in September, 1945 under the title "Full Employment and the Future of Industry."
I am posting a large excerpt from Hutt's eccentric full employment "plan"
here because it makes explicit principles that are tacit in the neo-liberal pursuit of
"non-inflationary growth":
Full employment and a prosperous industry might yet be achieved if what I propose
to call the three "basic principles of employment" determine our planning .
The first basic principle is as follows. Productive resources of all kinds, including
labour, can be fully employed when the prices of the services they render are sufficiently
low to enable the people's existing purchasing power to absorb the full flow of the
product.
To this must be added the second basic principle of employment. When the prices of
productive service have been thus adjusted to permit full employment, the flow of purchasing power,
in the form of wages and the return to property is maximised .
The assertion that unemployment is "voluntary" and can be cured by reducing wages is the classical
assumption that Keynes challenged in the theory of unemployment. Hutt's second principle, that full
employment, achieved by wage cuts, will maximize the total of wages, profit and rent thus would be
not be likely to command "more or less universal assent," as Hutt claimed. But even if it did, Hutt's
stress on maximizing a total , regardless of distribution of that total between wages
and profits, is peculiar. Why would workers be eager to work more hours for
less pay just to generate higher profits? Hutt's principles could only gain "more or
less universal assent" if they were sufficiently opaque that no one could figure out what he was
getting at, which Hutt's subsequent exposition makes highly unlikely.
Hutt's proposed full employment plan consisted of extending the hours of work, postponing retirement
and encouraging married women to stay in the work force. He advertised his idea as a reverse lump-of-labor
strategy. Instead of insisting - as contemporary economists do - that immigrants (older workers,
automation or imports) don't take jobs, Hutt boasted they create jobs, specifically because they
keep wages sufficiently low and thus maximize total returns to property and wages
combined. He may have been wrong but he was consistent. Nor did he conceal his antagonism toward
trade unions and collective bargaining behind hollow platitudes about
inclusive growth .
The U.S. has been following Hutt-like policies for decades now and the
results are in :
For the 117 million U.S. adults in the bottom half of the income distribution, growth has been
non-existent for a generation while at the top of the ladder it has been extraordinarily strong.
Or perhaps Hutt was right and what has held back those at the bottom of the income distribution
is that wages have not been sufficiently low to insure full employment and thus
to maximize total returns to labor and capital. The incontestable thing about Hutt's theory is that
no matter how low wages go, it will always be possible to claim that they didn't go sufficiently
low enough to enable people's purchasing power to absorb the full flow of their services.
coberly , December 10, 2016 11:52 am
I can't claim to know all of what Hayek meant. but I did read one of his books and it was clear
he did not mean what the right has taken him to not only mean, but to have proved.
In any case it is dangerous (and a bit stupid) to base policy on what someone said or is alleged
to have said. Especially economists who claim to have "proved" some "law" of economics.
That said, i wonder if some of what is said here is the result of over-reading what someone
(else) as said: to be concerned with policies "to the exclusion of all else" is not the same as
rejecting the policies while keeping other things in mind. and to recognize the potential of labor
unions to force inflationary levels of wages is not the same as opposing labor unions.
neither the advocates in favor of or those opposed to the extreme understanding of these cautions
–including the authors of them if that is the case - are contributing much to the development
of sane and humane policy.
I had always thought Hayek made some good critical points about the illusions of socialists/utopians
and then chose to ignore the fact that his criticism also applied to his neo-liberal
utopia. But I followed up the passage quoted by Collins and it turns out that Hayek was discussing
a statement made by Karl Mannheim, which he quoted out of context and egregiously misrepresented
-- a classic right-wing propaganda slander technique. So here is Hayek talking about emptying out
the meaning from words and filling them with new content and he is doing just that to the words
of another author.
So maybe Hayek didn't overlook the fact that his critique also applied to his utopia. Maybe
he knew full well he was misrepresenting what he was selling, engaging in exactly the same propaganda
techniques that he attributed to others. By accusing others first of doing what he was doing,
it made it awkward for anyone to point out that he was doing it, too. A Rovian strategy - conceal
your weakness by attacking others on precisely that issue.
One of the problems with Hayek is that there was always this conflict between the "comic book
Hayek" and the more scholarly and careful Hayek. In fact, there really was a comic book version
of The Road to Serfdom put out in the US after WWII, which was full of this inflammatory sort
of thing that doing anything to ameliorate the harder edges of capitalism put one inexorably on
the road to serfdom.
In the actual RtS one finds Hayek himself supporting quite a few such amiliorations,
most notably social insurance, especially national health insurance well beyond what we even have
in the US now with ACA.
The problem for lovers of Hayek, and arguably Hayek himself, is that he simply never repudiated
this comic book version of his work, even as he and many of his followers got all worked up when
people, such as Samuelson, would criticize Hayek for this comic book version of the RtS, pointing
out his support for these ameliorations in the original non-comic book version.
However, Samuelson
in his last remarks on Hayek, which I published in JEBO some years ago, effectively said that
Hayek had only himself to blame for this confusion.
To me it comes down to whether government is structured to serve all or some obfuscated minority
of all. With that as the divider it is easy to decipher Hayek's work and others.
I have been thinking that maybe both "sides" in our mostly brainwashed America today could
agree with the meme of "DRAIN-THE-SWAMP" and hope to see it carried proudly on protest signs by
the non-zombies of both sides in the ongoing social upheaval.
coberly , December 10, 2016 6:41 pm
Sammich
I agree that "accuse the other side of doing what you are doing" is a familiar ploy of the
right.
I don't know what Hayek was really saying, or if he let the comic book version stand because
he was so flattered to have his child receive such adulation, or just because he was in his dotage
and didn't really understand how he was being misrepresented if he was.
but the fun thing to do with Hayek is to point out what he "really" said to those who have
only heard the comic book version
if anyone is still talking about him at all. seems there was a big rush of talk about Hyak
a few years ago and now it has faded.
Sandwichman
:
December 07, 2016 at 12:06 PM
Terence Hutchison concluded his appendix on "Some postulates
of economic liberalism" in Significance and Basic Postulates
of Economic Theory with the admonition, "It is high time to
put these theories [laissez faire and equilibrium doctrines]
firmly back in their place as Utopian constructions." He
cited S. Bauer's 1931 article, "Origine utopique et
métaphorique de la théorie du "laissez faire" et de
l'équilibre naturel."
Prominent in Bauer's discussion is
the role of Baltasar Gracian's Oráculo Manual, which was
translated into French by Amelot de la Houssaie in 1684, in
popularizing both the notion and the term, laissez faire.
Pierre le Pesant Boisguilbert is credited with introducing
the term into political economic thought in a book published
in 1707. It is conceivable that Keynes knew of the Gracian
maxim because he used the image Gracian had used of
tempestuous seas in his famous rejoinder about "the long run"
being "a misleading guide to current affairs."
In his book Hutchinson noted that "several writers have
argued that some such postulate as 'perfect expectations' is
necessary for equilibrium theory." This observation lends a
special note of irony to Gracian's coinage of laissez faire.
In his discussion of Gracian's Oráculo, Jeremy Robbins
highlighted the observation that:
"Gracián's prudence rests firmly on a belief that human
nature is constant... In Gracián's case, human nature is
viewed as a constant in so far as he believes it to act
consistently contrary to reason."
In fact, Robbin's chapter on Gracian is titled "The
Exploitation of Ignorance." Gracian's maxims establish "a
sharp distinction between the elite and the necios [that is,
fools]." Assuming that most people are fools who act contrary
to reason is obviously something quite different from
assuming perfect expectations. For that matter, the prudence
of a courtier seeking to gain power over others is something
quite distinct the foresight required of a policy
professional acting ostensively on behalf of the public
welfare.
That metaphorical and Utopian notions of laissez faire and
natural equilibrium have managed to persist and even prevail
in economics -- impervious to Hutchinson's warning (or
Keynes's) -- is testimony to the perceptiveness of Gracian's
estimate of human nature.
"Let's stop pretending unemployment is voluntary" is the
title for chapter four of Roger Farmer's book,"Prosperity for
All: How to Prevent Financial Crises."
That is not good
enough.
No. Let's stop pretending that the "pretending" is
innocent. Let's stop pretending that it isn't a deliberate
fraud that has been aided and abetted by most of the
economics profession.
If you want to access the dynamical systems literature you
should know the terminology that self-equilibrating systems
have at least one stable equilibrium point with a non-empty
domain of attraction (think downward pointing pendulum). Any
state (set of variables describing the system configuration)
that starts in this domain will end up at the stable
equilibrium point. Non-linear systems can have several
equilibria and some may be unstable as well, in that starting
any small distance from those equilibria results in movement
away from that equilibrium (e.g. an upside down pendulum). It
is not enough to determine if a point is an equilibrium
point, you must also check its stability.
The trouble with this approach is that economics is
describing a system that is not an equilibrium system in the
first place. Economics is describing a system that is
1. Evolutionary
2. Dynamic. (In fact all the measurements are not
measurements of a static state but of movements. Even
apparently static things like asset values or the discounting
sum of flow over time.)
Just in case you don't see the relevance, just think about
what happens if it is not the position that is moving but the
equilibrium point (and worse the equilibrium point is not
known, and perhaps unknowable).
" If the expectations of agents are incompatible or
inconsistent with the equilibrium of the model, then, since
the actions taken or plans made by agents are based on those
expectations, the model cannot have an equilibrium solution.
..."
There is clearly one very important word missing in
this sentence.
Let me try again:
"" If the expectations of ANY agents are incompatible or
inconsistent with the equilibrium of the model, then, since
the actions taken or plans made by agents are based on those
expectations, the model cannot have an equilibrium solution.
..."
Now what at first look seems merely far fetched, just
became laughable.
I'm sorry, but this is very, very important. General
equilibrium is the original sin of economics (especially
Macro-economics). It is where it all went wrong. They should
just drop it, and try to model the dynamic response of agents
and the system to disequilibrium, which inevitably arises
faster than equilibrating forces can possibly work. A more
fundamental way of thinking about this is to realize that
economics deals with transactions and all transactions are
the result of a disequilibrium (at equilibrium all the trades
are already made).
Where did the disequilibrium come from? When you
understand the answer to that, you can understand what drives
the economy. Not before.
""The trouble is not so much that macroeconomists say things that are inconsistent with the facts."
-- that's a clear sign of a cult.
Notable quotes:
"... "The trouble is not so much that macroeconomists say things that are inconsistent with the facts. The real trouble is that other economists do not care that the macroeconomists do not care about the facts. An indifferent tolerance of obvious error is even more corrosive to science than committed advocacy of error." ..."
"... The obvious explanation is ideological. While Simon Wren Lewis cannot prove it was ideological, it is difficult to understand why one would choose to develop theories that ignore some of the existing evidence, in an area that lacks data. There is a reluctance among the majority of economists to admit that some among them may not be following the scientific method but may instead be making choices on ideological grounds. This is the essence of Romer's critique. ..."
"... ...it is all but indistinguishable from Milton Friedman's ideologically-driven description of the macroeconomy. In particular, Milton Friedman's prohibition of fiscal policy is retained with a caveat about the zero-lower bound in recent years. To argue otherwise is to deny Keynes' dictum that 'the ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood.' ..."
"... What I find most egregous in Neo-classicism, is it's failure to accept that people invented government to perform tasks they individually could not. ..."
"... Economics is a foul and pestilent ghetto, an intellectual dead-end akin to Ptolemaic astronomy. The priests will continue adding epicycles to epicycles until they are dragged screaming to the asylum. ..."
"... There is always some revered academic economist readily available to support virtually any political narrative imaginable, even if it's total rubbish. It is truly a "science" for all seasons fostered by reverend figures with authority earned by many years diligent practice in translating gibberish into runes of mathematical formulae. That's more dainty than poking about in sheep guts with a sharp stick, but of little more use in the real world which lies outside the ivied towers. ..."
"... Diligence blesses them with tenure followed by offers to serve private or public patrons perpetually engaged in rent-seeking. These made men (and women) are essentially set for life, regardless of whatever nonsense they may forever promote thereafter. A few are blessed by the good luck of a Nobel which guarantees a prosperous sinecure and unlimited opportunity to promote their own vacuous political narratives masqueraded as "science". ..."
"... This cult enjoys perpetual protection within public and private safe spaces created by their well-heeled paymasters. It is one of a number of deeply attached parasites which cannot be safely excised from the corrupt body of the host without killing it. ..."
"... I should add that neoclassical economics has damaged economics by excluding explicitly the government sector in their models. As a result, the impact of government on the macroeconomy has not been properly understood ..."
"... Do the economists he names really not understand the computer stat model they are using? Are they admitting to making up the fudge factors to make their 'data' fit their (wrong headed) totem pole, supply and demand? I mean, there it is in black and white, by the economists' own words, that their math is just flat out wrong. ..."
"... The economics I learned in the early 1960's seems to work as well now as it did back then. I was lucky enough to be so busy at work in the decades that followed, that I did not have a chance to keep up on the mis-education of the time. When I had the time to start paying more attention to the subject again, I couldn't understand what had happened to the knowledge that I had learned that seemed to explain all that was happening in the economy. ..."
"... The Neolib-Globalist Ministry Of Truth erased it. You must not have got the memo. ..."
"... It's 2016 and some Dismal Scientists are still debating whether "involuntary unemployment" exists. ..."
"... If anything, Philip Mirowski has persuasively argued that neoliberalism requires a powerful State. ..."
"... He has shown that the neoliberal thought collective theorized an elaborate political mobilization, and recognized early on that the creation of a new market is a political process requiring the intervention of organized power. The political will to impose a market required a strong state and elaborate regulation and also that the State would need to expand its economic and political power over time. ..."
"... The neoliberal market had to be imposed it did not just happen. A key issue for the future is defining the nature of the state–whether under neoliberalism or MMT or under Trump or Sanders, or left populist or right populist. ..."
"... Mankiw belongs in the non-ideological camp? I don't see how anybody with a brain could read any of his work past the first page and still hold that view. ..."
"... agreed, Mankiw is an intellectual clown and he has been mis-educating students for decades now. ..."
Romer
kicked off the debate in an essay, stating that for more than three decades, macroeconomics has
gone backwards. He finds that the treatment of identification now is no more credible than in the
early 1970s, but escapes challenge because it is so much more opaque. Macroeconomic theorists dismiss
mere facts by feigning an obtuse ignorance about such simple assertions as "tight monetary policy
can cause a recession." For Romer, the Nobel Prize-winning crop of macroeconomic theorists who transformed
the field in the late 1970s and 1980s - Robert Lucas, Edward Prescott and Thomas Sargent –
are the main people to be held responsible for this this development. Their models attribute fluctuations
in aggregate variables to imaginary causal forces that are not influenced by actions that any
person takes. Especially when it comes to monetary policy, the belief that it has no or little effect
on the economy is disturbing, or as Romer puts it:
"The trouble is not so much that macroeconomists say things that are inconsistent with the
facts. The real trouble is that other economists do not care that the macroeconomists do not care
about the facts. An indifferent tolerance of obvious error is even more corrosive to science than
committed advocacy of error."
... ... ...
Simon Wren-Lewis identifies yet another factor which lies at the heart of macroeconomic criticism:
ideology. As an example he quotes Real Business Cycle (RBC) research from a few decades ago. That
was only made possible because economists chose to ignore evidence about the nature of unemployment
in recessions. There is overwhelming evidence that employment declines in a recession because workers
are fired rather than choosing not to work, and that the resulting increase in unemployment is involuntary
(those fired would have rather retained their job at their previous wage). Both facts are incompatible
with the RBC model. Why would researchers try to build models of business cycles where these cycles
require no policy intervention, and ignore key evidence in doing so? The obvious explanation
is ideological. While Simon Wren Lewis cannot prove it was ideological, it is difficult to understand
why one would choose to develop theories that ignore some of the existing evidence, in an area that
lacks data. There is a reluctance among the majority of economists to admit that some among them
may not be following the scientific method but may instead be making choices on ideological grounds.
This is the essence of Romer's critique.
...it is all but indistinguishable from Milton Friedman's ideologically-driven description
of the macroeconomy. In particular, Milton Friedman's prohibition of fiscal policy is retained with
a caveat about the zero-lower bound in recent years. To argue otherwise is to deny Keynes' dictum
that 'the ideas of economists and political philosophers, both when they are right and when they
are wrong are more powerful than is commonly understood.'
PlutoniumKun, December 6, 2016 at 4:18 am
I can recall my very first lecture in Macroeconomics back in the mid 1980's when the Prof.
freely admitted that macro had very little real world validity as the models simply didn't match
the real world data. He advised us to focus on economic history if we wanted to understand how
the real world worked. That was the only useful thing I learned from three years studying the
subject.
Dr. George W. Oprisko, December 6, 2016 at 7:21 am
I cut y teeth on computer models of rainfall – streamflow relationships. We always started
with constants derived from experimental or theoretical bases
Recently I was asked to critique a paper written by a colleague which reported results of a
numeric model of plankton distribution in the Arabian Sea. In this paper his original constants
based on known relationships gave results which did not agree with reality, so instead of looking
for mistakes in his fundamentals, he massaged the constants until he got agreement. When I pointed
out that he neglected the Somali Current, he was livid. That is, instead of thanking me for pointing
out a glaring deficiency in his methodology, he chose to obfuscate.
I see the same thing prevalent in macro-economics, with the sole exception of Modern Monetary
Theory. I find MMT to be the only variant which concretely explains the real economy.
What I find most egregous in Neo-classicism, is it's failure to accept that people invented
government to perform tasks they individually could not.
iNDY
Jake, December 6, 2016 at 5:24 am
..and none of the economists were held responsible, refused tenure, tried in court or had
their nobel prizes taken away. They continued serving their pay masters or their ideologies and
nothing changed. Life went on, gradually becoming shittier, full of anxiety and ultimately meaningless.
But hey atleast the great information processor is satisfying your utility!
PlutoniumKun,
December 6, 2016 at 6:23 am
One Irish macro professor did quite well after the Irish economic crash (2008) informing everyone
about the correct policy approaches on various public media. His university department had one
of his peer reviewed papers online dating from 2005 which advocated the adoption of US style sub-prime
mortgages as a 'solution' to rising housing costs. Around 2010 the paper was quietly removed from
all servers. I regret not saving a copy so it could be linked to every time he popped up in public.
look for the doi and plug that in here (site does not work in Chrome) http://gen.lib.rus.ec/scimag/index.php
or here http://sci-hub.cc/
The 1st has an author search too, but it isn't as good, but it might work.
I Have Strange Dreams, December 6, 2016 at 5:43 am
Kill it with fire!
Economics is a foul and pestilent ghetto, an intellectual dead-end akin to Ptolemaic astronomy.
The priests will continue adding epicycles to epicycles until they are dragged screaming to the
asylum.
Burn the whole subject to the ground and sow the razed economics departments with salt. Require
economists to ring a bell when approaching the uninfected and cry "unclean! unclean!"
actually belly-laughed – 1st ever belly-laugh from an interweb comment – Bravisimmo!
H/e, can't agree with you re: economics. As a historical and social area of study, it is valid
in my book – even a necessity. Still, my eyes cross lately when I read the latest in economic
"theory" on any scale. Such a dreary and detached subject these days. Rootless and toothless.
Too bad.
Every time a bell rings, an angel gets his wings. That is a called a positive externality in
macroeconomics, and can therefore be defined in an equation. Which makes it thus so.
There is no chance of killing off this mystery cult as long as politicians rely on its ruminations
and incantations to help perpetuate them in office.
There is always some revered academic economist readily available to support virtually
any political narrative imaginable, even if it's total rubbish. It is truly a "science" for all
seasons fostered by reverend figures with authority earned by many years diligent practice in
translating gibberish into runes of mathematical formulae. That's more dainty than poking about
in sheep guts with a sharp stick, but of little more use in the real world which lies outside
the ivied towers.
Economists, like carny balloon sellers, are paid based on volume, not weight. Diligence
blesses them with tenure followed by offers to serve private or public patrons perpetually engaged
in rent-seeking. These made men (and women) are essentially set for life, regardless of whatever
nonsense they may forever promote thereafter. A few are blessed by the good luck of a Nobel which
guarantees a prosperous sinecure and unlimited opportunity to promote their own vacuous political
narratives masqueraded as "science".
This cult enjoys perpetual protection within public and private safe spaces created by
their well-heeled paymasters. It is one of a number of deeply attached parasites which cannot
be safely excised from the corrupt body of the host without killing it.
We live in a post-truth or post-fact world, where truth and fact do not matter.
But the fact is: Keynes has never gone away in the sense that governments have always been
trying to manage the economy with fiscal and monetary policies – which (to me) is the essence
of Keynes and macroeconomics. Most governments run budget deficits to stimulate demand. It is
merely cognitive dissonance of academics to think neoclassical economics only is mainstream and
solely responsible for the GFC, just because to them there is an apparent bias in research funding
at universities.
First, government is such a huge portion of the economy that its actions have huge influence
and therefore the impact has to be managed. Pretending you can have some type of neutral autopilot
is a false idea, but that is the bedrock of economic thinking, that economies have a natural propensity
to equilibrium and that equilibrium is full employment.
Second, it's not done much these days, but the best forms of intervention are ones that are
naturally countercyclical so you don't have politicians wrangling and have pork and election timing
and results and inertia get in the way.
I'm not defending neoclassical economics. In economics, the alternative to a wrong is another
wrong. Governments are politically compelled to intervene. But with the Keynesian economic fallacy,
their interventions make things worse in the long-run. Please visit my blog:
"The Battle of Bretton Woods" is very instructive. Start with two intellectuals (Keynes and
Harry Dexter White) who were big fans of Stalinist Russia's command economy ("I've seen the future and
it works!"). Last time I checked this kind of tomfoolery ("we will raise X number of cows because
we think we'll need leather for Y number of shoes") has been utterly discredited. Implement for
the global currency and trade systems. Fast forward to today where there are massive imbalances,
global currency wars, and a race to zero and beyond that has sucked all demand from the future
to the present and now the past. And the shining answer, the clarion rallying cry, is "we just
need more debt, and we need some new rugs to sweep all the bad debt under".
All while "macro-economists" propagate models that completely misunderstand how money is actually
created and distributed. All I can say is "Forward Soviet!".
Indeed. Gov't is the biggest business in town in every economy, everything else, even giant
corporations, are minuscule players in comparison. This is a large source of dynamical behavior,
the swings and re-balancing as the State throw its weight around in the marketplace.
I should add that neoclassical economics has damaged economics by excluding explicitly
the government sector in their models. As a result, the impact of government on the macroeconomy
has not been properly understood. The empirical facts, without theories or equilibrium assumptions
etc., show the failure of government policy of demand stimulation:
http://www.asepp.com/fiscal-stimulus-of-consumption/
It seems to me that for something to be called "keynesian", it should also mean that the aim
of those policies was to help create robust private demand (though I doubt Keynes was as emotionally
handicapped as today's mainstream bean-counting theorists are, if only because gdp figures didn't
yet dominate macro thinking in the manner they do today, thanks to everyone having received "economics
education" in school); if not, it wolud more fairly be called Marxist, because he was the one
from whom Keynes (indirectly, as he refused to read Marx personally) pilfered his insights. What
matters is whether we've got 'socialism for the rich / incumbents / industrial complexes', or
"socialism" (well, social-democrat, liberal new-dealerism) for the "masses".
Well, I have to say this article reminds me too much of the DNC sole searching over why Hillary
didn't win. Just another room full of wantonly clueless people.
Does start out on a high note where Romer states the problem is economists don't care if they
are winging and slinging BS from their arses same as chimpanzees.
I guess the article coulda ended there. But no.
Noah Smith laments a shortage of macro data – so the who knows how many gigs at FRED are found
wanting and I guess the BLS, etc aren't up to snuff either. Or maybe Noah means they are fabricating
phoney data? Then Noah doubles down on the efficacy of interest rate policy – after 9 years in
the liquidity trap.
[Caution: The following is allegory – we are speaking of the high priestess here.]
We then are treated to JYell and her discovery of the buggy whip. She states there is current
research being done on buggy whips, and more research is necessary. She is able to use big words
to speak of these buggy whips. Some of these words are borrowed from real science – making this
more scientific. Like hysteresis – and even an example for lay-off people. It's possible you may
never work again and add to the long term employment rate! Yikes. Worse yet, their definition
of "long term" is longer than 6 months. After that, 7 months or retire at 30 is all the same to
them. "Heterogeneity" is another good one. For use in polite company. Has an Evil Twin named inequality
and a macro version called crony capitalism. JYell can keep the hits coming!
I'm tired of typing someone else can take up the rest of it.
The complaint about not enough data struck me too; actually economist have vasts amounts of
data to gain insights from and test hypothesis against because economies are well recorded human
endeavours, recorded in actual painful detail thanks to the inexhaustible efforts of statemen
and statewomen to know everything about the populations they control and harvest. Probably more
data-oriented lines of research would lead to progress in macro-economy as a scholarly discipline?
@Ruben – They want more data because the data that exists cannot be explained by their eloquent
mathematical theories, which are based on assumptions that are ridiculous on their face e.g.,
rational expectations and utility maximization. The hope is that additional data will fit the
theories better allowing them to remain comfortably ensconced in their fantasy world of regressions
and p values.
Which is how we get adjustments to CPI based on the premise that CPI is overstating inflation.
Now the hip thing is that productivity is undermeasured because economists don't like what the
numbers are saying, so we can expect an upwards adjustment there as well.
Read Romer's article, twice. Will need a third try to fully get it, but as someone with a modest
background in engineering and engineering mathematics, I still can't quite believe what Romer
is saying. Do the economists he names really not understand the computer stat model they are
using? Are they admitting to making up the fudge factors to make their 'data' fit their (wrong
headed) totem pole, supply and demand? I mean, there it is in black and white, by the economists'
own words, that their math is just flat out wrong.
Now Romer is writing for the inside crowd, as an long time, connected insider himself, so don't
expect an easy read. But he writes quite clearly what is the problem with economics so the main
idea, that macro economics, in rejecting an early model of macro economics (Keynesian) because
said model was based on a few openly stated fudge factors, have spent the last 40 years building
models that are 1. full with even more fudge factors, 2. these fudge factors are never openly
stated, and 3. the new models have given truly disastrous results in the real world (also known
as the US economy, amoung others). Along the way, he names names and steps on some toes. Then
he finishes up with a full charge of how the 'dismal science' is a lying religion, nothing at
all like truth seeking science.
Okay, I'll quit here before I hurt myself. Let someone else slam the keys. (haha)
The economics I learned in the early 1960's seems to work as well now as it did back then.
I was lucky enough to be so busy at work in the decades that followed, that I did not have a chance
to keep up on the mis-education of the time. When I had the time to start paying more attention
to the subject again, I couldn't understand what had happened to the knowledge that I had learned
that seemed to explain all that was happening in the economy.
I was surprised to learn that Yellen had expressed any interest in the people permanently out
of the labor market. I thought all the discussions of interest rates focused almost exclusively
on what in my mind is the unemployment pseudo-rate, which completely ignores those people.
Regardless of which rate is considered, I have never been able to comprehend the mind that
can talk about acceptable levels of unemployment. Acceptable to whom? The people who lose their
homes, and sometimes their neighborhood networks when they have to move, and may with just a little
bad luck slide into still worse conditions? The communities that see more people becoming burglars,
muggers, bank robbers, drug dealers, and prostitutes because only the illegal economy has any
place for them? I have never seen a sustained or general effort to look at the economic consequences
of those events, much less an admission of the immorality of causing so much trouble. It seems
to me that a macroeconomics that divorces itself from those possibly micro concerns will be forever
irrelevant to good policy.
Way back prior to the great Permian-Triassic Extinction, I was fortunate enough to wander around
an Economics Department where I could encounter intellectual dead-ends like Keynes, Marx, Polanyi,
Kalecki, Veblen – all of whom prepared me to pump-gas at the local filling station oh wait!
Having somehow successfully survived the subsequent big-brain epoch, I settled comfortably into
making a modest annual donation to a scholarship fund for budding economists at the olde U. Then
it came to my attention that not only could one still obtain a BA in Economics, but the olde school
was also awarding two different Bachelor on Science degrees in Economics. Breathtaking! Economics,
an actual science! Like for example physics!
I am now in the reduced circumstance of donating only to my old high school in the doubtless vain
hope that the youngsters will study enough science to be able to shoot these aspiring BS cone-heads
to the moon.
It's 2016 and some Dismal Scientists are still debating whether "involuntary unemployment"
exists.
#FacePalm
Perhaps we should deploy them to that Carrier plant to investigate. So thankful for heterodox
voices:
Abba Lerner – Functional Finance
Hyman Minsky – Financial Instability
Wynne Godley – Sectoral Balances
Entire MMT School – Mosler, Wray, Kelton, Tcherneva et al
#ThereIsHope
Gee, why attack the one healthy sector of the economy, the Wealth Defence Industry?
(Why did so much of 'the social-democratic left' go along all this? I think John Rawls gave
them the excuse. He said inequality is great if the worse off are better off under this economic
system than they would be under a more equal one. The poor can therefore protest if they can show
that if we did things more equally they would be better off. The task of the economist today is
to ward this possibility off by ensuring that economic thought is utterly subservient to oligarchic
extraction. It does this by lying – Trickle Down! Rising Tide Lifts all Boats! This has worn out.
So next it does There Is No Alternative! – 'Those Jobs are Never Coming Back', 'Robots!' And finally,
to make really certain, it turns the whole discipline into toadying intellectual fantasy. Romer
homed in on the last.)
"Too much market and too little state invites a backlash."
If anything, Philip Mirowski has persuasively argued that neoliberalism requires a powerful
State.
He has shown that the neoliberal thought collective theorized an elaborate political mobilization,
and recognized early on that the creation of a new market is a political process requiring the
intervention of organized power. The political will to impose a market required a strong state
and elaborate regulation and also that the State would need to expand its economic and political
power over time.
The neoliberal market had to be imposed it did not just happen. A key issue for the future
is defining the nature of the state–whether under neoliberalism or MMT or under Trump or Sanders,
or left populist or right populist.
Mankiw belongs in the non-ideological camp? I don't see how anybody with a brain could
read any of his work past the first page and still hold that view.
I'm imagining them all as engineers on the deck of a half-submerged Titanic, debating about
whether the hull integrity model might perhaps not have been 100% accurate.
Ann Pettifor. give me ann pettifor always. she never puts the cart before the horse, only the
ideological neoliberals try to do that while keeping a straight face – they are quintessential
con artists if there ever were.
Excellent article, except it failed to point out that there are realistic and successful modeling
techniques, in addition to historical studies. These techniques are based on the nonlinear nature
of real world economies. Just use complexity and evolutionary techniques like agent based models
and nonlinear dynamical systems. Nothing new here – I still think that the limits-to-growth models
("system dynamics" = nonlinear dynamical systems) of the early 1970s represent the best mathematical
economics ever done. And the economists' agent based models are just a variation on cellular automata,
which have been used with notable success in other fields for many decades.
The problem is that economists either maintained a deliberate ignorance of such methods, or
have outright rejected them, like Nordhaus with system dynamics. In part this is because these
techniques involve a different mind set: they trade off simplistic models that are easy to understand,
but whose assumptions are demonstrably false, with complexity results that give much better real
world results but have more nuanced narratives.
Ann Pettifor is right about Brexit imo. The belief and the fact is that government is trying
a fast one on the people without being straightforward in its motives or intentions and a major
cause of the discontent and disillusionment seems to stem from the macro-economic error she highlights.
People don't want this mumbo-jumbo any more. The old professions – medicine, accountancy, law
– created jargons of specialist words and phrases (usually Latin) to make their speech and writings
incomprehensible to the hoi polloi. Then in recent decades all sorts of trades have adopted the
same jargon approach to mystifying their work. Enough already! Say what you mean, mean what you
say.
"Nick Bunker points out that in a recent speech, the Federal Reserve Chair Janet Yellen raised
important questions about macroeconomic research in the wake of the Great Recession."
Hint: Citing an ivory-tower twit like J-Yel as "raising important questions" is a huge bullshit
tell. While she was at it, did Janet raise any important questions as to why virtually every highly
credentialed macroeconomist on planet earth completely fail to foresee the global financial crisis
and the massive distortions, in very large part caused by the machinations of the high priests
of those "believers in the power of monetary policy", which portended its coming? But, on to the
bullshit:
"The first area of interest is the influence of aggregate demand on aggregate supply. Yellen
points to research that increasingly finds so-called hysteresis effects in the macroeconomy.
Hysteresis, a term borrowed from physics, is the idea that short-run shocks to the economy
can alter its long-term trend. One example of hysteresis is workers who lose jobs in recessions
and then are not drawn back into the labuor [sic] market but rather permanently locked out,
therefore increasing the long-term unemployment rate."
That's irreversibility, not hysteresis. The latter is a special case of the former, which the
chosen example does not illustrate. An example of hysteresis from my shower's temperature control:
I find the temp is a tad too high, and turn the control a bit toward the cold setting. But I overshoot
my target, and now it's too cold. Nudge back toward hot, but the somewhat-sticky mechanism again
overshoots and lands more or less on the starting "too hot" position. But the water is still too
cold, and I find I have to nudge even further toward hot to fix that. That's hysteresis. In the
context of the recession example, hysteresis would be e.g. if once the E/P ratio had recovered
to its pre-recession level but growth and its correlates remained weaker than expected, say due
to the "recovery jobs" being on average of poorer quality than those which were lost. Kinda like
the current 8-year-long "recovery", come to think of it! But I will admit that glossing over such
messy real-world details like "widespread worker immiseration" with hifalutin terminology-borrowed-form-actual-science
like "hysteresis:" is a great way to make oneself sound important, cloistered there in one's ivory
tower.
"Another open research question that Yellen raises is the influence of "heterogeneity" on aggregate
demand. Ignoring this heterogeneity in the housing market and its effects on economic inequality
seems like something modern macroeconomics needs to resolve."
Ah yes, "needs to resolve" - that implies lots of high-powered academic conferences and PhD
theses. And it's so wonderfully wishy-washy compared to "is something only a joke pretend-scientific
discipline would even need to consider stopping doing, because no self-respecting discipline would
have abandoned assumptions of homogeneity in roughly Year 2 of said discipline's evolutionary
history."
"Yellen raises other areas of inquiry in her speech, including better understanding how the
financial system is linked to the real economy and how the dynamics of inflation are determined.
Hey, when y'all finally "better understand" how this whole "financial system" thingy is linked
to the real economy, by all means do let us know, because it seems like such a linkage might have,
like, "important ramifications", or something. As to inflation, you mean actual inflation, or
the fake measures thereof the folks at the world's central banks make their stock in trade? You
know, for example, "in determining house price inflation we studiously ignore actual house prices
and instead use an artificial metric called Owner's Equivalent Rent, which itself studiously ignores
actual prices renters pay. Ain't it cool?"
Sorry if I sound grumpy, but this article is rather reminiscent of reading US Dem-party insiders
pretending to "soul search" in re. Election 2016. Let's see:
"Another open research question that Team HRC raises is the influence of "heterogeneity" on
voting preference. Ignoring this heterogeneity in the electoral trends and its effects on election
outcomes seems like something modern macroelectorodynamics needs to resolve."
"... he changed American politics forever by demonstrating that style was more important than substance. In fact, he showed that style was everything and substance utterly unimportant. ..."
"... Conservatives used "bracket creep" to convince the middle class that reducing marginal rates on the top tax brackets along with their own would be a good idea, then with the assistance of Democrats replaced the revenue with a huge increase in FICA so that the Social Security Trust Fund could finance the deficit in the rest of the budget. The result was a huge boon to the richest, little difference for the middle class, and a far greater burden for the working poor. ..."
"... Any conversation about who the fantasy-projection "Reagan" was, misses an important reality: He was a hologram, fabricated by a kaleidoscope of various sorts of so-called "conservative" handlers and puppeteers. It was those "puppeteers" who ranged from heartlessly, stunningly "conservative" (destroya-tive), all the way further right to the kind of militaristic, macho, crackpots who have finally emerged from under their rocks at this year's "candidates." ..."
Do not contradict the memories of all the old teabaggers who desperately need the myth of Saint
Ronnie to justify their Greed is Good declining mentality and years.
When Reagan cut-and-ran on Lebanon he showed rare discretion. A lot of the puffery stuff was
B-Movie grade, but there was a lot of cross-the-aisle ventures, too.
He was a politician. The current GOP is just a bunch of white Fundie bullies, actually and
metaphorically (e.g., Carson).
Zepp -> thedono 19 Sep 2015 11:37
Well, compared to Cruz, or Santorum, or Huckabee, he's a moderate. Of course, compared to the
right people, you can describe Mussolini or Khruschev as moderates...
mastermisanthrope 19 Sep 2015 11:37
Lifelong shill
LostintheUS -> William J Rood 19 Sep 2015 11:36
Reagan underwent a political conversion when Nancy broke up his marriage with Jane Wyman and
married him.
The cold war ended while Reagan was president, but he did not win the cold war. His rhetoric
and strategy was wishful thinking - there's no way he could have had the definitive intelligence
about the entire military-political-economic that would have justified the confidence he projected.
He merely lucked out, significantly damaging the US economy by trying (and luckily succeeding)
to out-militarize the soviets.
pretzelattack -> kattw 19 Sep 2015 11:31
both clinton and obama have showed a willingness to "reform social security". try naked capitalism,
there are probably a number of articles in the archives.
LostintheUS -> piethein 19 Sep 2015 11:29
And that the emergency room federally funded program that saved his life was soon after defunded...by
him.
LostintheUS -> pretzelattack 19 Sep 2015 11:28
Many of us saw through him...I noted the senility during his speeches during his first campaign...as
did many people I knew.
Dementia masquerading as politics.
But you can't say anything negative about Saint Ronald!
Peter Davis -> Peter Davis 19 Sep 2015 11:22
I believe Reagan also is responsible for creating the Hollywood notion in American politics
and political thinking that life works just like a movie--with good guys and bad guys. And all
one needs is a gun and you can save the world. That sort of delusional thinking has been at the
heart of the modern GOP ever since.
loljahlol -> ID3732233 19 Sep 2015 11:21
Reagan did not end the Cold War. Brezhnev rule solidified the Soviet death. Their corrupt,
inefficient form of capitalism could not compete with the globalization of Western capitalism.
John78745 19 Sep 2015 11:21
There's not much nuance to Reagan. He was a coward, a bully and a loser. He got hundreds of
U.S. Marines killed then he ran from the terrorists in Beirut and on the Archille Lauro personally
creating the seeds of the morass of terrorists we now live with. He fostered the republican traditions
of sending U.S. jobs overseas at the expense of U.S. taxpayers and of invading helpless, hapless
nations, a tradition so adeptly followed by Bush I & II. He also promised that there would never
be a need for another amnesty.
I guess it's true that he talked mean to the Russians, broke unions, and helped make the military
industrial complex into the insatiable war machine that it is today. Remember murderous Iran-Contra
(a real) scandal where he and his minions worked in secret without congressional authorization
to overthrow a democratically elected government while conspiring to supply arms to the dastardly
Iranians!
We could also say that he bravely fought to save the U.S. from socialized medicine and to expunge
the tradition of free tuition for California students. Whatta hero!
thankgodimanatheist 19 Sep 2015 11:19
Reagan, the acting President, was the worst President since WWII until the Cheney/Bush debacle.
Most of the problems we face today can be directly traced to his voodoo economics, huge deficit
spending, deregulation, and in retrospect disastrous foreign policies.
LostintheUS 19 Sep 2015 11:17
"these days everyone seems to love Ronald."
Absolutely, not true. The farther along we go in time, the more Americans realize the damage
this man and his backers did to America and the world. The inversion of the tax tables, the undoing
of union laws, the polarization of Americans against each other so the plutocrats had no real
opposition and on and on. His camp stole the election in 1980 through making a back door deal
with the Iranian government to hold onto the American hostages until the election when Jimmy Carter
had negotiated an end to the hostage crisis, which was the undoing of Jimmy Carter's administration.
"Behind Carter's back, the Reagan campaign worked out a deal with the leader of Iran's radical
faction - Supreme Leader Ayatollah Khomeini - to keep the hostages in captivity until after the
1980 Presidential election." This is, unquestionably, treason. http://www.truth-out.org/opinion/item/20287-without-reagans-treason-iran-would-not-be-a-problem
No, Reagan marks the downward turn for our country and has resulted in the economic and social
mess we still have not clawed our way back out of. No, Reagan is no hero, he is an American nemesis
and a traitor. Reagan raised taxes three times while slashing the tax rate of the super rich...starting
the downward spiral of the middle-class and the funneling of money toward the 1%. Thus his reputation
as a "tax cutter", yeah, if you were a multi-millionaire.
Never thought of Reagan as the first Shrub but it fits. I wonder if future pundits will sing
the Dub's praises as well. I think I'm gonna be sick for a bit.
kattw -> namora 19 Sep 2015 11:10
Pretzel is maybe talking about the 'strengthen SS' bandwagon? Perhaps? Not entirely sure myself,
but yeah - one of the major democrat platform planks is that SS should NOT be privatized, and
that if people want to invest in stocks, they can do that on their own. The whole point of SS
is to be a mattress full of cash that is NOT vulnerable to the vagaries of the market, and will
always have some cash in it to be used as needed.
SS would be totally secure, too, if congress would stop robbing it for other projects, or pay
back all they've borrowed. As it is, I wish *I* was as broke as republicans claim SS is - I wouldn't
mind having a few billion in the bank.
William J Rood 19 Sep 2015 11:08
Reagan was former president of the Screen Actors' Guild. Obviously, he thought unions for highly
educated workers were great. Meatpackers? Not so much.
RealSoothsayer 19 Sep 2015 11:04
This article does not mention the fact that in his last couple of years as President at least,
his mental state had seriously deteriorated. He could not remember his own policies, names, etc.
CBS' Leslie Stahl should be prosecuted for not being honest with her everyone when she found out.
Peter Davis 19 Sep 2015 11:04
Reagan was a failed president who nonetheless managed to convince people that he was great.
He was a professional actor, after all. And he acted his way into the White House. Most importantly,
he changed American politics forever by demonstrating that style was more important than substance.
In fact, he showed that style was everything and substance utterly unimportant. He was the
figurehead while his handlers did the dirty work of Iran-Contra, ballooning deficits, and tanking
unemployment.
nishville 19 Sep 2015 11:03
For me, he was a pioneer. He was the first sock-puppet president, starting a noble tradition
that reached its climax with W.
mbidding -> hackerkat 19 Sep 2015 11:03
In addition to:
Treasonous traitor when, as a presidential candidate, he negotiated with Khomeini to hold the
hostages till after the election.
Subverter of the Constitution via the Iran-Contra scandal.
Destroyer of social cohesion by turning JFK's famous admonishment of "ask not what your country
can do for you, ask what you can do for your country" on its head with his meme that all evil
emanates from the government and taxation represents stealing rather than a social obligation
for any civilized society that wishes to continue to develop in a sound fashion that lifts all
boats.
Incarcerator in Chief through his tough on crime and war on drugs policies, not to mention
defunding mental health care.
Pisser in Chief through his successful efforts to imbed trickle down economics as the economic
thought du jour which even its original architects, notably Stockman, now confirm is a failed
theory that we nonetheless cling to to this day.
Ignoramus in Chief by gutting real federal financial aid for higher education leading to the
obscene amounts of student debt our college students now incur.
Terrorist creator extraordinaire not only with the creation of the Latin American death squads
you note, but the creation, support, trading, and funding of the mujahedin and Bin Laden himself,
now known as the Taliban, Al Qa'ida, and ISIS, only the most notable among others.
namora -> trholland1 19 Sep 2015 10:59
That is not taking into account his greatest role for which he was ignored for a much deserved
Oscar, Golden Globe or any of the other awards passed out by the entertainment industry, President
of The United States of America. He absolutely nailed that one.
William J Rood 19 Sep 2015 10:58
Conservatives used "bracket creep" to convince the middle class that reducing marginal
rates on the top tax brackets along with their own would be a good idea, then with the assistance
of Democrats replaced the revenue with a huge increase in FICA so that the Social Security Trust
Fund could finance the deficit in the rest of the budget. The result was a huge boon to the richest,
little difference for the middle class, and a far greater burden for the working poor.
Tax brackets could have been indexed to inflation, but that wouldn't have been so great for
Reagans real supporters.
Doueman 19 Sep 2015 10:55
What sad comments by these armchair experts.
They don't gel with my experiences in North America during this period at all. When Reagan
ran for the presidency he was generally ridiculed by much of the press in the US and just about
all of the press in the UK for being a right wing fanatic, a lightweight, too old, uninformed
and even worse an actor. I found this rather curious and watched him specifically on TV in unscripted
scenarios to form my own impression as to how such a person, with supposedly limited abilities,
could possibly run for President of the US. I get a bit suspicious when organisations and individuals
protest and ridicule too much.
My reaction was that he handled himself well and gradually concluded that the mainly Eastern
liberal press in the US couldn't really stomach a California actor since they themselves were
meant to know everything. He actually was pretty well read ( visitors were later astonished to
read his multiple annotations in heavy weight books in his library). He was a clever and astute
union negotiator dealing with some of the toughest Hollywood moguls who would eat most negotiators
for dinner. He had become Governor of California and had done a fine job. I thought it was unlikely
he was the simpleton many portrayed. He couldn't be easily categorised as he embraced many good
aspects of the Democrats and the Republicans. Life wasn't so polarised then.
The US had left leaning Republicans and right wing Democrats. A political party as Churchill
noted was simply a charger to ride into action.
In my view, his presidential record was pretty remarkable. A charming, fair minded charismatic
man without the advantage of a wealthy background or influential family. The world was lucky to
have him.
raffine -> particle 19 Sep 2015 10:50
Reagan's second term was a disaster. But as someone below mentioned, conservative pundits and
their financers engaged in a campaign to make Reagan into a right-wing FDR. The most effective,
albeit bogus, claim on Reagan's behalf was that he had ended the Cold War.
jpsartreny 19 Sep 2015 14:22
Reagan is the shadow governments greatest triumph. After the adolescent Kennedy, egomaniacs
Johnson and Nixon , they needed front guys who followed orders instead .
The experiment with the peanut farmer from Georgia provided disastrous to Zebrew Brzezinski
and the liberals. The conservatives had better luck with a B- movie actor with an great talent
to read of the teleprompter.
RealSoothsayer -> semper12 19 Sep 2015 14:19
How? By talking? Gobachev brought down the USSR with his 'Glasnost' and 'Perestroika' policies.
His vision was what communist China later on achieved: mixed economy that flies a red flag. Reagan
was just an observer, absolutely nothing more. Tito of Yugoslavia was even more instrumental.
Marc Herlands 19 Sep 2015 14:17
IMHO Reagan was the second most successful president, behind FDR and ahead of LBJ. Not that
I liked anything about him, but he moved this country to the right and set the play book. He lowered
taxes on the wealthy, the corporations, capital gains, and estate taxes. He reduced growth in
programs for the poor, and made it impossible to increase their funding after his presidency because
of he left huge federal deficits caused by lowering taxes and increasing outlays on the military.
This Republican playbook still is their way of making sure that the Democrats can't give the poor
more money after they lose power. Also, he enlarged the program for deregulating industries, doing
away with antitrust laws, hindering labor laws, encouraged anti-union behavior, and did nothing
for AIDS research. He was a scoundrel who did a deal with Iran to prevent Carter from being re-elected.
He directly disobeyed Congressional laws not to intervene in Nicaragua. He set the tone for US
interventions after him.
bloggod 19 Sep 2015 14:17
Obama, Clinton, and the Bushes all hope to be forgiven for their unpardonable crimes.
Popularity is created. It is not populism, or informed consent of the pubic as approval for
more of the same collusion.
It is a One Party hoe down.
bloggod -> SigmetSue 19 Sep 2015 14:12
"they"
the indicted Sec of Defense Weinberger; the indicted head of the CIA Casey who "died" as he
was due to testify: Mcfarlane, Abrams, Clair George, Oilyver North, Richard Secord, Albert Hakim
Reagan had no genius, he had Bush-CIA and the Jerry Falwell, Billy Graham, and the "immoral
majority" of anti-abortion war profiteers.
Marios Antoniou Lattimore 19 Sep 2015 13:52
I agree with everything you mentioned, and I intensely dislike Reagan YET the point of the
article wasn't that Reagan was good, it rather points to the fact that Republicans have shifted
so far to the right that Reagan would appear moderate compared to the current batch.
Rainer Jansohn pretzelattack 19 Sep 2015 13:52
Interesting had been his speeches during the Cold War.Scientists have subsumed it under "Social
Religion",a special form of political theology.Simple dialectical:UDSSR the incarnation of the
evil/hell on the other side USA :the country of God himself.A tradition in USA working until now.There
is no separation between government and church as in good old centuries sincetwo centuries resulting
from enlightening per Philosophie/Voltaire/Kant/Hume/Descartes and so on.Look at Obamas speeches/God
is always mixed in!
talenttruth 19 Sep 2015 13:49
Any conversation about who the fantasy-projection "Reagan" was, misses an important reality:
He was a hologram, fabricated by a kaleidoscope of various sorts of so-called "conservative" handlers
and puppeteers. It was those "puppeteers" who ranged from heartlessly, stunningly "conservative"
(destroya-tive), all the way further right to the kind of militaristic, macho, crackpots who have
finally emerged from under their rocks at this year's "candidates."
The fact that Reagan was going ga-ga – definitely in his second term, and likely for part of
the first – was entirely convenient for his Non-Human-Based-Crackpot-Right-Holographers, since
he had was not actually "driven" to vacuousness by a tragic mental condition (dementia) – THAT
change was merely a "short putt" – from his entire previous life.
Regarding his Great Achievement, the collapse of the Soviet Union? After decades of monstrous
over-spending by the USA's Military-Industrial-Complex, the bogus and equally insane USSR finally
bankrupted itself trying to "compete" and fell. Reagan (and his puppeteer handlers), always excellent
at Taking Credit for anything, showed up with exquisite cynical timing, and indeed Took Credit.
Lest anyone forget, Reagan got elected in 1980, via a totally illegal and stunningly immoral
"side deal" with the Iranians, in which they agreed to not release our hostages to make Carter
look like a feeble old man. Then we got Reagan who WAS a "feeble old man" (ESPECIALLY intellectually
and morally). Reagan "won," the hostages were "released" and he of course took credit for that
too.
So all these so-called "candidates" ARE the heirs of all the very worst of Ronald Reagan: they
are all simpleminded, they are totally beholden to Hidden Sociopathic Billionaires hiding behind
various curtains, and they all have NO CLUE what the word "ethics" means. Vacuous, anti-intellectual,
scheming, appealing only to morons, and puppets all. Perfect "Reaganites."
Bill Ehrhorn -> semper12 19 Sep 2015 13:32
It seems that the teabaggers and their ilk give only Reagan credit.
SigmetSue 19 Sep 2015 13:16
They called him the Teflon President because nothing ever stuck. It still doesn't. That was
his genius -- and I'm no fan.
Lattimore 19 Sep 2015 13:13
The article seems to present Reagan as an theatrical figure. I disagree. Reagan, President
of the United States, was a criminal; as such, he was among the most corrupt and anti democratic
person to hold the office POTUS. The fact that he tripled the national debt, raised taxes and
skewed the tax schedules to benifit the wealthy, are comparitively minor.
,,,
Reagan's crimes and anti democratic acts:
1. POTUS: CIA smuggling cocaine into the U.S., passing the drug to wholesalers, who then processed
the drug and distributed crack to Black communities. At the same time Reagan's "War on Crime"
insured that the Black youth who bought "Central Intelligenc Agencie's" cocaine were criminalized
and handed lengthy prison sentences.
2. POTUS supported SOUTH AMERICAN terrorist, and the genocidal atrocities commited by terrorist
in Chili, Guatamala, El Mazote, etc.
3. POTUS supported SOUTH AFRICAN apartheid, and the imprisonment of Nelson Mandela as well. Vetoing
a bill that would express condemnation of South Africa.
4. POTUS sold Arms to Iran.
5. POTUS used taxpayer dollars to influence election outcomes.
6. POTUS rigged government grants to enrich his cronies.
7. POTUS thew mental patients onto the streets.
8. POTUS supported McCarthyism, witch hunts, etc.
9. POTUS created and supported Islamic terrorist--fore runners of al Queada, ISIS, etc.
Niko2 LostintheUS 19 Sep 2015 13:12
I don't have much love for Nancy, but she did not break up this marriage, to be fair. And she
actually got rid off the extreme right wingers in Reagan's administration, like Haig and Regan,
whom she called "extra chromosome republicans". Surely she was a vain and greedy flotus with no
empathy whatsoever for people not in her Bel Air circles (I can easily imagine her, "Do I really
have to go and see these Aids-Babies, I'd rather shop at Rodeo Drive, lose the scheduler") but
she realized at an early stage that hubbies shtick-it-to-the-commies policies would do him no
favour. Maybe she's the unsung heroine of his presidency.
tommydog -> MtnClimber 19 Sep 2015 13:04
The principle subsidies to big oil are probably the strategic oil reserve and subsidies to
low income people for winter heating oil. You can choose which of those you'd like to cut. After
that you're arguing about whether exploration costs should be expensed in the year incurred or
capitalized and amortized over time.
WilliamK 19 Sep 2015 13:03
He was one of J Edgar Hoover's red baiting fascist admiring boys along with Richard Nixon and
Walt Disney used to destroy the labor unions, control the propaganda machine of Hollywood and
used to knuckle under the television networks and undermine as much as possible the New Deal polices
of Franklin Roosevelt. An actor groomed by the General Electric Corporation and their fellow travelers.
"Living better through electricity" was his mantra and he played the role of President to push
forward their right wing agenda. Now we are in new stage in our "political development" in America.
The era of the "reality television star" with Hollywood in bed with the military industrial complex,
selling guns, violence and sex to the fool hardy and their children and prime time television
ads push pharmaceutical drugs, children hear warnings of four hour erections, pop-stars flash
their tits and asses and a billionaire takes center stage as the media cashes in and goes along
for the ride. Yeah Ronnie was a second tier film star and with his little starlet Nancy by his
side become one of America's greatest salesman.
Backbutton 19 Sep 2015 12:57
LOL! Reagan was a walking script renderer, with lines written by others, and a phony because
he was just acting the part of POTUS. His speeches were all crafted, and he had good writers.
He was no Abraham Lincoln.
And now these morons running for office all want to rub off his "great communicator" fix.
Good help America!
Milwaukee Broad 19 Sep 2015 12:49
Ronald Reagan was an actor whom the depressingly overwhelming majority of American voters thought
was a messiah. They so believed in him that they re-elected him to a second term. Nothing positive
whatsoever became of his administration, yet he is still worshiped by millions of lost souls (conservatives).
Have a nice day.
Michael Williams 19 Sep 2015 12:48
The US was the world's leading creditor when Reagan took office. The US was the world's leading
debtor by the time Bush 1 was tossed out of office.
This is what Republicans cannot seem to remember.
All of the other scandals pale in comparison, even as we deal with the blowback from most of
these original, idiotic policies.
Reagan was an actor, mouthing words he barely understood, especially as his dementia progressed.
This is the exact reason the history is so poorly taught in the US.
People might make connections....
Jessica Roth 19 Sep 2015 12:46
Oh, he had holes in his brain long before the dementia. "Facts are stupid things", trees cause
pollution, and so on.
A pathetic turncoat who sold out his original party (the one that kept his dad in work throughout
the Great Depression via a series of WPA jobs) because Nancy allegedly "gave the best head in
Hollywood" and who believed that only 144,000 people were going to Heaven, presumably accounting
for his uncaring treatment of the less-well-off.
His administration was full of corruption, from Richard Allen's $1000 in an envelope (and three
wristwatches) that he claimed was an inappropriate gift for Mrs. Reagan he had "intercepted" and
then "forgotten" to report to William Casey trading over $3,000,000 worth of stocks while CIA
director. (Knowing about changes in the oil market ahead of time sure came in handy.) You had
an attorney general who took a $50,000 "severance payment" (never done before) from the board
of a corporation he resigned from to avoid conflict of interest charges and this was William French
Smith; his successor, Edwin Meese, was the one with real scandals (about the sale of his home).
Hell, Reagan himself put his ranch hand (Dennis LeBlanc) on the federal payroll as an "advisor"
to the Commerce Department. I didn't know the Commerce Dept needed "advice" on clearing wood from
St. Ronnie's ranch, but LeBlanc got a $58,500 salary out of the deal. (Roughly £98,000 at today's
prices.) Nice work if you can get it.
Meanwhile, RR "talked tough" at the Soviets (resulting in the world nearly ending in 1983 due
to a false alarm about a US nuclear attack) while propping up any rightwing dictator they could
find, from the South African racists to Ferdinand and Imelda Marcos (after they had Aquino assassinated
at the airport) to Roberto "Death Squad" D'Aubuisson in El Salvador (the man who masterminded
the assassination of Archbishop Romero while he was performing Mass).
Oh, and while Carter did a nice job of shooting himself in the foot, Reagan benefited in the
election not only from his treasonous dealings with the Iranian hostage-takers (shades of Nixon
making a deal with North Viet Nam to stall the peace talks until after the 1968 elections, promising
them better terms) but through more pedestrian means such as his campaign's stealing of Carter's
briefing book for the campaign's only debate, Reagan being coached for the debate by a supposedly
neutral journalist (George Will, of ABC and The Washington Post), who then went on television
afterwards (in the days when there were only three commercial channels) and "analysed" how successful
Reagan had been in executing his "game plan" and seeming "Presidential" without either Will or
ABC bothering to mention that Will had coached Reagan and designed the "game plan" in question.
The "liberal bias" in the media, no doubt.
Always a joke, only looking slightly better by the dross that has followed him. (Including
Bill "Third Way" Clinton and his over-£50,000,000 in post-Presidential "speaking fees" graft,
and Barack Obama, drone-murderer of children in over a dozen countries and serial-summary-executioner
of U.S. citizens. When Gordon-effing-Brown is the best that's held office on either side of the
Atlantic since 1979, you can see how this planet is in the state it's in.)
pretzelattack DukeofMelbourne 19 Sep 2015 12:45
his stand on russia was inconsistent, and he didn't cause it to collapse. his economic programs
were a failure. his foreign policy generally a disaster. he set the blueprint for the current
mess.
pretzelattack semper12 19 Sep 2015 12:38
a total crock. reagan let murdering thugs run rampant as long as they paid lip service to democracy,
the world over from africa to central america. the ussr watched this coward put 240 marines to
die in lebanon, and then cut and run, exactly the pattern he was so ready to condemn as treason
in others, and was so ready to portray as showing weakness, and you think the ussr was terrified
of him. he was a hollywood actor playing a role, and you bought it.
Tycho1961 19 Sep 2015 12:13
No President exists in a political vacuum. While he was in office, Reagan had a large Democrat
majority in the House of Representatives and a small Republican majority in the Senate. The Supreme
Court was firmly liberal. Whatever his political agenda Reagan knew he had to constructively engage
with people of both parties that were in opposition to him. If he didn't he would suffer the same
fate as Carter, marginalized by even his own party. His greatest strength was as a negotiator.
Reagan's greatest failures were when he tried to be clever and he and his advisors were found
to be rather ham handed about it.
RichardNYC 19 Sep 2015 11:57
The principal legacy of Ronald Reagan is the still prevalent view that corporate interests
supersede individual interests.
Harry Haff 19 Sep 2015 11:45
Reagan did many horrible things while in office, committed felonies and supported murderous
regimes in Central America that murdered tens of thousands of people with the blessing of the
US chief executive. he sold arms to Iran and despoiled the natural environment whenever possible.
But given those horrendous accomplishments, he could not now get a seat at the table with the
current GOP. He would be considered a RINO, that most stupid and inaccurate term, at best, and
a closet liberal somewhere down the line. The current GOP is more to the right than the politicians
in the South after the Civil War.
There is no economics, only political economy. That means that financial oligarchy under liberalism
puts the political pressure and takes measures to have the final say as for who occupy top academic
positions.
Indirect negative selection under neoliberalism (much like in the USSR) occurs on multiple
fronts, but especially via academic schools and indoctrination of students. The proper term for
political pressure of science and creating an academic school that suppressed other is Lysenkoism.
So far this term was not mentioned even once here. But this what we have in the USA. Of course
there are some dissidents, some of them quite vocal, but in no way they can get to the level of
even a department chair.
In best traditions of Lysenkoism such people as Greg Mankiw, Krugman, DeLong and Summers after
getting to their lucrative positions can do tremendous, lasting decades damage. The same is true
for all other prominent neoliberal economists. It's not even about answers given, it is about
questions asked and framework and terminology used.
Fish rots from the head. It is important to understand that essentially the same game (with
minor variations, and far worse remuneration for sycophantism ) was played in the USSR -- the
Communist Party essentially dictated all top academic position assignments, so mostly despicable
sycophants had managed to raise to the top in this environment. Some people who can well mask
their views under the disguise of formal obedience also happened, but were extremely rare. Situation
in the past in the USA was better and such people as Hyman Minsky (who died in 1996) while not
promoted were not actively suppressed either. But He spend only the last decade of his career
under neoliberal regime.
What was really funny, is how quickly in late 80th prominent USSR economists switched to neoliberalism
when the wind (and money) start flowing in this direction.
I would suggest that there are non are trivial links between Soviet political and economic
science and neoclassical economics in the USA -- both are flavors of Lysenkoism.
I am a Marxist economist (Professor of Economics, Mount Holyoke College) and I appreciate Branko
Milanovic's open-mindedness and his efforts in a recent post on his blog to educate economists who
often have a crude and superficial misunderstanding of Marx's labor theory of value.
For context for my comments on Milanovic, I will first say a few words about my interpretation
of Marx's labor theory of value (LTV). In my view, Marx's LTV is primarily a macro theory and
the main question addressed in Marx's macro LTV is the determination of the total profit (or surplus-value)
produced in the capitalist economy as a whole. Profit is the main goal of capitalist economies
and should be a key variable in any theory of capitalism. Marx's theory of the total profit
is that profit is the difference between the value produced by workers and the wages they are paid,
i.e. that profit is produced by the "surplus labor" of workers.
I argue that Marx's "surplus labor" theory of profit has very significant and wide-ranging explanatory
power. Marx's theory provides straight-forward and robust explanations of the following important
phenomena of capitalist economies: conflicts between capitalists and workers over wages, and
over the length of the working day, and over the intensity of labor (i.e. how hard workers work,
which determines in part how much value they produce); endogenous technological change (in order
to reduce necessary labor and increase surplus labor and surplus-value); increasing concentration
of capital and income(i.e. increasing inequality); the trend and fluctuations in the rate of profit
over time; and endogenous cycles due to fluctuations in the rate of profit rate of profit.
(A more complete discussion of the explanatory power of Marx's theory of profit is provided in my
" Marx's Economic Theory: True or False? A Marxian Response to Blaug's Appraisal, " in Moseley (ed.),
Heterodox Economic Theories: True or False?, Edward Elgar, 1995).
This wide-ranging explanatory power of Marx's surplus labor theory of profit is especially impressive
when compared to mainstream economics. In mainstream macroeconomics, there is no theory of
profit at all; profit (or the rate of profit) is not even a variable in the theory! I was shocked
when I realized in graduate school this absence of profit in mainstream macro, and am still shocked
that there is no effort to include profit. Indeed, DSGE models go in the opposite direction
and many models do not even have firms!
Mainsteam micro does have a theory of profit (or interest) – the marginal productivity theory
of distribution – but it is a weak and largely discredited theory. Marginal productivity theory
has been shown by the capital controversy and other criticisms to have insoluble logical problems
(the aggregation problem, reswitching, cannot integrate intermediate goods, etc.). And marginal
productivity theory has very meager explanatory power and explains none of the important phenomena
listed above that are explained by Marx's theory.
Milanovic agrees that Marx's LTV is primarily a macro theory, but he interprets it in this post
as only the assumption that "sum of values will be equal to sum of production prices". And
he continues: "The former is an unobservable quantity so Marx's contention is not falsifiable.
It is therefore an extra-scientific statement that we have to take on faith.
I argue, to the contrary, that Marx's macro LTV is primarily a theory of profit and my conclusion
that Marx's theory is the best theory of profit we have is not based on faith but is instead based
on the standard scientific criterion of empirical explanatory power. It is much more accurate
to say that marginal productivity theory is accepted by mainstream economists on faith, as Charles
Ferguson famously said in his conclusion to the capital controversy.
Now to my comments on Milanovic's three main points:
1. Milanovic's main point is that the LTV is often misinterpreted as a simple micro theory
that assumes that the prices of individual commodities are proportional to the labor-times required
to produce them. Milanovic argues that is not true in a capitalist economy because of the equalization
of the profit rate across industries with unequal ratios of capital to labor, so that according to
Marx's theory, long-run equilibrium prices are determined by the equation: w + d + rK, where
w is wages, d is depreciation and r is the economy-wide rate of profit (missing in this equation
is the cost of intermediate goods, but I will ignore this).
Milanovic emphasizes that Walras and Marshall had essentially the same equation for long-run equilibrium
prices. I agree that all three theories of long-run equilibrium prices have this same form,
but there is an important difference. Marx's theory provides a logically rigorous theory of
the rate of profit in this equation (based on his theory of the total profit discussed above) and
Walras and Marshall just take the rate of profit as given , disguised as an "opportunity cost", and
thus provides no theory of profit at all . Therefore, I think Marx's theory of long-run equilibrium
prices is superior to Walras' and Marshall's in this important sense.
2. Milanovic's second main point is that Marx's theory of long-run equilibrium prices are
"clearly very, very far from derisive statements that the labor theory of value means that people
are just paid for their labor input regardless of what is the 'socially necessary labor' required
to produce a good." I presume that this derisive statement means that workers produce more
value than they are paid and thus are exploited in capitalism. But Branko is mistaken about
this. Marx's theory of long-run equilibrium prices is based on his macro theory of profit according
to which the source of profit is the surplus labor of workers. This conclusion is indeed derisive
and that is the main (non-scientific) reason that Marx's theory of profit is rejected by mainstream
economists in spite of its superior explanatory power.
I know from previous correspondence that Milanovic understands well Marx's "exploitation" theory
of profit, but he seems to overlook the connection between Marx's micro theory of prices of production
and his macro theory of profit.
3. Milanovic's third point is that Marx's labor theory of value is most helpful in understanding
pre-capitalist economies and the relation between capitalism and non-capitalist economies today.
I argue, to the contrary, that Marx's labor theory of value and profit is the best theory we have
to understand the most important phenomena of capitalist economies, including 21 st century capitalism.
It would be one thing if mainstream economics had a robust theory of profit with significant explanation
power. But it has almost no theory of profit. Therefore it would seem to be appropriate
from a scientific point of view that Marx's surplus labor theory of profit should be given more serious
consideration.
Thanks again to Milanovic and I look forward to further discussion.
I used to respect Krugman during Bush II presidency. His columns at this time looked like on target
for me. No more.
Now I view him as yet another despicable neoliberal shill. I stopped reading his
columns long ago and kind of always suspect his views as insincere and unscientific.
In this particular
case the key question is about maintaining the standard of living which can be done only if manufacturing
even in robotic variant is onshored and profits from it re-distributed in New Deal fashion. Technology
is just a tool. There can be exception for it but generally attempts to produce everything outside
the US and then sell it in the USA lead to proliferation of McJobs and lower standard of living.
Creating robotic factories in the USA might not completely reverse the damage, but might be a step
in the right direction. The nations can't exist by just flipping hamburgers for each other.
Actually there is a term that explains well behavior of people like Krugman and it has certain
predictive value as for the set of behaviors we observe from them. It is called Lysenkoism and it
is about political control of science.
Yves in her book also touched this theme of political control of science. It might be a good time
to reread it. The key ideas of "ECONned: How Unenlightened Self Interest Undermined Democracy and
Corrupted Capitalism " are still current.
"... For more than three decades, macroeconomics has gone backwards," the paper began. Romer closed out his argument, some 20 pages later, by accusing a cohort of economists of drifting away from science, more interested in preserving reputations than testing their theories against reality, "more committed to friends than facts." In between, he offers a wicked parody of a modern macro argument: "Assume A, assume B, blah blah blah and so we have proven that P is true ..."
"... The idea that consumers and businesses always make rational choices pervades mainstream economics. Romer thinks that's not only wrong, but may lead to the misleading conclusion that government action can't fix big problems. ..."
"... There is no better place to be writing this than from (nearly) Minneapolis, for the University of Minnesota's economics department is the most devoted coven worshipping the most extreme form of "rational expectations." The most famous cultists have now relocated, but the U. Minnesota economics department remains fanatical in its devotion to rational expectations theory. ..."
"... All of this means that Romer's denunciations were sure to hit home far harder with mainstream and theoclassical economists than anything a heterodox economist could write. ..."
"... What this paragraph reveals is the classic tactic of theoclassical economists – they simply ignore real criticism. Lucas, Prescott, and Sargent all care desperately about Romer's criticism – but they all refuse to engage substantively with his critique. One has to love the arrogance of Sargent in "responding" – without reading – to Romer's critique. Sargent cannot, of course, respond to a critique he has never read so he instead makes a crude attempt to insult Romer, asserting that Romer has not done any scientific work in three decades. ..."
"... The rational expectations purists have been unable to come up with a response to their predictive failures and their false model of human behavior for thirty years. The Bloomberg article does not understand a subtle point about their non-defense defense, as shown in these key passages. ..."
"... What the rational expectations devotees are actually saying is their standard line, which is a radical departure from the scientific method. Their mantra is "it takes a model to beat a model." That mantra violates the scientific method. Their models are designed to embody their rational expectations theory. Those models' predictive ability is pathetic, which means that their theory and models are both falsified and should be rejected. The academic proponents of modern macro models, however, assert that their models are incapable of falsification by testing and predictive failure. This is not science, but theology. ..."
"... V.V. Chari's criticism of Romer is revealing. He complains that Romer does not want to "build on [rational expectation theory's] foundations." Why would Romer want to commit such a pointless act? Romer's point is that rational expectations is a failed theory that needs to be rejected so macroeconomics can move on to useful endeavors. ..."
"... Rational expectations theory has no such empirical foundations. ..."
"... Further, the dynamic stochastic general equilibrium (DSGE) models routinely fail the predictive test and, as Romer details, fail despite the use of dozens of ways in which the models are "gamed" with arbitrary inputs and restrictions that have no theoretical or empirical basis. Chari is right to describe the modern macro model as an "edifice." I would add that it is a baroque edifice top heavy with ornamental features designed to hide its lack of a foundation. Modern macro collapsed as soon as its devotees tried to build without an empirical foundation. ..."
"... The rational expectation devotees respond that predictive failures – no matter how extreme or frequent – cannot falsify their models or their theories. The proponents claim that only a better model, with superior predictive ability can beat their model. ..."
"... Kocherlakota's summary description is appropriately terse. He later explains the dogmatic gloss that devotees place on each of these five points. The "budget constraint," for example, means that nations with sovereign currencies such as the U.S. cannot run deficits, even to fight severe recessions or depressions. Why? Because theoclassical economists are enormous believers in austerity. As Kocherlakota archly phrased the matter, "freshwater" DSGE models were so attractive to theoclassical macro types because their model perfectly tracked their ideology. ..."
"... Specifying household preferences and firm objectives is equally erroneous, as Akerlof and Romer's 1993 article on "Looting" demonstrated. "Firms" do not have "objectives." Employees have "objectives," and the controlling officers' "objectives" are the most powerful drivers of employee behavior. ..."
"... Kocherlakota unintentionally highlighted modern macros' inability to incorporate even massive frauds driving national scandals and banking crises, despite the efforts of Akerlof (1970) (a market for "lemons") and Akerlof and Romer 1993: ("looting") in this passage. ..."
"... If macroeconomics, outside the cult of modern macro, were a car, it would not be "broken." It would be episodically broken when the rational expectations devotees got hold of monetary or fiscal policy. The rational expectations model fails the most fundamental test of a financial model – people trying to make money by anticipating the macroeconomics consequences of changes in monetary and fiscal policy overwhelmingly do not use their models because they are known to have pathetic predictive ability. The alternative models that embrace Keynesian analysis and are not dependent on the fiction of rational expectations function pretty well. The real world macro car, when driven by real world drivers, works OK. Essentially, the rational expectations devotees say that we can never drive the macro "car" because the public will defeat any effort to drive the economy in any direction. Instead, the economy will lurch about n response to random technological "shocks" that cannot be predicted because they occur without any relationship to any public policy choices. ..."
"... I am completely confused about the prediction of "rational choices". Do they include going bankrupt on purpose and letting your investors take the hit, burning your building down for the insurance money, hostile takeover behavior where businesses are run into the ground on purpose, tax strategies, people going on unemployment when they want a vacation from work, and on and on? These are decisions that have a rationale for the people who make them, and they have not been uncommon. Perhaps "economists" are best off observing not predicting "human behavior". ..."
"... I majored in economics. as you go up higher up into the dismal science, the more deranged it gets. The reason they are vague is because they don't know what they are talking about. They don't consider the real world, and as Bill Black's so brilliantly points out, they are in no hurry to out themselves as frauds. ..."
"... thanks, Simon. there must be something in those mental masturbation models for some people. justification for something the 99 % are all paying for most likely ..."
"... In some natural sciences, abandoning equilibrium models and replacing them with dynamic models have led to great progress, and looking at the actual time evolution of economies, there is a great deal of dynamics, such as growth, recessions, demography, natural catastrophes, immigration/emigration, resource discovery and depletion, technological progress. ..."
"... Since our economy has been gradually going casino for so many years, it makes sense that the folks who hold the reigns would make every effort to assure that all their key players adhere to their singular perspectives. ..."
"... The Nobel Memorial Prize in economics promotes the illusion that economics is a science. It is better conceptualized as a literary genre, and economists should be forced to compete with other writers for the prize in literature. ..."
"... Bill Black has a fascinating opinion on unnecessary complexity and I agree with him 200 percent. ..."
"... interesting about Kocherlakota formerly being a rational expectations devotee just the phrase 'rational expectations' is mind boggling as if there were no reaction to any action anywhere. Jack Bogle was on the news this morning laughing about stock picking and saying that every stock picker that makes money is balanced out by another one who loses money and so the only thing that makes money net-net is the long term progress of the market, (or society I would say – and that requires planning). ..."
"... Not one mention of Chaos or Catastrophe Theory, which are theories of systems with non linear feedback (aka: Fear and Greed), which appear to me to be fundamental aspects of Economics, especially the humans who are the Economy. ..."
"... Two slogans I read somewhere recently seem appropriate for theoclassical economics: Ideology is easy, thinking is hard. Belief is belonging. ..."
"... One doesn't have to have read any Reformation theology, but only to have observed more or less casually that human being are scarcely rational even about their own self-interest, and then only self-deceptively. Thomas Frank has commented effectively on that point in the political arena in What's the Matter with Kansas. To wit: Republicans have, he points out, diverted voters attention to social/cultural issues while picking their pockets. Perhaps one might sense an intersection of politics and economics on the latter point. ..."
