Economism is
reduction of all
social facts to
economic
dimensions. The term is often used to criticize economics as an
ideology, in which
supply and
demand are the only important factors in decisions, and outstrip or permit ignoring all
other factors.
It is believed to be a side effect of
neoclassical economics and blind faith in an "invisible
hand" or "laissez-faire"
means of making decisions, extended far beyond controlled and regulated markets, and used to
make political and military decisions.
Conventional
ethics would play no role in
decisions under pure economism, except insofar as supply would be withheld, demand curtailed,
by moral choices of individuals. Thus, critics of economism insist on
political and other
cultural dimensions in
society.
Someone needed to write a book about how economic theory has been abused in American politics to
promote neoliberalism as an ideology. In this sense, James Kwak’s “Economism”
is a very important and timely book, and anyone who is interested in public affairs should pick up a
copy and read it.
He explains how simplistic and wrong supply-and-demand
theory fed a free-market ideology that led to a financial crash, a dysfunctional health-care system,
spiraling inequality and a threadbare social-safety net. The basic idea is that by getting everyone
to think in Econ 101 terms -- perfectly competitive well-functioning markets, rational well-informed
consumers and so on -- free-marketers were able to redefine the terms of the national debate to favor
their own interests. With Econ 101 as the default lens through which everyone views the world, Kwak
argues, government programs and regulations start to seem dangerous and inefficient, while inequality
begins to feel like the natural and just order of things.
There is much truth here. When competitive free markets and rational well-informed actors are the
baseline assumption, the burden of proof
shifts unfairly onto anyone proposing a government policy. For far too many years, free-marketers
have gotten away with winning debates by just sitting back and saying “Oh yeah? Show me the market failure!”
That deck-stacking has long forced public intellectuals on the left have to work twice as hard as those
safely ensconced in think tanks on the free-market right, and given the latter a louder voice in public
life than their ideas warrant.
It’s also true that simple theories, especially those we learn in our formative years, can maintain
an almost unshakeable grip on our thinking. For example, the basic Econ 101 theory of supply and demand
is fine for some products, but it doesn’t work very well for labor markets. It is
incapable
of simultaneously explaining both the small effect of minimum wage increases and the small impact of
low-skilled immigration. Some more complicated, advanced theory is called for. But no matter how much
evidence piles up, people keep talking about “the labor supply curve” and “the labor demand curve” as
if these are real objects, and to analyze policies -- for example,
overtime rules
-- using the same old framework. An idea that we believe in despite all evidence to the contrary isn’t
a scientific theory -- it’s an infectious meme.
Academic economists are unsure about how to respond to the abuse of simplistic econ theories for
political ends. On one hand, it gives them enormous prestige. The popularity of simplistic econ ideas
has made economists the toast of America’s intellectual classes. It has sustained enormous demand for
the undergraduate econ major, which serves, in the words of writer Michael Lewis, as a “standardized
test of general intelligence” for future businesspeople. But as Kwak points out, the simple theories
promulgated by politicians and on the Wall Street Journal editorial page often bear little resemblance
to the sophisticated theories used by real economists. And when things go wrong -- when the financial
system crashes, or millions of workers displaced by Chinese imports fail to find new careers -- it’s
academic economists who often get blamed, not the blasé and misleading popularizers.
Why was economism really
so successful at capturing hearts and minds? Kwak chalks it all up to the purposeful influence of business
leaders, the wealthy and their enablers. He writes:
A way of seeing the world, such as economism, does not become widespread and influential because
it is more accurate or correct than the alternatives. Instead, worldviews become powerful because
they reflect the beliefs and serve the purposes of an important interest group.
I don’t really believe this. It seems clear to me that the real-world usefulness of a worldview or
ideology really does have an effect. Russia and China have given up communism not because they
stopped having working classes, but because it became obvious that their communist systems were keeping
them in poverty. And Americans are now starting to question economism because of declining median income,
spiraling inequality and a huge financial and economic crisis.
Economism has obviously gone too far. The worldview it promulgates is too simplistic, and it sometimes
ends up hurting the many to benefit the few. But as we search for new ideologies and worldviews, I think
we shouldn’t forget economism. It should be just one tool in our mental toolbox.
"... The CPI is calculated by analyzing the price of a "basket of goods." The makeup of that basket has a big impact on the final CPI number. According to WolfStreet , 10.9% of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.) ..."
"... The things the government includes and excludes from the basket can make a profound difference in that final CPI number. Back in 1998, the government significantly revised the CPI metrics. Even the Bureau of Labor Statistics (BLS) admitted the changes were "sweeping." ..."
"... In 1998, the BLS followed the recommendations of the Boskin Commission. It was appointed by the Senate in 1995. Initially called the "Advisory Commission to Study the Consumer Price Index," its job was to study possible bias in the computation of the CPI. Unsurprisingly, it determined that the index overstated inflation " by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes to CPI were meant to address this "issue." ..."
"... As Peter pointed out, there is a lot of geometric weighting, substitution and hedonics built into the calculation. The government can basically create an index that outputs whatever it wants. ..."
"... Peter said there is a bit of irony in government officials and central bankers constantly complaining about "not enough inflation." ..."
"... They're the ones that are cooking the books to pretend that inflation is lower than it really is. Because what they're really trying to do is get the go-ahead to produce more inflation, which is printing money." ..."
"... And there are other things that hide inflation. For instance, shrinking packaging so there is less product sold at the same price, or substituting lower quality ingredients, or requiring consumers to assemble items themselves. ..."
"... They find different ways to lower the quality and not increase the price, and I'm sure that the government is not picking up on any of that. If the quality improves, yeah, yeah, they calculate that. But they probably ignore all the circumstances where the quality is diminished." ..."
"... The bottom line is we can't trust CPI to tell us the truth about inflation. ..."
And we're seeing rising prices all over the place, from the grocery store to the gas station. Even
the government numbers flash
warning signs . But as Peter Schiff explains in this clip from an interview with Jay Martin, it's probably even worse than we
realize because the government cooks the numbers when it calculates CPI.
The monthly rises in CPI
through the first quarter show an upward trend. The CPI in January was up 0.3%. It was up 0.4% in February. And now it's up 0.6%
in March. That totals a 1.013% increase in Q1 alone. The question is does this really reflect the truth about inflation? Peter doesn't
think it does.
The government always makes changes to their methods of measuring things, whether it's GDP, or inflation, or unemployment.
And they always tweak the numbers to produce a better result as a report card. "
Imagine if students in a school had the ability to change the metrics by which they were graded or the methodology the teacher
used to calculate their grades.
Would it surprise anybody that all of a sudden they started getting more As and Bs and fewer Cs and Ds? The government always
wants to make the good stuff better, like economic growth, and the bad stuff better, like unemployment or inflation. So, they
want to find ways to make those numbers little and the good numbers big."
The CPI is calculated by analyzing
the price of a "basket of goods." The makeup of that basket has a big impact on the final CPI number. According to WolfStreet , 10.9%
of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make
up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.)
The things the government includes and excludes from the basket can make a profound difference in that final CPI number. Back in 1998, the government significantly revised the CPI metrics. Even
the Bureau of Labor Statistics
(BLS) admitted the changes were "sweeping."
According to the BLS, periodic changes to the CPI calculation are necessary because "consumers change their preferences or new
products and services emerge. During these occasions, the Bureau reexamines the CPI item structure, which is the classification scheme
of the CPI market basket. The item structure is a central feature of the CPI program and many CPI processes depend on it."
In 1998, the BLS followed the recommendations of the Boskin Commission. It was appointed by the Senate in 1995. Initially called
the "Advisory Commission to Study the Consumer Price Index," its job was to study possible bias in the computation of the CPI. Unsurprisingly,
it determined that the index overstated inflation " by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes
to CPI were meant to address this "issue."
As Peter pointed out, there is a lot of geometric weighting, substitution and hedonics built into the calculation. The government
can basically create an index that outputs whatever it wants.
I think this period of "˜Oh wow! We have low inflation!' It's not a coincidence that it followed this major revision into how
we calculate it."
Peter said there is a bit of irony in government officials and central bankers constantly complaining about "not enough inflation."
They're the ones that are cooking the books to pretend that inflation is lower than it really is. Because what they're really
trying to do is get the go-ahead to produce more inflation, which is printing money."
Peter said the CPI will never reveal the true extent of rising prices.
And there are other things that hide inflation. For instance, shrinking packaging so there is less product sold at the same price,
or substituting lower quality ingredients, or requiring consumers to assemble items themselves.
They find different ways to lower the quality and not increase the price, and I'm sure that the government is not picking up
on any of that. If the quality improves, yeah, yeah, they calculate that. But they probably ignore all the circumstances where
the quality is diminished."
The bottom line is we can't trust CPI to tell us the truth about inflation.
For decades, governments and central banks have always identified the problems of the
economy as demand problems, even if it was not the case . If there was a crisis or a recession,
governments immediately believed that it must be due to lack of demand, and subsequently decide
that the private sector is not willing or able to fulfill the real demand needs of the economy,
even if there was no real evidence that companies or citizens were investing or consuming less
than what they needed. T he entire premise was that companies were not investing "enough".
Compared to what and decide by whom? Obviously by central planners who benefit from bubbles and
overcapacity but never suffer the consequences.
Governments and central banks never perceive risks of excess supply and even less predict a
bubble. Why? Because most central planners see debt, oversupply, and bubbles as small
collateral damages of a greater good: recover growth at any cost.
Behind the mistake in diagnosis is the obsession to maintain or grow Gross Domestic Product
(GDP) at any cost regardless of the quality of its components. GDP is relatively easy to
inflate. I always explain to my students that GDP is the only economic calculation in which you
add what you spend with what you earn. GDP can be inflated through government spending and with
higher debt-fueled expenditures. Debt is not a problem when it serves its purpose, which is to
finance productive investment and allow the economy to grow, while efficiency, innovation, and
technology allow us to be more productive and receive more and better goods and services at
cheaper prices. It is a virtuous cycle.
The virtuous cycle of credit turns into a vicious cycle of unproductive debt when we
incentivize malinvestment and prevent technology substitution by implementing massive
government stimuli and liquidity injections.
@Chinaman me obsolescent with the disappearance of home-ec from our high schools. Economy
means to economize, to save and to make do. Credit cards in hand, suburban Americans spend
like drunken Irish sailors on shore leave.
BTW Chinaman: Those you apparently consider as deplorable, are the ones who do the actual,
real productive work. Most of the rest of employed Americans are keystrokers and
button-pushers, ordered around by governmental administrators and corporate bureaucrats.
Squatting atop the economic scrotumpole are various types of parasites, include
coupon-clipper sons of riches and those who get their ill-gotten gains from the FIRE sector:
Finance, Insurance and Real Estate speculation.
Note: since the Chinese working class' average wage has been doubling in real terms
every ten years since the CPC took over, I'm assuming you're talking about the victimization
of the American working class only (specially, but not only, the white working class from the
Rust Belt).
Some math.....
From US Census Data...
Total US Population = 331,002,651
Average US Per Capita Income (USD 2019) = $35,977.
From World Odometer
Population of China = 1,442,055,798
Chinese Per Capita Income (USD - 2020) = $10,276
US Population X Per Cap Income = 11.9 USD$(trillions) = 54% of US - GDP
PRC population X Per Cap Income = 14.8 USD$(trillions) = 96% of PRC - GDP
By this metric......
Chinese Main Street GDP is 124% of USA Main Street GDP
This means that 46% of US GDP consists of financial manipulation in the FIRE sector, while
the FIRE sector in China is only 4% of the Chinese economy.