By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor
of economics and law at the University of Missouri-Kansas City. Jointly published at
New Economic Perspectives
Bloomberg has written an article about the origins of Paul Romer's increasingly famous
critique of modern macroeconomics.
His intention actually had been to write a paper that would celebrate advances in the understanding
of what drives economic growth. But when he sat down to write it in the months before taking over
as the World Bank's chief economist, Romer quickly found his heart wasn't in it. The world economy
wasn't growing much anyway; and the math that many colleagues were using to model it seemed unrealistic.
He watched a documentary about the Church of Scientology, and was struck by how groupthink can
operate.
So, Romer said in an interview at the Bank's Washington headquarters, "I just thought, OK,
I'm going to say what I think. I don't know if I'm the right person, but no one else is going
to say it. So I said it."
The upshot was "The Trouble With Macroeconomics," a scathing critique that landed among Romer's
peers like a grenade.
A bit of background makes the first paragraph more understandable. Romer's specialty is developmental
economics.
There are many economists who have said for years that modern macroeconomics is an abject failure.
But all economists are not equal, and Romer is both an extremely distinguished economist and the
World Bank's chief economist. When he writes that macroeconomics is absurd his position gets vastly
more attention from the field.
The Bloomberg article humorously summarizes Romer's article.
"For more than three decades, macroeconomics has gone backwards," the paper began. Romer
closed out his argument, some 20 pages later, by accusing a cohort of economists of drifting away
from science, more interested in preserving reputations than testing their theories against reality,
"more committed to friends than facts." In between, he offers a wicked parody of a modern macro
argument: "Assume A, assume B, blah blah blah and so we have proven that P is true."
The idea that consumers and businesses always make rational choices pervades mainstream
economics. Romer thinks that's not only wrong, but may lead to the misleading conclusion that
government action can't fix big problems.
There is no better place to be writing this than from (nearly) Minneapolis, for the University
of Minnesota's economics department is the most devoted coven worshipping the most extreme form of
"rational expectations." The most famous cultists have now relocated, but the U. Minnesota economics
department remains fanatical in its devotion to rational expectations theory.
A belief that consumers and businesses always make rational choices does not "pervade mainstream
economics." Mainstream economics is increasingly influenced by reality, particularly in the form
of behavioral economics. Behavioral economics, which has led to multiple Nobel awards, has many currents,
but each of them agrees that consumers and business people typically do not make rational decisions
even in simpler tasks, much less demonstrate the ability to predict the future required by rational
expectations theory. Similarly, even the proponents of modern macroeconomics admit that its predictive
ability – and predictive ability is supposed to be their holy grail of legitimacy – is beyond pathetic.
What is true is that mainstream economics' most egregious errors have come from assuming contrary
to reality in a wide range of contexts that corporate officers, consumers, and investors make optimal
decisions that maximize the firm or the household's utility.
In any real scientific field modern macro would, decades ago, have been abandoned as an abject
failure. Romer, therefore, is not storming some impregnable bulwark of economics. He is calling an
obvious, abject failure an obvious, abject failure. Private sector finance participants typically
believe the academic proponents of rational expectations theory are delusional. Romer is calling
out elites in his profession who have ignored these failures and doubled and tripled-down on their
failed dogmas for decades. This makes the Bloomberg article's title deeply misleading: "The
Rebel Economist Who Blew Up Macroeconomics."
Romer is not a rebel. He did not blow up academic, mainstream macroeconomics – the academic proponents
of modern macroeconomics blew it up decades ago. Romer is mainstream, and he is sympathetic on personal
and ideological grounds to the theoclasscial economist most famous for developing rational expectations
theory. Romer has strongly libertarian views and did his doctoral work under Robert Lucas. Romer
has long been appreciative of Lucas. All of this means that Romer's denunciations were sure to
hit home far harder with mainstream and theoclassical economists than anything a heterodox economist
could write.
The same Bloomberg article made a key factual claim that is literally true but misleading.
What's at stake far exceeds hurt feelings in the ivory tower. Central banks and other policy
makers use the models that Romer says are flawed.
Central banks and private economic forecasters rarely use modern macro models, though they have
begun to use New Keynesian models that are hybrids. They do not do use "freshwater" models because
they are known to have terrible predictive ability and because alternative models not based on rational
expectations have far superior predictive ability. The private financial sector typically does not
rely on modern macro models, even the New Keynesian hybrids. Romer is not saying that the models
are "flawed" – he is explaining that they are inherently failed models. Worse, he is saying that
the designers of the models know they are failed and respond by gimmicking the models by littering
them with myriad assumptions that have no empirical or theoretical basis and are designed to try
to make the models produce less absurd results.
I explained that Romer was far from the first to call out modern academic macroeconomics as a
failure but that he is a prominent mainstream economist. The Bloomberg article's most interesting
reveal was the response by the troika of economists must associated with rational expectations theory
to Romer's article decrying their dogmas.
Lucas and Prescott didn't respond to requests for comments on Romer's paper. Sargent did. He
said he hadn't read it, but suggested that Romer may be out of touch with the ways that rational-expectations
economists have adapted their models to reflect how people and firms actually behave. Sargent
said in an e-mail that Romer himself drew heavily on the school's insights, back when he was "still
doing scientific work in economics 25 or 30 years ago."
What this paragraph reveals is the classic tactic of theoclassical economists – they simply
ignore real criticism. Lucas, Prescott, and Sargent all care desperately about Romer's criticism
– but they all refuse to engage substantively with his critique. One has to love the arrogance of
Sargent in "responding" – without reading – to Romer's critique. Sargent cannot, of course, respond
to a critique he has never read so he instead makes a crude attempt to insult Romer, asserting that
Romer has not done any scientific work in three decades.
The rational expectations purists have been unable to come up with a response to their predictive
failures and their false model of human behavior for thirty years. The Bloomberg article does
not understand a subtle point about their non-defense defense, as shown in these key passages.
Allies of the three Nobelists have been more outspoken, and many of them point out that Romer
- unlike Keynes in the 1930s - doesn't offer a new framework to replace the one he says has failed.
"Burning down the edifice, and saying we'll figure out what we'll build on its foundations
later, just does not seem like a constructive way to proceed," said V. V. Chari, an economics
professor at the University of Minnesota.
Romer's heard that line often, and bristles at it: "I'm saying, 'the car is broken.' And everyone's
saying, 'Romer's a terrible guy, because he couldn't fix the car'."
What the rational expectations devotees are actually saying is their standard line, which
is a radical departure from the scientific method. Their mantra is "it takes a model to beat a model."
That mantra violates the scientific method. Their models are designed to embody their rational expectations
theory. Those models' predictive ability is pathetic, which means that their theory and models are
both falsified and should be rejected. The academic proponents of modern macro models, however, assert
that their models are incapable of falsification by testing and predictive failure. This is not science,
but theology.
V.V. Chari's criticism of Romer is revealing. He complains that Romer does not want to "build
on [rational expectation theory's] foundations." Why would Romer want to commit such a pointless
act? Romer's point is that rational expectations is a failed theory that needs to be rejected so
macroeconomics can move on to useful endeavors.
A "foundation" in such a building metaphor is the deep, well-grounded stone or reinforced concrete
beneath the visible building that is attached to solid bedrock. Rational expectations theory
has no such empirical foundations. It was not based on testing that found that people behaved
in accordance with the theory. Behavioral economics and finance, by contrast, is based on a growing
empirical base – virtually all of which refutes the first three assumptions of the models. Similarly,
the work of Akerlof (1970), Akerlof & Romer (1993), and the work of white-collar criminologists has
falsified each of the first three assumptions of the models.
Further, the dynamic stochastic general equilibrium (DSGE) models routinely fail the predictive
test and, as Romer details, fail despite the use of dozens of ways in which the models are "gamed"
with arbitrary inputs and restrictions that have no theoretical or empirical basis. Chari is right
to describe the modern macro model as an "edifice." I would add that it is a baroque edifice top
heavy with ornamental features designed to hide its lack of a foundation. Modern macro collapsed
as soon as its devotees tried to build without an empirical foundation.
The rational expectation devotees respond that predictive failures – no matter how extreme
or frequent – cannot falsify their models or their theories. The proponents claim that only a better
model, with superior predictive ability can beat their model. That might sound acceptable to
some, but there is a critical unstated twist. The many rival models actually used by the private
sector and central banks that produce far superior predictive ability can never be treated as "better
models" to these devotees because the models with far superior predictive powers reject rational
expectations theory, rational decision-making, and the "budget constraint." To the devotees, only
DSGE models that accept this trio of market fictions are eligible to be acceptable "models." Dr.
Kocherlakota states that acceptable models "share five key features." These five characteristics
define DSGE models.
They specify budget constraints for households, technologies for firms, and resource constraints
for the overall economy. They specify household preferences and firm objectives. They assume forward-looking
behavior for firms and households. They include the shocks that firms and households face. They are
models of the entire macroeconomy.
Kocherlakota's summary description is appropriately terse. He later explains the dogmatic
gloss that devotees place on each of these five points. The "budget constraint," for example, means
that nations with sovereign currencies such as the U.S. cannot run deficits, even to fight severe
recessions or depressions. Why? Because theoclassical economists are enormous believers in austerity.
As Kocherlakota archly phrased the matter, "freshwater" DSGE models were so attractive to theoclassical
macro types because their model perfectly tracked their ideology.
[A]lmost coincidentally-in these models, all government interventions (including all forms
of stabilization policy) are undesirable.
Yes, "almost coincidentally."
Specifying household preferences and firm objectives is equally erroneous, as Akerlof and
Romer's 1993 article on "Looting" demonstrated. "Firms" do not have "objectives." Employees have
"objectives," and the controlling officers' "objectives" are the most powerful drivers of employee
behavior.
As Akerlof and Romer (and every modern crisis) demonstrated, this frequently leads to firm practices
that harm the firm, the consumer, and the shareholders. Such behavior, however, is impossible under
the second assumption, so any model (such as control fraud or "looting") that violates the assumption
is not eligible to be a rival model because it these superior models do not produce "general equilibrium."
The "GE" in a "DSGE" model is general equilibrium, so rival models from economics and criminology
that note that the economy is not a self-correcting apparatus that produces general equilibrium are
ruled out as superior models even though they are superior in that they have an empirical and theoretical
basis and demonstrate far superior predictive results.
Kocherlakota unintentionally highlighted modern macros' inability to incorporate even massive
frauds driving national scandals and banking crises, despite the efforts of Akerlof (1970) (a market
for "lemons") and Akerlof and Romer 1993: ("looting") in this passage.
In the macro models of the 1980s, all mutually beneficial trades occur without delay. This
assumption of frictionless exchange made solving these models easy. However, it also made
the models less compelling.
He then goes on to a delighted description of macro economists now sometimes building in (arbitrary)
lags ("frictions") in the time required to accomplish "all mutually beneficial trades." But what
of the three great fraud epidemics that produced the U.S. financial crisis and the Great Recession?
Sorry, that's not allowed into the "friction" canon. The market model is still one of perfection
(albeit slightly delayed). It does not matter how many massive financial scandals occur in which
the largest UK banks and Wells Fargo deliberately abuse their customers by encouraging them to engage
in transactions that will harm them and make the bankers rich. It doesn't not matter that over ten
million Americans were induced by bankers and their agents to pay excessive interest rates in return
for yield spread premiums (YSP) to the bankers and brokers. None of these things are allowed to happen
in these models. Your better model, which includes such frauds and abuses, is not allowed precisely
because it (a) is better and (b) falsifies the theoclassical ideology underlying "rational expectations"
theory.
The assumption of "forward looking behavior" produces "expectations," which are assumed to be
accurate and rational. Theoclassical proponents claim that we all have the ability to predict vast
aspects of the financial future. While we are not perfect, we are optimal in our forecasts given
the state of knowledge. If your rival model lacks rational expectations, it isn't a real model. Romer
rejects the rational expectations myth, so he is incapable of presenting a superior model to the
devotees of rational expectations.
If macroeconomics, outside the cult of modern macro, were a car, it would not be "broken."
It would be episodically broken when the rational expectations devotees got hold of monetary or fiscal
policy. The rational expectations model fails the most fundamental test of a financial model – people
trying to make money by anticipating the macroeconomics consequences of changes in monetary and fiscal
policy overwhelmingly do not use their models because they are known to have pathetic predictive
ability. The alternative models that embrace Keynesian analysis and are not dependent on the fiction
of rational expectations function pretty well. The real world macro car, when driven by real world
drivers, works OK. Essentially, the rational expectations devotees say that we can never drive the
macro "car" because the public will defeat any effort to drive the economy in any direction. Instead,
the economy will lurch about n response to random technological "shocks" that cannot be predicted
because they occur without any relationship to any public policy choices.
Romer takes particular delight in shredding the pretension to "science" in the model's abuse of
shocks. Again, however, the Bloomberg article seriously misleads in making it appear that
his critique of shocks is novel. Then Minneapolis Fed Chair Dr.
Kocherlakota (formerly chair of the U. Minnesota economics department, where he was a "rational
expectations" devotee) forcefully owned up to the egregious predictive failures of the models. He
acknowledged that "macro models are driven by patently unrealistic shocks."
It is unfortunate that Bloomberg article about Romer's article is weak. It is useful, however,
because its journalistic inquiry allows us to know how deep in their bunker Sargent, Lucas, and Prescott
remain. They still refuse to engage substantively with Romer's critique of not only their failures
but their intellectual dishonesty and cowardice. It is astonishing that multiple economists were
awarded Nobel prizes for creating the increasingly baroque failure of modern macro. In any other
field it would be a scandal that would shake the discipline to the core and cause it to reexamine
how it conducted research and trained faculty. In economics, however, a huge proportion of Nobel
awards have gone to theoclassical economists whose predictions have been routinely falsified and
whose policy recommendations have proven disastrous. Theoclassical economists, with only a handful
of exceptions, express no concern about these failures.
I am completely confused about the prediction of "rational choices". Do they include going
bankrupt on purpose and letting your investors take the hit, burning your building down for the
insurance money, hostile takeover behavior where businesses are run into the ground on purpose,
tax strategies, people going on unemployment when they want a vacation from work, and on and on?
These are decisions that have a rationale for the people who make them, and they have not been
uncommon. Perhaps "economists" are best off observing not predicting "human behavior".
I was fortunate enough to have an econ. prof. (mid 70's) who was also my student counselor
tell me that unless I intended to work for the gov't or teach the subject, a degree in econ. was
pointless. What's taught in class has very little to do with the real world.
Anyone who contends that econ is a "science" rather than philosophy is deluded or just trying
to protect their place in the hierarchy. Seems that "physics envy" is never going away.
I'll see your DSGE model & raise with with the IBGYBG* model; in theory, you should win that
hand but I'll be walking away with the actual money.
*(by the time this blows up) I'll Be Gone & You'll Be Gone
I majored in economics. as you go up higher up into the dismal science, the more deranged
it gets. The reason they are vague is because they don't know what they are talking about. They
don't consider the real world, and as Bill Black's so brilliantly points out, they are in no hurry
to out themselves as frauds.
thanks, Simon. there must be something in those mental masturbation models for some people.
justification for something the 99 % are all paying for most likely
I am not sure which is the greatest shortcoming of the macro-economy theory described by Black:
rational expectations or global equilibrium?
In some natural sciences, abandoning equilibrium models and replacing them with dynamic
models have led to great progress, and looking at the actual time evolution of economies, there
is a great deal of dynamics, such as growth, recessions, demography, natural catastrophes, immigration/emigration,
resource discovery and depletion, technological progress.
I sometimes like to use the analogy of the famous failure of the Tacoma Narrows bridge failure.
The engineers calculated the maximum force that the wind would have on the bridge, but didn't
calculate the dynamic aerodynamic effect as the bridge deck swayed in the wind. The result was
a spectacular failure.
Since our economy has been gradually going casino for so many years, it makes sense that
the folks who hold the reigns would make every effort to assure that all their key players adhere
to their singular perspectives.
The most important of these perspectives is that there is no higher human purpose than to make
a lot of money, in essence, that greed is good.
Thus the problem facing economists worshiping at the altar of "rational expectations" is that
the only rational expectation that is accepted as 'truly rational', is first and foremost, the
love of money.
This leads to problems for businesses, as truly selfish, and money-motivated people are actually
rare, as most people have a wide range of possible motivations working in their lives.
This is why business 'leaders' give prospective employees tests to find the people they can
'trust', which is to say find those who are motivated by money, which is the only motivating factor
our masters find useful.
Of course those who are motivated exclusively by the love of money are also those who believe
that austerity is the proper medicine for the rest of us.
There's one more thing about people who are motivated only by the need to accumulate money,
they also tend to steal anything that isn't tied down.
This doesn't bother FIRE sector employers since they are only concerned to ferret-out those
whose motivations might be polluted by inclinations other than greed.
Anyway, it seems to me that the importance of 'rational expectations' is in predicting the
behavior of FIRE sector employees, not the economy as a whole.
As far as the bulk of humanity goes, the only true 'rational expectation' is that people have
many and varied motivations that make it hard to predict their behavior.
Hey Econ. Prof. – I'll see your DSGE model & raise with my IBGYBG** model. In theory, you'll
win the hand but we'll see who actually walks away the money.
**(by the time this thing blows up) I'll Be Gone, You'll Be Gone
The Nobel Memorial Prize in economics promotes the illusion that economics is a science.
It is better conceptualized as a literary genre, and economists should be forced to compete with
other writers for the prize in literature.
We need to get back to basics, to the real economy of people and necessary supplies to support
people. Model a simple city, with a simple agricultural hinterland. You can know how many bushels
of grain equivalent are necessary for subsistence economy. You can know how many people you have
in the countryside and in the city. You can know how many bushels of grain equivalent are in storage.
You can estimate how much of the economy is barter and how much is cash purchase. You can know
how much money is in circulation, and from those determine what velocity the money needs to have,
to pay for all that bushels of grain equivalent. You don't need calculus, just arithmetic. End
the sophistry and obscurity thru unnecessary complexity.
interesting about Kocherlakota formerly being a rational expectations devotee just the
phrase 'rational expectations' is mind boggling as if there were no reaction to any action anywhere.
Jack Bogle was on the news this morning laughing about stock picking and saying that every stock
picker that makes money is balanced out by another one who loses money and so the only thing that
makes money net-net is the long term progress of the market, (or society I would say – and that
requires planning).
Not one mention of Chaos or Catastrophe Theory, which are theories of systems with non
linear feedback (aka: Fear and Greed), which appear to me to be fundamental aspects of Economics,
especially the humans who are the Economy.
Perhaps an approach to a solution for economists who are rightly disgusted with the continuing
failures of macroeconomics is to confess that economics is theology/philosophy and not science.
Economics lands on the "mammon" side of serving God or mammon.
One doesn't have to have read any Reformation theology, but only to have observed more
or less casually that human being are scarcely rational even about their own self-interest, and
then only self-deceptively. Thomas Frank has commented effectively on that point in the political
arena in What's the Matter with Kansas. To wit: Republicans have, he points out, diverted voters
attention to social/cultural issues while picking their pockets. Perhaps one might sense an intersection
of politics and economics on the latter point.
There is less need to moralize about "sin" than to see it as an heuristic. That is, one might
begin by assuming that businesses and individuals are not only guided by rationality, but to the
contrary are aided by economists, say, of the U of Minnesota ilk, to rely upon the myth of rationality
to cloak fundamental selfishness, which economists have neutered by casting it as "self-interest."
Selfishness is the root of continuing, destructive "irrationality," because it is part of what
defines a root of sin, i.e., missing the mark.
An economics of gratitude for shared abundance would be closer to the mark.
Do Economists Promote Ideology as
Science?
: Which is more important in
determining the policy positions of
economists, ideology or evidence? Is
economics, as some assert, little more
than a means of dressing up ideological
arguments in scientific clothing?
This certainly happens, especially among
economists connected to politically
driven think tanks – places like the
Heritage Foundation come to mind.
Economists who work for businesses also
have a tendency to present evidence more
like a lawyer advocating a particular
position than a scientist trying to find
out how the economy really works. But
what about academic economists who are
supposed to be searching for the truth
no matter the political implications?
Can we detect the same degree of bias in
their research and policy positions? ...
rayward :
Thoma's assessment seems fair enough. I'd make the point that, for some
academic economists, no amount of evidence is sufficient to overcome their bias.
"Where's the proof" is the refrain one hears often. And then there's the
question: what is evidence? The availability of lots of data is often used to
"prove" this or that theory, even when the "proof" is contrary to the historical
evidence one can see with her own eyes. Data used as obfuscation rather than
clarification. I appreciate that one historical event following another
historical event does not prove causation, but what's better proof than history.
RogerFox :
, -1
"Shouldn't theory be a guide
when the empirical evidence
is unconvincing one way or
the other?"
No - we don't
allow MDs to prescribe or
treat on the basis of theory
alone. It's unethical for
any professional
practitioner to give advice
that is not supported by
compelling evidence
demonstrating that the
advise is both safe and
effective - 'First, do no
harm.'
To a man, professional
economists shill for the
view that they are morally
free to treat real economies
and real people as their
personal lab rats. As a
group, economists are an
ethically challenged bunch
in this respect, and
probably in other respects
too.
anne ->
RogerFox...
, -1
To a man, professional
economists shill...
[ This
phrase begins a
mean-spirited lie, no matter
how the sentence is
finished. The point of the
malicious post however is
only to be destructive. ]
Avraam Jack Dectis :
, -1
.
Economics is the most
interesting science because
it is not settled and has
great effect upon the
affairs of man.
One of the
things that make it
interesting is the number of
variables that exist in most
economic situations as well
as the strong psychological
and sociological component
to the science, due to its
attempts to predict the
actions of humans, a
hierarchical herd based
status insane animal.
Undoubtedly, the desire
to promote personally
attractive policies is
something everyone must
fight.
On a side note, having
seen this blog referenced
elsewhere and finally
starting to read it
regularly, truly a nice
thing, I notice that Dr.
Thoma and I are the same age
for about three months per
year. I suspect that is
about all we have in common
since I just spent the last
18+ years getting openly and
notoriously poisoned by a
stalker gang, have hit men
following me and am so
unpopular and poorly
connected that I seem
remarkably unable to engage
any law enforcement on the
issue.
Which leads into the next
point-> Is the dynamism of
an economy a function of
freedom of speech, riule of
law, security of the citizen
and so forth. For decades
the USA, as it fought two
opposing powerful systems,
made that case yet now that
no longer seems to be the
case in the USA and in fact
this is confirmed by the
fact that nobody makes that
case convincingly anymore.
Can this deterioration of
culture and embrace of
expediency have a stifling
economic effect?
DeDude :
, -1
Economics as a science is
mainly hurt by two things.
1. The rich plutocrats
have a major stake in
advocating very specific
narratives, so they will
throw large sums behind
those narratives (and the
fight against anything
conflicting with them).
2. Economics does not
have anything resembling the
double blind placebo
controlled trials that help
medicine fight off the
narratives of those with
money and power.
RGC :
, -1
What sort of opinions are
economists allowed to have
if they want tenure, want to
be published in the major
journals or want to make a
living?
Keynes concluded
that government direction
was necessary for a viable
economy. Keynes'
"interpreters" in the US
buried that idea, and thus
became very important
economists - guys like Paul
Samuelson. The first ( and
only) US book to faithfully
represent Keynes' ideas
faded away soon after
publication.
I did not know there was a
debate. Krugman summed it
all up in Peddling
Prosperity. Folks know who
pays the rent, and opine
accordingly.
Syaloch :
, -1
I think problems arise when
economists are called upon
by politicians or the media
to give expert advice.
Within the sciences, "We
don't know the answer to
that" is a perfectly
acceptable response, and in
scientific fields where the
stakes are low that response
is generally accepted by the
public as well. "What is
dark matter made of?" "We
don't know yet, but we're
working on it." But in
politics, where the stakes
are higher, not having a
definitive answer is viewed
as a sign of weakness. How
often do you hear a
politician responding to a
"gotcha" question admit that
they don't know the answer
rather than trying to BS
their way through?
Given the timeliness of
news coverage the media
prefer to consult experts
who offer definitive
answers, especially given
their preference for pro/con
type interviews which
require experts on both
sides of an issue.
Economists who are put on
the spot this way feel
pressured to ditch the error
bars and give unambiguous
answers, even answers based
purely on theory with little
to no empirical backing, and
the more often they do this
the more often they're
invited back.
It is impossible to talk
about economics without
making essentially
ideological distinctions.
Private property and wage
labor are not "natural"
categories. Their adequacy
as human practices therefore
needs to be either defended
or criticized. To simply
take them "as given" is an
ideological waffle that begs
THE question.
Economists thus SHOULD
have, acknowledge and fully
disclose their ideological
biases. When evaluating
evidence they should make
every effort to set aside
and overcome their biases.
And they need to stay humble
about how Sisyphean,
incongruous and incomplete
their attempts at
objectivity are.
Let's not forget that
"The End of Ideology" was a
polemical tract aimed at
designating the ideology of
the managers and symbol
manipulators "above" and
beyond ideology. Similarly,
Marx's brilliant critique of
ideology degenerated into
polemic as its practitioners
adopted the mantle of
"science."
The End of Ideology: On the
Exhaustion of Political
Ideas in the Fifties is a
collection of essays
published in 1960 by Daniel
Bell, who described himself
as a "socialist in
economics, a liberal in
politics, and a conservative
in culture". He suggests
that the older,
grand-humanistic ideologies
derived from the nineteenth
and early twentieth
centuries had been
exhausted, and that new,
more parochial ideologies
would soon arise. He argues
that political ideology has
become irrelevant among
"sensible" people, and that
the polity of the future
would be driven by piecemeal
technological adjustments of
the extant system.
A very big question! Like
"what is the meaning of
life?" At least a
semester-long upper division
seminar course. ;-)
In a
nutshell (to put it
crudely), Marx labelled as
ideologists a cohort of
German followers of Hegel's
philosophy who envisioned
historical progress as the
result of the progressive
refinement of intellectual
ideas. Marx argued instead
that historical change
resulted from struggle
between social classes over
the material conditions of
life, fundamental to which
was the transformation of
nature through human
intervention into means of
subsistence.
Marx labelled as ideologists
a cohort of German followers
of Hegel's philosophy who
envisioned historical
progress as the result of
the progressive refinement
of intellectual ideas. Marx
argued instead that
historical change resulted
from struggle between social
classes over the material
conditions of life,
fundamental to which was the
transformation of nature
through human intervention
into means of subsistence.
[ What a superb introductory
or summary explanation. I
could not be more impressed
or grateful. ]
"And so - though we proceed
slowly because of our
ideologies, we might not
proceed at all without
them."
- Joseph Schumpeter,
"Science and Ideology," The
American Economic Review
39:2 (March 1949), at 359
http://www.jstor.org/stable/1812737
Many guys are not driven by
ideology, rather than
evidence. The problem with
this article is that we
cannot compare with other
professions and say
"economists are more/less
prone to promote ideology
than the average".
All human endeavors are
shaped by "ideology" in many
different ways. What is
important is to be aware of
and explicit about their
influences on our thought
and action.
If there are two sides to an
argument that radically
disagree then it is possible
that both sides may be
ideology, but both sides
cannot be science. Only the
correct argument can be
science. Of course ideology
is a bit too kind of a word
since the incorrect argument
is actually just a con game
by people out to lay claim
on greater unearned wealth.
Economists seem content with
trying to figure out how to
make 'it' work. Far better,
I think, to try and figure
out how it should be.
It was philosophers such as
Hume, Locke, Marx, Smith,
Rawls, ... who asked the
right questions. Laws and
economics come down to us
according to how we think
about such things; they
change when we change the
way we think. Seems we're in
a bit of a philosophical dry
patch, here. Someday, we
will have to develop a
better economic system,
might be now. Likewise,
there are laws rooted in
antiquity that were wrong
then and are wrong still.
"Ideology certainly
influences which questions
academic researchers believe
are the most important, but
there is nothing wrong with
that."
No "experiment" in
economics comes with the
degree of control that
experiments in physical
sciences take for granted,
so there is tremendous room
for ideology to come into
the discussion of whether a
data set really represents
the conditions the model is
supposed to consider. Since
reviewing another
economist's study entails
asking questions those
questions...
DrDick ->
Arne...
, -1
Please describe the
"experimentation" which
takes place in astronomy and
geology. Ideologies also
play important roles in
experimental sciences, such
as biology (for which we
have a lot of evidence.
"... In fact, I would posit that the Ivy League, especially Yale, Princeton, Harvard and MIT, are the principal crime factories in America today. ..."
"... Brownback is in Kansas; UMKC is in Missouri. There is a Kansas City in Kansas, and another Kansas City in Missouri. Missouri is not as red as KS, but it's still a red state. ..."
"... UMKC is part of the state system and most likely receives no funding from the city. It was home to New Letters, a respected literary magazine edited by poet John Ciardi. I hail from Kanasa City and always thought of UMKC as a decent commuter school, mostly catering to the educational needs of adult city dwellers. But the evolution of both the Econ and jazz studies departments lead me to suspect things have changed. Whether that's by design or through organic happenstance I don't know. ..."
"... Couldn't a Marxian analysis of capitalism as a whole also shed some light on this issue? I think Hudson is pretty much right but I think, like Sanders, he's offering a reformist option as opposed to a full on critique of the entire system. ..."
"... Not that a revolution is the option you necessarily want to go with, I just think that Marx's criticism of capitalism has useful information that could help with shaping the perspective here. ..."
Michael
Hudson spends a half hour with Meet the Renegades explaining his views on money, finance, economic
training, rentier capitalism, and how debt overhangs operate. Hudson fans will recognize his regular
themes. This is a good segment for introducing people you know to Hudson and to heterodox economic
ideas.
I've always found it interesting that both Hudson and Bill Black are on the faculty of UMKC,
which is a state university in a pretty conservative state. It's possible that some of the funding
for UMKC comes from the municipality of Kansas City, MO, but that town has never been known as
a hotbed of radical intellectuality either.
Joseph Campbell didn't teach at an Ivy League either. Conformity starts with the faculty in
your own department … and the Ivy League is as status quo and status conscious as it gets.
The Ivy League are not much different than privately held corporations when you consider who
their alma materi are, how much money the alma materi have, and where Ivy League endowments come
from.
In fact, I would posit that the Ivy League, especially Yale, Princeton, Harvard and MIT, are
the principal crime factories in America today.
Please recall that the dood who financed Liberty Lobby and other white supremacist nonsense
was Koch family patriarch, Fred Koch, who was a trustee at MIT. (Ever hear Noam Chomsky complain
about that????? Of course not!)
Ah but is it really an inherently conservative state fiscally, or just socially? That is, are
the people like Brownback appealing to one sort of conservatism and using that to do a "trust
me" on the other sort?
I would say it's not unreasonable for anybody to delegate something they are not so sure of
to somebody they trust for other reasons.
Brownback is in Kansas; UMKC is in Missouri. There is a Kansas City in Kansas, and another
Kansas City in Missouri. Missouri is not as red as KS, but it's still a red state.
UMKC is part of the state system and most likely receives no funding from the city. It was
home to New Letters, a respected literary magazine edited by poet John Ciardi. I hail from Kanasa
City and always thought of UMKC as a decent commuter school, mostly catering to the educational
needs of adult city dwellers. But the evolution of both the Econ and jazz studies departments
lead me to suspect things have changed. Whether that's by design or through organic happenstance
I don't know.
If you are not on the money makers' distribution list, it would make sense to find other ways
to get some of that loot if you can't the traditional way…
You can be conservative in your social values but want change, i.e. liberalism, in the way
the monetary system distributes the money.
The UMKC is also the home of the Kansas City School of Economics, more commonly known as the
MMT School. Neither Hudson nor Black are MMTers per se, but both have grown by their affiliation
with the school.
Thanks for sharing this excellent interview. Watching it I realized the people I actually admire
more than Hudson are his students. They must care more about learning the truth than securing
wealth and job prospects on wall street.
Couldn't a Marxian analysis of capitalism as a whole also shed some light on this issue? I
think Hudson is pretty much right but I think, like Sanders, he's offering a reformist option
as opposed to a full on critique of the entire system.
Not that a revolution is the option you necessarily want to go with, I just think that Marx's
criticism of capitalism has useful information that could help with shaping the perspective here.
I asked Yves Smith at the Dallas meetup last week (paraphrasing) "Do you meet with Michael
Hudson and Bill Black… is the independent media community, or any community, organizing around
Michael Hudson and Bill Black… to not only support and promote Hudson's and Black's perspectives
but to help develop their concepts and 'fine tune' their messaging?" I said to Yves "Hudson and
Black are clearly the leaders we desperately need to rally behind and push into Washington… they
clearly know what needs to be done… a PR machine needs to be developed… to get their messages
out to our families, friends, and acquaintances… unfortunately, the current messaging is not good
enough… I can't get my family, friends, and others to engage and echo the messaging to their family,
friends, etc."
Michael Hudson has been good at repeating his central message… 'by increasing land, monopoly,
and finance rent costs… the 1% are a highly organized mafia methodically looting our economy…
effectively raping, pillaging and consequently destroying every component of our social structures'.
Very unfortunately, Bill Blacks central message seems to have been lost for years now… he doesn't
repeat his central message… 'the crimes must be stopped… there is no alternative… looting criminals
MUST be publicly exposed, investigated, indicted, prosecuted, convicted, punished and their loot
returned to society… by letting cheaters prosper, organized white-collar crime, perpetrated by
the top-most leaders of our public and private institutions, has become an epidemic… the very
fabric of civil society is being destroyed… we have no choice… the criminals must be stopped…
and the only way to do that is to publicly expose, investigate, indict, prosecute, punish, and
take back what is ours'.
In 2008, when I tuned out of the mainstream media and tuned into the independent media, I thought
the messages from Michael Hudson ("they are organized criminals… this is what they're doing…")
and Bill Black ("the criminals must be stopped… here's how we stopped the Savings & Loan criminals…)
would resonate and become common knowledge. I quickly discovered that it didn't even resonate
with close family and friends. Why???
I will send out this video… Michael Hudson at his best, speaking-wise. I don't expect to get
any reaction… why?… very frustrated…
Amen. Once you start noticing, it becomes hard to stop. In looking hard for a silver lining
to the current election storm clouds, public awareness of the MSM seems to have nudged a few toward
slightly more objectivity, although I may just be wishing for that after media fatigue ;)
"...That is, even central banks that follow some kind of Taylor rule in a flexible inflation-targeting
regime are susceptible to the knowledge problem...
The biggest information challenge comes from attempting to measure the output gap in real
time. The output gap is the difference between the economy's actual and potential level of output
and is subject to two big measurement problems.
First, real-time output data generally get revised and often on the same order of magnitude
as the estimated output gap itself.
Second, potential output estimates are based on trends that rely on ever-changing endpoints.
Orphanides finds the latter problem to be the biggest contributor to real-time misperceptions
of the output gap. This means that even if real-time data improved such that there were fewer
revisions, there would still be a sizable problem measuring the real-time output gap."
Conservative ideologues tell us government/central planners are inefficient because of the
"knowledge problem." Well so are private sector central planners. See the big banks and the housing
bubble/financial crisis. Or Samsung and its exploding Note 7. Or Volkswagon and its cheating on
benchmark tests.
This "output gap" is another rightwing diversion. It is useful to them precisely because it
is impossible to measure and therefore people can argue about it ad infinitum.
Meanwhile we have a lot of people who can't get a decent job at a living wage. That can
be easily measured and it could be easily remedied. And it is what average people actually care
about. So they want to make sure that isn't discussed. They want to discuss something with no
clear answer instead.
"Former Fed Vice Chairman Alan Blinder said he's skeptical that fiscal policy will be loosened
a great deal if Clinton wins the election, as seems likely based on recent voter surveys.
"She is promising not to make budget deficits bigger by her programs," said Blinder, who is
now a professor at Princeton University. "Whatever fiscal stimulus there is ought to be small
enough for the Fed practically to ignore it.""
Blinder is skeptical that Clinton will do enough to force the Fed to modulate their plans,
even though PGL and Sanjait tell us otherwise.
Clinton's infrastructure plans should be "substantially" larger as Krugman and Summers write.
This would help close the output gap. This would help with the job market and increasing incomes
and lowering personal debt loads.
But PGL can't admit this because he's a petulant child who thinks Germany still uses the Deutsche
Mark.
"The recent decision by the Fed to raise interest rates is the latest example of the rigged
economic system. Big bankers and their supporters in Congress have been telling us for years that
runaway inflation is just around the corner. They have been dead wrong each time. Raising interest
rates now is a disaster for small business owners who need loans to hire more workers and Americans
who need more jobs and higher wages. As a rule, the Fed should not raise interest rates until
unemployment is lower than 4 percent. Raising rates must be done only as a last resort - not to
fight phantom inflation."
"... An important essay indeed in that ideological influence is pervasive in writing by economists, which should be no problem as such, but economists should be aware of ideological influence in the work that they do. The problem is being unaware that work is ideological, so that the work is presented as simple truth allowing for no alternative presentation and argument. ..."
"... RBC economists are very well compensated for saying that no government intervention is needed in the economy, as are those saying that minimum wages harm employment. ..."
"... Actually a lot of academics are not exactly paid that well. This crowd does this sort as a religion. The problem is that those of us who never accepted perfect markets and instant market clearing were closed out of publications for 30 years. Now if RBC explained the real world - fine. But it had zero explanation for the last 9 years. ..."
"... Mankiw is paid well. ..."
"... Krugman is paid well. ..."
"... Speaking as an academic, in the university system with the lowest paid faculty in the nation, I am well aware of that. It is not the academic salaries, but the research grants and consulting contracts that matter here. ..."
"... Upton Sinclair is always right. ..."
"... "I suspect there is a reluctance among the majority of economists to admit that some among them may not be following the scientific method but may instead be making choices on ideological grounds." ..."
"... The RBC crowd is arrogant enough to argue that Keynes was practicing junk science. They knew his writings and just ignored it. ..."
"... That US economists are completely clueless is obvious to anyone who travels around the world. That free trade economies such as the US are complete basket cases is obvious to anyone who visits mercantilist economies such as Singapore, Japan, Israel etc. US trained economists only have prestige because the masses don't know how backward and poverty-stricken the US has become under the policies they relentlessly justify and apologize for. ..."
Being honest about ideological influence in economics : Noah Smith has an
article that talks about Paul Romer's recent
critique
of macroeconomics. ... He says the fundamental problem with macroeconomics is lack of data,
which is why disputes seem to take so long to resolve. That is not in my view the whole story.
If we look at the rise of Real Business Cycle (RBC) research a few decades ago, that was only
made possible because economists chose to ignore evidence about the nature of unemployment in
recessions. There is overwhelming evidence that in a recession employment declines because workers
are fired rather than choosing not to work, and that the resulting increase in unemployment is
involuntary (those fired would have rather retained their job at their previous wage). Both facts
are incompatible with the RBC model.
In the RBC model there is no problem with recessions, and no role for policy to attempt to
prevent them or bring them to an end. The business cycle fluctuations in employment they generate
are entirely voluntary. RBC researchers wanted to build models of business cycles that had nothing
to do with sticky prices. Yet here again the evidence was quite clear...
Why would researchers try to build models of business cycles where these cycles required no
policy intervention, and ignore key evidence in doing so? The obvious explanation is ideological.
I cannot prove it was ideological, but it is difficult to understand why - in an area which as
Noah says suffers from a lack of data - you would choose to develop theories that ignore some
of the evidence you have. The fact that, as I argue
here , this bias may have expressed itself in the insistence on following a particular methodology
at the expense of others does not negate the importance of that bias. ...
I suspect there is a reluctance among the majority of economists to admit that some among them
may not be following the scientific method but may instead be making choices on ideological grounds.
This is the essence of Romer's critique, first in his own area of growth economics and then for
business cycle analysis. Denying or marginalizing the problem simply invites critics to apply
to the whole profession a criticism that only applies to a minority.
An important essay indeed in that ideological influence is pervasive in writing by economists,
which should be no problem as such, but economists should be aware of ideological influence in
the work that they do. The problem is being unaware that work is ideological, so that the work
is presented as simple truth allowing for no alternative presentation and argument.
The point of Sophocles Oedipus cycle for Sophocles and for Freud was found in the Oracle at Delphi
with which the cycle begins. The inscription at Delphi read "Know Thyself."
Know your ideological bent or leaning. The tragedy of Oedipus was in not knowing himself.
Under Fidel Castro's rule Cuba bucked the historical trend--moving not toward but far away
from political democracy.
Under Fidel Castro it looks as though Cuba lost two generations of economic growth --
generations that other neighboring economies like Mexico, Costa Rica, and Puerto Rico made
very good use of. The only good thing you can say about Castro is that Cuba continued to have
the social indicators of a middle-income country even as it became a poor one.
It was always incomprehensible that an anti-Democratic dictator who managed to turn a
middle-income country into a poor one would have fans. Yet there are still people in the class
not of stooges looking for their Stalin, but fools who have found their Fidel.
-- Brad DeLong
[ Importantly, the economics here happen to be wildly wrong but is there any concern about
how Cuba actually fared in real per capita growth relative to Mexico, Costa Rica or Puerto
Rico since 1971 when record keeping begins?
Since 1971, real per capita GDP in Cuba has grown faster than real per capita GDP in Mexico, Guatemala,
El Salvador, Nicaragua, Costa Rica and Panama, faster than in Puerto Rico, Jamaica, Trinidad and
Bermuda, faster than in Colombia, Venezuela, Brazil and Argentina, faster than in Ecuador, Bolivia,
Uruguay and Paraguay, faster than in Spain and Portugal.
Real per capita growth in the Dominican Republic and Chile alone among Spanish or Portuguese
language countries has been faster than in Cuba.
Since 1971, real per capita GDP in Cuba has also grown faster than real per capita GDP in Peru...
Correcting:
Since 1971, real per capita GDP in Cuba has grown slightly slower than real per capita GDP
in Paraguay...
Completing:
Since 1971, real per capita GDP in Cuba has grown faster than real per capita GDP in Mexico,
Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and Panama, faster than in Puerto Rico,
Jamaica, Trinidad and Bermuda, faster than in Colombia, Venezuela, Peru, Brazil and Argentina,
faster than in Ecuador, Bolivia and Uruguay, faster than in Spain and Portugal.
Real per capita growth in the Dominican Republic, Chile and Paraguay alone among Spanish or
Portuguese language countries has been faster than in Cuba.
RBC economists are very well compensated for saying that no government intervention is needed
in the economy, as are those saying that minimum wages harm employment.
Actually a lot of academics are not exactly paid that well. This crowd does this sort as a religion.
The problem is that those of us who never accepted perfect markets and instant market clearing
were closed out of publications for 30 years. Now if RBC explained the real world - fine. But
it had zero explanation for the last 9 years.
I write "a lot" and you read "all". More evidence that my internet stalker flunked pre-K. BTW
- Mankiw is not part of the RBC crowd but PeterK is too stupid to know that. Geesh.
Lord - what a stupid comment. Krugman does make his believes against evidence. I see this is another
post you did not bother to read before posting one of your patented pointless rants.
Speaking as an academic, in the university system with the lowest paid faculty in the nation,
I am well aware of that. It is not the academic salaries, but the research grants and consulting
contracts that matter here.
Speaking as an academic, in the university system with the lowest paid faculty in the nation,
I am well aware of that. It is not the academic salaries, but the research grants and consulting
contracts that matter here.
RBC economists are very well compensated for saying that no government intervention is needed
in the economy, as are those saying that minimum wages harm employment.
Real business-cycle theory (RBC theory) are a class of New Classical macroeconomics models
in which business-cycle fluctuations to a large extent can be accounted for by real (in contrast
to nominal) shocks. Unlike other leading theories of the business cycle, RBC theory sees business
cycle fluctuations as the efficient response to exogenous changes in the real economic environment.
That is, the level of national output necessarily maximizes expected utility, and governments
should therefore concentrate on long-run structural policy changes and not intervene through discretionary
fiscal or monetary policy designed to actively smooth out economic short-term fluctuations.
According to RBC theory, business cycles are therefore "real" in that they do not represent
a failure of markets to clear but rather reflect the most efficient possible operation of the
economy, given the structure of the economy.
"I suspect there is a reluctance among the majority of economists to admit that some among them
may not be following the scientific method but may instead be making choices on ideological grounds."
How is the ridiculous RBC theory different from saying, as many prominent economists do, that
presidents do not significantly influence economic growth and job creation?
Thus, I have heard repeatedly that FDR, Reagan, Clinton and Obama should not get credit for
the economic recoveries and job creation that occurred during their presidencies. Likewise, Hoover,
Carter and the Bushes should not be blamed for the economic debacles that occurred during their
presidencies. Apparently, these were all just real business cycles that no president has responsibility
for.
Of course voters do not agree at all, re-electing all of the "lucky" presidents while throwing
out all of the "unlucky" ones. For example, Carter, who is now regarded as a good president, was
buried in a massive landslide: 489-49 by a second rate actor who was regarded as a fool by many.
(Trump will outperform Carter!)
Either RBC is correct or presidents and their policies do matter a lot. Economists have to
decide where they stand.
The RBC crowd never really got that much into politics. Of course assuming markets always clear
and are perfect in every other way is a silly way to model a real world economy.
"you would choose to develop theories that ignore some of the evidence you have". It first this
New Classical/RBC crowd put forth all sorts of fancy new econometrics thinking if you looked at
the data the right way, their model would be confirmed. Only problem is their model says aggregate
demand can have only very transitional effects but the data show persistent effects. Shocks in
other words have sustained real effects.
So when their model was shown to be faulty by the evidence, they gave up on econometrics and
turned to calibration which is just fancy math designed to hide the failure of their models.
SWL continues noting David Card's research on the effects of increases in minimum wages:
'As Card points out in the interview his research involved no advocacy, but was simply about
examining empirical evidence. So the friends that he lost objected not to the policy position
he was taking, but to him uncovering and publishing evidence. Suppressing or distorting evidence
because it does not give the answer you want is almost a definition of an illegitimate science.'
Greg Mankiw searches high and low for anything that goes along with his view that higher wage
floors lead to less employment demand. Of course this kind of bias favors people like Donald Trump
who built that DC hotel under budget by ignoring the minimum wage laws.
Much of the economic models debates hinge on "sticky wages" which are irrefutable from all empirics.
What I haven't seen yet though is a sound testable hypothesis that supports the empirical observation.
In other words, we know by empirics it's true, but we really don't yet know why its true or true
in most, but certainly not all cases -- e.g. Greece recently for example. Many suppositions have
been described but none have to my knowledge been put into the form of testable hypothesis to
suppot the suppositions with "scientific" methods..
How does the relate to RBC models and ideology embedded in models?
RBC ignores the empirics for what can be said to be ideological reasons. But models which include
those observations have no hypothesis proven to support the observations either, so then those
models are equally using unscientific methods in their construction, which just so happens to
support a different ideological position.
I don't disagree at all that models must use observations in their construction but it doesn't
put those models at any greater scientific method advantage.
"It appears, therefore, that we have a sort of asymmetry on the two sides of the critical level
above which true inflation sets in. For a contraction of effective demand below the critical level
will reduce its amount measured in cost-units; whereas an expansion of effective demand beyond
this level will not, in general, have the effect of increasing its amount in terms of cost-units.
"This result follows from the assumption that the factors of production, and in particular
the workers, are disposed to resist a reduction in their money-rewards, and that there is no corresponding
motive to resist an increase. This assumption is, however, obviously well founded in the facts,
due to the circumstance that a change, which is not an all-round change, is beneficial to the
special factors affected when it is upward and harmful when it is downward.
"If, on the contrary, money-wages were to fall without limit whenever there was a tendency
for less than full employment, the asymmetry would, indeed, disappear. But in that case there
would be no resting-place below full employment until either the rate of interest was incapable
of falling further or wages were zero.
"In fact we must have some factor, the value of which in terms of money is, if not fixed, at
least sticky, to give us any stability of values in a monetary system.
"The view that any increase in the quantity of money is inflationary (unless we mean by inflationary
merely that prices are rising) is bound up with the underlying assumption of the classical theory
that we are always in a condition where a reduction in the real rewards of the factors of production
will lead to a curtailment in their supply." The General Theory, pp. 303-304.
yes, Keynes supposition, among other was precisely what I was referring to by knowing the observation
is true but not why it is.
Everybody knows it is true by observation that the sun rises in the east and settles in the
west 1x in roughly 24 hours give or take a winter/summer trend change. But it took an awfully
long time before Copernicus figured out why that was the case... and from his theory testable
hypothesis were developed to show that the hypothesis were confirmed.
With sticky wages we don't know why. E.G.
Wages will not go below [this level] because [insert testable hypothesis]. A testable hypothesis
takes the form
Lower Bound of Wage = [insert independent measurable variables and their relationships here]
As I said, lower bounds to wages are empirically observed. Now show why in repeatable results
with the equations using the independent variables that apply under the conditions imposed by
he hypothesis.
Until that is the observation is used in models because it suits ones interest to do so...
i.e. they like the results of the models better. It isn't a scientifically founded model... the
assumption is no better than rational expectations.
"If, on the contrary, money-wages were to fall without limit whenever there was a tendency
for less than full employment, . . . there would be no resting-place below full employment until
either the rate of interest was incapable of falling further or wages were zero."
Absent sticky wages, at ZLB interest, wages would fall to zero whenever there was a tendency
for less than full employment and nobody works for zero wages.
RBC also ignores anything that would explain why we have recessions at all. Its assumption that
markets instantly clear is key to their model but we know that markets are not so perfect.
A few years ago I would have suggested otherwise. But recent research notes you are right. Obama's
CEA is noting this but he will not be President for long. Our next President needs to take this
head on. Trump won't. Will Clinton? We will see.
"There is overwhelming evidence that in a recession employment declines because workers are fired
rather than choosing not to work, and that the resulting increase in unemployment is involuntary"
see Keynes called it involuntary unemployment NOT cyclical unemployment
as all the politicians are saying now a days, words mean something
Simon-Wren Lewis is making a common mistake as I see it. The limitations and assumptions of a
model should not be conflated with evidence against the model. Not considering certain types of
data is a limitation of a model; not evidence against that model. If an RBC model does not include
certain types of data, then the best approach is to try and understand that data and attempt to
show how it fits into the existing model. Another model should be considered only when certain
limitations appear intractable. Because there are almost always lots of ways to model the same
problem, at least in the social sciences, if you create a new model every time you come across
a limitation, you'll end up running around in circles.
This makes no sense to me. So how about explaining what you meant with real world examples? I
choose the examples of involuntary unemployment and wage stickiness, and the effects of raising
the minimum wage.
"The limitations and assumptions of a model should not be conflated with evidence against the
model."
I don't think this is what SWL is saying and am fairly certain it is not what Romer is saying:
The problem is not limitation or contradiction, it is central variables assumed to confer verisimilitude
that cannot and assumptions considered true that are not.
The assumptions of the model are false and therefore should be construed as evidence against
using the model. I'm saying that's faulty reasoning.
The "my model is better than your model" argument is not a good way to approach problems at
a theoretical level. It's sometimes okay at an applied level. One thing that's hard to wrap one's
head around is that a model can still be useful even when its assumptions are false. When data
is sparse, all useful theories will have to rely on false or incomplete assumptions. Usually a
better approach is to extend rather than start over to keep people from running in too many different
directions.
"Not considering certain types of data is a limitation of a model; not evidence against that
model. If an RBC model does not include certain types of data, then the best approach is to try
and understand that data and attempt to show how it fits into the existing model"
Henry Carey - a real American economist, sadly forgotten to history : , -1
That US economists are completely clueless is obvious to anyone who travels around the world.
That free trade economies such as the US are complete basket cases is obvious to anyone who visits
mercantilist economies such as Singapore, Japan, Israel etc. US trained economists only have prestige
because the masses don't know how backward and poverty-stricken the US has become under the policies
they relentlessly justify and apologize for.
The Walloon mouse : ...Instead of decrying people's stupidity and ignorance in rejecting trade
deals, we should try to understand why such deals lost legitimacy in the first place. I'd put
a large part of the blame on mainstream elites and trade technocrats who pooh-poohed ordinary
people's concerns with earlier trade agreements.
The elites minimized distributional concerns, though they turned out to be significant for
the most directly affected communities. They oversold aggregate gains from trade deals, though
they have been smallish since at least NAFTA. They said sovereignty would not be diminished though
it clearly was in some instances. They claimed democratic principles would not be undermined,
though they are in places. They said there'd be no social dumping though there clearly is at times.
They advertised trade deals (and continue to do so) as "free trade" agreements, even though Adam
Smith and David Ricardo would turn over in their graves if they read, say, any of the TPP chapters.
And because they failed to provide those distinctions and caveats now trade gets tarred with
all kinds of ills even when it's not deserved. If the demagogues and nativists making nonsensical
claims about trade are getting a hearing, it is trade's cheerleaders that deserve some of the
blame.
One more thing. The opposition to trade deals is no longer solely about income losses. The
standard remedy of compensation won't be enough -- even if carried out. It's about fairness, loss
of control, and elites' loss of credibility. It hurts the cause of trade to pretend otherwise.
... ... ..
Trump would propose and/or enact, he listed the following six:
"A Constitutional Amendment to impose term limits on all members of Congress."
"A hiring freeze on all federal employees."
"A requirement that for every new federal regulation, 2 existing regulations must be eliminated."
"A 5-year ban on White House and Congressional officials becoming lobbyists after they leave government."
"A lifetime ban on White House officials lobbying on behalf of a foreign government."
"A complete ban on foreign lobbyists raising money for American elections."
"
~~WWW~
Lot of reform is needed but may be
The forgotten spirit of American protectionism : , -1
The free traders have human economic history precisely inverted. Countries that practice protectionism
almost uniformly become wealthy and technologically advanced. Countries that don't become or remain
terribly sad, poverty-stricken producers of worthless raw materials and desperate labor migrants.
This has been true at least going back to Byzantium and its economic conquest by Genoa and Venice.
That the US thrived pre-1970 free trade is no coincidence. There is no alternative to protectionism.
Free trade = no industry = no money = no future.
I think he is trying to talk about soft neoliberalism vs rejection of neoliberalism as discredited
economics dogma and ideology. I think like Marxism neoliberalism has religious elements in it (as in
"secular religion") so will not go away completely much like obscure religious cults does not dissapper
they on a given date second coming of Christ did not happen.
Notable quotes:
"... new research showing that policies like public housing , welfare and public education spending are more beneficial than conservatives have recognized in decades past. ..."
"... But there are not one, but two big trends in liberal economic thinking. One wants to modify the economic thinking of the past few decades, and the other wants to rip it up. I expect to see a lot of the economic debate in the coming years play out not between the left and right, but between these two strains of thought. ..."
"... The New Center-Left Consensus is attractive to academics and policy wonks. It draws on an eclectic mix of mainstream economic theory, empirical studies and historical experience. It refuses to assume, as many conservatives and libertarians do, that free markets are always the best unless there is a glaring case for government intervention. ..."
In 2015, Forbes writer Adam Ozimek
suggested that a "new liberal consensus" is forming in the economic-policy world. The data back
him up. Many economics professors now
tend to favor government intervention in the economy more than the general public. And the profession's
biggest public stars, from Paul Krugman to Thomas Piketty to Joseph Stiglitz, are now more likely
to lean
to the left than to the right. Meanwhile, I've tried to document the flood of new research
showing that policies like
public housing ,
welfare and public education
spending are more beneficial than conservatives have recognized in decades past.
But there are not one, but two big trends in liberal economic thinking. One wants to
modify the economic thinking of the past few decades, and the other wants to rip it up. I expect
to see a lot of the economic debate in the coming years play out not between the left and right,
but between these two strains of thought.
The research and people I've been writing about fit into what we might call the New Center-Left
Consensus. This strain of thought is based on data and empiricism. Support for higher minimum wages,
for example,
has grown among economists because a large amount of careful
empirical analysis has
shown that minimum wage hikes don't usually cause sizable immediate disruptions in local labor markets.
These economists aren't ignorant of the basic theory of labor supply and demand -- the kind that
every undergrad econ student is forced to learn. They just realize that
it might not be the right theory in this case.
The New Center-Left Consensus is attractive to academics and policy wonks. It draws on an
eclectic mix of mainstream economic theory, empirical studies and historical experience. It refuses
to assume, as many conservatives and libertarians do, that free markets are always the best unless
there is a glaring case for government intervention. It's more willing to entertain all kinds
of ways that government can improve the economy, from welfare to infrastructure spending to regulation,
but it also recognizes that these won't always work. It embraces a philosophy of careful experimentation.
Sometimes the new center-left is even in favor of deregulation -- for example, loosening
zoning restrictions and reducing
occupational licensing . It's not ideologically opposed to the free market.
The best evangelist of the New Center-Left Consensus might be President Barack Obama. In an amazingly
well-informed
editorial in the Economist, he recently laid out a comprehensive picture of the economy and policy.
I have little doubt that Obama's understanding was heavily informed by his chief economic adviser,
Jason Furman ,
who has become a titan of center-left policy advocacy. Obama mixes a healthy respect for capitalism
with a desire to use government to temper the market's excesses.
But there's a second strain of progressive economic thinking that is gaining attention and strength.
This alternative could be called the New Heterodox Explosion. It's basically a movement to purge
mainstream economics from progressive policy-making and thought.
The New Heterodox Explosion rose in large part out of strongly left-leaning intellectual circles,
particularly sociology, the humanities and other disciplines outside economics. It has also found
a home in some economics departments in other countries (most notably the U.K.). Recently, it has
started to permeate blogs and the media.
The new website Evonomics , for example, is
heavily devoted to strongly worded critiques of the entire edifice of modern [neoliberal] economics
and it's where the work of many of the most outspoken champions of the New Heterodox Explosion appears.
These include evolutionary biologist David Sloan Wilson, activist and venture capitalist Nick Hanauer,
speechwriter Eric Liu and Eric Beinhocker of the Institute for New Economic Thinking. In a spate
of recent blog posts and editorials, these thinkers have
advocated replacing mainstream economic theory with thinking based on evolution, and/or on complexity
theory.
Though it's difficult to boil down these critiques to a few sentences, one basic theme of Wilson,
Hanauer, et al.'s thinking is that modern economics is based on selfishness. Mainstream theories
model human beings as atomistic individuals pursuing their own wants. But, say these Evonomics writers,
people are social beings who care a lot about their fellow humans, and are also deeply embedded in
larger social structures and organizations like communities, nations and cultures.
I'm sympathetic to this point of view. I'm not at all sure that economies can be completely understood
by looking at individual decisions, any more than I'm certain the growth of a tree can be understood
simply by looking at the motions of the particles in the leaves and roots. And I do wish that economists
dedicated a lot more thought and attention to the phenomena they call "
externalities "
and "
social preferences ."
But I'm also very wary of applying the Evonomics ideas to policy-making without a lot more work.
First, the connection to evolution and complexity theory often seems less than solid. Nobody
really knows if economies evolve the way organisms do. And efforts to connect complexity theory
to economics, led by the Santa Fe Institute
, have been going on for quite some time without any dramatic breakthroughs.
So while the New Center-Left Consensus is fully formed and ready for application in the real world,
the New Heterodox Explosion is still in its infancy. Center-left ideas have tons of very careful
academic empirical work behind them, while those wishing to tear up economics and start over are
still working mostly with broad analogies. I hope that the New Heterodox Explosion -- which of course
extends far beyond the few writers and ideas I've cited in this post -- becomes a rich source of
new and innovative economic ideas. But it still has a long way to go to match the intellectual heft
of the center-left.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and
its owners.
Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony
Brook University, and he blogs at Noahpinion.
"... The corridor between Manhattan and Washington is a well trodden highway for the personalities we have all gotten to know in the period since the massive deregulation of Wall Street: Robert Rubin, Lawrence Summers, Henry Paulson, Timothy Geithner and many others. ..."
"... General Petraeus' expertise in these areas is unclear. His ability to peddle influence, however, is a known and valued commodity. ..."
"... Petraeus also obtained a sinecure as a non-resident senior fellow at the Belfer Center for Science and International Affairs at Harvard. The Ivy League is, of course, the preferred bleaching tub and charm school of the American oligarchy. ..."
"... The Cathedral has no central administrator, but represents a consensus acting as a coherent group that condemns other ideologies as evil. ..."
"... "you believe that morality has been essentially solved, and all that's left is to work out the details." ..."
"... Cultural assimilation is partly a matter of what psychologist Irving L. Janis called "groupthink," the chameleon-like ability of people to adopt the views of their superiors and peers. This syndrome is endemic to Washington: The town is characterized by sudden fads, be it negotiating biennial budgeting, making grand bargains or invading countries. Then, after a while, all the town's cool kids drop those ideas as if they were radioactive. As in the military, everybody has to get on board with the mission, and questioning it is not a career-enhancing move. The universe of people who will critically examine the goings-on at the institutions they work for is always going to be a small one. As Upton Sinclair said, "It is difficult to get a man to understand something when his salary depends upon his not understanding it. ..."
"... A more elusive aspect of cultural assimilation is the sheer dead weight of the ordinariness of it all once you have planted yourself in your office chair for the 10,000th time. ..."
"... No wonder so few people are whistle-blowers, quite apart from the vicious retaliation whistle-blowing often provokes: Unless one is blessed with imagination and a fine sense of irony, growing immune to the curiousness of one's surroundings is easy. To paraphrase the inimitable Donald Rumsfeld, I didn't know all that I knew, at least until I had had a couple of years away from the government to reflect upon it. ..."
"... It's probably not a coincidence that the American media elite live, work, and socialize in New York and Washington, ..."
"... It's a kind of corporatism. ..."
"... They pretend to be merrily neutral servants of the state, giving the best advice possible on national security or financial matters. But they hold a very deep ideology of the Washington consensus at home, which is deregulation, outsourcing, de-industrialization and financialization. ..."
"... And they believe in American exceptionalism abroad, which is boots on the ground everywhere, it's our right to meddle everywhere in the world. And the result of that is perpetual war. ..."
The corridor between Manhattan and Washington is a well trodden highway for the personalities
we have all gotten to know in the period since the massive deregulation of Wall Street: Robert
Rubin, Lawrence Summers, Henry Paulson, Timothy Geithner and many others.
Not all the traffic involves persons connected with the purely financial operations of the
government: In 2013, General David Petraeus
joined KKR (formerly Kohlberg Kravis Roberts) of 9 West 57th Street, New York, a private equity
firm with $62.3 billion in assets. KKR specializes in management buyouts and leveraged finance.
General Petraeus' expertise in these areas is unclear. His ability to peddle influence, however,
is a known and valued commodity. Unlike Cincinnatus, the military commanders of the Deep
State do not take up the plow once they lay down the sword. Petraeus also obtained a sinecure
as a non-resident senior fellow at the
Belfer Center for Science and International Affairs at Harvard. The Ivy League is, of course,
the preferred bleaching tub and charm school of the American oligarchy.
Lofgren goes on to say that Silicon Valley is a node of the Deep State too, and that despite the
protestations of its chieftains against NSA spying, it's a vital part of the Deep State's apparatus.
More:
The Deep State is the big story of our time. It is the red thread that runs through the war
on terrorism, the financialization and deindustrialization of the American economy, the rise of
a plutocratic social structure and political dysfunction. Washington is the headquarters of the
Deep State, and its time in the sun as a rival to Rome, Constantinople or London may be term-limited
by its overweening sense of self-importance and its habit, as Winwood Reade said of Rome, to "live
upon its principal till ruin stared it in the face."
The Cathedral - The self-organizing consensus of Progressives and Progressive ideology
represented by the universities, the media, and the civil service. A term
coined by blogger Mencius Moldbug. The Cathedral has no central administrator, but represents
a consensus acting as a coherent group that condemns other ideologies as evil. Community
writers have enumerated the
platform of Progressivism as women's suffrage, prohibition, abolition, federal income tax,
democratic election of senators, labor laws, desegregation, popularization of drugs, destruction
of traditional sexual norms, ethnic studies courses in colleges, decolonization, and gay marriage.
A defining feature of Progressivism is that "you believe that morality has been essentially
solved, and all that's left is to work out the details." Reactionaries see Republicans as
Progressives, just lagging 10-20 years behind Democrats in their adoption of Progressive norms.
You don't have to agree with the Neoreactionaries on what they condemn - women's suffrage? desegregation?
labor laws? really?? - to acknowledge that they're onto something about the sacred consensus that
all Right-Thinking People share. I would love to see a study comparing the press coverage from 9/11
leading up to the Iraq War with press coverage of the gay marriage issue from about 2006 till today.
Specifically, I'd be curious to know about how thoroughly the media covered the cases against the
policies that the Deep State and the Shallow State decided should prevail. I'm not suggesting a conspiracy
here, not at all. I'm only thinking back to how it seemed so obvious to me in 2002 that we should
go to war with Iraq, so perfectly clear that the only people who opposed it were fools or villains.
The same consensus has emerged around same-sex marriage. I know how overwhelmingly the news media
have believed this for some time, such that many American journalists simply cannot conceive that
anyone against same-sex marriage is anything other than a fool or a villain. Again, this isn't a
conspiracy; it's in the nature of the thing. Lofgren:
Cultural assimilation is partly a matter of what psychologist
Irving L. Janis called
"groupthink," the chameleon-like ability of people to adopt the views of their superiors and peers.
This syndrome is endemic to Washington: The town is characterized by sudden fads, be it negotiating
biennial budgeting, making grand bargains or invading countries. Then, after a while, all the
town's cool kids drop those ideas as if they were radioactive. As in the military, everybody has
to get on board with the mission, and questioning it is not a career-enhancing move. The universe
of people who will critically examine the goings-on at the institutions they work for is always
going to be a small one. As Upton Sinclair said, "It is difficult to get a man to understand something
when his salary depends upon his not understanding it."
A more elusive aspect of cultural assimilation is the sheer dead weight of the ordinariness
of it all once you have planted yourself in your office chair for the 10,000th time. Government
life is typically not some vignette from an Allen Drury novel about intrigue under the
Capitol dome. Sitting and staring at the clock on the off-white office wall when it's 11:00 in
the evening and you are vowing never, ever to eat another piece of takeout pizza in your life
is not an experience that summons the higher literary instincts of a would-be memoirist.
After a while, a functionary of the state begins to hear things that, in another context, would
be quite remarkable, or at least noteworthy, and yet that simply bounce off one's consciousness
like pebbles off steel plate: "You mean the
number of terrorist groups we are fighting is classified?" No wonder so few people
are whistle-blowers, quite apart from the vicious retaliation whistle-blowing often provokes:
Unless one is blessed with imagination and a fine sense of irony, growing immune to the curiousness
of one's surroundings is easy. To paraphrase the inimitable Donald Rumsfeld, I didn't know all
that I knew, at least until I had had a couple of years away from the government to reflect upon
it.
When all you know is the people who surround you in your professional class bubble and your social
circles, you can think the whole world agrees with you, or should. It's probably not a coincidence
that the American media elite live, work, and socialize in New York and Washington, the two
cities that were attacked on 9/11, and whose elites - political, military, financial - were so genuinely
traumatized by the events.
Anyway, that's just a small part of it, about how the elite media manufacture consent. Here's
a final quote, one from
the Moyers interview with Lofgren:
BILL MOYERS: If, as you write, the ideology of the Deep State is not democrat or republican,
not left or right, what is it?
MIKE LOFGREN: It's an ideology. I just don't think we've named it. It's a kind of
corporatism. Now, the actors in this drama tend to steer clear of social issues. They
pretend to be merrily neutral servants of the state, giving the best advice possible on national
security or financial matters. But they hold a very deep ideology of the Washington consensus
at home, which is deregulation, outsourcing, de-industrialization and financialization.
And they believe in American exceptionalism abroad, which is boots on the ground everywhere,
it's our right to meddle everywhere in the world. And the result of that is perpetual war.
This can't last. We'd better hope it can't last. And we'd better hope it unwinds peacefully.
I, for one, remain glad that so many of us Americans are armed. When the Deep State collapses
- and it will one day - it's not going to be a happy time.
Questions to the room: Is a Gorbachev for the Deep State conceivable? That is, could you foresee
a political leader emerging who could unwind the ideology and apparatus of the Deep State, and not
only survive, but succeed? Or is it impossible for the Deep State to allow such a figure to thrive?
Or is the Deep State, like the Soviet system Gorbachev failed to reform, too entrenched and too far
gone to reform itself? If so, what then?
"... Krugman is such a deplorable hack. I know we are supposed to accept bribe-taking politicians and the economy run by looting robber barons. But can't we even have a goddamn fourth estate? ..."
"... The way Krugman murders journalism ethics by outright campaigning for one of the most corrupt politicians in American history is outrageous. Barfing up her disgusting campaign memes verbatim as if he's coordinating his columns with her war room. ..."
"... If you're a scientist you would know that economics does not remotely resemble a science. One familiar with the history of math and science will notice that their development (based on discovered facts) forms a tree-like structure. One discovery branches out to more discoveries. The growth is therefore exponential. ..."
Sure...Krugman will occasionally pay lip service to green energy.
The problem is that 'liberal' economists tend to keep separate silos for green energy and infrastructure.
Question is, why do they refuse to connect the dots between climate change mitigation, green
energy, fiscal stimulus, and lots of jobs? And why do they prioritize more road and bridges, which
will only make climate change worse?
Krugman is an abhorrent neoliberal hack (as well as Hillary stooge).
Who actually understand very little about climate change clearly being non-specialist without
any training of physics and geophysics. He is a second rate neoclassical economist with penchant
for mathiness (and a very talented writer).
The key question here is Clinton warmongering and the threat of nuclear war with Russia. Washington
neocon chichenhawks became recently realty crazy. Obama looks completely important and does not
control anything.
I think this is more immediate threat then climate change.
Oil depletion (which already started and will be in full force in a couple of decades) might
take care about climate change as period of "cheap oil" (aka "oil age") probably will last less
then 100 years and as such is just a blip in Earth history.
End of cheap oil also might lead to natural shrinking of human population -- another factor
in the global climate change and a threat to natural ecosystems.
Hillary is the fracking Queen. Claiming she's a champion of the environment is as ridiculous portraying
Donald Trump a feminist.
Obomba is another pretender on the environment. The Paris Agreement commits to absolutely nothing
but more talk at a future time. China signed on and is still keeping its commitment to do absolutely
nothing to reduce emissions until 2030. (By the time the West has exported the lion share of its
emissions to the country in a pointless GHG emissions shell game; emission per capita have skyrocketed
since 2002! a 25% increase!)
Krugman is such a deplorable hack. I know we are supposed to accept bribe-taking politicians
and the economy run by looting robber barons. But can't we even have a goddamn fourth estate?
The way Krugman murders journalism ethics by outright campaigning for one of the most corrupt
politicians in American history is outrageous. Barfing up her disgusting campaign memes verbatim
as if he's coordinating his columns with her war room.
So to all the pretend liberals out there who offer the people nothing more than more corruption,
lies, war-profiteering and public trust liquidation: you deserve Trump. And I pray that you get
him. (After him, a New Deal; and the 'me generation,' the Void.)
If you're a scientist you would know that economics does not remotely resemble a science.
One familiar with the history of math and science will notice that their development (based on
discovered facts) forms a tree-like structure. One discovery branches out to more discoveries.
The growth is therefore exponential.
Economic history does not follow this pattern.
With science there are paradigm shifts that occur with groundbreaking discoveries like the
theories of relativity and quantum mechanics. The Friedmanian paradigm shift was founded on jettisoning
all the enormously successful work Keynes accomplished and digging up failed 19th century ideology,
repeating disastrous history.
Even psychology follows the pattern. Although it began with a lot of unsubstantiated Aristotelian
philosophizing, it was a starting point from which a significant body of definite knowledge and
medical treatments developed. A real social science. (Not perfect. It was recently discovered
that about 50% of published psychological experiments were not reproducible.)
As an anthropologist you should know about cliques and group-think. Have an inkling of how
corruption could gradually develop and spread among upper-echelon cliques to the point where the
government, the economy, the courts and the news media become captured by the upper class. Understand
how cowards would rather look the other way than take a stand and deal with it: "see no evil,
hear no evil, speak no evil."
As an anthropologist, I can assert with confidence that you are babbling about things you do not
really understand at all. I have issues with a lot of economics, but you are completely incoherent.
Completely incoherent? Then it should be easy enough for you to tear apart what I wrote. It was
certainly easy enough for me to tear into Krugman's crass political pandering. But all you got
is lame generalizations. Stock insults that could be said about anything.
What issues do you have with "a lot of economics?" I bet you can't come up with anything. Come
on. Out with it! Say something intelligent about anything, if you are at all capable, Mr. Dick.
I have yet to read anything from you that indicates you have any knowledge about anything.
It is Dr. Dick, since I have a Ph.D. If you ever read the comments on this blog, you would know
full well what those issues are, since I have raised them here many times. For a start the assumption
of "rational actors" (only partially true), the assumption of economic maximization (people maximize
many different things which affect their economic choices), and the assumption of "rational markets"
(this ignores pervasive information assymetry and active deceit).
"... I got tired of lambasting macroeconomics a while ago, and the "macro wars" mostly died down in the blogosphere around when the recovery from the Great Recession kicked in. But recently, there have been a number of respected macroeconomists posting big, comprehensive criticisms of the way academic macro gets done. Some of these criticisms are more forceful than anything we bloggers blogged about back in the day! ..."
"... First, there's Paul Romer's latest, " The Trouble With Macroeconomics ". The title is an analogy to Lee Smolin's book " The Trouble With Physics ". Romer basically says that macro (meaning business-cycle theory) has become like the critics' harshest depictions of string theory - a community of believers, dogmatically following the ideas of revered elders and ignoring the data. The elders he singles out are Bob Lucas, Ed Prescott, and Tom Sargent. ..."
"... In response to the observation that the shocks [in DSGE models] are imaginary, a standard defense invokes Milton Friedman's (1953) methodological assertion from unnamed authority that "the more significant the theory, the more unrealistic the assumptions (p.14)." More recently, "all models are false" seems to have become the universal hand-wave for dismissing any fact that does not conform to the model that is the current favorite. ..."
"... We [macroeconomists] tend to view research as being the process of posing a question and delivering a pretty precise answer to that question...The research agenda that I believe we need is very different. It's hugely messy work. We need...to build a more evidence-based modeling of financial institutions. We need...to learn more about how people actually form expectations. We need [to use] firm-based information about residual demand functions to learn more about product market structure. At the same time, we need to be a lot more flexible in our thinking about models and theory, so that they can be firmly grounded in this improved empirical understanding. ..."
"... This is a somewhat misleading way of putting it, but it allows me to illustrate some important points about 'unrealistic' assumptions. In real world modelling in Physics 'unrealistic' assumptions are ubiquitous. What matters is not literal realism of assumptions but robustness.of conclusions. ..."
"... Simplifying assumptions are context specific, ie ad hoc, and never axiomatic.The ad hoc nature of simplifying assumptions is a feature, not a bug as the above example illustrates. ..."
"... Robustness is critical. As we move from our simplifying assumptions towards greater realism/precision, the conclusion should not change in any material way, and we use the simplifications because the gain in accuracy of the conclusions is not worth the added complexity and consequent loss of tractability in the model. ..."
"... This is indeed excellent. The three criteria for evaluating assumptions/simplifications, the precise definition of ad hoc, and the crystal-clear example of point mass for orbits vs rotation. ..."
"... So, we are witnessing a battle between a declining DSGE scam and ascending "Realistic assumptions" scam. ..."
"... Both approaches are worthless, but I guess it will give an excuse to macroeconomists why they are useless: we just used the wrong paradigm, now we are switching to the new one. Just many more years of research is needed and we will be ready. Science!, as they say. ..."
"... Science, IEHO, has three touchstones. Coherence - your model and its assumptions should not contradict each other or lead to contradictory conclusions. Consilience - a good theory has a broad reach for explaining reality. Consensus - a theory which is coherent and consilient should lead to a consensus among practicioners. It is only within a strong consensus that people can talk to each other and extend the field. ..."
"... It appears that macro misses out on a number of these. ..."
"... "Romer basically says that macro (meaning business-cycle theory)" ..."
"... In either case, I think this is another big problem with macro, its obsession with business cycles as opposed to long-term thriving and prosperity. eg, Gerald Friedman got tied in knots by this; he was trying to use "stimulus" thinking and arguments to talk about about multi-decadal possibilities. ..."
"... I'm fond of observing that in addition to "cargo cult science", macroeconomics has often been likened to a religion. What religions do when the mainstream becomes intolerable for one reason or another is schism. Then after a number of years what used to be the mainstream dies out and the former schismatics become the mainstream. ..."
"... Psychology went through this kind of crisis some years ago when the scientists split off from the clinicians, and created the Association for Psychological Science to contrast with the clinically-oriented American Psychological Association (the APA is the one that publishes the unscientific but influential Diagnostic and Statistical Manual). ..."
"... In order to be scientific, the standard method is to actually try predicting. Prediction is messy and provably fails to converge to any possible theory, but there are other authentic sciences that have this same theoretical limitation, like meteorology. This doesn't prevent meteorologists from constructing theories which make predictions that demonstrably get better and better year after year. ..."
"... For twenty years Romer has been implying (and recently saying) that economists who don't accept endogenous growth theory have abandoned the canons of science and are either blind or indifferent to the truth. Over the same twenty years he seems to have produced very little theoretical work, while his targets have remained working economists. (Why, after all, should anyone continue to do theory, since Romer has discovered the truth?) ..."
I got tired of lambasting macroeconomics a while ago, and the "macro wars" mostly died down in
the blogosphere around when the recovery from the Great Recession kicked in. But recently, there
have been a number of respected macroeconomists posting big, comprehensive criticisms of the way
academic macro gets done. Some of these criticisms are more forceful than anything we bloggers blogged
about back in the day! Anyway, I thought I'd link to a couple here.
First, there's Paul Romer's latest, "
The Trouble
With Macroeconomics ". The title is an analogy to Lee Smolin's book "
The Trouble With Physics ". Romer basically says that macro (meaning business-cycle theory) has
become like the critics' harshest depictions of string theory - a community of believers, dogmatically
following the ideas of revered elders and ignoring the data. The elders he singles out are Bob Lucas,
Ed Prescott, and Tom Sargent.
Romer says that it's obvious that monetary policy affects the real economy, because of the Volcker
recessions in the early 80s, but that macro theorists have largely ignored this fact and continued
to make models in which monetary policy is ineffectual. He says that modern DSGE models are no better
than old pre-Lucas Critique simultaneous-equation models, because they still take lots of assumptions
to identify the models, only now the assumptions are hidden instead of explicit. Romer points to
distributional assumptions, calibration, and tight Bayesian priors as ways of hiding assumptions
in modern DSGE models. He cites
an interesting
2009 paper by Canova and Sala that tries to take DSGE model estimation seriously and finds (unsurprisingly)
that identification is pretty difficult.
As a solution, Romer suggests chucking formal modeling entirely and going with more general, vague
but flexible ideas about policy and the macroeconomy, supported by simple natural experiments and
economic history.
Romer's harshest zinger (and we all love harsh zingers) is this:
In response to the observation that the shocks [in DSGE models] are imaginary, a standard
defense invokes Milton Friedman's (1953) methodological assertion from unnamed authority that
"the more significant the theory, the more unrealistic the assumptions (p.14)." More recently,
"all models are false" seems to have become the universal hand-wave for dismissing any fact that
does not conform to the model that is the current favorite.
The noncommittal relationship with the truth revealed by these methodological evasions...goes
so far beyond post-modern irony that it deserves its own label. I suggest "post-real."
Ouch. He also calls various typical DSGE model elements names like "phlogiston", "aether", and "caloric".
Fun stuff
. (Though I do think he's too harsh on string theory, which often is just a kind of math that
physicists do to keep themselves busy, and has no danger of hurting anyone, unlike macro theory.)
Meanwhile, a few weeks earlier, Narayana Kocherlakota wrote a post called "
On the Puzzling Prevalence of Puzzles ". The basic point was that since macro data is fairly
sparse, macroeconomists should have lots of competing models that all do an equally good job of matching
the data. But instead, macroeconomists pick a single model they like, and if data fails to fit the
model they call it a "puzzle". He writes:
To an outsider or newcomer, macroeconomics would seem like a field that is haunted by its lack
of data...In the absence of that data, it would seem like we would be hard put to distinguish
among a host of theories...[I]t would seem like macroeconomists should be plagued by underidentification...
But, in fact, expert macroeconomists know that the field is actually plagued by failures to fit
the data – that is, by overidentification.
Why is the novice so wrong? The answer is the role of a priori restrictions in macroeconomic theory...
The mistake that the novice made is to think that the macroeconomist would rely on data alone
to build up his/her theory or model. The expert knows how to build up theory from a priori restrictions
that are accepted by a large number of scholars...[I]t's a little disturbing how little empirical
work underlies some of those agreed-upon theory-driven restrictions – see p. 711 of Lucas (JMCB,
1980) for a highly influential example of what I mean.
In fact, Kocherlakota and Romer are complaining about much the same thing: the overuse of unrealistic
assumptions. Basically, they say that macroeconomists, as a group, have gotten into the habit of
assuming stuff that just isn't true. In fact, this is what the Canova and Sala
paper
says too, in a much more technical and polite way:
Observational equivalence, partial and weak identification problems are widespread and typically
produced by an ill-behaved mapping between the structural parameters and the coefficients of the
solution.
That just means that the model elements aren't actually real things.
(This critique resonates with me. From day 1, the thing that always annoyed me about macro was how
people made excuses for assumptions that were either unverifiable or just flatly contradictory to
micro data. The usual excuse was the "
pool player analogy " - the idea that the pieces of a model don't have to match micro data as
long as the resulting model matches macro data. I'm not sure that's how Milton Friedman wanted his
metaphor to be used, but that seems to be the way it does get used. And when the models didn't
match macro data either, the excuse was "all models are wrong," which really just seems to be a way
of saying "the modeler gets to choose which macro facts are used to validate his theory". It seemed
that to a large extent, macro modelers were just allowed to do whatever they wanted, as long as their
papers won some kind of behind-the-scenes popularity contest. But I digress.)
So what seems to unite the new heavyweight macro critics is an emphasis on realism . Basically,
these people are challenging the idea, very common in econ theory, that models shouldn't worry about
being realistic. (Paul Pfleiderer is another economist who has recently made
a similar complaint , though not in the context of macro.) They're not saying that economists
need 100% perfect realism - that's the kind of thing you only get in physics, if anywhere. As
Paul
Krugman and
Dani Rodrik have emphasized, even the people advocating for more realism acknowledge that there's
some ideal middle ground. But if Romer, Kocherlakota, etc. are to be believed, macroeconomists aren't
currently close to that optimal interior solution.
Updates
Olivier Blanchard is a bet less forceful, but he's definitely also
one of the new heavyweight
critics . Among his problems with DSGE models, at least as they're currently done, are 1. "unappealing"
assumptions that are "at odds with what we know about consumers and firms", and 2. "unconvincing"
estimation methods, including calibration and tight Bayesian priors. Sounds pretty similar to Romer.
Meanwhile,
Kocherlakota
responds to Romer . He agrees with Romer's criticism of unrealistic macro assumptions, but he
dismisses the idea that Lucas, Prescott, and Sargent are personally responsible for the problems.
Instead, he says it's about the incentives in the research community. He writes:
We [macroeconomists] tend to view research as being the process of posing a question and delivering
a pretty precise answer to that question...The research agenda that I believe we need is very
different. It's hugely messy work. We need...to build a more evidence-based modeling of financial
institutions. We need...to learn more about how people actually form expectations. We need [to
use] firm-based information about residual demand functions to learn more about product market
structure. At the same time, we need to be a lot more flexible in our thinking about models and
theory, so that they can be firmly grounded in this improved empirical understanding.
Kocherlakota says that this isn't a "sociological" issue, but I think most people would call it that.
Since journals and top researchers get to decide what constitutes "good" research, it seems to me
that to get the changes in focus Kocherlakota wants, a sociological change is exactly what would
be required.
Kocherlakota now has another post describing
how
he thinks macro ought to be done . Basically, he thinks researchers - as a whole, not just on
their own! - should start with toy models to facilitate thinking, then gather data based on what
the toy models say is important, then build formal "serious" models from the ground up to match that
data. He contrasts this with the current approach of tweaking existing models.
My question
is: Who is going to enforce this change? If a few established researchers start doing things
the way Kocherlakota wants, they'll certainly still get published (because they're famous old people),
but will the young folks follow? How likely is it that established researchers en masse are going
to switch to doing things this way, and demanding that young researchers do the same, and using their
leverage as reviewers, editors, and PhD advisers to make that happen? This doesn't seem like the
kind of change that can be brought about by a few young smart rebels forcing everyone else to recognize
the value of their approach - the existing approach, which Kocherlakota dislikes, already succeeds
in getting publication and prestige, so the rebels would simply coexist alongside the old approach,
rather than overthrowing it. How could this cultural change be put into effect?
Also: Romer
now has a follow-up
to his original post, defending his original post against the critics. This part stood out to
me as particularly persuasive:
The whine I hear regularly from the post-real crowd is that "it is really, really hard to do research
on macro so you shouldn't criticize any of our models unless you can produce one that is better."
This is just post-real Calvinball used as a shield from criticism. Imagine someone saying to a
mathematician who finds an error in a theorem that is false, "you can't criticize the proof until
you come up with valid proof." Or try this one on and see how it feels: "You can't criticize the
claim that vaccines cause autism unless you can come up with a better explanation for autism."
Sounds right to me. The old like that "it takes a theory to kill a theory" just seems wrong to me.
Sometimes all it takes is evidence.
I've already commented at lenght on Romer at
Mark Thoma's. So I'll just use something you wrote on physics to make a tangential comment
on unrealistic assumptions.
"They're not saying that economists need 100% perfect realism - that's the kind of thing
you only get in physics, if anywhere"
This is a somewhat misleading way of putting it, but it allows me to illustrate some important
points about 'unrealistic' assumptions. In real world modelling in Physics 'unrealistic' assumptions are ubiquitous. What matters is
not literal realism of assumptions but robustness.of conclusions.
Consider a point-mass. There is no such thing. Yet it is a perfectly legitimate simplifying
assumption about a planet if you are interested in studying its orbit around its sun. It is not
a legitimate assumption if you are interested in studying a planet's rotation about its axis
The most important points underlying such simplifying assumptions are:
1. Simplifying assumptions are context specific, ie ad hoc, and never axiomatic.The ad hoc
nature of simplifying assumptions is a feature, not a bug as the above example illustrates.
2. Robustness is critical. As we move from our simplifying assumptions towards greater realism/precision,
the conclusion should not change in any material way, and we use the simplifications because the
gain in accuracy of the conclusions is not worth the added complexity and consequent loss of tractability
in the model.
3. Out of sample performance of the model.
* Richard Feynman:
"...in order to understand physical laws you must understand that they are all some kind of
approximation.
The trick is the idealizations. To an excellent approximation of perhaps one part in 10^10,
the number of atoms in the chair does not change in a minute, and if we are not too precise we
may idealize the chair as a definite thing; in the same way we shall learn about the characteristics
of force, in an ideal fashion, if we are not too precise. One may be dissatisfied with the approximate
view of nature that physics tries to obtain (the attempt is always to increase the accuracy of
the approximation), and may prefer a mathematical definition; but mathematical definitions can
never work in the real world. A mathematical definition will be good for mathematics, in which
all the logic can be followed out completely, but the physical world is complex, as we have indicated
in a number of examples, such as those of the ocean waves and a glass of wine. When we try to
isolate pieces of it, to talk about one mass, the wine and the glass, how can we know which is
which, when one dissolves in the other? The forces on a single thing already involve approximation,
and if we have a system of discourse about the real world, then that system, at least for the
present day, must involve approximations of some kind.
This system is quite unlike the case of mathematics, in which everything can be defined, and
then we do not know what we are talking about. In fact, the glory of mathematics is that we do
not have to say what we are talking about. The glory is that the laws, the arguments, and the
logic are independent of what "it" is.
Indeed. That was part of the reason for redundantly using the phrase :) . The other reason
was that the usage is strictly accurate. ad hoc = for this particular purpose (Shorter OED)
It is difficult to see how simplifying assumptions underlying real world models can be anything
but ad hoc (context-specific)
For a mathematician to object to ad hoc statements would be understandable, but for someone
concerned with real world modelling to do so is mind-boggling.
It is worth pointing out that the economists who do so object have never in their life built
a model that works, for any definition of 'works' acceptable anywhere outside economics.
This is indeed excellent. The three criteria for evaluating assumptions/simplifications, the
precise definition of ad hoc, and the crystal-clear example of point mass for orbits vs rotation.
I'd like to bring in my pet bailiwick, accounting. Our (national) accounting systems are rife
with assumptions and simplifications - they are economic models. (Or in Feynman's excellent
term, "idealizations.") And those assumptions are effectively invisible to almost everyone. If
I had a nickel for every time I've heard "it's an accounting identity" as if that was somehow
synonymous with "truth"...
Just one example, relating to a rather important economic measure - income:
The national-accounting sages know that the appropriateness of this basic conceptual construct
is a very open question. But that fact is invisible to almost everyone. National accounts could
be depicted quite differently (yes, with everything still balancing).
Economists' thinking is completely owned by the conceptual constructs, the idealizations, embodied
in our national-accounting structures. And they frequently display zero understanding of the constructs
that they are (we are) using to think with.
I've been critical of you in the past, but that is a really good comment, 100% on the ball.
But I will add that the simplifying assumption you used to illustrate your point, may not be true,
but it is nearly true (without the scales being considered). And many simplifying assumptions
used in economics are not nearly true.
Informally we might - and sometimes do - say that the assumption (point-mass) is 'nearly true',
but it is not quite correct. It is an idealization that satisfies criterion (2): robustness, and
the resulting model satisfies criterion (3); out-of-sample performance.
Of course this is very different from the sort of assumptions common in economics which are
often patently false - and this is the critical point - making them more realistic materially
changes the conclusions ie the assumptions in the models fail to satisfy the robustness criterion.
And, at least in DSGE/RBC macro to talk of in-sample fit or out-of-sample performance of the resulting
model would imply a libelous misuse of the terms.
Actually, as Romer notes, the situation in economics is often even worse.with assumptions being
not merely false ( with non-robust conclusions) but entirely meaningless in terms of real world
observables. Assumptions of the sort that are deservedly derisively dismissed as not even wrong
in every scientific or engineering discipline.
It's not just an argument about having models with realistic assumptions. It is also an argument
about the extent to which mathematics and models can usefully provide the answers we need to know.
Basically we are going back to Keynes's (1937) arguments about the limitations of "pretty and
polite techniques". Edgeworth was also very much aware of the limitations of mathematics in economics.
And so have many others, for a long time.
I have been critical of Romer in the past. His growth theory for me does not answer the critical
questions that I think are the most important into understanding why certain countries get on
to a growth curve and others do not. But I now really have to admire his honesty.
It is not true that we do not have a lot of macro data. The National Accounts contain scores
of (largely stock-flow consistent) data. The point is: one of the big failures of DSGE economists
is their failureto establish a measurement system which produces data consistent with the DSGE
models. Keynes, who even established his own government statistical office, the present day ONS,
and, in a more indirect sense, Smith, Marshall as well and Veblen did establish systems of measurement
to measure data consistent with their models and ideas. Read Mitra Kahn http://openaccess.city.ac.uk/1276/
or my efforts
DSGE economists never bothered to do this. Weird (well, not that weird - taking account of
real life data would have meant taking unemployment and the government serious... Or the fact
that the National Accounts identities only hold for nominal variables, not for deflated real variables).
Anyway - as there is no system of DSGE consistent measurement of the macro-economy it can't be
called a valid science.There are however systems consistent with the ideas of Keynes and Veblen...
So, we are witnessing a battle between a declining DSGE scam and ascending "Realistic assumptions"
scam.
Both approaches are worthless, but I guess it will give an excuse to macroeconomists why
they are useless: we just used the wrong paradigm, now we are switching to the new one. Just many
more years of research is needed and we will be ready. Science!, as they say.
I'm curious how many economists are simply too blind to understand that this will lead nowhere
and how many are simply cynical beyond belief.
I just don't understand the mentality. Wouldn't you like to do something productive? Like produce
actual knowledge? Can you guys be satisfied with infinite curve fitting?
Science, IEHO, has three touchstones. Coherence - your model and its assumptions should not contradict each other or lead to contradictory
conclusions. Consilience - a good theory has a broad reach for explaining reality. Consensus - a theory which is coherent and consilient should lead to a consensus among practicioners.
It is only within a strong consensus that people can talk to each other and extend the field.
It appears that macro misses out on a number of these.
"Romer basically says that macro (meaning business-cycle theory)"
Are you equating macro with business-cycle theory, or are you saying that Romer does?
In either case, I think this is another big problem with macro, its obsession with business
cycles as opposed to long-term thriving and prosperity. eg, Gerald Friedman got tied in knots
by this; he was trying to use "stimulus" thinking and arguments to talk about about multi-decadal
possibilities.
" (Though I do think he's too harsh on string theory, which often is just a kind of math that
physicists do to keep themselves busy, and has no danger of hurting anyone, unlike macro theory.)"
I find it hard to believe Noah understands string theory well enough to justify such a strong
opinion of it only existing to keep theorists employed. As much as I like "The Trouble With Physics"
those reading should keep in mind that Lee Smolin acknowledges that maybe there is something to
string theory.
And again, the focus of string theory in theoretical physics is harmful to the expansion of
knowledge and economic growth if too many brains not only barked up the wrong tree - nothing wrong
with that - but *continued* to bark up the wrong tree for years, ignoring other paths of understanding
physics, which is Smolin's main point.
I'm fond of observing that in addition to "cargo cult science", macroeconomics has often
been likened to a religion. What religions do when the mainstream becomes intolerable for one
reason or another is schism. Then after a number of years what used to be the mainstream dies
out and the former schismatics become the mainstream.
Psychology went through this kind of crisis some years ago when the scientists split off
from the clinicians, and created the Association for Psychological Science to contrast with the
clinically-oriented American Psychological Association (the APA is the one that publishes the
unscientific but influential Diagnostic and Statistical Manual).
All that heterodox economists need to do is gain some self-confidence and stop calling themselves
derogatory names. That won't make them scientific, but it'll be a step in the right direction.
In order to be scientific, the standard method is to actually try predicting. Prediction is
messy and provably fails to converge to any possible theory, but there are other authentic sciences
that have this same theoretical limitation, like meteorology. This doesn't prevent meteorologists
from constructing theories which make predictions that demonstrably get better and better year
after year.
Why don't all these macro critics stop publishing in "unscientific" mainstream journals and
setup their own J.Econ.Sci. that has rigorous scientific standards? Many of them have tenure or
non-academic jobs (e.g. Roemer) and don't need to kowtow to committees who care only about established
impact factors. It's been done elsewhere. It wasn't so long ago that one of the most prestigious
biology journals Cell, was just an upstart new face on the block. All it takes is a strong editor
and a pool of like-minded peer reviewers.
I think Paul Romer's self-serving ad hominem attacks should be identified as just that. One
would hardly blame the older generation of Nobel laureates of conspiring to deny economic pre-eminence
to Romer - look at how he behaves! - but I think they probably have better things to do.
I admit I haven't completely digested Romer's latest thunderbolt - I'm basing my comments more
on Romer's "mathiness" series of a year ago. In that case, I went back and read the "mathy" papers
that Romer was attacking. Mathy they were, but the Lucas and Moll paper at least was very clear
about why it didn't see increasing returns-to-scale in growth models convincing: the intellectual
property-driven economic sector just isn't, in their view, big enough. (BTW, that's almost exactly
the same argument made by William Nordhaus against the AI "singularity" folks: it could happen,
but none of today's macroeconomic data suggest that it is happening.)
To come back to the current discussion, I have no particular sympathy with the Lucas-Prescott-Sargent
rational expectations / microfoundations / real business cycle approach - but the needed discussion
of the defects of RBC has been underway for some time. And note that Romer's opening distillation
of RBC makes its problems all about a supposed "exogenous" component, for which the subtext is
that RBC's authors don't accept Romer's "endogenous" growth theory.
For twenty years Romer has been implying (and recently saying) that economists who don't accept
endogenous growth theory have abandoned the canons of science and are either blind or indifferent
to the truth. Over the same twenty years he seems to have produced very little theoretical work,
while his targets have remained working economists. (Why, after all, should anyone continue to
do theory, since Romer has discovered the truth?)
I wish Romer well at the World Bank. There is no doubt that his ideas around urbanization,
for example, will bring an important and updated perspective to a development bank. But the very
move suggest to me that the World Bank has not failed to note Romer's ability to propagandize
an economic agenda - and that it values his political skills as much as his reputation as an economic
theorist.
It's easy to poke holes in existing methodology, but it's much more difficult to come up with
viable alternatives and solutions. Do those who knock DSGE models really think we should go back
to 1970's macro and reuse old-school Keynesian models? The empirical evidence against Keynesian
multipliers is overwhelming (See Ramey for an overview). Methodologically, Keynesian models make
just as many implausible, ad hoc assumptions as DSGE models, if not more. Their forecast accuracy
is no better; private forecasters are mostly selling stories and scenarios, not forecasts that
in any way will prove ex post to be accurate.
I think you are repeating - and it is a good reminder - the classic Mark Blaug argument that
economists should not abandon the "best available" theory (even if its deficiencies are manifest)
if there is no better replacement. I have no problem with that.
However, I think the discussion right now is about those manifest defects. And there are stirrings
about what comes next. Noah has blogged several times on the new "empirical turn". And the Keynesians,
who have never gone away, may yet stand up a rehabilitated theory. For a usable business cycle
theory, there are really three tests to satisfy:
1) Normal forecasting capability (as you mention);
2) Convincing comparative statics on the effects of monetary or fiscal intervention. (RBC omitted
this almost by definition.)
3) Some ability to detect pressures that are building toward a major shock. (I call this 'the
Cassandra feature', since the predictions are unlikely to be believed or heeded.) Whether any
model could really offer this is open to question, but it's a real question. The Fed always talks
about "risks to the economy", but is the perception of those risks coming from the model? How
did Warren Buffet know that the pile of financial derivatives would collapse, but bankers and
regulators and economists not know it? One answer, at least for economists, is that rational expectations
theory forces prediction of any kind of discontinuity completely out of the model. That part of
Paul Romer's complaint seems to me to be valid.
"... There is indeed a wing of heterodox economics that is anti-mathematical. Known as "Critical Realism" and centred on the work of Tony Lawson at Cambridge UK, it attributes the failings of economics to the use of mathematics itself... ..."
"... Steve also offers some useful criticism of Milton Friedman's ideas about how to evaluate a model's empirical success ( I agree ). ..."
"... The problem with 'heterodox economics' is that it is self-definition in terms of the other. It says 'we are not them' - but says nothing about what we are. This is because it includes everything outside of the mainstream, from reasonably well-defined and coherent schools of thought such as Post Keynesians, Marxists and Austrians, to much more nebulous and ill-defined discontents of all hues. To put it bluntly, a broad definition of 'people who disagree with mainstream economics' is going to include a lot of cranks. People will place the boundary between serious non-mainstream economists and cranks differently, depending on their perspective. ..."
"... Aside from rejecting standard neoclassical economics, the Marxists and the Austrians don't have a great deal in common. ..."
"... Noah seems to define heterodox economics as 'non-mathematical' economics. This is inaccurate. There is much formal modelling outside of the mainstream. ..."
"... Noah's post unfortunately seems to have elicited some rather defensive responses from the heterodox community, along the lines of " But we DO like mathematics! " or even, " Actually our mathematics is better than yours ". But this is to buy into Noah's core proposition. The heterodox economics community should - and, to be fair, in most cases does - reject it outright. Economics is not, and cannot be , exclusively mathematical...There is no need for the heterodox economic community to be defensive about vagueness. ..."
The other day I wrote
a Bloomberg View post arguing that heterodox macroeconomics is not in any better shape than mainstream
macroeconomics. As you might expect, this drew some lively responses.
One or two of the responses seemed to be arguing against the title of my post, rather than
the contents. That's understandable, since titles are important. In this case, though, it probably
detracted from the debate a great deal. The Bloomberg title people are good, and they usually get
things right, but once in a while the title they choose doesn't quite capture the point I'm trying
to make. This was one of those cases. The title they gave my post was "Economics Without Math Is
Trendy, But It Doesn't Add Up." But actually, this wasn't what I was arguing. My point about non-mathy
models wasn't that these are bad, useless, or inferior. It was that they're different from
mathy models, and so comparing non-mathy models with mathy ones is an apples-to-oranges comparison.
Both types of models have their uses, but you can't really compare one to the other. I make that
pretty clear in the text of
my post , but most of the people who responded tended to focus more on the title. Oh well. These
things happen.
Anyway, on to some of the responses. The numbering here is arbitrary, corresponding to the order
in which the tabs were open on my browser. (Note: The ordering has changed; see #4.)
Response 1: Steve Keen
First, we have
a
response by Steve Keen . Steve, unlike others, did get the point I was making about mathy vs.
non-mathy models (Thanks, Steve!), and had some good commentary on the subject:
There is indeed a wing of heterodox economics that is anti-mathematical. Known as "Critical
Realism" and centred on the work of Tony Lawson at Cambridge UK, it attributes the failings of
economics to the use of mathematics itself...
What Noah might not know is that many heterodox economists are critical of this approach as well.
In response to
a paper by Lawson that effectively defined "Neoclassical" economics as any economics that
made use of mathematics (which would define me as a Neoclassical!), Jamie Morgan edited a book
of replies to Lawson entitled
What is Neoclassical Economics? (including a chapter by me). While the authors agreed with
Lawson's primary point that economics has suffered from favouring apparent mathematical elegance
above realism, several of us asserted that mathematical analysis is needed in economics, if only
for the reason that Noah gave in his article[.]
Steve also offers some useful criticism of Milton Friedman's ideas about how to evaluate a model's
empirical success (
I agree ).
Steve also makes the useful point that linearization critically hampers many mainstream models
(
I agree ).
Steve points out that non-mathy models can make qualitative forecasts. That's true. However, my
point was that these are often a lot less actionable than quantitative forecasts. A non-mathy model
might tell you that private-sector debt is dangerous, but it might not tell you how much of
it is dangerous, or how dangerous. For that, you'd need some kind of mathy model. Steve definitely
seems to get this point too, though, so I'm not disagreeing.
Steve then discusses overfitting of data, and points out that many mainstream models do this too.
That's certainly true, although I think DSGE models tend to be a lot more parsimonious than SFC models
or stuff like FRB/US. Actually, overfitting is one of the big criticisms of the most popular DSGE
models in use at central banks.
Steve then addresses the idea that heterodox models are similar to mainstream ones. I never said
they were, although I said there are some similarities between the FRB/US model and Wynne Godley-type
SFC models. In fact, there are some similarities, though there are also differences. But in general,
most heterodox models are very different from most mainstream models.
Steve also discusses my (admittedly too brief) mention of agent-based models, and has some good
comments:
Largely speaking, this is true - if you want to use these models for macroeconomic forecasting.
But they are useful for illustrating an issue that the mainstream avoids: "emergent properties".
A population, even of very similar entities, can generate results that can't be extrapolated from
the properties of any one entity taken in isolation...Neoclassical economists unintentionally
proved this about isolated consumers as well, in what is known as the Sonnenschein-Mantel-Debreu
theorem. But they have sidestepped its results ever since...Multi-agent modelling may not lead
to a new policy-oriented theory of macroeconomics. But it acquaints those who do it with the phenomenon
of emergent properties - that an aggregate does not function as a scaled-up version of the entities
that comprise it. That's a lesson that Neoclassical economists still haven't absorbed.
I think this is right. Agent-based models have so far served as a demonstration of the fragility
of representative agent models. In the future, they might be much more than that.
So anyway, I'd say I pretty much agree with Steve's response. Good stuff. (Though
this person on Reddit had some problems with it.)
Response 2: Ari Andricopolous
Ari
has a response as well . His response comes in the form of a list of things that he thinks macro
models should not include. The list is:
Microfoundations
Neoliberal_rationality/
Loanable funds
Interest rate effects
The financial sector
It's pretty clear that the last item on this list is misplaced, since Ari thinks one should
include the financial sector in models.
Whether macro models should be microfounded is a big open question, but I'd like to note that
by saying they shouldn't be, Ari is saying that agent-based models are bad. Agent-based models are
as microfounded as they come.
As for rationality, I kind of disagree...humans observe and learn and adapt (OK, some more than
others, I'll grant). Even though perfect rationality is probably pretty unrealistic, to insist that
models totally ignore human observation, learning, and adaptation seems very dangerous for the realism
of any model.
As for the loanable funds thing...yeah, OK, sure.
Response 3: Jo Michell
Jo Michell's response might have been the first to go up, but it's later on this list because...the
numbering is arbitrary!
Jo, which I believe is short for "Jörmungandr", has a helpful diagram of the "schools" of macroeconomic
thought. He also pushes back on the notion that "heterodox" is a useful classification at all:
The problem with 'heterodox economics' is that it is self-definition in terms of the other.
It says 'we are not them' - but says nothing about what we are. This is because it includes everything
outside of the mainstream, from reasonably well-defined and coherent schools of thought such as
Post Keynesians, Marxists and Austrians, to much more nebulous and ill-defined discontents of
all hues. To put it bluntly, a broad definition of 'people who disagree with mainstream economics'
is going to include a lot of cranks. People will place the boundary between serious non-mainstream
economists and cranks differently, depending on their perspective.
Another problem is that these schools of thought have fundamental differences. Aside from
rejecting standard neoclassical economics, the Marxists and the Austrians don't have a great deal
in common.
This is a good and useful point. My Bloomberg post really did bite off more than it could chew. My
point was that there wasn't something better and more successful out there that by rights ought to
already have displaced the (unsuccessful) mainstream approach. But in making that point, I touched
on a number of different types of alternatives that aren't really closely connected. And I left out
others (for example, Steve Keen's own work, and the Austrians).
Jo, unfortunately, appears to have gotten tripped up by the title:
Noah seems to define heterodox economics as 'non-mathematical' economics. This is inaccurate.
There is much formal modelling outside of the mainstream.
Well, no, I don't define it that way, otherwise I wouldn't have discussed SFC models and agent-based
models in my post.
Jo goes on to make some good points about mainstream models, and some of the problems they encounter.
Response 4: Frances Coppola
Frances Coppola, whom I cited in my Bloomberg post,
also has
a response . I responded to this post earlier, but Frances changed it, so I moved my response
down to #4.
Frances still seems to misunderstand my post somewhat, and to have been tripped up by the title:
Noah's core proposition is that economics has no validity unless it is expressed in mathematical
terms. He says that economics without mathematics doesn't add up.
Actually, I didn't make such a claim. Nor do I believe it.
What I wrote was:
Broad idea-sketching is certainly a valuable activity. If theorists get lost in the specifics
of their models, they can blind themselves to truly new hypotheses and mechanisms that would let
them make big, radical changes. I do think this has happened to some degree in mainstream macro...But
that doesn't mean that broad idea-sketching is a replacement for formal models. It's not an apples-to-apples
comparison.
My point is that although non-mathematical econ is often valuable, it's not comparable to mathematical
econ. Both have their place. But to say that a non-quantitative theory was successful at predicting
the Great Recession, while a quantitative theory failed, is to hold the two theories to very different
standards, since "predict" means different things for quantitative theories than it does for non-quantitative
theories.
Frances goes on to discuss some of the limitations of purely quantitative models. She's broadly
right. She then criticizes some heterodox theorists who, in her opinion, focus too much on math:
Noah's post unfortunately seems to have elicited some rather defensive responses from the
heterodox community, along the lines of "
But we DO like mathematics! " or even, "
Actually our mathematics is better than yours ". But this is to buy into Noah's core proposition.
The heterodox economics community should - and, to be fair, in most cases does - reject it outright.
Economics is not,
and cannot be , exclusively mathematical...There is no need for the heterodox economic community
to be defensive about vagueness.
Again, Frances demonstrates a deep misunderstanding of my thesis. I never said that econ theory should
be exclusively mathematical, nor do I believe it. This confusion is partly the result of the title,
and partly the result of me just not explaining my thesis well enough.
Anyway, those are the responses I've seen. Thanks to everyone who took the time to respond!
"... Some combination of improved public infrastructure, better education, more encouragement for private investment, and more-effective regulation is likely to promote faster growth, which would increase the natural rate of interest and, thus, reduce the probability that we may find ourselves again struggling to avoid Keynes's infamous liquidity trap. If the natural rate can be lifted by appropriate policies, the economic near-stagnation that many countries have experienced in recent years may well turn out not to be that secular after all. ..."
"... A truly orthodox monetarist believes that monetary policy IS a panacea, that counter-cyclical fiscal policy is inflationary and debt expanding such that it should never be used. ..."
[If Vice Chairman Stanley Fischer is not a strictly orthodox monetarist then I cannot see any
reason for anyone else to be one. ]
...But, second, the virtues of sound monetary policy notwithstanding, we must not forget, as former
Fed Chairman Ben Bernanke reminded us on numerous occasions, that "monetary policy is not a panacea."17
For instance, as I mentioned recently elsewhere, policies to boost productivity growth and the
longer-run potential of the economy are more likely to be found in effective fiscal and regulatory
measures than in central bank actions.18
Some combination of improved public infrastructure, better
education, more encouragement for private investment, and more-effective regulation is likely
to promote faster growth, which would increase the natural rate of interest and, thus, reduce
the probability that we may find ourselves again struggling to avoid Keynes's infamous liquidity
trap. If the natural rate can be lifted by appropriate policies, the economic near-stagnation
that many countries have experienced in recent years may well turn out not to be that secular
after all.
[A truly orthodox monetarist believes that monetary policy IS a panacea, that counter-cyclical
fiscal policy is inflationary and debt expanding such that it should never be used.]
Notice that Fishers remedies do not include policy actions to support increased consumption/demand
apparently believing that Investment is done for what purpose? Could he not have said that people
might increase Investment in productive purposes if they felt they could sell their produced offerings
profitably. Then I would like him to say that the creation of credit is not productive as it comes
almost costlessly (a corporate bond, even a mortgage contract cost little to produce), the same
with a govt bond or govt currency, or the electronic registration of a stock, or the creation
of derived financial instruments defined by ink on paper.
Inputs like labor, equipment and supplies of materials produce offerings, but financial assets
need almost none of these inputs. We need much more flow going to getting real offerings marketed.
But why does investing-wherewithal take such risks in hoping to organize all these inputs and
marketing efforts when the huge volumes of high trading frequency lead to returns of added wherewithal
coming to comfortable offices anywhere, to be churned again in the trading of non-production based
financial things.
Have central banks (and others in the financial asset trading club) become so distanced from
the production economics of Wicksall and Keynes that they can no longer even talk about basic
demand for goods and services as a reason to Invest?
How about a set of remarks focused on aggregate demand for real offerings.
How about a set of remarks focused on how to redirect the economic wherewithal churning about
in the financial asset trading marketplaces and convert more and more of this wherewithal into
taking risks on real production and marketing businesses (more than ample supply of wherewithal
now). The central bank leaders could talk more about how they can serve in making this conversion
happen well, in coordination with other public policies such as those that help support more basic
demand and happier more dynamic animal spirits in society, so to speak.
Can we replace Fisher with a deputy who sees everything first via the lens of demand side thinking
followed by labor market considerations, long before they see solutions coming from "encouraging
private investment" in financial assets?
Vice Chairman Stanley Fischer is a very conventional orthodox establishment economist, just not
a strictly orthodox monetarist. I was in no way lauding Fischer other than by just spelling his
last name correctly. However he can serve as a benchmark that distinguishes orthodox establishment
economics from the even more narrow and rigid orthodox monetarism.
My misspelling was not intended as a passive aggressive disrespect. But of course I called for
his replacement, and I did this to bring attention to matters important to me, not just as an
ad hominem attack on Mr. Fischer.
I do not want more policies to encourage capital formation and husbandry, nor do I want managers
of capital to use public means or subsidues so they can get better educated workforces and eak
more out of them so their capital is further favored (of course there are public good reasons
for public effirts here, but its purposes are not just to encourage more investment because it
is further subsidized), and the same with public efforts to build better infrastructure if the
idea of 'better' is because it subsidizes investors (not perhaps because it makes society safer
to have a more reilient and efficient energy delivery system that also helps with climate change
concerns too), or better regulation of the financial system so its risks are spread better and
investors are encouraged to trade even more in them. So here I've taken each of Fischers recommendations
and addressed them, pointing out how these statements can be seen as supporting the investing
class nit the real economy of demand side considerations about economics.
Perhaps the Deputy Director didn't intend for these remarks to be read that way. After all
he talked about Wicksell, and I'm pretty sure his views were tied to the world of real production,
anf Fischer even talked about production. So maybe I'm too willing to read with suspicion, or
he is not cautious enough in his writing, or he needs to be replaced (because I read this the
way he meant it).
Conventional orthodox establishment economists worry about inflation even after they deliver 1.6
percent growth for 2016.
And they insist monetary policy doesn't work well which is somewhat of a contradiction as they're
worrying about inflation and monetary policy working too well.
If you read the Sept. 2008 minutes of the FOMC they are worrying about inflation 48 hours after
Lehman failed and the implosion of the financial system. Just 8 years ago and they don't seem
to have learned.
Noah Smith from yesterday: "Most of the profession does
believe in the power of monetary policy. The dominant form of
macroeconomic model for at least a decade has been so-called
New Keynesian models, which say that interest rates play a
very large role in stabilizing the economy. These are also
the dominant form of modern macro model in use at central
banks...
Now, the big question is whether faith in monetary policy
might have been misplaced. The seemingly small effects of
quantitative easing, and the difficulty of dealing with very
low interest rates, are causing some macroeconomists to cast
about for alternatives to the New Keynesian paradigm.
It sure seems like the economics profession is confused,
very confused. Sadly, that will not keep them from
demagoguing their favorite policy and insulting those who
dare to point out the obvious problems and mistakes.
"... Trump isn't attempting to appeal to neocons or neoliberals. (New Classical or New Keynesian.) That's Hillary's job. So losing this guy (neocon Bush economist) means nothing. ..."
"... Accusations of corruption against Hillary are ridiculous! Have you ever listened to Hillary's voice? Her speeches are like music to the ears! The only reason why corporations across various industrial complexes - financial, healthcare, private prison, military, Big Oil, etc. - pay Hillary $250k a speech is because they can afford to. The rest of society - the moochers - can only dream of being wealthy enough to enjoy a Hillary speech! ..."
"... I'm so tired of people hating on the rich and disparaging the Clintons' 'democratic innovation' techniques. They are clearly nothing more than envious ingrates and ignoramuses! ..."
"... All of the neoclassical tax cutting over the past 35 years has only provided a net benefit to the upper class. Only 30% of the US economy is related to international trade. So very little of the debt created with tax cuts has trickled down into trade deficits. ..."
"... But trade-liberalization/outsourcing policies, on the other hand, explain how a trade deficit has an accompanying budget deficit (according to the Twin Deficits hypothesis.) If a country is spending more on imports than it is earning in exports it will have to borrow the money to pay for them. ..."
"... Trump's absurd tax cuts would only benefit the top 20%. They would not increase demand for imports or increase the trade deficit. All of this money would be in the form of whopping budget deficits and growing government debt. It would be a spectacular failure. A better one than what Hillary would bring: because the Republicans would be on the hook for it. (If Hillary wins, the Democrats are on the hook for a 12 year Great Recession by 2020. That kicks the New Deal can down the road to 2024.) ..."
"... Sanders supporters dislike Republicans more than Hillary supporters do according to polls. They're not going to go for trickle-down economics. Sanders's message was that the problem with the economy and political system are people like Trump. That's why he proposed a significant financial transaction tax. Sanders supporters agree with Sanders, Dean Baker and Jared Bernstein that corporate trade deals could be made more fair. ..."
"... "Corporate" trade deals aren't the issue. It is capital markets. Republicans wants a total abolition of regulations on capital markets. Not only will Trumps deficits need more foreign finance, he will gut the economy to bring that foreign finance in or gut the economy if it doesn't come in if he trade saber rattles. The only other option is much such large government spending cuts, that creates a recession as well creating capital flight. ..."
"... Mankiw reveals like Krugman he's never been to East Asia, nor is he the least bit curious about why the US developed in the first place. If he had studied economic development or East Asia he would know that blistering high interest rates (+50%) were common in the East Asian countries during their periods of stunning growth. Rising interest rates from the reduced flow of capital would also be associated with - for the first time in 40 years -- positive incentives to invest in US tradable goods production. ..."
"... Watch Charles Ferguson's Inside Job for information on how morally and financially compromised US economists are. ..."
"... And Mankiw does this specifically in the context of offering support to idiotic Republican policies, to pander to the Republican mandarins who hire him every 4 years as economic adviser to their Presidential candidate (and to sell more textbooks at Red-state schools). ..."
"... Why does Mankiw think he deserves to sell his own ass like a two-bit prison whore, while Navarro and Ross can't? ..."
Trump isn't attempting to appeal to neocons or neoliberals. (New Classical or New Keynesian.)
That's Hillary's job. So losing this guy (neocon Bush economist) means nothing.
This argument against Trump's economic plan would appear to be nonsensical. Interest rates
are not marked to international markets. They are set by the central bank to manage demand and
inflation. (According to 'orthodox' economics, protectionism would negatively affect GDP and put
a downward pressure on demand, inflation and interest rates. So this argument is doubly senseless.)
I can't imagine that many economists understand international trade or they wouldn't be in
favor of the highly mercantlist global economy that free-trade globalization has produced.
The 35 years of trade deficits the US has run with undeveloped mercantilist countries is a
triple whammy: 1) jobs, production and investment flow out of the country reducing GDP, real incomes
and demand; 2) the trade deficit has an accompanying budget deficit (according to the Twin Deficits
hypothesis); this creates rising government debt; spending cuts further depress demand; 3) for
every dollar that flows out of the country from imported goods, a dollar must flow back into the
country in the form of foreign investment (i.e. debt owed to foreign countries.)
This process is certainly no Carnot engine. Simply a linear process of wealth being transferred
from one source to another (much of it in debt.) A process that is quickly running out of steam.
My impression is that only a return to the progressive Keynesian New Deal era (that began with
FDR and ended with Reagan) can prevent the global economy from collapsing into fascist revolutions
and world war. (Repeating the history of the 1930s; Trump would make a better Herbert Hoover than
Hillary, that's for sure.)
Accusations of corruption against Hillary are ridiculous! Have you ever listened to Hillary's
voice? Her speeches are like music to the ears! The only reason why corporations across various
industrial complexes - financial, healthcare, private prison, military, Big Oil, etc. - pay Hillary
$250k a speech is because they can afford to. The rest of society - the moochers - can only dream
of being wealthy enough to enjoy a Hillary speech!
I'm so tired of people hating on the rich and disparaging the Clintons' 'democratic innovation'
techniques. They are clearly nothing more than envious ingrates and ignoramuses!
All of the neoclassical tax cutting over the past 35 years has only provided a net benefit
to the upper class. Only 30% of the US economy is related to international trade. So very little
of the debt created with tax cuts has trickled down into trade deficits.
But trade-liberalization/outsourcing policies, on the other hand, explain how a trade deficit
has an accompanying budget deficit (according to the Twin Deficits hypothesis.) If a country is
spending more on imports than it is earning in exports it will have to borrow the money to pay
for them.
Clearly any form of non-regulated stimulus (tax cuts or income redistribution) that primes
anemic demand by putting more money in the hands of the bottom 80% will produce a bigger trade
deficit. The only way to eliminate a trade deficit with a mercantilist country is with tariffs.
If Trump's plan is to raise GDP by eliminating the trade deficit with some form of regulatory
measures, then clearly this could not raise the trade deficit.
Trump's absurd tax cuts would only benefit the top 20%. They would not increase demand
for imports or increase the trade deficit. All of this money would be in the form of whopping
budget deficits and growing government debt. It would be a spectacular failure. A better one than
what Hillary would bring: because the Republicans would be on the hook for it. (If Hillary wins,
the Democrats are on the hook for a 12 year Great Recession by 2020. That kicks the New Deal can
down the road to 2024.)
Sanders supporters dislike Republicans more than Hillary supporters do according to polls.
They're not going to go for trickle-down economics. Sanders's message was that the problem with
the economy and political system are people like Trump. That's why he proposed a significant financial
transaction tax. Sanders supporters agree with Sanders, Dean Baker and Jared Bernstein that corporate
trade deals could be made more fair.
Ben Groves -> Peter K.... , -1
"Corporate" trade deals aren't the issue. It is capital markets. Republicans wants a total
abolition of regulations on capital markets. Not only will Trumps deficits need more foreign finance,
he will gut the economy to bring that foreign finance in or gut the economy if it doesn't come
in if he trade saber rattles. The only other option is much such large government spending cuts,
that creates a recession as well creating capital flight.
Sanders doesn't support deregulated capital markets, he can swagger about 'trade'.
Saigo Takamori : , -1
Mankiw reveals like Krugman he's never been to East Asia, nor is he the least bit curious
about why the US developed in the first place. If he had studied economic development or East
Asia he would know that blistering high interest rates (+50%) were common in the East Asian countries
during their periods of stunning growth. Rising interest rates from the reduced flow of capital
would also be associated with - for the first time in 40 years -- positive incentives to invest
in US tradable goods production.
US economists are paid to confuse people and be confused. Watch Charles Ferguson's Inside
Job for information on how morally and financially compromised US economists are.
No wonder the US is an economic basket case on the cusp of becoming a third world country.
Thanks economists! You guys have the best advice! Free trade and comparative advantage are real
winners! Just ask Haiti, the second most open economy in the Americas after the US.
I've watched Mankiw, on video, on several occasions, make patently false claims about economic
policy based on first-year macro that's completely and utterly disproven at even a third-year
level.
And Mankiw does this specifically in the context of offering support to idiotic Republican
policies, to pander to the Republican mandarins who hire him every 4 years as economic adviser
to their Presidential candidate (and to sell more textbooks at Red-state schools).
Why does Mankiw think he deserves to sell his own ass like a two-bit prison whore, while
Navarro and Ross can't?
The crisis exposed some serious flaws in our economic thinking. It has highlighted the need to
look at economic policy with more critical, fresh approaches. It has also revealed the limitations
of existing tools for structural analysis in factoring in key linkages, feedbacks and trade-offs
– for example between growth, inequality and the environment.
We should seize the opportunity to develop a new understanding of the economy as a highly complex
system that, like any complex system, is constantly reconfiguring itself in response to multiple
inputs and influences, often with unforeseen or undesirable consequences. This has many implications.
It suggests policymakers should be constantly vigilant and more humble about their policy prescriptions,
act more like navigators than mechanics, and be open to systemic risks, spillovers, strengths, weaknesses,
and human sensitivities. This demands a change in our mind-sets, and in our textbooks. As John Kenneth
Galbraith once said, "the conventional view serves to protect us from the painful job of thinking."
This is why at the OECD we launched an initiative called New Approaches to Economic Challenges
(NAEC). With this initiative we want to understand better how the economy works, in all its complexity,
and design policies that reflect this understanding. Our aim is to consider and address the unintended
consequences of policies, while developing new approaches that foster more sustainable and inclusive
growth.
Complexity is a common feature of a growing number of policy issues in an increasingly globalised
world employing sophisticated technologies and running against resource constraints.
The report of the OECD Global Science Forum (2009) on Applications of Complexity Science for Public
Policy reminds us of the distinction between complicated and complex systems. Traditional science
(and technology) excels at the complicated, but is still at an early stage in its understanding of
complex phenomena like the climate.
For example, the complicated car can be well understood using normal engineering analyses. An
ensemble of cars travelling down a highway, by contrast, is a complex system. Drivers interact and
mutually adjust their behaviours based on diverse factors such as perceptions, expectations, habits,
even emotions. To understand traffic, and to build better highways, set speed limits, install automatic
radar systems, etc., it is helpful to have tools that can accommodate non-linear and collective patterns
of behaviour, and varieties of driver types or rules that might be imposed. The tools of complexity
science are needed in this case. And we need better rules of the road in a number of areas.
This is not an academic debate. The importance of complexity is not limited to the realm of academia.
It has some powerful advocates in the world of policy. Andy Haldane at the Bank of England has thought
of the global financial system as a complex system and focused on applying the lessons from other
network disciplines – such as ecology, epidemiology, and engineering – to the financial sphere. More
generally, it is clear that the language of complexity theory – tipping points, feedback, discontinuities,
fat tails – has entered the financial and regulatory lexicon. Haldane has shown the value of adopting
a complexity lens, providing insights on structural vulnerabilities that built up in the financial
system. This has led to policy suggestions for improving the robustness of the financial system.
Closer to home, Bill White, Chairman of our Economic and Development Review Committee (EDRC) has
been an ardent advocate of thinking about the economy as a complex system. He has spoken in numerous
OECD meetings – in part as an explanation and in part as a warning – that systems build up as a result
of cumulative processes, can have highly unpredictable dynamics and can demonstrate significant non-linearity.
As a result Bill has urged policymakers to accept more uncertainty and be more prudent. He also urged
economists to learn some exceedingly simple but important lessons from those that have studied or
work with complex systems such as biologists, botanists, anthropologists, traffic controllers, and
military strategists.
Perhaps the most important insight of complexity is that policymakers should stop pretending that
an economy can be controlled. Systems are prone to surprising, large-scale, seemingly uncontrollable,
behaviours. Rather, a greater emphasis should be placed on building resilience, strengthening policy
buffers and promoting adaptability by fostering a culture of policy experimentation.
At the OECD, we are starting to embrace complexity. For several years we have been mapping the
trade "genome" with our Trade in Value Added (TiVA) database to explain the commercial interconnections
between countries.
We have examined the possibilities for coupling economic and other systems models, for example
environmental (climate) and societal (inequalities). Our work on the Costs of Inaction and Resource
Constraints: Implications for Long-term Growth (CIRCLE) is a key example of linking bio-physical
models and economic models to gauge the impact of environmental degradation and climate change on
the economy.
We are also looking at governing complex systems in areas as diverse as education and international
trade policy. And we are looking at the potential for tapping big data – an indispensable element
of complexity modelling approaches. But there remains much to do to fully enrich our work with the
perspectives of complexity.
The OECD is delighted to work with strong partners – the Institute for New Economic Thinking (INET)
Oxford, and the European Commission to help policy-makers advance the use of complex systems thinking
to address some of the most difficult challenges.
An important question remains. How can the insights and methods of complexity science be applied
to assist policymakers as they tackle difficult problems in areas such as environmental protection,
financial regulation, sustainability or urban development?
At the Workshop on Complexity and Policy on 29-30 September at the OECD, we will help find the
answer – stimulate new thinking, new policy approaches and ultimately better policies for better
lives.
[Sometimes when it seems like you are just howling at the moon there really is a new day coming.]
I think it is both correct,
and entirely wrong-headed.
Firstly, we have not believed that the economy can be controlled (we were just trying
to steer it) - the guiding principle was that it didn't need to be controlled which is something
completely different. It also falls into the trap of talking about "the economy" as though
the economy was an organism that had its own purposes, rather than as a set of institutions
that ultimately exist to serve human beings (a job which it achieves with quite varying
degrees of success). I won't say this approach is necessarily bound to fail, I just doubt
that it will be alone sufficient.
The OECD is one of those institutions.
Yep, they have plenty of their own assumptions. Complexity has been mentioned here before.
Exactly what they mean is indeterminable from the general principles mentioned, but examples
are worthwhile. You might read them to mean be cautious about leaps of faith such as financial
deregulation because bad stuff CAN happen.
"...Perhaps the most important
insight of complexity is that policymakers should stop pretending that an economy can be
controlled. Systems are prone to surprising, large-scale, seemingly uncontrollable, behaviours.
Rather, a greater emphasis should be placed on building resilience, strengthening policy
buffers and promoting adaptability by fostering a culture of policy experimentation..."
[In context I took this more to mean that economic models are probabilistic at best rather
than deterministic rather than that it said policy makers in the OECD were performing central
planning of the economy, which everyone knows is not true.]
Firstly, we have not believed
that the economy can be controlled (we were just trying to steer it) - the guiding principle
was that it didn't need to be controlled which is something completely different. It also
falls into the trap of talking about "the economy" as though the economy was an organism
that had its own purposes, rather than as a set of institutions that ultimately exist to
serve human beings (a job which it achieves with quite varying degrees of success)....
Re: Stop pretending that an economy can be controlled -
OECD Insights
"The crisis exposed some serious flaws in
our economic thinking. It has highlighted the need to look
at economic policy with more critical, fresh approaches.
It has also revealed the limitations of existing tools for
structural analysis in factoring in key linkages,
feedbacks and trade-offs – for example between growth,
inequality and the environment.
We should seize the opportunity to develop a new
understanding of the economy as a highly complex system
that, like any complex system, is constantly reconfiguring
itself in response to multiple inputs and influences,
often with unforeseen or undesirable consequences. This
has many implications. It suggests policymakers should be
constantly vigilant and more humble about their policy
prescriptions, act more like navigators than mechanics,
and be open to systemic risks, spillovers, strengths,
weaknesses, and human sensitivities. This demands a change
in our mind-sets, and in our textbooks. As John Kenneth
Galbraith once said, "the conventional view serves to
protect us from the painful job of thinking."
..................................
Complex systems such as chemical processes are managed by
feedback control systems that specify a desired output and
then measure deviation from that control point (the error
signal) to adjust the inputs and thus return to the
desired setpoint.
I have promoted the use of control theory concepts in
economics before. From a previous post:
Auto-control:
Did you ever think about how you keep the temperature
in your house at a comfortable level even though the
weather is unpredictable and can change a lot?
Well, maybe the level of the economy could be controlled
on similar principles. Maybe economists could borrow from
the control theory that is employed in air conditioning
thermostats.
For example, if we wanted to maintain full employment we
could adjust inputs in a similar manner to the way heat
and cooling is adjusted in your house. Just as heat is
added when the temperature gets too low, government jobs
could be added when private employment falls short. When
the temperature starts to get too high ( full employment
is achieved), heat could be sucked out ( no more jobs
would be added and/or higher taxes could be imposed) to
cool things off.
This is an appealing analogy because, like the weather,
the economy is inherently unpredictable and, like the air
conditioning in your house, you could keep things
comfortable without the need of forecasting the
unknowable.
So maybe economists should forsake their DSGE models and
instead study control theory.
...................
In my view such approaches are not promoted because they
require central control by the state and our elite
establishment quashes such threats to their dominance.
That is why Keynes' conclusions were subverted:
"The context is as follows: in an interview with the
leftist British journalist Kingsley Martin (1897–1969) in
the New Statesman of January 1939, Keynes – commenting on
the need for a new interventionist economic system and at
the same time the need to avoid the authoritarianism of
the Fascist and communist states – said this:
"The question is whether we are prepared to move out of
the nineteenth-century laissez faire state into an era of
liberal socialism, by which I mean a system where we can
act as an organized community for common purposes and to
promote social and economic justice, whilst respecting and
protecting the individual-his freedom of choice, his
faith, his mind and its expression, his enterprise and his
property." (Moggridge 1982: 500 = Keynes and Martin 1939:
123).
............
Many people now accept that we have traveled the wrong
path since the 1950's. I would submit that economists
would do well to go back to the ideas of Keynes, Kalecki,
Lerner and perfect those concepts within a framework of
automatic stabilization. This would be greatly facilitated
if some prominent economists would have the guts to say
again what Keynes was saying in the 30's.
What would a recommended reading of or about Abba Lerner
be? Though Lerner is frequently mentioned, I still have no
idea where to begin reading. Would this do?
The Lerner symmetry theorem is a result used in
international trade theory, which states that, based on an
assumption of a zero balance of trade (that is, the value
of exported goods equals the value of imported goods for a
given country), an ad valorem import tariff (a percentage
of value or an amount per unit) will have the same effects
as an export tax. The theorem is based on the observation
that the effect on relative prices is the same regardless
of which policy (ad valorem tariffs or export taxes) is
applied.
The theorem was developed by economist Abba P. Lerner
in 1936.
Functional Finance and Full Employment: Lessons from
Lerner for Today?
By Mathew Forstater
The Asian Crisis, with the fallout in Latin America and
the transition economies; the Russian default; continuing
troubles in Japan; weaknesses in the structure of the new
European EMU; volatility on Wall Street; deflationary
pressures in the global economy: recent economic
developments invite a reconsideration of some of our most
deeply held beliefs concerning economic theory and public
policy. Even within the hallowed halls of mainstream
economics, voices of dissent can be heard. Paul Krugman,
Joseph Stiglitz, and Jeffrey Sachs are among those whose
recent proclamations indicate that we have entered a
period in which orthodox views are being openly
questioned, creating an atmosphere characterized by a
crisis of confidence.
Such periods of impending crisis and open expressions
of self-doubt, questioning our most deeply held beliefs
about the way the world works, creates a climate in which
the ideas of the great unorthodox thinkers of the past may
be revisited. The work of those who in the past dedicated
their lives to formulating solutions to the challenges of
modern capitalist economies may contain lessons applicable
to the contemporary situation. It is in this spirit that
this paper revisits the early works of Abba Lerner,
outlining fifteen such lessons regarding macroeconomic
theory and policy, as fresh in the context of the current
scene as they were some five decades ago when they were
first formulated.
Lesson #1: Full employment, price stability, and a
decent standard of living for all are fundamental
macroeconomic goals, and it is the responsibility of the
state to promote their attainment.
Lesson #2: Policies should be judged on their ability
to achieve the goals for which they are designed and not
on any notion of whether they are "sound" or otherwise
comply with the dogmas of traditional economics.
Lesson #3: "Money Is a Creature of the State"
Lesson #4: Taxing is not a funding operation.
Lesson #5: Government Borrowing is not a funding
operation.
Lesson #6: The primary purpose of taxation is to
influence the behavior of the public.
Lesson #7: The primary purpose of government bond sales
is to regulate the overnight interest rate.
Lesson #8: Bond sales logically follow from, rather
than precede, government spending....
Functional Finance: Monetary and Fiscal Policy for
Sovereign Currencies
By L. Randall Wray
Today we will lay out Abba Lerner's approach to policy.
In the 1940s he came up with what he called the functional
finance approach to policy.
Lerner's Functional Finance Approach. Lerner posed two
principles:
First Principle: if domestic income is too low,
government needs to spend more. Unemployment is sufficient
evidence of this condition, so if there is unemployment it
means government spending is too low.
Second Principle: if the domestic interest rate is too
high, it means government needs to provide more "money",
mostly in the form of bank reserves.
The idea is pretty simple. A government that issues its
own currency has the fiscal and monetary policy space to
spend enough to get the economy to full employment and to
set its interest rate target where it wants. (We will
address exchange rate regimes later; a fixed exchange rate
system requires a modification to this claim.) For a
sovereign nation, "affordability" is not an issue-it
spends by crediting bank accounts with its own IOUs,
something it can never run out of.If there is unemployed
labor, government can always afford to hire it-and by
definition, unemployed labor is willing to work for money.
Lerner realized that this does not mean government
should spend as if the "sky is the limit"-runaway spending
would be inflationary (and, as discussed many times, it
does not presume that government spending won't affect the
exchange rate). When Lerner first formulated the
functional finance approach (in the early 1940s),
inflation was not a major concern-the US had recently
lived through deflation in the Great Depression. However,
over time, inflation became a serious concern, and Lerner
proposed a form of wage and price controls to constrain
inflation that he believed would result as the economy
nears full employment. Whether or not that would be an
effective and desired way of attenuating inflation
pressures is not our concern here. The point is that
Lerner was only arguing that government should use its
spending power with a view to moving the economy toward
fullemployment-while recognizing that it might have to
adopt measures to fight inflation.
Lerner rejected the notion of "sound finance"-that is
the belief that government ought to run its finances as if
it were like a household or a firm. He could see no reason
for the government to try to balance its budget annually,
over the course of a business cycle, or ever. For Lerner,
"sound" finance (budget balancing) was not "functional"-it
did not help to achieve the public purpose (including, for
example, full employment). If the budget were occasionally
balanced, so be it; but if it never balanced, that would
be fine too. He also rejected any attempt to keep a budget
deficit below any specific ratio to GDP, as well as any
arbitrary debt to GDP ratio. The "correct" deficit would
be the one that achieves full employment.
Similarly the "correct" debt ratio would be the one
consistent with achieving the desired interest rate
target. This follows from his second principle: if
government issues too much debt, it has by the same token
issued too few bank reserves and cash. The solution is for
the treasury and central bank to stop selling bonds,and,
indeed, for the central bank to engage in open market
purchases (buying treasuries by crediting the selling
banks with reserves). That will allow the overnight rate
to fall as banks obtain more reserves and the public gets
more cash.
Essentially, the second principle just says that
government ought to let the banks,households, and firms
achieve the portfolio balance between "money" (reserves
and cash) and bonds desired. It follows that government
bond sales are not really a "borrowing" operation required
to let the government deficit spend. Rather, bond sales
are really part of monetary policy, designed to help the
central bank to hit its interest rate target. All of that
is consistent with the modern money view advanced
previously....
It seems to me this line from Wren-Lewis is the biggie as far
as the Great Recession/Longer Depression is concerned:
"A
recession initiated by a financial crisis is also likely to
see consumers reducing their own borrowing, and so
(erroneous) analogies between governments and households
resonate."
In 2008/9 the public was (rightly) convinced that the
collapse was due to deflation of a financial bubble blown up
by many years of excessive private borrowing and debt-fueled
over-consumption: too much credit card debt; too much
borrowing against (inflated) home values; two much
speculative gambling with, and ponzi profiting from, cutesy
and overvalued financial instruments. That correct,
instinctive evaluation of the situation was backed up by
numbers showing that the total private debt to GDP ratio had
reached a level unseen since 1928, and by the sudden
discovery of the many analyses of many experienced, sober,
but neglected financial observers who had been predicting
some kind of collapse for years.
Since the public was thus primed to believe that, going
forward, the private economy had to reduce its overall debt
load, it was very easy to convince them that governments,
being just another part of the overall economy, had to do the
same thing.
But what Wren-Lewis doesn't seem to mention is that the
public had already been primed by decades of Norquistian,
Petersonian and Rubinite deficit-hectors, debt-despairers and
entitlement-exterminators to believe that our deficits were a
very bad thing, that government was too big, and that we were
headed for a "fiscal train wreck" because of our
undisciplined budgets and government spending. They were thus
easily convinced that the financial crisis also had something
to to with the problems alleged by this bipartisan team of
budget Casandras all finally coming a-cropper.
We had endless cadres of Republican politicians promoting
hysteria over the public debt and also decrying the very size
of government, whether deficit-financed or not.
We had Bill Clinton running around bragging about his
"reinvention" (shrinking) of government and his dot-com
boom-assisted surprise surplus.
We had Joe Biden telling everyone that the financial
collapse was caused by "putting two wars on a credit card".
We had the Concord Coalition and the Peterson Institute
gearing up their zombies for the Fix the Debt onslaught that
eventually saddled us with an economic discourse driven by a
stupid budget-reduction commission in the middle a deep
recession!
Hatred of governments and their spending habits had
already given us years of gradually building stagnation due
to declining public investment and a consequent secular shift
from capital formation to consumption. But the voters saw
only that all of the Serious People in both parties were
strongly in favor of this "disciplined" decimation of
government. So why in the world wouldn't they end up
supporting its continuation?
"... Most workers suffer serious consequences when they mess up on their jobs. Custodians get fired
if the toilet is not clean. Dishwashers lose their job when they break too many dishes, but not all
workers are held accountable for the quality of their work. ..."
"... At the top of the list of people who need not be competent to keep their job are economists.
Unlike workers in most occupations, when large groups of economists mess up they can count on the media
covering up their mistakes and insisting it was just impossible to understand what was going on. ..."
Economists Keep Getting It Wrong Because the Media Coverup Their Mistakes
Most workers suffer serious consequences when they mess up on their jobs. Custodians get
fired if the toilet is not clean. Dishwashers lose their job when they break too many dishes,
but not all workers are held accountable for the quality of their work.
At the top of the list of people who need not be competent to keep their job are economists.
Unlike workers in most occupations, when large groups of economists mess up they can count on
the media covering up their mistakes and insisting it was just impossible to understand what was
going on.
This is first and foremost the story of the housing bubble. While it was easy * to recognize
that the United States and many other countries were seeing massive bubbles that were driving
their economies, which meant that their collapse would lead to major recessions, the vast majority
of economists insisted there was nothing to worry about.
The bubbles did burst, leading to a financial crisis, double-digit unemployment in many countries,
and costing the world tens of trillions of dollars of lost output. The media excused this extraordinary
failure by insisting that no one saw the bubble and that it was impossible to prevent this sort
of economic and human disaster. Almost no economists suffered any consequences to their career
as a result of this failure. The "experts" who determined policy in the years after the crash
were the same people who completely missed seeing the crash coming.
We are now seeing the same story with trade. The New York Times has a major magazine article
** on the impact of trade on the living standards of workers in the United States and other wealthy
countries. The subhead tells readers:
"Trade is under attack in much of the world, because economists failed to anticipate the accompanying
joblessness, and governments failed to help."
Of course many economists did not anticipate the negative impact of trade, but of course many
of us did. The negative impact was entirely predictable and predicted. (Here are a few from Center
for Economic and Policy Research, *** **** ***** there are many more books and papers from my
friends at the Economic Policy Institute.) The argument is straightforward: trade policy has been
designed to put manufacturing workers in direct competition with low paid workers in the developing
world. This costs jobs and puts downward pressure on the wages of these workers. It also puts
downward pressure on the wages of less-educated workers more generally, as displaced manufacturing
workers seek jobs in retail and other sectors. Stagnating wages and increasing inequality are
the predicted result of this pattern of trade, not a surprising outcome.
If economists were like custodians and dishwashers, the failure to recognize this obvious outcome
of trade policy would have put them out on the street. Instead, we get major news outlets like
the New York Times, telling us this is all a remarkable surprise. No one could have seen that
trade would have bad outcomes for large segments of the workforce. Rather than lose their jobs,
economists can still draw comfortable six figure salaries as they tell reporters how it was impossible
for them to understand the economy.
Economic theory tells us that if economists don't face consequences for completely messing
up on the job then they have no incentive to get things right. If the custodian never pays any
price for not cleaning the toilet, then they won't clean the toilet. In the same way, if the media
and the country always grant a "who could have known" amnesty to large chunks of the economics
profession when it gets things completely wrong, then there is no reason to expect that economists
will ever get things right. All they have to do is say the same things as other elite economists
say, and if it turns out to be wrong, the NYT will just run major news articles explaining that
no one could have known better.
There is one other important point that needs emphasis here. There was nothing inherent to
trade that required growing inequality, it was the structure of trade policy that gave us this
result. There are millions of very bright ambitious people in the developing world who would be
very happy to study to meet U.S. standards and work as doctors, dentists, lawyers and other professionals
in the United States. We could have designed trade agreements to facilitate this process.
The result would be massive economic gains in the form of lower cost health care, dental care,
legal services and other professionals services. In the case of physicians alone, if the increased
supply brought the pay of our doctors down to the levels of Western Europe and Canada, we would
save close to $100 billion a year. This comes to roughly $700 a year in savings for every family
in the United States. And, this would lead to a reduction in inequality.
Our elite economists have chosen not to discuss this sort of trade opening. (They also rarely
discuss reducing rather than increasing protectionist barriers like patents and copyrights.) These
issues are discussed in more depth in my forthcoming book, "Rigged: How Globalization and the
Rules of the Modern Economy Were Structured to Make the Rich Richer" (coming to a website near
year in October). But the key point here is that economists should know better, and if they were
doing their job, they did.
"The argument is straightforward: trade policy has been designed to put manufacturing workers
in direct competition with low paid workers in the developing world. This costs jobs and puts
downward pressure on the wages of these workers. It also puts downward pressure on the wages of
less-educated workers more generally, as displaced manufacturing workers seek jobs in retail and
other sectors. Stagnating wages and increasing inequality are the predicted result of this pattern
of trade, not a surprising outcome."
This is surprising to PGL and Krugman who argue the Fed will just adjust to keep full employment
or at least that's what the models tell them.
Dean is talking about protectionism for drug companies, doctors etc. and free trade for the rest
of us. On this score he is exactly right and I have said so many times. This is a very different
issue from the macroeconomic ones. I would accuse you of once again misrepresenting what I have
said. But to be fair - you are too stupid to get these distinctions so maybe you are not lying.
I do wish I had a smarter internet stalker.
Tom aka Rusty -> anne... , -1
Baker get the diagnosis correct.
Baker's standard solutions do very little for blue collar workers. Having a cheaper doctor
and lawyer don't help much for the unemployed and underemployed.
Simon Wren-Lewis has an excellent new paper * trying to
explain the widespread resort to austerity in the face of a
liquidity trap, which is exactly the moment when such
policies do the most harm. His bottom line is that
"austerity was the result of right-wing opportunism,
exploiting instinctive popular concern about rising
government debt in order to reduce the size of the state."
I think this is right; but I would emphasize more than he
does the extent to which both the general public and Very
Serious People always assume that reducing deficits is the
responsible thing to do. We have some polling from the 1930s,
showing a strong balanced-budget bias even then:
[Chart]
I think Simon would say that this is consistent with his
view that large deficits grease the rails for deficit phobia,
since Franklin Roosevelt's administration did run up deficits
and debt that were unprecedented for peacetime. But has there
ever been a time when the public favored bigger deficits?
Meanwhile, as someone who was in the trenches during the
US austerity fights, I was struck by how readily mainstream
figures who weren't especially right-wing in general got
sucked into the notion that debt reduction was THE central
issue. Ezra Klein documented this phenomenon ** with respect
to Bowles-Simpson: ***
"For reasons I've never quite understood, the rules of
reportorial neutrality don't apply when it comes to the
deficit. On this one issue, reporters are permitted to openly
cheer a particular set of highly controversial policy
solutions. At Tuesday's Playbook breakfast, for instance,
Mike Allen, as a straightforward and fair a reporter as
you'll find, asked Simpson and Bowles whether they believed
Obama would do 'the right thing' on entitlements - with 'the
right thing' clearly meaning 'cut entitlements.' "
Meanwhile, as Brad Setser points out, the International
Monetary Fund - whose research department has done heroic
work puncturing austerity theories and supporting a broadly
Keynesian view of macroeconomics - is, in practice, pushing
for fiscal contraction **** almost everywhere.
Again, this doesn't exactly contradict Simon's argument,
but maybe suggests that there is a bit more to it.
Austerity is defined as a fiscal contraction that causes a
significant increase in aggregate unemployment. For the
global economy, or an economy with a flexible exchange rate,
or a monetary union as a whole, an increase in unemployment
following a fiscal consolidation can and should be avoided
because monetary policy can normally offset the demand impact
of the consolidation. The tragedy of global austerity after
2010 was that fiscal consolidation was not delayed until
monetary policy was able to do this.
An individual member of a currency union that requires a
greater fiscal contraction than the union as a whole cannot
use its own monetary policy to offset the impact of fiscal
consolidation. Even in this case, however, a sharp and deep
fiscal contraction is unlikely to be optimal. Providing this
economy is in a union where the central bank acts as a
sovereign lender of last resort, a more gradual fiscal
adjustment is likely to minimise the unemployment cost.
As the theory behind these propositions is simple and
widely accepted, the interesting question is why global
austerity happened. Was austerity an unfortunate accident, or
is there a more general political economy explanation for why
it occurred? Answering this question is vital to avoid the
next global recession being followed by yet more austerity.
The answer is that politicians and pundits have a flawed
understanding of inflation and its relationship to
hyperinflation.
Some economists promoted a seriously flawed interpretation of
the 1970s stagflation that solidified myths about inflation.
As Max Planck said, "Science advances one funeral at a time."
We need the current generation of economists and their failed
models to be replaced by a new generation that does not
suffer from the same mythology.
Peter K. -> anne...
, -1
If one just read Krugman or Kevin Drum you wouldn't
understand how Bill Clinton declared "the era of Big
Government is over" or how after he was first elected he
listened to his top two economic advisers Robert Rubin and
Alan Greenspan and dropped his middle class spending campaign
promise in favor of deficit reduction.
Greenspan promised Clinton lower rates in exchange for
reducing government. Clinton ended "welfare as we knew it."
But Greenspan didn't regulate this increase in private
investment. It led to the tech-stock bubble and a shadow
banking system which was susceptible to a banking panic.
According to Hillary, Bush's tax cuts caused the housing
bubble and Great Recession. It's a little more complicated.
But this cuts against Krugman and Drum's narrative that the
Clinton years were nothing but awesome.
Summers told Brooksley Born that derivatives shouldn't be
regulated b/c the market is magic.
Obama reinforced the narrative that government should
tighten its belt during hard times like households do. This
is exactly wrong.
Maybe it's understandable for politicians to pander for
short-term political expediency but it's hurts the long-term
ideological conflict.
There's the right and there's the left and Obama and
Clinton tried to straddle the two ideologies which just
waters down the left's appeal and pull.
That's why the millennials and more progressive workers
aren't as excited for Hillary's candidacy. That's why Sanders
energized them.
Now I agree with Sanders that a Trump Presidency would be
a disaster, but this doesn't preclude me from correcting
Krugman's outlook as some center-leftists would insist in
their binary thinking.
It seems to me this line from Wren-Lewis is the biggie as far
as the Great Recession/Longer Depression is concerned:
"A
recession initiated by a financial crisis is also likely to
see consumers reducing their own borrowing, and so
(erroneous) analogies between governments and households
resonate."
In 2008/9 the public was (rightly) convinced that the
collapse was due to deflation of a financial bubble blown up
by many years of excessive private borrowing and debt-fueled
over-consumption: too much credit card debt; too much
borrowing against (inflated) home values; two much
speculative gambling with, and ponzi profiting from, cutesy
and overvalued financial instruments. That correct,
instinctive evaluation of the situation was backed up by
numbers showing that the total private debt to GDP ratio had
reached a level unseen since 1928, and by the sudden
discovery of the many analyses of many experienced, sober,
but neglected financial observers who had been predicting
some kind of collapse for years.