The Jewish consortium behind Biden is almost identical in its financial composition to
that behind Trump which, as I've explained previously, was notable for its embodiment of
"usury and vulture capitalism, bloated consumerism, and the sordid commercial exploitation
of vice."
GDP figures hide rents, and unearned income as if they are GDP gains.
Let's take the housing bubble years up to 2008 as an example. Thought experiment:
Everybody in the West sells their home to their neighbor.
New bank credit was created due to loan formation to buy and sell homes. There was
activity as new finance paper was created in the form of new debt instruments to transfer
your home to your neighbor. All the new interest collected by banks is seen as profit.
GDP goes up by the profits and new finance activity.
The physical housing stock does not change at all.
Hudson and PCR explains how GDP is a false metric for measuring economic activity. People
cannot understand things if they don't have words for it, or if they don't have a way of
measuring.
Clown world is formed purposefully.. rents, unearned income, usury are a feature of the
system, not a bug. It is not you going crazy, you have become Allice in wonderland, where
reality is unreal.
According to official US government economic data, the US economy has been growing for
10.5 years since June of 2009. The reason that the US government can produce this false
conclusion is that costs that are subtrahends from GDP are not included in the measure.
Instead, many costs are counted not as subtractions from growth but as additions to
growth . For example, the penalty interest on a person's credit card balance that results
when a person falls behind his payments is counted as an increase in "financial services" and
as an increase in Gross Domestic Product. The economic world is stood on its head.
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.
When doing GDP-PPP comparisons there is one very important thing your guys do not take into
account at all and that's a given country's infrastructure.
I mean what each and every citizen "own" just because he lives in that country : roads,
highways, schools, hospitals etc etc.
If you take that into account then the US is in a worse shape then many many third world
countries....
I don't have the exact numbers in head right now but for example, having a kid in the US
costs 10s of thousands of USD (like 40 or 50.000 USD) that you have to pay from your own
pocket.
The same thing in Russia costs more like 3-5.000 USD.
In most of the European countries (guess it's the same thing in Russia), if you want to go
to school, you'll have to pay a few hundred USD a year to enroll and that's it (of course you
have to pay for housing and food just like anybody else). Schools are free and payed by the
state, so every citizen "own" them.
If you add up all the things that are private (i.e. that you have to pay for) in the
States, compared to what is just "given" to you, I guess, just with school & healthcare,
you'll end up easily with 1/2 million dollars per citizen (think about old age healthcare...
mamamia, I'm glad I'm not american).
Which means that every Russian is 500.000$ richer that every american at birth...
Then you can start bitching about the few thousand dollars more or less that someone makes
in this or that country...
@ Danny 16
Yah, the "numbers" do not show the quality of life. Rarely mentioned for the US is that half
the adult population makes $30K or less and cannot afford simple emergencies under $500.
Russia now was better maternal survivor rates than the United States. Looks like Canada is
suffering the same problem with homelessness. (Homeless problem will get worse as the US
Supreme Court ruled that the homeless have a right to camp on sidewalks if no shelters. While
maybe compassionate sounding, it removes from local governments the ability to regulate
homeless camps.)
By contrast, around 17% of Americans don't have enough to eat (about 24x higher than the
Russian figure). But, as the US has a larger middle class, we can assume there's a higher
percentage of families there with disposable income beyond essentials.
Erelis , Dec 23 2019 20:58 utc | 47
I agree with you. It's impossible to live in the USA with USD 30,000.00. You're literally a
homeless person if you have that wage level.
Nowadays, you can live in the USA with a USD 50,000.00-60,000.00 household wage. But you
live badly and one cyclical business crisis or minor heath problem away to be completely
bankrupt. And forget about retiring: you'll work until you drop dead.
If you want to consider yourself "middle class" in America, you're probably talking about
USD 120,000.00 household earnings. Hence the term "six figure wage/salary" you hear so often in
the USA: this is a codename for middle class wage. Americans don't like to describe
themselves as a class-based society, for historical reasons that go since its very foundation,
so they avoid the word "class" whenever they can.
To be in the "solid" American middle class, you need to be earning (by household) around USD
300,000.00. That generally means both husband and wife are middle class (i.e. earn the famous
"six-figure"). In that band of earnings, the family is in a secure position and will be able to
send up to two children to a top college. Only a major financial crisis or a catastrophic
health tragedy (one of the breadwinners dying prematurely) would be able to knock this family
out of the middle class.
From USD 720,000.00 up, you're already in the "upper" middle class territory. At this level,
we're probably talking about a household located in downtown New York and Los Angeles, plus
second houses to spend the summer, winter or both. These are the households who have a
participation (albeit minor) on the Wall Street pie, and who get richer and richer (albeit on a
lower pace and smaller scale) as inequality rises. Only a series of very unfortunate events
could knock an upper middle class family off its class. The upper middle class also makes up
most of the Ivy League elites (in number terms) and serve as a genetic reserve for the American
capitalist class (the elite per se), since they are essentially the only
Let that sink in for a moment. Over the same period, the CPI for new vehicles (green
line, right scale in the chart below) rose just 22%:
Note that from 1990 through 1998, the CPI for new vehicles closely tracked the price
increases of the F-150. But this surge in CPI was too disturbing, apparently, and so the CPI
methodology was enhanced with aggressive hedonic quality adjustments and other methods to
bring CPI down, and it actually fell from 1997 through 2009, even as new vehicle prices were
soaring.
Note the inherent class warfare aspect of the dynamic here: Technological advances are
inherently deflationary, in that they allow a manufacturing worker to produce ever-more
value-add per hour. In a fair world, said workers would share in that increased value-add via
salary gains, which would largely offset the price increases of the higher-value-add products
they and others produce.
"Note the inherent class warfare aspect of the dynamic here: Technological advances are
inherently deflationary, in that they allow a manufacturing worker to produce ever-more
value-add per hour. In a fair world, said workers would share in that increased value-add via
salary gains, which would largely offset the price increases of the higher-value-add products
they and others produce."
I entered the workforce in ~1984, and I have yet to see the workers get a share in
anything.
In Eric Weinstein's podcast with Tyler Cowen they have an argument about the CPI and the
hedonic adjustment. Cowen claims that the finance markets are totally cool with CPI as is and
if you think it is messed up then you have the basis for an investment play that will make
you a ton of profits if you are correct.
This is the kind of argument that has given rhetoric a bad name for 2500 years.
If you do not have the patience to listen all the way to the end (I am not proud to say
that I did) you will learn that Cowen and Weinstein are sure that they have impeccable taste
in music. They sound like one of those cartoon characters like Phineas Whoopie the man who
knows everything.
First problem is that in order to be comparable they are converted into the same currency,
typically dollars. That's a problem because things don't cost the same in different
countries. If you want to measure strength of economy you need to measure the purchasing
power based on where the money is spend and not based on the costs of goods and services in
the US (which you inadvertently do when you convert GDP's in US dollar values).
Second problem is that GDP does not measure the 'size' of the economy. It measures how
much money is being pumped around within an economy and how often it is being pumped around
and then the assumption is made that this represents the size of the economy. It's very easy
to artificially increase this pumping around to inflate the apparent size of an 'economy'.
Companies do this routinely before IPO's for example. The perversions we now have
masquerading as stock markets are another. But mostly it is done by creating debt. When you
get a loan, you get money that mostly did not exist prior to you getting it. It's not
backed by anything but the expectation of profits (in the sense that you're expected
to manage to leverage the money into creating at least enough real economic value to back not
just the issue of your loan but also the interest, representing costs for the providers, and
provide your share of the compensation for those loan receivers who fail in this task, ie
provide backing for the previously non-existing money they received).
So in order to get a genuine measure of the economic power of an economy you need to rate
their GDP in terms of local purchasing power which puts Russia equal to Germany. But you also
need to account for the amount of debt in an economy as the money issued as debt for the most
part does not represent actual existing economic value but at best expected economic value
and at worst will not be recouped at all in which case you need to detract it from the GDP
numbers.
That gets far too complicated for most people who just want simple, reassuring numbers,
like comparing economies on GDP numbers based on dollar values. Dream on.
Here are some facts on the Russian economy:
– in 2018 approx. 82% of GDP was spend domestically and only about 18% exported (see
why purchasing power matters?)
– of that 18% exports about a third represented raw materials, so 6% of GDP
– oil and natural gas represented between 35% and 40% percent of raw material exports,
which means between 2% and 2,5% of GDP consisted of oil and gas exports.
– in 2018 Russia achieved a rare economical feat, a triple surplus. The total
government debt (which was only a few percent of GDP) was less than the surpluses on the
government bank accounts meaning there was no net debt. Instead there was a modest net
surplus. The second surplus was the annual government budget. In 2018 Russian government
spending was less than the government revenues that year. And thirdly, they had a trade
surplus, exporting more than they imported.
In case you failed to notice, they exported more than they imported even though only 18%
of GDP consists of exports. Given the other two surpluses they could import a lot more than
that if they wanted to or if they needed to .
They don't because they don't need to. Russia does not depend on the rest of the world to
keep its economy going. It is about as autarkic as it is nowadays possible to be.
(cnbc.com) 139In a speech last week, Fed Chairman Jerome
Powell raised the possibility that the problem is with the data itself. GDP measures the value
of products and services that are bought and sold. But many of the greatest technological
innovations of the internet age are free. Search engines, e-mail, GPS, even Facebook -- the
official economic statistics are
not designed to capture the benefits they generate for businesses and consumers . "Good
decisions require good data, but the data in hand are seldom as good as we would like," Powell
said. Instead, Powell cited recent work by MIT economist Erik Brynjolfsson, one of the leading
academics on the intersection of technology and the economy. In a paper with Avinash Collis of
the National Bureau of Economic Research and Felix Eggers of the University of Groningen in the
Netherlands, the authors conducted massive surveys to estimate the monetary value that users
place on the tools of modern life.
The results? The median user would need about $48 to give up Facebook for one month. The
median price of giving up video streaming services like YouTube for a year is $1,173. To stop
using search engines, consumers would need a median $17,530, making it the most valuable
digital service. The authors also conducted more limited surveys with students in Europe on
other popular platforms. One month of Snapchat was valued at about 2.17 euros. LinkedIn was
just 1.52 euros. But giving up WhatsApp? That would require a whopping 536 euros. Twitter,
however, was valued at zero euros.
In response to a weakening in the yearly growth rate of key economic indicators such as
industrial production and real gross domestic product (GDP)
some commentators have raised
the alarm of the possibility of a recession emerging.
Some
other commentators are dismissive of this arguing that the likelihood of a
recession ahead is not very high given that other important indicators such as consumer outlays
as depicted by the annual growth rate of retail sales and the state of employment appear to be in
good shape (see charts).
Most experts tend to assess the strength of an economy in terms of real gross domestic product
(GDP), which supposedly mirrors the total amount of final goods and services produced.
To calculate a total, several things must be added together.
In order to add
things together, they must have some unit in common. It is not possible, however, to add
refrigerators to cars and shirts to obtain the total amount of final goods.
Since total real output cannot be defined in a meaningful way, obviously it cannot be
quantified. To overcome this problem economists employ total monetary expenditure on goods, which
they divide by an average price of goods. However, is the calculation of an average price possible?
Suppose two transactions are conducted. In the first transaction, one TV set is exchanged for
$1,000. In the second transaction, one shirt is exchanged for $40. The price or the rate of
exchange in the first transaction is $1000/1 TV set. The price in the second transaction is $40/1
shirt. In order to calculate the average price, we must add these two ratios and divide them by 2.
However, $1000/1 TV set cannot be added to $ 40/1 shirt, implying that it is not possible to
establish an average price.
On this Rothbard wrote in
Man, Economy, and State
:
Thus, any concept of average price level involves adding or multiplying quantities of
completely different units of goods, such as butter, hats, sugar, etc., and is therefore
meaningless and illegitimate.
Since GDP is expressed in dollar terms, which are deflated by a dubious price deflator,
it is obvious that the so called real GDP fluctuations mirror fluctuations in the amount of dollars
pumped into the economy.
Hence, various statements by government statisticians regarding the growth rate of the real
economy are nothing more than a reflection of the fluctuations in the growth rate of the money
supply.
Now, once a recession is assessed in terms of real GDP it is not surprising that the
central bank appears to be able to counter the recessionary effects that emerge.
For
instance, by pushing more money into the economy the central bank's actions would appear to be
effective since real GDP will show a positive response to this pumping after a time lag. (Remember
that changes in real GDP reflect changes in money supply).
This means that if the economy can be expressed through indicators such as GDP, then
this will allow the central bank to appear to be able to navigate the economy (i.e., GDP) by means
of a suitable policy mix. In addition, it makes sense to demand that the central bank should
interfere in order to help the economy.
Why Business Cycles Are Recurrent
Even if one were to accept that real GDP is not a fiction and depicts the so-called true economy
there is still a problem as to why recessions are of a recurrent nature. Is it possible that it is
only external shocks that cause this repetitive occurrence of recessions? Surely, there must be a
mechanism here that gives rise to this repetitive occurrence?
In a free market, we could envisage that the economy would be subject to various shocks but it
is difficult to envisage a phenomenon of recurrent boom-bust cycles. According to Rothbard,
Before the Industrial Revolution in approximately the late 18th century, there were no
regularly recurring booms and depressions. There would be a sudden economic crisis whenever some
king made war or confiscated the property of his subjects; but there was no sign of the
peculiarly modern phenomena of general and fairly regular swings in business fortunes, of
expansions and contractions.
1
The boom-bust cycle phenomenon is somehow linked to the modern world. But what is the link? The
source of recurrent recessions turns out to be the alleged "protector" of the economy -- the central
bank itself.
We suggest that the phenomenon of recessions is not about the weakness of the economy as such
but about the liquidation of various activities that sprang up on the back of the loose monetary
policies of the central bank. Here is why.
A loose central bank monetary policy, which results in an expansion of money out of
"thin air" sets in motion an exchange of nothing for something, which amounts to a diversion of
real wealth from wealth-generating activities to non-wealth-generating activities.
In the
process, this diversion weakens wealth generators, and this in turn weakens their ability to grow
the overall pool of real wealth.
The expansion in activities that emerge from the loose monetary policy is what an economic
"boom" (or false economic prosperity) is all about. Note that an increase in the monetary pumping
due to loose monetary policy of the central bank lifts the monetary turnover and hence GDP.
Once this monetary turnover is deflated by the so-called average price index this will manifest
itself in terms of a strengthening in real GDP. Most experts and commentator are likely to proclaim
that the central bank's loose monetary policies were successful in growing the economy.
Once however, the central bank tightens its monetary stance, this slows down the diversion of
real wealth from wealth producers to non-wealth producers. Activities that sprang up on the back of
the previous loose monetary policy are now getting less support from the money supply - they fall
into trouble and an economic bust or recession emerges in terms of the monetary turnover deflated
by the average price index i.e. the growth rate of real GDP comes under downward pressure.
Activities that emerged on the back of previous loose monetary policy cannot now divert real
wealth to support themselves. This is because these activities were never economically viable –
they could not support themselves without the diversion of real wealth to them by means of an
expansion in money supply. Consequently, most of these activities are likely to perish or barely
survive.
Could these activities escape the consequences of a bust if they are well managed and have solid
appearance? For instance, as a result of the loose monetary stance on the part of the Fed various
activities emerge to accommodate the demand for goods and services of the first receivers of newly
injected money.
Now, even if these activities are well managed, and maintain very efficient inventory control,
this fact cannot be of much help once the central bank reverses its loose monetary stance. These
activities are the product of the loose monetary stance of the central bank and they were never
approved by the market as such. They emerged on account of the increase in money supply, which gave
rise to an increased demand for goods.
Once the central bank monetary stance is reversed, regardless of efficient inventory
management, these activities will come under pressure and run the risk of being liquidated. The
supply of real savings is not large enough to support these activities.
From what was said we could conclude that recessions are about the liquidation of economic
activities that emerged on the back of the loose monetary policy of the central bank . This
recessionary process is set in motion when the central bank reverses its earlier loose stance. Note
that recession is good news for wealth generators since less real wealth is now being taken from
them.
This means that central bank's ongoing policies that are aimed at mitigating the
consequences that arise from its earlier attempts at stabilizing the so-called economy, i.e., real
GDP, are key factors behind the repetitive boom-bust cycles.
Because of the variable time
lags from changes in money to changes in prices and changes in real GDP, Fed policy makers are
confronted with economic data that could be in conflict with the Fed's targets. Hence, this forces
central bank officials to respond to the effects of their own previous monetary policies.
Note that Fed policymakers regard themselves as being responsible to bring the so-called economy
onto a path of stable economic growth and stable price inflation. Consequently, any deviation from
the stable growth path as outlined by policy makers sets the Fed's response in terms of either
tighter or looser stance. These responses to the effects of past policies give rise to fluctuations
in the growth rate of the money supply and in turn to recurrent boom-bust cycles.
In fact, the downtrend in the yearly growth rate in the adjusted money supply (AMS) during 2002
to 2007 was responsible for the economic slump of 2008. An uptrend in the growth rate of AMS during
2008 to 2011 provided a support for the strengthening in economic activity until very recently. A
visible decline in the annual growth rate in AMS since 2012 has set in motion an economic slump.
This slump is likely to strengthen as time goes by.
Even if the Fed were to lift aggressively its monetary pumping it will not be possible
to reverse the downtrend in the AMS growth rate instantly.
The state of the pool of real
wealth is going to determine the severity of the downturn. We suggest that prolonged reckless
monetary and fiscal policies have likely severely undermined the process of real wealth generation.
This in turn raises the likelihood that the pool of real wealth is hardly growing. Consequently, it
will not surprise us that the likely emerging economic downturn is going to be quite severe by most
historical standards.
It is now popular to blame the policies of the US President Trump in particular his
trade war with China as the key factor behind a possible recession ahead.
While President
Trump's policies are not in the spirit of the free market, we suggest that the downtrend in the AMS
annual growth rate since 2012 has nothing to do with President Trump's policies but with the
policies of the Fed.
Conclusions
Recessions, which are set in motion by a tight monetary stance of the central bank, are
about the liquidations of activities that sprang up on the back of the previous loose monetary
policies.
Rather than paying attention to the so-called strength of real GDP to ascertain
where the economy is heading, it will be more helpful to pay attention to the growth rate of the
money supply.
By following the growth rate of the money supply, one can ascertain the pace of damage to the
real economy that central bank policies inflict. Thus, the increase in the growth momentum of money
should mean that the pace of wealth destruction is intensifying. Conversely, a fall in the growth
momentum of money should mean that the pace of wealth destruction is weakening.
Real GDP growth rate does not measure the real strength of an economy but rather
reflects monetary turnover adjusted by a dubious statistic called the price deflator.
Obviously then the more money is pumped, all other things being equal, the stronger the economy
appears to be. In this framework of thinking one is not surprised that the Fed can "drive" the
economy since by means of monetary pumping the central bank can influence the GDP growth rate. By
means of the real GDP statistic Fed policy makers and government officials can create an illusion
that they can grow the economy. In reality the policy of intervention of the Fed and the government
can only deepen the economic impoverishment by weakening wealth generators.
It now seems to be the consensus that the key factor behind a possible recession ahead
would be the policies of the US President Trump
in particular his trade war with China as.
However we suggest that a key cause behind the possible recession had already been set in motion by
the downtrend in the AMS annual growth rate since 2012.
This downtrend has nothing
to do with President Trump's current policies but with the past policies of the Fed.
"Real GDP growth rate does not
measure the real strength of an
economy but rather reflects monetary
turnover adjusted by a dubious
statistic called the price
deflator."
The above
quoted from the authors post , and
below the definition of the price
deflator. We all know the Fed is the
primary inflator.
"What Is the GDP Price
Deflator? The GDP price deflator
measures the changes in prices for
all of the goods and services
produced in an economy. Gross
domestic product or GDP represents
the total output of good and
services. However, as GDP rises and
falls,
the metric doesn't
consider the impact of inflation or
rising prices on the GDP results.
The GDP deflator shows the extent of
price changes on GDP by first
establishing a base year, and
secondly, comparing current prices
to prices in the base year. The GDP
deflator shows how much a change in
GDP relies on changes in the price
level. The GDP price deflator is
also known as the GDP deflator or
the implicit price deflator."
John Williams of Shadowstats wrote about the GDP almost 20 years
ago. What he had to say was this:
The U.S. government has been
throwing in upward growth biases into GDP modeling ever since the
early 1980s, which have rendered this important series nearly
worthless as an indicator of economic activity and reality. As a
consequence, the distortions from bad GDP reporting have major
impact within the financial system.
"With reported growth moving up and away from economic reality,
the primary significance of GDP reporting now is as a political
propaganda tool and as a cheerleading prop for Pollyannaish
analysts on Wall Street".
Basically to say: trash anything you see about U.S. GDP
figures. It's not real world.
Don't forget all the borrowed money spent into the economy which
is measured as GDP . On the micro level it looks like this : I
made $100k last year in wages and spent all of it. I also spent
$50k with Credit Cards. Of which I still carry that debt. I have a
personal GDP of $150K ...isn't that a neat trick ?
Simply put, "money-pumping" is equivalent to credit creation and
ultimately is the creation of usury based debt, which is of
course, impossible to repay. It is the means to an end, and that
'end' is worldwide slavery.
The money printing creates a fake GDP. The GDP is adjusted for
inflation, measured by CPI. However, the CPI is much higher for
everything people buy: housing (prices and rent), health care,
education, food and transportation.
The CPI published if fake to
control government entitlements adjustments. Therefore, from the
nominal GDP they subtract less inflation and the GDP seems
higher.
If the real inflation would be used, the GDP would have been
negative for the past 10 years - economy in contraction. That is
what people on main street experience - continuing depression.
I am all for the ending of the Fed, the income tax and fiat
currency -and the sooner the better.
However, we still need to
address the problem with capitalism that eventually a tiny few own
all the assets.
In the 1870-1910 period, the US experienced a lot of the same
problems we see today: massive income and wealth inequality,
political fighting over immigration, tariffs, monopolies/
anti-trust and taxation. As a result, several significant changes
came to the country: the creation of the Fed, the income tax,
social security, new tariffs, anti trust legislation, New Deal. I
would argue that many of these things came in response to the
problems of the day. It's important to note that all of these
problems occurred in a free market capitalist system before the
Fed, income tax, etc came into existence!
I believe the system needs a debt and asset reset like the
Jubilee called for in the Bible.
Each boom and bust cycle is purposefully designed to make the
banks and the Fed more powerful and helps destroy America's middle
class. That's been the plan for decades. Besides big government,
the Fed is a foreign enemy and privately owned institution that
wants to destroy America from within. It's not China, it's not
Russia, it's not Iran or Venezuela. It's the Fed that gets more
powerful every time more debt is issued. Their plan is inequality
with a two tier system in order to get rid of the middle class.