Since the public was thus primed to believe that, going
forward, the private economy had to reduce its overall debt
load, it was very easy to convince them that governments,
being just another part of the overall economy, had to do the
same thing.
But what Wren-Lewis doesn't seem to mention is that the
public had already been primed by decades of Norquistian,
Petersonian and Rubinite deficit-hectors, debt-despairers and
entitlement-exterminators to believe that our deficits were a
very bad thing, that government was too big, and that we were
headed for a "fiscal train wreck" because of our
undisciplined budgets and government spending. They were thus
easily convinced that the financial crisis also had something
to to with the problems alleged by this bipartisan team of
budget Casandras all finally coming a-cropper.
We had endless cadres of Republican politicians promoting
hysteria over the public debt and also decrying the very size
of government, whether deficit-financed or not.
We had Bill Clinton running around bragging about his
"reinvention" (shrinking) of government and his dot-com
boom-assisted surprise surplus.
We had Joe Biden telling everyone that the financial
collapse was caused by "putting two wars on a credit card".
We had the Concord Coalition and the Peterson Institute
gearing up their zombies for the Fix the Debt onslaught that
eventually saddled us with an economic discourse driven by a
stupid budget-reduction commission in the middle a deep
recession!
Hatred of governments and their spending habits had
already given us years of gradually building stagnation due
to declining public investment and a consequent secular shift
from capital formation to consumption. But the voters saw
only that all of the Serious People in both parties were
strongly in favor of this "disciplined" decimation of
government. So why in the world wouldn't they end up
supporting its continuation?
Exactly. This all having started with the 70s arrival of
monetarism, essentially a gold standard with no gold. While
no one really paid attention to gold standard (depressionary)
budgeting until Clinton I, the rhetoric was being put into
place such that, even today, the Democrats still hail
Clinton's "balanced budget" disaster as if it were God's
gift, when in reality it was the kickoff to consumers
cannibalizing the home equity just to keep pace, and the
ultimate reason the 2008 crash was so severe on household
spending. Hillary Clinton; be forewarned.
If governmental fat cats and billionaire lobbyists would
spend more time at fixing the obvious, they would have less
time for looting the public treasure. Do you see how they
could have prevented the HD, Hoboken disaster?
They could have removed the overpowered transformers that
oversupplied coulombs to the Catenary wire that supplied
current to the Pantograph of the Hoboken train that just now
crashed into the station full of passengers. All the
transformers at the end of the line should be scaled down to
prevent this sort of disaster, plus all the transformers near
a curves in the roadbed should be scaled back to prevent
excess power from speeding train up enough to jump the track.
No!
You can't always depend on the engineer's judgment to
prevent these disasters. Can't always depend on
high-tech-safety devices to prevent! Hell! High-tech can be
hacked by the North Koreans. You need to change the deep
infrastructure of power available.
Most people have a flawed understanding of inflation.
Sustainable inflation means BOTH wages and prices go up.
Most people think of inflation only in terms of price
increases so we get: Prices go up, wages stay the same: BAD.
A minimum level of inflation is necessary to allow relative
prices and wages to reset smoothly.
Prices and wages are sticky downward.
It is unsustainable for a business to deflate prices below
fixed costs.
A price can be reset downward by inflation (if inflation is
high enough) erosion and thus is less likely to be below
fixed costs.
Businesses don't cut wages of employees, they layoff
employees.
Businesses don't only cut prices, they cut production.
Workers with leverage and fixed payments cannot afford to
work for less.
Inflation allows relative wages to deflate without causing
issues with fixed payments.
Everyone agrees that deflation is bad because it is
associated with lower output and higher unemployment.
Inflation and deflation are a continuum. Inflation that is
too low is only marginally better than deflation.
Inflation must be high enough to absorb relative price resets
demanded by the majority of economic shocks or the process of
resetting wages and prices will be extended and be a
continued drag on an economy.
The evidence clearly suggests that US inflation in the 21st
Century has been much too low. A higher inflation target is
clearly necessary.
People misunderstand hyperinflation.
Hyperinflation is associated with an increased money supply.
The increased money supply is an effect of hyperinflation not
its cause.
Under hyperinflation, an economy needs increasingly larger
amounts of currency for transactions, so governments print
more money to meet demand.
Hyperinflation is caused by loss of confidence in a
currency.
Under hyperinflation, the risk of complete loss of buying
power of a currency factors into the price that vendors are
willing to accept for goods and services.
Example: In the 1865 US, Confederate currency hyper inflated,
not because too much was printed, but because the Confederate
government was facing elimination and the currency no longer
being honored. 90 percent of the currency could have been
eliminated and prices still would have hyperinflated.
Major Myths:
Printing money does not cause hyperinflation, loss of
confidence does.
A higher rate of inflation does not make hyperinflation more
likely.
A lower rate of inflation is NOT always better for an economy
than a higher rate.
Politicians and pundits need to unlearn these inflation
myths.
DrDick -> pgl...
, -1
Krugman makes some good points, adding to Wren Lewis's
excellent observations. I would point out, however, that
neither of them acknowledges that most of our media are
economic and policy illiterates and incapable of
understanding the issues, while the general public has been
sold on the idiocy that national budgets are just like
household budgets (mostly by that same illiterate media).
Perusing
Palgrave's Dictionary of Political Economy from 1894 alerted me to the odd interaction
of a pair of distinctions. The first distinction was between the study of "what is" and "what ought
to be." The second distinction was between "economic science" (or "economics") and "political economy."
Economic science presumably distinguished itself from political economy by its strict focus on describing
"what is" rather than on prescribing "what ought to be."
Palgrave's explains the latter distinction to have been at least partly motivated by the confusion
that arose over just what kind of laws -- legal or natural -- so-called "laws of political economy"
were. Even after the attempt at rebranding, however:
"...even well-educated persons still occasionally speak of "laws of political economy" as being
"violated" by the practice of statesmen, trades-unions and other individuals and bodies.
You can't "break" scientific laws. They are simply generalized descriptions of fact. A flying airplane
doesn't break the law of gravity. It conforms to a more comprehensive complex of physical laws. The
law of gravity isn't the only law.
Palgrave's Dictionary further noted that the "great complexity and variety of circumstance
which surround every economic problem are such as to render the enunciation of general laws, on a
large scale, barely possible and if possible barely useful."
So the whole "positive" economics rigamarole wasn't just about methodological rigor. It was a
purification ritual to rid the political economist of the stigma of dogma. Economists
who invoke the violation of so-called laws aren't only forfeiting any legitimate claim to
economic science. They are contaminating their profession with atavistic hokum.
Speaking of atavistic hokum, I have been trying to track down ANY accessible published
record of a trade unionist or advocate of the reduction of the hours of labor EVER overtly
expressing the belief that there is a fixed amount of work to be done or a certain quantity of labor
to be performed or whatever synonymous equivalent. There is none.
There is a reasonable explanation for this absence of evidence. The alleged false belief is expressed
in abstract language that was not vernacular to the people accused of harbouring it. It's the wrong
answer to a question workers never asked themselves.
False belief requires two conditions to be fulfilled: 1. the idea is false and 2. it is believed
by someone to be true. The matrix below shows the possible states of belief and falsehood. An idea
does not have to be true to be "not false" and it doesn't have to be believed to be false to be "not
believed to be true." The fallacy claim asserts a simplistic (and false!) polarization in which the
beliefs of the "unenlightened" are "the opposite" of economic orthodoxy.
In an 1861 letter to the Times of London "A Master Builder" alleged that George Potter,
secretary of the carpenters' union, and his associates had "absurdly argued that there was only a
certain amount of work to be done" during a 1859 strike and lock-out of the London building trades.
There is a detailed report on the 1859 strike in an 1860 report on
Trades' Societies and Strikes published by the National Association for the Promotion of
Social Science. The 23-page account presents several items of correspondence from Potter outlining
the union's position with not a hint of a lump in the load. The "certain amount of work to be done"
was what Mr. Master Builder thought he heard when he mentally translated Potter's argument
into his own capitalistic patois .
There was something else interesting in the 685-page document -- an overarching controversy about
whether or not labor was a commodity just like any other and therefore whether or not unions violated the laws of political economy by trying to regulate wages and hours
of work. The employers who maintained this were pretty dogmatic about it. "Rates of wages cannot
be settled by mediation, but must be left to the free operation of supply and demand." It's the law!
This was not simply political economy It was vulgar political economy of the most self-serving
and disingenuous kind. One has no difficulty whatsoever finding multiple evocations by employers
of the so-called laws of political economy but the elusive lump remains "one of the most tenaciously
held and generally least articulated of trade union beliefs."
Least articulated? Least articulated is an understatement. Try NEVER articulated. There
is no there there. The alleged false belief is a pure projection by the laws-of-political-economy
crowd onto the unbeliever. The
eighth annual report of the New York Bureau of Labor Statistics for the year 1890 contains the
responses of over 600 labor union locals to the question of whether and why they support an eight-hour
day. Not one claims there is only a certain quantity of work to be done.
Below is an example of what an overt statement of the theory of the lump of labor looks like.
It is not from a trade union manifesto or a pamphlet of the eight-hour day movement. It is from a
propaganda tract put out by Nassau Senior's crew of Whig-Benthamites in defense of their New Poor
Laws, which abolished outdoor relief and established the workhouse test:
The fact is, there is a certain quantity of work to be done, and the question is who ought to
do it -- those who live by their labour, and their labour only, or those who have thrown themselves
on public charity.
Can anyone find such an unequivocal articulation of the false belief by a trade unionist? Of course
not. It's not the way that workers talk about their work. Work is not an abstract, disembodied
quantity to those who do it. It is part of a lived experience. "A certain quantity of work to
be done" is political economy speak, plain and simple. It's ceteris paribus and "all else
being equal."
Paradoxically, for old school vulgarians there both is and is not a certain quantity
of work to be done. There is a certain quantity of work to be done when it comes to disparaging
the idea that workers might increase wages their through collective action:
There is a certain quantity of work to be done, and a certain number of hands to do it; if there
be much work and comparatively few hands, wages will rise; if little work and an excess of hands,
wages will fall. It is self-evident that combinations and strikes cannot alter this law. They
can neither increase capital, nor diminish population; and, therefore, it is utterly impossible,
in the very nature of things, that they ever can procure a permanent rise of wages.
But there isn't a certain amount of work when it comes to explaining why such foolish action
isn't even necessary:
There is, say they, a certain quantity of labour to be performed. This used to be performed by
hands, without machines, or with very little help from them... The principle itself is false.
There is not a precise limited quantity of labour, beyond which there is no demand. Trade is not
hemmed in by great walls, beyond which it cannot go. By bringing our goods cheaper and better
to market, we open new markets, we get new customers, we encrease the quantity of labour necessary
to supply these, and thus we are encouraged to push on, in hope of still new advantages. A cheap
market will always be full of customers.
Five years ago I compiled a database of over 500 instances of the claim in books and journal articles
between 1890 and 2010 (
Excel file ). That's 500 claims without a single overt statement of the false belief from an
alleged believer. Six claimants (about one percent) named culprits whose argument "arguably depends
upon..." "makes an error equivalent to..." "indicates a belief..." "seems hopelessly involved in..."
"is an example of the strange conclusions to which one may be carried by clinging clinging firmly
to..." and "are driven by implicit assumptions." Each of those turns out to be a false alarm -- an
uncharitable, speculative inference. Five hundred boys crying "wolf" and not a single wolf to be
seen?
This is an astonishing performance. This compulsion to repeat is not "careless" or "dogmatic."
It's neurotic.
The patient cannot remember the whole of what is repressed in him, and what he cannot remember
may be precisely the essential part of it.. He is obliged to repeat the repressed material as
a contemporary experience instead of remembering it as something in the past.
The atavistic return of the repressed "laws of political economy" conforms faithfully to a description
toward the end of chapter 3 of Beyond the Pleasure Principle where Freud talks about the experiences
of "people with whom every human relationship ends in the same way" and gives as a "singularly affecting"
final example the events in a romantic epic, in which the hero, Tancred, repeatedly slays his beloved,
Clorinda, each time she reappears in a different guise. In this example, as Gavriel Reisner notes,
Freud reverses the compulsion to repeat, showing how we will sometimes injure others in order
to avoid injuring ourselves. Freud concludes that we often project the internal, masochistic drive
as the external, sadistic drive, victimizing others to redirect an intent toward self-victimization.
The utilitarian political economists styled themselves advocates for "the greatest good for the greatest
number" and viewed opponents as apologists for narrow special interests. The supposed laws they discovered,
which operated through isolated exchanges between individuals in the market, vindicated a system
of natural liberty and consequently freedom entailed obedience to those laws. Collective action and
collective bargaining violated the laws of individual exchange, resulting in sub-optimal outcomes.
Such perversity could only be motivated by false beliefs. The false beliefs of the adversary were
presumably the opposite of the true beliefs of the faithful: trade unions operated through tyranny
and their bizzaro-world political economy assumed that less output meant more income.
Reality discredited that polemic of political economy and calmer heads sought to rebrand the enterprise
as economics. The ersatz laws were scaled back to tendencies, which operated within the admittedly
abstract ceteris paribus pound of the economist's static model. Real life and the evolution
of economic relations operated outside the ceteris paribus pound but maybe the static model
could shed light on dynamic economic activity.
It was no longer fashionable to denounce "The Evils of Collective Bargaining in Trades' Unions"
(Thomas Cree, 1898) because it was increasingly understood that the so-called laws of supply and
demand operated quite differently with regard to the peculiar commodity of labor power (Richard Ely,
1886):
While those who sell other commodities are able to influence the price by a suitable regulation
of production, so as to bring about a satisfactory relation between supply and demand, the purchaser
of labor has it in his own power to determine the price of this commodity and the other conditions
of sale.
But even as old-guard political economy was being gradually displaced by rebranded economics in the
universities, employers' associations and business journalism emerged to propound and propagate the
old-time religion. The break with quasi-scientific, quasi-legalistic, quasi-religious pseudo-laws
was ambivalent, the reconciliation surreptitious. Employers' associations told the college teachers
what to teach. Textbooks served up a smorgasbord of the obsolescent and the innovative.
In this twilight of science and superstition, the fallacy claim offered uncertain economists a
distinctive advantage. It enabled them to continue to denounce violations of the laws of political
economy without actually having to specify which laws were being violated. That left them
exempt from any obligation to justify the validity of defunct laws. The burden of proof deftly shifted
and the providence of economic science affirmed, albeit by default.
Economic science thus gets to have its "what is" humility... and eat its "what ought to be" hubris
too! Evidence be damned.
That there was one particular offense singled out for condemnation by the self-appointed economic
police is suggested by the example given in Palgrave's Dictionary for the common confusion
between the legislative and scientific senses of law: "Thus it is often said that to regulate the
hours of labour, or to introduce differential import duties, is to break economic law." The anachronism
of such a view should require no explanation. The hours of labor are regulated.
Any proposal to repeal the Fair Labor Standards Act of 1938 on the grounds that it "breaks economic
law" would no doubt be laughed at by Paul Krugman, David Autor, Jonathan Portes or Alan Manning.
But, inadvertently, that is precisely the historical grammar of their lump-of-labor fallacy taunt.
Although there is no logical imperative that links the law-breaking claim to the fallacy claim, they
have been inseparably paired in usage from their inception. To invoke the latter is either to imply
the former or it is a non sequitur.
At long last, economists, have you no scientific self-respect ? On this labor day, 2016,
would you still insist that regulating of the hours of work breaks the laws of economics? Posted
by
Sandwichman at
12:00 AM
"Everybody except Joan Robinson agrees about capital theory." -- Robert Solow (as paraphrased
by Robinson)
An essential text in my researches on mercantilism, usury and bills of exchange is Raymond de Roover's
Gresham on Foreign Exchange, which just happens to be stored in part of SFU's library that
is under construction and thus inaccessible. The immediate unavailability of that book, however,
led to a fortuitous discovery.
I browsed in the call number section of the library's general collection where de Roover's book
would have been and Robert Leeson's Ideology and the International Economy caught my eye.
I flipped through the book and noticed on page 19 the delicious quote from Joan Robinson that, "the
free-trade doctrine is just a more subtle form of mercantilism."
The quote is from a 1966 lecture, "The New Mercantilism" that is included in a collection of essays,
Contributions to Modern Economics, which also contains "Capital Theory Up-to-Date," a 1970
review of C. E. Ferguson's The Neoclassical Theory of Production and Distribution, in which
Robinson reprises her parody of neo-Walrasian, neo-neoclassical capital "
leets. " Leets is steel spelled backward and
makes its debut in "Equilibrium Growth Models," Robinson's 1961 review of James Meade's Neo-Classical
Theory of Economic Growth. This allegedly ectoplasmic representation of capital is, in a nutshell, the crux of the "Cambridge
capital controversy," which Robinson launched with her 1952 challenge, "I leave it to those who draw
production functions to say what marginal productivity and the elasticity of substitution mean when
labour and capital are the factors of production." Looking back, in 1978, on her 1952 essays and
the "long struggle to escape... habitual modes of thought and expression," Robinson stressed that
"it was precisely from the concept of equilibrium that Keynes was struggling to escape..." Contrarily,
though:
"...textbook teaching in the department of so-called macro theory was an attempt to push Keynes
into short-term equilibrium. ... The grand neoclassical synthesis (now known as bastard Keynesianism)
was a more ambitious attempt to reduce the General Theory to a system of equilibrium."
In responding to Robinson's leets critique, Robert Solow began by acknowledging "much truth" to the
objection that "the usual production functions, allowing for more or less substitutability between
capital and labor, attribute to 'capital' a degree of malleability which contradicts common observation."
He then distinguished between the "econometrically-minded person" who would view the overly malleable
capital as a "specification error" and others -- presumably including Robinson -- who judge it to
be "a doctrinal error; and its consequence is a kind of Fall from Grace." Seven years later, Robinson
had this to say about "doctrinal disputes":
Many economists, nowadays, who are interested in practical questions are impatient of doctrinal
disputes. What does it matter, they are inclined to say, let him have his leets, what harm does
it do? But the harm that the neo-neoclassicals have done is, precisely, to block off economic
theory from any discussion of practical questions.
If one is concerned about actual unemployment in an actual economy, Robinson later
explained, one "has to discuss it in terms of processes taking place in actual history. The concept
of equilibrium is incompatible with history. It is a metaphor based on movements in space applied
to processes taking place in time." In other words, it is not just some kind of ethereal affectation
to object to the concept of equilibrium -- it is an argument with irrevocable real-world consequences.
The failure of what Robinson dismissed as "bastard Keynesianism" also had real-world doctrinal
consequences. "In the era of stagflation, this notion [that equilibrium growth can be achieved through
fiscal and monetary 'fine tuning'] has been discredited and the quantity theory of money is blossoming
afresh amongst its ruins." This 'blossoming,' incidentally, was not something Robinson welcomed.
Well, my interlibrary loan of de Roover's Gresham on Foreign Exchange has arrived, so I'm
off up the hill to pick it up.
To be continued...
"... [Dave Elder-Vass accepted my invitation to write a response to my discussion of his recent
book, ..."
"... Profit and Gift in the Digital Economy ..."
"... ). Elder-Vass is Reader in sociology at Loughborough University and author as well of ..."
"... The Causal Power of Social Structures: Emergence, Structure and Agency ..."
"... The Reality of Social Construction ..."
"... , discussed ..."
"... . Dave has emerged as a leading voice in the philosophy of social science, especially in the
context of continuing developments in the theory of critical realism. Thanks, Dave!] ..."
"... Profit and Gift in the Digital Economy ..."
"... Financial Times ..."
"... the argument for Pareto optimality of real market systems is patently false, but it continues
to be trotted out constantly. ..."
We need to move on from existing theories of the economy
Let me begin by thanking Dan Little for his very perceptive review of my book
Profit and Gift in the Digital Economy . As he rightly says, it's more ambitious than
the title might suggest, proposing that we should see our economy not simply as a capitalist market
system but as a collection of "many distinct but interconnected practices". Neither the traditional
economist's focus on firms in markets nor the Marxist political economist's focus on exploitation
of wage labour by capital is a viable way of understanding the real economy, and the book takes
some steps towards an alternative view.
Both of those perspectives have come to narrow our view of the economy in multiple dimensions.
Our very concept of the economy has been derived from the tradition that began as political economy
with Ricardo and Smith then divided into the Marxist and neoclassical traditions (of course there
are also others, but they are less influential). Although these conflict radically in some respects
they also share some problematic assumptions, and in particular the assumption that the contemporary
economy is essentially a capitalist market economy, characterised by the production of commodities
for sale by businesses employing labour and capital. As Gibson-Graham argued brilliantly in their
book
The End Of Capitalism (As We Knew It): A Feminist Critique of Political Economy , ideas seep
into the ways in which we frame the world, and when the dominant ideas and the main challengers
agree on a particular framing of the world it is particularly difficult for us to think outside
of the resulting box. In this case, the consequence is that even critics find it difficult to
avoid thinking of the economy in market-saturated terms.
The most striking problem that results from this (and one that Gibson-Graham also identified)
is that we come to think that only this form of economy is really viable in our present circumstances.
Alternatives are pie in the sky, utopian fantasies, which could never work, and so we must be
content with some version of capitalism – until we become so disillusioned that we call for its
complete overthrow, and assume that some vague label for a better system can be made real and
worthwhile by whoever leads the charge on the Bastille. But we need not go down either of these
paths once we recognise that the dominant discourses are wrong about the economy we already have.
To see that, we need to start defining the economy in functional terms: economic practices
are those that produce and transfer things that people need, whether or not they are bought and
sold. As soon as we do that, it becomes apparent that we are surrounded by non-market economic
practices already. The book highlights digital gifts – all those web pages that we load without
payment, Wikipedia's free encyclopaedia pages, and open source software, for example. But in some
respects these pale into insignificance next to the household and family economy, in which we
constantly produce things for each other and transfer them without payment. Charities, volunteering
and in many jurisdictions the donation of blood and organs are other examples.
If we are already surrounded by such practices, and if they are proliferating in the most dynamic
new areas of our economy, the idea that they are unworkably utopian becomes rather ridiculous.
We can then start to ask questions about what forms of organising are more desirable ethically.
Here the dominant traditions are equally warped. Each has a standard argument that is trotted
out at every opportunity to answer ethical questions, but in reality both standard arguments operate
as means of suppressing ethical discussions about economic questions. And both are derived from
an extraordinarily narrow theory of how the economy works.
For the mainstream tradition, there is one central mechanism in the economy: price equilibration
in the markets, a process in which prices rise and fall to bring demand and supply into balance.
If we add on an enormous list of tenuous assumptions (which economists generally admit are unjustified,
and then continue to use anyway), this leads to the theory of Pareto optimality of market outcomes:
the argument that if we used some other system for allocating economic benefits some people would
necessarily be worse off. This in turn becomes the central justification for leaving allocation
to the market (and eliminating 'interference' with the market).
There are many reasons why this argument is flawed. Let me mention just one. If even one market
is not perfectly competitive, but instead is dominated by a monopolist or partial monopolist,
then even by the standards of economists a market system does not deliver Pareto optimality, and
an alternative system might be more efficient. And in practice capitalists constantly strive to
create monopolies, and frequently succeed! Even the Financial Times recognises this:
in today's issue (Sep 15 2016) Philip Stevens argues, "Once in a while capitalism has to be rescued
from the depredations of, well, capitalists. Unconstrained, enterprise curdles into monopoly,
innovation into rent-seeking. Today's swashbuckling "disrupters" set up tomorrow's cosy cartels.
Capitalism works when someone enforces competition; and successful capitalists do not much like
competition".
So the argument for Pareto optimality of real market systems is patently false, but it
continues to be trotted out constantly. It is presented as if it provides an ethical justification
for the market economy, but its real function is to suppress discussion of economic ethics: if
the market is inherently good for everyone then, it seems, we don't need to worry about the ethics
of who gets what any more.
The Marxist tradition likewise sees one central mechanism in the economy: the extraction of
surplus from wage labour by capitalists. Their analysis of this mechanism depends on the labour
theory of value, which is no more tenable that mainstream theories of Pareto optimality (for reasons
I discuss in the book). Marxists consistently argue as if any such extraction is ethically reprehensible.
Marx himself never provides an ethical justification for such a view. On the contrary, he claims
that this is a scientific argument and disowns any ethical intent. Yet it functions in just the
same way as the argument for Pareto optimality: instead of encouraging ethical debate about who
should get what in the economy, Marxists reduce economic ethics to the single question of the
need to prevent exploitation (narrowly conceived) of productive workers.
We need to sweep away both of these apologetics, and recognise that questions of who gets what
are ethical issues that are fundamental to justice, legitimacy, and political progress in contemporary
societies. And that they are questions that don't have easy 'one argument fits all' answers. To
make progress on them we will have to make arguments about what people need and deserve that recognise
the complexity of their social situations. But it doesn't take a great deal of ethical sophistication
to recognise that the 1% have too much when many in the lower deciles are seriously impoverished,
and that the forms of impoverishment extend well beyond underpaying for productive labour.
I'm afraid that I have written much more than I intended to, and still said very little about
the steps I've taken in the book towards a more open and plausible way of theorising how the economy
works. I hope that I've at least added some more depth to the reasons Dan picked out for attempting
that task.
"This in turn becomes the central justification for leaving allocation to the market (and eliminating
'interference' with the market)."
Krugman is a neoliberal, although a softer, kinder neoliberal much better than Mankiw, Cowen
or the Republicans.
"pgl -> Peter K....
Please find me a Krugman discussion where he says nothing can be done about income inequality.
This is so straw man that the winds have blown this stupid lie away.
Wisdom, Courage and the Economy
by Paul Krugman
AUG. 15, 2016
It's fantasy football time in political punditry, as commentators try to dismiss Hillary Clinton's
dominance in the polls - yes, Clinton Derangement Syndrome is alive and well - by insisting that
she would be losing badly if only the G.O.P. had nominated someone else. We will, of course, never
know. But one thing we do know is that none of Donald Trump's actual rivals for the nomination
bore any resemblance to their imaginary candidate, a sensible, moderate conservative with good
ideas.
Let's not forget, for example, what Marco Rubio was doing in the memorized sentence he famously
couldn't stop repeating: namely, insinuating that President Obama is deliberately undermining
America. It wasn't all that different from Donald Trump's claim that Mr. Obama founded ISIS. And
let's also not forget that Jeb Bush, the ultimate establishment candidate, began his campaign
with the ludicrous assertion that his policies would double the American economy's growth rate.
Which brings me to my main subject: Mrs. Clinton's economic vision, which she summarized last
week. It's very much a center-left vision: incremental but fairly large increases in high-income
tax rates, further tightening of financial regulation, further strengthening of the social safety
net.
It's also a vision notable for its lack of outlandish assumptions. Unlike just about everyone
on the Republican side, she isn't justifying her proposals with claims that they would cause a
radical quickening of the U.S. economy. As the nonpartisan Tax Policy Center put it, she's "a
politician who would pay for what she promises."
So here's my question: Is the modesty of the Clinton economic agenda too much of a good thing?
Should accelerating U.S. economic growth be a bigger priority?
For while the U.S. has done reasonably well at recovering from the 2007-2009 financial crisis,
longer-term economic growth is looking very disappointing. Some of this is just demography, as
baby boomers retire and growth in the working-age population slows down. But there has also been
a somewhat mysterious decline in labor force participation among prime-age adults and a sharp
drop in productivity growth.
The result, according to the Congressional Budget Office, is that the growth rate of potential
G.D.P. - what the economy could produce at full employment - has declined from around 3.5 percent
per year in the late 1990s to around 1.5 percent now. And some people I respect believe that trying
to get that rate back up should be a big goal of policy.
But as I was trying to think this through, I realized that I had Reinhold Niebuhr's famous
Serenity Prayer running through my head: "Grant me the serenity to accept the things I cannot
change, courage to change the things I can, and wisdom to know the difference." I know, it's somewhat
sacrilegious applied to economic policy, but still.
After all, what do we actually know how to do when it comes to economic policy? We do, in fact,
know how to provide essential health care to everyone; most advanced countries do it. We know
how to provide basic security in retirement. We know quite a lot about how to raise the incomes
of low-paid workers.
I'd also argue that we know how to fight financial crises and recessions, although political
gridlock and deficit obsession has gotten in the way of using that knowledge.
On the other hand, what do we know about accelerating long-run growth? According to the budget
office, potential growth was pretty stable from 1970 to 2000, with nothing either Ronald Reagan
or Bill Clinton did making much obvious difference. The subsequent slide began under George W.
Bush and continued under Mr. Obama. This history suggests no easy way to change the trend.
Now, I'm not saying that we shouldn't try. I'd argue, in particular, for substantially more
infrastructure spending than Mrs. Clinton is currently proposing, and more borrowing to pay for
it. This might significantly boost growth. But it would be unwise to count on it.
Meanwhile, I don't think enough people appreciate the courage involved in focusing on things
we actually know how to do, as opposed to happy talk about wondrous growth.
When conservatives promise fantastic growth if we give them another chance at Bushonomics,
one main reason is that they don't want to admit how much they would have to cut popular programs
to pay for their tax cuts. When centrists urge us to look away from questions of distribution
and fairness and focus on growth instead, all too often they're basically running away from the
real issues that divide us politically.
So it's actually quite brave to say: "Here are the things I want to do, and here is how I'll
pay for them. Sorry, some of you will have to pay higher taxes." Wouldn't it be great if that
kind of policy honesty became the norm?
"For while the U.S. has done reasonably well at recovering from the 2007-2009 financial crisis,"
Reasonably well?
"Now, I'm not saying that we shouldn't try. I'd argue, in particular, for substantially more
infrastructure spending than Mrs. Clinton is currently proposing, and more borrowing to pay for
it. "
Then why was he for Hillary over Bernie Sanders who did campaign on substantially more infrastructure
spending?
Instead Krugman argues that we need to lower our hopes and expectations.
"According to the budget office, potential growth was pretty stable from 1970 to 2000, with
nothing either Ronald Reagan or Bill Clinton did making much obvious difference. "
So the market price mechanism rules and we government can't do much?
"So here's my question: Is the modesty of the Clinton economic agenda too much of a good thing?
Should accelerating U.S. economic growth be a bigger priority?"
Her agenda is unambitious. It is "center-left" as Krugman puts it which is partly why her poll
numbers are in the dumps.
" It's very much a center-left vision: incremental but fairly large increases in high-income
tax rates, further tightening of financial regulation, further strengthening of the social safety
net."
Point me to a blog post where Krugman spells out exactly where he explains how Clinton proposes
to do things.
President Trump has proposed a $25000 standard deduction for each of us, but $50,000 for married
couples who prove that they have consummated. Hey! IRS Agents like to watch.
Can you see how this minimum federal standard-deduction is de-fang-ed by lower state-standard-deduction?
Tell me something!
When state minimum wage is $5 / hour but federal minimum wage is $9 / hour, does employer hiring
in same state have to pay $5 or $9? Do you see how that works?
State's rights are dissolved by the federal statute.
This dissolution of state's rights means that Congress could as easily pass a law to establish
minimum standard-deduction for all state's income tax collection. Tell me something else!
Would such a minimum standard deduction on all state income tax collection cause any unemployment?
Would it bankrupt any small businesses?
Of course not! By contrast, the federal minimum wage regulation does cause unemployment, does
close down some employers of entry level workers, a danger to employment and poverty.
Economics is all about opportunity costs. The opportunity cost of federal minimum wage is the
possibility of federal minimum standard deduction, a more harmless subsidy.
State's rights are dissolved by the federal statute.
This dissolution of state's rights means that Congress could as easily pass a law to establish
minimum standard-deduction for all state's income tax collection. Tell me something else!
Would such a minimum standard deduction on all state income tax collection cause any unemployment?
Would it bankrupt any small businesses?
Of course not! By contrast, the federal minimum wage regulation does cause unemployment, does
close down some employers of entry level workers, a danger to employment and poverty.
[ Ah, understood. A clever and important argument that I am thinking through. Like the rational
for the federal Earned Income Tax Credit. ]
The United States federal earned income tax credit or earned income credit (EITC) is a refundable
tax credit for low- to moderate-income working individuals and couples, particularly those with
children. The amount of EITC benefit depends on a recipient's income and number of children. For
a person or couple to claim one or more persons as their qualifying child, requirements such as
relationship, age, and shared residency must be met. In the 2013 tax year, working families, if
they have children, with annual incomes below $37,870 to $51,567 (depending on the number of dependent
children) may be eligible for the federal EITC. Childless workers who have incomes below about
$14,340 ($19,680 for a married couple) can receive a very small EITC benefit.
Growth is a fixed investment. The investments have been made. Especially older societies, consumption
and leisure become more important the nature of purchases change.
I see Space Exploration as the only thing that will change that narrative. That would probably
create another computer revolution, industrial revolution kind of change. People just aren't into
it thought. People are happy with the dopamine economy and just want to get high.
"Second, less relevant to Sims but very relevant to other helicopter people, a deficit ultimately
financed by inflation is just as much of a burden on households as one ultimately financed by
ordinary taxes, because inflation is a kind of tax on money holders. From a Ricardian point of
view, there's no difference.
So I'm trying to figure out exactly what Sims is saying. What, ahem, is his model?"
Inflation hits people with savings who don't have debt.
Inflation helps people with debt by eating away at the principle. Inflation signals tight job
markets with growing incomes as well. That's why you have price pressures. That's why low inflation
and loose job markets can be just as bad as deflation.
Who taxes hit depends on how the government has set up its tax system. Some people and corporations
like Apple, Mitt Romney and presumably Trump pay little in taxes.
Capitalism was invented by Sephardic Jews who immigrated to Iberia in the 15th and 16th century.
They eventually invented market based economy.
By 1600's they had a swirling business sector located in Amsterdam and William the Orange spread
it into England during the latter 17th century, creating the Bank of England in 1694 and became
the worlds central bank via commodity money.
There is nothing to see here people. It is ponzi scheme and nothing more. Capitalism has only
made it because of liberalism. You have to be open to market expansion and have the resources
to make it work. It is why "konservatism" is a farce. One, the konservatives were the ones that
pushed the decaying "feudal" aristocracy to merge with the merchant caste in the first place and
create the bourgeois, despite the aristocracy being the birth place of most of the technology
we have now. This morphed into what we call capitalism. Basically the Jews are the Parasites(Finance),
"Whites"(the capitalists, which has a abnormal % of homosexuals) the Host and the non-whites the
cattle(mass famines and genocide during the 19th and 20th century are what really powered the
manpower behind anti-capitalism. Aka the British Empire led to 150 million deaths globally. All
global fraternities and organizations like the Skull in Bones to the Council of Foreign relations
are a conservative institutions. Yet, those cons won't admit it. As Butler said about his Pacific
"campaigns" is is all about spreading capitalism. It is indeed a racket.
These same forces are what created "Protestantism" and "Mormanism", which were a global financed
movement. First led by Catholic turncoat Martin Luther, who was financed by the Jews, then run
by Jewish John Cohen(Calvin) who spread the judeo-christian revolution globally. This also led
to the farce of "sovereignty" nonsense Mormons have tried to use in the last 40 years to push
a plutocracy. Then the other bible thumpers caught on. Destroy the nation, bring on the market
totalitarianism. Dumb sheep.
This is what we have long been used to from Mr. Groves. Ramblings in this style pretty much comment
on their own merit and don't need to be graced with rebuttals, as that implies an acknowledgement
that at some level a sort of identifiable argument was made.
"America's economic performance peaked in the late 1990s, and erosion in crucial economic indicators
such as the rate of economic growth, productivity growth, job growth, and investment began well
before the Great Recession.
Workforce participation, the proportion of Americans in the productive workforce, peaked in
1997. With fewer working-age men and women in the workforce, per-capita income for the U.S. is
reduced.
Median real household income has declined since 1999, with incomes stagnating across virtually
all income levels. Despite a welcome jump in 2015, median household income remains below the peak
attained in 1999, 17 years ago. Moreover, stagnating income and limited job prospects have disproportionately
affected lower-income and lower-skilled Americans, leading inequality to rise."
and something I have been going hoarse saying:
"The U.S. lacks an economic strategy, especially at the federal level. The implicit strategy
has been to trust the Federal Reserve to solve our problems through monetary policy."
the charts alone are worth the effort to check out this excellent study.
" Neither the traditional economist's focus on firms in markets nor the Marxist political economist's
focus on exploitation of wage labour by capital is a viable way of understanding the real economy,
and the book takes some steps towards an alternative view. "
Why did East Asia become Star Trek instead of the US? Why didn't the hopeful visions of mid-1960's
America become reality for the Americans? Read Ha Joon Chang if you want to know why East Asia
is on track to be as rich as the US/USSR portrayed in 2001 Space Odyssey. Western provincialism,
or perhaps the corruption of economists by looting banks (as documented by Charles Ferguson) has
led Western economists to offer really, really terrible advice to their own governments: free
trade forever, don't worry about massive deindustrialization, there will be new jobs, there's
no chance the US ends up like Mali.
One of the big problems of economics is how little of our society it explains. Exactly how many
people of either sex actually sit down and decide to have children based on a return on investment
calculation? How many people spend time with their friends and families based on some kind of
maximization function? When you visit a dying friend or family member at the hospital is this
the result of some gift exchange calculus? What about the time one spends listening to music,
watching a baseball game or browsing Facebook?
It might help to start with anthropology and think about human societies and their organization.
Start with something like the Lynds' Middletown books to get away from the implicit exoticism
that the term anthropology invokes. Societies have certain basic functions: raising children,
caring for those who cannot care for themselves, earning a living, spending free time, recognizing
one's place in the universe, participating in civil society and so on. Economics only looks at
a tiny piece of this, just part of the earning a living section. It's as if chemists never studied
anything except hydrogen molecules.
Economics really does need some new thinking. Starting with Pareto optimality is simply the
argument that we live in the best of all possible worlds. It is so transparently bogus that it
is hard to believe that anyone ever took it seriously. Oil lamps were hard on torch makers and
the automobile destroyed the buggy whip business. We need an economic system to regulate the production
and allocation of goods and services, but we also need child custody laws and burial customs.
I'm a capitalist at heart, but I view capitalism as I view fire. There is nothing quite like
fire for cooking food, lighting the dark, scaring wild animals, firing pottery and so on, but
fire also needs to be carefully controlled, constantly monitored and subject to societal sanction.
Economics fashions itself (or is being fashioned) as a science, and as such has to restrict itself
to measurable, identifiable, and (in principle) predictable phenomena.
What you are describing is more in the realm of philosophy, psychology, and moral judgement.
The problem starts when the economics profession and related occupations (business media, etc.)
pretend to have identified "market mechanisms" as the unifying theory of society and world, including
"explaining" social dynamics in terms of "objective/rational" market transactions and motivations.
But the desire for grand unified theories and "whole truths" is ever strong, lending credence
and support to such efforts.
Now is the time to push for my leisure theory of value. All goods and services traded in the economy
are intermediate goods, and value is actually created during leisure time!
"... The deficit obsession that governments have shown since 2010 has helped produce a recovery that has been far too slow, even in the US. ..."
"... The Zero Lower Bound (ZLB) raises an acute problem for what I call the consensus assignment (leaving macroeconomic stabilisation to an independent, inflation targeting central bank), but add in austerity and you get major macroeconomic costs. ICBs appear to rule out the one policy (money financed fiscal expansion) that could combat both the ZLB and deficit obsession. ..."
Simon Wren-Lewis has a follow-up to his recent post on central bank independence:
The 'strong case' critically examined : Perhaps it was too unconventional
setting out an argument (against independent central banks, ICBs) that
I did not agree with, even though I made it abundantly clear that was what
I was doing. It was too much for one blogger, who reacted by deciding that
I did agree with the argument, and sent a series of tweets that are best
forgotten. But my reason for doing it was also clear enough from the final
paragraph. The problem it addresses is real enough, and the problem appears
to be linked to the creation of ICBs.
The deficit obsession that governments have shown since 2010 has
helped produce a recovery that has been far too slow, even in the US.
It would be nice if we could treat that obsession as some kind of aberration,
never to be repeated, but unfortunately that looks way too optimistic.
The Zero Lower Bound (ZLB) raises an acute problem for what I call
the consensus assignment (leaving macroeconomic stabilisation to an independent,
inflation targeting central bank), but add in austerity and you get major
macroeconomic costs. ICBs appear to rule out the one policy (money financed
fiscal expansion) that could combat both the ZLB and deficit obsession.
I wanted to put that point as strongly as I could. Miles Kimball does
something similar
here , although without the fiscal policy perspective ...
Skipping ahead (and omitting quite a bit of the argument):
... The basic flaw with my strong argument against ICBs is that the ultimate
problem (in terms of not ending recessions quickly) lies with governments.
There would be no problem if governments could only wait until the recession
was over (and interest rates were safely above the ZLB) before tackling
their deficit, but the recession was not over in 2010. Given this failure
by governments, it seems odd to then suggest that the solution to this problem
is to give governments back some of the power they have lost. Or to put
the same point another way, imagine the Republican Congress in charge of
US monetary policy.
But if abolishing ICBs is not the answer to the very real problem I set
out, does that mean we have to be satisfied with the workarounds? One possibility
that a few economists
like Miles Kimball have argued for is to effectively abolish paper money
as we know it, so central banks can set negative interest rates. Another
possibility is that the government (in its saner moments) gives ICBs
the power to undertake helicopter money.
Both are complete solutions to
the ZLB problem rather than workarounds. Both can be accused of endangering
the value of money. But note also that both proposals gain strength from
the existence of ICBs: governments are highly unlikely to ever have the
courage to set negative rates, and ICBs stop the flight times of helicopters
being linked to elections.
These are big (important and complex) issues. There should be no taboos
that mean certain issues cannot be raised in polite company. I still think
blog posts are the best medium we have to discuss these issues, hopefully
free from distractions like partisan politics.
"... We don't get to do many controlled experiments in economics, so history is mainly what we have to go on. ..."
"... What did orthodox salt-water macroeconomists believe about disinflation on the eve of the Paul Volcker contraction? As it happens, we have an excellent source document: James Tobin's "Stabilization Policy Ten Years After," * presented at Brookings in early 1980. ..."
"... Unemployment shot up faster than in Tobin's simulation, then came down faster, because the Fed didn't follow the simple rule he assumed. But the basic shape - a clockwise spiral, with inflation coming down thanks to a period of very high unemployment - was very much in line with what standard Keynesian macro said would happen. ..."
"... trade between any two regional economies is roughly proportional to the product of their GDPs and inversely related to distance. Neat. ..."
We don't get to do many controlled experiments in economics, so history
is mainly what we have to go on. Unfortunately, many people who imagine
that they know how the economy works go with what they think they heard
about history, not with what actually happened. And I'm not just talking
about the great unwashed; quite a few well-known economists seem not to
have heard about FRED, or at least haven't picked up the habit of doing
a quick scan of the actual data before making assertions about facts.
And there's one decade in particular where people are weirdly unaware
of the realities: the 1980s. A lot of this has to do with Reaganolatry:
the usual suspects have repeated so often that it was a time of extraordinary,
incredible success that I often encounter liberals who believe that something
special must have happened, that somehow the events were at odds with what
the prevailing macroeconomic models of the time said would happen.
But nothing special happened, aside from the unexpected willingness of
the Federal Reserve to impose incredibly high unemployment in order to bring
inflation down.
What did orthodox salt-water macroeconomists believe about disinflation
on the eve of the Paul Volcker contraction? As it happens, we have an excellent
source document: James Tobin's "Stabilization Policy Ten Years After," *
presented at Brookings in early 1980. Among other things, Tobin laid out
a hypothetical disinflation scenario based on the kind of Keynesian model
people like him were using at the time (which was also the model laid out
in the Dornbusch-Fischer and Robert Gordon textbooks).
These models included
an expectations-augmented Phillips curve, ** with no long-run tradeoff between
inflation and unemployment - but expectations were assumed to adjust gradually
based on experience, rather than changing rapidly via forward-looking assessments
of Fed policy.
This was, of course, the kind of model the Chicago School dismissed scathingly
as worthy of nothing but ridicule, and which was more or less driven out
of the academic literature, even as it continued to be the basis of a lot
of policy analysis.
So here was Tobin's picture:
[Picture]
Here's what actually happened:
[Graph]
Unemployment shot up faster than in Tobin's simulation, then came down
faster, because the Fed didn't follow the simple rule he assumed. But the
basic shape - a clockwise spiral, with inflation coming down thanks to a
period of very high unemployment - was very much in line with what standard
Keynesian macro said would happen. On the other hand, there was no sign
whatsoever of the kind of painless disinflation rational-expectations models
suggested would happen if the Fed credibly announced its disinflation plans.
Now that's fun: Adam Davidson tells us * about trade in the ancient Near
East, as documented by archives found in Kanesh - and reports that the volume
of trade between Kanesh and various trading partners seems to fit a gravity
equation: trade between any two regional economies is roughly proportional
to the product of their GDPs and inversely related to distance. Neat.
But what does the seemingly universal applicability of the gravity equation
tell us? Davidson suggests that it's an indication that policy can't do
much to shape trade. That's not where I would have gone, and it's not where
those who have studied the issue closely ** have gone.
Here's my take: Think about two cities with the same per capita GDP -
we can relax that assumption in a minute. They will trade if residents of
city A find things being sold by residents of city B that they want, and
vice versa.
So what's the probability that an A resident will find a B resident with
something he or she wants? Applying what one of my old teachers used to
call the principle of insignificant reason, a good first guess would be
that this probability is proportional to the number of potential sellers
- B's population.
And how many such desirous buyers will there be? Again applying insignificant
reason, a good guess is that it's proportional to the number of potential
buyers - A's population.
So other things equal we would expect exports from B to A to be proportional
to the product of their populations.
What if GDP per capita isn't the same? You can think of this as increasing
the "effective" population, both in terms of producers and in terms of consumers.
So the attraction is now the product of the GDPs.
Is there anything surprising about the fact that this relationship works
pretty well? A bit. Standard pre-1980 trade theory envisaged countries specializing
in accord with their comparative advantage - England does cloth, Portugal
wine. And these models suggest that how much countries trade should have
a lot to do with whether they are similar or not. Cloth exporters shouldn't
be selling much to each other, but should instead do their trading with
wine exporters. In reality, however, there's basically no sign of any such
effect: even seemingly similar countries trade about as much as a gravity
equation says they should.
Calibrated models of trade have long dealt with this reality, somewhat
awkwardly, with the so-called Armington assumption, *** which simply assumes
that even the apparently same good from different countries is treated by
consumers as a differentiated product - a banana isn't just a banana, it's
an Ecuador banana or a Saint Lucia banana, which are imperfect substitutes.
The new trade theory some of us introduced circa 1980 - or as some now call
it, the "old new trade theory" - does a bit more, and possibly better, by
introducing monopolistic competition and increasing returns to explain why
even similar countries produce differentiated products.
And there's also a puzzle about both the effect of distance and the effect
of borders, both of which seem larger than concrete costs can explain. Work
continues.
Does any of this suggest the irrelevance of trade policy? Not really.
Changes in trade policy do have obvious effects on how much countries trade.
Look at what happened when Mexico opened up starting in the late 1980s,
as compared with Canada, which was fairly open all along - and which, like
Mexico, mainly trades with the US:
[Graph]
So what does gravity tell us? Simple Ricardian comparative advantage
is clearly incomplete; the process of international trade is subtler, with
invisible as well as visible costs. Not trivial, but not too unsettling.
And gravity models are very useful as a benchmark for assessing other effects.
One morning, just before dawn, an old man named Assur-idi loaded up two
black donkeys. Their burden was 147 pounds of tin, along with 30 textiles,
known as kutanum, that were of such rare value that a single garment cost
as much as a slave. Assur-idi had spent his life's savings on the items,
because he knew that if he could convey them over the Taurus Mountains to
Kanesh, 600 miles away, he could sell them for twice what he paid.
At the city gate, Assur-idi ran into a younger acquaintance, Sharrum-Adad,
who said he was heading on the same journey. He offered to take the older
man's donkeys with him and ship the profits back. The two struck a hurried
agreement and wrote it up, though they forgot to record some details. Later,
Sharrum-Adad claimed he never knew how many textiles he had been given.
Assur-idi spent the subsequent weeks sending increasingly panicked letters
to his sons in Kanesh, demanding they track down Sharrum-Adad and claim
his profits.
These letters survive as part of a stunning, nearly miraculous window
into ancient economics. In general, we know few details about economic life
before roughly 1000 A.D. But during one 30-year period - between 1890 and
1860 B.C. - for one community in the town of Kanesh, we know a great deal.
Through a series of incredibly unlikely events, archaeologists have uncovered
the comprehensive written archive of a few hundred traders who left their
hometown Assur, in what is now Iraq, to set up importing businesses in Kanesh,
which sat roughly at the center of present-day Turkey and functioned as
the hub of a massive global trading system that stretched from Central Asia
to Europe. Kanesh's traders sent letters back and forth with their business
partners, carefully written on clay tablets and stored at home in special
vaults. Tens of thousands of these records remain. One economist recently
told me that he would love to have as much candid information about businesses
today as we have about the dealings - and in particular, about the trading
practices - of this 4,000-year-old community.
Trade is central to every key economic issue we face. Whether the subject
is inequality, financial instability or the future of work, it all comes
down to a discussion of trade: trade of manufactured goods with China, trade
of bonds with Europe, trade over the Internet or enabled by mobile apps.
For decades, economists have sought to understand how trade works. Can we
shape trade to achieve different outcomes, like a resurgence of manufacturing
or a lessening of inequality? Or does trade operate according to fairly
fixed rules, making it resistant to conscious planning?
Economists, creating models of trade, have faced a challenge, because
their data have derived exclusively from the modern world. Are their models
universal or merely reflections of our time? It's a crucial question, because
many in our country would like to change our trading system to protect American
jobs and to improve working conditions here and abroad. The archives of
Kanesh have proved to be the greatest single source of information about
trade from an entirely premodern milieu.
In a beautifully detailed new book - ''Ancient Kanesh,'' written by a
scholar of the archive, Mogens Trolle Larsen, to be published by Cambridge
University Press later this year - we meet dozens of the traders of Kanesh
and their relatives back home in Assur. Larsen has been able to construct
family trees, detailing how siblings and cousins, parents and spouses, traded
with one another and often worked against one another. We meet struggling
businessmen, like Assur-idi, and brilliant entrepreneurs, like Shalim-Assur,
who built a wealthy dynasty that lasted generations. In 2003, while covering
the war in Iraq, I traveled to many ancient archaeological sites; the huge
burial mounds, the carvings celebrating kings as relatives to the gods,
all gave the impression of a despotic land in which a tiny handful of aristocrats
and priests enjoyed dictatorial control. But the Kanesh documents show that
at least some citizens had enormous power over their own livelihoods, achieving
wealth and power through their own entrepreneurial endeavors.
The details of daily life are amazing, but another scholar, Gojko Barjamovic,
of Harvard, realized that the archive also offered insight into something
potentially more compelling. Many of the texts enumerate specific business
details: the price of goods purchased and sold, the interest ate on debt,
the costs of transporting goods and the various taxes in the many city-states
that the donkey caravans passed on the long journey from Assur to Kanesh.
Like most people who have studied Kanesh, Barjamovic is an Assyriologist,
an expert in ancient languages and culture. Earlier this year, he joined
some economists, as well as some other Assyriologists and archaeologists,
on a team that analyzed Kanesh's financial statistics. The picture that
emerged of economic life is staggeringly advanced. The traders of Kanesh
used financial tools that were remarkably similar to checks, bonds and joint-stock
companies. They had something like venture-capital firms that created diversified
portfolios of risky trades. And they even had structured financial products:
People would buy outstanding debt, sell it to others and use it as collateral
to finance new businesses. The 30 years for which we have records appear
to have been a time of remarkable financial innovation....
Multipliers: What We Should Have Known
By Paul Krugman
There's a very nice interview * with Olivier Blanchard, who is leaving
the International Monetary Fund, in which among other things Olivier says
the right thing about changing one's mind:
"With respect to outside, the issue I have been struck by is how to indicate
a change of views without triggering headlines of 'mistakes,' 'Fund incompetence,'
and so on. Here, I am thinking of fiscal multipliers. The underestimation
of the drag on output from fiscal consolidation was not a 'mistake' in the
way people think of mistakes, e.g. mixing up two cells in an excel sheet.
It was based on a substantial amount of prior evidence, but evidence which
turned out to be misleading in an environment where interest rates are close
to zero and monetary policy cannot offset the negative effects of budget
cuts. We got a lot of flak for admitting the underestimation, and I suspect
we shall continue to get more flak in the future. But, at the same time,
I believe that we, the Fund, substantially increased our credibility, and
used better assumptions later on. It was painful, but it was useful."
Indeed. There are a lot of people out there whose idea of a substantive
argument is "you used to say X, now you say Y" - never mind the reasons
why you changed your view, and whether it was right to do so.It's important
not to fall into the trap of being afraid to let new evidence or analysis
speak.
One thing I would say, however, is that on this particular issue the
Fund should have known better. Olivier says that the evidence "turned out
to be misleading in an environment where interest rates are close to zero
and monetary policy cannot offset the negative effects of budget cuts",
but didn't we know that? I certainly did. **
And let me also beat one of my favorite drums: the prediction that multipliers
would be much larger in a liquidity trap came out of IS-LMish macro (or,
to be fair, New Keynesian models) and has been overwhelmingly confirmed
by experience. So this was yet another victory for Keynesian analysis, the
success story nobody will believe.
Barry Eichengreen and Kevin O'Rourke have lately been scoring a series
of research coups, based on the combination of historical perspective and
a global view. Most famously, they showed that on a global basis the first
year of the current crisis was every bit as severe * as the first year of
the Great Depression.
Now they and collaborators have a new piece on policy effects, ** especially
fiscal multipliers.
The background here is that there are two problems with estimating multipliers
relevant to our current situation. First, you need to look at what happens
under liquidity-trap conditions - and except in Japan,these haven't prevailed
anywhere since the 1930s. The second is that in the United States, fiscal
policy was never forceful enough to provide a useful natural experiment.
We didn't have a really big fiscal expansion until World War II; and WWII
isn't a good experiment because the surge in defense spending was accompanied
by government policies that suppressed private demand, such as rationing
and restrictions on investment. (I really, really don't understand why this
point has been so hard to get across.)
What E&R do here is use a broad international cross-section to overcome
this problem. This works because a number of countries had major military
buildups during the 1930s - fiscal expansions that can be regarded as exogenous
to the economic situation, since they were
"driven above all by Hitler's rearmament programmes and other nations'
efforts to match the Nazis in this sphere, and by one-off events like Italy's
war in Abyssinia."
What do E&R find? Initial fiscal multipliers of 2 or more, although they
shrink over time. Yes, fiscal expansion is expansionary.
So how does the decade of the 1980s end up being perceived as a defeat
for Keynesians? To see it that way you have to systematically misrepresent
both what happened to the economy and what people like Tobin were saying
at the time. In reality, Tobinesque economics looks very good in the light
of events.
In economics, the Phillips curve is a historical inverse relationship
between rates of unemployment and corresponding rates of inflation that
result in an economy. Stated simply, decreased unemployment, (i.e. increased
levels of employment) in an economy will correlate with higher rates of
inflation.
"... By Daniela Gabor is associate professor in economics at the University of the West of England, Bristol. Originally published at the Institute for New Economic Thinking website ..."
"... For a detailed account see Gabor, D. (2016) The (impossible) repo trinity : the political economy of repo markets, Review of International Political Economy, doi 10.1080/09692290.2016.1207699 ..."
Since the 1980s, central banks have been increasingly freed from
fiscal dominance , the obligation to monetize government debt. The new regime of monetary dominance
celebrated the (price) stability benefits of insulating scientific monetary policy from poorly theorized,
highly politicized fiscal policy. Yet the growing dominance of the 'monetary science, fiscal
alchemy' view in both academia and
policy circles played a critical role in the rapid rise of shadow banking. The untold story of shadow
banking is the story of (failed) attempts to separate monetary from fiscal policy, and of the bordeland
that connects them, mapped onto the
repo market .
While the state withdrew from economic life, privatizing state-owned enterprises or state banks,
and putting macroeconomic governance in the hands of independent central banks, its role in financial
life grew bigger. Sovereign debt evolved into the cornerstone of modern financial systems, used as
benchmark for pricing private assets, for hedging and
as base asset for credit creation via shadow banking . The state's role as debt issuer, passive
and systemic at once, has been reliant, beyond the arithmetic of budget deficits, on the intricate
workings of the repo trinity.
The repo trinity captures a consensus in central bank circles emerging after the 1998 Russian
crisis, the first systemic crisis of collateral-intensive finance, that financial stability requires
liquid government bond markets and liberalized repo markets (fig. 1).
Figure 1 The repo trinity
The repo-government bond market nexus took shape in the 1980s. In the US, securities dealers
preferred repos to secured lending against collateral because market convention treated repos
as outright sales and repurchases of collateral that allowed dealers to re-use collateral for a wide
range of activities (short-selling, hedging, selling to a third party). When bankruptcy courts decided
that repos would be subjected to automatic stay rules, Paul Volcker, then the Federal Reserve chairperson,
successfully lobbied Congress to exempt repos with US Treasuries (UST) and agency securities collateral.
Then, Salomon Brothers short-squeezed the UST market in 1991 by becoming the only repo supplier of
a two-year note. This allowed Salomon to fund securities through repo transactions at exceptionally
low rates. The ensuing public enquiry into the Salomon scandal showed little appetite for regulating
repos. Rather, the Fed and the Treasury
introduced new practices to fix gaps in repo plumbing, celebrating repos as innovative, liquidity
enhancing instruments that would support the state in the post fiscal-dominance era.
The UST blueprint diffused rapidly to Europe. Pressured to adjust to a world of independent central
banks, market-based financing and global competition for liquidity, European states embarked on a
project of creating modern government bond markets, with
modernity understood to mean the structural features of the US government bond market: regular
auctions, market-making based on primary dealers and a liberalised repo market.
Central banks were at first divided on the benefits of opening up repo markets. While Banque de
France followed the US Fed in assuming a catalyst role for the repo-sovereign bond market nexus,
Bundesbank and Bank of England worried that deregulated repo markets would unleash structural changes
in finance that could undermine the conduct of monetary policy and financial stability. In the architecture
of the US government bond market, the Bundesbank saw the conditions nurturing
short-term , fragile finance.
Seeking to keep banks captive on the uncollateralized segment of interbank markets, Bundesbank imposed
reserve requirements on repo liabilities. In parallel, as government's fiscal agent, Bundesbank followed
a conservative strategy, with irregular auctions, issuance concentrated at long maturities and repo
rules that increased the costs of funding bunds via repos. German banks responded by moving (bund)
repo activities to London and warned that France's open repo strategy would make it into the benchmark
sovereign issuer for the Euroarea. For similar reasons, the Bank of England exercised strict control
over the repo gilt market for 10 years after the 1986 Big Bang liberalisation of financial markets.
Under intense pressure from the financial industry and Ministries of Finance, the two central banks
liberalized repo markets by 1997.
As the fragilities of the new, collateral-intensive world became apparent in the 1998 Russian
crisis, central banks working together in the Committee on the Global Financial System subscribed
to the policy goals of the repo trinity. The
CGFS argued that financial
stability in market-based finance required global safe assets, issued in government bond markets,
in turn 'lubricated' by free repo markets with carefully designed (but not regulated) risk management
regimes.
In pursuing the objectives of the repo trinity, central banks helped consolidate the critical
role that sovereign bonds play in modern financial markets. Throughout the 2000s, the shortage of
US government bonds saw the trinity extended to include securitization markets, while the Euro project
galvanized consensus for a European repo trinity, whereby central banks encouraged the European banks
dominating the repo market to treat all Euro sovereign debt as high-quality
collateral
.
After Lehman, central banks and the Financial Stability Board recognized the impossible nature
of the repo trinity, attributing cyclical leverage, fire sales and elusive liquidity in collateral
markets, including government bond markets, to free repo markets. Central banks, with the
Bank of England leading the way, now accept that financial stability means supporting liquidity
in collateral markets in times of stress rather than supporting banking institutions as in the traditional
lender of last resort (LOLR) model. Paradoxically, LOLR support, implemented through repo loans,
can
destabilize (shadow) banks where central banks' collateral framework follows collateral market
valuations (figure 2).
Figure 2 The impossible repo trinity
The quiet revolution in crisis central banking that involves direct support for core markets may
appear like, but does not entail a return to, fiscal dominance. Rather, it creates
financial dominance , defined
as asymmetric support for falling asset prices. While financial dominance should be addressed by
direct regulatory interventions, the quest for biting repo rules has so far proved illusive. The
precise impact of Basel III liquidity and leverage rules is yet to be determined, whereas the failed
attempts to include repos in the European
Financial
Transactions Tax and the FSB's watered-down repo proposals suggest that (countercyclical) collateral
rules are only possible once states design alternative models of organizing their sovereign debt
markets. Paradoxically, new initiatives in Europe suggest that a return to the repo trinity is rather
more likely: the Capital Market Union plans to create Simple, Transparent and Standardized (
STS ) securitisation again illustrate the catalyst role that central banks choose to play in
market-driven solutions to safe asset shortages.
For a detailed account see Gabor, D. (2016)
The (impossible)
repo trinity : the political economy of repo markets, Review of International Political Economy,
doi 10.1080/09692290.2016.1207699
Uhhh. The article is one of the rare "too short, wish it was longer" breed.
I'll hazard a remark: how can securitization be "transparent" if, as one of the articles yesterday
discussed, central banks intervene to support banks so as to allow them to avoid having the market
deliver a price verdict on asset value?
Any time you let central banks like the Federal Bank of NY create money from debt; bankruptcy
is on the horizon. This has only been proven true for around five thousand years.
For a recent example have a look at the difference in government debt in Canada now verses
when it had a public banking system.
"Throughout the 2000s, the shortage of US government bonds saw the trinity extended to include
securitization markets,"
This started treating asset based securities similar to US Treasuries
Also this:
"fire sales and elusive liquidity in collateral markets, including government bond markets,"
I don't think the European government bond market can be treated as sovereign government bonds
as they don't have that guarantee of backing from a central bank.
----
Quite simply, US Treasuries can be put to much better use than supporting asset prices and
other financial products.
Repos hide risk and makes it possible to increase leverage. Why would anyone but financial
institutions want that?
But since financial institutions rule all then I suppose that repos will continue and as a gesture
of goodwill (dressed up as something else) they'll just become more and more complex – those (high)
fees for the professionals enabling the practice has to be justified somehow…
"... The values and ideology represented in the Economics textbook Bill Black analyzed didn't arise in a vacuum. The points Black lists reflect the ideology, values, ethics and interests of a narrow segment of our society who have accumulated enormous personal wealth through a variety of extra-legal and illegal mechanisms, and who use a small portion of that wealth to fund "Economics Chairs" in our public and private universities; economics "think tanks"; and speeches, books, consulting engagements, and board memberships for "prominent economists". ..."
"... Mankiw is a shill/useful idiot for his oligarchs patrons. #11 explains the idiocy of the previous 10. ..."
"... Did the banks which loaned billions to the gas frackers of North Dakota know that production would exceed demand and cause a crash? Perhaps the loan officer might have such concern, but would more likely be most concerned with his/her own bottom line – a meme Yves explores in Econned. ..."
"... Newly-printed money CAN cause inflation, but WHERE the price rises happen depends greatly on the pockets in which the money lands. ..."
"... stocks, real estate, luxury goods, premium educations, etc. ..."
"... This kind of ignorant cluelessness is pretty prevalent among the oligarchy and its supporters like Mankiw. Just like that guy in Davos who simply couldn't understand why there's so much social unrest in the world today. They live in a completely different world. ..."
"... My first exposure to Mankiw's principles was actually an early version of the talk by Yoram Bauman in this video. It hits several of the points Mr. Black makes and is also pretty funny. It definitely demonstrates how Mankiw attempts to cloak his biases in supposedly neutral terms. ..."
"... I doubt Mankiw will accept 100% estate tax on the justification that the cost of bequests is zero to the recipient. (and thus a 100% estate tax doesn't incur large costs on the recipient) ..."
"... My paper lists four principles claimed to be at the core of modern economics by Mankiw and then shows how all four principles are false: Amir-ud-Din, Rafi and Zaman, Asad, Failures of the 'Invisible Hand' (July 15, 2013). Forum for Social Economics, Vol. 45, Iss. 1, 2016. Available at SSRN: http://ssrn.com/abstract=2293940 or http://dx.doi.org/10.2139/ssrn.2293940 ..."
By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate
professor of economics and law at the University of Missouri-Kansas City. Jointly published with
New Economic Perspectives
This is the second column in a series on the N. Gregory Mankiw's myths and dogmas that he spreads
in his economic textbooks. The first column exposed the two (contradictory) meta-myths that begin
his preface. This column de-mythologizes Mankiw's unprincipled "
principles " of economics – the ten commandments of theoclassical economics' priestly caste.
Some of these principles, correctly hedged, could be unobjectionable, but in each case Mankiw dogmatically
insists on pushing them to such extremes that they become Mankiw myths.
To understand Mankiw's mythical 10 commandments, one must understand "Mankiw morality" – a morality
that remains hidden in each of his textbooks. Few people understand how radically theoclassical economics
has moved in the last thirty years. Milton Friedman famously argued that CEOs should operate exclusively
in the interest of shareholders. Mankiw, however, is a strong supporter of the view that CEOs will
not only defraud customers, but also shareholders and creditors by looting the firm. "[I]t would
be irrational for savings and loans [CEOs] not to loot." "Mankiw morality" decrees that if you have
an incentive as CEO to loot, and fail to do so, you are not moral – you are insane. Mankiw morality
was born in Mankiw's response as discussant to George Akerlof and Paul Romer's famous 1993 article
"Looting: The Economic Underworld of Bankruptcy for Profit."
Mankiw's textbooks preach the wonders of the indefensible a system he has helped design to allow
elite CEOs to loot the shareholders with impunity – the antithesis of Friedman's stated goal. Mankiw
morality helps create the "criminogenic environments" that produce the epidemics of "control fraud"
that drive our recurrent, intensifying financial crises. It is essential to interpret Mankiw's ten
myths in light of his unacknowledged immoral views about how CEOs will and should respond to incentives
to rig the system against the firm's consumers, employees, creditors, and shareholders. His textbooks
religiously avoid any disclosure of Mankiw morality or its implications for perverting his ten commandments
into an unethical and criminogenic dogma that optimizes the design of a criminogenic environment.
Mankiw's myths
People Face Tradeoffs. To get one thing, you have to give up something else.
Making decisions requires trading off one goal against another.
This can be true, but Mankiw pushes his principle to the point that it becomes a myth. Life
is filled with positive synergies and externalities. If you study logic or white-collar criminology
you will make yourself a far better economist. You may trade off hours of study, but not "goals."
If your "goal" is to become a great economist you will not be "trading off one goal against another"
if you become a multidisciplinary scholar – you will strongly advance your goal. If you study
diverse research methods you will be a far better economist than if you study only econometrics.
The Cost of Something is What You Give Up to Get It. Decision-makers have
to consider both the obvious and implicit costs of their actions.
"Opportunity costs" are an important and useful economic concept, but Mankiw's definition sneaks
ideological baggage into both sentences that turns his principle into multiple myths. Mankiw implicitly
assumes fraud and other forms of theft out of existence in the first sentence. "Cost" is often
not measured in economics by "what you give up to get it." If your inherit a home that lacks fire
insurance and immediately burns down there is a cost to you (and society) even though you gave
up nothing to inherit the home. If the CEO loots "his" firm he gave up nothing to get the millions,
but if he loses those millions he will consider it to have a "cost." Theoclassical economists
have a primitive tribal taboo against even using the "f" word (fraud).
Decision-makers frequently ignore the "costs of their actions." There is nothing in economic
theory or experience that supports the claim that the "decision-makers" "have" to consider costs.
It is rare that decision-makers must do – or not do – anything.
It is likely that Mankiw means that optimization requires decision-makers to "consider" all
"costs of their actions," but that too is a myth. Theoclassical optimization requires perfect,
cost-free information, pure "rationality," and no externalities. None of these conditions exist.
Car buyers have no means of knowing the costs of buying a particular car. If they bought a GM
car the ignition mechanism defect could cause the driver to lose the ability to control the car
– turning it into an unguided missile hurtling down (or off) a highway at 70 mph. The car buyer
does not know of the defect, does not know who will be driving when the defect becomes manifest,
does not know who the passengers will be, and does not know who and what else could be injured
or damaged as a result of the defect. The theoclassical view is that the buyer who "considers"
the costs of buying his defective car to others (negative externalities) and pays more money to
buy a car that minimizes those negative externalities is not acting ethically, but irrationally.
It is typically cheaper (for the producer, not society) to produce goods of inferior (but difficult
to observe) quality. The inability of the consumer to "consider" even the true costs to the consumer
and the consumer's loved ones of these hidden defects means that economists began warning 46 years
ago that "market forces" could become criminogenic. George Akerlof's 1970 article on markets for
"lemons" even coined the term "Gresham's" dynamic to describe the process. A Gresham's dynamic
is a leading form of a criminogenic environment.
[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty,
therefore, lies not only in the amount by which the purchaser is cheated; the cost also must
include the loss incurred from driving legitimate business out of existence.
Akerlof was made a Nobel laureate in economics in 2001 for this body of work. Economics is
the only field in which someone would write a textbook ignoring a Nobel laureate whose work has
proven unusually accurate on such a critical point. There is only one reason to exclude this reality
from Mankiw's myths – Akerlof's work falsifies Mankiw's myths, so Akerlof's work disappears from
Mankiw's principles, as does the entire concept of fraud.
Rational People Think at the Margin . A rational decision-maker takes action
if and only if the marginal benefit of the action exceeds the marginal cost.
The mythical nature of this principle flows from the multiple errors I have described. Mankiw
is being deliberately disingenuous. Theoclassical economics does not claim, for example, that
a firm produces a product "only if the marginal benefit of the action exceeds the marginal cost."
Theoclassical economists claim that a firm sells a product "only if the marginal benefit of the
action to the seller exceeds the marginal cost to the seller." The seller ignores social costs
and benefits.
For the sake of brevity, I will summarize that Mankiw's third principle is a myth for five
reasons known to every economist. First, it implicitly assumes out of existence positive and negative
externalities, which means that supposedly rational, self-interested decision-makers he postulates,
even if they had perfect, cost-free information, would not contract to maximize social welfare.
Second, as Mankiw morality implicitly admits, the actual optimization principle under theoclassical
economics would be determined by the marginal benefits and costs of an action to the decision-maker
– the CEO – not the firm, and certainly not society. Theoclassical economists, however, refuse
to admit that explicitly, so it disappears from Mankiw's 10 commandments.
Third, the information provided by CEOs is often not simply incomplete and costly, but deliberately
deceptive. Where information is merely incomplete, consumers may pay far more for a product than
they will benefit from the purchase. Where the seller provides deceptive information about quality,
the buyer and members of the public may be harmed or even killed. The CEO may also be looting
"his" firm as well as the customers. Mankiw has implicitly assumed perfect, cost-free information
and implicitly assumed that fraud does not exist.
Fourth, conflating rationality with optimization of personal costs and benefits is wrong on
multiple grounds. It defines ethical behavior as "irrational" where the consumer or CEO takes
into account social costs and benefits and protects the interests of others in an altruistic manner.
Everything we know from behavioral economics also makes clear that humans are not "rational" in
the manner predicted by theoclassical economics. Mankiw has implicitly assumed out of existence
thirty years of economic research on how people actually behave and make decisions.
Fifth, firms with monopoly power, according to theoclassical economics, maximize their profits
by deliberately reducing production to a point that the social cost of producing the marginal
unit is less than the marginal benefit to the consumer. Mankiw has implicitly assumed away monopolies.
People Respond to Incentives. Behavior changes when costs or benefits change.
I have responded to this myth in a
prior article . The implications of his fourth principle in conjunction with Mankiw morality
are devastating for theoclassical economics. CEOs create the incentives and understand how "behavior
changes" among their agents, employees, and subordinate officers in response to those incentives.
Under theoclassical principles this will unambiguously lead "rational" CEOs to set incentives
to rig the system in favor of the CEO. Because fraud and abuse creates a "sure thing" that is
certain to enrich the CEO, Mankiw's fourth commandment predicts that control frauds led by CEOs
will be ubiquitous. Fortunately, many CEOs are ethical and remain ethical unless they are subjected
to a severe Gresham's dynamic. As a result, Mankiw's commandments over-predict the incidence of
fraud and abuse by CEOs. Similarly, experiments demonstrate that humans frequently act in altruistic
manners despite financial incentives to act unfairly.
Trade Can Make Everyone Better Off .
Trade allows each person to specialize in the activities he or she does best. By trading with
others, people can buy a greater variety of goods or services.
See my
article on faux "trade deals" that exposes this myth.
Markets Are Usually a Good Way to Organize Economic Activity .
Households and firms that interact in market economies act as if they are guided by an "invisible
hand" that leads the market to allocate resources efficiently. The opposite of this is economic
activity that is organized by a central planner within the government.
Again, the key interaction under theoclassical theory is between CEO and consumers, employees,
creditors, shareholders, and the general public. "Markets" are vague constructs and they work
best when ethical and legal provisions reduce fraud to minor levels. When these ethical and legal
institutions are not extremely effective against fraud, the incentives created by the market can
be so perverse that they create a criminogenic environment that produces epidemic levels of fraud.
Mankiw's myth is to describe only one possible incentive and treat it as the sole possibility
other than what he falsely describes as "the opposite" – a government planner. The opposite incentive
to the so-called "invisible hand" is the Gresham's dynamic. Mankiw mythically presents the government
as the threat to an effective economy rather than an institution that is essential to producing
and enforcing the rule of law that prevents a Gresham's dynamic.
Governments Can Sometimes Improve Market Outcomes .
When a market fails to allocate resources efficiently, the government can change the outcome through
public policy. Examples are regulations against monopolies and pollution.
The myth here is that government only has a desirable role where there is a "market fail[ure]."
Mankiw treats "markets" as the norm and implicitly assumes that the government normally has nothing
to do with making markets succeed. Even conservative classical economists admitted that the rule
of law was essential to an effective economy and required an effective government. Well-functioning
governments always improve "market outcomes." Indeed, they are typically essential to making possible
well-functioning "markets."
Mankiw also fails to explain that "markets" will be fictional and massively distort resource
allocation (that is what a hyper-inflated bubble does) when there is an epidemic of control fraud.
As I have explained, Mankiw's own principles predict (indeed, over-predict) that deregulated "markets"
will frequently prove so criminogenic that they will produce epidemics of control fraud.
A Country's Standard of Living Depends on Its Ability to Produce Goods and Services.
Countries whose workers produce a large quantity of goods and services per unit of time
enjoy a high standard of living. Similarly, as a nation's productivity grows, so does its average
income.
First, the CEOs of sectors such as finance that are immensely unproductive – so unproductive
that they cause enormous losses rather than growth, and receive exceptional income because they
loot. Income is often based not on productivity, but on the CEOs' wealth and economic and political
power that allows them to rig the economy. A nation's standard of living also depends on its employment
levels, which can be crushed by economic policies such as austerity.