This is their banking manifesto. It's all there. How they planned
the great depression and how this foreign entity controls politics
through money corruption by debt.
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.
GDP is as misleading as average income & unemployment rate used by
economists and policy makers to manipulate the crowd in order to
enrich and reward themselves.
Fun with numbers. Recently I discussed the falsity of stated GDP since it counts transactions
that ought not to be counted as additions but rather as subtractions. I'd like to take this a
step further with GDP/capita, which is about $61,000/yr within the Outlaw US Empire. Yes, as
previously discussed, that figure's overstated due to the errors in GDP accounting. But
there's another realm that must be considered and that the fact that the
3 richest people within the USA own more wealth than the bottom 50% combined, or more
than 160 million people. In other words, the income disparity is so skewed in favor of just
those 3 that there's no possible way GDP per capita can be $61,000/yr.
Here annual personal
median income for USA is cited as $31,099 in 2016, well below the stated
$57,467 GDP/capita for that year. Clearly, the economic position of the USA in contrast to
other nations is much worse that depicted just as are the statistics provided by the USG to
show the economy isn't as bad as it is actually.
@d dan What people
have to understand is the the 2.1% GDP growth is "paper" growth. Every stock bought or sold
is a "service" for the purposes of GDP growth. Trumps corporate tax cuts were supposed to
allow companies to invest in R&D, and re-open manufacturing plants. What has happened is
a massive stock buyback by corporations, which artificially inflates stock value, as well as
artificially increases the GDP. This is not to say that China's 6.1% growth does not include
a sizeable chunk of "paper" GDP growth. Even if it were equal to the US's entire 2.1% GDP
growth, it would still be 3times as large.
"... “Any US claims to economic stability – the stock market is roaring like a chained tiger, unemployment is at near-record lows – must be balanced against the fact that the country owes its entire GDP plus a considerable amount in accumulated debt. ..."
“Any US claims to economic stability – the stock market is roaring like a chained tiger, unemployment is at near-record
lows – must be balanced against the fact that the country owes its entire GDP plus a considerable amount in accumulated debt.
And growing, if the source is reliable, at 36% faster than the US economy.”
A large part of the US GDP is FIRE business and that alone makes the USA GDP fake metric of
economic growth. .
Notable quotes:
"... The conclusion was that the US GDP was something between $5 to $10 trillion instead of $15 trillion as officially reported by the USG . We assume that the official data, especially economic, released by governments is fake, cooked or distorted in some degree. ..."
As you can see from the soon collapse of the western financial system, the valuation
metrics that we have looked to for stability and "the truth" have been mostly fake and
gamed.
Inflation, currency supply, housing data, economic growth or lack thereof, all of these
data points are manipulated, faked and gamed. Just like the Soviet Union was known in the
West to be "faking" their econ data, so too is the west engaged in the same practice.
For example, several years ago Dagong, the Chinese ratings agency, published a report
analyzing the physical economy of the States comparing it with those of China, Germany and
Japan.
The conclusion was that the US GDP was something between $5 to $10 trillion instead of
$15 trillion as officially reported by the USG . We assume that the official data,
especially economic, released by governments is fake, cooked or distorted in some
degree.
Historically it is well known that the former Soviet Union was making up fake statistics
years before its collapse. Western as well as other countries are making up their numbers
today to conceal their real state of affairs.
We are sure that many people out there can find government statistics in their own
countries that by their own personal experience are hard to believe or are so optimistic
that may belong to a different country.
Well, the old boys are back at their old tricks again.
FASAB 56 has made government financial reporting unreliable. They can hide financial
statements. It gives them the right to move around money to hide where money is spent or not
report spending at all. I think they used it's loop holes to hide the 17 trillion in drug
money.
FASAB is a dream come true for Bank money laundering and embezzlers. The Fed is a joke all
these Bank are crooked the way things are set up they can say what ever they want and just
screw Nations of the world. End the Fed go to MMT Hybrid system for the sake of the living
now, each Nation with it's Own money.
"... To extract meaning from GDP trends we have to break it into its components: consumption, investment, government spending, the trade balance. Consumption is by far the largest of these, and the main driver of the economy, but its level is precariously underpinned by unsecured private debt. It is broadly accepted that real investment (in new productive capacity) is dismally inadequate for the continued growth of a modern economy; much of what does take place goes into buying paper assets. ..."
"... focusing on GDP is even more absurd than "prioritising short-term growth over long-term sustainability". ..."
"... a passage spells out the absurdity: "Anything that causes economic activity of any kind, whether good or bad, adds to GDP. An oil spill, for example, increases GDP because of the cost of cleaning it up: the bigger the spill, the better it is for GDP." ..."
"... He goes on and finally shows that "after a country's GDP per capita reaches a moderate level there is no correlation between the wealth of a country and the reported happiness of its population". ..."
As an economist I endorse Dan Button's article ( Stop
obsessing about GDP: we should focus on wellbeing , 11 June). The most we can say is that a
succession of GDP figures over months should indicate whether the economy is growing or moving
into recession. Also aggregate GDP statistics tell us nothing about how national wealth and
income are distributed: globalisation in recent decades has increased the size of the cake, but
the main beneficiaries have been the already better-off.
To extract meaning from GDP trends we have to break it into its components: consumption,
investment, government spending, the trade balance. Consumption is by far the largest of these,
and the main driver of the economy, but its level is precariously underpinned by unsecured
private debt. It is broadly accepted that real investment (in new productive capacity) is
dismally inadequate for the continued growth of a modern economy; much of what does take place
goes into buying paper assets.
As for government expenditure, most of us are crying out for more on education, health,
social care, police, early childhood services, to name a few, but as a nation we want "big
state" levels of public services financed by "small state" levels of taxation. Last, we have a
massive balance-of-payments deficit: we are exporting too little to pay for our imports; we are
living beyond our means. We can only continue this by selling capital assets (such as water
companies) to overseas investors, thus losing the dividends and tax revenue that they
generate.
Lawrence Lockhart Bath
• Spot on, Dan Button. But focusing on GDP is even more absurd than "prioritising
short-term growth over long-term sustainability". In Jeremy Lent's The Patterning Instinct (a
magnificent book
recently recommended by George Monbiot ) a passage spells out the absurdity: "Anything that
causes economic activity of any kind, whether good or bad, adds to GDP. An oil spill, for
example, increases GDP because of the cost of cleaning it up: the bigger the spill, the better
it is for GDP."
He goes on and finally shows that "after a country's GDP per capita reaches a moderate level
there is no correlation between the wealth of a country and the reported happiness of its
population".
Trouble is, this is hard for free-market "wealth creators" to swallow and, as Lent
observes: "the mainstream media unquestionably accept the mantra of our locked-in ideology that
economic growth, measured by GDP, is the social objective to be pursued above all else". So
well done Dan Button and the Guardian for questioning the mantra. Keep it up.
John Airs Liverpool
• Although the measurement of "personal wellbeing" introduced by David Cameron's
government in 2010 is a welcome addition to crude GDP measures, it relies heavily on subjective
assessments of life satisfaction, personal happiness, perception of financial situation, level
of anxiety and a strange "worthwhile rating". It would be more useful to measure the wellbeing
of society as a whole using objective criteria.
These could include, along with GDP per head, medical factors such as infant mortality,
longevity, incidence of mental illness, numbers of doctors per head and access to hospitals;
social factors such as crime rates, percentage of population in prison, stability of marriages
and partnerships, working hours, holidays, homelessness and unemployment; cultural factors such
as human rights and access to the arts; and environmental factors such as pollution and carbon
footprint.
Such a measure, if internationally agreed, could be used to rate the success or otherwise
over time of governments, and to compare wellbeing between countries.
Peter Wrigley Birstall, West Yorkshire
• It is increasingly accepted that continued economic growth is a short route to
eventual disaster for anyone not protected by high wealth: the decline in biodiversity, global
heating, air pollution, water stress, soil deterioration and rising sea levels are all trends
directly linked to the increase in the amount of the natural world's resources going to fuel
consumption. The only way we can protect the mass of human populations is to abandon economic
growth altogether and concentrate on better using what we have. This will include changing the
numerous ways in which human societies channel the profits of economic activity into the
pockets of a few, and challenging the immense pressure exerted by those few on governments
whether democratic or other.
Jeremy Cushing
The right-wing libertarian gold-currency types hate the 2% target. They call the Fed
"economic illiterates" for having a 2% inflationary target. After all, "why would anyone think
it's a good thing to have prices go up on purpose?"
That is the end of their analysis.
But these boneheads completely miss the point: the 2% target isn't about an intentional
effort to create inflation and make things constantly more expensive for people. It's instead
about stability.
The 2% target came about almost by accident and fairly unintentionally when it was first set
by
New Zealand . So this isn't about an intentional effort by the diabolical (((Fed))) to make
things more expensive for everyone, or to prevent inflation from becoming lower.
Before, the Fed would just say they want to "lower" inflation, or "increase" inflation
without a real target other than to stave off run away inflation. You had chairman like Volker
just let the interest rate rip in order to break the back of inflation in a reactionary way.
What we ended up with were massive inflationary and deflationary swings and the Central Bankers
became tired of it.
So instead of reacting to swings, they decided to just set the target at 2%, that way you
are trying to hit the target rather than trying to react to economic indication of rising or
lowering inflation.
This isn't all good news. Because when you see the 2% target for what it is, an artificial
target that Central Bankers are hell-bent on hitting, you can see why the Fed is getting really
anxious these days.
The Central Bankers have pulled out all the tricks out of the bag, QE, ZIRP, rock bottom
interest, and even negative interest in Europe, and for a while in 2018 they pretty much hit
their 2% target (at least in the US). And we were all styling. Home prices were growing in a
stable way. Jobs numbers were great. Stock Market was high. The Trump tax cut scam pumped the
economy up even further.
But then December 2018 hit. The sugar high from the Trump tax cut wore off. Wall Street took
a 20% bear-market nose dive. Housing prices slowed growth and sales slowed. And now we are
seeing manufacturing indexes, initial jobs reports showing things have slowed.
Now they can't keep it at the target and they aren't sure what to do about it. You don't cut
interest rates in a strong economy (which is what we supposedly have), but at the same time
Wall Street is screaming for further rate cuts. And when Wall Street threw its temper tantrum
in December 2018, the Fed rewarded them with putting a stop to the three anticipated rate hikes
this year.
If the current CPI stats are an indication of where things are going, it sounds like Wall
Street had it right and the Fed had it wrong–the Fed wanted to increase interest rates,
which would have had a deflationary effect. Wall Street wanted the cut to get an inflationary
effect that helps the market. Wall Street won.
The problem is now that the pause in interest rates didn't have the inflationary effect Wall
Street wanted (even though the Fed is still holding on to hope that deflation is "transitory")
and so now they are demanding more cuts. At the same time the Fed is scratching its head saying
it's "open" to more cuts, but showing some genuine misgivings about cutting rates when they
were certain just 7 months ago that rate hikes were what the economy needed.
This is on top of a mixed bag of data suggesting the economy isn't really coming or going at
this point, it's just frothy. What we are seeing is paralysis. he only thing left is more cuts.
J-Rome knows it.
The other problem is that CPI is also largely a contrived number. It's based on funny math.
Don't like the swings in the price of gas? Just take it out of the CPI! Don't like the price of
food in there, take it out! Don't like the price of houses, take it out!
If you are trying to manage an economy by hitting an artificial inflationary target of 2%
based on artificial inflationary data that doesn't give you the whole picture, an observer
could see why you'd be a little confused when your decisions don't lead to your intended
outcome.