The issue is not what happens to "average income," but what happens to median income, wealth,
the income and wealth of the lowest quartile or particular minorities, and to income and wealth
inequality. A nation can have high average productivity, yet have poor performance for decades
in these other critical measures.
Consider what has happened to the folks who tried to do everything right to boost their productivity
according to the theoclassical economic "experts'" advice. This is what has happened to Latino
and black households where a head of the household has at least a college degree. The source is
economists at the extremely conservative
St. Louis Fed .
Hispanic and black families headed by someone with a four-year college degree, on the other
hand, typically fared significantly worse than Hispanic and black families without college
degrees. This was true both during the recent turbulent period (2007-2013) as well as during
a two-decade span ending in 2013 (the most recent data available).
White and Asian college-headed families generally fared much better than their less-educated
counterparts. The typical Hispanic and black college-headed family, on the other hand, lost
much more wealth than its less-educated counterpart. Median wealth declined by about 72 percent
among Hispanic college-grad families versus a decline of only 41 percent among Hispanic families
without a college degree. Among blacks, the declines were 60 percent versus 37 percent.
One of the reasons that college-educated Latino and black families lost so much wealth compared
to their white and Asian-American counterparts is that they were more likely to get their degrees
from the for-profit colleges that theoclassical economists touted – colleges that frequently provided
a very expensive and very poor education, often involving defrauding the students. Another reason
that college-educated Latino and black families lost so much wealth compared to their white and
Asian-American counterparts is that they were far more likely to be the victims of predatory home
lending – an activity for which theoclassical economists served as the primary apologists.
Mankiw also ignores critical factors that determine "a country's standard of living." Yes,
China reports higher growth, but it is also operating in an unsustainable fashion that has destroyed
much of its environment and threatens to be a major contributor to the global suicide strategy
of causing severe climate change.
Prices Rise When the Government Prints Too Much Money . When a government
creates large quantities of the nation's money, the value of the money falls. As a result, prices
increase, requiring more of the same money to buy goods and services.
No, and Mankiw knew this was a myth when he wrote it. First, "prices rise" for many reasons.
Pharmaceutical prices rise because hedge fund managers take over pharma firms or encourage others
to do so in order to increase prices on existing drugs by hundreds, sometimes thousands of percent.
Prices rise because accounting control fraud recipes hyper-inflated the largest bubble in history
in U.S. real estate. Prices rise because of cartels. Prices rise because oil cartels cause oil
shocks. Prices rise due to real bottlenecks, e.g., shortages of a skill or material.
Inflation has not risen, indeed general price levels have often fallen (deflation) despite
record creation of money by central banks and private banks. Theoclassical economists have regularly
predicted hyper-inflation. As Paul Krugman emphasizes, virtually none of them even admits their
serial prediction failures.
Society Faces a Short-Run Tradeoff Between Inflation and Unemployment . Reducing
inflation often causes a temporary rise in unemployment. This tradeoff is crucial for understanding
the short-run effects of changes in taxes, government spending and monetary policy.
Mankiw ends his ten myths with a series of myths. Foolish, counterproductive austerity often
causes inflation to fall to harmfully low – even negative (deflation) – levels that can lead to
prolonged recessions that cause severe damage to people and economies. Stimulus provides a win-win
that improves economic growth and reduces human suffering without causing harmful inflation.
A nation is able to operate at extremely high levels of employment without producing harmful
inflation. Mankiw is a partisan Republican. When Republican presidents in the modern era are faced
with recessions they junk their theoclassical dogmas and adopt stimulus programs, though they
generally do so largely through the economically inefficient and less effective means of slashing
tax rates for the wealthy.
Democrats: Please Renounce Mankiw's Myths
Unlike the Republicans, who always rise above their theoclassical principles when their president
is in office and faces a recession, the "New Democrats" are the ones who seem to have drunk the theoclassical
Kool-Aid and strive endlessly to create the self-inflicted wound of austerity when they are in power.
New Democrats also love to bash Republican presidents for running deficits even when those deficits
produced no harmful inflation and helped produce recovery. It is sensible and honest to point out
that tax cuts for the wealthy are a far less effective form of stimulus and to present and support
superior alternatives such as job guarantee and infrastructure programs. It would be superb if Democrats
were to point out that by far the most effective, prompt means of cutting taxes to stimulate the
economy in response to a recession is to cease collecting the Social Security taxes for several years.
It is not fine to praise Bill Clinton for taking the harmful step of running a budget surplus or
to bash Republicans because they – correctly – increased fiscal stimulus (and therefore the short-term
deficit) in response to a recession.
Democrats also need to stop spreading the myth that Bill Clinton was an economic marvel. He was
the luckiest president in history in terms of timing. His economic "success" was the product of two
of the largest bubbles in history (the dot.com and real estate bubbles). The real estate bubble is
the only thing that prevented his dot.com bubble from causing an economic collapse during his term.
The real estate bubble was so enormous that it made it easy for the fraudulent CEOs to "roll" (refinance)
the fraudulent loans they made, which helped cause the bubble to hyper-inflate. The saying in the
trade is "a rolling loan gathers no loss." This meant that the bubble was Bill Clinton and George
Bush's bubble, but it collapsed on George Bush's watch so Clinton gets the credit for the high employment
produced by the twin bubbles and Bush gets the blame for the massive unemployment that a massive
bubble will create when it collapses (if it is not replaced by an even larger bubble).
The pots are calling the kettles black; standard politics, redundancy easily replaced by automation.
You do know that Bernie isn't going after Hillary because he has his skeletons, especially
in the medical university complex, don't you. Ever live in Vermont. You did notice that Hillary
just threatened him, to the core of his argument.
This… "Energy is information, most of which humans ignore."…and this… "Public Education policies
are disgusting to anyone who really wants to learn…" are the important elements although I would
add that humans don't ignore so much as don't know/are not taught, and I would say Public education
has been purposefully corroded to the point of disgusting.
Pharmaceutical prices rise because hedge fund managers take over pharma firms or encourage
others to do so in order to increase prices on existing drugs by hundreds, sometimes thousands
of percent. Prices rise because accounting control fraud recipes hyper-inflated the largest bubble
in history in U.S. real estate. Prices rise because of cartels. Prices rise because oil cartels
cause oil shocks. Prices rise due to real bottlenecks, e.g., shortages of a skill or material.
- Bill Black
----–
All of these examples treat relative price rises in the affected sector, not the general
inflation which saw the U.S. CPI increase by a factor of ten (10) since 1950. Hedge funds and
cartels couldn't do that, no matter how successful they were in increasing their share of the
pie.
The same logic is used by union busters to claim that "greedy labor unions" cause inflation
- an equally false notion. Labor can increase its share of national income at the expense of corporate
profit, but it cannot cause a general inflation.
This unprecedented secular inflation did, however, coincide with government bonds surpassing
gold as the Federal Reserve's largest holding in 1945, and with the dollar's gold link being severed
in 1971.
Bill Black evidently hews to the scholarly tradition of the eminent Argentine economist and
former central banker Mercedes Marcó del Pont:
"It is totally false to say that the printing more money generates inflation; price increases
are generated by other phenomena like supply and external sector's behaviour," said Marcó del
Pont.
I would argue that the real estate bubble caused genuine inflation because it was a credit
bubble, but I agree on your other points. Intuitively I think of inflation as a rise in prices
without a corresponding rise in (average) affordability. It's why a Big Mac today can cost multiple
times what it did 30 years ago without being any less affordable for the average customer.
Mankiw's definition isn't precisely wrong but it's oversimplified. He doesn't address the role
of banks in money creation, he doesn't define money (what about credit?) he doesn't discuss the
factors that might cause government to print more or less money, and he doesn't say how much is
too much. Without more rigor than he provides, it's only useful as a plausibility argument after
the fact.
Regarding Black's comment:
Inflation has not risen, indeed general price levels have often fallen (deflation) despite
record creation of money by central banks and private banks.
I would say this was because they were doing it during the deflation of a credit bubble on
a large enough scale that money creation by the government was a drop in the bucket by comparison,
and that was what caused deflation. Which again points to the importance of defining terms and
operating constraints (why couldn't the government print money on a massive scale to compensate?
What are the drawbacks and limitations on that approach?)
Economists do love to make doomsday hyperinflation predictions that never seem to pan out.
As far as I can tell, that's because they think that the economy is inherently unstable and will
lapse naturally into massive inflation (see: wage-price spiral) or some other disastrous state
without the wise guiding hand of a central banker to prevent it. There seems to be very little
evidence of this actually happening in reality, and the few genuine examples of hyperinflation
(Weimar, Zimbabwe) have typically resulted from a collapse in production coupled with debts denominated
in other currencies that (a) considerably exceed the country's ability to pay and (b) require
the attempt to be made anyway.
Notice that Mankiw managed to say nothing about "Economic instability or deflation, and eventually
economic depression, is caused when the government prints TOO LITTLE money", which is actually
true and happens quite reliably.
If it is physically impossible for something to occur, it won't, and finance be damned.
Economics is first and foremost a branch of the physical sciences, though most economists have
forgotten this.
Supply and demand.
Unintended consequences.
High productivity does not create high wages. High wages create high productivity. If you
spend a lot of money on water-conservation technology at the base of Niagara Falls, will it
increase the economic value of water there?
The physical utility of a commodity (including labor) is not related to its economic value.
Adam Smith did get something right.
Nothing in this universe can grow exponentially for very long. Societies with sustained
high fertility rates will always be miserably poor, and only societies that have first reduced
their fertility rate can hope to become rich.
A (more-or-less) free market is indeed a powerful and essential optimization mechanism
("the invisible hand") but it is nonlinear. Like all such nonlinear optimization mechanisms,
it can and does get stuck in local minima and require external directed efforts to move to
a more optimal solution. This is basic math.
Inflation occurs when prices go up. That's it.
"Capitalism" guarantees neither poverty nor prosperity. The market is neutral. Even as
the laws of physics are obeyed equally well by a building that stands tall as by one that collapses
into a heap of rubble, the laws of the market are also obeyed in miserably poor Bangladesh
as well as in prosperous Switzerland. With 100 desperate people competing for every job, wages
for the many will be low and profits for the few will be high. And vice versa. Blaming "capitalism"
for poverty is silly, as if I threw someone off a cliff and then blamed the law of gravity
for their death. Trying to deny market forces is equally silly, like trying to legislate gravity
out of existence. It simply must be worked with.
"Free to choose to own or employ slaves", "Free trade includes the ability of big corporations
to restrict trade to maximize their profits", "Free to buy politicians and have them loot the
public treasury in your interest" … Strict libertarianism is logically incoherent and ethically
vile.
I quibble with 6 & 8. "A more or less free market" is a well regulated market. How much "more
free" or "less free" a market needs to be to best distribute its product depends entirely on its
particular conditions and vagaries. The insinuation that a market should be "stuck in a local
minima" before oversight can improve its performance echoes Mankiw's 7th misconstruction, that
(in Bill Black's words) "government only has a desirable role when there is a market failure."
I especially disagree that markets are neutral. Markets exist at the pleasure of the Capitalists
who create and smother them for profit. Capitalists are forever cajoling "market opportunities"
out from under every rock they can turn over. They invent, shape, split, combine, dissect, analyze,
produce, reproduce, abandon, corner and strangle markets in pursuit of lucre. There is no market
for Ford electric cars in California beyond the handful required by statute, despite ample demand,
because individuals at Ford have determined that creating that particular market will eat into
the personal profit they might extract from other markets. "Efficient" markets, that only return
a gazilionth of a point on investment because of optimal competition, cease to be because the
margin is too low to justify the hassle or the capital risk. Switching gears, labor markets in
Bangladesh & Switzerland exist when Capitalists decide to hire workers. Hirees agree to be paid
what Capitalists choose to pay, whether "freely" or under the duress of the State.
There is no market equivalent to gravity or the law of planetary motion. The model of supply
and demand is a hypothetical post rationalization of a shifting negotiation – while it's helpful
to a degree, supply/demand doesn't make "lawfull" (or useful) predictions until demand nears infinity
(see health care: "how much will that be, doc?" – "how much have you got?", or housing: "how much
can you borrow from a fractional reserve player who lends without risk and won't verify your income?")
As the local monopolists of violence, States can engage markets as they see fit. They can supply
(Volkswagon & the post office), demand (food stamps, R&D grants), regulate, open (ACA) or close
them (pharmaceutical imports) to their hearts desire. Good or bad outcomes depend entirely on
the wisdom of the policy.
Whoa. Exhale. To be sure, I inhaled. Too many words when I should just say:
Nice.
Its good we agree that policy should be just and compassionate.
The values and ideology represented in the Economics textbook Bill Black analyzed didn't
arise in a vacuum. The points Black lists reflect the ideology, values, ethics and interests of
a narrow segment of our society who have accumulated enormous personal wealth through a variety
of extra-legal and illegal mechanisms, and who use a small portion of that wealth to fund "Economics
Chairs" in our public and private universities; economics "think tanks"; and speeches, books,
consulting engagements, and board memberships for "prominent economists".
This matter is really about whose values will control government economic policy and law.
Excellent analysis. Thank you, Bill Black, for all you do and have done.
I see much of the underlying theory of classical economics as simplifications that make the
math easier. One of my favorite examples of misallocation of resources was the market for Burbank
Russet potatoes in 2001. Basically, producers wanted $6.50 per hundredweight for spuds. The big
buyer, Simplot offered farmers $4.50 pre-season. Many farmers decided to wait until harvest, hoping
the spot market would give them a better price. I should also mention that in Idaho, farmers not
wishing to plant in a given year, could sell their water to other farmers, or to the federal government
which uses the water to help salmon and to produce hydropower. Thus, producing potatoes carried
the opportunity cost of water leasing. But leasing water leasing to the federal government is
culturally taboo in the ag. community. 2001 was a dry year and most of the ag. water was consumed
growing spuds.
The outcome was a banner year in production, driving the spot market price to $0.50 per hundredweight,
far less than the cost of production. Many acres of potatoes were plowed under – a total loss
– to everyone.
My point is – there is no way to know, in advance, what the price of a commodity will be in
the future unless you know, or can limit, the rate of production and control demand.
Did the banks which loaned billions to the gas frackers of North Dakota know that production
would exceed demand and cause a crash? Perhaps the loan officer might have such concern, but would
more likely be most concerned with his/her own bottom line – a meme Yves explores in Econned.
I suppose I am a bit defensive of classical microeconomics because it is elegant. But I am
also terribly suspicious of its answers because one never has either the information or the control
to be anywhere near as certain as the calculus would suggest.
On point #9: "Prices Rise When the Government Prints Too Much Money". Recent inflation data
suggests it's a myth. But if restated as "When government prints money, prices rise on the goods
and services that the people who receive the money tend to buy", then it's NOT a myth.
That was the whole problem with the Federal Reserve's damned QE efforts. They printed gobs
of money, and it all landed in the pockets of the wealthy. The stuff they buy (stocks, real estate,
luxury goods, premium educations, etc.) has seen prices rise MUCH faster than nominal inflation.
And the people who didn't get any of the newly printed money (i.e., most of us)… Well, these sad
folks couldn't afford to spend any more than before, so anybody who attempted to impose prices
hikes on low-end consumer goods saw a loss of sales volume.
Newly-printed money CAN cause inflation, but WHERE the price rises happen depends greatly
on the pockets in which the money lands.
stocks, real estate, luxury goods, premium educations, etc.
But it's hard to produce more of those, so with an increase in money chasing them their prices
will rise. If the government handed money to poor people, they would buy food, clothes, cars,
televisions, etc. In other words, things that society can produce more of. That's my read, anyway.
Partially. Prices for good where quantities are truly fixed (like acres of land in San Francisco)
can rise sharply when extra money pours in.
But even when there is opportunity to increase production, manufacturers must purchase equipment
(like farm equipment for more food) or hire more workers (thereby tightening the labor market
and pushing wages up). These result in price hikes. More modest price hikes than San Francisco
real estate, but still real hikes. It's the classic supply vs. demand curve from classic microeconomics.
That said, "QE to the people" is certainly less objectionable than the "QE to the bankers and
the 1%" that we've seen over the past five years. Prices would go up, but people would get to
buy more things they want or need, and hiring would likely go up as well. [And at a minimum, there
needs to be at least *some* growth in the money supply to keep up with population growth. Otherwise
we see deflation and the ability to become wealthier by hoarding cash.]
"Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes
at the top of the income distribution have fallen substantially over the past few years.
"According to the most recent IRS data, between 2007 and 2009, the 99th percentile income
(AGI, not inflation-adjusted) fell from $410,096 to $343,927. The 99.9th percentile income
fell from $2,155,365 to $1,432,890. During the same period, median income fell from $32,879
to $32,396."
This kind of ignorant cluelessness is pretty prevalent among the oligarchy and its supporters
like Mankiw. Just like that guy in Davos who simply couldn't understand why there's so much social
unrest in the world today. They live in a completely different world.
The big difference being that $70k to the 99th percentile means the difference between a new
Beemer this year or next while $500 for the median family means choosing which child goes hungry
for the second half of December.
And of course, Anonymous's excellent point. You are cherry picking old data based on a stock
market and real estate bubble crash. Median income families don't "own" real estate and certainly
don't own stocks.
Mankiw is either psychotic or was gleefully obfuscating when he presenting that out-dated analysis.
I say Kill the Rich and feed their bodies to the poor. It's not a solution at all (and I am
rich myself) but it would be deeply, deeply satisfying!
My first exposure to Mankiw's principles was actually an early version of the talk by Yoram
Bauman in this video. It hits
several of the points Mr. Black makes and is also pretty funny. It definitely demonstrates how
Mankiw attempts to cloak his biases in supposedly neutral terms.
As for number 6, I couldn't disagree with you more. Organisational power is dependent on it
being enforced BY THE GOVERNMENT. Without that coercion, individuals would find other solutions
for the want provided for by that particular organisation. I would suggest that you look at the
history of Pennsylvania circa 1681-1690 or Moresnet (in what is now Aachen) circa 1816 until the
end of WWI to understand what is possible when the free market really operates.
I am actually a returning undergrad student and starting an econ course next week. I just
looked at the text book… and its Mankiw. Should be a fun semester.
Don't argue with the PR. You need to be strategic. Regurgitate the BS but be sure to read enough
corrective material that the toxins don't infect your brain.
I doubt Mankiw will accept 100% estate tax on the justification that the cost of bequests
is zero to the recipient. (and thus a 100% estate tax doesn't incur large costs on the recipient)
Greenspan phony "Shocked disbelief" reminds classic "...I am shocked - shocked, there is gambling
going on in this establishment...." "...here are your winnings..." exchange between Humphrey Bogart
& Claude Rains in Casablanca. Compare with "... "Those of us who have looked to the self-interest
of lending institutions to protect shareholders' equity, myself included, are in a state of shocked
disbelief," he said. ..."
Notable quotes:
"... "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief," ..."
"... Greenspan spurned the Republican acolytes trying desperately to defend the faith and blame the crisis on the Community Reinvestment Act and the powerful lobby of poor people who forced powerless banks to do reckless things. ..."
"... Private greed, not public good, caused this catastrophe: "The evidence now suggests, but only in retrospect, that this market evolved in a manner which if there were no securitization, it would have been a much smaller problem and, indeed, very unlikely to have taken on the dimensions that it did. It wasn't until the securitization became a significant factor, which doesn't occur until 2005, that you got this huge increase in demand for subprime loans, because remember that without securitization, there would not have been a single subprime mortgage held outside of the United States, that it's the opening up of this market which created a huge demand from abroad for subprime mortgages as embodied in mortgage-backed securities. ..."
"... But having admitted the failure of his faith, Greenspan could not abandon it. Credit default swaps had to be "restrained," he admitted. Those who create mortgages should be mandated to retain a piece of them to insure responsible lending. Otherwise, the old faith still applied. No new regulations were needed, because the markets "for the indefinite future will be far more restrained than would any currently contemplated new regulatory regime." ..."
"... The only Guantanamo that the United States has any business running is a concentration camp for the hundreds of wall street executives and their cronies in Bushland that conspired to defraud the American people from their hard earned dollar. ..."
"... There are no free markets in America, any more than there is free lunch. ..."
"... So it wasn't the military-industrial complex that did us in after all . . . ..."
"... It's clear from comments on this contribution that few readers of Truthout believe Alan Greenspan's sorry testimony before Congress. What has faith in something to do with enforcing the policies of fiduciary responsibility already on the books? All these so-called "experts" on capitalism are now coming out to say "I'm sorry." Well, I won't be sorry for them until they are held monetarily and criminally responsible for their actions, inept or not. ..."
"... If it looks like class warfare, as David Harvey, author of Neoliberalism, has stated, call it class warfare and act accordingly. ..."
"... it doesn't take a genius to understand that when financial instruments are created based on crap (subprime mortgages), that eventually problems will occur with those instruments. In fact, Greenspan and his cronies knew that, which is why they resisted these instruments being regulated by the SEC or even the CFTC. ..."
"... Sounds like the "maestro" hit a flat note in his orchestra of greed and deregulation. ..."
"... Did anybody even bother to consult the Math PhDs who created these instruments to run possible scenarios -- just in case? why bother when you know you can scare congress, the president and the treasury and ultimately the people into bailing your ass out of worldwide collapse? ..."
"... Shocked Disbelief is a ploy. When they were all riding high, they didn't give a crap. They were going to come out richer than hell anyway. ..."
"... Where's Ayn Rand when you need her? Give me a break Mr Greenspan. Never let history and reality get in the way of the big unregulated celebration of greed like we have had since "Saint Ronald Wilson Reagan", and the other "Free Market" "government is the problem" ideologues ..."
"... What about the 1994 Act of Congress that required the Fed to monitor and regulate derivatives? The Act Greenspan ignored? ..."
"... "...I am shocked - shocked, there is gambling going on in this establishment...." "...here are your winnings..." exchange between Humphrey Bogart & Claude Rains in Casablanca ..."
by: Robert Borosage, The Campaign for America's Future
On October 23, former Federal Reserve Chairman Alan Greenspan testified before a House Oversight
and Government Reform Committee hearing on the role of federal regulators in the current financial
crisis.
It marks the end of an era. Alan Greenspan, the maestro, defender of the market fundamentalist faith,
champion of deregulation, celebrator of exotic banking inventions, admitted Thursday in a hearing
before Rep. Henry Waxman's House Committee and Oversight and Government Reform that he got it wrong.
"Those of us who have looked to the self-interest of lending institutions to protect shareholders'
equity, myself included, are in a state of shocked disbelief," he said.
As to the fantasy that banks could regulate themselves, that markets self-correct, that modern
risk management enforced prudence: "The whole intellectual edifice, however, collapsed in the summer
of last year."
Greenspan spurned the Republican acolytes trying desperately to defend the faith and blame
the crisis on the Community Reinvestment Act and the powerful lobby of poor people who forced powerless
banks to do reckless things. Greenspan dismissed that goofiness in response to a question from
one of its right-wing purveyors, Rep. Todd Platts, R-Pa., noting that subprime loans grew to a crisis
only as the unregulated shadow financial system securitized mortgages, marketed them across the world,
and pressured brokers to lower standards to generate a larger supply to meet the demand. Private
greed, not public good, caused this catastrophe:
"The evidence now suggests, but only in retrospect, that this market evolved in a manner which
if there were no securitization, it would have been a much smaller problem and, indeed, very unlikely
to have taken on the dimensions that it did. It wasn't until the securitization became a significant
factor, which doesn't occur until 2005, that you got this huge increase in demand for subprime
loans, because remember that without securitization, there would not have been a single subprime
mortgage held outside of the United States, that it's the opening up of this market which created
a huge demand from abroad for subprime mortgages as embodied in mortgage-backed securities.
But having admitted the failure of his faith, Greenspan could not abandon it. Credit default
swaps had to be "restrained," he admitted. Those who create mortgages should be mandated to retain
a piece of them to insure responsible lending. Otherwise, the old faith still applied. No new regulations
were needed, because the markets "for the indefinite future will be far more restrained than would
any currently contemplated new regulatory regime."
Now hung over from their bender, the banks could be depended upon to remain sober "for the indefinite
future." Or until taxpayers' money relieves their headaches, and they are free to party once more.
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Comments
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Sun, 10/26/2008 - 23:37 - Captain America (not verified)
The only Guantanamo that the United States has any business running is a concentration camp
for the hundreds of wall street executives and their cronies in Bushland that conspired to defraud
the American people from their hard earned dollar.
What they did dwarfs the damage caused to this country by 911, (no disrespect for the many
innocents who died). However, here, every single citizen is a victim of fraud and corruption on
a scale that was heretofore inconceivable. Greenspan, Bush and now Paulson have done more than
Bin Laden and his hordes could do in a 100 years.
By the way, if you protest YOU wind up locked up for being un-American. What happened America
?
There are no free markets in America, any more than there is free lunch. The game was always
fixed and Greenspan was the ultimate shill for the fixers. The past thirty years have been an orgy
of greed with common sense shoved aside for the sake of uncommon expediency. Americans became infatuated
by arcane formulas and dense incomprehensible mathematics to the point that they forget simple arithmetic.
America wake up it was only a dream, and a bad one at that.
It's clear from comments on this contribution that few readers of Truthout believe Alan Greenspan's
sorry testimony before Congress. What has faith in something to do with enforcing the policies
of fiduciary responsibility already on the books? All these so-called "experts" on capitalism
are now coming out to say "I'm sorry." Well, I won't be sorry for them until they are held monetarily
and criminally responsible for their actions, inept or not. The truth is as plain as the
nose on your face: Greenspan, the Federal Reserve, the investment banks, the Bush administration
and several members of Congress unobtrusively acted to consciously and knowingly to rob the national
treasury for the sake of capitalism's sacred cow: capital accumulation on behalf of the nation's
political and economic elite. If it looks like class warfare, as David Harvey, author of Neoliberalism,
has stated, call it class warfare and act accordingly.
We have heard statements like "the mathematical models used for knowing the behavior of derivatives
based on subprime mortgages were too difficult to understand", etc. But it doesn't take a
genius to understand that when financial instruments are created based on crap (subprime mortgages),
that eventually problems will occur with those instruments. In fact, Greenspan and his cronies
knew that, which is why they resisted these instruments being regulated by the SEC or even the
CFTC. And this is why they turned a blind eye to many of the rating agencies giving many
of these instruments AAA ratings. I am sure that a real investigation will reveal numerous instances
of fraudulent activity in conjunction with this debacle. Those perpetrators must be identified
and brought to justice. While this will not fix our current problem, it hopefully should serve
as a deterrent to those who would in the future attempt to again engage in such activities.
Sun, 10/26/2008 - 08:13 - Robert Iserbyt (not verified)
Well here you have it a confessional lie from the biggest fraud perpetrator in the history of
American finance Why the markets ever listened to this criminal in the first place is evidence
that our entire nation should be required to take a full year of real unfettered economics just
in case they don't understand what is going on now. All the pundits on MSNBC and all the talking
heads should be removed from the airwaves. The Bailout what will that do? the answer lies before
you.
Sounds like the "maestro" hit a flat note in his orchestra of greed and deregulation.
Come on, do you really think we are all so stupid to buy into the story that you couldn't predict
a melt down knowing that those writing the subprimes held no responsibility for their actions?
That's like giving a "get out of jail card" to someone who just created a felony! Did anybody
even bother to consult the Math PhDs who created these instruments to run possible scenarios --
just in case? why bother when you know you can scare congress, the president and the treasury
and ultimately the people into bailing your ass out of worldwide collapse?
I'm a former real estate broker and my son is a mortgage broker. From about 2004 through the beginning
of this "greatest financial crisis since '29", we frequently talked on the phone about the disaster
which would ensue when the real estate value appreciation stopped, and people were no longer fueling
the economy with money borrowed against their equity, and the sub-prime loan fiasco would end.
We knew it would be disastrous, and both of us were astonished that neither the FED nor congress
was willing to say or do anything about it. Anyone who has witnessed over the years the cycle
of boom/bust/boom/bust in the real estate market knew that after eleven years of unprecedented
"boom" -- '96 through '2007 -- the "bust" would be like an earthquake. Paulson and Greenspan and
their ilk now denying that they suspected this is just is just their lying to protect the GOP
which was benefitting from the booming economy. They should both end up in prison, with all of
the GOP members of congress who have had their hands in the cash register.
Dance clown, dance. First you were against the FED until you became head of the FED. Then you
were for trickle down economics and letting the "system" regulate itself until you saw the inevitable
destruction it caused. Dance clown, dance. You should be the first one sent to prison under the
"Un-American activities act". The arrogance of your testimony before the committee was appalling.
You honestly couldn't believe you were wrong !!!
This is like telling the Fox to watch the Hens and then walking away and trusting him to do the
right thing. Government has to return to regulation and see that there is no hanky, Banky going
on anymore. Monopolies have to be busted up, like the Communication industry's, the Drug industries
and any other Corporations that control to much of the way the Country operates. No more Outsourcing
any Government duties.
Where's Ayn Rand when you need her? Give me a break Mr Greenspan. Never let history and reality
get in the way of the big unregulated celebration of greed like we have had since "Saint Ronald
Wilson Reagan", and the other "Free Market" "government is the problem" ideologues. We can
spend trillions on war and corporate bailouts, but we can't have a single payer health system?
We can't rebuild our infrastructure? Say it again- give me a break!
"...I am shocked - shocked, there is gambling going on in this establishment...." "...here
are your winnings..." exchange between Humphrey Bogart & Claude Rains in Casablanca
"... By Gerald Friedman, Professor of Economics, University of Massachusetts, Amherst. A version of this post first appeared at the Institute for New Economic Thinking website ..."
"... Lesser Depression ..."
"... The reason why elite economists and politicians were so angry at my analysis of Sanders' proposals was that it disrupted a consensus that nothing can be done by government to improve the performance of the economy. After all, if things are already as good as they can be, it is irresponsible pie-in-the-sky to even suggest to the general public that we can do better. Instead, the task of economists and other policy elites becomes to explain to the general public why they should accept stagnant incomes and rising inequality, and applaud the anemic growth of recent years as the best possible outcome. But the real danger of such thinking is that it leaves liberals like Hillary Clinton with few policy options to offer in response to the siren song of demagogues like Donald Trump. The self-proclaimed "responsible" elite economists see their role as to persuade the public that nothing can be done, in the hope of heading off the challenge of those who would capitalize on the electorate's appetite for change. They have to slap down critics. "Responsible" elite economists have to keep the party of "good arithmetic" from overpromising at all costs. It should not surprise us, though, that those whose living standards have suffered most from stagnant growth are more inclined to believe politicians promising change. ..."
"... John Maynard Keynes showed how active government policy can raise employment and output; his followers, including Joan Robinson and Nicholas Kaldor, showed how full employment encourages further investments and leads businesses to find ways to raise labor productivity to match increasing product demand. New Deal American economists, such as Rexford Tugwell and John Maurice Clark, showed how active government policy can raise growth rates with investments in infrastructure, in public services, in human capital development, and in research and development. By listening to these ideas, economists associated with liberal American politics helped produce 25 years of relatively rapid and egalitarian growth after World War II. Abandoning these ideas, we have suffered 30 years of relatively slow growth and rising inequality, culminating in the current Lesser Depression. ..."
"... I had dinner last night with two excellent people who happen to be doing well at this time. They could not comprehend why anyone would be voting for Trump, whom they saw as a dangerous lunatic. They have supported Sanders and voted for him in the NY primary, but are absolutely going to vote for Clinton in the Fall. What I view as the credible case against Clinton has not reached them with any strength or registered at all. I was asked (because I had said nothing while they talked–I hate this kind of confrontation) what problem people could have with Hillary? I said: Libya, Ukraine, and Nicaragua. They really didn't know what I was talking about and although I spoke up for why I thought this made her a neocon like the ones that surrounded Dubya, they simply didn't know any of the details and we left it at that. ..."
"... HRC's recap of Reaganite Latin America policy is her most vile achievement. If anything demonstrates a continuity of imperialist strategy across administrations, that's it. ..."
"... " I said: Libya, Ukraine, and Nicaragua. They really didn't know what I was talking about and although I spoke up for why I thought this made her a neocon like the ones that surrounded Dubya, they simply didn't know any of the details and we left it at that." ..."
"... I run into this all the time. Utter and complete foreign policy illiteracy, particularly from otherwise politically correct millennials who know so little that Hillary gets a complete pass. ..."
"... This is a common story and illustrates that our current detachment from the world around us and our fellow citizens is coming to an end. We are being forced out of our individual bubbles. Modern corporations have supplied the populations of the world with abundance of goods, but in order to accomplish this feat, have destroyed and are destroying the cultural glue, if you will, that holds society together. ..."
"... TINA will be maintained by propaganda and physical force. We see that the propaganda is starting to weaken because the contradictions of the message can no longer be hidden. The destruction is too widespread and the inequality can no longer be hidden. You can hollow out a social system only so much before it collapses. The collapses we are witnessing is the promise of democracy. A collapse of the ideals of moderation and compromise. ..."
"... We are entering a phase of civil war. It is still carried out in a polite manner and intellectually, the discussion is still couched in Orwellian doublespeak. However, criticisms of the ruling elite are becoming more straightforward and more people are waking up to the fact that the system is rigged against them. ..."
"... This civil war is a battle over leadership. It is a battle to demand good government instead of no government. It is a battle to demand a government for and by the people. A battle for the common good. Evaluated not in some abstract terms like "trickle down" economics, but direct support and action. The hearts and minds of the population was won over long ago to wholeheartedly support capitalism and private ownership of the world's resources. This is proving to be a disaster. ..."
"... Supporters of unfettered capitalism know only one way. Privatization of ALL the worlds resources and potential. They showed their hand in 2008 with the bailouts and implementation of austerity policies. In their minds, there is no turning back. To compromise means failure. For them, TINA is real and logical. This is the perspective of owners of capital. They gain strength and advantage from seeming to compromise, but in the end know they can always reverse course and regain private control. Subterfuge and force allows the resilience of capitalism as the reigning social order. ..."
"... Jonathan Haidt is a psychologist, sometimes featured in the New York Times, who apparently believes the capability of people to be convinced by reasoned argument is not strong. From my limited reading of his work, he suggests that humans are instinctive beings who, when they have strong beliefs, their reasoning powers are used to justify these beliefs, not to cast doubt about these beliefs. ..."
"... For example, I believe HRC is little more than a well-connected and well traveled mediocrity, with a record of few positives and many egregious negatives that justifies this assessment. I view her as potentially more damaging to the USA, as President, than Trump. ..."
"... Successful big ideas and big projects require cheap abundant energy, resources and intelligent design. It'll be mighty funny when the Keynesians finally implement their plan to overhaul the national highway infrastructure, creating tons of high paying jobs and speeding up the economy–right when our access to cheap oil collapses. That's dumb design at its finest, yet this sort of thing is almost certainly the best that the lobotomized Keynesian planners will be able to think up and do. ..."
"... A truly innovative program to get the economy moving in a positive direction would be to outlaw personal vehicles and rebuild the nation's railway network. ..."
"... I share your antipathy toward freeways. I remember the big Freeway they built in Fresno when I was a child, destroying hundreds, if not thousands of modest homes (we had to move from a grand rental to a dilapidated house that cost more – were the landlords behind getting rid of a surplus of houses????) – to save maybe – maybe at the most 3 minutes in transit time over driving an existing surface street. Jobs were part of the rationale. ..."
"... "Sorry, nothing more can be done for you." TINA. ..."
The ferocious
reaction
to my
assessment
that Senator Bernie Sanders' economic and health care proposals could create long-term economic
growth shows how mainstream economists who view themselves as politically liberal in America have
abandoned progressive politics to embrace a political economy of despair. Rationalizing personal
disappointment and embracing market-centric economic theories according to which government can do
little more than fuss around the edges, their conclusions - and the political leadership that embraces
them - have little to offer millions of angry ordinary people for whom the economy simply isn't working.
It has certainly been a rough seven years for the economists in the Obama Administration. While
avoiding a Great Depression, the Administration has presided over what Paul Krugman and Brad DeLong
call a "
Lesser Depression ." One might almost forgive them for a certain defeatism after seven
years of painfully slow economic recovery, and the dismay of seeing urgently needed programs blocked
by the Republican congressional majority. After so many compromises and let-downs, perhaps it is
easier to tell those who expect more that it just can't happen. There is comfort in the Thatcherite
phrase, "There Is No Alternative" (TINA).
Combined with orthodox neoclassical microeconomics, however, rationalization has produced a toxic
political economy that abandons progressive ideals and surrenders political space to xenophobes and
the populist rightwing (see: Donald Trump). The mainstream economists who have attacked my embrace
of Keynesian economics have abandoned, in practice, the notion that government can effectively intervene
in the economy to raise levels of employment, and to promote economic growth and equity. Instead,
they have returned to pre-Keynesian Classical thinking, where the very suggestion that government
action can raise growth rates or wages is taken to be obviously wrong. Criticisms of the
orthodox model and its conservative policies are deemed worthy of scorn, to be dismissed tout
court because they are obviously at variance not only with textbook economics, but with what
we need to believe in order to accept failure .
The mechanism of economic policy paralysis among the liberals who espouse market-centric economics
works like this: If we accept the (flawed) premise that the total supply of goods and services equals
total demand, then we can agree with the Congressional Budget Office (CBO) that potential output
is best measured by observing actual output. And, with that - presto! - unemployment magically disappears,
and we no longer suffer from slow growth. Conveniently align growth projections with the otherwise-disappointing
performance during the Lesser Depression, and, as the CBO has done, estimates of potential growth
now equal actual growth: Instead of the 3 percent average annual growth of the 1959-2007 period,
not to mention the 4 percent growth 1947-73, we are now told to accept 2 percent growth not as a
disappointment, but as recognition of an unfortunate necessity. Such reevaluations say to policy
elites, "Hey, we are doing as well as can be expected." To the general public, the message is: "Sorry,
nothing more can be done for you." TINA.
The reason why elite economists and politicians were so angry at my analysis of Sanders' proposals
was that it disrupted a consensus that nothing can be done by government to improve the performance
of the economy. After all, if things are already as good as they can be, it is irresponsible pie-in-the-sky
to even suggest to the general public that we can do better. Instead, the task of economists and
other policy elites becomes to explain to the general public why they should accept stagnant incomes
and rising inequality, and applaud the anemic growth of recent years as the best possible outcome.
But the real danger of such thinking is that it leaves liberals like Hillary Clinton with few policy
options to offer in response to the siren song of demagogues like Donald Trump. The self-proclaimed
"responsible" elite economists see their role as to persuade the public that nothing can be done,
in the hope of heading off the challenge of those who would capitalize on the electorate's appetite
for change. They have to slap down critics. "Responsible" elite economists have to keep the party
of "good arithmetic" from overpromising at all costs. It should not surprise us, though, that those
whose living standards have suffered most from stagnant growth are more inclined to believe politicians
promising change.
It was only by rejecting classical economics that Franklin Roosevelt was able to save the American
economy and bring about a revolution in social policy. And only by rejecting the new classical economics
and the policy of so-called responsible elite economists can Clinton meet our current economic crisis.
John Maynard Keynes showed how active government policy can raise employment and output; his
followers, including Joan Robinson and Nicholas Kaldor, showed how full employment encourages further
investments and leads businesses to find ways to raise labor productivity to match increasing product
demand. New Deal American economists, such as Rexford Tugwell and John Maurice Clark, showed how
active government policy can raise growth rates with investments in infrastructure, in public services,
in human capital development, and in research and development. By listening to these ideas, economists
associated with liberal American politics helped produce 25 years of relatively rapid and egalitarian
growth after World War II. Abandoning these ideas, we have suffered 30 years of relatively slow growth
and rising inequality, culminating in the current Lesser Depression.
The debate over my little report showed how mainstream economics has left us with a smugly certain
macroeconomics lacking in imagination, and offering no effective policies to move beyond economic
stagnation and escalating inequality. If these economists cannot do better, then we risk more than
personal disappointment; we gamble our liberal political economy against the likes of Donald Trump
and Ted Cruz. Hillary Clinton can do better. And Americans deserve better.
A very bold thing for a man like this to say. I know he will be criticized (vilified?) for
his misplaced belief that Clinton can "do better", but considering who this man is and where he
is coming from, condemning him at this stage of the game would be churlish. He's taken on The
Bigs and the stifling orthodoxy they embody and for that we owe him.
I had dinner last night with two excellent people who happen to be doing well at this time.
They could not comprehend why anyone would be voting for Trump, whom they saw as a dangerous lunatic.
They have supported Sanders and voted for him in the NY primary, but are absolutely going to vote
for Clinton in the Fall. What I view as the credible case against Clinton has not reached them
with any strength or registered at all. I was asked (because I had said nothing while they talked–I
hate this kind of confrontation) what problem people could have with Hillary? I said: Libya, Ukraine,
and Nicaragua. They really didn't know what I was talking about and although I spoke up for why
I thought this made her a neocon like the ones that surrounded Dubya, they simply didn't know
any of the details and we left it at that.
I've had many similar recent encounters. I find that if I ask for a positive reason to vote
Clinton, the first three or four reasons they raise can be dismissed by single phrase references
to past betrayals, Sister Solja, End of Welfare, Nafta etc. and the next few by scandals, Lewensky
or what should be scandals as you mentioned. As a rule after four or five tries I get to watch
them self censor before each subsequent try and don't have to make any negative claims myself.
I doubt I've changed minds, but they no longer doubt mine.
I think that was a slip, but an historically correct one I can completely sympathize with.
HRC's recap of Reaganite Latin America policy is her most vile achievement. If anything
demonstrates a continuity of imperialist strategy across administrations, that's it.
" I said: Libya, Ukraine, and Nicaragua. They really didn't know what I was talking
about and although I spoke up for why I thought this made her a neocon like the ones that surrounded
Dubya, they simply didn't know any of the details and we left it at that."
I run into this all the time. Utter and complete foreign policy illiteracy, particularly
from otherwise politically correct millennials who know so little that Hillary gets a complete
pass.
This is a common story and illustrates that our current detachment from the world around
us and our fellow citizens is coming to an end. We are being forced out of our individual bubbles.
Modern corporations have supplied the populations of the world with abundance of goods, but in
order to accomplish this feat, have destroyed and are destroying the cultural glue, if you will,
that holds society together.
TINA will be maintained by propaganda and physical force. We see that the propaganda is
starting to weaken because the contradictions of the message can no longer be hidden. The destruction
is too widespread and the inequality can no longer be hidden. You can hollow out a social system
only so much before it collapses. The collapses we are witnessing is the promise of democracy.
A collapse of the ideals of moderation and compromise.
We are entering a phase of civil war. It is still carried out in a polite manner and intellectually,
the discussion is still couched in Orwellian doublespeak. However, criticisms of the ruling elite
are becoming more straightforward and more people are waking up to the fact that the system is
rigged against them.
This civil war is a battle over leadership. It is a battle to demand good government instead
of no government. It is a battle to demand a government for and by the people. A battle for the
common good. Evaluated not in some abstract terms like "trickle down" economics, but direct support
and action. The hearts and minds of the population was won over long ago to wholeheartedly support
capitalism and private ownership of the world's resources. This is proving to be a disaster.
Supporters of unfettered capitalism know only one way. Privatization of ALL the worlds
resources and potential. They showed their hand in 2008 with the bailouts and implementation of
austerity policies. In their minds, there is no turning back. To compromise means failure. For
them, TINA is real and logical. This is the perspective of owners of capital. They gain strength
and advantage from seeming to compromise, but in the end know they can always reverse course and
regain private control. Subterfuge and force allows the resilience of capitalism as the reigning
social order.
I bring up the notion of a civil war because these ideas are too important to be left to chance.
In America, the citizenry has been complacent with their lot in life and so have lost control
over their fate. As the world changes around them, they desperately attempt to hold onto their
position while not realizing they are supporting their own impoverishment. Speaking ideas of the
common good -for ALL- and notions of public ownership of land, natural resources, citizens natural
rights to jobs, basic income, and healthcare divide family and friends. Those who are comfortable
don't want to cause trouble and those feeling the pressures brought down upon them by an unrelenting
system are too weak and fearful to act.
In a sense, the revolution has already begun. It is the revolution to convince people that
there is a better and different way to live our lives.
Jonathan Haidt is a psychologist, sometimes featured in the New York Times, who apparently
believes the capability of people to be convinced by reasoned argument is not strong. From my
limited reading of his work, he suggests that humans are instinctive beings who, when they have
strong beliefs, their reasoning powers are used to justify these beliefs, not to cast doubt about
these beliefs.
This can explain why attempting to convince someone to change their political/religious beliefs
is fated to be largely futile.
For example, I believe HRC is little more than a well-connected and well traveled mediocrity,
with a record of few positives and many egregious negatives that justifies this assessment. I
view her as potentially more damaging to the USA, as President, than Trump.
Per Haidt, maybe my beliefs are instinctive and I am willfully blind to all of Clinton's accomplishments
over the last 40 years.
I think that if there are to be any Keynesian big ideas and projects that will help lift us
out of this stagnation, they will much more likely come from a Trump Administration than a Clinton
one.
Successful big ideas and big projects require cheap abundant energy, resources and intelligent
design. It'll be mighty funny when the Keynesians finally implement their plan to overhaul the
national highway infrastructure, creating tons of high paying jobs and speeding up the economy–right
when our access to cheap oil collapses. That's dumb design at its finest, yet this sort of thing
is almost certainly the best that the lobotomized Keynesian planners will be able to think up
and do.
A truly innovative program to get the economy moving in a positive direction would be to
outlaw personal vehicles and rebuild the nation's railway network. But this society isn't
even anywhere close to having something so useful on its agenda. So we'll do some Keynesian program,
funnel the few remaining resources we have left down into some stupid dead end rathole, and then
in a couple of years we'll be envious here in America of the extravagant lifestyles that the Mexicans
are leading. Hell Trump's wall will be a lot more useful keeping the Mexicans in who are trying
to flee. That is the end result of Keynesian programs in a delusional society with bass-ackward
priorities. Way more harm than good.
I share your antipathy toward freeways. I remember the big Freeway they built in Fresno
when I was a child, destroying hundreds, if not thousands of modest homes (we had to move from
a grand rental to a dilapidated house that cost more – were the landlords behind getting rid of
a surplus of houses????) – to save maybe – maybe at the most 3 minutes in transit time over driving
an existing surface street. Jobs were part of the rationale.
I have been gone 20 years, and they had gone on a real freeway building tear while I was gone.
The whole city crisscrossed with freeways laid out as if someone had thrown a bowl of spaghetti
on a map – apparently so every neighborhood can enjoy the sound of traffic.
Really, Fresno is just not that physically big to justify all these freeways. And with its
high unemployment and no real "center" there aren't any places with traffic congestion anyway
– but you get these dubious justifications that millions of dollars are wasted because an implausible
auto trip is 4 minutes longer without the freeway….
There seems to be a developing narrative that the Obama Administration has just been brimming
with big ideas that have been thwarted by evil Republicans.
I don't remember it this way. I do remember an Obama Administration that turned to austerity
shortly after the 2009 stimulus, and one that has been patting itself on the back all along about
what a great job it has done.
"All across America, families are tightening their belts and making hard choices. Now, Washington
must show that same sense of responsibility."
President Obama, April 2009(!)
Now that the pictures we snapped of Obama are finally beginning to develop, where we thought
we had photographed his lush jungle, we're now seeing just a single thin sapling planted for "the
future." And Clinton will soon have a picture of her snapped at this sad tree, with her big lying
smile.
I don't think Friedman is saying this, unless Rex Tugwell has been secretly disinterred and
is serving under Obama. The capitalist ideological counteroffensive that got going in the 70s
has been hegemonically successful. Friedman doesn't acknowledge that enough, he instead focuses
on what sounds more like disciplinary politics.
This type of article or perhaps, all articles about the Economy, deal with the Economy as a
substance to which people are appended as accidents. The economy is the sum total of the effort
of the people and if the people think that enjoying this very present is preferable to an effort
to build a future nothing can be done about it. It is the mind of the people that has to be changed.
Wars are very good mechanisms for that.
I can't remember if I got this link from an NC comment, or elsewhere. In any case, it's a scary
read: "The 14 Defining Characteristics of Facism," augmented by a selection from "They Thought
They Were Free." http://rense.com/general37/fascism.htm
Brings Obama and HRC to mind just as much as Trump, if not more.
"The ferocious reaction to my assessment that Senator Bernie Sanders' economic and health care
proposals could create long-term economic growth shows how mainstream economists who view themselves
as politically liberal in America have abandoned progressive politics to embrace a political economy
of despair."
==========================
Here is the problem: "a political economy of despair" – accepting that economists are a real
objective academic discipline is a BIG mistake – the idea that these technocrats, who never seem
to recognize how much fraud, rent seeking, and capture of the political system
((because the people paying them don't WANT THEM TO)),
decides things like how much inequality there is, which than decides how much demand there is,
and NOT knowing, and apparently NOT WANTING TO KNOW, that it is a POLITICAL economy, and politics
decides how resources are often allocated.
We can have single payer heath care if we choose it and free college education (it wasn't all
that long ago that I went to a CA college essentially for free). HOW is it college used to be
free when GDP was less than 1/6 of what it is now??????
It just doesn't make sense that we used to be able to afford free college and we can't now. It
is a POLITICAL decision – when Krugman says Sanders plan is "too expensive" Krugman is making
a political decision – not some objective scientific assessment. And if he is not even smart enough
to ponder why it used to be free and it is not free now – well, theres your problem right there!
Nice to see this article. When I talk about economics, most people who know anything, only
know what someone on TV tells them, so they often question, well who agrees with you? Nice to
have another name to list.
And then…
"Sorry, nothing more can be done for you." TINA.
Of course for those at the tippy-top, "How can I help you today?"
Economic Models Must Account for Who Has the Power''
: Nobel Prize
winning economist
Joseph
Stiglitz recently highlighted
two schools of thought on how income
is distributed to different groups of people in the economy. Which
school is correct has important implications for our understanding of
the forces that have caused the rise in inequality, and for the
policies needed to reverse this trend. It also relates to another
controversy that has flamed up recently, how economics should be
taught in principles of economics courses. ...
And according to Sraffa's
side in the Cambridge capital controversy labour and capital
do not receive their marginal products, which leaves the
distribution of income to some extent socially or politically
determined.
Now please make a donation to Project Syndicate, and check
out Robert Skidelsky at the same site.
Excellent. It will be taught in graduate school, long after
the little ones have been indoctrinated in reactionary
thought be Econ 101.
P.S. The school of thought that
accepts inequality as a Teh Awesome result of merit cannot
explain why inherited wealth should be allowed to accumulate
- another aspect of how power writes the economic rules.
"It will be taught in graduate school, long after the little
ones have been indoctrinated in reactionary thought be Econ
101."
Joan Robinson's writing on market power was required
reading when I was in graduate school. My undergrad profs
touched on this issue but not as much. I wonder if Greg
Mankiw teaches market imperfections to his undergrad students
at Harvard.
"I wonder if Greg Mankiw teaches market imperfections to his
"undergrad students at Harvard."
According to theoclassical
doctrine, all market imperfections are the result of gummint
innerference. Left to themselves, markets hum with music of
the perfect spheres.
We are way past just one or the other of those explanations
being true. Opportunities come in many forms, but just not
for many people. Competition becomes limited in the womb and
then they go from there. Better schools across all zip codes
and public day care with universal pre-K would be a start.
Even that is doomed to the catch-22 of making a better
informed public requires a better informed public to demand
being better informed. Down east they say "You can't get thar
from here."
I was fortunate enough to grow up in Prince
William County VA in the late sixties just as it was
beginning to boom from growth proximate to the DC Beltway. We
had a new and progressive school system even relative to
NoVA. Still by the 7th grade it was evident to me that the
pedagogy related to reality in dogmatic POVs that were only
relevant to the next generation of yuppie kids that had
gotten a half step advantage in some various way from their
parents.
My half step came from an unusual source though. My dad
was illiterate and my mom only finished the 8th grade, but
they were stoics with exceedingly powerful work ethics
transferred more by their example of excellence in every
menial thing that they did rather than by belittling and
cajoling me. My dad was the best hunter, the most successful
fisherman, grew the most beautiful and bountiful garden, and
was self-sufficient in caring for his car and home. His
position with the state highway department was limited by his
illiteracy to maintenance superintendent, but due to his
ability he still got to supervise the construction of roads
and bridges without the benefit of commensurate pay.
My mom was the best cook, kept the cleanest house, and as
at home day care for a few friends was the best a dealing
with troubled children from potty training to outbursts of
anger. It was a tough act to follow. Furthermore it did not
fit the status quo mold that public schools were designed to
reinforce. My half step freed me to reject the intellectual
authority of my instructors even though their administrative
authority was still sacrosanct in my home. I did well in
school and even better on tests eking by to enter the Honor
Society and passing the SAT test well enough to qualify for
Mensa, but I dropped out of college first semester mostly
just to relocate away from home to find a job in the city.
So, I got drafted and went to Viet Name, but was lucky enough
to survive and develop a successful career in IT systems
management large systems capacity planning and performance
management. The best break that I got was being laid off in
June 2015 with a severance package good enough to afford me a
retirement income equal after the change in expenses from
leaving the professional world behind to what I had been
making while working.
The moral to my story is that one can despise our
education system and still do very well by themselves with
it. One can reject our higher education and still do very
well by themselves without it. One can despise our corporate
"meritocracy" system and still have a successful career and
maybe even a comfortable retirement, but the ladder has been
raised for the latter. How anyone can be successful in school
and/or in career without recognizing their own half step
advantage or recognizing the intellectually and morally
vacant institutions that they traversed in their journey is
deeply puzzling to me.
P.S. I had the good fortune to relocate from Prince William
County to Orange County VA in summer 1966 before my senior
year in high school when my dad cashed out his state
retirement fund saving to start an electric motor/ john boat
livery and concession stand at Lake Orange, a VA Game and
Fisheries Commission state fishing lake.
The high school teachers were probably just as intelligent as
in Manassas Park, but far more socially challenged at least
in the academic curriculum. Still, the kids with that half
step from their successful parents did well enough to attend
decent colleges, but academic performance overall was much
lower than it had been in Manassas Park back in Prince
William County. The kids in Orange with really successful
parents all attended private prep schools.
P.P.S. Relative to the thread topic then we have a fairly
rigid establishment that favors the haves and keeps the
have-nots at bay. Monopoly rents are just one of the
luxurious rent extracting tools of an aristocracy of social
exclusion. Bankers, proto-industrialists, and slave owners
established the meme of republicanism as the conservative
power that protects us all from tyranny of the majority, but
perhaps a little too well. More importantly they established
the US Constitution as a nearly inviolable foundation for
preserving their world view of well-deserved elite privilege.
And they did it all in the name of democracy while showing
Thomas Paine the door.
It's a cool rainy day in central VA. Being retired and
primarily a person of outdoor interests then today I have an
abundance of time to waste. And commenting on the EV blog
sure beats a colonoscopy, which is what I will be getting
this time next week :<)
John Kenneth Galbraith used to write about countervailing
power. Unfortunately Galbraith has been pretty much consigned
to the dustbin. Even when he was writing, economics courses
did not talk about his ideas much...I guess he did not use
enough math symbols.
Business has long understood the
concept of what I'll call leverage points...critical
intellectual property, experience, and know how. Control of
these critical factors is a key to pricing power and
profitability. As one example, Symbol Technologies dominated
the handheld bar code scanner market for years, not because
they had superior technology or marketing, but because they
held the patent on the trigger, which was critical to
activating the scanner for reading. Their market power
affected not only competitors but suppliers and customers as
well.
Leverage points like this are commonplace in business
today. Yet I'm not aware that economics, with its orientation
towards competitive markets, has ever tried to model this
common behavior or even dealt with it.
Likewise, businesses have also understood the importance
of market and marketing channel domination to their long term
survival and profitability. Firms who fail to dominate must
specialize. These concepts are considered elementary in
business schools. Yet I don't know that economists have ever
managed (or even tried) to incorporate them into their
models.
It might help if more economists took business courses to
understand how the game is played...
I still say that until economists can reach consensus on the
objective of an economy, they remain divided on the
objective. Simply defining it as "for the general good" is a
cop-out --- and economists and everybody else know this full
well. Define what "general good means"....then see if
consensus can be reached. I seriously conclude this cannot be
done, since only by compromises can they reach consensus, and
this means defining the objective in subjective, vague
terms... just like "the general good" is vague and
subjective.
The cop-out used by economists is at the heart
of what Thomas' blog subject is about: Policy makers .. i.e.
gov't decides the objectives of an economy, which is to say
that economic power defines it. And of course economic power
will define it to maintain and extend their economic
power.... and at the very least to minimize any erosion
thereof.
So one must wonder how, if gov't is controlled by economic
power, that gov't will NOT insure the maintenance and
extension of that economic power? Is it possible in a
democracy defined by the U.S. constitution to significantly
reduce the economic power of those who have it? The
constitution in fact makes it impossible.
Even when congress occasionally finds a large enough
majority to make law to erode or reduce economic power in
gov't, the constitution enables 5 people in robes to deem it
unconstitutional OR the next congress, or the next will make
law that erode or reduce the effect of prior congress's law(s)
that reduced or eroded economic power.
If this were not the case we'd long since have had
universal single payer health care, strong labor unions, tax
policies that don't give unearned income a huge break, and
don't give offshore income an out by not taxing it until its
"repatriated", welfare systems that don't keep people in
poverty, and an educational system that provide free & equal
education to all (not one that gives communities, county's,
and States with the highest incomes & property values the
best education and everybody else with a lesser one.
Nor, will I add would it be possible to rape the nation's
environment by contaminating the nation's rivers, soils, and
the air with green-house gases .. not just "paying" fines
after the fact for doing so or putting low cost "caps" on
green-house gas emissions.
So what does "the general good" actually mean? Economists
can't agree on it, nor the means of achieving it of course
nor can policy makers.... and this is the fundamental problem
not being addressed.
One comment: You wrote "...individuals are
rewarded according to their contributions to the economic
well being of society. Those who contribute the most to the
production of the goods and services we all enjoy receive the
highest rewards and climb to the top of the income
distribution." I would add that having power includes being
able to dictate that rewards are allotted according to
economic contributions as opposed to other contributions. Cue
my go-to Chris Lasch quote: "... individuals cannot learn to
speak for themselves at all, much less come to an intelligent
understanding of their happiness and well-being, in a world
in which there are no values except those of the market....
the market tends to universalize itself. It does not easily
coexist with institutions that operate according to
principles that are antithetical to itself: schools and
universities, newspapers and magazines, charities, families.
Sooner or later the market tends to absorb them all. It puts
an almost irresistible pressure on every activity to justify
itself in the only terms it recognizes: to become a business
proposition, to pay its own way, to show black ink on the
bottom line. It turns news into entertainment, scholarship
into professional careerism, social work into the scientific
management of poverty. Inexorably it remodels every
institution in its own image."
"... Alternative theories would have led to very different policies. For instance, the tax cut in 2001 and 2003 under President Bush. Economists that are very widely respected were cutting taxes at the top, increasing inequality in our society when what we needed was just the opposite. Most of the models used by economists ignored inequality. They pretended that macroeconomy was unaffected by inequality. I think that was totally wrong. The strange thing about the economics profession over the last 35 year is that there has been two strands: One very strongly focusing on the limitations of the market, and then another saying how wonderful markets were. Unfortunately too much attention was being paid to that second strand. ..."
"... ditto...everyone from Tyler Cohen to Mark Perry of the AEI does daily posts about the markets working for everything...a daily "Market Failure in Everything" would provide a useful alternative to that point of view... ..."
"... Nobel-prize winner Joseph Stiglitz said monetary policies have exacerbated inequality and need to be redirected to better target getting money flowing into economies and helping small and medium-size businesses. ..."
"... policies such as quantitative easing were a "version of trickle-down economics" and the subsequent increase in asset prices only affected the wealthiest in society ..."
"... "The key problem is the access of credit to small and medium-size enterprises, is getting that flow of money into the real economy," Stiglitz said. It's "nice to have a stock market bubble if you have a lot of stock. But if you are in the bottom 80 percent of America, you have a little stock and you can feel a little good about the stock going up. But let's face it, the overwhelming bulk of our stock market is owned by the 1 percent." ..."
"... Oh my god. He lumps in Bernanke with Greenspan. What are the Fed worshippers going to do now? Their deity is under attack from Stiglitz. Of course it is nothing but fact that bernanke denied that bubbles in real estate were possible OR that a bubble could become s problem for the economy. Hats off to Stiglitz. ..."
"... How much more evidence do we need that the current trickle down monetary policy has failed? "The weak growth for the quarter puts this recovery even further behind any prior recovery at the same stage. After eight and a quarter years, the economy is only 10.1 percent larger than its pre-recession level of output. A more typical recovery would have seen at least twice as much growth." ..."
...White: ... To what extent do you feel economist and economic theory
is culpable for the crisis? What is the role of an economist going
forward?
Stiglitz: The prevalent ideology-when I say prevalent it's not all
economists- held that markets were basically efficient, that they were
stable. You had people like Greenspan and Bernanke saying things like
"markets don't generate bubbles." They had precise models that were
precisely wrong and gave them confidence in theories that led to the
policies that were responsible for the crisis, and responsible for the
growth in inequality.
Alternative theories would have led to very
different policies. For instance, the tax cut in 2001 and 2003 under
President Bush. Economists that are very widely respected were cutting
taxes at the top, increasing inequality in our society when what we
needed was just the opposite. Most of the models used by economists
ignored inequality. They pretended that macroeconomy was unaffected by
inequality. I think that was totally wrong. The strange thing about
the economics profession over the last 35 year is that there has been
two strands: One very strongly focusing on the limitations of the
market, and then another saying how wonderful markets were.
Unfortunately too much attention was being paid to that second strand.
What can we do about it? We've had this very strong strand that is
focused on the limitations and market imperfections. A very large
fraction of the younger people, this is what they want to work on.
It's very hard to persuade a young person who has seen the Great
Recession, who has seen all the problems with inequality, to tell them
inequality is not important and that markets are always efficient.
They'd think you're crazy. ...
When I first started blogging, I used to do posts with the title
"Market Failure in Everything." as a counter to "the prevalent ideology."
Maybe I should revive something similar.
ditto...everyone from Tyler Cohen to Mark Perry of the
AEI does daily posts about the markets working for
everything...a daily "Market Failure in Everything" would
provide a useful alternative to that point of view...
Nothing about Ricardian Equivalence or RBC fallacies.
While
inequality is certainly important for consumption demand, PCE
has not been a significant problem in the recovery. OTOH,
reduction of the federal budget deficit explains virtually
all of the deficient demand we have experienced. Obama and
the Dems bought into RE and are paying the price now.
"Nobel-prize winner Joseph Stiglitz said monetary policies have exacerbated inequality
and need to be redirected to better target getting money
flowing into economies and helping small and medium-size
businesses.
In a Bloomberg Television interview Tuesday with Francine
Lacqua and Michael McKee in New York, he said policies such
as quantitative easing were a "version of trickle-down
economics" and the subsequent increase in asset prices only
affected the wealthiest in society.
"The key problem is the access of credit to small and
medium-size enterprises, is getting that flow of money into
the real economy," Stiglitz said. It's "nice to have a stock
market bubble if you have a lot of stock. But if you are in
the bottom 80 percent of America, you have a little stock and
you can feel a little good about the stock going up. But
let's face it, the overwhelming bulk of our stock market is
owned by the 1 percent."
Stiglitz's comments come as some central banks around the
world are being forced to delve deeper into their policy
tools to help support their economies. As policy makers
struggle to find a way out of the economic malaise, some have
even raised the idea of helicopter money, which aims to
direct cash straight to consumers.
The Columbia University professor, who said the Federal
Reserve can do more to "channel" money to small companies and
the economy, was also critical of negative rates. This is
partly because of their potential impact on lending.
"The dangers of negative interest rates -- if you don't
manage it extraordinarily well; some countries are doing it
reasonably well, some are not -- is that it actually weakens
the banking system," he said. "If it weakens the banking
system, the banks are going to provide even less credit.
While it might have some effect on financial markets, in
terms of what we really should be concerned about, which is
the flow of credit to businesses, that's not working."
http://www.bloomberg.com/news/articles/2016-04-26/stiglitz-says-misdirected-monetary-policies-increased-inequality
What's the point of low interest rates, if they only serve
the interests of Wall Street banks and their wealthy
clientele? Oh, right! That IS the point. And most economists
are just fine with that.
Oh my god. He lumps in Bernanke with Greenspan. What are
the Fed worshippers going to do now? Their deity is under
attack from Stiglitz. Of course it is nothing but fact that
bernanke denied that bubbles in real estate were possible OR
that a bubble could become s problem for the economy. Hats
off to Stiglitz.
Falling Investment and Rising Trade Deficit Lead to Weak
First Quarter
By Dean Baker
Health care costs remain well-contained, barely growing as
a share of GDP.
GDP grew at just a 0.5 percent annual rate in the first
quarter. This weak quarter, combined with the 1.4 percent
growth rate in the 4th quarter, gave the weakest two quarter
performance since the 3rd and 4th quarters of 2012 when the
economy grew at just a 0.3 percent annual rate.
Growth was held down by both a sharp drop in
non-residential investment and a further rise in the trade
deficit. Equipment investment fell at an 8.6 percent annual
rate, while construction investment dropped at a 10.7 percent
annual rate. The latter is not a surprise, given the
overbuilding in many areas of the country. The drop in
equipment investment was undoubtedly in part driven by the
worsening trade situation, as many factories curtailed
investment plans as U.S.-made products lost out to foreign
competition, weakening demand growth. There was also a drop
in information processing equipment, indicating that those
who are expecting that robots will replace us all will have
to wait a bit longer.
The rise in the trade deficit was due to a 2.6 percent
drop in exports, as imports were nearly flat for the quarter.
Trade subtracted 0.34 percentage points from growth for the
quarter.
Consumption continued to grow at a modest 1.9 percent
annual rate, adding 1.27 percentage points to growth.
Consumption growth was held down in part by weaker demand for
new cars, which subtracted 0.33 percentage points from growth
for the quarter. This was the second consecutive decline in
the sector. It is likely that car purchases will be up
somewhat in future quarters.
The savings rate for the quarter was 5.2 percent, which is
up slightly from the 5.0 percent from the prior three
quarters and the 4.8 percent rates from 2013 and 2014, before
people started saving their oil dividends. But seriously,
there may be some modest room for this rate to decline, but
for the most part consumption growth will depend on income
growth going forward.
Health care services added 0.26 percentage points to
growth, its smallest contribution since a reported decline in
the first quarter of 2014. Spending in the sector remains
well contained, growing at just a 3.8 percent annual rate
over the last quarter and by 4.4 percent over the last year
in nominal spending.
Housing grew at a 14.8 percent annual rate, adding 0.49
percentage points to growth. Housing has being growing at a
double digit rate since the fourth quarter of 2014. While the
sector is likely to continue to grow in subsequent quarters,
the pace is almost certain to slow.
The government sector was a modest positive in the
quarter, growing at a 1.2 percent rate. State and local
spending increased at a 2.9 percent annual rate, more than
offsetting a 1.6 percent drop in federal spending, all of it
on the military side. Future quarters are likely to show
comparable growth, although the composition may be somewhat
different.
A slower rate of inventory accumulation reduced growth by
0.33 percentage points, as final sales of domestic product
grew at a 0.9 percent rate. This is the third consecutive
quarter in which the pace of inventory accumulation slowed,
although the current pace is not especially low. It is likely
that inventories will grow somewhat more quickly in the rest
of the year, being at least a small positive in the growth
story.
The weak growth for the quarter puts this recovery even
further behind any prior recovery at the same stage. After
eight and a quarter years, the economy is only 10.1 percent
larger than its pre-recession level of output. A more typical
recovery would have seen at least twice as much growth.
[Graph]
On the whole this is a weak report. The headline 0.5
percent figure probably overstates the weakness somewhat, but
it is not a good sign when two consecutive quarters have an
average growth rate of less than 1.0 percent. Inflation
remains well under control, although there was a modest
uptick in the rate of inflation shown by the core personal
consumption expenditure deflator to 1.7 percent over the last
year. Nonetheless, with an economy barely growing and an
inflation rate that remains below target, it is difficult to
envision the Federal Reserve raising interest rates further
any time soon.
How much more evidence do we need that the current trickle
down monetary policy has failed? "The weak growth for the
quarter puts this recovery even further behind any prior
recovery at the same stage. After eight and a quarter years,
the economy is only 10.1 percent larger than its
pre-recession level of output. A more typical recovery would
have seen at least twice as much growth."
Market failures aren't really market failures but market
responses to market conditions. They are failures only in the
sense that something deemed bad (e.g., falling home prices)
is the market response. An extreme example is what's being
called secular stagnation, which is just the market response
to the shift of an enormous volume of production and income
from the U.S. and Europe to China and other like places with
much higher levels of inequality and savings. It's a market
failure only in the sense that something bad (wage
stagnation, slow economic growth) happened in the U.S. and
Europe. Those responsible for the shift in production and
income to China et al. (i.e., U.S. and European business
executives) were either ignorant of the likely market
response or didn't care as long as it increased profits (via
lower costs). But that's not a market failure, it's an
executive failure.
Peter, -1
"I think almost surely both Hillary and Bernie Sanders are
very very committed to a pro-equality agenda, and the
differences are more in details, more in one's confidence in
their ability to execute this in a political context."
Disappointing. I guess we'll find out if he's right. Also his
suggestion that the economy would have done just as well with
no QEs is very disappointing.
"Stiglitz: I think they were right. They originally said,
"When we hit 6 percent that's full employment." Now they know
that 4.9 isn't full employment, there's weak labor market.
They should have focused more on improving the channel of
credit to make sure that money was going to small and
medium-sized enterprises They should have said to the
bank-like some other countries have done-if you want access
to the Fed window you have to be lending to SMEs. "
Which was Bernie's suggestion. Hillary has said nothing.
"... The case for additional public investment is as strong in the UK (and Germany ) as it is in the US. Yet since 2010 it appeared the government thought otherwise. ..."
"... However since the election George Osborne seems to have had a change of heart. ... ..."
The economic case for investing when the cost of borrowing is so cheap (particularly when the
government can issue 30 year fixed interest debt) is overwhelming. I had guessed the majority
would be pretty large just by personal observation. Economists who are not known for their anti-austerity
views, like
Ken Rogoff, tend to support additional public investment.
Thanks to a
piece by Mark Thoma I now have some evidence. His article is actually about ideological bias
in economics, and is well worth reading on that account, but it uses results from the ChicagoBooth
survey of leading US economists. I have used this survey's results on the impact of fiscal policy
before, but they have
asked a similar question about public investment. It is
"Because the US has underspent on new projects, maintenance, or both, the federal government
has an opportunity to increase average incomes by spending more on roads, railways, bridges
and airports."
Not one of the nearly 50 economists surveyed disagreed with this statement. What was interesting
was that the economists were under no illusions that the political process in the US would be
such that some bad projects would be undertaken as a result (see the follow-up question). Despite
this, they still thought increasing investment would raise incomes.
The case for additional public investment is as strong in the UK (and
Germany)
as it is in the US. Yet since 2010 it appeared the government thought otherwise. ...
However since the election George Osborne seems to have had a change of heart. ...
"... It should never be forgotten that the conservative orthodoxy -- of low taxes on the wealthiest, deregulation of finance, small govt deficits, and the need for inequality to spur individual initiative -- was also economics departments orthodoxy for decades. Economists put their imprimatur on this whole mess, with VERY few exceptions. ..."
"... 70% of the population STILL believes that federal deficits are a big problem, and also believes that this is standard economic orthodoxy. Until the crash, most people were ready to accept some degree of privatization of Social Security, and Martin Feldstein pushed on this repeatedly with no counterargument from the economics departments. The Clinton economic team was instrumental in pushing financial deregulation, upon the supposed orthodoxy that it is good for the economy. Even the worst nonsense in Friedmans Capitalism and Freedom and Free to Choose barely saw any push-back from other economists in the op-ed pages. ..."
"... Reaganomics was approved by most economists either through mood affiliation or intellectual incompetence. That 70% currently includes college graduates who took economics classes and traders on Wall Street. ..."
"... Nonsense. Polls of profession economists opinions abound. Reaganomics/neoliberalism has predominated in economics until recently. On a few big issues (notably, on whether the size of federal deficits as % of GDP should be reduced) the split remained even. ..."
It should never be forgotten that the "conservative orthodoxy" -- of low taxes on the wealthiest,
deregulation of finance, small gov't deficits, and the need for inequality to spur individual
initiative -- was also "economics departments orthodoxy" for decades. Economists put their imprimatur
on this whole mess, with VERY few exceptions.
It's been a first-rate intellectual scandal, perpetrated by some of the biggest names in the
economics racket, and with most of the lesser lights tagging along, for fear of ostracism.
And most of them STILL don't have a clear view of what the real problems are.
70% of the population STILL believes that federal deficits are a big problem, and also believes
that this is standard economic orthodoxy. Until the crash, most people were ready to accept some
degree of privatization of Social Security, and Martin Feldstein pushed on this repeatedly with
no counterargument from the economics departments. The Clinton economic team was instrumental
in pushing financial deregulation, upon the supposed orthodoxy that it is good for the economy.
Even the worst nonsense in Friedman's "Capitalism and Freedom" and "Free to Choose" barely saw
any push-back from other economists in the op-ed pages.
"Conservative orthodoxy" can be laid squarely at the feet of the economics departments, up
until the crash. If the ones who are supposed to know better, don't make a concerted effort to
refute the tons of nonsense spouted in the name of economics, then they should resign their tenure.
It most certainly WAS taken as the orthodoxy. Reaganomics was approved by most economists
either through mood affiliation or intellectual incompetence. That 70% currently includes college
graduates who took economics classes and traders on Wall Street.
"Reaganomics was approved by most economists either through mood affiliation or intellectual incompetence."
Not even remotely true. Criticized by liberal economists. Blasted by the conservative economists
who refused to work for the Reagan White House. Even blasted by a young Greg Mankiw but that is
before he drank the Bush Kool Aid.
Lee - your claim here is just wrong. And the more you defend it, the worse it gets.
Nonsense. Polls of profession economists' opinions abound. Reaganomics/neoliberalism has predominated
in economics until recently. On a few big issues (notably, on whether the size of federal deficits
as % of GDP should be reduced) the split remained even.
(1992 -- responses from 464 US economists):
"A large federal budget deficit has an adverse
effect on the economy" 78.7% agree (includes 'agree with provisos').
"The money supply is a more important target that interest rates for monetary policy" 56.7%
agree.
"As the USSR moves toward a market economy. a rapid and total reform (i.e., "going cold turkey")
would result in a better outcome than a slow transition" 57.6% agree.
"A minimum wage increases unemployment among young and unskilled workers" 78.9% agree.
"An economy in short-run equilibrium at a real GNP below potential GNP has a self-correcting
mechanism that will eventually return it to potential GNP" 50.8% agree.
"Changes in aggregate demand affect real GNP in the short run but not in the long run" 52.8%
agree.
"Lower marginal income tax rates reduce leisure and increase work effort" 55.4% agree. (Alston
et al., "is there a global economic consensus?" AEA Papers and Proceedings, 1992)
"... Sometimes … demand is restricted by the fact that nobody has any money in their pocket. ..."
"... the only takeaway is that most economists are nothing more than rancid witch doctors doing
backflips to skirt the basic explanation that aggregate demand has been deliberately sabotaged. ..."
"... Modern neoliberal economics is just an ideology not a science. It exists to justify the current
distribution of wealth with pseudoscientific nonsense written in abstruse mathematical language. Milton
Friedman was to economics what T.D. Lysenko was to Soviet biology. Pseudoscience in service to the ruling
class. ..."
"... [Economists are] clueless about the real world because their fat paycheck magically appears
in their bank account, while producing nothing. ..."
By Ashoka Mody, Professor of Economics at Princeton. Originally published at
Project
Syndicate
For starters, world trade is growing at an anemic annual rate of 2%, compared to 8% from 2003
to 2007. Whereas trade growth during those heady years far exceeded that of world GDP, which averaged
4.5%, lately, trade and GDP growth rates have been about the same. Even if GDP growth outstrips growth
in trade this year, it will likely amount to no more than 2.7%.
The question is why. According to Christina and David Romer of the University of California, Berkeley,
the aftershocks of modern financial crises – that is, since World War II –
fade after 2-3 years . The Harvard economists
Carmen Reinhart
and Kenneth
Rogoff say that it takes
five years
for a country to dig itself out of a financial crisis. And, indeed, the financial dislocations
of 2007-2008 have largely receded. So what accounts for the sluggish economic recovery?
One
popular explanation lies in the fuzzy notion of "secular stagnation": long-term depressed demand
for goods and services is undermining incentives to invest and hire. But demand would remain weak
only if people lacked confidence in the future. The only logical explanation for this enduring lack
of confidence, as Northwestern University's Robert Gordon has
painstakingly documented
and argued , is slow productivity growth.
Before the crisis – and especially from 2003 to 2007 – slow productivity growth was being obscured
by an illusory sense of prosperity in much of the world. In some countries – notably, the United
States, Spain, and Ireland – rising real-estate prices, speculative construction, and financial risk-taking
were mutually reinforcing. At the same time, countries were amplifying one another's growth through
trade.
Central to the global boom was China, the rising giant that flooded the world with cheap exports,
putting a lid on global inflation. Equally important, China imported a huge volume of commodities,
thereby bolstering many African and Latin American economies, and purchased German cars and machines,
enabling Europe's largest economy to keep its regional supply chains humming.
This dynamic reversed around March 2008, when the US rescued its fifth-largest investment bank,
Bear Sterns, from collapse. With the eurozone banks also deeply implicated in the subprime mortgage
mess and desperately short of US dollars, America and much of Europe began a remorseless slide into
recession. Whereas in the boom years, world trade had spread the bounty, it was now spreading the
malaise. As each country's GDP growth slowed, so did its imports, causing its trading partners' growth
to slow as well.
The US economy began to emerge from its recession in the second half of 2009, thanks largely to
aggressive monetary policy and steps to stabilize the financial system. Eurozone policymakers, by
contrast, rejected
monetary stimulus and implemented
fiscal
austerity measures , while ignoring the deepening distress of their banks. The eurozone thus
pushed the world into a second global recession.
Just when that recession seemed to have run its course, emerging economies began to unravel. For
years, observers had been touting the governance and growth-enhancing reforms that these countries'
leaders had supposedly introduced. In October 2012, the IMF
celebrated
emerging economies' "resilience." As if on cue, that facade began to crumble, revealing an inconvenient
truth: factors like high commodity prices and massive capital inflows had been concealing serious
economic weaknesses, while legitimizing a culture of
garish inequality and rampant corruption .
These problems are now being compounded by the growth slowdown in China, the fulcrum of global
trade. And the worst is yet to come. China's huge industrial overcapacity and property glut needs
to be wound down; the hubris driving its global acquisitions must be reined in; and its corruption
networks have to be dismantled.
In short, the factors that dragged down the global economy in 2015 will persist – and in some
cases even intensify – in the new year. Emerging economies will remain weak. The eurozone, having
enjoyed a temporary reprieve from austerity, will be constrained by listless global trade. Rising
interest rates on corporate bonds portend
slower growth in
the US. China's collapsing asset values could trigger financial turbulence. And policymakers are
adrift, with little political leverage to stem these trends.
The IMF should stop forecasting renewed growth and issue a warning that the global economy will
remain weak and vulnerable unless world leaders act energetically to spur innovation and growth.
Such an effort is long overdue.
ArkansasAngie , January 6, 2016 at 6:17 am
"But demand would remain weak only if people lacked confidence in the future"
Sometimes … demand is restricted by the fact that nobody has any money in their pocket.
James Levy, January 6, 2016 at 6:45 am
Is he kidding:
The only logical explanation for this enduring lack of confidence, as Northwestern University's
Robert Gordon has painstakingly documented and argued, is slow productivity growth.
Real wages for a hefty percentage of the population haven't risen since 1971. Most people are
treading water or losing ground. Over 90% of the modest gains since the 2008 crash have gone to
1% or less of the population. But the problem is productivity! And this guy has a tenured job
at Princeton. Standards for employment there must include smug self-assurance, ideological blinders,
and the inability to assimilate any facts not cogent to people richer than you are.
Jim Haygood, January 6, 2016 at 11:37 am
If Princeton's most illustrious alumnus can finally make some serious loot in the private sector,
soon the author will be toiling at the Bernanke School of Economics.
Skippy, January 6, 2016 at 8:18 am
Productivity is the cocaine of the labour pool, like the old cocaine ad of the 80s in Calif
[during the epidemic].
White square room about 6M X 6M, top shelf sale executive sort doing laps like a con and the
verse goes like…. I do cocaine because I'm more productive… so I make more money… so I can do
more cocaine… over and over and with each litany increases his speed until a blur….
Skippy…. the end is a wrung out wretch sitting on the step of some low socioeconomic apt talking
about losing, wife, kids, job, everything…. w burnt out dopamine receptors as a lullaby till morte'
efschumacher, January 6, 2016 at 8:50 am
Here in the US:it's not like there's a shortage of work to be done to fix the massively inappropriate
national infrastructure – to make it human sustainable – I mean for the 'little people'. There
is of course the perennial lack of congressional vision and long term planning. There lies a huge
root of the problem.
RabidGandhi, January 6, 2016 at 9:12 am
Is this meant as a good cop/bad cop contrast piece with the Ann Pettifor post?
Here, I gave up any hope of Mody being at all earnest when he cited Rogoff and Reinhart (!!!).
Then the rest of the article completely self-destructs: weak productivity and insufficient innovation
are the issue?
When combined with yesterday's NYT article on inequality, the only takeaway is that most
economists are nothing more than rancid witch doctors doing backflips to skirt the basic explanation
that aggregate demand has been deliberately sabotaged.
Stephen Gardner, January 6, 2016 at 9:33 am
Modern neoliberal economics is just an ideology not a science. It exists to justify the
current distribution of wealth with pseudoscientific nonsense written in abstruse mathematical
language. Milton Friedman was to economics what T.D. Lysenko was to Soviet biology. Pseudoscience
in service to the ruling class.
cnchal, January 6, 2016 at 9:43 am
. . . the only takeaway is that most economists are nothing more than rancid witch doctors
doing backflips to skirt the basic explanation that aggregate demand has been deliberately sabotaged.
They are the useless eaters. [Economists are] clueless about the real world because their
fat paycheck magically appears in their bank account, while producing nothing.
Here is Mody
The US economy began to emerge from its recession in the second half of 2009, thanks
largely to aggressive monetary policy and steps to stabilize the financial system.
Totally clueless.
susan the other, January 6, 2016 at 2:02 pm
"Lack of confidence" – let me count the ways. This is a phrase to match every vacuous denial
of human economic chaos ever pontificated. Yuck.
"... [The financial crisis is worse than thought …] ..."
"... – Yes Prime Minister, A Real Partnership ..."
"... Economists: purveyors of fictions upon which the superstructure of organized robbery is raised. ..."
"... "Market Failure" is the name that economists who believe that the market cannot ever fail use when the market fails. ..."
"... "Economists put decimal points in their forecasts to show that they have a sense of humour" ..."
"... "Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else." ..."
A6: None. They're all waiting for the unseen hand of the market to correct the lighting disequilibrium.
tony, December 30, 2015 at 6:12 am
Q: What do you call an economist that makes a prediction?
A: Wrong.
ben, December 30, 2015 at 3:28 pm
Two economists are walking on the street. They notice a pile of horseshit, and the older
one says to the younger one: "I'll pay you twenty thousand if you eat that." The younger one
ponders for a moment, then agrees and eats it. They walk a bit more and run into another pile
of horse feces. So the younger one tells the elder: "I'll pay you twenty thousand if you eat
that!". The older economist considers the offer and starts eating. After a while the younger
economists stops and asks: "What was the point of this? We both ate a pile shit and neither of
us got richer." The older one answers: "What are you talking about? We both produced and
received twenty thousand worth in income and services."
GDP. Great deposits of poo.
Clive, December 31, 2015 at 5:41 am
"This economy is really terrible."
"How bad is the economy?"
"The economy is so bad, this year oysters are making fake pearls…"
"The economy is so bad, organised crime just laid off 10 judges…"
(and so on)
Paul Jonker-Hoffrén, December 30, 2015 at 7:27 am
"Knock Knock!"
"Who's there?"
"It's Return to Growth!"
Two years later…
"Knock Knock!"
"Who's there?"
"It's Return to Growth!"
And ad finitum…
Clive, December 30, 2015 at 6:21 am
"Knock Knock"
"Who's there?"
"Janet Yellen"
"Well there's no need to shout, I heard you knocking"
Joaquin Closet, December 30, 2015 at 7:42 am
The number of economists is the only thing that contradicts the Law of Supply and Demand.
craazyboy, December 30, 2015 at 9:00 am
Q: How many economists does it take to change a light bulb?
A: Three. A micro-economist to hold the ladder, a macro-economist to rotate the room, and a
university economist to develop the math model and forecast how long it will take.
Ulysses, December 30, 2015 at 9:56 am
A mathematician, an accountant and an economist apply for the same job at an oil company.
The interviewer calls in the mathematician and asks "What do two plus two equal?" The
mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at
the interviewer hard and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two
equal?" The accountant says "On average, four – give or take ten percent, but on average,
four."
Then the interviewer calls in the economist and poses the same question "What do two plus two
equal?" The economist gets up, locks the door, closes the shade, sits down next to the
interviewer and says, "What do you want it to equal"?
Paul Tioxon, December 30, 2015 at 10:02 am
What do you call a cruise ship sinking with 500 PhD economists chained below deck?
A good start.
allan, December 30, 2015 at 10:03 am
Frederic Mishkin.
Yves Smith, December 30, 2015 at 4:32 pm
Oh, that is good!
Paul
An economist is someone who will tell you tomorrow why what they predicted yesterday didn't happen
today.
An economist, a physicist, and an engineer are stranded on an island with a can of food, and no
opener.
The engineer says, "Let's smash the can open with a rock and eat". The physicist replies, "Naw, that's going to splatter the food all over the place. Let's light a
fire, the expanding gases will force the can to pop open and presto: warm food!" The economist says, "Bad idea: the can will explode and the food will be all over the place. Now…
let's assume we have a can opener…."
Blue Meme
A physician, an engineer, and an economist were discussing who among them belonged to the oldest
profession. The physician said, "Remember, on the sixth day God took a rib from Adam and fashioned
Eve, making him the first surgeon. Therefore, medicine is the oldest profession."
The engineer replied, "But, before that, God created the heavens and earth from chaos, thus he
was the first engineer. Therefore, engineering is an older profession than medicine."
Then, the economist spoke up. "Yes," he said, "But who do you think created the chaos?"
aj
The First Law of Economists: For every economist, there exists an equal and opposite economist. The Second Law of Economists: They're both wrong.
fresno dan
Pareto's law of optimal economic theory: an economic theory has reached an optimal state when no other economist can make it wronger
pat b
The Third Law of Economists : The two economists theories don't add up.
twonine
"Economics is extremely useful as a form of employment for economists." ― John Kenneth Galbraith
gordon
JKG has some excellent one-liners. My favourite:
"The trouble with competition is that in the end somebody wins."
Joe Hill
"Again, since I'm not an economist I really have no idea what the wrong solution is."
~ @RudyHavenstein
Ramanan
[The financial crisis is worse than thought …]
James Hacker: Bernard, Humphrey should have seen this coming and warned me.
Bernard Woolley: I don't think Sir Humphrey understands economics, Prime Minister;
he did read Classics, you know.
James Hacker: What about Sir Frank? He's head of the Treasury!
Bernard Woolley: Well I'm afraid he's at an even greater disadvantage in understanding
economics: he's an economist.
Economists: purveyors of fictions upon which the superstructure of organized robbery is raised. (apologies to Ambrose Bierce)
Synoia
Q: What do you call an Economist who tells the truth?
A: Unemployed.
Ivy
If you laid all the economists end to end,
it would probably be a good thing.
They still wouldn't reach a conclusion.
ben
A farmer and two bankers are shipwrecked on an island. Two weeks later help finally arrives. The
bankers greet their rescuer who remarks how well they look.
BankerA: "we realised the potential of the natural resources on this island were tremendous".
BankerB: "I created some fiat money, we divided it up. I lent BankerA ten times my share for a
coconut farm startup, he invested ten times his share in an accountancy startup."
Rescuer: "well that's amazing, only where is it all, I don't see any produce – how did you actually
survive?"
BankerA: "We each used our debt to invest in futures given the fertile land it was clear the land
could generate wealth once labour was applied. We both realised significant paper profits. Oh and
we ate the farmer"
--
Bankers live off our backs.
Nortino
What did the supply curve say to the demand curve?
If you shift a little to the right, I'll give you some more of what you want.
_________
Why did the economist cross the road?
Because his models predicted he would.
TG
"Market Failure" is the name that economists who believe that the market cannot ever fail use
when the market fails.
Synoia
Hmm, it seems you should take your own advice to heart. :-)
What is a person called who claims to predict the future and has a history of 100% failure
in predictions?
a) A Charlatan b) An Economist c) A prophet
afreeman
In the same vein: econ entropy: money invented from hot air evaporates, what do you expect?
How many economists does it take to screw in a lightbulb?
Only one, but the lightbulb has to be hanging from the ceiling. Because economists can only screw
things up.
Minnie Mouse
It takes one economist to change a light bulb and take the entire power grid down.
James McFadden
"Did you ever think that making a speech on economics is a lot like pissing down your leg?
It seems hot to you, but it never does to anyone else." Lyndon Johnson
"... the ideal markets that would produce Pareto Optimal allocations don't actually exist ..."
"... moving from actually existing non-ideal markets to ideal markets WOULD NOT BE Pareto Optimal even if it was possible to do so, which it isn't. ..."
"... In short, Pareto Optimality is a just so story that has absolutely no bearing on the real world other than as an ideological justification for tons of bullshit. ..."
"... The next step in graduate students' indoctrination is to teach them that although Pareto Optimal reallocations are implausible, you can get around that with a "principle of compensation." The principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality smokescreen and the compensation smokescreen have constrained economists to think in terms of doing what is best for the wealthiest. Funny how that happens. ..."
"Graduate students of economics learn, early in their careers, that markets allocations are Pareto
Optimal."
What they don't learn is that
1. the ideal markets that would produce Pareto Optimal allocations don't actually exist
and
2. moving from actually existing non-ideal markets to ideal markets WOULD NOT BE Pareto Optimal
even if it was possible to do so, which it isn't.
In short, Pareto Optimality is a just so story that has absolutely no bearing on the real
world other than as an ideological justification for tons of bullshit.
The next step in graduate students' indoctrination is to teach them that although Pareto Optimal
reallocations are implausible, you can get around that with a "principle of compensation." The
principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality smokescreen
and the compensation smokescreen have constrained economists to think in terms of doing what is
best for the wealthiest. Funny how that happens.
The next step in graduate students' indoctrination is to teach them that although Pareto
Optimal reallocations are implausible, you can get around that with a "principle of compensation."
The principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality
smokescreen and the compensation smokescreen have constrained economists to think in terms
of doing what is best for the wealthiest....
Richest in U.S. Shape Private Tax System to Save Billions
By NOAM SCHEIBER and PATRICIA COHEN
The very wealthiest families are able to quietly shape tax policy that will allow them
to shield millions, if not billions, of their income using maneuvers available only to several
thousand Americans.
Supposing I understand the essay, Roger Farmer is just writing the logical justification
to Herbert Spencer's (never Charles Darwin's) "survival of the fittest" rationale that Spencer
made wildly popular after Darwin published "On the Origin of Species."
Spencer was the successful ultimate justifier of British "sun-never-setting-on-the-Empire"
capitalism. Spencer sold a biological justification, Farmer is selling a logical justification
of Empire.
No, I think Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems
to do it in a way that opens up space for countless side arguments that leave Pareto
Optimality unscathed.
The bottom line is that NO ONE would have ever paid any attention to the not just
"weak" but nonsensical concept if it didn't serve the function of justifying and ultimately
glorifying great inequalities of wealth and income.
;
I understand the argument and I am entirely right:
Roger Farmer is just writing the
logical justification to Herbert Spencer's (never Charles Darwin's) "survival of the
fittest" rationale that Spencer made wildly popular after Darwin published "On the Origin
of Species."
Spencer was the successful ultimate justifier of British "sun-never-setting-on-the-Empire"
capitalism. Spencer sold a biological justification, Farmer is selling a logical justification
of Empire capitalism.
I needed to be sure the argument was as empty morally as I supposed initially, but I
supposed correctly. The Roger Farmer essay is an amoral logical justification of imperial
capitalism. Plato's "Republic" conceived amorally. ;
Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it
in a way that opens up space for countless side arguments that leave Pareto Optimality
unscathed.
The bottom line is that NO ONE would have ever paid any attention to the
not just "weak" but nonsensical concept if it didn't serve the function of justifying
and ultimately glorifying great inequalities of wealth and income.
[ Agreed completely, but this argument runs with mine. ]
Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it
in a way that opens up space for countless side arguments that leave Pareto Optimality
unscathed....
[ The issue is that Roger Farmer leaves Pareto Optimality unscathed,
and this is an essential point. The essay is beyond the morality of now, but there is
no beyond. ]
"... the ideal markets that would produce Pareto Optimal allocations dont actually exist ..."
"... moving from actually existing non-ideal markets to ideal markets WOULD NOT BE Pareto Optimal even if it was possible to do so, which it isnt. ..."
"... In short, Pareto Optiimality is a just so story that has absolutely no bearing on the real world other than as an ideological justification for tons of bullshit. ..."
"... The next step in graduate students indoctrination is to teach them that although Pareto Optimal reallocations are implausible, you can get around that with a principle of compensation. The principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality smokescreen and the compensation smokescreen have constrained economists to think in terms of doing what is best for the wealthiest. Funny how that happens. ..."
"Graduate students of economics learn, early in their careers, that markets allocations are Pareto
Optimal."
What they don't learn is that
1. the ideal markets that would produce Pareto Optimal allocations don't actually exist
and
2. moving from actually existing non-ideal markets to ideal markets WOULD NOT BE Pareto Optimal
even if it was possible to do so, which it isn't.
In short, Pareto Optimality is a just so story that has absolutely no bearing on the real
world other than as an ideological justification for tons of bullshit.
The next step in graduate students' indoctrination is to teach them that although Pareto Optimal
reallocations are implausible, you can get around that with a "principle of compensation." The
principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality smokescreen
and the compensation smokescreen have constrained economists to think in terms of doing what is
best for the wealthiest. Funny how that happens.
The next step in graduate students' indoctrination is to teach them that although Pareto
Optimal reallocations are implausible, you can get around that with a "principle of compensation."
The principle, too is based on a same yardstick fallacy. But never mind the Pareto Optimality
smokescreen and the compensation smokescreen have constrained economists to think in terms
of doing what is best for the wealthiest....
Richest in U.S. Shape Private Tax System to Save Billions
By NOAM SCHEIBER and PATRICIA COHEN
The very wealthiest families are able to quietly shape tax policy that will allow them
to shield millions, if not billions, of their income using maneuvers available only to several
thousand Americans.
Supposing I understand the essay, Roger Farmer is just writing the logical justification
to Herbert Spencer's (never Charles Darwin's) "survival of the fittest" rationale that Spencer
made wildly popular after Darwin published "On the Origin of Species."
Spencer was the successful ultimate justifier of British "sun-never-setting-on-the-Empire"
capitalism. Spencer sold a biological justification, Farmer is selling a logical justification
of Empire.
No, I think Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems
to do it in a way that opens up space for countless side arguments that leave Pareto
Optimality unscathed.
The bottom line is that NO ONE would have ever paid any attention to the not just
"weak" but nonsensical concept if it didn't serve the function of justifying and ultimately
glorifying great inequalities of wealth and income.
;
I understand the argument and I am entirely right:
Roger Farmer is just writing the
logical justification to Herbert Spencer's (never Charles Darwin's) "survival of the
fittest" rationale that Spencer made wildly popular after Darwin published "On the Origin
of Species."
Spencer was the successful ultimate justifier of British "sun-never-setting-on-the-Empire"
capitalism. Spencer sold a biological justification, Farmer is selling a logical justification
of Empire capitalism.
I needed to be sure the argument was as empty morally as I supposed initially, but I
supposed correctly. The Roger Farmer essay is an amoral logical justification of imperial
capitalism. Plato's "Republic" conceived amorally. ;
Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it
in a way that opens up space for countless side arguments that leave Pareto Optimality
unscathed.
The bottom line is that NO ONE would have ever paid any attention to the
not just "weak" but nonsensical concept if it didn't serve the function of justifying
and ultimately glorifying great inequalities of wealth and income.
[ Agreed completely, but this argument runs with mine. ]
Farmer is dissing Pareto Optimality and using "sunspots" as sarcasm. He seems to do it
in a way that opens up space for countless side arguments that leave Pareto Optimality
unscathed....
[ The issue is that Roger Farmer leaves Pareto Optimality unscathed,
and this is an essential point. The essay is beyond the morality of now, but there is
no beyond. ]
"... Summers is right that bubbles are usually accompanied by some kind of financial euphoria. ..."
"... There will be massive pushback because so many have wasted many years and resources building mathematically elegant but fatally flawed models that do not make accurate predictions on even represent the fundamentals of any economy. ..."
"It seems to me looking at a year when the stock market has gone down a bit, credit spreads
have widened substantially and the dollar has been very strong it is hard to say that now is
the time to fire a shot across the bow of financial euphoria. Looking especially at emerging
markets I would judge that under-confidence and excessive risk aversion are a greater threat
over the next several years than some kind of financial euphoria."
Summers is right that bubbles are usually accompanied by some kind of financial euphoria.
I disagree with your assessment. People (elite?) are talking about unusual solutions because fiscal
policy is being blocked politically.
MMT doesn't seem that different from Keynesianism, except proponents have very big chips on
their shoulders for some reason.
Right now the Keynesians are arguing that the Fed shouldn't raise rates. Are the MMTers arguing
any differently? Or are they merely giving us the blue prints for utopia. Blue prints don't help
much if the politics are against you.
Syaloch said in reply to Peter K....
Great question.
If I have two black boxes that always produce exactly the same outputs, does
it matter whether their internal mechanisms are different?
Dan Kervick said in reply to Syaloch...
"Or maybe they would be effective because people believe they ought to be effective."
Possibly. I think back in the 80's when monetarism was the super-sexy new view, there were
a lot of people who thought inflation was mainly a function of the monetary base, so if the Fed
made a big public stink about pumping up the monetary base, that could be counted on the boost
inflation expectations, at least in some quarters, and the high expectations would in turn help
to boost actual inflation. That doesn't seem to be the case any longer.
Dan Kervick said in reply to pgl...
The heyday of monetarism was the late 70's and early 80's. That's when Friedman's monetary theory
of inflation caught the public imagination, and it's the only time the Fed ever attempted (briefly)
to target the money supply.
Conservative spear-carrier Niall Ferguson knows how important monetarism
was to the neoliberal movement, and how big a deal it was during the Thatcher-Reagan era.
The heyday of monetarism was the late 70's and early 80's. That's when Friedman's monetary theory
of inflation caught the public imagination, and it's the only time the Fed ever attempted (briefly)
to target the money supply.
Conservative spear-carrier Niall Ferguson knows how important monetarism
was to the neoliberal movement, and how big a deal it was during the Thatcher-Reagan era.
"Given what we know about representative-agent models…there is not the slightest reason
for us to think that the conditions under which they should work are fulfilled. The claim that
representative-agent models provide microfundations succeeds only when we steadfastly avoid
the fact that representative-agent models are just as aggregative as old-fashioned Keynesian
macroeconometric models. They do not solve the problem of aggregation; rather they assume that
it can be ignored."
This the reason Macro needs to move into more data driven empirics.
There will be massive pushback because so many have wasted many years and resources building
mathematically elegant but fatally flawed models that do not make accurate predictions on even
represent the fundamentals of any economy.
The Advantages of Higher Inflation - The New York Times
From the article:
"A critical problem with aiming for higher inflation is how to get from here to there. The
Fed has spent enormous effort anchoring people's expectations to 2 percent. Even economists sympathetic
to a higher target are wary of what such a shift might do to its credibility.
"'A perfect world, where you could commit to 4 percent and everybody believed it, would be
great,' Mr. Mishkin told me. 'We are not in a perfect world. Moving much higher than 2 percent
raises the risk that expectations become unanchored.'
"So here is an alternative proposal. If the Fed is too cautious to risk unhinging inflationary
expectations, how about just delivering what it has promised? Among economists and investors,
the problem with the Fed's 2 percent target is that just about everybody believes it is really
a ceiling. That makes it even harder for inflation to rise to that level. The market expects the
Fed to act pre-emptively to ensure it never goes over that line - which is what it seems to be
doing now.
"If the Fed is not going to aim for higher inflation, the least it could do is re-anchor expectations
to the goal it established, allowing inflation to fluctuate above and below a 2 percent average.
That alone might help deal with the next economic crisis.
"'We haven't fully tested whether we can deal with this kind of crisis with a 2 percent inflation
target,' said David H. Romer of the University of California, Berkeley. 'Central banks have lots
of tools. If they say they are willing to keep using them until they get where they want, they
can eventually do it.'"
This highlights a confusing aspect of inflation targets. If the Fed simply announces a higher
inflation target without taking any other action, have they really done anything? What's more,
they not only need to announce the new target, they need to convince markets that they are willing
to do whatever it takes to hit that target -- it's all about credibility and re-anchoring expectations.
And while engaging in QE to push down longer-term rates might help make that statement more convincing,
it doesn't seem to be strictly necessary for the new target to be effective.
Thus inflation targets seem in at least some cases to operate purely through psychological
manipulation, as a sort of placebo effect: inflation rises not because the Fed has injected money
into the economy today or changed the cost of lending today, but rather because the Fed is able
to "trick" markets into believing it will rise in the future.
Peter K. said in reply to Syaloch...
And the reverse is true. The markets are skeptical that the Fed will hit its 2 percent ceiling
target any time soon.
Inflation expectations are becoming un-anchored on the downside but nobody cares because ....
oil.
Dan Kervick said in reply to Peter K....
I guess we'll all have to wait for Yellen's future memoirs to know the thinking that was going
on inside the Fed during 2015. But it's interesting that both Yellen and Stanley Fischer, both
formerly held in gigantic respect by the more prominent liberal economists, are now the targets
of ire for apparently not seeing eye-to-eye with their opinionated friends on the outside. Despite
the fact that BoG members have access to mountains of internal research and policy input that
people on the outside can only guess at, the default position of the outsiders is that the insiders
have been corrupted by power and fast-talking bankers or something.
Here's my conjecture about
what the Fed's thinking is: The Fed recognizes that keeping policy interest rates down at an unprecedentedly
low basement level for years on end sends this message to the global economy: the US economy is
a sick basket case. It needs the permanent life support of extraordinary monetary policy intervention
to be kept from flat-lining.
I think the people who actually work inside the Fed think that is total bunk, and that as they
gradually wean the financial sector off of the monetary ventilator, nothing bad is going to happen
at all. The patient is going to get up, walk around and breathe normally. And when that happens,
it will say, "Wow, maybe I should have tried that earlier!" Business confidence will spurt; people
will think, "Hey, I guess we're not in that gloomy post-2008 depression any more!", and the country
will get on with its business more cheerfully.
The Fed has had a devil of a time getting back to normal, because despite its best intentions
it has inadvertently re-defined a condition of zero rates and excess reserves bleeding from bankers's
ears as the new normal, and created an out-of-control public fixation on monetary policy intervention.
Fed communications strategies aimed at guiding the market have turned back on them in a reflexive
and self-defeating cycle. They got themselves into a terrible pattern for a while where every
time there was good economic news, the markets would respond negatively because they interpreted
the good news as evidence that the Fed would "taper" - which they regarded as bad news! And if
there was bad news, the markets would respond favorably because they saw the bad news as evidence
that the fed would "remain aggressive" - which is good news! Obviously that's a pretty pathological
cycle to be in: it's a mechanism fro economic self-stultification. Indicating a move toward normalization
too suddenly in 2013 caused the irrational "taper tantrum", so they have had to go more slowly
this time around with the hand-holding and by building a longer "guidance" runway.
Their chief need now is to push back against the monetary maniacs and hyperventilators who
keep trying to convince impressionable business people and consumers that the Fed has somehow
been "keeping the economy" afloat, and that when interest rates go up - from 1/4 to 1/2 of a percent!
- we're all going to drown. If you have enough ambulance chasers convincing people they are sick
and damaged, they will act sick and damaged.
"... "The problem for early would - be neoclassical macroeconomists was that, strictly speaking, there was no microeconomic model of macroeconomics when they began their campaign. So they developed a neoclassical macro model from the foundation of the neoclassical growth model developed by Nobel laureate Robert Solow (Solow 1956) and Trevor Swan (Swan 2002). They interpreted the equilibrium growth path of the economy as being determined by the consumption and leisure preferences of a representative consumer, and explained deviations from equilibrium – which the rest of us know as the business cycle – by unpredictable 'shocks' to technology and consumer preferences. ..."
"... This resulted in a model of the macroeconomy as consisting of a single consumer, who lives for ever, consuming the output of the economy. Which is a single good produced in a single firm, which he owns and in which he is the only employee, which pays him both profits equivalent to the marginal product of capital and a wage equivalent to the marginal product of labor. To which he decides how much labor to supply by solving a utility function that maximizes his utility over an infinite time horizon, which he rationally expects and therefore correctly predicts. ..."
"... Paul Krugman is a quintessential neoclassical economist. Neoclassical economists threw the notion that economics should deal with empirical or factual reality overboard quite some time ago. ..."
"... Economists often invoke a strange argument by Milton Friedman that states that models do not have to have realistic assumptions to be acceptable - giving them license to produce severely defective mathematical representations of reality. ..."
"... Economists as a rule do not deny that their assumptions about human nature are highly unrealistic, but instead claim, following Friedman (1962, 1982), that the absence of realism does not diminish the value of their theory because it "works," in the sense that it generates valid predictions…. ..."
"... Most important, philosophers of science have almost universally rejected Friedman's position (Boland, 1979). It is very widely agreed that the purpose of a theory is to explain. Otherwise, [predictions] are unable to foretell under what conditions they will continue to hold or fail. ..."
"... With the advent of the Great Financial Crisis, which began in 2007 and continues to this day, the neoclassical models did fail. And they failed in the most spectacular way. ..."
"... Nevertheless, for those like Krugman who are in love with orthodox economic theory, when facts don't conform to theory, so much worse for the facts. ..."
"... It should be added that not everyone who rejects the orthodox, neoclassical theory of exogenous money creation and its "available funds" theory of banking, as Keen calls it, believes that debt matters. ..."
"... A very good example of this is the MMT school, which even though it rejects the orthodox theory of money creation, nevertheless discounts the importance of debt, or at least public debt. ..."
"... The distinction between private debt and public debt, however, is not a clear one. We all saw, for instance, the ease with which private debt was converted into public debt in the cases of Ireland and Spain in the wake of the GFC. ..."
"... The piece that VK posted by Keen was essentially a rejection of the macroeconomic theory that was formulated to replace Keynesian theory. ..."
"... The debate between these two economists on the role of banking and specifically the creation of credit is of fundamental importance in understanding the shortcomings of orthodox economic thinking – and why it was so ill-equipped to handle, let alone predict, the crash of 2008. ..."
"... However, because he has such an important platform, it matters more to many monetary economists (including the editor of this series) that he appears to lack a proper understanding of the nature of credit, and the role of banks in the economy. ..."
"... So yes debt is a big problem with a poorly regulated banking industry (financial industry really because of shadow banking). ..."
Beware Economics 101. The peer review mechanism has horribly failed.
When you read Krugman,
this is what he and our central bankers believe.
"The problem for early would - be neoclassical macroeconomists was that, strictly speaking,
there was no microeconomic model of macroeconomics when they began their campaign. So they developed
a neoclassical macro model from the foundation of the neoclassical growth model developed by Nobel
laureate Robert Solow (Solow 1956) and Trevor Swan (Swan 2002). They interpreted the equilibrium
growth path of the economy as being determined by the consumption and leisure preferences of a
representative consumer, and explained deviations from equilibrium – which the rest of us know
as the business cycle – by unpredictable 'shocks' to technology and consumer preferences.
This resulted in a model of the macroeconomy as consisting of a single consumer, who lives
for ever, consuming the output of the economy. Which is a single good produced in a single firm,
which he owns and in which he is the only employee, which pays him both profits equivalent to
the marginal product of capital and a wage equivalent to the marginal product of labor. To which
he decides how much labor to supply by solving a utility function that maximizes his utility over
an infinite time horizon, which he rationally expects and therefore correctly predicts.
The economy
would always be in equilibrium except for the impact of unexpected 'technology shocks' that change
the firm's productive capabilities (or his consumption preferences) and thus temporarily cause
the single capitalist/worker/consumer to alter his working hours.
Any reduction in working hours
is a voluntary act, so the representative agent is never involuntarily unemployed, he's just taking
more leisure. And there are no banks, no debt, and indeed no money in this model."
Prof. Steve Keen, Debunking Economics.
Dennis Coyne, 12/04/2015 at 6:11 pm
Hi VK,
No this is not what Krugman believes at all. There are some economists that think in these terms,
in the US it is primarily in the interior of the country, the economists on the east and west
coast, (this includes Krugman and many others) would not think in these terms at all.
Krugman gives assessments based on the representative agent models, with its no money, no debt,
no banks assumptions. Very linear models, no dynamic modeling.
Economic theory and modeling is stuck in the 19th century. Rest of the hard sciences, physics,
chemistry, atmospherics moved on with Poincare and later Lorenz to dynamic simulations.
The fractional reserve banking model taught in economics is absolutely empirically wrong. Because
banks have the power to create credit money, they can issue in excess.
Under the empirically correct credit money creation model, there can be an excessive build
up of debt. Hence the more than 250 sovereign and domestic govt debt crises since 1850.
Rune Likvern posted the link and I read the paper. US textbooks through 1990 covered
this exactly as in that paper, so it was a good refresher, but not different from what I had learned
in the past.
There can be excessive debt and banks can fail due to poor lending practices combined with
a severe recession. Nations can also default. The question is how much debt is too much debt.
In economics there are different opinions on this question. When I was studying economics the
focus was on public debt crowding out private debt when an economy was close to full employment.
Now there seems to be more focus on private debt, which nobody in economics used to worry about.
It may be that the lack of banking regulation and the rise of shadow banking has made this
more of a problem, I am out of date on the latest research.
U.S. Textbooks don't cover this at all. The assumption that Paul Samuelson used in his seminal
undergraduate textbook that millions have studied was the fractional reserve lending model which
is empirically false.
The whole of economics is empirically false, it would be a laughing stock if people looked
under the hood with its assumptions that are meant to preserve straight line thinking rather than
dealing with reality, which is highly non-linear and dynamic.
Private debt wasn't a concern in economics because they assumed away the role of banks to preserve
the equilibrium models. Once you incorporate reality into the models, which is what a true science
would do, you find that private debt levels matter.
What economists think: Saver lends to borrower. Saver loses purchasing power, borrower gains
purchasing power. Purchasing power hasn't changed in the economy. Just a shift
What really happens: Saver puts money in a bank, has access to his money anytime. Borrower
wants money, bank issues a credit and writes loan amount as asset. Purchasing power as a whole
increases across the economy as both saver and borrower now have money to buy goods and services
with.
That's how the economy grows – bank issuance of credit. And it can easily be in excess.
I tried to explain this to my father in law who is an attorney
specializing in finance and accounting. He simply could not accept it or even wrap his head around
it even after reading the Bank of England piece.
It is fraud plain and simple and the cost to humanity in both financial terms and lives lost
is huge.
Paul Krugman is a quintessential neoclassical economist. Neoclassical economists threw the
notion that economics should deal with empirical or factual reality overboard quite some time
ago.
Perhaps no one was more explicit in articulating this notion that science should discard
factual reality than Milton Friedman.
Any number of critics have pointed this out. For instance,
Economists often invoke a strange argument by Milton Friedman that states that models
do not have to have realistic assumptions to be acceptable - giving them license to produce
severely defective mathematical representations of reality.
–NASSIM NICHOLAS TALEB, The Black Swan
and
Economists as a rule do not deny that their assumptions about human nature are highly
unrealistic, but instead claim, following Friedman (1962, 1982), that the absence of realism
does not diminish the value of their theory because it "works," in the sense that it generates
valid predictions….
Most important, philosophers of science have almost universally rejected Friedman's
position (Boland, 1979). It is very widely agreed that the purpose of a theory is to explain.
Otherwise, [predictions] are unable to foretell under what conditions they will continue to
hold or fail.
AMITAI ETZIONI, The Moral Dimension
With the advent of the Great Financial Crisis, which began in 2007 and continues to this
day, the neoclassical models did fail. And they failed in the most spectacular way.
Nevertheless, for those like Krugman who are in love with orthodox economic theory, when
facts don't conform to theory, so much worse for the facts.
It should be added that not everyone who rejects the orthodox, neoclassical theory of exogenous
money creation and its "available funds" theory of banking, as Keen calls it, believes that debt
matters.
A very good example of this is the MMT school, which even though it rejects
the orthodox theory of money creation, nevertheless discounts the importance of debt, or at least
public debt.
The distinction between private debt and public debt, however, is not a clear one. We all
saw, for instance, the ease with which private debt was converted into public debt in the cases
of Ireland and Spain in the wake of the GFC.
Krugman does hold relatively mainstream views, but there are significant differences
of opinion within economics. Many economists reject Keynesian theory, Krugman does not. The
piece that VK posted by Keen was essentially a rejection of the macroeconomic theory that was
formulated to replace Keynesian theory. Krugman would make many of the exact same criticisms.
The "debt doesn't matter" theme is carried a little too far, nobody really argues this. The
argument is that when the economy is doing poorly due to low aggregate demand (during a severe
recession) and monetary policy is not effective because interest rates are near zero (so that
the federal funds rate cannot be lowered any further), cutting fiscal deficits is poor public
policy.
Are you unaware of the famous debate between Krugman and Keen, and what it is all about?
Perhaps this article by Ann Pettifor will help:
The debate between these two economists on the role of banking and specifically the
creation of credit is of fundamental importance in understanding the shortcomings of orthodox
economic thinking – and why it was so ill-equipped to handle, let alone predict, the crash
of 2008.
Many rightly applaud Paul Krugman for using his platform at the New York Times to defend
further fiscal stimulus in the US–against a hostile political crowd, not to mention the downright
opposition of neo-liberal economists –- and we commend him for that.
However, because he has such an important platform, it matters more to many monetary
economists (including the editor of this series) that he appears to lack a proper understanding
of the nature of credit, and the role of banks in the economy.
There are many of us who have studied beyond the introductory level. In my introductory
courses, I believe we were taught this correctly, but that was long ago, I know when I instructed
the introductory students as a grad student what I was teaching was essentially what I read in
the paper you cited. Perhaps the "textbooks" have improved over time, I haven't read an economics
textbook for many years.
Have you read any economics papers lately, perhaps there has been more progress than you think.
A fundamental problem with economics is that how we understand the workings of the economy can
affect the way people behave. People will always try to game the system and this then effects
the system. It is a difficult modelling problem not faced by chemists and physicists.
What economists think: Saver lends to borrower. Saver loses purchasing power, borrower
gains purchasing power. Purchasing power hasn't changed in the economy. Just a shift
Economists don't think this way at all. These kinds of lessons are often presented in introductory
economics courses to show how economists once thought things worked in 1803 when Say introduced
"Say's Law".
Then the economics professor goes on to explain how a modern economy actually works (which
we don't understand all that well.)
Generally speaking economic growth is considered a good thing, and banks lending to borrowers
that are likely to be able to repay the loan (not true leading up to the financial crisis due
to poor regulation and lending practices), is not a problem in a well regulated banking sector
(in the US this went away in the 1980s).
So yes debt is a big problem with a poorly regulated banking industry (financial industry
really because of shadow banking).
Debt is like a lot of things in life, too much or too little can be a bad thing.
The central bank can certainly influence the amount of lending by raising interest rates, as
long as inflation is moderate, there is not much reason to do so.
"... As a rising economist at Harvard and at the World Bank, Summers argued for privatization and deregulation in many domains, including finance. Later, as deputy secretary of the treasury and then treasury secretary in the Clinton administration, he implemented those policies. Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-Steagall, permitted the previously illegal merger that created Citigroup, and allowed further consolidation in the financial sector. He also successfully fought attempts by Brooksley Born, chair of the Commodity Futures Trading Commission in the Clinton administration, to regulate the financial derivatives that would cause so much damage in the housing bubble and the 2008 economic crisis. He then oversaw passage of the Commodity Futures Modernization Act, which banned all regulation of derivatives, including exempting them from state antigambling laws. ..."
"... Over the past decade, Summers continued to advocate financial deregulation, both as president of Harvard and as a University Professor after being forced out of the presidency. During this time, Summers became wealthy through consulting and speaking engagements with financial firms. Between 2001 and his entry into the Obama administration, he made more than $20-million from the financial-services industry. (His 2009 federal financial-disclosure form listed his net worth as $17-million to $39-million.) ..."
"... In 2005, at the annual Jackson Hole, Wyo., conference of the worlds leading central bankers, the chief economist of the International Monetary Fund, Raghuram Rajan, presented a brilliant paper that constituted the first prominent warning of the coming crisis. Rajan pointed out that the structure of financial-sector compensation, in combination with complex financial products, gave bankers huge cash incentives to take risks with other peoples money, while imposing no penalties for any subsequent losses. Rajan warned that this bonus culture rewarded bankers for actions that could destroy their own institutions, or even the entire system, and that this could generate a full-blown financial crisis and a catastrophic meltdown. When Rajan finished speaking, Summers rose up from the audience and attacked him, calling him a Luddite, dismissing his concerns, and warning that increased regulation would reduce the productivity of the financial sector. (Ben Bernanke, Tim Geithner, and Alan Greenspan were also in the audience.) ..."
"... Over the past 30 years, the economics profession-in economics departments, and in business, public policy, and law schools-has become so compromised by conflicts of interest that it now functions almost as a support group for financial services and other industries whose profits depend heavily on government policy. The route to the 2008 financial crisis, and the economic problems that still plague us, runs straight through the economics discipline. And its due not just to ideology; its also about straightforward, old-fashioned money. ..."
"... Prominent academic economists (and sometimes also professors of law and public policy) are paid by companies and interest groups to testify before Congress, to write papers, to give speeches, to participate in conferences, to serve on boards of directors, to write briefs in regulatory proceedings, to defend companies in antitrust cases, and, of course, to lobby. This is now, literally, a billion-dollar industry. The Law and Economics Consulting Group, started 22 years ago by professors at the University of California at Berkeley (David Teece in the business school, Thomas Jorde in the law school, and the economists Richard Gilbert and Gordon Rausser), is now a $300-million publicly held company. Others specializing in the sale (or rental) of academic expertise include Competition Policy (now Compass Lexecon), started by Richard Gilbert and Daniel Rubinfeld, both of whom served as chief economist of the Justice Departments Antitrust Division in the Clinton administration; the Analysis Group; and Charles River Associates. ..."
"... I think it is interesting that Summers led the financial deregulation efforts of the Clinton administration and then made a bundle on Wall Street. I think that should be taken into account when evaluating his discussions of economics. ..."
"... It is difficult to get a man to understand something when his salary depends upon his not understanding it. ..."
The Obama administration recently announced that Larry Summers is resigning as director of
the National Economic Council and will return to Harvard early next year. His imminent departure
raises several questions: Who will replace him? What will he do next? But more important, it's
a chance to consider the hugely damaging conflicts of interest of the senior academic economists
who move among universities, government, and banking.
Summers is unquestionably brilliant, as all who have dealt with him, including myself, quickly
realize. And yet rarely has one individual embodied so much of what is wrong with economics, with
academe, and indeed with the American economy. For the past two years, I have immersed myself
in those worlds in order to make a film, Inside Job, that takes a sweeping look at the financial
crisis. And I found Summers everywhere I turned.
Consider: As a rising economist at Harvard and at the World Bank, Summers argued for privatization
and deregulation in many domains, including finance. Later, as deputy secretary of the treasury
and then treasury secretary in the Clinton administration, he implemented those policies. Summers
oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-Steagall, permitted the previously
illegal merger that created Citigroup, and allowed further consolidation in the financial sector.
He also successfully fought attempts by Brooksley Born, chair of the Commodity Futures Trading
Commission in the Clinton administration, to regulate the financial derivatives that would cause
so much damage in the housing bubble and the 2008 economic crisis. He then oversaw passage of
the Commodity Futures Modernization Act, which banned all regulation of derivatives, including
exempting them from state antigambling laws.
After Summers left the Clinton administration, his candidacy for president of Harvard was championed
by his mentor Robert Rubin, a former CEO of Goldman Sachs, who was his boss and predecessor as
treasury secretary. Rubin, after leaving the Treasury Department-where he championed the law that
made Citigroup's creation legal-became both vice chairman of Citigroup and a powerful member of
Harvard's governing board.
Over the past decade, Summers continued to advocate financial deregulation, both as president
of Harvard and as a University Professor after being forced out of the presidency. During this
time, Summers became wealthy through consulting and speaking engagements with financial firms.
Between 2001 and his entry into the Obama administration, he made more than $20-million from the
financial-services industry. (His 2009 federal financial-disclosure form listed his net worth
as $17-million to $39-million.)
Summers remained close to Rubin and to Alan Greenspan, a former chairman of the Federal Reserve.
When other economists began warning of abuses and systemic risk in the financial system deriving
from the environment that Summers, Greenspan, and Rubin had created, Summers mocked and dismissed
those warnings. In 2005, at the annual Jackson Hole, Wyo., conference of the world's leading central
bankers, the chief economist of the International Monetary Fund, Raghuram Rajan, presented a brilliant
paper that constituted the first prominent warning of the coming crisis. Rajan pointed out that
the structure of financial-sector compensation, in combination with complex financial products,
gave bankers huge cash incentives to take risks with other people's money, while imposing no penalties
for any subsequent losses. Rajan warned that this bonus culture rewarded bankers for actions that
could destroy their own institutions, or even the entire system, and that this could generate
a "full-blown financial crisis" and a "catastrophic meltdown."
When Rajan finished speaking, Summers rose up from the audience and attacked him, calling him
a "Luddite," dismissing his concerns, and warning that increased regulation would reduce the productivity
of the financial sector. (Ben Bernanke, Tim Geithner, and Alan Greenspan were also in the audience.)
Soon after that, Summers lost his job as president of Harvard after suggesting that women might
be innately inferior to men at scientific work. In another part of the same speech, he had used
laissez-faire economic theory to argue that discrimination was unlikely to be a major cause of
women's underrepresentation in either science or business. After all, he argued, if discrimination
existed, then others, seeking a competitive advantage, would have access to a superior work force,
causing those who discriminate to fail in the marketplace. It appeared that Summers had denied
even the possibility of decades, indeed centuries, of racial, gender, and other discrimination
in America and other societies. After the resulting outcry forced him to resign, Summers remained
at Harvard as a faculty member, and he accelerated his financial-sector activities, receiving
$135,000 for one speech at Goldman Sachs.
Then, after the 2008 financial crisis and its consequent recession, Summers was placed in charge
of coordinating U.S. economic policy, deftly marginalizing others who challenged him. Under the
stewardship of Summers, Geithner, and Bernanke, the Obama administration adopted policies as favorable
toward the financial sector as those of the Clinton and Bush administrations-quite a feat. Never
once has Summers publicly apologized or admitted any responsibility for causing the crisis. And
now Harvard is welcoming him back.
Summers is unique but not alone. By now we are all familiar with the role of lobbying and campaign
contributions, and with the revolving door between industry and government. What few Americans
realize is that the revolving door is now a three-way intersection. Summers's career is the result
of an extraordinary and underappreciated scandal in American society: the convergence of academic
economics, Wall Street, and political power.
Starting in the 1980s, and heavily influenced by laissez-faire economics, the United States
began deregulating financial services. Shortly thereafter, America began to experience financial
crises for the first time since the Great Depression. The first one arose from the savings-and-loan
and junk-bond scandals of the 1980s; then came the dot-com bubble of the late 1990s, the Asian
financial crisis; the collapse of Long Term Capital Management, in 1998; Enron; and then the housing
bubble, which led to the global financial crisis. Yet through the entire period, the U.S. financial
sector grew larger, more powerful, and enormously more profitable. By 2006, financial services
accounted for 40 percent of total American corporate profits. In large part, this was because
the financial sector was corrupting the political system. But it was also subverting economics.
Over the past 30 years, the economics profession-in economics departments, and in business,
public policy, and law schools-has become so compromised by conflicts of interest that it now
functions almost as a support group for financial services and other industries whose profits
depend heavily on government policy. The route to the 2008 financial crisis, and the economic
problems that still plague us, runs straight through the economics discipline. And it's due not
just to ideology; it's also about straightforward, old-fashioned money.
Prominent academic economists (and sometimes also professors of law and public policy) are
paid by companies and interest groups to testify before Congress, to write papers, to give speeches,
to participate in conferences, to serve on boards of directors, to write briefs in regulatory
proceedings, to defend companies in antitrust cases, and, of course, to lobby. This is now, literally,
a billion-dollar industry. The Law and Economics Consulting Group, started 22 years ago by professors
at the University of California at Berkeley (David Teece in the business school, Thomas Jorde
in the law school, and the economists Richard Gilbert and Gordon Rausser), is now a $300-million
publicly held company. Others specializing in the sale (or rental) of academic expertise include
Competition Policy (now Compass Lexecon), started by Richard Gilbert and Daniel Rubinfeld, both
of whom served as chief economist of the Justice Department's Antitrust Division in the Clinton
administration; the Analysis Group; and Charles River Associates.
In my film you will see many famous economists looking very uncomfortable when confronted with
their financial-sector activities; others appear only on archival video, because they declined
to be interviewed. You'll hear from:
Martin Feldstein, a Harvard professor, a major architect of deregulation in the Reagan administration,
president for 30 years of the National Bureau of Economic Research, and for 20 years on the boards
of directors of both AIG, which paid him more than $6-million, and AIG Financial Products, whose
derivatives deals destroyed the company. Feldstein has written several hundred papers, on many
subjects; none of them address the dangers of unregulated financial derivatives or financial-industry
compensation.
Glenn Hubbard, chairman of the Council of Economic Advisers in the first George W. Bush administration,
dean of Columbia Business School, adviser to many financial firms, on the board of Metropolitan
Life ($250,000 per year), and formerly on the board of Capmark, a major commercial mortgage lender,
from which he resigned shortly before its bankruptcy, in 2009. In 2004, Hubbard wrote a paper
with William C. Dudley, then chief economist of Goldman Sachs, praising securitization and derivatives
as improving the stability of both financial markets and the wider economy.
Frederic Mishkin, a professor at the Columbia Business School, and a member of the Federal
Reserve Board from 2006 to 2008. He was paid $124,000 by the Icelandic Chamber of Commerce to
write a paper praising its regulatory and banking systems, two years before the Icelandic banks'
Ponzi scheme collapsed, causing $100-billion in losses. His 2006 federal financial-disclosure
form listed his net worth as $6-million to $17-million.
Laura Tyson, a professor at Berkeley, director of the National Economic Council in the Clinton
administration, and also on the Board of Directors of Morgan Stanley, which pays her $350,000
per year.
Richard Portes, a professor at London Business School and founding director of the British
Centre for Economic Policy Research, paid by the Icelandic Chamber of Commerce to write a report
praising Iceland's financial system in 2007, only one year before it collapsed.
And John Campbell, chairman of Harvard's economics department, who finds it very difficult
to explain why conflicts of interest in economics should not concern us.
But could he be right? Are these professors simply being paid to say what they would otherwise
say anyway? Unlikely. Mishkin and Portes showed no interest whatever in Iceland until they were
paid to do so, and they got it totally wrong. Nor do all these professors seem to make policy
statements contrary to the financial interests of their clients. Even more telling, they uniformly
oppose disclosure of their financial relationships.
The universities avert their eyes and deliberately don't require faculty members either to
disclose their conflicts of interest or to report their outside income. As you can imagine, when
Larry Summers was president of Harvard, he didn't work too hard to change this.
Now, however, as the national recovery is faltering, Summers is being eased out while Harvard
is welcoming him back. How will the academic world receive him? The simple answer: Better than
he deserves.
While making my film, we wrote to the presidents and provosts of Harvard, Columbia, and other
universities with detailed questions about their conflict-of-interest policies, requesting interviews
about the subject. None of them replied, except to refer us to their Web sites.
Yeah, after an economist has had one job in the government; one job in the banking system; and
one teaching job he should be required to stop working as an economist.
RGC said in reply to EMichael...
I think it is interesting that Summers led the financial deregulation efforts of the Clinton administration
and then made a bundle on Wall Street. I think that should be taken into account when evaluating
his discussions of economics.
EMichael said in reply to RGC...
Of course it should.
At the same time this is not taking anything into account, this is about
"subverting" economics.
Can you make a case that the only reason Summers made a "bundle" working on Wall Street is
because of the financial deregulation efforts he made? Last time I looked he did not have a vote
on the legislation.
RGC said in reply to EMichael...
I think this is especially troubling for the economics profession:
"Over the past 30 years,
the economics profession-in economics departments, and in business, public policy, and law schools-has
become so compromised by conflicts of interest that it now functions almost as a support group
for financial services and other industries whose profits depend heavily on government policy.
The route to the 2008 financial crisis, and the economic problems that still plague us, runs straight
through the economics discipline. And it's due not just to ideology; it's also about straightforward,
old-fashioned money."
EMichael said in reply to RGC...
Cause no economists actually believed in any of the policies that caused all of those things nor
did any economist fail to vote for the policies adopted.
RGC said in reply to EMichael...
Upton Sinclair:
"It is difficult to get a man to understand something when his salary depends
upon his not understanding it."
Tom aka Rusty said in reply to RGC...
As Hemingway and F. SCott Fitzgerald exchanged in their writings (the reputed face-to-face conversation
may not have happened):
The rich are different.
Yes, they have more money.
Combine elite and rich and you get a toxic combination.
I think it is perfectly clear that a secular policy of increasing private indebtedness is not
indefinitely extendable. Sure, if we had printed money in the past and kept monetary policy relatively
tight (or otherwise managed the international financial system so that large persistent balance of
payments deficits were not tolerated) we wouldn't have got in the mess we are in. But once we are
there just trying to get over-indebted people to take on more debt doesn't seem like a winning strategy.
1. asset taxes are tricky things to run (many assets aren't traded and the prices of other assets
are very volatile). And there is the problem of offshore ownership and offshore assets, so it requires
international co-operation.
2. This takes a very closed economy view of things - the trade deficit might end up affecting the
trade balance and hence the flow of assets into and out of the country, and eventually also the terms
of trade. You should think through how such a policy would work in say - Luxembourg.
reason:
EMichael
You see no increase in private indebtedness - when do you mean? If you mean now - then yes - that
is exactly why the economy is so sluggish. Where is the increase in demand going to come from if
the country is running a trade deficit, is not increasing its borrowing and is committed to reducing
its government deficit?
"... neoclassical economics cannot establish the definition/measurement of "capital" without first knowing marginal productivity of capital; but they cannot establish the definition/measurement of marginal productivity of capital without first establishing "capital". ..."
"... ironically, it is conceivable that the entire neoclassical case for invisible hand can be reconstructed based on labor theory of value; after all, Ricardo did that ..."
"... But since then there has been lots of development among the more enlightened mainstream economists that have basically established that market failures are both devastating and universal. This is serious, because this means, in fact, in their heart, they know the invisible hand argument is invalid. Stiglitz came close to admit it in some interviews. ..."
"... Whatever is/was their internal system, both the Soviet Union and China are a part of the capitalist world system and therefore both of them are obligated to pursue economic growth. ..."
"... What you are saying/suggesting presents a profound misunderstanding of open, dissipative complex systems/structures – which we (our society, our economy – indeed our entire world ) are. ..."
"... Such systems cannot be in a permanent thermodynamic equilibrium – controlled plateau, or "sustainability" if we will (which you seem to be wishing/suggesting). They are utterly and totally dependent on ever-expanding energy/resource "consumption" and they ALWAYS and without exception collapse (hint: A.Bartlet)! Indeed, if physics and mathematics is to be trusted, they must collapse! ..."
Hi Dennis, I wrote a long reply to your question on labor theory of value. But somehow after I
posted it, it appears to have disappeared. I am trying to re-post it here
Dennis:
Hi Dennis, thanks for bringing this up. This is definitely not about energy. But since you
mentioned this here, let me give you some of my thought.
First, regarding neoclassical economics, the debate between two Cambridges pretty much destroyed
the logical foundation of neoclassical economics. Because neoclassical economics cannot establish
the definition/measurement of "capital" without first knowing marginal productivity of capital;
but they cannot establish the definition/measurement of marginal productivity of capital without
first establishing "capital".
So neoclassical economics is involved in circular reasoning, and without a meaningful concept
of capital, the rest of the system collapses.
The above is mostly theoretical. It does not necessarily undermine one's faith in the efficiency
of a market economy (ironically, it is conceivable that the entire neoclassical case for invisible
hand can be reconstructed based on labor theory of value; after all, Ricardo did that)
But since then there has been lots of development among the more enlightened mainstream
economists that have basically established that market failures are both devastating and universal.
This is serious, because this means, in fact, in their heart, they know the invisible hand argument
is invalid. Stiglitz came close to admit it in some interviews.
Why does it matter? Consider the current environmental crisis. It is conceivable that we will
fail to stop climate change and the emerging climate catastrophes will bring down human civilization.
From the neoclassical perspective, this is because the market prices for fossil fuels are wrong.
Can this be corrected by government intervention? From the neoclassical perspective, to do this,
the government needs to know the correct prices and even if the government does know the correct
prices, there is still the implementation problem (principal-agent problem, people will find ways
to outmaneuver government, etc). If the government does not know the correct prices or cannot
implement, then we cannot correct market failures. If, on the other hand, the government does
know the correct prices and can implement, why not have socialist planning?
Compare this to socialism. Of course one needs to be reminded of the Soviet environmental disasters.
But the Soviet environmental failures were almost nothing compared to the contemporary Chinese
environmental crisis (and I need to remind people that China's current environmental crisis has
happened after China's capitalist transition). Whatever is/was their internal system, both
the Soviet Union and China are a part of the capitalist world system and therefore both of them
are obligated to pursue economic growth.
Although this has not happened in history, but it is definitely conceivable that a socialist
economy can be structured to be based on zero or negative growth. But this cannot be said of capitalism.
In fact the strongest economic argument against socialism is that the socialist economies did
not grow rapidly enough (even though Cuba succeeded in delivering higher life expectancy than
the United States and for some years Cuba was considered the only country that met the principle
of sustainable development by the living planet report). Therefore, the question is, if it turns
out that capitalism cannot provide sustainability for human civilization, what social system can
deliver sustainability while meeting population's basic needs?
Now, about labor theory of value. There are two different questions here. One has to do with
the labor theory of value as a theory to explain the long-term equilibrium prices in a competitive
market economy and the other has to do with what Marx called the theory of surplus value.
About the theory of surplus value, it needs to be reminded that Marx's theory of surplus value
or exploitation is not moralistic but based on observed economic facts (although it could be used
for moralistic purposes). All it says is no more than this: in a capitalist economy, a workers
has to work longer than the social labor time embodied in the commodities consumed by the worker
himself (or the worker's family) and in this sense, the capitalist profit (surplus value) derives
from the worker's surplus labor. This is factually true.
Of course, as you said, a similar quantitative relationship can be established for other production
inputs. Say, the total energy consumed in a society will have to be greater than the energy input
used for energy production (people here are of course familiar with EROEI, which has to be greater
than 1 for society to function). Based on this, one could argue that not only the workers are
exploited but energy is also "exploited".
But if one really wants to extend the concept of "exploitation" here (which I don't think makes
sense), what is being "exploited" is energy BUT NOT energy owners (even less the owners of capital
goods consuming energy).
In any case, the concept of "exploitation" or surplus value has to be used in a context of
social relations. It makes sense that the workers can take over the means of production and appropriate
their own surplus value (or products of their surplus labor). But it is obviously nonsense to
say that the energy input can somehow appropriate the "surplus energy" consumed in other energy
consumption processes.
Finally, about the long-term equilibrium prices. It can be easily established that in "simple
commodity production" (pre-capitalist market economy, where the producers own their means of production),
market prices tend to fluctuate around ratios that are in proportion to the total labor embodied
in commodities (including both direct labor and indirect labor embodied in means of production).
The problem has to do with "prices of production" or the equilibrium prices in capitalism (you
are probably aware that this is known as the "transformation problem" in the Marxist literature).
All the difficulty comes from the fact that in capitalism, the direct labor time ("live labor")
is further divided into necessary labor (the labor time it takes for the worker to replace his
value of labor power) and surplus labor. In fact, knowing the production coefficients, a unique
set of equilibrium prices and the equilibrium profit rate can be solved from a set of past labor
(indirect labor), necessary labor, and surplus labor for each commodity. Thus, a definite set
of mathematical relations can be established between the prices and the labor variables (although
it's no longer simple proportionality; but I think it does not matter)
Of course the Neo-Sraffians would like to emphasize that you can take any other important input
(say, energy) and establish a similar set of relationship between prices and say, past energy,
necessary energy, and surplus energy. But, as I said, energy cannot be a player in social relations.
In any case, labor theory of value plays an insignificant role in modern Marxist economics
(I personally still think labor theory of value is valid but it no longer provides important insights).
You will not find labor theory of value in my book. But I hope you will still find it intellectually
interesting (and a little provocative).
Hi Minqi Li,
I read your reply to Dennis and found it cogent, however I do have a problem with the standard
neoclassical economic viewpoint and as I have stated many times I find the standard capitalist
and communist economic models to be less than useful systems with which to address our current
global dilemmas. I am of the school of thought that we have to invent completely new ways of thinking
and acting. There are some people who have embarked on this journey. I think this group best embodies
my current thinking about what kinds of systems we need to develop. Some of these ideas are already
taking hold in China too.
The concept of 循环经济 or recycling economy is actually what China
borrowed from the West. Chinese economists started talking about it in the 1990s. The practice
is not as radical as it sounds. The primary intention has not been so much about saving the environment
as accelerating capital accumulation by saving costs.
Although in some cases it has had some beneficial "side effects"
I agree that we need completely new thinking and practice that go beyond the 20th century.
I am of the school that zero (if not negative) economic growth is necessary for sustainability.
The question is what kind of economic system can deliver it.
"…I am of the school that zero (if not negative) economic growth is necessary for sustainability.
The question is what kind of economic system can deliver it…."
What you are saying/suggesting presents a profound misunderstanding of open, dissipative
complex systems/structures – which we (our society, our economy – indeed our entire world ) are.
Such systems cannot be in a permanent thermodynamic equilibrium – controlled plateau, or
"sustainability" if we will (which you seem to be wishing/suggesting).
They are utterly and totally dependent on ever-expanding energy/resource "consumption" and they
ALWAYS and without exception collapse (hint: A.Bartlet)!
Indeed, if physics and mathematics is to be trusted, they must collapse!
-So, when you say:
"…The question is what kind of economic system can deliver it…", you are looking for the wrong,
non-existing thing.
I agree in principle, but it is clear that societies can be built that are stable
for hundreds to thousands of years until conditions diverge too much from those that allowed their
formation. Hunter-gatherer societies were economically and socially stable in many parts of the
world for most of the Holocene, so in principle it is theoretically possible to build a stable
society that takes from the environment not much more than what can be renewed or recycled or
last for a very long time. Animals and plants do it all the time, but of course their numbers
are checked by the environment. And of course it would have little to do with current industrial
civilization that is completely unsustainable.
Hunter-Gatherers were stable ONLY for nature kept a "big stick" over their head every time they
multiplied more than they should have…but as Ron has said multiple times: we are clever and have
bypassed that (or so we think…).
Theoretically- as you say- yes!
Practically: NO!
"…We will kill them all…"
~ Ron Patterson
-And lastly, all this is mute for we ALREADY have passed the tipping point, or the point of
no return- if you will.
I agree with the idea that trying to achieve a zero growth economy is the only path towards
sustainability.
Two points:
First the concept of the 'Circular Economy' goes far beyond simple recycling.
It incorporates systems and design thinking at a fundamental level in all aspects of the economy,
government,and social systems. It thinks of the economy as an ecosystem. It borrows heavily from
how nature builds sustainable systems. It is also very important to understand that it is not
just a greenwashing. It is about a deep and fundamental process change.
Second: At our current juncture 'Perfect' is the enemy of good enough!
We need to move forward with all aspects of the 'Circular Economy' We don't have time to design
and build a perfect system, We are in a situation where we know that our current ways of doing
things are not sustainable so we have to push ahead with imperfect solutions and learn as we go.
Best Hopes!
BTW, Petro is only technically correct here:
-What you are saying/suggesting presents a profound misunderstanding of open, dissipative
complex systems/structures – which we (our society, our economy – indeed our entire world ) are.
Without throwing the baby of ecosystem thermodynamics 101 out with the bath water, I repeat
my point 'Perfect' is the enemy of good enough. Ecosystems are relatively speaking stable and
have been for long periods of time. Nature has been tweaking them for 3.8 billion years. We on
the other hand have managed to really screw things up in just a few thousand years.
We need to go back and learn how nature does design
If we went back to when nature was
in balance, to the point to where we were no longer destroying the ecosystem, then we would be
back to only a few million Homo sapiens on earth.
While it is true that humans are a part of nature, it is also true that cancer is a part of
nature.
We need to go back and learn how nature does design
If we went back to when nature
was in balance,
Ron, that totally misses the point!
Yes, the ultimate goal would be to have sustainable systems in place. However, we are not in
a position to go back to anything. We need to go forward. The point I was making is that we can
learn from the way nature creates sustainable ecosystems and apply those lessons to our own systems.
This is why I wanted to make crystal clear that I'm not talking about greenwashing or anything
'Green' in the old hippie commune model.
Basically nature uses multiple interconnected circular systems simultaneously on various scales
from the microscopic to gigantic. Think of the multiple ecosystems on a single tree in a rainforest.
The mosses and lichens fungi living on the bark of the tree. All the insect communities, ants,
beetles, arachnids, etc, that depend on that. The tree itself using sunlight through photosynthesis,
breathing, producing O2,transporting water and recycling nutrients, the carbon and nitrogen cycles
and so on. The top of the tree is colonized with with completely different specialized ecosystems
covered with epiphytes. Tree frogs and lizards living in the water filled pools created in the
base of bromeliads. The birds and snakes living in the canopy. The large and small mammals living
in various niches within all those ecosystems, the detrivores and bacteria and fungi that recycle
all the nutrients from the organisms that die, etc… etc… and we are talking just one tree in a
forest. This is the kind of integrated systems design that we need to emulate in our cities and
businesses.
We humans, on the other hand, have built linear consumptive nonintegrated systems. These systems
are extremely wasteful. Linear systems only work when resources limits are nonexistent. We no
longer have the luxury of continuing with such systems. We need to learn how nature practically
eliminates waste by emulating a model where waste streams are resource inputs and everything is
reused there is practically no waste in a functioning stable ecosystem.
We need to learn how nature practically eliminates waste by emulating a model where waste streams
are resource inputs and everything is reused there is practically no waste in a functioning stable
ecosystem.
I totally understand your point Fred, but you are simply missing the big picture.
When you say "we" just who are you talking about? Obviously if you are talking about fixing the
terrible mess we find ourselves in, then "we" has to mean "we humans", all of us. And when you
do that you are talking absolute nonsense.
Individuals can change but human nature cannot change. "We" will go on behaving in the future
exactly as we have behaved in the past. The mass of humanity is consuming the natural resources
like a drunken sailor going through his rich uncle's inheritance. And I don't mean just fossil
resources, I mean all resources, all nature's bounty. And we are taking it from all the other
creatures who are less clever than we are.
And "we" will continue to do so until it is gone, and all the other creatures are gone also.
wimbi, 11/13/2015 at 10:50 pm
A simple engineer's suggestion for basis of new economics, based on conversation with wiser
ones elsewhere.
Proper economic structure is that which maximizes the number of options available for future
choices.
Same as, minimize irreversibility; same as second law of thermo. Or, don't mess things up for
the next guy.
Examples of violations of basic rule- kill the coral, next guy has less fish ; burn the oil,
next guy has a smaller hunk of planet at bearable temps.
Example of application of basic rule – go to solar for energy, and stick within bounds of
activity thereby set.
NB- another fundamental flaw of capitalism– like stars growing in a dust cloud where more
massive ones grab mass faster than littler ones, ending up with big one gobbling it all.
Bigger capitalists grab more resources faster than smaller ones, ending up with big ones
getting it all.
And, very serious consequence – gross maldistribution of resource relative to individual
ability to use resource wisely.
"... Every year, in the backwaters of America, that economy seems to put out fewer and fewer chairs. ..."
"... Not pull the wool over our eyes. But they both do defend and rely on a mainstream neoliberal, New Keynesian models of the economy which I think paint a very inadequate picture of the way our economy actually functions and is woefully inadequate as a guide for policy action - especially of the kinds that are urgently needed in 2015. ..."
"... I dont think Krugman and DeLong are the forces of evil. I just think the United States is in much worse shape then they seem prepared to come to grips with, and is in need of much more radical social and economic change then they seem willing to propose or entertain. They are stuck in the past and weighed down by defunct orthodoxies and theoretical abstractions. ..."
"... Most of my general criticisms of economists, by the way, are aimed at macroeconomists. I listened to a lecture by Robert Schiller the other day about his new book, and thought it sounded like great stuff. I think there is lots of great empirical work going on based on nuanced and up-to-date theories of human behavior. The macro guys often claim - on the basis of some kind of anti-reductionist credo - that their grand uniform economic theories of everything can float free of any foundation in theories of the actual behavior of actual human beings. But the theories are in practice based on analogies from individual or firm behavior to macro behavior, and the behavioral models on which they are based are extremely crude. ..."
"... But basically, I think my main axe to grind is that these economists are just not sufficiently appalled by the moral horrors of the social world we live in. There is a general lack of zeal. ..."
"... Sadly, it is also the case that the Democrats have backed way off economic issues since the late 1970s. At the time they suffered a massive fundraising disadvantage and wanted to attract big money donors (still Hillarys position). ..."
Harold Pollack (the beginning of the post talks about a recent column in the NY Times noting that
"The people who most rely on the safety-net programs secured by Democrats are, by and large, not
voting against their own interests by electing Republicans. Rather, they are not voting, period,"
and how that has turned blues states red):
What's the matter with Kentucky?: ...Viewed from afar, one might think that categories such
as "deserving poor" or "disabled" are reasonably clear-cut. Viewed up-close, things seem much
more fuzzy. Many people who rely on public aid straddle the boundaries between deserving and undeserving,
disabled and able-bodied. Many of us know people who receive various public benefits, and who
might not need to rely on these programs if they made better choices, if they learned how to not
talk back at work, if they had a better handle on various self-destructive behaviors, if they
were more willing to take that crappy job and forego disability benefits, etc.
It's easy, even
viewing our own friends and relatives, to confuse cause and effect regarding more intimate barriers.
A sad reality of psychiatric disorders is that the very symptoms which inflict mental pain on
the sufferer can make themselves felt to others in ways that undermine empathy and personal relationships.
Across the Thanksgiving dinner table, you see these human frailties and failures more intensely
and with greater granularity than the labor economist could possibly see running cold data at
the Census Bureau. But operating at high altitude, the labor economist sees structural issues
you can't see from eye level.
There have always been vulnerable people, whose troubles arise from an impossible-to-untangle
mixture of bad luck, destructive behaviors, and difficult personal circumstance. That economist
can't see why your imperfect cousin can't seem to get it together to hold a basic job. She can
see that your cousin is being squeezed out by an unforgiving musical-chairs economy. Every
year, in the backwaters of America, that economy seems to put out fewer and fewer chairs.
"Supporters of expanded social provision must find better ways to engage poor people, to get out
their votes."
Of course Republicans are doing everything they can to keep poor people from voting.
cm -> pgl...
Also in the US, elections seem to always (?) take place on work days, whereas e.g. in Germany
the happen on Sundays as a rule. Of course one can vote by mail, but that requires a pretty stable
and reliable mailing address ...
pgl -> cm...
In the South the Republicans loathe the idea that voting might occur on Sundays. Seems they fear
those black mega churches turning out the vote.
cm -> pgl...
I was thinking more of people being unable to (or "preferring" not to) miss work, and not being
able to show up for work as well as vote on the same day.
Do you think that people don't have
enough willpower to sustain their decision to vote from Sunday to Tuesday? Or that they would
vote only under the social pressure from the church group?
pgl -> cm...
I'm just saying let them vote when they can. As in your first sentence here.
Number 6 said...
The US is a militarist-imperialist, rentier-socialist, friendly fascist (for now) corporate-state
for the top 0.001-1% to ~10% (the best gov't the money of the top 0.001-1% can buy) and a moronocracy
for the rest of us, i.e., "no representation without taxation".
What is needed is 'Merikans for Moronocracy (or Morons for a New 'Merika) for us morons in
red AND blue states to write in our own names for CEO of the fascist corporate-state. Imagine
tens of millions of us unaffiliated morons writing in Joe Moron for POTUS and Jane Moron for Veep
(or switch for your gender-specific or non-specific preference, or not).
Surely, none of us could do any worse for the bottom 90%+ than the Establishmet top 0.001%'s
"choices" over the past 30-40+ years, or the current lot of Dame Hilbillary, The Donald, Crazy
Carson, et al. (Of course, Bernie Sanders speaks to the values and objectives of the vast majority
of 'Merikans who are actually democratic socialists but have been propagandized for at least a
century or more not to know it.)
Alan Abramowitz * reads the latest Washington Post poll and emails:
"Read these results ** and tell me how Trump doesn't win the Republican nomination? I've been
very skeptical about this all along, but I'm starting to change my mind. I think there's at least
a pretty decent chance that Trump will be the nominee.