The reality is for the vast majority of Americans, the price they pay at the pump has
direct, immediate and visible impact on their bills, spending and outlook. The price of food
does too, and so does the price of the roof over their head. People notice when the price of
the big mac extra value meal shoots up a dollar. This is probably also why we have the
cognitive dissonance of a "great" economy while people are buried in credit card debt, student
loan debt and corporate debt and while a majority ( https://www.cnbc.com/2017/06/19/heres-how-many-americans-have-nothing-at-all-in-savings.html
) of Americans don't have $1,000 liquid money to tap in case of an emergency.
So if CPI is going lower, but CPI doesn't take into account the basic costs of living that
are actually extremely volatile and not just smoothly going down, and the Fed is chasing a 2%
CPI number that doesn't include these inflationary variables, the Fed could be targeting an
inflationary target that is actually deflationary when all the gimmicky math is taken out of
the equation.
Now we see why the fed is struggling, CPI is going down. Consumers are feeling the pain
of higher prices none-the-less, along with stagnant wages and more debt. What the consumers
are experience aren't being taken into consideration by the Fed because those numbers "don't
count." You have the market demanding further cuts because the lower the interest rate, the
more likely people are to dump their money into the market searching for some investment
returns that at least are par with inflation that is probably a lot higher in reality for the
average Joe than core CPI lets on.
Why bother saving when you get no return and you can't save anyway because your cost of
living is out of control?
No wonder the Fed is being indecisive. They don't want to believe their lying
eyes.
economic welfare cannot be adequately measured unless the personal distribution of income is
known. And no income measurement undertakes to estimate the reverse side of income, that is,
the intensity and unpleasantness of effort going into the earning of income. The welfare of a
nation can, therefore, scarcely be inferred from a measurement of national income as defined
above.
Thanks as always for the valuable posts. I am curious about your opinion on something.
Once oil production peaks and plateaus, then inevitably declines, do you think world GDP will
start declining afterwards? I'd assume it would lag behind it by a short period of time
possibly (obviously depending on country etc but overall).
If that was to happen and no energy source can cover the decline rate, wouldn't the world be
pretty fucked economically thereafter? Hence one can assume or take a wild ass guess that the
decline after peak would resemble something like Venezuela. So not a smooth short % decline
rate.
I hope what i am asking makes sense.
Mike, in all honesty, I have no idea. The problem is there are so many other things going on
at the same time. The world is getting warmer, water tables are falling everywhere, rivers
are drying up, fisheries are disappearing, and I could go on for an hour explaining how
everything is falling apart. And now we hear that the insect population is declining very
fast. Why?
So as fossil energy starts to decline and renewables will not help very much, what will
happen. Will that exacerbate all our other problems. Yes, it most likely will. Look at
Venezuela. Is that what almost every nation will look like in 50 years? Well, probably not
every nation but a lot of them for sure.
So, the world is going to hell in a handbasket. But I am 80 years old. I will be safely
dead when the shit hits the fan. Lucky me.
x Ignored
says: 02/26/2019
at 3:27 pm I think not all
followed the link
article is big.
Maybe someone will be interested
I will write here in several posts.
I hope someone will be interested.
I continue:
The fluctuations of this second parameter, associated with economic crises and recessions
observed in the period under review, make it possible to evaluate the contribution of the
notorious "energy efficiency" to the global increase in energy consumption. In a situation of
almost "zero growth" of the world economy, which occurred in the period 2008–2009, the
consumption of primary energy decreased by 0.8% per year. At the same time, for each percent of
economic growth, it is necessary to "pay off" by increasing the consumption of primary energy
by about 0.6%.
In an expected way, an improvement in energy efficiency was reflected in monetary
indicators: in 2017, each TOE of consumed energy generated $ 8,617 of global GDP, which
corresponds to 1.7% of annual growth over the period 2007–2017.
Of course, the world's primary energy is not evenly distributed across countries. Even the
top five leaders in the use of primary energy: China, the United States, the European Union,
India and Russia – have completely different consumption patterns, which are associated
with the historical, geographical, economic and political differences of these countries.
Thus, as of 2017, China has already been the largest global consumer of primary energy: its
energy consumption has reached 3.132 billion TOE, which is equal to 23% of the global
consumption of primary energy. The growth of Chinese energy consumption is also impressive: in
the period from 1990 to 2013, per capita energy consumption in China increased from 0.602 TOE
to 2.14 TOE -- that is, almost four times. Since then, energy consumption growth in China has
somewhat slowed down, and by 2017, per capita energy consumption there was only 2.26 TOE, which
is not only still significantly lower than per capita energy consumption in countries with
developed capitalist economies, but and corresponds to an increase in energy consumption of
about 1.5% per year (and an economic growth of 2% per year).
If we consider the inertia of this historical trend and additionally take into account the
fact that the new policy of the ruling CPC implies a transition to stimulating consumer demand
within the country, then we can assume that by 2050 per capita energy consumption in China
should reach 5-5.5 TOE. This figure takes into account, in addition, the observed impact of
energy efficiency (the same 0.8% per year), but suggests that GDP per capita in China will grow
to about the equivalent of $ 50,000 by 2050. At the same time, it should be understood that in
a part of the population, a conservative forecast is adopted, according to which the population
of China will reach a peak by 2030 and decrease to 1.36 billion by 2050. Taking into account
these factors, China's energy demand in 2050 will exceed 7,000 million TOE, i.e., it will grow
2.23 times and make up more than half of the current volume of primary energy production.
Information that, according to fertility data, the population of China in 2018 decreased by
1.27 million people, has not yet been officially confirmed, and it is clear that the above
figure can be significantly adjusted downward, but in any case, China will pull the world
energy "blanket" on themselves.
The United States is the second largest consumer of primary energy in the world. In 2017,
the US energy consumption amounted to 2,235 million TOE, which corresponds to 17% of world
primary energy consumption. US per capita energy consumption peaked at 8.01 TOE in 2000, which
was a historic peak. For the period from 2007 to 2009, per capita energy consumption in the
United States decreased from 7.7 to 7.04 TOE, and in 2017 it reached the level of 6.87 TOE.
Nevertheless, the United States continues to be the most "voracious" consumer of primary energy
per capita, and their ability to further reduce the achieved level is very slim if they are not
linked to the global restructuring of their economic and social structure, which is highly
unlikely without a deep national crisis. An additional factor is the steady growth of the US
population, which has no tendency to slow down until 2050.
Reply
Still continuing (3):
The European Union is the third largest consumer of primary energy in the world. In 2017, the
energy consumption of the European Union amounted to 1,689 million TOE, which is equivalent
to 13% of world primary energy consumption. Historically, EU per capita energy consumption
was the highest before the onset of the 2008 crisis and amounted to 3.71 TOE in 2006. In the
future, the European Union immediately fell into a double crisis: the global economic year
2008–2009 and its own financial one, connected with the debts of the Mediterranean
countries, first of all – Greece. This led to the fact that energy consumption per
capita in the EU was reduced to a minimum of 3.2 TOE in 2014. By 2017, per capita energy
consumption in the EU was only partially recovered and reached 3.29 TOE. At the same time,
its value has a very pronounced country differentiation, and if for Germany in 2017 this
figure was 3.86 TOE, for France – 3.61 TOE, then for the UK – 2.72 TOE, for
Poland – 2.71 TOE, for Portugal – 2.23 TOE, and for Romania – 1.69 ToE. In
general, this level of per capita energy consumption quite adequately reflects the EU's
longstanding efforts towards supporting energy efficiency, but also vividly shows the limits
of what can be achieved within the framework of a concept combining a set of measures for
energy saving and green energy replacement. As we see, as a result of the implementation of
such programs, the European Union did not become "European China" at all, although it became
less like "European America" in the energy issue.
Thus, it can be assumed that in the long-term trend, the per capita energy consumption of
EU countries will decrease slightly, only by copying the general trend of slow increase in
energy efficiency.
India is the fourth largest consumer of primary energy in the world. In 2017, energy
consumption in India increased to 754 million TOE, which is 5.6% of the world. India, like
China, is characterized by very rapid economic growth, which was expressed in terms of per
capita energy consumption: more than twice since 1990, when it amounted to 0.225 TOE, to
0.562 TOE in 2017. If per capita energy consumption in India continues to follow the same
pace, by 2050 it should reach a mark of 1.21 TOE, while India's GDP per capita will reach
approximately 19 thousand dollars. It is expected that by 2050 the population of India will
grow to 1.72 billion people. That is, it can be expected that by 2050 India's energy demand
will exceed 2 billion THN – or it will grow 2.65 times, overtaking even China in terms
of relative growth, and in absolute figures ahead of the European Union.
And finally, the Russian Federation, which is the fifth of the world's largest energy
consumers. In 2017, primary energy consumption in Russia amounted to 698 million TOE, which
accounted for 5.2% of world primary energy consumption. In 1990, when Russia was still part
of the USSR, per capita energy consumption in Russia was 5.8 TOE. Over the past years, Russia
has already passed its historic low, when the economy of the new country was torn to shreds
by neoliberal "shock therapy", the short-sighted policy of rapid privatization and the total
introduction of the "wild" market – including in the energy sector. This was reflected
in the fact that the minimum energy consumption per capita in Russia was achieved by 1998 and
amounted to 4.03 TOE. Smaller values of per capita consumption, apparently, are
simply impossible in a cold and harsh Russian climate, since heat supply is a vital function
in it – therefore, a value of 4.03 TOE can be considered the level of "basic survival"
in Russia. An interesting fact: in Canada, where the climate is very similar to that of
Russia, per capita energy consumption is 9.5 TOE as of 2017. At the same time, no one in
Canada speaks of "cheap electricity" or "too high costs for heat supply," realizing that this
is the necessary conditions for the survival of the country's population.
Since 1998, per capita energy consumption in Russia has been steadily growing and reached
a level of 4.83 Toe in 2017, which corresponds to about 0.8% per year. Most likely, this
trend will continue in the future, since the living standards of the Russian population are
still lower than the living standards in the European Union or the United States, and the
Russian level of per capita consumption lags behind the level of the late USSR, even taking
into account the accumulated "bonuses" in energy efficiency.
World energy: forecast
As noted above, the parameters of GDP and total energy consumption – just as the
parameters of per capita GDP and per capita energy consumption – in the current economy
have a strong correlation.
Moreover, almost all the leading countries of the world fit into a very clearly traceable
ratio, which corresponds to 10 thousand dollars of per capita GDP for every one TOE per
capita consumption. Smaller values of this parameter are characteristic of a
number of underdeveloped and developing countries, which leads to a "average" value of $
8,617 per 1 TOE for global GDP.
There are deviations and "up" on the scale of specific energy – this is already
mentioned in the text of Russia, Canada and the United States.
For Canada, Russia and the Scandinavian countries, you can build a separate branch of the
graph, on which for the "northern" economies it turns out that for every 10 thousand dollars
of per capita GDP they need to spend about 2 TOE per capita consumption – twice as much
as for those living in tropical or subtropical climate of China or India.
The phenomenon of "overconsumption" of the United States, as is clear, has a different
nature – it is associated with the actual "imperial" energy tax for the whole world,
which allows the United States to still maintain excessive energy consumption, which is in no
way connected with the country's climate the political structure of the United States, which
is the world hegemon.