"Here's why I think Trump could very well end up as the nominee:
"1. He's way ahead of every other candidate now and has been in the lead or tied for the lead
for a long time.
"2. The only one even giving him any competition right now is Carson who is even less plausible
and whose support is heavily concentrated among one (large) segment of the base-evangelicals.
"3. Rubio, the great establishment hope now, is deep in third place, barely in double digits
and nowhere close to Trump or Carson.
"4. By far the most important thing GOP voters are looking for in a candidate is someone to
'bring needed change to Washington.'
"5. He is favored on almost every major issue by Republican voters including immigration and
terrorism by wide margins. The current terrorism scare only helps him with Republicans. They want
someone who will "bomb the shit" out of the Muslim terrorists.
"6. There is clearly strong support among Republicans for deporting 11 million illegal immigrants.
They don't provide party breakdown here, but support for this is at about 40 percent among all
voters so it's got to be a lot higher than that, maybe 60 percent, among Republicans.
"7. If none of the totally crazy things he's said up until now have hurt him among Republican
voters, why would any crazy things he says in the next few months hurt him?
"8. He's very strong in several of the early states right now including NH, NV and SC. And
he could do very well on 'Super Tuesday' with all those southern states voting. I can't see anyone
but Trump or Carson winning in Georgia right now, for example, most likely Trump.
"9. And as for the idea of the GOP establishment ganging up on him and/or uniting behind another
candidate like Rubio, that's at least as likely to backfire as to work. And even if it works,
what's to stop Trump from then running as an independent?"
Indeed. You have a party whose domestic policy agenda consists of shouting "death panels!,"
whose foreign policy agenda consists of shouting "Benghazi!," and which now expects its base to
realize that Trump isn't serious. Or to put it a bit differently, the definition of a GOP establishment
candidate these days is someone who is in on the con, and knows that his colleagues have been
talking nonsense. Primary voters are expected to respect that?
The reason may well be that there is a vast group of voters who consistently vote against their
better interests, because their mindset is conservative, though they are actually middle class
or lower. - Kansas appears to be a great example. These people do not think things through but
vote on their gut (conservative they think) instincts. Education has a great deal to do with that
voting decision. Thus we seem to see a blue collar worker with a median income take positions
similar to that of the 1%. Curious but educational level is the likely answer. Such voters are
also much more susceptible to propaganda based on tainted or false information which is circulated
freely by many of the talking heads on radio and TV. Note that the Republicans work assiduously
to discourage and restrict voting by gerrymandering, rules, voting days and sometimes requiting
ID. - Democracy in America is a theoretical concept now.
cm said...
The Musical Chairs happens not only in the backwaters. It happens in and around the major job
centers too. Nor is it only a matter of no job vs. some job, also how well the job is paid, working
conditions, full time vs. part time, predictable work hours or on call (and only on-premises hours
paid), etc.
It also doesn't just affect people with various "problems". There is the meme that
when you are good you will always find a job, but that only works when employers are actually
hiring. And the unstated part is that the job will be at your level of skill/ability. In "tech",
and probably most "high skilled" fields, employers have a rather strong preference for an unbroken
career in the field, you are basically defined by the "lowest" work you have done recently.
Dan Kervick -> Peter K....
"Kervick on the other hand tells us everyday that Krugman and DeLong are trying to pull
the wool over our eyes on behalf of an evil neoliberal consensus."
Not pull the wool over our eyes. But they both do defend and rely on a mainstream neoliberal,
New Keynesian models of the economy which I think paint a very inadequate picture of the way our
economy actually functions and is woefully inadequate as a guide for policy action - especially
of the kinds that are urgently needed in 2015.
I don't think Krugman and DeLong are the forces of evil. I just think the United States
is in much worse shape then they seem prepared to come to grips with, and is in need of much more
radical social and economic change then they seem willing to propose or entertain. They are stuck
in the past and weighed down by defunct orthodoxies and theoretical abstractions.
Maybe in their hearts they really do grasp the magnitude of the problems, but just think
the political environment is not hospitable to an honest airing of the alternatives. Maybe they
are scared like everyone else.
But until prominent, established intellectuals with high profiles begin to come forward with
bolder alternatives to late 20th century thinking, the America that is being crushed underfoot
by an out-of-control capitalist leviathan is going to have to face a lot of unwelcome headwinds
in their drive for liberating progressive change.
Syaloc -> Dan Kervick...
So basically you're calling for a return to a more institutional form of economics led by figures
like John Kenneth Galbraith?
Dan Kervick -> Syaloc...
Yes, a more concrete, detailed, institution-based picture of the economic world, with more attention
to history, other branches of social science, moral philosophy, cultural criticism, etc. - as
well as just a bit more street smarts. Macroeconomists seem to have siloed themselves in self-contained
theoretical world, where engagement with the human sciences of power and control, and the moral
implications of those fields of study, are ignored.
Most of my general criticisms of economists,
by the way, are aimed at macroeconomists. I listened to a lecture by Robert Schiller the other
day about his new book, and thought it sounded like great stuff. I think there is lot's of great
empirical work going on based on nuanced and up-to-date theories of human behavior. The macro
guys often claim - on the basis of some kind of anti-reductionist credo - that their grand uniform
economic theories of everything can float free of any foundation in theories of the actual behavior
of actual human beings. But the theories are in practice based on analogies from individual or
firm behavior to macro behavior, and the behavioral models on which they are based are extremely
crude.
But basically, I think my main axe to grind is that these economists are just not sufficiently
appalled by the moral horrors of the social world we live in. There is a general lack of zeal.
djb said...
a lot of it , I am sure, has to do with the "there is no difference between democrats and republicans"
constant brainwashing
which helps the republicans big time
DrDick -> djb...
Sadly, it is also the case that the Democrats have backed way off economic issues since the
late 1970s. At the time they suffered a massive fundraising disadvantage and wanted to attract
big money donors (still Hillary's position).
djb -> DrDick...
still republicans are way worse especially now
DrDick said in reply to djb...
True, but for the poor, it is quite obvious that no one really gives a damn about them. Why
should they vote when all they get is bailouts for banksters and the TPP? Right now, Sanders is
the only one talking about programs that would really help them and he is a long shot (and I am
a Sanders supporter).
Avraam Jack Dectis said...
.
A good economy compensates for much social dysfunction.
A bad economy moves people toward the
margins, afflicts those near the margins and kills those at the margins.
This is what policy makers should consider as they pursue policies that do not put the citizen
above all else.
cm -> Avraam Jack Dectis...
"A good economy compensates for much social dysfunction."
More than that, it prevents the worst
of behaviors that are considered an expression of dysfunction from occurring, as people across
all social strata have other things to worry about or keep them busy. Happy people don't bear
grudges, or at least they are not on top of their consciousness as long as things are going well.
This could be seen time and again in societies with deep and sometimes violent divisions between
ethnic groups where in times of relative prosperity (or at least a broadly shared vision for a
better future) the conflicts are not removed but put on a backburner, or there is even "finally"
reconciliation, and then when the economy turns south, the old grudges and conflicts come back
(often not on their own, but fanned by groups who stand to gain from the divisions, or as a way
of scapegoating).
"... I loved that Bernie Sanders was willing to drop the "F-bomb" (fraud) on Wall Street but he needs to swing much harder at Clinton. Clinton was quick to zing O'Malley as a hypocrite by noting he appointed a former hedge-fund manager to some state regulatory position when given the chance, but yet neither Sanders or O'Malley hit back with the fact that her only child and Clinton Foundation board member, Chelsea Clinton, worked for the hedge fund of a Clinton family pal and mega-donor in 2006. ..."
"... I thought O'Malley had one of the best lines of the night when he said "I think it may be time for us to quit taking advice from economists" but it seemed to go mostly unnoticed and unappreciated. ..."
"... Sanders did a relatively good job of deflecting and not getting zinged by the 'gotcha' question but a full-frontal assault would have been much better. Stronger, more Presidential and with the added bonus of giving neo-liberal economists under the pay of plutocrats a black eye. Another missed opportunity. The questioner set it up perfectly for him. I would have loved to see the expression on her corn-fed face when Bernie turned her 'gotcha' question that she had spent so much time and thought crafting into the home-run answer of the evening. Perhaps it could happen in a debate in the near future. ..."
I couldn't believe my eyes and ears during the debate when Sanders impugned Clinton's
integrity for taking Wall Street super PAC money and she seemed to successfully deflect the
accusation by going full-bore star-spangled sparkle eagle. She played the vagina card then
quickly blurted out "9/11 New York" for applause while attempting conflate aiding and abetting
Wall Street with the 9/11 attacks and patriotism. I couldn't believe people were clapping and
I couldn't believe Clinton had the audacity to pull such a illogical and juvenile stunt on
live television, but yet CBS reported her highest approval scores of the debate were
registered during her confusing but emotionally rousing (for some people apparently) "vagina,
9/11" defense.
I loved that Bernie Sanders was willing to drop the "F-bomb" (fraud) on Wall Street but he
needs to swing much harder at Clinton. Clinton was quick to zing O'Malley as a hypocrite by
noting he appointed a former hedge-fund manager to some state regulatory position when given
the chance, but yet neither Sanders or O'Malley hit back with the fact that her only child and
Clinton Foundation board member, Chelsea Clinton, worked for the hedge fund of a Clinton
family pal and mega-donor in 2006. Neither candidate mentioned that her son-in-law and
the father of her grandchild who she is so fond of mentioning, just so happens to be an
extremely rich hedge fund manager who benefits handsomely from the Clinton's political
connections and prestige. This isn't mud, this is extremely germane, factual material already
on the public record. It gets to the core of who Hillary is and where her loyalties lie.
Hillary herself chose to identify unregulated derivatives and the repeal of Glass-Steagall as
the primary causes of the financial crisis. She either claimed directly or insinuated that she
would address these issues as President, but surprisingly no one pointed out that it was her
husband's administration that blocked Brooksley Born from regulating derivatives in the 1990's
and it was her husband's administration that effectively repealed Glass-Steagal with the
signing of Gramm-Leach-Billey act in 1999. It's not a stretch to say the Clinton's
deregulation of Wall Street paved the way for the crisis of 2008 and the extreme income
inequality of today. Wall Street is deeply unpopular and Bernie Sanders has built a candidacy
on two main issues: attacking Wall Street and addressing income inequality. These are punches
he can't afford not to throw at his rival when she holds a commanding lead in the polls plus
the support of the DNC and media establishment. Clinton is deeply corrupt and beholden to Wall
Street. She needs to be beaten with this stick hard and often. Attempting to deflect this very
accurate, very damaging criticism by wrapping herself in the flag and invoking feminism is a
cheap stunt that will only work so many times before people notice what she is doing. Bernie
needs to swing harder and keep at it, he already has the right message and Clinton is highly
vulnerable on his pet topics.
I thought O'Malley had one of the best lines of the night when he said "I think it may be
time for us to quit taking advice from economists" but it seemed to go mostly unnoticed and
unappreciated. I would have loved a frontal assault on the validity and integrity of
economists when the bespectacled lady in blue attempted to nail down Sanders with a 'gotcha'
question implying raising the minimum wage would be catastrophic for the economy because
"such-and-such economist" said so. There is so much disdain for science and academic
credentials in the heartland right now, it seems crazy not to harness this anti-academic
populist energy and redirect it to a deserving target like neo-liberal economists instead of
climate scientists. " How's that Laffer curve working out for ya Iowa? Are you feeling the
prosperity 'trickle down' yet?" Sanders did a relatively good job of deflecting and not
getting zinged by the 'gotcha' question but a full-frontal assault would have been much
better. Stronger, more Presidential and with the added bonus of giving neo-liberal economists
under the pay of plutocrats a black eye. Another missed opportunity. The questioner set it up
perfectly for him. I would have loved to see the expression on her corn-fed face when Bernie
turned her 'gotcha' question that she had spent so much time and thought crafting into the
home-run answer of the evening. Perhaps it could happen in a debate in the near future.
It's not about Adam Smith, it's about well paid intellectual prostitutes hired to restore the rule
of financial oligarchy. The books discussed are
Chicagoedonomics: The Evolution of Chicago Free Market Economics by By Lanny Ebenstein (278pp)
and ECONOMICS RULES The Rights and Wrongs of the Dismal Science By Dani Rodrik (253pp)
Notable quotes:
"... He believed that government had a crucial role to play in a well-functioning economy. It should finance and run good schools, as well as build roads, bridges and parks, he argued. It should tax alcohol, sugar and tobacco, all of which impose costs on society. It should regulate businesses to protect workers. And it should tax the rich - who suffer from "indolence and vanity" - to help the poor. ..."
"... Which leftist economist was this? None other than Adam Smith, the inventor of the "invisible hand" and the icon of laissez-faire economics today. Smith's modern reputation is a caricature. ... ..."
David Leonhardt reviews 'Chicagonomics' and 'Economics Rules':
'Chicagonomics' and 'Economics Rules': He believed that government had a crucial role to play
in a well-functioning economy. It should finance and run good schools, as well as build roads, bridges
and parks, he argued. It should tax alcohol, sugar and tobacco, all of which impose costs on society.
It should regulate businesses to protect workers. And it should tax the rich - who suffer from "indolence
and vanity" - to help the poor.
Which leftist economist was this? None other than Adam Smith, the inventor of the "invisible
hand" and the icon of laissez-faire economics today. Smith's modern reputation is a caricature.
...
pgl
"Dani Rodrik, a Harvard economics professor, has written a much less political book than
Ebenstein has, titled "Economics Rules," in which he sets out to explain the discipline to
outsiders (and does a nice job). Yet in surveying the larger "rights and wrongs" of economics,
to quote his subtitle, Rodrik has diagnosed the central mistake that contemporary libertarians
have made: They have conflated ideas that often make sense with those that always make sense."
Dani is often under looked in these discussions which is a shame. His writings on how different
societies have dealt with their local issues is some of the most informed economics out there.
likbez -> pgl...
I think we need to distinguish between Friedman the academic economist before writing Capitalism
and Freedom (1962) and Friedman the public intellectual after.
"After" Friedman was a dismal intellectual prostitute that promoted neoliberalism for money paid
by financial oligarchy. The level of dishonesty and intellectual degradation that he displays in
his public appearances that now are available in YouTube videos is simply astonishing.
Actually Professor Wendy Brown touched the mechanics of this slick propaganda campaign in her
book "Undoing the Demos". From Amazon:
=== Start of quote === Neoliberal rationality -- ubiquitous today in statecraft and the workplace, in jurisprudence, education,
and culture -- remakes everything and everyone in the image of homo oeconomicus. What happens when
this rationality transposes the constituent elements of democracy into an economic register? In Undoing
the Demos, Wendy Brown explains how democracy itself is imperiled. The demos disintegrates into bits
of human capital; concerns with justice bow to the mandates of growth rates, credit ratings, and
investment climates; liberty submits to the imperative of human capital appreciation; equality dissolves
into market competition; and popular sovereignty grows incoherent. Liberal democratic practices may
not survive these transformations. Radical democratic dreams may not either.
In an original and compelling argument, Brown explains how and why neoliberal reason undoes the
political form and political imaginary it falsely promises to secure and reinvigorate. Through meticulous
analyses of neoliberalized law, political practices, governance, and education, she charts the new
common sense. Undoing the Demos makes clear that for democracy to have a future, it must become an
object of struggle and rethinking.
"... model one under which the efficient markets hypothesis is correct-and that's a model where there are a number of critical assumptions: one is rationality (we rule out behavioral aspects like bandwagons, excessive optimism and so on); second, we rule out externalities and agency problems ..."
"... to liberalize as many markets as possible and to make regulation as light as possible. In the run-up to the financial crisis, if you'd looked at the steady increase in house prices or the growth of the shadow banking system from the perspective of the efficient markets hypothesis, they wouldn't have bothered you at all. You'd tell a story about how wonderful financial liberalization and innovation are-so many people, who didn't have access before to mortgages, were now able to afford houses; here was a supreme example of free markets providing social benefits. ..."
"... But if you took the same [set of] facts, and applied the kind of models that people who had been looking at sovereign debt crises in emerging markets had been developing-boom and bust cycles, behavioral biases, agency problems, externalities, too-big-to-fail problems-if you applied those tools to the same facts, you'd get a very different kind of story. ..."
"... "efficient markets hypothesis": ..."
"... tendency in the policy world to liberalise as many markets as possible and to make regulation as light as possible ..."
Q. You give a couple of examples in the book of the way theoretical errors can lead to policy
errors. The first example you give concerns the "efficient markets hypothesis". What role did
an overestimation of the scope and explanatory power of that hypothesis play in the run-up to
the global financial crisis of 2007-08?
A. If we take as our central model one under which
the efficient markets hypothesis is correct-and that's a model where there are a number of critical
assumptions: one is rationality (we rule out behavioral aspects like bandwagons, excessive optimism
and so on); second, we rule out externalities and agency problems-there's a natural tendency
in the policy world to liberalize as many markets as possible and to make regulation as light
as possible. In the run-up to the financial crisis, if you'd looked at the steady increase in
house prices or the growth of the shadow banking system from the perspective of the efficient
markets hypothesis, they wouldn't have bothered you at all. You'd tell a story about how wonderful
financial liberalization and innovation are-so many people, who didn't have access before to mortgages,
were now able to afford houses; here was a supreme example of free markets providing social benefits.
But if you took the same [set of] facts, and applied the kind of models that people who
had been looking at sovereign debt crises in emerging markets had been developing-boom and bust
cycles, behavioral biases, agency problems, externalities, too-big-to-fail problems-if you applied
those tools to the same facts, you'd get a very different kind of story. I wish we'd put
greater weight on stories of the second kind rather than the first. We'd have been better off
if we'd done so.
djb said...
"efficient markets hypothesis": magical thinking
Jerry Brown said...
I can't get that link to open. Dani Rodrik says "there is a natural tendency in the policy
world to liberalise as many markets as possible and to make regulation as light as possible".
Is that in general? Or is that a part of the efficient market hypothesis?
"... There's a certain fetishism that comes along with the use of math. And that shows up in two ways: one is that arguments which are relatively straightforward, that can be put in a directly literary form, we feel we have mathematise them. Sometimes, there's undue mathematisation or formalisation. We get so enamoured of the math that the mathematical structure of models becomes an object of analysis. And that's one of the problems with economic theory-that it often becomes applied mathematics, where the point is the mathematical properties of the models. And so it becomes more and more peripheral to what economics should be about, which is to look at social phenomena. But there's a much better appreciation today of the role and also the limits of math in economics than there was 30 years ago. ..."
"... it has squeezed out the space for mindless, abstract theorising or modelling for the sake of modelling. ..."
"... Models are stylised abstractions that lay bare the relationship between cause and effect. I liken [models] to lab experiments. When you conduct an experiment in a lab, you're trying to isolate the thing you're looking at. ..."
"... As long as we don't forget that [the model we're using] is a model, not the model. An immediate implication of what I just said, of the way I defined the usefulness of the model, is that the model captures only one of many different causal effects. And it's going to be most useful when we apply it to a real world setting where, in some sense, that causal effect is the dominant one. But [we should not] forget that there will be other settings where other causal effects or other models are more relevant. ..."
"... model one under which the efficient markets hypothesis is correct-and that's a model where there are a number of critical assumptions: one is rationality (we rule out behavioural aspects like bandwagons, excessive optimism and so on); second, we rule out externalities and agency problems-there's a natural tendency in the policy world to liberalise as many markets as possible and to make regulation as light as possible. In the run-up to the financial crisis, if you'd looked at the steady increase in house prices or the growth of the shadow banking system from the perspective of the efficient markets hypothesis, they wouldn't have bothered you at all. You'd tell a story about how wonderful financial liberalisation and innovation are-so many people, who didn't have access before to mortgages, were now able to afford houses; here was a supreme example of free markets providing social benefits. ..."
The economist Dani Rodrik, a professor at Harvard, recently spent a couple of years at Princeton's
Institute for Advanced Study. In his new book, "Economics
Rules: Why Economics Works, When it Fails, and How to Tell the Difference," he recalls just what
a "mind-stretching experience" that sojourn was. He found that many of the visitors to the Institute's
School of Social Sciences, prominent academics from other disciplines, harboured a deep "suspicion
toward economists." Those visitors seemed to believe, he writes, that "economists either stated the
obvious or greatly overreached by applying simple frameworks to complex social phenomena." It felt,
Rodrik says, as if economists were being cast as the "idiots savants of social science: good with
math and statistics, but not much use otherwise."
Part of the problem, Rodrik thinks, is
"misinformation" about what it is economists do, exactly. "Economics Rules" is in part, therefore,
an attempt to set the record straight-and to rebut some fairly widespread criticisms of economics
in the process. But it's also aimed at his colleagues in the economics profession, who he thinks
have made a sorry fist of "presenting their science to the world." When I spoke to him on the phone
from the United States this week, I asked about that assumption he'd encountered at Princeton-that
economists are "good with math and statistics" and not much else.
DR: Often we take it [mathematics] too far. There's a certain fetishism that
comes along with the use of math. And that shows up in two ways: one is that arguments which are
relatively straightforward, that can be put in a directly literary form, we feel we have mathematise
them. Sometimes, there's undue mathematisation or formalisation. We get so enamoured of the math
that the mathematical structure of models becomes an object of analysis. And that's one of the problems
with economic theory-that it often becomes applied mathematics, where the point is the mathematical
properties of the models. And so it becomes more and more peripheral to what economics should be
about, which is to look at social phenomena. But there's a much better appreciation today of the
role and also the limits of math in economics than there was 30 years ago.
JD: Right. You say in the book that one of the most significant developments
in economics over the past three decades or so has been the increasingly widespread use of empirical
methods.
Yes, that has definitely been a [sign of] great progress and has forced us to be much more grounded.
And it has squeezed out the space for mindless, abstract theorising or modelling for the sake
of modelling. But there's a tendency in parts of the profession [today] to believe that if you're
just doing empirical work, then you can do away with theory or with thinking about the models that
lie behind the particular empirical application. The point that is important to realise-and I'm not
sure if I make this sufficiently strongly in the book itself-is that it's impossible to interpret
any empirical evidence without either an implicit or, better still, an explicit model behind it.
So every time we make a causal assertion about the real world using data we are implicitly using
a model.
The idea of the economic model is one of the central concepts in the book. Where
does the explanatory power of economic models come from?
Models are stylised abstractions that lay bare the relationship between cause and effect.
I liken [models] to lab experiments. When you conduct an experiment in a lab, you're trying to isolate
the thing you're looking at.
You draw an interesting comparison between models and fables. You say that models, like
fables, leave out or abstract from certain aspects of the world as it is. And that, in your view,
is a strength, a feature, as you put it, rather than a bug.
As long as we don't forget that [the model we're using] is a model, not the
model. An immediate implication of what I just said, of the way I defined the usefulness of the model,
is that the model captures only one of many different causal effects. And it's going to be most useful
when we apply it to a real world setting where, in some sense, that causal effect is the dominant
one. But [we should not] forget that there will be other settings where other causal effects or other
models are more relevant.
A charge often made against economics, and which you try to rebut in the book, is that
many of its assumptions, particularly about the rationality of economic actors, are unrealistic.
To what extent does behavioural economics, which injects the insights of psychology into formal economic
modelling, take that kind of criticism for granted? Or, to put it another way, does behavioural economics
overturn or invalidate what you call the "garden-variety perfectly competitive market model"?
Yes, but it's only the latest a stream of models that have all had the effect of overturning the
central implication of the perfectly competitive model. We've known since the 19th century that a
market with a few firms would not produce the efficiency consequences of the perfectly competitive
model. Then, of course, in the 1970s there was the imperfect competition revolution, where it turns
out that, in the presence of asymmetric information, all kinds of consequences follow. So the behavioural
revolution isn't new in the sense of generating results that overturn the basic implications of the
perfectly competitive model. It's new in that it directly removes an assumption that had been at
the core of neoclassical theorising-the notion of individual rationality.
There's a tendency now to interpret the behavioural models as implying that we can now forget
about "rational man," that we can forget about all these optimising frameworks. And again I think
that's wrong. There are going to be settings in which the behavioural model provides important insights.
But it would be wrong to discard models in which rational behaviour plays an important role. The
trick is to know when to apply a behavioural approach and when to apply a rational approach.
You have a chapter entitled "When Economists Go Wrong" in which you argue that economists'
biggest mistake concerns the claims they often make for the general validity of certain assumptions
and models. The danger, in other words, is that of confusing a model with the model.
Right. In policy, that's where we fall on our faces repeatedly. When we are called on for policy
advice our biggest mistake is not drawing the links between the critical assumptions of a model and
the real world context with the same kind of rigour and systematic thinking that we exercise when
we're operating within a model.
You give a couple of examples in the book of the way theoretical errors can lead to policy
errors. The first example you give concerns the "efficient markets hypothesis". What role did an
overestimation of the scope and explanatory power of that hypothesis play in the run-up to the global
financial crisis of 2007-08?
If we take as our central model one under which the efficient markets hypothesis is correct-and
that's a model where there are a number of critical assumptions: one is rationality (we rule out
behavioural aspects like bandwagons, excessive optimism and so on); second, we rule out externalities
and agency problems-there's a natural tendency in the policy world to liberalise as many markets
as possible and to make regulation as light as possible. In the run-up to the financial crisis, if
you'd looked at the steady increase in house prices or the growth of the shadow banking system from
the perspective of the efficient markets hypothesis, they wouldn't have bothered you at all. You'd
tell a story about how wonderful financial liberalisation and innovation are-so many people, who
didn't have access before to mortgages, were now able to afford houses; here was a supreme example
of free markets providing social benefits.
But if you took the same [set of] facts, and applied the kind of models that people who had been
looking at sovereign debt crises in emerging markets had been developing-boom and bust cycles, behavioural
biases, agency problems, externalities, too-big-to-fail problems-if you applied those tools to the
same facts, you'd get a very different kind of story. I wish we'd put greater weight on stories of
the second kind rather than the first. We'd have been better off if we'd done so.
You also have a chapter on "Economics and Its Critics". To what extent does your point
about economists' tendency to overestimate the scope and power of their models neutralise some fairly
common criticisms of the discipline made by non-economists? Your point being, as I understand it,
that the problem is not so much with the models themselves as with economists' expectations of what
those models will yield.
What I'm claiming is that if economists were actually truer to their discipline and were to project
their discipline to the rest of the world as a collection of models, to a large extent it would help
neutralise the criticism that economists are [wedded to] one model in particular. You don't get a
reputation as a successful researcher by demonstrating that Adam Smith was right! You get a reputation
by showing that there are very circumstances in which he might have been wrong. But this richness,
this willingness to countenance non-free-market outcomes, is somehow rarely revealed to the outside
world.
Dani Rodrik's "Economics Rules: Why Economics Works, When It Fails, And How to Tell the Difference"
is published by Oxford University Press (£16.99)
"... STUDY: During the past three years, members of the Standard Poor's 500 Index have spent more than $1.5 trillion buying back stock ... US companies issued stock equal to $1.2 trillion last year. All told the new issues in 2014 exceeded share buybacks ... The conclusion is that what looks like buybacks are actually thinly veiled management-compensation plans. ..."
"... Looser monetary policy increases the value of existing assets but reduces the return on assets. So the impact it has on inequality is to increase it in the short run, but in the long run the first order* impact is zero. ..."
"... I doubt that trickle down, starve the beast, supply-side, sound money fantasies are really economics at all. They look now more like the supportive myths of a new, much more hierarchical social order. As such, they should be seen as modern equivalents of the Divine Right royal myth of the Ancien Regime, or even the claim of Dark Age warlords to be descendants of Woden. ..."
"Ben Bernanke, the Federal Reserve chairman when the QE programs were first launched, claimed
that asset purchases would have a "wealth effect": by the Fed purchasing bonds in such large amounts,
bond prices would rise, yields would fall, and investors would shift into riskier securities,
driving up the price of corporate shares and stock markets. Everyone would feel richer, businesses
would invest and consumers would spend more. This seems much like the theory of "trickle-down"
fiscal policy: that tax cuts for those with high incomes would be invested, thereby leading to
the hiring of additional workers and spreading the benefits to the rest of the economy. But like
the Bush administration's tax cuts, the Fed's monetary trickle-down has not worked so well. The
Fed's lending and asset purchase programs have effectively propped up Wall Street interests -- big
banks and financial markets -- but they have also neglected the needs of Main Street, including the
small community banks, small and moderate sized and family-owned businesses, unemployed and underemployed
workers, and state and local governments."
https://www.dissentmagazine.org/article/who-runs-federal-reserve-2008-crash
What's amazing: 'liberals' can see trickle down when it comes to tax cuts but not in monetary
policy. They march in lock step with Wall Street when it comes to monetary policy...which has
barely trickled down at all after seven years.
STUDY: "During the past three years, members of the Standard & Poor's 500 Index have spent
more than $1.5 trillion buying back stock ... US companies issued stock equal to $1.2 trillion
last year. All told the new issues in 2014 exceeded share buybacks ... The conclusion is that
what looks like buybacks are actually thinly veiled management-compensation plans."
It's apparently impossible for most to understand this ... but the most accurate way to describe
the first order distributional impact of looser monetary policy would be to say:
Looser monetary policy increases the value of existing assets but reduces the return on assets.
So the impact it has on inequality is to increase it in the short run, but in the long run the
first order* impact is zero.
*Of course, second order impacts are important here. But if we're counting those, we should probably
keep in mind the dynamics of the given situation, and the fact that workers in no way benefit
from letting the economy slide into depression.
Peter K. said...
WSJ:
"It's also notable that nearly all of the GOP candidates identify the Federal Reserve's post-crisis
monetary policy as a source of rising inequality "
I find it hard to believe that the Wall Street Journal or the GOP candidates actually think rising
inequality is a bad thing.
gordon said...
I doubt that "trickle down, starve the beast, supply-side, sound money fantasies" are really
economics at all. They look now more like the supportive myths of a new, much more hierarchical
social order. As such, they should be seen as modern equivalents of the Divine Right royal myth
of the Ancien Regime, or even the claim of Dark Age warlords to be descendants of Woden.
"... Is economics, as some assert, little more than a means of dressing up ideological arguments in scientific clothing? ..."
"... This certainly happens, especially among economists connected to politically driven think tanks – places like the Heritage Foundation come to mind. Economists who work for businesses also have a tendency to present evidence more like a lawyer advocating a particular position than a scientist trying to find out how the economy really works. ..."
"... No - we dont allow MDs to prescribe or treat on the basis of theory alone. Its unethical for any professional practitioner to give advice that is not supported by compelling evidence demonstrating that the advise is both safe and effective - First, do no harm. ..."
"... To a man, professional economists shill for the view that they are morally free to treat real economies and real people as their personal lab rats. As a group, economists are an ethically challenged bunch in this respect, and probably in other respects too. ..."
"... The rich plutocrats have a major stake in advocating very specific narratives, so they will throw large sums behind those narratives (and the fight against anything conflicting with them). ..."
"... What sort of opinions are economists allowed to have if they want tenure, want to be published in the major journals or want to make a living? ..."
"... Keynes concluded that government direction was necessary for a viable economy. Keynes interpreters in the US buried that idea, and thus became very important economists - guys like Paul Samuelson. The first ( and only) US book to faithfully represent Keynes ideas faded away soon after publication: http://news.stanford.edu/pr/93/931011Arc3112.html ..."
"... It is impossible to talk about economics without making essentially ideological distinctions. Private property and wage labor are not natural categories. Their adequacy as human practices therefore needs to be either defended or criticized. To simply take them as given is an ideological waffle that begs THE question. ..."
"... Economists thus SHOULD have, acknowledge and fully disclose their ideological biases. When evaluating evidence they should make every effort to set aside and overcome their biases. And they need to stay humble about how Sisyphean, incongruous and incomplete their attempts at objectivity are. ..."
"... And so - though we proceed slowly because of our ideologies, we might not proceed at all without them. - Joseph Schumpeter ..."
Do Economists Promote Ideology as Science?: Which is more important in determining the policy
positions of economists, ideology or evidence? Is economics, as some assert, little more than
a means of dressing up ideological arguments in scientific clothing?
This certainly happens, especially among economists connected to politically driven think tanks
– places like the Heritage Foundation come to mind. Economists who work for businesses also have
a tendency to present evidence more like a lawyer advocating a particular position than a scientist
trying to find out how the economy really works.
But what about academic economists who are supposed
to be searching for the truth no matter the political implications? Can we detect the same degree
of bias in their research and policy positions? ...
rayward said...
Thoma's assessment seems fair enough. I'd make the point that, for some academic economists, no
amount of evidence is sufficient to overcome their bias. "Where's the proof" is the refrain one hears
often. And then there's the question: what is evidence? The availability of lots of data is often
used to "prove" this or that theory, even when the "proof" is contrary to the historical evidence
one can see with her own eyes. Data used as obfuscation rather than clarification. I appreciate that
one historical event following another historical event does not prove causation, but what's better
proof than history.
RogerFox said...
"Shouldn't theory be a guide when the empirical evidence is unconvincing one way or the other?"
No - we don't allow MDs to prescribe or treat on the basis of theory alone. It's unethical for
any professional practitioner to give advice that is not supported by compelling evidence demonstrating
that the advise is both safe and effective - 'First, do no harm.'
To a man, professional economists shill for the view that they are morally free to treat real
economies and real people as their personal lab rats. As a group, economists are an ethically challenged
bunch in this respect, and probably in other respects too.
DeDude said...
Economics as a science is mainly hurt by two things.
The rich plutocrats have a major stake in advocating very specific narratives, so they will
throw large sums behind those narratives (and the fight against anything conflicting with them).
Economics does not have anything resembling the double blind placebo controlled trials that
help medicine fight off the narratives of those with money and power.
RGC said...
What sort of opinions are economists allowed to have if they want tenure, want to be published
in the major journals or want to make a living?
Keynes concluded that government direction was necessary for a viable economy. Keynes' "interpreters"
in the US buried that idea, and thus became very important economists - guys like Paul Samuelson.
The first ( and only) US book to faithfully represent Keynes' ideas faded away soon after publication: http://news.stanford.edu/pr/93/931011Arc3112.html
pete said...
I did not know there was a debate. Krugman summed it all up in Peddling Prosperity. Folks know
who pays the rent, and opine accordingly.
Syaloch said...
I think problems arise when economists are called upon by politicians or the media to give expert
advice.
Within the sciences, "We don't know the answer to that" is a perfectly acceptable response, and
in scientific fields where the stakes are low that response is generally accepted by the public as
well. "What is dark matter made of?" "We don't know yet, but we're working on it." But in politics,
where the stakes are higher, not having a definitive answer is viewed as a sign of weakness. How
often do you hear a politician responding to a "gotcha" question admit that they don't know the answer
rather than trying to BS their way through?
Given the timeliness of news coverage the media prefer to consult experts who offer definitive
answers, especially given their preference for pro/con type interviews which require experts on both
sides of an issue. Economists who are put on the spot this way feel pressured to ditch the error
bars and give unambiguous answers, even answers based purely on theory with little to no empirical
backing, and the more often they do this the more often they're invited back.
It is impossible to talk about economics without making essentially ideological distinctions.
Private property and wage labor are not "natural" categories. Their adequacy as human practices therefore
needs to be either defended or criticized. To simply take them "as given" is an ideological waffle
that begs THE question.
Economists thus SHOULD have, acknowledge and fully disclose their ideological biases. When evaluating
evidence they should make every effort to set aside and overcome their biases. And they need to stay
humble about how Sisyphean, incongruous and incomplete their attempts at objectivity are.
Let's not forget that "The End of Ideology" was a polemical tract aimed at designating the ideology
of the managers and symbol manipulators "above" and beyond ideology. Similarly, Marx's brilliant
critique of ideology degenerated into polemic as its practitioners adopted the mantle of "science."
The End of Ideology: On the Exhaustion of Political Ideas in the Fifties is a collection of essays
published in 1960 by Daniel Bell, who described himself as a "socialist in economics, a liberal in
politics, and a conservative in culture". He suggests that the older, grand-humanistic ideologies
derived from the nineteenth and early twentieth centuries had been exhausted, and that new, more
parochial ideologies would soon arise. He argues that political ideology has become irrelevant among
"sensible" people, and that the polity of the future would be driven by piecemeal technological adjustments
of the extant system.
A very big question! Like "what is the meaning of life?" At least a semester-long upper division
seminar course. ;-)
In a nutshell (to put it crudely), Marx labelled as ideologists a cohort of
German followers of Hegel's philosophy who envisioned historical progress as the result of the progressive
refinement of intellectual ideas. Marx argued instead that historical change resulted from struggle
between social classes over the material conditions of life, fundamental to which was the transformation
of nature through human intervention into means of subsistence.
Marx labelled as ideologists a cohort of German followers of Hegel's philosophy who envisioned historical
progress as the result of the progressive refinement of intellectual ideas. Marx argued instead that
historical change resulted from struggle between social classes over the material conditions of life,
fundamental to which was the transformation of nature through human intervention into means of subsistence.
[ What a superb introductory or summary explanation. I could not be more impressed or grateful. ]
Well said. I would add "markets" to that list of relatively recent cultural constructs that needs
greater scrutiny.
Chuck said...
"And so - though we proceed slowly because of our ideologies, we might not proceed at all without
them."
- Joseph Schumpeter, "Science and Ideology," The American Economic Review 39:2 (March 1949), at 359 http://www.jstor.org/stable/1812737
Many guys are not driven by ideology, rather than evidence. The problem with this article is that
we cannot compare with other professions and say "economists are more/less prone to promote ideology
than the average".
DrDick said in reply to Ignacio...
All human endeavors are shaped by "ideology" in many different ways. What is important is to be aware
of and explicit about their influences on our thought and action.
RC AKA Darryl, Ron said in reply to RC AKA
Darryl, Ron...
If there are two sides to an argument that radically disagree then it is possible that both sides
may be ideology, but both sides cannot be science. Only the correct argument can be science. Of course
ideology is a bit too kind of a word since the incorrect argument is actually just a con game by
people out to lay claim on greater unearned wealth.
ken melvin said...
Economists seem content with trying to figure out how to make 'it' work. Far better, I think, to
try and figure out how it should be.
It was philosophers such as Hume, Locke, Marx, Smith, Rawls, ... who asked the right questions. Laws
and economics come down to us according to how we think about such things; they change when we change
the way we think. Seems we're in a bit of a philosophical dry patch, here. Someday, we will have
to develop a better economic system, might be now. Likewise, there are laws rooted in antiquity that
were wrong then and are wrong still.
RC AKA Darryl, Ron said in reply to ken melvin...
Exactly! They all know what they are doing. Some of them are just trying to do the wrong thing.
Arne said...
"Ideology certainly influences which questions academic researchers believe are the most important,
but there is nothing wrong with that."
No "experiment" in economics comes with the degree of control
that experiments in physical sciences take for granted, so there is tremendous room for ideology
to come into the discussion of whether a data set really represents the conditions the model is supposed
to consider. Since reviewing another economist's study entails asking questions those questions...
DrDick said in reply to Arne...
Please describe the "experimentation" which takes place in astronomy and geology. Ideologies also
play important roles in experimental sciences, such as biology (for which we have a lot of evidence.
"... Of course, the Cato Institute, Heritage, and Team Republican economists are proud that their
opinions are bought and paid for. ..."
"... Most (all?) academic types are keenly aware of the importance of grantsmanship as a basic
skill. Knowing the appropriate funding sources and, in some cases, the interests and biases of
funding sources, is stock in trade. Scientific research has become so capital intensive that large
grants from government and large foundations are necessary to carry it out. For the most part,
the biases of the granting institutions are known and discounted. ..."
Is Money Corrupting Research?: The integrity of research and expert opinions in Washington
came into question last week, prompting the resignation of Robert Litan ... from his position
as a nonresident fellow at the Brookings Institution.
Senator Elizabeth Warren raised the issue
of a conflict of interest in Mr. Litan's testimony before a Senate committee... Senator Warren
was herself criticized by
economists and
pundits, on the left and right. ... But at stake is the integrity of the research process
and the trust the nation puts in experts, who advise governments and testify in Congress. Our
opinions shape government policy and judicial decisions. Even when we are paid to testify...,
integrity is expected from us. ...
Yet it is disingenuous for anybody (especially an economist) to believe that reputational incentives
do not matter. Had the conclusions not pleased the Capital Group, it would probably have found
a more compliant expert. And the reputation of not being "cooperative" would have haunted Mr.
Litan's career as a consultant. ...
Reputational ... concerns do not work as well with sealed expert-witness testimony or paid-for
policy papers that circulate only in small policy groups. ... A scarier possibility is that reputational
incentives do not work because the practice of bending an opinion for money is so widespread as
to be the norm. ...
He goes on to suggest some steps to strengthen the reputational incentive.
pgl said in reply to Larry...
"Businesses sometimes finance policy research much as advocacy groups or other interests
do," the economists wrote. "A reader can question the source of the financing on all sides,
but ultimately the quality of the work and the integrity of the author are paramount." They
praised Litan's quality and integrity as having been "impeccable over a career of four decades."
The fact of the matter is that funding comes from all sorts of places. One should always disclose
the sourcing of funding and then let one's writings stand scrutiny.
Of course, the Cato Institute, Heritage, and Team Republican economists are proud that their
"opinions" are bought and paid for.
Brookings fellow resigns after Senator Warren accuses him of conflicts
By SARAH N. LYNCH - Reuters
WASHINGTON
A prominent Brookings Institution fellow resigned on Tuesday, after Massachusetts Senator Elizabeth
Warren accused him of failing to fully disclose industry funding tied to a study that criticized
the U.S. Labor Department's plan to regulate brokerages.
The resignation of Robert Litan came just one day after Warren, a Democrat, sent Brookings'
president a letter demanding to know more about the think tank's policies on financial conflicts
and details about the communications between Litan and Capital Group, an investment firm that
funded his research paper.
"He has acknowledged that he made a mistake in not following Brookings regulations designed
to uphold the independence of the institution," Brookings President Strobe Talbott said in a statement
provided to Reuters.
Warren's concerns center a study that Litan and researcher Hal Singer jointly conducted which
examined a controversial plan by the Labor Department to try and rein in conflicts posed by brokers
who offer retirement advice.
The proposal has garnered fierce opposition from Wall Street, and Litan's study concluded that
the plan could harm consumers.
Litan testified about the study's findings in a July hearing before a U.S. Senate panel, in
which he represented himself as a fellow at Brookings.
The study was conducted by Litan and Singer in their capacity as staffers for Economists, Inc.,
a consulting firm.
Although his testimony and his study did disclose that Capital Group provided funding, Warren
said that she later learned this was not the full story.
In a series of follow-up questions Warren sent to Litan after the hearing, she said he disclosed
that Capital Group also provided feedback and editorial comments on a draft.
This, she said, ran counter to his claim at the hearing that he and Singer were "solely responsible"
for the study's conclusions.
In addition, he disclosed that Capital Group had paid Economists Inc $85,000 for the study,
and his share was $38,800.
In her letter to Brookings, Warren said the lack of disclosure raises "significant questions
about the impartiality of the study and its conclusions."
Litan, a former top official in the Clinton administration, did not respond to an email seeking
comment.
He is a well-known economics expert in Washington who has authored or co-authored over 25 books.
"We greatly appreciate all the good work Bob has done for Brookings over the 40-plus years
he has been connected to this institution," Talbott said.
According to Reuters, he failed to disclose his relationships
when presenting his report and when testifying, and seems to have lied:
"Although his testimony and his study did disclose that Capital Group provided funding, Warren
said that she later learned this was not the full story.
"In a series of follow-up questions Warren sent to Litan after the hearing, she said he disclosed
that Capital Group also provided feedback and editorial comments on a draft.
"This, she said, ran counter to his claim at the hearing that he and Singer were "solely responsible"
for the study's conclusions."
Can I edit anything you write and claim as solely your own work? I want to have my point of
view endorsed by a much larger group of writers, and the best way is for me to fix their writings.
It was not Litan being paid that was the problem, but the fact he claimed the words written
for him were his own as an "independent" authority.
Second Best said...
Money corrupts research as sure as the Pope is Catholic...
This is the actual paper of the model, but do not be afraid. Here are the highlights:
" HANDY is a 4-variable thought-experiment model for interaction of humans and nature.
The focus is on predicting long-term behavior rather than short-term forecasting.
Carrying Capacity is developed as a practical measure for forecasting collapses.
A sustainable steady state is shown to be possible in different types of societies.
But over-exploitation of either Labor or Nature results in a societal collapse."
There are equations. And graphs. The concluding paragraph of the abstract:
"The measure "Carrying Capacity" is developed and its estimation is shown to be a practical
means for early detection of a collapse. Mechanisms leading to two types of collapses are discussed.
The new dynamics of this model can also reproduce the irreversible collapses found in history.
Collapse can be avoided, and population can reach a steady state at maximum carrying capacity
if the rate of depletion of nature is reduced to a sustainable level and if resources are distributed
equitably."
This made the press about a year and a half ago, was commented on, but has since been ignored.
Google "Handy Model" for popular presentations and critiques.
You decide whether it should continue to be ignored, given the remarkable progress the world
has made towards remedying inequality, conserving resources, and controlling population growth.
(That's sarcasm.)
reason said...
There is another solution to this issue. Financing should never be direct to the researcher.
That way there is a funding body (say a university) that decides who researches what, and the
funding is channeled through them (through a public application process). If a firm is really
interested in disinterested research, no problem.
If it wants to control the research, they have a problem. Of course the whole funding body
could be corrupted but if there is a public review process that can be minimised.
cm said in reply to reason...
It is more subtle than asking for or implying a preference for specific results. Regardless
how the funding is distributed, except perhaps by lottery, there is the issue of "repeat business"
or expert shopping (cherry-picking research organizations that are known to fall in a particular
camp).
Then there is the issue of fads - even in relatively apolitical tech science, funding and research
flocks to certain hot topics, as people hunt for funding by trying to tie their proposal to the
current hot topics. But then this is perhaps more a consequence of an already corrupted funding
process that only supports R&D that conforms to current preconceived notions and business interests.
bakho said...
Money supports bias.
RC AKA Darryl, Ron said...
Money is power. Power corrupts.
mrrunangun said...
Most (all?) academic types are keenly aware of the importance of grantsmanship as a basic
skill. Knowing the appropriate funding sources and, in some cases, the interests and biases of
funding sources, is stock in trade. Scientific research has become so capital intensive that large
grants from government and large foundations are necessary to carry it out. For the most part,
the biases of the granting institutions are known and discounted.
Even in science, when research into a controversial area has been ambiguous enough for sustained
disagreement, it is common to find that a given research shop's work consistently comes down on
one side of the controversy and another shop's work consistently on the opposing side of the controversy.
In such cases, only people who follow the research in the area closely are likely to be aware
of this. Usually time and technical improvements in measuring equipment puts controversies to
rest, but the time is often measured in years. In these cases, the biases come from the leaders
of the research shops rather than the grantors.
There are politics among granting institutions as well. These are less often political biases
and more often they are of a personal nature, and since the people on a granting committee are
necessarily expert in the field that the grantee will be working in, they will often be personally
acquainted with the grant applicants. Not uncommonly, former students of the members of the committee.
Economics and long range climate science are necessarily model-based. Their short-term predictions
are often proven wrong which casts doubt on the reliability of their long-term predictions. As
a result, there may be legitimate differences of opinion as to the applicability of a particular
model to a particular situation.
In the case of Mr Litan, the fact that he acknowledged that his study was funded by Capital
and that he was testifying on behalf of the industry announce his bias.
GeorgeK said...
Tainted research is the norm in most industries, research dollar come from corporations that
expect their interest to be served. Currently Monsanto emails show how heavy handed this pay for
research problem has become. ...""Professors/researchers/scientists have a big white hat in this
debate and support in their states, from politicians to producers," Bill Mashek, a vice president
at Ketchum, a public relations firm hired by the biotechnology industry, said in an email to a
University of Florida professor. "Keep it up!"...
The antidote to this kind of crap is the public funded University with tenured professors and
sufficient resources (endowed Chairs) to conduct research without need to go out and get external
funding for a study. As the public funding is reduced in order to give tax cuts to the rich plutocrats
such truly independent research become more rare -and the plutocrats increasingly manage to own
the facts.
Alan Kirman is a great economist. Amazingly clear exposition of complex subjects.
Notable quotes:
"... I think what happened was on the one hand people became obsessed with proving
there was some sort of socially satisfactory situation that corresponded to markets in equilibrium,
and on the other hand, there was a lot of effort made, right up to the 1950s, to try to show
that a market or an economy would converge on that. But we gave up on that in the 70s when there
were results that showed that essentially we couldnt prove it. So the theoreticians gave up but
the underlying economic content and all of the ideology behind it has just kept going. We are
in a strange situation where on the one hand we say we should leave markets to themselves because
if they operate correctly and we get to an equilibrium this will be a socially satisfactory state.
..."
"... Nowadays, you hear all the
time about how neoliberal ideology and thought is invading European countries and is undoing forms
of governance that are actually working quite well. I work a lot in Norway and Scandinavia and
there you hear all the time that Nordic model works and at the same time it is being corrupted
by the neoliberal ideology, which is being spread in some sort of cancerous fashion. Please comment
on that-Current neoliberalism. What justifies it? Is it spreading? Is that a good thing or a bad
thing? Anything you would like to say on that topic. ..."
"... The idea that anything even close to laissez faire ever exisited is silly ..."
"... Laissez faire has never existed; it is code for when the govt allows the rich to trample
the poor, and the govt actively sides with the rich ..."
"... Too often, efficiency is modeled too simply, failing to capture important benefits. You
may make widgets with fewer workers and more unemployed but at the loss of workforce training,
most of which is on the job. ..."
"... You can reduce unit labor costs, which usually means reducing wages. But that has all sorts
of consequences, which are not perceived. ..."
"... If industry is freed by reducing their investment in human capital, replacement investment
in human capital must come from elsewhere in higher taxes on business to pay for training that
may be less effective. Else workforce quality declines and becomes a drag on overall economic
efficiency. ..."
AK: I think the basic story that really interests us is
that with the Enlightenment and with people like Adam Smith and David Hume, people had this idea
that somehow intrinsically people should be left to their own devices and this would lead society
to a state that was satisfactory in some sense for everybody, with some limits of course–law and
order and so on. That's the idea that is underlying our whole social and philosophical position
ever since. ... I think what happened was on the one hand people became obsessed with proving
there was some sort of socially satisfactory situation that corresponded to markets in equilibrium,
and on the other hand, there was a lot of effort made, right up to the 1950's, to try to show
that a market or an economy would converge on that. But we gave up on that in the 70's when there
were results that showed that essentially we couldn't prove it. So the theoreticians gave up but
the underlying economic content and all of the ideology behind it has just kept going. We are
in a strange situation where on the one hand we say we should leave markets to themselves because
if they operate correctly and we get to an equilibrium this will be a socially satisfactory state.
On the other hand, since we can't show that it gets there, we talk about economies that are
in equilibrium but that's a contradiction because the invisible hand suggests that there is a
mechanism that gets us there. And that's what we're lacking–a mechanism. ...
DSW: ...This has been a wonderful conversation, by the way. Nowadays, you hear all the
time about how neoliberal ideology and thought is invading European countries and is undoing forms
of governance that are actually working quite well. I work a lot in Norway and Scandinavia and
there you hear all the time that Nordic model works and at the same time it is being corrupted
by the neoliberal ideology, which is being spread in some sort of cancerous fashion. Please comment
on that-Current neoliberalism. What justifies it? Is it spreading? Is that a good thing or a bad
thing? Anything you would like to say on that topic.
AK: I think that one obsession that economists have is with efficiency. We're always, always,
worrying about efficiency. People like to say that this is efficient or not efficient. The argument
is, we know that if you free up markets you get a more efficient allocation of resources. That
obsession with efficiency has led us to say that we must remove some of these restraints and restrictions
and this sort of social aid that is built into the Scandinavian model. I think that's without
thinking carefully about the consequences. ...
I think what has happened is, because of this mythology about totally free markets being efficient,
we push for that all the time and in so doing, we started to do things like-for example, we hear
all the time that we have to reform labor markets in Europe. Why do we want to reform them? Because
then they'll be more competitive. You can reduce unit labor costs, which usually means reducing
wages. But that has all sorts of consequences, which are not perceived. In model that is more
complex, that sort of arrangement wouldn't necessarily be one that in your terms would be selected
for. When you do that, you make many people temporary workers. You have complete ease in hiring
and firing so that people are shifting jobs all the time. When they do that, we know that employers
then invest nothing in their human capital. ... We're reducing the overall human capital in society
by having an arrangement like that. ... Again, the idea that people who are out of work have chosen
to be out of work and by giving them a social cushion you induce them to be out of work-that simply
doesn't fit with the facts. I think that all the ramification of these measures-the side effects
and external effects-all of that gets left out and we have this very simple framework that says
"to be competitive, you just have to free everything up." That's what undermining the European
system. European and Scandinavian systems work pretty well. ... The last remark I would make is
that to say "you've got to get rid of all those rules and regulations you have"-in general, those
rules and regulations are there for a reason. Again, to use an evolutionary argument, they didn't
just appear, they got selected for. We put them in place because there was some problem, so just
to remove them without thinking about why they are there doesn't make a lot of sense. ...
DSW: There's no invisible hand to save the day.
AK: (laughs). Joe Stiglitz used to say that we also need a visible hand. The visible hand is
sometimes pretty useful. For example in the financial sector I think you really need a visible
hand and not an invisible hand. ...
e abrams said...
The idea that anything even close to laissez faire ever exisited is silly
at all stages, the gov't actively intervened in the economy; eg, look at the rules for labor
unions....
Laissez faire has never existed; it is code for when the gov't allows the rich to trample
the poor, and the gov't actively sides with the rich
bakho said...
I enjoyed the interview with Kirman. Thanks for posting.
Too often, efficiency is modeled too simply, failing to capture important benefits. You
may make widgets with fewer workers and more unemployed but at the loss of workforce training,
most of which is on the job. This is important:
You can reduce unit labor costs, which usually means reducing wages. But that has all sorts
of consequences, which are not perceived. In model that is more complex, that sort of arrangement
wouldn't necessarily be one that in your terms would be selected for. When ... you make many people
temporary workers.... so that people are shifting jobs all the time. ..employers then invest nothing
in their human capital. ... We're reducing the overall human capital in society .. If you're working
for ... all your lifetime, they probably invest quite a lot in you. ... it is a much more stable
arrangement. .. the ramification of these measures-the side effects and external effects... gets
left out and we have this very simple framework that says "to be competitive, you just have to
free everything up."
If industry is freed by reducing their investment in human capital, replacement investment
in human capital must come from elsewhere in higher taxes on business to pay for training that
may be less effective. Else workforce quality declines and becomes a drag on overall economic
efficiency.
"... That's the idea that is underlying our whole social and philosophical position ever since.
Economics is trying to run along side that. Initially the idea was to let everybody do what they want
and this would somehow self-organize. But nobody said what the mechanism was that would do the self-organization.
John Stewart Mill advanced the same position. He had the idea that people had to be given, as far as
their role would permit, the possibility of doing their own thing, and this would be in the interests
of everybody. And gradually we came up against this difficulty that we couldn't show economically, in
a market for example, how we would ever get to such a position. I think what happened was on the one
hand people became obsessed with proving there was some sort of socially satisfactory situation that
corresponded to markets in equilibrium, and on the other hand, there was a lot of effort made, right
up to the 1950's, to try to show that a market or an economy would converge on that. But we gave up
on that in the 70's when there were results that showed that essentially we couldn't prove it. So the
theoreticians gave up but the underlying economic content and all of the ideology behind it has just
kept going. We are in a strange situation where on the one hand we say we should leave markets to themselves
because if they operate correctly and we get to an equilibrium this will be a socially satisfactory
state. On the other hand, since we can't show that it gets there, we talk about economies that are in
equilibrium but that's a contradiction because the invisible hand suggests that there is a mechanism
that gets us there. And that's what we're lacking–a mechanism. Is that clear more or less? ..."
"... Theory of Moral Sentiments ..."
"... Nowadays, if you take a very primitive version of the invisible hand, people say something
like "greed is good". Somehow, if everyone is greedy and tries to serve their own interest, it will
get to a good position socially. Adam Smith didn't have that view at all. He had the view that people
have other things in mind. For example he said that one of the strongest motivations men have is to
be seen to be a good citizen and therefore would do things that would appear to other people to be good.
If you have motivations like that then you can be altruistic and you're not behaving like the strict
Homo economicus ..."
"... Walras wasn't someone who pushed hard for laissez faire, but he started to build the weapons
for trying to understand whether all markets could get into equilibrium. He wasn't so interested, himself,
on whether the equilibrium was good for society; in other words, Adam Smith's original position. I would
say that Walras was more a person who was worried about the very existence of equilibrium and he tried
desperately at various points to show how we might get there. I don't think he was arguing in favor
of laissez faire. I wouldn't regard Walras as being strictly in that tradition. ..."
"... Pareto was concerned about the idea of the invisible hand himself. He said: "Look, what I want
to show you is that the competitive equilibrium is a social optimum. He was the person to define what
we now call a Pareto optimum, a situation in which you cannot make one person better off without making
somebody else worse off-which is a pretty weak criterion, but still is a criterion for some sort of
social efficiency. He was interested in the relationship between the two, so he brought us back on track
to what I interpret as the invisible hand. Then, we can make a huge jump it you want to the first theorem
of welfare of economics. That, mistakenly, is often referred to as the invisible hand theorem. But it
is nothing about the invisible hand. It just says that if you are in a competitive equilibrium, then
that will be a Pareto optimum, in the sense that I have just mentioned. You couldn't make someone better
off without making someone else worse off. That's all it says. It does not say that if you leave a society
alone it will get there, but thousands of people have interpreted it in that way. ..."
"... He had a different position from Walras company and he wasn't very consistent in his views.
According to Hayek, Walras said that nobody influences prices but take prices as given, and then somebody,
not specified, adjusts them until they get to equilibrium. There is some mechanism out there. ..."
"... The Road to Serfdom ..."
"... He believed that people with little information of their own, like ants, would somehow collectively
get it right. It was a very different view of the world than Walras. ..."
"... he was a pioneer in two respects. First of all, he grasped the idea of self-organizing and
decentralized processes-that the intelligence is in the system, not in any individual, and secondly
cultural group selection, that the reason economic systems were like this is because of some past history
of better systems replacing worse systems. The wisdom of the system was the product of cultural group
selection, as we would put it today, and that we shouldn't question its wisdom by tampering with it.
Is that a fair thing to say? ..."
"... Yes, that's a fair thing to say and I think it is what Hayek believed. He didn't actually show
how it would happen but you're absolutely right-I think that's what he believed and he thought tampering
with this system would make it less perfect and work less well, so just leave it alone. I don't think
he had in mind, strictly speaking, group-level selection, but that's clearly his idea. A system that
works well will eventually come to outstrip other systems. That's why he was advising Thatcher. ..."
"... He was much less naïve than Friedman. Friedman has a primitive natural selection argument that
if firms aren't doing better than other firms they'll go bust and just die. That's a summary of Friedman's
evolutionary argument! But Hayek is much more sophisticated-you're absolutely right. ..."
"... Friedman and Hayek didn't see eye to eye at all, as I understand it. Hayek was actually very
concerned that Friedman and other mathematical economists took over the Mont Pelerin Society, if I understand
it correctly, but now let's put Friedman on center stage, and also the society as a whole and the creation
of all the think tanks, which caused the society to become politically influential. ..."
"... "Greed is Good" sounds so simplistic, but what all of this seems to do is to provide some moral
justification for individuals or corporations to pursue their own interests with a clear conscience.
It's a moral justification for "Greed is Good", despite all of the complexities and all of the mathematics-that's
what it seems to come down to. Am I wrong about that? ..."
"... Macroeconomic models are still all about equilibria, don't worry about how we got them, and
their nice efficient properties, and so forth. They are nothing to do with distribution and nothing
to do with disequilibrium. Two big strands of thought-Keynes and all the people who work on disequilibrium-they're
just out of it. We're still working as if underlying all of this, greed-we don't want to call it greed,
but something like greed-is good. ..."
"... Nowadays, you hear all the time about how neoliberal ideology and thought is invading European
countries and is undoing forms of governance that are actually working quite well. I work a lot in Norway
and Scandinavia and there you hear all the time that Nordic model works and at the same time it is being
corrupted by the neoliberal ideology, which is being spread in some sort of cancerous fashion. Please
comment on that-Current neoliberalism. ..."
"... We're always, always, worrying about efficiency. People like to say that this is efficient
or not efficient. The argument is, we know that if you free up markets you get a more efficient allocation
of resources. That obsession with efficiency has led us to say that we must remove some of these restraints
and restrictions and this sort of social aid that is built into the Scandinavian model. I think that's
without thinking carefully about the consequences. ..."
"... just to make my position clear, the idea of no regulations is absurd. For a system that is
basically well adapted to its environment, then most of its regulations are there for a reason, as you
say, but one of the things that everyone needs to know about evolution is that a lot of junk accumulates.
There is junk DNA and there is junk regulations. Not every regulation has a purpose just because it's
there, and when it comes to adapting to the future, that's a matter of new regulations and picking the
right one out of many that are wrong. The question would be, how do you create smart regulations? Knowing
that you need regulations, how do you create smart ones? That's our challenge and the challenge of someone
who appreciates complexity, as you do. How would you respond to that? ..."
What you always wanted to know about the "let it be" philosophy
I'll bet money that Alan Kirman
is the only economist with animated ants running around his email signature. Highly regarded by mainstream
economists, he is also a critic of equilibrium theory and proponent of new economic thinking that
takes complex systems theory into account. It was my privilege to work with Alan and Germany's Ernst
Strungmann Forum to organize a conference titled "Complexity
and Evolution: A New Synthesis for Economics" that was held in February 2015 and will result
in a volume published by the MIT press in 2016.
After the conference was over, I sought Alan out
to help me understand the complex history of laissez faire, the "let it be" philosophy that underlies
mainstream economic theory and public policy.
DSW: I'm so happy to talk with you about the concept of laissez faire, all the way back
to its origin, which as I understand it is during the Enlightenment. Then we can bring it up to date
with some of its formalized versions in economic theory. Tell me what you know about the early history
of laissez faire.
AK: I think the basic story that really interests us is that with the Enlightenment and
with people like Adam Smith and David Hume, people had this idea that somehow intrinsically people
should be left to their own devices and this would lead society to a state that was satisfactory
in some sense for everybody, with some limits of course–law and order and so on. That's the idea
that is underlying our whole social and philosophical position ever since. Economics is trying to
run along side that. Initially the idea was to let everybody do what they want and this would somehow
self-organize. But nobody said what the mechanism was that would do the self-organization. John Stewart
Mill advanced the same position. He had the idea that people had to be given, as far as their role
would permit, the possibility of doing their own thing, and this would be in the interests of everybody.
And gradually we came up against this difficulty that we couldn't show economically, in a market
for example, how we would ever get to such a position. I think what happened was on the one hand
people became obsessed with proving there was some sort of socially satisfactory situation that corresponded
to markets in equilibrium, and on the other hand, there was a lot of effort made, right up to the
1950's, to try to show that a market or an economy would converge on that. But we gave up on that
in the 70's when there were results that showed that essentially we couldn't prove it. So the theoreticians
gave up but the underlying economic content and all of the ideology behind it has just kept going.
We are in a strange situation where on the one hand we say we should leave markets to themselves
because if they operate correctly and we get to an equilibrium this will be a socially satisfactory
state. On the other hand, since we can't show that it gets there, we talk about economies that are
in equilibrium but that's a contradiction because the invisible hand suggests that there is a mechanism
that gets us there. And that's what we're lacking–a mechanism. Is that clear more or less?
DSW: Yes, but it was very fast! I want to pull us back to the early times and make a couple
of observations. First of all, that the first thinking about laissez faire came at a time when government
was monarchy and absolutist rule. The whole struggle of the Enlightenment, to have a more egalitarian
and inclusive society, was part of this. Am I right about that?
AK: Absolutely right. There was a social and philosophical revolution, precisely because
of that. Men were trying to liberate themselves from a very hierarchical and monarchical organization.
And economics tried to go along with that. There were good reasons and I think that even now there
is no reason to say that there is anything wrong with the liberal position. On the other hand, what
we can't show is that there is anything that would enable a liberal approach like that to get things
under control. So you're right. It was a reaction to very autocratic systems that led the whole of
the laissez faire and liberal position to develop.
DSW: Right. So laissez faire made a lot of sense against the background of monarchy and
controlling church and so on. Now I know that Adam Smith invoked the invisible hand metaphor only
three times in the entire corpus of his work and it is said that his first book on moral sentiments
is much more nuanced than the popular notion of the invisible hand. Could you speak a little more
on Adam Smith? On the one hand he's an advocate of laissez faire but on the other hand he is very
nuanced in both of his books but especially in his Theory of Moral Sentiments. What do you
have to say about that?
AK: Right. Adam Smith was fully cognizant of the fact that man is motivated by many things.
Nowadays, if you take a very primitive version of the invisible hand, people say something like
"greed is good". Somehow, if everyone is greedy and tries to serve their own interest, it will get
to a good position socially. Adam Smith didn't have that view at all. He had the view that people
have other things in mind. For example he said that one of the strongest motivations men have is
to be seen to be a good citizen and therefore would do things that would appear to other people to
be good. If you have motivations like that then you can be altruistic and you're not behaving like
the strict Homo economicus. Adam Smith didn't take the strong position that people left
entirely to their own selfish devices will make things OK. He had the view that man is much more
complicated and governed by his emotions. He talks a lot about sympathy, which we would now call
empathy.
DSW: That's great! Now let's talk about Walras and what his ambitions were to come up with
the first mathematical justification for laissez faire, as I understand it.
AK: Actually, Walras himself didn't talk so much about laissez faire. He at that time had
a very simple idea, that the amount of goods that people wanted to supply at a given price would
be the amount that people would want to buy; i.e, demand at that price, so if those two were equal
then that was the equilibrium price. Then he said that if we have many markets, how can we be sure
that they will simultaneously be cleared, because after all if you raise the price in one market
then that will effect the price in other markets. If you raise the price of bananas then the price
of oranges will be effected, and so forth. He said "my problem is to solve the market clearing for
all goods", but he was not so interested in the underlying philosophical context. Walras wasn't
someone who pushed hard for laissez faire, but he started to build the weapons for trying to understand
whether all markets could get into equilibrium. He wasn't so interested, himself, on whether the
equilibrium was good for society; in other words, Adam Smith's original position. I would say that
Walras was more a person who was worried about the very existence of equilibrium and he tried desperately
at various points to show how we might get there. I don't think he was arguing in favor of laissez
faire. I wouldn't regard Walras as being strictly in that tradition.
DSW: OK, that's new for me. So what about the rise of so-called neoclassical economics.
At what point did it become toward demonstrating what I understand is the first fundamental theorem
of economics-laissez faire leads to the common good and that being justified by some mathematical
apparatus. Where does that come from, if not from Walras?
AK: We missed a very important step, which is [Vilfredo] Pareto. Pareto was concerned
about the idea of the invisible hand himself. He said: "Look, what I want to show you is that the
competitive equilibrium is a social optimum. He was the person to define what we now call a Pareto
optimum, a situation in which you cannot make one person better off without making somebody else
worse off-which is a pretty weak criterion, but still is a criterion for some sort of social efficiency.
He was interested in the relationship between the two, so he brought us back on track to what I interpret
as the invisible hand. Then, we can make a huge jump it you want to the first theorem of welfare
of economics. That, mistakenly, is often referred to as the invisible hand theorem. But it is nothing
about the invisible hand. It just says that if you are in a competitive equilibrium, then that will
be a Pareto optimum, in the sense that I have just mentioned. You couldn't make someone better off
without making someone else worse off. That's all it says. It does not say that if you leave a society
alone it will get there, but thousands of people have interpreted it in that way.
DSW: OK. So where do we go from here? Tell me a little about agency theory, which is also
something that seems to imply, if I understand it, that the only responsibility of corporations is
to maximize their profits. The economy will work well if that's their only obligation.
AK: That's not exactly a sideline but a development where people are worrying about firms
in addition to individuals. When you are just dealing with individuals in a simple economy, when
they are exchanging goods there is no problem. When you get firms in there you need to ask "What's
the objectives of these firms?" The objective, the argument is, is if they maximize profit then they
are maximizing their shareholders' benefits and so therefore we get to the idea of increasing the
welfare of society as a whole. But there is a huge leap there, because we haven't specified closely
in our models who owns these firms and how ownership is transferred between these people. So I think
there is a fuzzy area there, which is not completely included in the theory.
DSW: Please give me a thumbnail history of the Mont Pelerin Society and the role it played
in advancing economic theory and policy. So this would be Hayek, Friedman and all that.
AK: The great hero of that society was Hayek. He had a different position from Walras
& company and he wasn't very consistent in his views. According to Hayek, Walras said that nobody
influences prices but take prices as given, and then somebody, not specified, adjusts them until
they get to equilibrium. There is some mechanism out there. That was Walras. Hayek said "Not
at all!" He said - actually he was a horrid man.
DSW: Wait a minute! Why was he a horrid man? You can't just glide over that!
AK: The reason I say that is-he had very clever ideas-but he was extremely bigoted, he
was racist. There is a wonderful interview with him that you can find on You Tube, where he says
(imitating Hayek's accent) "I am not a racist! People accuse me of being a racist. Now it's true
that some of the Indian students at the London School of Economics behave in a very nasty way, typical
of Indian people…" and he carries on like this. So that's one reason he is horrid. A second thing
is that if you don't believe he is horrid, David, I will send you his book The Road to Serfdom,
which said that if there is any planning going on in the economy, it will inevitably lead you to
a fascist situation. When he produced that book it had a big success, particularly in the United
States, and what is more, he authorized a comic book version of it, which is absolutely dreadful.
One Nobel Prize winner, [Ronald] Coase, said "you are carrying on so much against central planning,
you forget that a large part of our economy is actually governed by centrally planned institutions,
i.e., big firms, and these big firms are doing exactly what you say they can't do. Hayek shrugged
that off, but what he did in his book was say that if any planning goes on then eventually you are
all going to wind up in a fascist state where you'll be shot if you don't do what you're told to
do. At the end of the book there is some poor guy who's being shot because he wants to be a carpenter
or a plumber, or something like that. It's terrible! And the irony of the whole situation is that
comic book was issued and financed by General Motors, and GM of course is one of those corporations
that Hayek didn't see were centrally planned institutions. That's way I say that Hayek was a dreadful
person.
Hayek's idea was, there is no way that people could know what was going on and could know what
the prices of goods are. Everyone has a little piece of information of their own, and in acting upon
it, this news gets out into the market. So, for example I buy something such as a share, and you
say "Oh, Kirman bought a share, so something must be going on there, based on information that he
had that I didn't have", and so forth. Hayek's idea was that this mechanism-people watching each
other and getting information from their acts, would lead you to the equilibrium that would be a
socially optimal state. But again, he never specified closely what the mechanism was. He has little
examples, such as one about shortage of tin and how people would adjust, but never really specified
the mechanism. He believed that people with little information of their own, like ants, would
somehow collectively get it right. It was a very different view of the world than Walras.
DSW: So he was a pioneer in two respects. First of all, he grasped the idea of self-organizing
and decentralized processes-that the intelligence is in the system, not in any individual, and secondly
cultural group selection, that the reason economic systems were like this is because of some past
history of better systems replacing worse systems. The wisdom of the system was the product of cultural
group selection, as we would put it today, and that we shouldn't question its wisdom by tampering
with it. Is that a fair thing to say?
AK: Yes, that's a fair thing to say and I think it is what Hayek believed. He didn't
actually show how it would happen but you're absolutely right-I think that's what he believed and
he thought tampering with this system would make it less perfect and work less well, so just leave
it alone. I don't think he had in mind, strictly speaking, group-level selection, but that's clearly
his idea. A system that works well will eventually come to outstrip other systems. That's why he
was advising Thatcher. Just trust the markets and let things go. Get rid of the unions, and
so forth. So it's clearly he had in mind that interfering with that system would just lead you to
a worse social situation. He was much less naïve than Friedman. Friedman has a primitive natural
selection argument that if firms aren't doing better than other firms they'll go bust and just die.
That's a summary of Friedman's evolutionary argument! But Hayek is much more sophisticated-you're
absolutely right.
DSW: I think Hayek was explicit about cultural group selection, and Friedman-I've paid
quite a bit of attention to his 1953 article on positive economics, in which he makes a very naïve
evolutionary argument. Friedman and Hayek didn't see eye to eye at all, as I understand it. Hayek
was actually very concerned that Friedman and other mathematical economists took over the Mont Pelerin
Society, if I understand it correctly, but now let's put Friedman on center stage, and also the society
as a whole and the creation of all the think tanks, which caused the society to become politically
influential.
AK: Yes, I think that it coincided very nicely with conservative ideology and people who
had really strongly liberal-not in the Mills sense (you have to make this distinction particularly
in the United States where these words have different meanings), but really completely free market
leave-everybody-to-their own-thing libertarian point of view. Those people found it a wonderful place
to gather and reinforce themselves. And Hayek was a strong member of that. Another was Gary Becker,
but I don't know how directly. Becker had the economics of everything-divorce, whatever. You'd have
these simple arguments, but not necessarily selection arguments, often some sort of justification
in terms of a superior arrangement. The marginal utility of the woman getting divorced just has to
equal the marginal utility of not getting divorced and that would be the price of getting divorced,
and that sort of stuff. Adam Smith would have rolled over in this grave because he believed emotions
played a strong role in all of this and the emotions that you have during divorce don't tie into
these strict calculations.
DSW: This is a tailor-made ideology for powerful interests, powerful people and corporations
who simply do want to have their way. Is that a false statement to make?
AK: No, I think that's absolutely right. They can benefit from using that argument to advance
their own ends. As someone once said, if you think of saying to firms, we're going to diminish their
taxes, no firm in its right mind would argue with that. Even though they might think deep down that
there are other things that could be done for society. There are some things which are part of this
philosophy which is perfect for firms and powerful interest groups. You're absolutely right. And
so they lobby for this all the time, pushing for these positions that are in fact in their own interest.
DSW: So, at the end of the day, "Greed is Good" sounds so simplistic, but what all
of this seems to do is to provide some moral justification for individuals or corporations to pursue
their own interests with a clear conscience. It's a moral justification for "Greed is Good", despite
all of the complexities and all of the mathematics-that's what it seems to come down to. Am I wrong
about that?
AK: I think you're absolutely right. What's interesting is that if you look at various
economic situations, like today the first thing that people tell you about the Greeks is that they
are horrid ideological people. But the people on the other side have an equally strong ideology,
which is being justified by the sort of economic models that we are building. Remember that even
though we had this discussion about how this became a real difficulty in theoretical economics, in
macroeconomics they simply carried on as if these theoretical difficulties hadn't happened. Macroeconomic
models are still all about equilibria, don't worry about how we got them, and their nice efficient
properties, and so forth. They are nothing to do with distribution and nothing to do with disequilibrium.
Two big strands of thought-Keynes and all the people who work on disequilibrium-they're just out
of it. We're still working as if underlying all of this, greed-we don't want to call it greed, but
something like greed-is good.
DSW: Could I ask about Ayn Rand and what role she played, if any? On the one hand she was
not an economist, she was just a philosopher and novelist. On the other hand, she is right up there
in the pantheon of free market deities alone with Smith, Hayek and Friedman. Do you ever think about
Ayn Rand. Does any economist think about Ayn Rand?
AK: That's an example of my narrowness that I never read Ayn Rand, I just read about her.
I think it would be unfair now to make any comments about that because I'd be as uninformed as some
people who talk about Adam Smith. What I should do at some point is read some of her work, because
she is constantly being cited on both sides as a dark bad figure or as a heroine in the pantheon
as you said, with Hayek and everybody else. I just admit my ignorance and I don't know if Rand had
a serious position on her own or whether she is being cited as a more popular and easily accessible
figure.
DSW: Fine! I'd like to wrap this up with two questions. This has been a wonderful conversation,
by the way. Nowadays, you hear all the time about how neoliberal ideology and thought is invading
European countries and is undoing forms of governance that are actually working quite well. I work
a lot in Norway and Scandinavia and there you hear all the time that Nordic model works and at the
same time it is being corrupted by the neoliberal ideology, which is being spread in some sort of
cancerous fashion. Please comment on that-Current neoliberalism. What justifies it? Is it spreading?
Is that a good thing or a bad thing? Anything you would like to say on that topic.
AK: I think that one obsession that economists have is with efficiency. We're always,
always, worrying about efficiency. People like to say that this is efficient or not efficient. The
argument is, we know that if you free up markets you get a more efficient allocation of resources.
That obsession with efficiency has led us to say that we must remove some of these restraints and
restrictions and this sort of social aid that is built into the Scandinavian model. I think that's
without thinking carefully about the consequences. Let me tell you my favorite and probably
not very funny story about how economists are obsessed with efficiency. There were three people playing
golf; a priest, a psychoanalyst, and an economist. The got very upset because the guy in front was
playing extremely slowly and he had a caddy to help him. So these guys get very upset and they start
to shout and say "Come on, can we play through please! You can't waste all of our afternoon!" They
sent the priest up to find out what was going on and he came back absolutely crestfallen and said
"You know why that poor guy is laying so slowly? It's because he's blind. I'm so upset because every
Sunday I'm preaching to people to be nice to others." He turns to his psychoanalyst friend and say's
"Joe, what do you think?" Joe says "I have these guys on my coach every week. I'm trying to help
them live with this problem and here I am screaming at this guy. It's horrible!" Then they turn to
the economist and say "Fred, what do you think?" Fred says "I think that this situation is totally
inefficient. This guy should play at night!" As you can see, this is a very different attitude to
how the world works.
I think what has happened is, because of this mythology about totally free markets being efficient,
we push for that all the time and in so doing, we started to do things like-for example, we hear
all the time that we have to reform labor markets in Europe. Why do we want to reform them? Because
then they'll be more competitive. You can reduce unit labor costs, which usually means reducing wages.
But that has all sorts of consequences, which are not perceived. In model that is more complex, that
sort of arrangement wouldn't necessarily be one that in your terms would be selected for. When you
do that, you make many people temporary workers. You have complete ease in hiring and firing so that
people are shifting jobs all the time. When they do that, we know that employers then invest nothing
in their human capital. When you have a guy who may disappear tomorrow-and we have a lot of these
temporary agencies now in Europe–which send you people when you need them and take away people when
you don't. Employers don't spend anything on human capital. We're reducing the overall human capital
in society by having an arrangement like that. If you're working for Toyota, Toyota knows pretty
much that you'll be working all your lifetime, so they probably invest quite a lot in you. They make
you work hard for that, but nevertheless it is a much more stable arrangement. Again, the idea that
people who are out of work have chosen to be out of work and by giving them a social cushion you
induce them to be out of work-that simply doesn't fit with the facts. I think that all the ramification
of these measures-the side effects and external effects-all of that gets left out and we have this
very simple framework that says "to be competitive, you just have to free everything up." That's
what undermining the European system. European and Scandinavian systems work pretty well. Unemployment
is not that high in the Scandinavian system. It may be a little bit less efficient but it may also
be a society where people are a little bit more at ease with themselves, than they are in a society
where they are constantly worrying about what will happen to them next. The last remark I would make
is that to say "you've got to get rid of all those rules and regulations you have"-in general, those
rules and regulations are there for a reason. Again, to use an evolutionary argument, they didn't
just appear, they got selected for. We put them in place because there was some problem, so just
to remove them without thinking about why they are there doesn't make a lot of sense.
DSW: Right, but at the same time, a regulation is a like a mutation: for every one that's
beneficial there are a hundred that are deleterious. So…
AK: You are an American, deep at heart! You believe that all these regulations are dreadful.
Think of regulations about not allowing people to work too near a chain saw that's going full blast,
or not being allowed to work with asbestos and so forth. Those rules, I think, have a reason to be
there.
DSW: Well of course, but just to make my position clear, the idea of no regulations
is absurd. For a system that is basically well adapted to its environment, then most of its regulations
are there for a reason, as you say, but one of the things that everyone needs to know about evolution
is that a lot of junk accumulates. There is junk DNA and there is junk regulations. Not every regulation
has a purpose just because it's there, and when it comes to adapting to the future, that's a matter
of new regulations and picking the right one out of many that are wrong. The question would be, how
do you create smart regulations? Knowing that you need regulations, how do you create smart ones?
That's our challenge and the challenge of someone who appreciates complexity, as you do. How would
you respond to that?
AK: I think you're absolutely right. It's absolutely clear that as these regulations accumulate,
they weren't developed in harmony with each other, so you often get even contradictory regulations.
Every now and then, simplifying them is hugely beneficial. But that doesn't mean getting rid of regulations
in general. It means somehow managing to choose between them, and that's not necessarily a natural
process. For example, in France when I arrived here it used to take about a day and a half to make
my tax return. Now it takes around about 20 minutes, because some sensible guy realized that you
could simplify this whole thing and you could put a lot of stuff already into the form which they
have received. They have a lot of information from your employer and so forth. They've simplified
it to a point where it takes me about 20 minutes a year to do my tax return. It used to take a huge
amount of time.
DSW: Nice!
AK: What's interesting is that you have some intelligent person saying "let's look at this
and see if we can't make these rules much simpler, and they did. I have conflicting views, like you.
These things are usually there for a reason, so you shouldn't just throw them away, but how do you
select between them. I don't think that they necessarily select themselves out.
DSW: I would amend what you said. You said that some intelligent person figured out how
to make the tax system work better in France. Probably not just a single intelligent person. Probably
it was an intelligent process, which included intelligent people, but I think that gets us back to
the idea that we need systemic processes to evaluate and select so that we become adaptable systems.
But that will be systemic thing, not a smart individual.
AK: You're absolutely right. I shouldn't have said smart individual because what surely
happened was that there was a lot of pressure on the people who handle all of these things, and gradually
together they realized that this situation was becoming one where their work was becoming almost
impossible to achieve in the time available. So there was some collective pressure that led them
to form committees and things that thought about this and got it together. So it was a natural process
of a system, but it wasn't the rules themselves that selected themselves out, as it were. It was
the collectivity that evolved in that way to make it simpler.
DSW: There's no invisible hand to save the day.
AK: (laughs). Joe Stiglitz used to say that we also need a visible hand. The visible hand
is sometimes pretty useful. For example in the financial sector I think you really need a visible
hand and not an invisible hand.
DSW. That's great and a perfect way to end. I'm so happy to have had this conversation,
Alan, and to be working with you at the conference we just staged and into the future.
AK: A pleasure. Always good to talk with you.
Alan Kirman is professor emeritus of Economics at the University of Aix-Marseille III
and at the Ecole des Hautes Etudes en Sciences Sociales and is a member of the Institut Universitaire
de France. His Ph.D. is from Princeton and he has been professor of economics at Johns Hopkins University,
the Universite Libre de Bruxelles, Warwick University, and the European University Institute in Florence,
Italy. He was elected a fellow of the Econometric Society and of the European Economic Association
and was awarded the Humboldt Prize in Germany. He is member of the Institute for Advanced Study in
Princeton. He has published 150 articles in international scientific journals. He also is the author
and editor of twelve books, most recently
Complex Economics: Individual and Collective Rationality, which was published by Routledge in
July 2010.
"... In 1959, noted American
economist Moses Abramovitz cautioned that "we must be highly skeptical of the view that long-term
changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth
of output." ..."
"... In 2009, a commission of leading economists convened by President Nicolas Sarkozy of France and
chaired by Nobel laureate Joseph Stiglitz reported on the inadequacies of GDP. They noted well-known
issues such as the fact that GDP does not capture changes in the quality of the products (think of
mobile phones over the past 20 years) or the value of unpaid labor (caring for an elderly parent
in the home). The commission also cited evidence that GDP growth does not always correlate with increases
in measures of well-being such as health or self-reported happiness, and concluded that growing GDP
can have deleterious effects on the environment. ..."
"... Our issue isn't with GDP per se. As the English say, "It does what it says on the tin"-it measures
economic activity or output. Rather, our issue is with the nature of that activity itself. Our question
is whether the activities of our economy that are counted in GDP are truly enhancing the prosperity
of our society. ..."
"... Robert Shiller
of Yale University, who ironically shared this year's Nobel with Fama, showed in the early 1980s
that stock market prices did not always reflect fundamental value, and sometimes big gaps could open
up between the two. ..."
"... And therein lies the difference between a poor society and a prosperous one. It isn't the amount
of money that a society has in circulation, whether dollars, euros, beads, or wampum. Rather, it
is the availability of the things that create well-being-like antibiotics, air conditioning, safe
food, the ability to travel, and even frivolous things like video games. It is the availability of
these "solutions" to human problems-things that make life better on a relative basis-that makes us
prosperous. ..."
"... This is why prosperity in human societies can't be properly understood by just looking at monetary
measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems. ..."
The most basic measure we have of economic growth is gross domestic product. GDP was developed from
the work in the 1930s of the American economist Simon Kuznets and it became the standard way to measure
economic output following the 1944 Bretton Woods conference. But from the beginning, Kuznets and
other economists highlighted that GDP was not a measure of prosperity. In 1959, noted American
economist Moses Abramovitz cautioned that "we must be highly skeptical of the view that long-term
changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth
of output."
In 2009, a commission of leading economists convened by President Nicolas Sarkozy of France and
chaired by Nobel laureate Joseph Stiglitz reported on the inadequacies of GDP. They noted well-known
issues such as the fact that GDP does not capture changes in the quality of the products (think of
mobile phones over the past 20 years) or the value of unpaid labor (caring for an elderly parent
in the home). The commission also cited evidence that GDP growth does not always correlate with increases
in measures of well-being such as health or self-reported happiness, and concluded that growing GDP
can have deleterious effects on the environment. Some countries have experimented with other
metrics to augment GDP, such as Bhutan's "gross national happiness index."
Our issue isn't with GDP per se. As the English say, "It does what it says on the tin"-it measures
economic activity or output. Rather, our issue is with the nature of that activity itself. Our question
is whether the activities of our economy that are counted in GDP are truly enhancing the prosperity
of our society.
Since the field's beginnings, economists have been concerned with why one thing has more value than
another, and what conditions lead to greater prosperity-or social welfare, as economists call it.
Adam Smith's famous diamond-water paradox showed that quite often the market price of a thing does
not always reflect intuitive notions of its intrinsic value-diamonds, with little intrinsic value,
are typically far more expensive than water, which is essential for life. This is of course where
markets come into play-in most places, water is more abundant than diamonds, and so the law of supply
and demand determines that water is cheaper.
After lots of debate about the nature of economic value in the nineteenth and early twentieth
centuries, economists considered the issue largely settled by the mid-twentieth century. The great
French economist Gerard Debreu argued in his 1959 Theory of Value that if markets are competitive
and people are rational and have good information, then markets will automatically sort everything
out, ensuring that prices reflect supply and demand and allocate everything in such a way that everyone's
welfare is maximized, and that no one can be made better off without making someone else worse off.
In essence, the market price of something reflects a collective judgment of the value of that thing.
The idea of intrinsic value was always problematic because it was inherently relative and hard to
observe or measure. But market prices are cold hard facts. If market prices provide a collective
societal judgment of value and allocate goods to their most efficient and welfare-maximizing uses,
then we no longer have to worry about squishy ideas like intrinsic value; we just need to look at
the price of something to know its value.
Debreu was apolitical about his theory-in fact, he saw it as an exercise in abstract mathematics
and repeatedly warned about over-interpreting its applicability to real-world economies. However,
his work, as well as related work in that era by figures such as Kenneth Arrow and Paul Samuelson,
laid the foundations for economists such as Milton Friedman and Robert Lucas, who provided a devastating
critique of Keynesianism in the 1960s and '70s, and recent Nobel laureate Eugene Fama, who pioneered
the theory of efficient markets in finance in the 1970s and '80s. According to the neoclassical theory
that emerged from this era, if markets are efficient and thus "welfare-maximizing," then it follows
that we should minimize any distortions that move society away from this optimal state, whether it
is companies engaging in monopolistic behavior, unions interfering with labor markets, or governments
creating distortions through taxes and regulation.
These ideas became the intellectual touchstone of a resurgent conservative movement in the 1980s
and led to a wave of financial market deregulation that continued through the 1990s up until the
crash of 2008. Under this logic, if financial markets are the most competitive and efficient markets
in the world, then they should be minimally regulated. And innovations like complex derivatives must
be valuable, not just to the bankers earning big fees from creating them, but to those buying them
and to society as a whole. Any interference will reduce the efficiency of the market and reduce the
welfare of society. Likewise the enormous pay packets of the hedge-fund managers trading those derivatives
must reflect the value they are adding to society - they are making the market more efficient. In
efficient markets, if someone is willing to pay for something, it must be valuable. Price and value
are effectively the same thing.
Even before the crash, some economists were beginning to question these ideas. Robert Shiller
of Yale University, who ironically shared this year's Nobel with Fama, showed in the early 1980s
that stock market prices did not always reflect fundamental value, and sometimes big gaps could open
up between the two. Likewise, behavioral economists like Daniel Kahneman began showing that
real people didn't behave in the hyper-rational way that Debreu's theory assumed. Other researchers
in the 1980s and '90s, even Debreu's famous co-author Arrow, began to question the whole notion of
the economy naturally moving to a resting point or "equilibrium" where everyone's welfare is optimized.
An emerging twenty-first century view of the economy is that it is a dynamic, constantly evolving,
highly complex system-more like an ecosystem than a machine. In such a system, markets may be highly
innovative and effective, but they can sometimes be far from efficient. And likewise, people may
be clever, but they can sometimes be far from rational. So if markets are not always efficient and
people are not always rational, then the twentieth century mantra that price equals value may not
be right either. If this is the case, then what do terms like value, wealth, growth, and prosperity
mean?
Prosperity Isn't Money, It's Solutions
In every society, some people are better off than others. Discerning the differences is simple. When
someone has more money than most other people, we call him wealthy. But an important distinction
must be drawn between this kind of relative wealth and the societal wealth that we term "prosperity."
What it takes to make a society prosperous is far more complex than what it takes to make one individual
better off than another.
Most of us intuitively believe that the more money people have in a society, the more prosperous
that society must be. America's average household disposable income in 2010 was $38,001 versus $28,194
for Canada; therefore America is more prosperous than Canada.
But the idea that prosperity is simply "having money" can be easily disproved with a simple thought
experiment. (This thought experiment and other elements of this section are adapted from Eric Beinhocker's
The Origin of Wealth, Harvard Business School Press, 2006.) Imagine you had the $38,001 income of
a typical American but lived in a village among the Yanomami people, an isolated hunter-gatherer
tribe deep in the Brazilian rainforest. You'd easily be the richest Yanomamian (they don't use money
but anthropologists estimate their standard of living at the equivalent of about $90 per year). But
you'd still feel a lot poorer than the average American. Even after you'd fixed up your mud hut,
bought the best clay pots in the village, and eaten the finest Yanomami cuisine, all of your riches
still wouldn't get you antibiotics, air conditioning, or a comfy bed. And yet, even the poorest American
typically has access to these crucial elements of well-being.
And therein lies the difference between a poor society and a prosperous one. It isn't the amount
of money that a society has in circulation, whether dollars, euros, beads, or wampum. Rather, it
is the availability of the things that create well-being-like antibiotics, air conditioning, safe
food, the ability to travel, and even frivolous things like video games. It is the availability of
these "solutions" to human problems-things that make life better on a relative basis-that makes us
prosperous.
This is why prosperity in human societies can't be properly understood by just looking at monetary
measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems.
These solutions run from the prosaic, like a crunchier potato chip, to the profound, like cures for
deadly diseases. Ultimately, the measure of a society's wealth is the range of human problems that
it has found a way to solve and how available it has made those solutions to its citizens. Every
item in the huge retail stores that Americans shop in can be thought of as a solution to a different
kind of problem-how to eat, clothe ourselves, make our homes more comfortable, get around, entertain
ourselves, and so on. The more and better solutions available to us, the more prosperity we have.
The long arc of human progress can be thought of as an accumulation of such solutions, embodied in
the products and services of the economy. The Yanomami economy, typical of our hunter-gatherer ancestors
15,000 years ago, has a variety of products and services measured in the hundreds or thousands at
most. The variety of modern America's economy can be measured in the tens or even hundreds of billions.
Measured in dollars, Americans are more than 500 times richer than the Yanomami. Measured in access
to products and services that provide solutions to human problems, we are hundreds of millions of
times more prosperous.
"... The biggest lie is money and the notion that issuers of fiat currencies, sovereign
governments, are like households and need to balance deficit spending by borrowing the
shortfall in tax revenues. ..."
As an economist who was taught at the Australian National University in the 1980s, I know,
now, that the profession has more in common with PolSci than it has to do with math. Yet, we
had all those demand and supply graphs, ISLM, Phillips curves and so on. Very mathy, we even
did Economic Stats, Accounting and Comp Sci just to round off the notion that Economic
theories were like, say Physics, full of 'laws' that were immutable.
Non economists, most of the rest of you, I hope, can only imagine what it feels like to
know that much of what you read and thought about during those years of study was complete
crap as the syllabus failed to account for fraud, corruption, how money and debt works in
reality etc….
The biggest lie is money and the notion that issuers of fiat currencies, sovereign
governments, are like households and need to balance deficit spending by borrowing the
shortfall in tax revenues.
Hopefully, the new thinkers in the profession like Steve, can continue to spread their
message
Knute Rife, October 13, 2015 at 12:05 am
When I was an undergrad, I took macro and micro in very classical courses. It didn't take
long to see the "math" on the board was more conjuring than calculating. In law school I took
Law and Economics from an econ prof. There were about three of us in the class who had any
decent math. The prof's "calculations" had us constantly looking at one another. One day she
finally hit the limit. We pointed out to her that she had the central fraction reversed. She
stood back and said (I kid you not), "Oh well, it doesn't matter." I turned down the sound on
economic "calculations" in general after that.
Furzy Mouse, October 12, 2015 at 12:42 pm
Keen's talk….cannot read the subtitles….the screen is too small, even when I go to YouTube…
Have you tried your browser's zoom function? This is often CTRL-Plus. CTRL-Minus reduces
the size, and CTRL-Zero restores the default size.
low_integer, October 12, 2015 at 2:00 pm
If you put your cursor on the bottom right corner of the video and click, the video will
expand into full screen. It is one of the options in the bar that is only visible when your
cursor is at the bottom of the video area, from which you can also turn the subtitles on and
off. Also, press escape to exit full screen mode. Hope that makes sense
Faith in an Unregulated Free Market? Don't Fall for It: Perhaps
the most widely admired of all the economic theories taught in our
universities is the notion that an unregulated competitive economy
is optimal for everyone. ...
The problem is that these ideas are flawed. Along with George A.
Akerlof ... I have used behavioral economics to plumb the soundness
of these notions. ...
Don't get us wrong: George and I are certainly free-market
advocates. In fact, I have argued for years that we need more such
markets, like futures markets for
single-family home
prices or occupational incomes, or markets that would enable us
to trade claims on gross domestic product. I've written about these
things in this column.
But, at the same time, we both believe that standard economic
theory is typically overenthusiastic about unregulated free
markets. It usually ignores the fact that, given normal human
weaknesses, an unregulated competitive economy will inevitably
spawn an immense amount of manipulation and deception. ...
Current economic theory does recognize that if there is an
"externality" - say, a business polluting the air in the course of
producing the goods it sells - the outcome won't be optimal, and
most economists would agree that in such cases we need government
intervention.
But the problem of market-incentivized professional manipulation
and deception is fundamental, not an externality...
david said...
"But the problem of market-incentivized professional
manipulation and deception is fundamental, not an externality..."
Glad to see Shiller pushing this line.
But that's true of loads of what gets called externality --
that's the trouble with the term, it presumes some idyllic
unregulated market with just a few troubling side effects to
regulate away. The markets are made so that certain actors gain
rewards and others bear costs, fundamentally. Externality suggests
tweaks, but to go back to the Stavins bit from a few days ago, we
need to be thinking structure and power.
JohnH said...
An unregulated free market is a recipe for oligopoly and
monopoly, the very antithesis of a free market.
pgl said in reply to JohnH...
"The problem of market-incentivized professional manipulation
and deception is fundamental, not an externality" goes well beyond
anti-trust concerns."
Paul Mathis said...
Unregulated Free Markets Never Existed
Nearly 4,000 years ago the Babylonian King Hammurabi carved onto a
large stone a code of laws regulating contracts: the wages to be
paid to an ox driver or a surgeon, the liability of a builder for a
house that collapses, property that is damaged while left in the
care of another, etc. – Wikipedia.
Governments have been regulating and enforcing contracts ever
since because no economy can function without such regulation and
enforcement. And whenever government regulation is absent,
businesses collude to fix prices, divide up markets and drive out
competitors thereby nullifying any illusion of "free market"
competition.
GeorgeNYC said...
Just ask any "free market" advocate if they believe that the
stock market is a good example of their vision for a "free market".
They will invariably say "yes" as the stock market is the cathedral
of religious capitalism.
Point out to them that the "stock market" is actually one of the
most highly regulated "markets" with strict disclosure requirements
(enforced by the government) and insider trading prohibitions (also
enforced by the government), to name but a few, without which much
of our faith in the "market" would be completely eliminated (and
whose weak enforcement invariably lead to concerns about fraud). Of
course, there are also a huge number of "private" regulations that
ultimately have the force of the government behind them in that
they allow for exchanges to "self-regulate".
Most people do not understand that force is required to maintain
the type of transparency needed to allow the proper information
flow necessary to actually have a market work with true efficiency.
"Free" is a complete misnomer. "Open" would probably be better term
although that does not really fully capture the requirements.
likbez said in reply to GeorgeNYC...
That's brilliant: "the stock market is the cathedral of
religious capitalism".
The term "free market" became symbol of faith for neoliberalism and
obtained distinct religious overtones. Because neoliberalism is in
reality a secular religion. That's why neoliberalism is often
called casino capitalism.
And at the same time it is powerful instrument of propaganda of
neoliberalism, a very skillful deception that masks what is in
practice the advocacy of the law of jungle.
Advocates of "free market" (note that they never use the term
"fair market") are lavishly paid by Wall Street for one specific
purpose: first to restore and now to maintain the absolute
dominance of financial oligarchy which now successfully positioned
itself above the law. Kind of return to feudalism on a new level.
Bud Meyers said...
Great posts on this topic:
Free Markets are Fraudulent Markets (by Eric L. Prentis)
How the Financial Elite Con Us into Wanting the Wrong Thing
Competitive or self-regulating
market economies promote dynamic creative destruction and rebirth-led by people's needs, wants and
desires, thus properly directing economic progress. Historically, competitive market economies are
a relatively new economic system, and while very productive, they are not self-sustaining, are unstable
and require significant state support and regulation to function properly.
Nevertheless, self-regulating market economies are superior to other political-economic systems-such
as dictatorial fascism or autocratic communism-however, the state can mismanage them.
History of Market Economies
Market economies are nonexistent during primitive times, and even during feudal times, markets
trade local goods and remain small, with no tendency to grow. External foreign markets carry only
specialty items-such as spices, salted fish and wine. Foreign trade does not begin in feudal societies,
between individuals, but is only sanctioned by civic leaders-between whole communities.
During feudal times, markets for local community goods do not mix with markets for goods that
come from afar. Local and external foreign markets differ in size, origin and function-are strictly
segregated, and neither market is permitted to enter the countryside.
Feudal society transitions into the mercantile society of the 16th to late 18th
centuries, where the state monopolizes the economic system, for the state's benefit. Colonies are
forbidden to trade with other countries, and workers' wages are restricted. However, mercantilism
proves divisive; fostering imperialism, colonialism and many wars between the Great Powers. Market
economies have yet to arrive, and would not do so until after 1790.
During the Industrial Revolution, production processes transition from hand crafting methods that
supply only the local community, into mechanized manufacturing; thereby vastly increasing production,
driving down costs and increasing wealth. The source of a person's income is now the result of product
sales to far-off, unknown customers. Private business entrepreneurs are the driving force pushing
the state to institute the market economy, thereby protecting the sale of their goods in far-off
lands.
Unfortunately, in practice, market economies result in corporate monopolies. Corporations may
use a product dumping predatory pricing strategy, by charging less than their cost to produce, in
a specific market, in order to drive weaker, smaller competitors out of business, and then significantly
raise prices at a later date, in order to gouge the consumer. If the monopoly is in a vital economic
area and the company institutes monopoly pricing to overcharge the consumer, only the state has the
power to protect the market economy from monopolistic inefficiencies and break up the offending company;
thus reinstituting competitive pricing. As a result, government regulations and market economies
develop simultaneously.
Laws & Regulations Are Necessary
Leaving business a free hand, especially when dealing with far off customers, leads to misrepresentations,
shoddy practices and fraud. The food industry is an example.
Upton Sinclair writes The Jungle (1906), exposing the disgusting unsanitary conditions
in the Chicago meatpacking industry, during the early 20th century. Public uproar prompts
President Theodore Roosevelt to pass the Pure Food and Drug Act of 1906 and the Meat Inspection Act.
Roosevelt says that government laws and regulations are the only way to restrain the arrogant and
selfish greed of the capitalist system.
Shocking examples of food fraud in 2013 highlight the need for enforcing government regulations.
Inspectors uncover corporations selling horse meat as beef, and routinely mislabeling about 40% of
the fish served in U.S. restaurants. Cheap rockfish and tilapia are substituted and sold as
expensive snapper, and restaurateurs frequently switch escolar for white tuna, causing diners to
suffer indigestion.
Over 70% of the tilapia sold in the U.S. is imported from Asia, and only 2% is inspected by the
Food and Drug Administration. Much of this Asian farm raised tilapia is "filthy fish," where pesticides
and manure run off into the tilapia raising ponds, causing infections. Or the tilapia is raised in
polluted Asian rivers. Americans are impairing their health by unknowingly eating filthy Asian tilapia,
fraudulently substituted in U.S. restaurants for the healthy fish ordered.
Other fraudulently mislabeled foods include sausage, organic foods, energy drinks, milk and eggs.
Without sanitary food preparation standards, set and fairly enforced by the government-Americans
will soon return to naively eating rat droppings-so, unknown to them, CEOs can meet Wall Street earnings
expectations.
Departments of Weights and Measures (DWMs) at the state and federal level develop "uniform laws,
regulations and methods of practice" that impact about 50% of U.S. GDP-to ensure there is equity
between buyers and sellers in commercial transactions.
Because gasoline stations routinely pumped less gas then charged for, DWMs now ensure the accuracy
of gasoline pumps, octane levels, labeling and restricting water in gasoline. Butchers used to add
lead weights to the chest cavity of the poultry sold, prior to weighing, then noiselessly dumped
the weights out into an unseen padded draw before the bird was held up for the customer's inspection,
thereby swindling their trusting patrons.
Without the state to step in to punish fraudulent wrongdoers, dishonest business practices would
be widespread. Consumer trust, in everyday market transactions, is paramount for market economies
to function effectively and efficiently-making government regulations vitally important.
Without regulation and transparency, bad businesses drive out good businesses, following Gresham's
Law. The economic system then atrophies, with a loss of trust in the marketplace.
What is lost is not just the money on an inferior product or service, in the short run, but more
importantly, the bad businesses may use their outsized profits to buy political protection and start
changing laws, to make new laws favorable only for them-thereby damaging the market economy and reducing
the state's economic growth and welfare.
Competitive Market Economies
An economic market system capable of directing the whole of economic life, without out-side help
or interference, is called self-regulating. Once the self-regulating or competitive market economy
is designed and implemented by the state, to give all participants an equal opportunity for success,
the self-regulating market is to be let alone by the state and allowed to function according to laws
and regulations, without after-the-fact government intrusions-regardless of the expected consequences.
Those in Western societies are told that competitive market economies, which have self-regulated
prices for land, labor and money, set solely by the market, are normal, and that human beings develop
market economies on their own, without help from the state, which is the proof of human progress.
Also, that market institutions will arise naturally and spontaneously, if only persons are left alone
to pursue their economic interests, free from government control. This is incorrect.
Throughout most of human history, self-regulating markets are unnatural and exceptional. Human
beings are forced into the self-regulating market economy, by the state. Look at the following false
competitive market economy assumptions.
We are told people naturally bartered goods. Actually, human beings, down through history, have
no predilection to barter. Social anthropology says that assuming tribal and feudal men and women
bartered are rationalist constructs, with no basis in fact. Market economies are the result of often
violent government directives, implemented for society's eventual improvement.
The assumption is man is a trader by nature, and that any different human behavior is an artificial
economic construct. By not interfering in human behavior, markets will spring up spontaneously. Social
anthropology disproves this.
Neoliberal Economic Theory
Originally, neoliberal economic theory means, "free enterprise, competitive markets, the priority
of the market price setting mechanism, and a strong and impartial state-to ensure it all functions
properly."
The Mont Pelerin Society, led by Dr. Milton Friedman, supports Hayek's economic theories, based
on "free market" ideology and help change neoliberal economic theory by rejecting government regulation-calling
it inefficient. In addition, financial economists at the University of Chicago School of Business
promote the efficient market hypothesis or theory (EMT), supporting the Mont Pelerin Society's conjecture.
Thus, the primacy of deregulated or "free markets" becomes mainstream within academe in the 1970s.
Large corporations then use "free market fundamentalism" to their advantage, by lobbying the U.S.
Congress to pass legislation beneficial to them.
Some think that "free markets" are a matter of degree, and the practical issues of implementation
are paramount. This is incorrect, and will not resolve the current "free market fundamentalism" debate.
Instead, the real issue is semantics. Notice how quickly those with a political
agenda change the debate from "competitive markets," which require state regulations and are highly
productive-to "free markets," which result in fraudulent marketplace behavior, crony capitalism and
weak economic growth.
Using the term "free markets" is an Orwellian ruse, designed to change the focus in the public's
mind from, "those in authority have to do better" to "those in authority know best, therefore, let
them have their way."
Today, neoliberal economic dogma promotes "free market fundamentalism" of reducing the size of
government through the privatization of government services, deregulation and globalization. Privatization
professes to reduce the state's authority over the economy, but state money is used by private companies
to lobby legislators, to change laws, which will increase the government's demand for these same
private corporation services. Privatization of government services by corporations does not promote
the common good, only corporations' private profits.
Neoliberal "free market" economists have doubled down on the failed liberal economic theory, with
the ongoing 2008 credit crisis as the result.
Free Markets Are Impractical
"Free markets" are free from state intervention, i.e., unfettered capitalism. Those who understand
how markets function realize this is an impractical view-simply a rhetorical device-using the popular
word "freedom" to mask its real purpose.
"Free markets" are a fantasy, far outside the realm of practicality, used by wealthy international
corporations to bully governments and labor, to get their way. The reality is a competitive market
economy requires powerful complex opposing interests, mediated by government, to produce an efficient
and effective economy that supplies the most to the many, which includes the common good.
Free Market Fundamentalism Leads To Economic Disaster
Nowhere is "free market fundamentalism" more highly trumpeted by neoliberal economists than in
the financial markets. The foundation of neoliberalism is, "a deregulated financial sector will regulate
itself efficiently, making better use of capital, thus ushering in a new age of prosperity."
Tragically, the massive deregulation of the financial markets during the Clinton and Bush presidencies,
results in the ongoing 2008 credit crisis-which the U.S. Government Accountability Office reports
has cost the U.S. economy about $13 trillion dollars in lost GDP output.
"Free market" apologists ingenuously explain the 2008 credit crisis is not caused by "free markets,"
but because government regulations are not loose enough. All "free market" failures are dismissed
by the financial elite, because of cognitive dissonance. Bankers and neoliberal economists want to
believe in what is making them richer and more important. This is the same logic used by those in
charge in the USSR, when communism failed, "it wasn't being applied purely enough."
Free Market Ideology in Practice
"Free market," ideology, as practiced today, is the opposite of what is stated.
Instead, governments step in to save insolvent banks and large international corporations, when they
make bankrupting mistakes, and give the bill to the taxpayer. This transforms the difficult but manageable
ongoing 2008 credit crisis, into a much larger and dangerous sovereign bankruptcy crisis, with potentially
calamitous political consequences.
"Free markets" usher in unfettered capitalism, unleashing the "law of the jungle" and a "dog-eat-dog
world" that fosters fraud and corruption. Human beings, no matter their station in life, cannot be
trusted to always do the right thing, especially in a competitive situation. Doing away with laws
or regulations so those in power know it is impossible to be caught or penalized does not stop them
from acting improperly. Only criminal punishment and public disgrace accomplish that.
The resulting "free market" business jungle includes monopolies, coercion, fraud, theft, parasitism,
crony cabals and racketeering. Ironically, unfettered "free markets" are not free, but increase injustice,
making the economic system inefficient. Only government laws and regulations can keep markets competitive.
The EMT Supporting Free Markets Is Wrong
New scientific evidence on the efficient market hypothesis or theory (EMT), shows University of
Chicago School of Business researchers ask the wrong questions, use erroneous data and an incorrect
research method to analyze the data, and then jump to false conclusions, based on half-truths-please
read further in my journal articles:
link,link and
link.
The EMT and "free market fundamentalism" are false gods.
Conclusion
Markets are not efficient, based on the data. Consequently, "free markets" have no theoretical
foundation. Therefore, reject the incorrect theory of "free market fundamentalism" It is impractical
and dangerous, leading us into the ongoing 2008 credit crisis.
Competitive market economies only function properly by having fair laws and regulations, set up
and impartially enforced, by a strong state. Dr. Robert M. Solow, 1987 Nobel Prize Winner in Economics
and MIT Institute Professor Emeritus says, "The switch to talk about "free" markets diverts attention
from these deficiencies and suggests that any attempts at corrective regulation are instead limitations
on freedom."
Neoliberal" free market fundamentalists" in business use "free market" ideology as a negotiation
ploy. Do not succumb to this ruse. The U.S. requires "competitive markets for economic growth," not
"free markets for fraud."
"... There is no and never has been "economics". Only political economy. That means that
neoliberal "Flat Earth Theories" will be enforced, by force if necessary. ..."
"... Blanchard is a pro system guy. A maintainer not a disrupter. When he lauds the thousand
schools cacophony, it's simply to spread caution about government macro engineering ..."
...IMF Survey: In pushing the envelope, you also hosted three major Rethinking Macroeconomics
conferences. What were the key insights and what are the key concerns on the macroeconomic front?
Blanchard:
Let me start with the obvious answer: That mainstream macroeconomics had
taken the financial system for granted. The typical macro treatment of finance was a set of arbitrage
equations, under the assumption that we did not need to look at who was doing what on Wall Street.
That turned out to be badly wrong.
But let me give you a few less obvious answers:
The financial crisis raises a potentially existential crisis for macroeconomics. Practical
macro is based on the assumption that there are fairly stable aggregate relations, so we do not
need to keep track of each individual, firm, or financial institution-that we do not need to understand
the details of the micro plumbing. We have learned that the plumbing, especially the financial
plumbing, matters: the same aggregates can hide serious macro problems. How do we do macro then?
As a result of the crisis, a hundred intellectual flowers are blooming. Some are very old flowers:
Hyman Minsky's financial instability hypothesis. Kaldorian models of growth and inequality. Some
propositions that would have been considered anathema in the past are being proposed by "serious"
economists: For example, monetary financing of the fiscal deficit. Some fundamental assumptions
are being challenged, for example the clean separation between cycles and trends: Hysteresis is
making a comeback. Some of the econometric tools, based on a vision of the world as being stationary
around a trend, are being challenged. This is all for the best.
Finally, there is a clear swing of the pendulum away from markets towards government intervention,
be it macro prudential tools, capital controls, etc. Most macroeconomists are now solidly in a
second best world. But this shift is happening with a twist-that is, with much skepticism about
the efficiency of government intervention. ...
pgl said...
"That mainstream macroeconomics had taken the financial system for granted. The typical macro
treatment of finance was a set of arbitrage equations, under the assumption that we did not need
to look at who was doing what on Wall Street. That turned out to be badly wrong."
Ah yes - the Efficient Markets Hypothesis (EMH). Nice academic theory but Wall Street exists
because they are deviations from EMH. And the scale of operations there - even the slightest deviation
can generate huge profits for them. And when the rest of us are not careful - huge costs to the
rest of the world.
It is not that these deviations are not known and how to address the downsides of them are
that complicated. What is complicated is making sure Congress and not and paid for by the Wall
Street crowd. Dodd-Frank was a nice start. It is a same that our expert on everything - Rusty
- has joined in the chorus to get rid of Dodd-Frank.
RC AKA Darryl, Ron said in reply to djb...
"now its getting spooky"
[Welcome to my world. I have always been ahead of trend, but usually
by several decades rather than just a few hours :<)
I would venture that you don't know the half of it yet. Let me elucidate.]
"...Olivier Blanchard will step down as Economic Counsellor and Director of the IMF's Research
Department at the end of September.
He will join the Peterson Institute for International Economics in October as the first C.
Fred Bergsten senior fellow, a post named for the founder of the influential 35-year-old, Washington-based
think tank..."
[Now tell me how that you can imagine anyone to be more mainstream status quo establishment
than that in the general spectrum of academic research and study economics? The plot thickens.
Like I said earlier today, we have been solidly in a Second Best world practically since FDR died
from the perspective of economics as a socio-political discipline exercised for the common good
in any manner discernible by the wage class.
The social expression of our anxiety and grief post-2008 is being played out in compartmentalized
parallel tracts organized by socio-economic class. We are experiencing denial, anger, bargaining,
depression and acceptance all at once now. Since the crisis was caused by the conservative agenda
of financial innovation and deregulation then they are expressing most of the denial. People that
lost their jobs and homes are expressing much of the anger, but a threatened white male population
deeply invested in the emotional capital of white supremacy and chauvinism is even louder in their
anger (and they are having a Tea Party to get to know each other and celebrate being white men).
Elites are doing the bargaining because they really don't want to lose establishment control to
populists. Folk that still don't have a job or a home are expressing the depression. Finally most
people that do have a home and a job that do not fall into any of the other groups are expressing
the acceptance.
Me? I recently got laid off, but was lucky enough having just turned 66 that with six years
service credit taken from my severance benefits added to my pension plus what little I had in
457 and 401 plans then I could retire and still pay my bills including four more years of mortgage
and HELOC payments. So, I am a bit cash strapped presently but have time to work on some projects.
I have been waiting to get the establishment on the ropes for nearly fifty years. So, I am not
healing from grief. I have been released and am looking for an opportunity to get the establishment
on its intellectual ropes.
I thought it was getting spooky when I first began to learn about mainstream economic thought
regarding capital gains windfalls, corporate mergers, and financial "innovation" in the mid-sixties.
For the first time in my life I am beginning to see a tiny glimmer of it starting to get real.]
JohnH said...
"Mainstream macroeconomics had taken the financial system for granted."
It's actually worse than that. Mainstream macroeconomics willfully ignores the impact of
rising asset prices on inequality, democracy, and power dynamics between the 1% and the rest.
Cui bono from their willful negligence? The powerful and wealthy, of course!
Amateur said...
I'm a fan of Olivier.
The leaders of the IMF were in a unique position to see new insights into our macro problems
because they are largely caused by the globalization of capital flows and labor.
I think he's getting there, but I suspect the old frameworks are still going to be an
impediment to mainstream economic thinking.
I'm glad to hear there are more people that we might be aware of that are rethinking macro in
this context.
Dan Kervick said...
"The plumbing matters."
Yes, that's it. I hope that is the main lesson the economics profession takes away from the
current crisis. It would be nice if we get a new generation of practitioners who think a bit
more like engineers and technicians, and less like mathematical physicists.
Paul Mathis
"Some propositions that would have been considered anathema in the past are being
proposed by "serious" economists: For example, monetary financing of the fiscal deficit."
Wasn't Keynes a "serious" economist? Monetary financing of the fiscal deficit was his idea
80 years ago. Today's economists are just getting the message.
likbez said...
There is no and never has been "economics". Only political economy. That means that
neoliberal "Flat Earth Theories" will be enforced, by force if necessary.
greg said...
Pathetic half measures. No need to question any of the fundamental assumptions underlying
the whole sorry mess, eh? Like what is money, really? Or: How does the production of the
various sectors actually combine to create value in the whole economy?
Matt Young said...
Macroeconomists are not up to speed? How long has this been going on? Ever since the
Kanosian dandy from England. Sick, sick and fraudulent science.
RC AKA Darryl, Ron said in reply to djb...
That is a good start. You just need to get the context switch straight and then you may
find yourself in an epiphany (metaphorically speaking). Likbez up thread touches another live
wire, but lacks faith in democratic alternatives. Shocking!
Larry said...
No mention of the end of the ZLB? Of NGDP targeting? Of the missing trade-off between
inflation and unemployment? Of the abject failures of governments/CBs to respond to the crisis
and restore normal times? Of new levers such as reverse repos, QE and IoER? Maybe the excerpt
was ill-chosen...
Davis X. Machina said in reply to Larry...
"Of the abject failures of governments/CBs to respond to the crisis and restore
normal times?"
"Normal" for whom, and at whose expense?
Squint just right, and this *is* normal.
Paine said...
Blanchard is a pro system guy. A maintainer not a disrupter. When he lauds the thousand
schools cacophony, it's simply to spread caution about government macro engineering
We've recently learned doing the right sorts of interventions but too cautiously.
Works more like " Let the markets correct themselves "
We need to isolate those who try by various means to minimize state intervention
"...Many of the
conditions under which free trade between nations is guaranteed to be desirable are unlikely to
hold in practice." . "...All conservative economics is faith based (along with everything else they believe). Delusional
is another good descriptor." . "...Fair trade might actually be a good thing, but that is not what "Free trade" generally means.
Mostly it means freedom for capital, chains for labor, and devastation for the environment."
Dani Rodrik:
Trade within versus between nations: ...economics does not offer unconditional policy prescriptions.
Every graduate student learns that depending on the background specifications, any policy
x can be good or bad. A minimum wage can lower or raise employment (depending on whether
employers have monopsony power); a natural resource discovery can raise or lower growth (depending
on the likelihood of the Dutch disease); fiscal consolidation can expand or contract output (depending
on the respective strengths of expectational versus Keynesian effects). And yes, the dictum that
free trade benefits a nation depends on a
long list of qualifying conditions.
So the proper response to the question "is free trade good?" is, as always, "it depends." When
an economist says "I support free trade" s/he must mean that s/he judges the circumstances under
which free trade would not be desirable to be very rare or unlikely to obtain in the context at
hand.
Many of the
conditions under which free trade between nations is guaranteed to be desirable are unlikely
to hold in practice. Market imperfections, returns to scale, macro imbalances, absence of
first-best policy instruments are ubiquitous in the real world, particularly in the developing
world on which I spend most of my time. This does not guarantee that import restrictions will
be necessarily desirable. There are many ways in which governments can screw up, even when they
mean well. But it does mean that a knee-jerk free trader response is faith-based rather than science-based.
...
[He goes on to answer a question about differential support for trade within nations versus trade
between nations.]
"economics does not offer unconditional policy prescriptions. Every graduate student learns
that depending on the background specifications, any policy x can be good or bad."
Thank you Dani! This statement holds in general but in particular on the issue of free trade.
I've loved his old post where he admitted he had to endure a class taught by William Kristol and
Kristol gave this brilliant man only a C.
DrDick
All conservative economics is faith based (along with everything else they believe). Delusional
is another good descriptor.
DrDick -> Paine ...
Fair trade might actually be a good thing, but that is not what "Free trade" generally
means. Mostly it means freedom for capital, chains for labor, and devastation for the environment.
Stubborn1:
About the fact that economists do not offer unconditional policy prescriptions, especially
when it comes to free trade and "the dictum that free trade benefits a nation depends on a long
list of qualifying conditions". One thing I have to strenuously say about that: BULLSHALONEY!
All I heard in my econ classes were the benefits of free trade. EVERYONE drank the kool aid!
I even had a prof who had worked in the Council of Economic Advisors and his role was to review
trade policies. He told us flat out he would ALWAYS ALWAYS ALWAYS support any and all free trade
agreements that came up, without ANY regard to damage done to domestic firms and/or workers. Paul
Krugman wrote one of our text books which, like many econ textbooks at the time, had WHOLE chapters
dedicated to debunking free trade myths! Now you are going to tell me that economists never take
a stand on a policy position as being good or bad?! ARE YOU KIDDING?
Pgl I have seen you post and have agreed with you many times, but not on this one, hell no!
MacAuley -> Stubborn1...
You are so right, Stubborn1. I have taken at least six international econ courses, and in every
case the prof was strongly in favor of "free trade", usually the more the merrier. Last year,
as a refresher I took an internet Int'l Econ course at "Marginal Revolution University", which
was surprisingly good except for the relentless free-trade propaganda.
Kenneth said...
Friday, May 15th, 2015, "Details of President Barack Obama's proposed trade deal, the Trans
Pacific Partnership, have been kept secret, and the deal itself is kept in a locked room guarded
by men with guns, with members of Congress having to schedule an appointment and jump through
hoops just to actually read the massive proposed treaty.
Let me tell you what you have to do to read this agreement. Follow this: You can only take a few
of your staffers who happen to have a security clearance, because - God knows why - this is secure.
This is classified. It's nothing to do with defense," said Boxer.
Boxer then described how she was forced to turn over her cell phone and was prevented from even
taking notes while looking over the 800-plus page trade treaty.
"So I go down with my staff that I could get to go with me, and as soon as I get there, the guard
says to me, 'Hand over your electronics. Okay. I give over my electronics. Then the guard says,
'You can't take notes.' I said, 'I cannot take notes?'" said Boxer.
Some have taken to calling the TPP treaty "Obamatrade," in reference to the secretive nature in
which Obamacare was written and how then-House Majority Leader Nancy Pelosi infamously claimed,
"We have to pass it to find out what's in it."
At the heart of the TPP is something referred to as a "living agreement provision," which means
the treaty can be amended or changed at any time after it is ratified, without congressional approval,
essentially handing over U.S. sovereignty and subjugating U.S. businesses and workers to international
laws, according to CNS News.
While this treaty is being promoted as being about FREE TRADE, it is really just a massive corporatist
agreement that gives increased authority to major international corporations, which will hurt
both American labor unions and small businesses.
Conservatives need to look past the pleasant sounding platitudes put forward by the Establishment
Republicans who are supporting this massive secret deal that only benefits major international
corporations, and (gulp) team up with socialists like Sen. Elizabeth Warren to kill this deal,
which will only hurt America in the long run.
'At the heart of the TPP is something referred to as a "living agreement provision," which
means the treaty can be amended or changed at any time after it is ratified, without congressional
approval, essentially handing over U.S. sovereignty and subjugating U.S. businesses and workers
to international laws, according to CNS News.'
---
what's new, this is SOP in the U.S., don't bother to read the fine print, it's out of date before
the ink is dry, like hospitals that don't accept same day payment on site, then submit individual
bills showing up months later from every damn person within 50 ft of the patient and refuse to
confirm if there's more
and Scott Walker is busting up unions with right to work laws so labor can have the same power
under a 'living agreement' as hospitals to charge for services provided.
MacAuley -> Kenneth...
Kenneth,
It's not accurate to call TPP "Obamatrade" since the concept was developed and fleshed out in
2007 and 2008 under the Bush Administration. Most of the work was managed at the SES level, since
the Bush Administration was pretty lame-duck by then and most of the political appointees were
looking for jobs. But the Bush Administration at the cabinet level gave approval for the exploratory
discussions and conceptual analysis of a TPP.
By the time Obama arrived in 2009 there was a coherent TPP initiative ready for the Obama Administration
to consider. I doubt that Obama had heard of TPP before he came to Washington, but it wasn't long
before the Obama Administration decided to go forward with it.
Paine said...
Dani is a source of wisdom and shrewdness
A combo rarely combined in one head
I would summarize the Keynesian view in terms of four points:
1. Economies sometimes produce much less than they could, and employ many fewer workers than
they should, because there just isn't enough spending. Such episodes can happen for a variety
of reasons; the question is how to respond.
2. There are normally forces that tend to push the economy back toward full employment. But
they work slowly; a hands-off policy toward depressed economies means accepting a long, unnecessary
period of pain.
3. It is often possible to drastically shorten this period of pain and greatly reduce the human
and financial losses by "printing money", using the central bank's power of currency creation
to push interest rates down.
4. Sometimes, however, monetary policy loses its effectiveness, especially when rates are close
to zero. In that case temporary deficit spending can provide a useful boost. And conversely,
fiscal austerity in a depressed economy imposes large economic losses.
Is this a complicated, convoluted doctrine? ...
But strange things happen in the minds of critics. Again and again we see the following bogus
claims about what Keynesians believe:
B1: Any economic recovery, no matter how slow and how delayed,
proves
Keynesian economics wrong. See [2] above for why that's illiterate.
B2: Keynesians believe that printing money solves all problems. See [3]: printing money can
solve one specific problem, an economy operating far below capacity. Nobody said that it can
conjure up higher productivity, or cure the common cold.
B3: Keynesians always favor deficit spending, under all conditions. See [4]: The case for fiscal
stimulus is quite restrictive, requiring both a depressed economy and severe limits to monetary
policy. That just happens to be the world we've been living in lately.
I have no illusions that saying this obvious stuff will stop the usual suspects from engaging
in the usual bogosity. But maybe this will help others respond when they do.
I would add:
5. Keynesian are not opposed to supply-side, growth enhancing policy. They types of taxes that
are imposed matters, entrepreneurial activity should be encouraged, and so on. But these arguments
should not be used as cover for redistribution of income to the wealthy through tax cuts and other
means, or as a means of arguing for cuts to important social service programs. Not should they
be used only to support tax cuts. Infrastructure spending is important for growth, an educated,
healthy workforce is more productive, etc., etc. Economic growth is about much more than tax cuts
for wealthy political donors.
On the other side, I would have added a point to B3:
B3a: Keynesians do not favor large government. They believe that deficits should be used to stimulate
the economy in severe recessions (when monetary policy alone is not enough), but they also believe
that the deficits should be paid for during good times (shave the peaks to fill the troughs and
stabilize the path of GDP and employment). We haven't been very good at the pay for it during
good times part, but Democrats can hardly be blamed for that (see tax cuts for the wealthy for
openers).
Anything else, e.g. perhaps something like "Keynesians do not believe that helping people in need
undermines their desire to work"?
"...The reason the Friedmanian era turned out to be vastly different from the Keynesian era
was because the neoclassical economic reforms were colossal failures."
"...Nothing in the history of the universe has failed more than neoclassical ideology. If one
is to call that failure, one would have to redefined the word failure to include all other failures
that pale by comparison. But according to the Medieval Barbers, their policies were a resounding success.
Anyone who questions them is a philistine. Thankfully, these modern high priests aren't able to burn
dissenters at the stake like their forebears. "
"..."Krugan's free-trade ideology rhetoric shows he's more New Keynesian (neoclassical synthesis)
than Keynesian. More neoliberal than liberal.""
"...Modern Monetary Theology brought back pre-Keynesian boom-to-bust business cycles, drove
down real incomes and the employment rate (now expect a decade before the economy can recover from a
recession.) "
"...China is in hot water because neoclassical reforms have killed demand in the Western economy.
Its economy is founded on importing more and more Western jobs and manufacturing, not to mention GHG
emissions. "
Yes the laws of physics change every 35 years too.
The reason the Friedmanian era turned out to be vastly different from the Keynesian era
was because the neoclassical economic reforms were colossal failures.
Tax cuts did not pay for themselves or create prosperity, they created skyrocketing government
debt. Deregulation didn't create prosperity, but produced numerous disasters including financial
meltdowns. Free-trade exported wealth and jobs and killed real income growth. Modern Monetary
Theology brought back pre-Keynesian boom-to-bust business cycles, drove down real incomes and
the employment rate (now expect a decade before the economy can recover from a recession.)
Nothing in the history of the universe has failed more than neoclassical ideology. If one
is to call that failure, one would have to redefined the word failure to include all other failures
that pale by comparison.
But according to the Medieval Barbers, their policies were a resounding success. Anyone who
questions them is a philistine. Thankfully, these modern high priests aren't able to burn dissenters
at the stake like their forebears.
Economic facts do. Are you trying to state there has not been a sea change in the world economy
since the post WWII era?
Sorry, but Japan, China and Europe are an awful lot different than they were in 1950. And that
is not saying that I disagree with everything you say. Actually, I agree with a lot of it.
But thinking solutions lie in the policies of the 50s and 60s ignore that the problems that
exist did not exist in the 50s and the 60s.
"But thinking solutions lie in the policies of the 50s and 60s ignore that the problems
that exist did not exist in the 50s and the 60s."
EMichael there is a logical hole here. I am not sure I disagree with you on the substance but
there is a coherent argument that the problems that exist NOW are precisely BECAUSE of changes
away from the polices of the 50s and 60s. And that the reason we didn't have the same problems
then is that the policies prevented them. And that a change back to those policies would serve
to ameliorate them.
What you would need to do to rescue your argument is to prove that current problems could
NOT have existed in the 50's and 60's, that there is something unique to today's problems that
make them resistant to yesterday's solutions.
I am not saying you couldn't do that. Merely that you haven't attempted it. Instead you present
a circular argument. What EXACTLY about today's problems make them incurable by yesterday's solutions?
The main thing that did not exist in the US was competition for labor. Free trade is a marvelous
thing when you are the only one selling.
Take a look at trade balances from that period and the last couple of decades.
You can almost trace the trade balance changes to the changes(or lack of changes) to the income
of the vast majority of Americans.
People in here(and myself) talk about the need for a tighter labor market. And we applaud the
actions that create one. But I am almost totally committed to the idea that the only way to create
a tight labor market is protectionism. We have to protect our workers.
Of course there is a price to be paid, but I think the increased costs of some goods will be
overwhelmed by the benefits to be gained by a tight labor market.
Then again, we would be harming other countries trying to move into a industrialized state.
But the last time I looked, none of them were helping me pay for SS; or Medicare; or education;
or the keep the street lights working.
I know it is not politically correct, but charity begins at home. Especially in a home which
has seen such decline in only three or four decades.
Economic policy doesn't happen in a vacuum. Before the 90's there was no internet. There were
its precursors of a sort, e.g. fax and data transmission over the phone, and computer networks/links
based on that (90's comms technology existed but only in the lab or at the high end). In the post-WW2
decades, there weren't built out telephone networks at the national and international level, only
few high end players could arrange to make instant international calls. Even electrification wasn't
completed.
This meant obviously more bottlenecks and more intermediation and control, barriers to
globally distributed operations, and in addition everything happened at a slower speed.
In addition most of the world, including large parts of Europe and the US, was agricultural
or sparsely populated and un"developed".
In the decades after, the "second" and "third" world invested big time in education and technological
development. It really took off when international business logistics and global IT/telecom became
ubiquitous, and "first world" companies eagerly "helped" build the offshore know-how.
Generalizations don't identify any problems, provide any solutions, justify failed policies
or rule out successful policies. Japan and Europe are in hot water because of bad economic policy.
(Not demand-side Keynesian economic policy.)
China is in hot water because neoclassical reforms have killed demand in the Western economy.
Its economy is founded on importing more and more Western jobs and manufacturing, not to mention
GHG emissions.
It's only a matter of time before the entire house of cards collapses. Then people will be
looking to the 1930s for policy solutions
I agree with the others. To say that the economy was different back then is to minimize the
manner in which policy has changed for the worse.
I don't think fundamentally the laws of economics have changed that much because of technology
or globalization or vague "productivity changes."
This is like being like Martin Feldstein who says we should be happy with what we got. No policy
has changed much to the worse since the 1950s and 1960s. For one thing unions have been politically
destroyed.
EMichael said in reply to Peter K
Not the laws of economics, the facts. Y'know the old Keynes thing(supposedly):
"When the facts change, I change my mind. What do you do, sir?"
I'll give you one change.
In the 70's China had almost no foreign exchange reserves. Now they have around $4 Trillion.
That is a real fact. And the reasons behind it are obvious.
... For the old lions, Paul Samuelson and Milton Friedman, the '80s meant a bittersweet departure
from the center stage of economics after forty years of dominating the scene. The two had entered
their sixties; neither was out of steam. But the leaders of the next generation had become apparent:
Lucas, in macroeconomics; Kenneth Arrow in nearly everything else.
The election of Ronald Reagan was a triumph for Friedman; they had known each other since Friedman
spent a quarter at the University of California at Los Angeles, shortly after Reagan had been
elected Governor of California.He was invited to lecture in China. And the international success
of Free to Choose kept Friedman in the public eye.
But Paul Volcker took a different approach to monetary policy from the one Friedman advocated,
and Friedman's forecasts became markedly worse. The editorial page of The Wall Street Journal
adopted as its champion Friedman's long-time rival in currency matters, Robert Mundell, now teaching
at Columbia University, and went all in for Mundell's young associate, consultant Arthur Laffer.
A research appointment at the Federal Reserve Bank of San Francisco was not the same platform
as the University of Chicago. Friedman still had his membership on the President's Economic
Policy Board, but after he "savaged" Volcker to his face before the president in a meeting
in 1983, both men lost influence. Pointing a finger at Volcker, Friedman said (according to Newsweek's
account), "because of the policies of the Fed under that man we have had an inflationary surge
in the money supply that is going to have to be corrected." Volcker was not reappointed. Edward
Nelson, of the Federal Reserve Bank of St. Louis is writing a
scientific
biography of Friedman. It will make interesting reading when it is done.
In March 1981, Friedman wrote his Newsweek column in the form of a letter to Philip Handler,
president of the National Academy of Sciences, advocating major cuts in the budget of the National
Science Foundation, as a step towards the abolition of the NSF. The Reagan administration
had proposed sharp cuts in the economics program. Friedman argued the government shouldn't
pay for any scientific research. True, the NSF had funded much good science; but it had paid for
much bad science, too, including, he wrote, overmuch mathematical economics. The great scientists
of the past had done without NSF funding. Einstein did his work in a government patent office;
general relativity might never have made it past a peer-review panel. "The innovative ideas
that have stirred controversy in economics since NSF funding of economics began two decades ago
owe little or nothing to NSF funding," he wrote.
Thus did Friedman dismiss the agency that Paul Samuelson had brought to life in 1945.
Perhaps more important, by extension he dismissed the program of government fellowships, awarded
by competitive exam, that had sent Samuelson to graduate school in 1935, all expenses paid
– and countless others since, many of them as impecunious as Friedman had been in 1932.
The NSF ran similar programs in mathematics and many ciences, and the principle had been extended,
by Sen. Jacob Javits (R-NY) to humanities. NSF research grants funding had helped build
the Massachusetts Institute of Technology into a powerhouse to rival Harvard, and played a similar
role at many other public and private universities.
No Samuelson column followed Friedman's. Samuelson never wrote again for Newsweek . He resigned
the column he written for fifteen years. When, many years later, I asked him about his timing,
he firmly denied that it had anything to do with Friedman's column, and wrote me a letter for
the file the next day repeating what he had said. I have always wondered if he sought to defuse
the matter out of habit. That he and Friedman had remained on civil terms for seventy-five years
was clearly a source of pride, though privately he grew less tolerant of his rival after
1980.
Samuelson, too, was in mild recession in the '80s. Keynesian economics hadn't yet rebounded
from the biting criticism of the New Classicals in the '70s. Tensions were growing within the
MIT department over appointments and the direction of future research. Samuelson formally
retired in 1985, at 70, to make room for others. He had plenty to engage his professional attention.
Commodities Corp., which had discovered such natural traders as Paul Tudor Jones and Bruce Kovner,
was winding down, but Samuelson's interest in Warren Buffet's Berkshire Hathaway was gearing up.
The Vanguard Group, whose godfather he had been ever since founder John Bogle introduced the first
index fund, was thriving. Samuelson's friends and colleagues James Tobin, Franco Modigliani,
and Robert Solow received Nobel Prizes.
Young Lions at Large
To the young lions of Keynesian economics in the '80s, rational- expectations macroeconomics
and real business cycle theory posed a considerable bar. To work in the new traditions required
a considerable investment in new tools and mathematical techniques, and, even fully teched-up,
didn't seem to speak very directly to policy. A strong corps of economists went to work to fashion
a "new Keynesian" version of the latest general equilibrium economics. But gradually one rising
star of saltwater economics after another left academia for a policy job.
Martin Feldstein, of Harvard University, was the first. As something of an acolyte of Milton
Friedman, Feldstein was never very high in salinity, but he demonstrated plenty of professional
backbone as Chairman of the Council of Economic Advisers under Ronald Reagan for two years in
the early days of the controversies over deficits before returning in 1984 to Harvard and his
position as president of the National Bureau of Economic Research. Stanley Fischer, of MIT,
was next, wrapping up a highly successful research career in order to serve as chief economist
of the World Bank (a path that led to leadership positions in the International Monetary Fund,
governor of the Bank of Israel and, currently, vice chairman of the Fed). Lawrence
Summers, Feldstein's student, served as campaign economist to Democratic candidate Michael Dukakis
in the 1988 presidential campaign and succeeded Fischer at the World Bank before joining the Clinton
administration, where he advanced to Secretary of the Treasury.
Soon the flood was on: Jeffrey Sachs, Joseph Stiglitz, Olivier Blanchard, Kenneth Rogoff,
Gregory Mankiw, Glen Hubbard, and Christina Romer were among those MIT- or Harvard-trained economists
who served in government jobs or NGO positions. Paul Krugman retooled as a journalist.
Lists of MIT and Harvard graduates in high positions in European, South American, and Asian
governments were even longer. Did this differ in kind, and not degree, from the trajectory
of academic economists dating back to to the New Frontier, if not the New Deal? I think
so.
In 2006, Harvard's Mankiw, in an
article for
the Journal of Economic Perspectives argued, as I did in a book, that the differences in interests
among economists were best understood as being similar to those between scientists and engineers.
The early macroeconomists, led by Samuelson and Friedman, had resembled engineers seeking to solve
practical problems, Mankiw wrote; macroeconomists of the past several decades, led by Tjalling
Koopmans, Jacob Marschak, Kenneth Arrow, and others had been more interested in developing analytic
tools and establishing theoretical principles. Their students the '80s had joined teams along
similar lines. "Recently Paul Romer, of New York University, introduced a different distinction
to elucidate some of the controversies in present-day macro – between
bench science and clinical medicine. Both analogies will get plenty of elaboration in future
years, for this is what changed in kind in the '80s: economics developed a clinical/engineering
wing.
... ... ...
likbez said...
Due to his role in neoliberal transformation of Chile after Pinochet coup of 1973, Friedman
can be viewed as a one of the first economic hitman for multinationals, member of organized
crime disguised as an economist. According to the 1975 report of a United States Senate Intelligence
Committee investigation, the Chilean economic plan was prepared in collaboration with the CIA.
In 1987 45% of Chile's population was below poverty line. From Wikipedia:
==Start of quote ===
Milton Friedman gave some lectures advocating free market economic policies in Universidad
Católica de Chile. In 1975, two years after the coup, he met with Pinochet for 45 minutes,
where the general "indicated very little indeed about his own or the government's feeling"
and the president asked Friedman to write him a letter laying out what he thought Chile's economic
policies should be, which he also did.[26] To stop inflation, Friedman proposed reduction of
government deficits that had increased in the past years and a flat commitment by government
that after six months it will no longer finance government spending by creating money. He proposed
relief of cases of real hardship among poorest classes.[2] In October 1975 the New York Times
columnist Anthony Lewis declared that "the Chilean junta's economic policy is based on the
ideas of Milton Friedman…and his Chicago School".[26]
=== End of quote ===
In her book The Shock Doctrine, Naomi Klein criticized Friedman's recipe for neoliberal
scheme of the economic rape of the countries under disguise of transformation toward "free"
market economics -- the neoliberal restructuring that followed the military coups in several
countries using suspiciously similar schemes. She suggested that the primary role of
neoliberalism was to be an ideological cover for capital accumulation by multinationals. Chilean
economist Orlando Letelier considered that the main driving force behind Pinochet's dictatorship
violence toward opponents was the level of opposition to Chicago School policies in Chile.
And Friedman himself was a coward who never personally acknowledged his role in the events.
After a 1991 speech on drug legalization, Friedman answered a question on his involvement with
the Pinochet regime, saying that he was never an advisor to Pinochet (also mentioned in his
1984 Iceland interview), but that only his students (Chicago boys) were involved.
He was followed by Harvard mafia with their economic rape of Russia in early 90th. Probably
also prepared in collaboration with the CIA...
It is interesting that the paper does not mention Galbraith who was important opponent of
Friedman (see "Friedman on Galbraith, and on curing the British disease", 1977) . In those
two lectures Friedman disagrees with Galbraith's four most popular works: "Countervailing Power,"
"The Great Crash of 1929," "The Affluent Society," and "The New Industrial State". Friedman
consistently repeats the neoliberal dogma that it is unfettered free market, with minimal rules
and regulations, is the best economic system.
So it might be useful to distinguish between two instances of Friedman: the first is Friedman
before "Capitalism and Freedom" and the second is after. Friedman after Capitalism and Freedom
is a pitiful figure of a prostitute to power that be.
chris herbert said...
The best observation was the one by Wojnilower that the animals in the zoo were let out
of their cages.. They are still roaming around, not yet put back in their regulatory cages.
The list of financial crises beginning in the 1980s looks as bad and as frequent as those of
the 1800s. Technology gives a sheen to the past 35 years or so, but underneath there's been
immense intellectual damage. A degradation of morals and honesty. Today, greed is good. I'll
be gone, you'll be gone (IBGUBG), rules politics and finance today. The animals are still lose,
more trouble will visit the Kingdom.
bakho said...
Interesting history lesson.
Needs more links.
Friedman's spat with Volcker:
In Friedman's view, Volcker was too vulnerable to political pressures from Congress and
the White House, Condemned by liberals and conservatives for plunging the country into recession
and worried that continued high interest rates would cause massive default by Third World debtors,
Volcker in mid-1982 shifted his sights away from the monetarist approach, loosening the Fed's
targets for money growth and restoring interest-rate manipulation as a policy tool. In the
five months before the November 1984 elections, the Fed increased the money supply to bring
down interest rates and thus fuel the recovery to better Reagan's chances at re-election. After
Reagan's reelection victor in November, the Fed again tightened the money supply, "This is
not monetarist policy," Friedman says, "The key element of monetarism is to define what you
are going to do and then stick with it."
For any Fed chairman, Friedman thinks, the temptation to linker with money-supply targets
is probably irresistible. According to the monetarist doctrine, the Fed chairman's job is purely
technical, "a matter of every month looking at the money base and making sure it increases
by about a quarter of one percent," Friedman explains, "If the Fed chairman were to do a good
job, he would become an unknown, a faceless bureaucrat."
I wonder if so many of the young economist went into policy because the people involved:
Volcker, Friedman, Laffer etc were pretty clueless and made bad predictions.
bakho said...
Just how wrong was Friedman?
DARPA turned the internet over to NSF and NSF spun it off into a large commercial engine.
NSF funds high risk investment, the kind that most corporations cannot. High risk research
means many projects that don'r pan out, a small pool of winners and a handful that hit jackpot.
It takes a large organization with very deep pockets to fund enough high risk research over
long periods to have a good likelihood of getting a large hit. Industry cannot fund at that
level, government can.
Another example: NSF funded obscure biochemistry into esoteric research on enzymes that
could degrade DNA. That research became the foundation of genetic engineering. Who could have
known?
pgl said in reply to Paine ...
Warsh did write an incredible amount of BS in this silly essay. I didn't think Mundell ever
endorsed Laffer's stupid cocktail napkin.
Lafayette said...
REAGANOMICS
From WikiP: {According to Keynesian economists, a combination of deficit spending and
the lowering of interest rates slowly led to economic recovery. However, conservatives insist
that the significantly lower tax rates caused the recovery. From a high of 10.8% in December
1982, unemployment gradually improved until it fell to 7.2% on Election Day in 1984.}
Even Reagan, a good friend of Friedman, when push-came-to-shove, indulged is stimulus spending
to get his presidency out of the deep-doodoo.
Which the Replicants stonewalled in 2010 when a Great Recession was in full sway, but the PotUS
was a Democrat ...
pgl said in reply to Lafayette...
Wikipedia gets another wrong. It was Reagan's 1981 tax cut (deficit spending) that led Volcker
to do round 2 of his tight money. Volcker kept trying to make a deal withe White House - reverse
the fiscal stimulus in exchange for lower interest rates. The White House did not even know
what was going on. And Wikipedia does not either.
My recent
post on realism in the social realm generated quite a bit of commentary, which I'd like to
address here.
Brad Delong offered an incredulous response -- he seems to think that any form of scientific
realism is ridiculous (link).
He refers to the predictive success of Ptolemy's epicycles, and then says, "But just because your
theory is good does not mean that the entities in your theory are "really there", whatever that
might mean...." I responded on Twitter: "Delong doesn't like scientific realism -- really?
Electrons, photons, curvature of space - all convenient fictions?" The position of
instrumentalism is intellectually untenable, in my opinion -- the idea that scientific theories
are just convenient computational devices for summarizing a range of observations. It is hard to
see why we would have confidence in any complex technology depending on electricity, light,
gravity, the properties of metals and semiconductors, if we didn't think that our scientific
theories of these things were approximately true of real things in the world. So general
rejection of scientific realism seems irrational to me. But the whole point of the post was that
this reasoning doesn't extend over to the social sciences very easily; if we are to be realists
about social entities, it needs to be on a different basis than the overall success of theories
like Keynsianism, Marxism, or Parsonian sociology. They just aren't that successful!
There were quite a few comments (71) when Mark Thoma reposted this piece on
economistsview. A number of the commentators were particularly interested in the question of
the realism of economic knowledge. Daniel Hausman addresses the question of realism in economics
in his article on the philosophy of economics in the Stanford Encyclopedia of Philosophy (link):
Economic methodologists have paid little attention to debates within philosophy of science
between realists and anti-realists (van Fraassen 1980, Boyd 1984), because economic theories
rarely postulate the existence of unobservable entities or properties, apart from variants of
"everyday unobservables," such as beliefs and desires. Methodologists have, on the other hand,
vigorously debated the goals of economics, but those who argue that the ultimate goals are
predictive (such as Milton Friedman) do so because of their interest in policy, not because
they seek to avoid or resolve epistemological and semantic puzzles concerning references to
unobservables.
Examples of economic concepts that commentators seemed to think could be interpreted
realistically include concepts such as "economic disparity". But this isn't a particularly
arcane or unobservable theoretical concept. There is a lot of back-and-forth on the meaning of
investment in Keynes's theory -- is it a well-defined concept? Is it a concept that can be
understood realistically? The question of whether economics consists of a body of theory that
might be interpreted realistically is a complicated one. Many technical economic concepts seem
not to be referential; instead, they seem to be abstract concepts summarizing the results of
large numbers of interactions by economic agents.
The most famous discussion of realism in economics is that offered by Milton Friedman in relation
to the idea of economic rationality (Essays
in Positive Economics); he doubts that economists need to assume that real economic actors do
so on the basis of economic rationality. Rather, according to Friedman this is just a simplifying
assumption to allow us to summarize a vast range of behavior. This is a hard position to accept,
though; if agents are not making calculating choices about costs and benefits, then why should we
expect a market to work in the ways our theories say it should? (Here is a good critique by Bruce
Caldwell of Friedman's instrumentalism;
link.)
And what about the concept of a market itself? Can we understand this concept realistically? Do
markets really exist? Maybe the most we can say is something like this: there are many social
settings where stuff is produced and exchanged. When exchange is solely or primarily governed by
the individual self-interest of the buyers and sellers, we can say that a market exists. But we
must also be careful to add that there are many different institutional and social settings where
this condition is satisfied, so there is great variation across the particular "market settings"
of different societies and communities. As a result, we need to be careful not to reify the
concept of a market across all settings.
"...Personally, I think he senses that RE/New Classicalism
is in decline, not comprehending why, struggling to understand, looking for scapegoats (Solow,
tribal behaviour, mathiness) and is essentially mourning its demise."
"...read Kuhn famous book on The Structure of Scientific
Revolutions, in which he argues persuasively (or shows definitively, for those who prefer), that
"Competition between segments of the scientific community [tribes?] is the only historical process
that ever actually results in the rejection of one previously accepted theory or in the adoption of
another," though at the same time, most progress comes from working within an established paradigm.
My own intuition is that economics if very much like physics in both those respects. "
So, within economics, is macro unusual? Of course not. Indeed, the whole emphasis of post-1970 macroeconomics
is to do it like everyone else. Before 1970, no one would have been discussing macro and Dixit-Stiglitz
in the same sentence. Should economics work like physics? Of course not. We're studying very different
problems requiring very different methods. Why would you expect economists to behave like physicists?
What's my bottom line? Romer is just leading us through an unproductive conversation -
one that's not going to persuade anyone of anything.
"Romer is just leading us through an unproductive conversation
- one that's not going to persuade anyone of anything."
It's almost as if Romer is wandering around testing the waters seeing how far he can push things before
he actually says what he wants to say coherently.
Personally, I think he senses that RE/New Classicalism
is in decline, not comprehending why, struggling to understand, looking for scapegoats (Solow,
tribal behaviour, mathiness) and is essentially mourning its demise.
Actually, Romer doesn't argue that physicists are not tribalists – he just asserts it, on
the basis of a thought experiment based on two particular statements. It may well be true that
there is a lot of consensus on the particular physics statements in his post, but no doubt you
could also find a couple of statements in economics that most economists agree about. For
evidence of tribalism in physics, google "superstring controversy," or at a more personal
level, Newton and Hooke, Einstein and Lenard.
Or read Kuhn famous book on The Structure of Scientific Revolutions, in which he argues
persuasively (or shows definitively, for those who prefer), that "Competition between segments
of the scientific community [tribes?] is the only historical process that ever actually
results in the rejection of one previously accepted theory or in the adoption of another,"
though at the same time, most progress comes from working within an established paradigm. My
own intuition is that economics if very much like physics in both those respects.
As to how tribalism has arisen in economics, the answer is easy: economists are people, and
people are tribal. Search the psychology of "ingroup bias".