It is important to emphasize that, if we exclude from consideration the "imperial" United
States and "northern" Russia and Canada, then the correlation between oil consumption and the
GDP of a particular country acquires almost 100% of its character. For example, Japan, not
mentioned above, was the sixth largest energy consumer in the world in 2017 and surpassed
most EU countries in terms of both per capita GDP and per capita oil consumption! Although,
it would seem, the southern conditions of Japan, almost completely located in the subtropical
and tropical zones, suggest lower figures for per capita oil consumption.
In 2017, energy consumption in Japan amounted to 456 million TOE, which amounted to 3.4%
of world primary energy consumption. Historical peak energy consumption per capita in Japan
reached in 2005 and amounted to 4.15 TOE. Since then, energy consumption in Japan has tended
to decline, as the country's national economy fluctuated between a hidden recession and sheer
economic stagnation. The effect of the largest nuclear accident at the Fukushima nuclear
power plant in 2011 is indicative in this respect: despite the radical restructuring of the
energy sector in Japan caused by this catastrophe and the almost complete closure of nuclear
power plants in the country, the consumption of primary energy in the Land of the Rising Sun
has not undergone such a sharp falls: almost all the "fallen out" volumes of atomic energy
were promptly replaced by increased consumption of oil and natural gas. And the general trend
of growth or reduction of primary energy consumption still showed a correlation with only
three parameters: the country's population, the level of per capita GDP of the national
economy and the general trend of improving energy efficiency, which in the case of Japan
describes the same energy saving parameter of 0.8% per year .
By 2016, per capita energy consumption in Japan decreased to 3.55 TOE, which was even
lower than per capita consumption in 1990, with a fundamentally higher GDP and a practically
stable population (an increase of only 3 million people with 123 million in 1990). In 2017,
per capita energy consumption in Japan grew only slightly to 3.6 TOE, which is quite
consistent with the very modest growth of the national economy.
As already mentioned, the practical economic result of "green" energy, observed for the
period 2007–2017, can be optimistically described as "zero" or "poorly distinguishable
from statistical error". Of course, one can complain that the sun and wind today give only 2%
of the global primary energy production and you need to "just give them more time (and
money)", but the sad reality is this: supposedly "promising" new energy sources affect the
economy. Their implementation in the countries of the European Union did not affect the
picture of energy efficiency and did not alter the ratio between GDP and tons of oil
equivalent spent on its production, while the global crisis and the debt crisis of the EU
itself turned out to be much more significant factors.
Still continuing (4):
A simple forecast follows from these sad conclusions: even if over the next decade the volume
of "green" energy again grows 4 times, then its share will reach only 8%. However, even this
level is an almost unrealizable dream: according to most forecasts – for example, the
IEA in 2017 and the Energy Information Administration (EIA) in 2018 – the actual
relative growth of renewable energy sources will be only about 2–20 years before 2030.
2.5 times. Unknown conclusion: even by 2030, the share of oil, natural gas and coal will be
at least 75% of the total primary energy level, which will be related to nuclear and
hydropower and the continuing relative waste from the use of wood energy and biomass. During
the years 2030-2040, the year can be almost fantastic, and all this will be due to the
difficulties that must be achieved in the field of oil, gas and coal in the balance sheet.
energy.
An extremely unpleasant situation with such a pessimistic forecast is expected with world
oil production. At the moment, its growth was concentrated in only nine oil-producing
countries. As an example, oil production in China is expected in 2015, after which it was not
even possible to achieve an increase in Chinese oil production.
Today, this "growing oil subsoil" includes the following countries (the estimated year of
oil production and data source are shown in brackets): Canada (peak in 2049, BP), USA (2042,
EIA), Iraq (2042, BP) , Kuwait (2040, BP), Iran (2039, BP), United Arab Emirates (2037, BP),
Russia (2033, IEA), Saudi Arabia (2030, BP), Brazil (2024, BP).
The exit from almost all the "growing" sources of oil production in the world is caused by
a drop in production from 2030 to 2040, which means the global energy crisis of humanity. and
there is "tasty", and there is energy, and all this economic strategy of modern
civilization.
Of course, partial replacement with liquid motor fuel, which is easily obtained from
petroleum, can be carried out using natural gas, as well as using chemical reforming in
various types of liquid hydrocarbons and molecular hydrogen.
However, this situation is hardly optimistic. In 2015, the world's peak production was
observed. Currently, natural gas production growth is concentrated in only ten countries (the
estimated year of natural gas production and data source are shown in parentheses): Canada
(2074, IEA), USA (2063, EIA), Iran (2046, BP), Qatar (2043 , BP), Saudi Arabia (2037, BP),
Algeria (2027, BP), China (2027, BP), Australia (2026, BP), Russia (2026, BP), Norway (2023,
IEA).
It is easy to see that already after 2030, the natural gas market will, like the oil
market, be practically monopolized by four or five countries, each of which will be able to
easily manipulate prices by simply adjusting its own production, since other players simply
will not have any -or free capacity. Unfortunately, in the case of Russian oil, and when
analyzing the prospects for Russian gas in such an oligopolistic market, it can be noted that
Russia will be in the "first echelon" of losers, at whose expense they will try to solve
world problems with the energy balance.
Of course, a partial replacement of natural gas and oil can be expected in the form of a
return to more "dirty" and expensive coal. By the way, it was precisely such a strategy that
China and India chose in the 1990s, who, without having wide access to the oil and natural
gas market, relied on their own deposits of hard coal. The incidental damage to ecology and
human health in this case was the price paid for the rapid industrialization paid by Indian
and Chinese society.
However, even on the "coal" path, humanity has its own problems. Today, the rapid growth
of coal production is possible only in four (!) Countries of the world. All other countries
have already passed their peak of hard coal mining, some of them more recently, such as the
USA (2008), China (2013) or South Africa (2014).
According to estimates by international energy agencies, today, growth in coal production
is possible only in the following countries (in brackets is the expected year of peak coal
mining and source of data): Russia (2112, BP), India (2052, BP), Australia (2032, IEA) ,
Indonesia (2031, BP).
I apologize for
posting an article here
– It was designed for a reader in Russia.
Ending:
Mirovaya energiya: stsenariy
I
World Energy Scenario
The inertial scenario of the development of mankind suggests that by 2050 the world
consumption of primary energy will increase one and a half times and will be about 20 billion
TOE. This indicator takes into account both the observed effects of energy conservation and a
very conservative estimate of future economic growth – within 2–2.5% of the
annual increase in global GDP.
However, crisis tendencies will be waiting for us much earlier than in 2050: it seems that
the gap between supply and demand on the global energy market will be formed by the early
2030s, when global energy consumption will approach the level of 16-17 billion TNE . As
already mentioned, peak years for world production of oil, natural gas and coal are coming in
the very near future. According to the IEA, the peak of world oil production will come as
early as 2022, when all of humanity will be able to provide about 4,530 million TOE with oil.
According to the same forecast, coal will be at its peak in 2028, when at the expense of it
it will be possible to get about 6 billion THE (which corresponds to about 8.4 billion tons
of physical coal mining, due to its lower energy value). And finally, global natural gas
production will peak in 2036, when this energy carrier can provide 3.9 billion ToE.
It is easy to understand that, taking into account the predicted share of oil, coal and
natural gas in primary energy of about 75% by 2030, the sum of peak production (14,430 TOE)
almost fully corresponds to ¾ the lower bar of estimated consumption in 2030 (16,000
TOE) . It should be understood that the peak values for oil and hard coal in
the world will be reached before 2030, after which these energy carriers will only decrease
in the volume of physical production. In part, this effect can be compensated for through the
involvement of more low-margin fields (as it happened with shale oil and gas), but the limits
of such compensatory mechanisms are not unlimited. In addition, a significant increase in the
price of primary energy in itself is a sign of the crisis of the existing economic structure,
which clearly links social stability with economic growth, and economic growth is fueled
precisely by the available (both physically and in price) energy.
Of course, the increase in the price of oil, natural gas and coal will improve the
economic prospects of "green" energy (simply due to the banal high cost of any energy
available to humanity), but this also means that within future economies huge amounts of
energy will simply be spent on maintaining the internal structure economies and the
livelihoods of the critically needed primary energy sector.
An idea of this kind of economic structure may well be given by the economic
model of the USSR, where such a bias towards the enterprises of "Group A" was dictated by
military and state construction, while consumer goods of the enterprises of "Group B" were in
short supply. However, in the USSR this mechanism was a reflection of the planned economy, in
the case of the supposed "peak" scenario of 2030, it would be formed by purely market
mechanisms within the framework of the "classical" capitalist economy.
It is clear that this implies a "contraction" of the final consumption of the population,
which will be caused by the forced flow of capital to the high-yielding primary energy
production sectors, forced and natural in the framework of the capitalist economy. At the
same time, the "welfare society" of the model countries of the "collective West", such as the
European Union and, in particular, the United States, will collapse. Faced with this kind of
crisis, the "overconsuming" Western countries will unambiguously join the battle for the
remnants of mineral energy resources. Such events and wars are likely to surpass even the
current "oil conflicts" in the Middle East, North Africa and Latin America, in which the
United States and its European allies are directly involved.
Probably, Russia will again be hit, which remains the "last natural storeroom" for large
reserves of sufficiently cheap oil, natural gas and coal. Most likely, the "energy predators"
will try once again to control the richest natural resources of our country, which, under
various pretexts, will strive to declare "the heritage of all mankind". In fact, we will talk
about the banal energy robbery of our country, which will hide behind the fig leaf of
propaganda.
Another disappointing conclusion follows from the energy "poverty" of the "world of the
future": Russia today has to prepare for the fact that our "four hard-earned oil equivalent
per capita", which, as noted above, is the basic condition for survival in Russia's severe
climate should be in the future provided for the population of the country from sources other
than oil, natural gas and coal. The challenges facing the world are facing Russia, but what
the United States is the reason for the rejection of overconsumption turns out to be another
challenge for Russia in the face of cold and death by starvation.
Unfortunately, the "world of the future" does not promise to be a pleasant and comfortable
place to live. And we should prepare for such a negative scenario today.
Thank you for the thought provoking thoughts Opritov Alexander.
It is useful to hear these ideas from the perspective of those from various countries, such
as yours.
The data dovetails closely with what has been presented from other sources, by and large.
The geopolitical ramifications of these challenges is obviously paramount.
I am concerned that countries will be pressured to go to war over the shortfall in energy,
through desperation.
A few points about different countries-
The USA could likely decrease it energy use/capita considerably (perhaps 30%), without severe
economic repercussion. But it is not taking the issue seriously.
Some countries like Korea will have a very hard time decreasing consumption. They are cold,
and heavily industrialized. And rely almost entirely on imported fossil fuel.
I expect India, and China, to lean heavily toward suppliers of fuel as they plan their
position in the world and choose allies. Iran and Australia both seem to be prime suppliers
considering proximity.
Concerns over global warming will be swamped by concerns over energy shortage, despite the
severity of the change, such as food supply disruption and forced migration. These climate
problems will likely be much more severe after energy shortage problems develop due to the
lag in CO2 effects.
Mostly I agree with you.
It's hard to imagine the future.
Much will depend on politicians and the willingness of peoples to reduce consumption for the
sake of an acceptable standard of living in the future.
Passing the peak of energy consumption will lead to a decrease in global GDP.
This means a decrease in per capita consumption.
Reduced consumption = reduced demand = industrial workload = crisis.
I believe that in order to save people, they will live in multi-storey buildings, perhaps
without an elevator (of course, it may not be soon for 50 years), the transport will be
public, there will not be enough private cars.
In addition to the peak of hydrocarbons, the peak of copper, gold, silver, tin, and a lot
more is coming. How to solve these problems I don't want to dream
Post scriptum. The problem of CO2 and the problem of global warming in Russia is not a
popular topic. So much that everyone refuses to discuss it and even think about it.
Approximately as an alien topic.
from what I recall the global debt to GDP ratio is about 320% in Q4 2018. GDP growth will cease when debt expansion ceases (FWIW
I suspect widely acknowledged peak oil in the rear view mirror, so to speak, will likely play a role in the realization that event)
In 2008 the size of the US economy was $14.5 trillion. A decade later, the size of the economy is $19.7 trillion, so about
36% greater.
Over the same ten years the national debt has grown from $9.4 trillion to over $21 trillion- about 123% greater.
It's hard to pretend that's not a problem, but people still do try.
Interestingly enough .
Census Bureau, Treasury, EIA Detail American Insolvency
"And comparing the US primary energy consumption versus the Wilshire 5000 (representing the value of all publicly traded US
equity), a funny thing shows up. Flat to declining energy consumption vs. surging asset valuations this is typically understood
as a red flag for phony wealth creation via market manipulation, monetization, and banana republic central banking."
Is a slow recession a tragedy, with chaos necessarily baked into the equation?
If we are lucky, that will be the global challenge.
If not so lucky, recession will be depression.
Some places more than others, of course.
Russia may be be looking more solid than most in the 2030's.
Western Europe, not so good.
Overall, I was referring to the conditions that will likely ensue after peak fossil.
As very well stated in the post by Opritov Alexander above (and by Ron so many times), the hurdles to replace fossil energy are
insurmountable, by and large.
As you have pointed out before, there is a big risk for economic contraction around the time of peal oil.
I expect it to be severe in degree, especially among countries that are elderly, heavily indebted, and heavily dependent on imported
energy. And many of these places are your trading partners, no matter what country you hail from.
Indebtedness is not just a transitory or 'paper' issue, IMHO. The cost to attempt transition to non-fossil energy will be huge
(beyond huge). How do you buy a second home (renewable energy on a countrywide basis), when you are already maxed out on your
credit for the 30 yr loan on your current one (maintenance of your current economic activity and dependents)?
As a slight aside, GDP is not very useful when determining the wealth of a country, since it includes frivolous activity that
will evaporate in tough times. Financial transactions, hair dressers, restaurants, sports and music entertainment, weddings, luxury
items such as fancy cars, boats and fashion, advertising , are examples of GDP components that can evaporate almost immediately
when the times get tough and the velocity of money heads towards zero.
GDP considers natural disasters like earthquakes, floods, tsunamis and hurricanes as being favorable to the economy. Add to this
the fact that these disasters are hated by the common people who rightly pray that this destruction happens as seldom as possible.
Once again, due to the poor fundamentals of the GDP system, the entire science of economics is branded as being anti social. Once
again, the true economic fundamentals are not being considered or else the question of economics being an anti-social science
does not arise. In this article we will first consider the prevalent viewpoint and then we will debunk the myths pertaining to
it.
When a metric values natural disasters as favorable to the economy then you know somethings being missed. I would suggest that
repairing after a storm is not growth. GDP makes no distinction between Construction and Reconstruction.
Why Did Simon Kuznets Want to Leave Military Spending out of GDP?
Simon Kuznets (Nobel 1971) usually gets the credit for doing as much as anyone to organize
our modern thinking about what should be included in GDP, or left out. But I had not known
that Kuznets apparently argued for leaving military spending out of GDP, on the grounds that
it wasn't actually "consumed" by anyone, but should instead be treated as an intermediate
input that supported production and consumption.
=== end ===
In political terms, excluding national defense from GDP would create the impression that
the government's statistical agency supports "Peaceniks" -- the critics of "oversized"
America's defense budget. It was incompatible with the imperial ambitions of the USA in
post-WWII era.
Simon Kuznets (
Nobel 1971 ) usually
gets the credit for doing as much as anyone to organize our modern thinking about what should
be included in GDP, or left out. But I had not known that Kuznets apparently argued for leaving
military spending out of GDP, on the grounds that it wasn't actually "consumed" by anyone, but
should instead be treated as an intermediate input that supported production and consumption.
Here's how Hugh Rockoff tells the story in his
essay, "On the Controversies behind the Origins of the Federal Economic Statistics," in the
Winter 2019 issue of the Journal of Economic Perspectives . [Full disclosure: I work at
JEP as Managing Editor.] Rockoff writes:
Military spending presented another problem. In one of his last discussions of national
income and product before US entry in World War II, Kuznets (1941, pp. 19–20) explained
that his estimates included "dreadnoughts, bombing planes, poison gas, and patent medicines
because they are rated economic goods in our country today," even though they "might well be
considered worthless and even harmful" in a society organized differently. In a footnote,
Kuznets (p. 31, fn. 5) used an analogy with private spending to buttress his case for
including military expenditures: "If the activities of the private police used by many large
corporations are productive, why not those of the municipal police? And if of the domestic
police, why not of the international police, i.e., the armed forces of the nation?" During
World War II, however, Kuznets (1945) modified his thinking. He argued that military spending
should be counted in national product during a time of total war, but it should be excluded
during peacetime because military spending was then an intermediary good for producing a flow
of consumption to consumers. Other economists, including decisively those at the Department
of Commerce, thought otherwise (Gilbert, Staehle, Woytinsky, and Kuznets 1944).
A number of economists, however, have found Kuznets's concept of a Peacetime National Income
to be attractive. Higgs (1992), for example, argued that the then-current interpretation of
the impact of World War II on the American economy, that it created unprecedented prosperity,
was reversed when one used Kuznets's peacetime concept rather than the conventional measure.
Higgs even took exception to Kuznets's decision to include some military durables such as
aircraft in investment because Kuznets thought that they could later be turned to peacetime
purposes.
In retrospect, a number of concerns weighed against adopting Kuznets's concept of peacetime
national product. One reason, as Coyle (2014, p. 20) suggests, was the rise of Keynesian
economics. In principle, one could use Kuznets's peacetime version of national product to
analyze the macroeconomy, but the conventional measure fit more smoothly into the simple
Keynesian model taught to a generation of economics students in Samuelson and other
textbooks. Perhaps the most important reason for rejecting Kuznets's concept, however, was
the Cold War. In his famous study of productivity, Kendrick (1961, p. 25) chose to include
all defense spending in his estimates of national product partly on the grounds that
"national security is at all times [Kendrick's italics] a prime objective of economic
organization." In political terms, excluding national defense from national product would
create the appearance that the government's statistical agency was siding with the critics of
America's defense budget. Of course, no one was required, as Kuznets had pointed out, to use
only one measure of aggregate product. To the contrary, Kuznets thought that it would be best
to produce a series of measures, some specialized for one purpose and some for another. But
as we have learned, public attention does tend to focus on a single measure of national
product, so the decision to ignore Kuznets's peacetime concept may have had important
consequences.
I find myself in agreement with the views of Kuznets expressed back in 1941, that
if private security guards and municipal police are in GDP, the military should be, too.
But more broadly, the dispute serves as a useful reminder that GDP includes some categories
of expenditures that society would have preferred not to make. For example, GDP includes all
measures for home security and corporate security--not just guards but also locks, bars, and
electronic measures. In addition, GDP includes cleaning up after pollution spills and natural
disasters, although it would certainly have been preferable if such events had not happened in
the first place. It would also be socially beneficial if people got more exercise and at
healthier diets, and as a result a substantial proportion of health care spending didn't need
to happen.
For other comments on the relationship between GDP and social welfare, readers might be
interested in the well-known comments from "Robert
Kennedy on the Shortcomings of GDP in 1968" (January 30, 2012). My own sense is that
economists are well-aware of the shortcomings of GDP--indeed, probably better aware of the
shortcomings than many critics. But economists also point out that on a wide array of
dimensions, people who live in societies with higher GDP tend to live better lives. For samples
of these arguments, see "Why GDP Growth
is Good" (October 11, 2012) and "GDP
and Social Welfare in the Long Run" (April 6, 2015).
> It appears that GDP is not going to be published by the BEA either.
Nonpublishing of GDP might actually be positive ;-) One less " number racket" metric to
deal with. Once a year publication would be more than enough.
Of course, there will be some deprivation among addicted to GDP neoliberal economists, but
that's the price to pay for the progress. All "cult of GDP" folk needs to be sent to the dust
bin of history anyway, with their books and fake math (aka mathiness).
Subtracting from it 66% of financial sector contribution would also be a step in the right
direction.
"... "GDP provides measurements of output, income and expenditure quite well, and these are needed to understand and devise fiscal and monetary policies. But this measure flatly fails when it comes to well being." ..."
"... As Michael Hudson has pointed out GDP includes all sorts of figures that rightly should be subtracted from economic output since they represent a cost, a drain on productivity as opposed to actual production. Fees charged by financiers, monopoly prices extracted by big pharma, ever-increasing rents, all these things make our economy more expensive, less competitive, and less productive, They make us collectively poorer, not richer. Fix how GDP is calculated and we'd see the truth behind the cheery numbers. ..."
"... I am curious if there was an ulterior motive when US switched from GNP to GDP in 1991; does anyone know ..."
"... The United States used GNP as its primary measure of total economic activity until 1991, when it began to use GDP.[11] In making the switch, the Bureau of Economic Analysis (BEA) noted both that GDP provided an easier comparison of other measures of economic activity in the United States and that "virtually all other countries have already adopted GDP as their primary measure of production".[12] Many economists have questioned how meaningful GNP or GDP is as a measure of a nation's economic well-being, as it does not count most unpaid work and counts much economic activity that is unproductive or actually destructive.[13] ..."
"... Human capital. This word as well as any other captures the dehumanizing nature of capitalism. Just a factor of production. We don't have blood and bone and families. We have exploitable skills. Screw that. Leave not one stone upon another when you rise up and destroy the dystopian economy these swine have created. ..."
"... So the most elite of the global elite have just now figured out that averages can be skewed by extreme outliers? What any undergrad student in statistics could tell you? Man, they're really selling the need for global hierarchies. ..."
GDP provides measurements of output, income and expenditure quite well, and these are
needed to understand and devise fiscal and monetary policies. But this measure flatly fails
when it comes to wellbeing.
I guess that's news to no-one but the Davos crowd.
They continue:
Hence growing international interest in a tool that still captures financial and produced
capital, but also the skills in our workforce (human capital), the cohesion in our society
(social capital) and the value of our environment (natural capital).
Work has advanced on some of these elements. The UN Environment Programme-led
Inclusive Wealth Index shows the aggregation through accounting and shadow pricing of
produced capital, natural capital and human capital for 140 countries. The global growth rate
of wealth tracked by this index is much lower than growth in GDP. In fact, the 2018 data
suggests natural capital declined for 140 countries for the period of 1992 to 2014.
This is the chart:
Again, I guess that's news to no one, except the Davos crowd.
But what's scary is the conclusion:
People deserve an accurate sense of how well their economies are performing, with a view
to long-term sustainability. GDP has and always will have valuable short-term insights, but
to respond to 21st-century pressures we need a modern economic measure.
At that point I wanted to scream. What we, apparently, need is a measure of how badly Davos
mentality is screwing things up. We don't need to heed the warnings. Or give up a growth
obsession that fuels globalization and is supported by the myth of profit maximization driving
well-being to which the whole of Davis subscribes. No, we just need a better measure of the
damage that myth causes.
Bring on the Green New Deal, I say.
Will it be on the Davos agenda? I doubt it, somehow.
Fully elucidated about a quarter century ago in an October, 1995 article in the Atlantic
– "If the GDP is Up, Why is America Down?" – by Clifford Cobb, Ted Halstead, and
Jonathan Rowe.
"Human capital" is a deceptive way of saying "buy low, sell high". As an employee, you are
bought for as little as possible, and sold for as much as possible, with Davos Man collecting
that difference, making him filthy rich off the sweat of your brow. When you can no longer
sweat for Davos Man, you are no longer human capital, and Davos Man would prefer you die
quietly, so he can enjoy his jets and yachts without looking at the wreckage left behind.
"GDP provides measurements of output, income and expenditure quite well, and these are
needed to understand and devise fiscal and monetary policies. But this measure flatly fails
when it comes to well being."
While I suspect birds instinctively understand the problem with fouling their nests, GDP
promoters seem not as instinctively aware.
Much of the GDP industrial "output" pushes the world ever closer to the climate change
tipping point, suggesting those promoting GDP growth don't realize the sign on much of their
favored metric is negative, not positive, when it comes to the well being of the earth and
its inhabitants.
And concern about "well being" should not be limited to humankind.
As Michael Hudson has pointed out GDP includes all sorts of figures that rightly should be
subtracted from economic output since they represent a cost, a drain on productivity as
opposed to actual production. Fees charged by financiers, monopoly prices extracted by big
pharma, ever-increasing rents, all these things make our economy more expensive, less
competitive, and less productive, They make us collectively poorer, not richer. Fix how GDP
is calculated and we'd see the truth behind the cheery numbers.
I've been curious about the disappearance of the old Gross National Product, replaced by
GDP I thought the word National was just too impolitic to use in a globalized world and of
course "national" implies a clearer view of sovereignty, etc. Probably had a tendency to
nationalize all natural resources and other things no longer tolerable to globalization.
I am curious if there was an ulterior motive when US switched from GNP to GDP in 1991;
does anyone know?
The United States used GNP as its primary measure of total economic activity until
1991, when it began to use GDP.[11] In making the switch, the Bureau of Economic Analysis
(BEA) noted both that GDP provided an easier comparison of other measures of economic
activity in the United States and that "virtually all other countries have already adopted
GDP as their primary measure of production".[12] Many economists have questioned how
meaningful GNP or GDP is as a measure of a nation's economic well-being, as it does not count
most unpaid work and counts much economic activity that is unproductive or actually
destructive.[13]
Human capital. This word as well as any other captures the dehumanizing nature of
capitalism. Just a factor of production. We don't have blood and bone and families. We have
exploitable skills. Screw that. Leave not one stone upon another when you rise up and destroy
the dystopian economy these swine have created.
So the most elite of the global elite have just now figured out that averages can be
skewed by extreme outliers? What any undergrad student in statistics could tell you? Man,
they're really selling the need for global hierarchies.
Dec 3, 2018
Joseph E. Stiglitz
What we measure affects what we do. If we focus only on material wellbeing – on, say, the production of goods,
rather than on health, education, and the environment – we become distorted in the same way that these measures
are distorted; we become more materialistic.
INCHEON – Just under ten years ago, the International
Commission on the Measurement of Economic Performance and Social Progress issued its report,
Mismeasuring Our Lives: Why GDP
Doesn't Add Up
.The title summed it up: GDP is not a good measure of wellbeing. What we measure affects
what we do, and if we measure the wrong thing, we will do the wrong thing. If we focus only on material wellbeing
– on, say, the production of goods, rather than on health, education, and the environment – we become distorted in
the same way that these measures are distorted; we become more materialistic.
We were more than pleased with the reception of our report,
which spurred an international movement of academics, civil society, and governments to construct and employ
metrics that reflected a broader conception of wellbeing. The OECD has constructed a
Better Life Index
,
containing
a range of metrics that better reflect what constitutes and leads to wellbeing. It also supported a successor to
the Commission, the High Level Expert Group on the Measurement of Economic Performance and Social Progress. Last
week, at the OECD's sixth World Forum on Statistics, Knowledge, and Policy in Incheon, South Korea, the Group
issued its report,
Beyond
GDP: Measuring What Counts for Economic and Social Performance
.
The new report highlights several topics, like trust and
insecurity, which had been only briefly addressed by
Mismeasuring Our Lives
, and explores several others,
like inequality and sustainability, more deeply. And it explains how inadequate metrics have led to deficient
policies in many areas. Better indicators would have revealed the highly negative and possibly long-lasting
effects of the deep post-2008 downturn on productivity and wellbeing, in which case policymakers might not have
been so enamored of austerity, which lowered fiscal deficits, but reduced national wealth, properly measured, even
more.
Political outcomes in the United States and many other
countries in recent years have reflected the state of insecurity in which many ordinary citizens live, and to
which GDP pays scant attention. A range of policies focused narrowly on GDP and fiscal prudence has fueled this
insecurity. Consider the effects of pension "reforms" that force individuals to bear more risk, or of labor-market
"reforms" that, in the name of boosting "flexibility," weaken workers' bargaining position by giving employers
more freedom to fire them, leading in turn to lower wages and more insecurity. Better metrics would, at the
minimum, weigh these costs against the benefits, possibly compelling policymakers to accompany such changes with
others that enhance security and equality.
Spurred on by Scotland, a small group of countries has now
formed the
Wellbeing Economy Alliance
. The hope is
that governments putting wellbeing at the center of their agenda will redirect their budgets accordingly. For
example, a New Zealand government focused on wellbeing would direct more of its attention and resources to
childhood poverty.
Better metrics would also become an important diagnostic tool,
helping countries both identify problems before matters spiral out of control and select the right tools to
address them. Had the US, for example, focused more on health, rather than just on GDP, the decline in life
expectancy among those without a college education, and especially among those in America's deindustrialized
regions, would have been apparent years ago.
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Likewise, metrics of equality of opportunity have only recently
exposed the hypocrisy of America's claim to be a land of opportunity: Yes, anyone can get ahead, so long as they
are born of rich, white parents. The data reveal that the US is riddled with so-called inequality traps: Those
born at the bottom are likely to remain there. If we are to eliminate these inequality traps, we first have to
know that they exist, and then ascertain what creates and sustains them.
A little more than a quarter-century ago, US President Bill
Clinton ran on a platform of "putting people first." It is remarkable how difficult it is to do that, even in a
democracy. Corporate and other special interests always seek to ensure that their interests come first. The
massive US tax cut enacted by the Trump administration at this time last year is an example,
par excellence
.
Ordinary people – the dwindling but still vast middle class – must bear a tax increase, and millions will lose
health insurance, in order to finance a tax cut for billionaires and corporations.
If we want to put people first, we have to know what matters to
them, what improves their wellbeing, and how we can supply more of whatever that is. The
Beyond GDP
measurement agenda will continue to play a critical role in helping us achieve these crucial goals.
"... You said that we're entering into a recession. That's just the flat wrong statement. The economy's been in a recession ever since 2008, as a result of what President Obama did by bailing out the banks and not the economy at large. ..."
"... The largest element of fakery is a category that is imputed – that is, made up – for rising rents that homeowners would have to pay if they had to rent their houses from themselves. That's about 6 percent of GDP right there. Right now, as a result of the 10 million foreclosures that Obama imposed on the economy by not writing down the junk mortgage debts to realistic values, companies like Blackstone have come in and bought up many of the properties that were forfeited. So now there are fewer homes that are available to buy. Rents are going up all over the country. Homeownership has dropped by abut 10 percent since 2008, and that means more people have to rent. When more people have to rent, the rents go up. And when rents go up, people lucky enough to have kept their homes report these rising rental values to the GDP statisticians. ..."
"... The other great jump in GDP has been people paying more money to the banks as penalties and fees for arrears on student loans and mortgage loans, credit card loans and automobile loans. When they fall into arrears, the banks get to add a penalty charge. The credit-card companies make more money on arrears than they do on interest charges. This is counted as providing a "financial service," defined as the amount of revenue banks make over and above their borrowing charges. ..."
"... The statistical pretense is that they're taking the risk on making loans to debtors that are going bad. They're cleaning up on profits on these bad loans, because the government has guaranteed the student loans including the higher penalty charges. They've guaranteed the mortgages loans made by the FHA – Fannie Mae and the other groups – that the banks are getting penalty charges on. So what's reported is that GDP growth is actually more and more people in trouble, along with rising housing costs. What's good for the GDP here is awful for the economy at large! This is bad news, not good news. ..."
Paul Sliker: So, Michael, over the past few months the IMF has been sending warning
signals about the state of the global economy. There are a bunch of different macroeconomic
developments that signal we could be entering into another crisis or recession in the near
future. One of those elements is the yield curve, which shows the difference between short-term
and long-term borrowing rates. Investors and financial pundits of all sorts are concerned about
this, because since 1950 every time the yield curve has flattened, the economy has tanked
shortly thereafter.
Can you explain what the yield curve signifies, and if all these signals I just mentioned
are forecasting another economic crisis?
Michael Hudson: Normally, borrowers have to pay only a low rate of interest for a
short-term loan. If you take a longer-term loan, you have to pay a higher rate. The longest
term loans are for mortgages, which have the highest rate. Even for large corporations, the
longer you borrow – that is, the later you repay – the pretense is that the risk is
much higher. Therefore, you have to pay a higher rate on the pretense that the interest-rate
premium is compensation for risk. Banks and the wealthy get to borrow at lower rates.
Right now what's happened is that the short-term rates you can get by putting your money in
Treasury bills or other short-term instruments are even higher than the long-term rates. That's
historically unnatural. But it's not really unnatural at all when you look at what the economy
is doing.
You said that we're entering into a recession. That's just the flat wrong statement. The
economy's been in a recession ever since 2008, as a result of what President Obama did by
bailing out the banks and not the economy at large.
Since 2008, people talk about "look at how that GDP is growing." Especially in the last few
quarters, you have the media saying look, "we've recovered. GDP is up." But if you look at what
they count as GDP, you find a primer on how to lie with statistics.
The largest element of fakery is a category that is imputed – that is, made up
– for rising rents that homeowners would have to pay if they had to rent their houses
from themselves. That's about 6 percent of GDP right there. Right now, as a result of the 10
million foreclosures that Obama imposed on the economy by not writing down the junk mortgage
debts to realistic values, companies like Blackstone have come in and bought up many of the
properties that were forfeited. So now there are fewer homes that are available to buy. Rents
are going up all over the country. Homeownership has dropped by abut 10 percent since 2008, and
that means more people have to rent. When more people have to rent, the rents go up. And when
rents go up, people lucky enough to have kept their homes report these rising rental values to
the GDP statisticians.
If I had to pay rent for the house that I have, could charge as much money as renters down
the street have to pay – for instance, for houses that were bought out by Blackstone.
Rents are going up and up. This actually is a rise in overhead, but it's counted as rising GDP.
That confuses income and output with overhead costs.
The other great jump in GDP has been people paying more money to the banks as penalties
and fees for arrears on student loans and mortgage loans, credit card loans and automobile
loans. When they fall into arrears, the banks get to add a penalty charge. The credit-card
companies make more money on arrears than they do on interest charges. This is counted as
providing a "financial service," defined as the amount of revenue banks make over and above
their borrowing charges.
The statistical pretense is that they're taking the risk on making loans to debtors that
are going bad. They're cleaning up on profits on these bad loans, because the government has
guaranteed the student loans including the higher penalty charges. They've guaranteed the
mortgages loans made by the FHA – Fannie Mae and the other groups – that the banks
are getting penalty charges on. So what's reported is that GDP growth is actually more and more
people in trouble, along with rising housing costs. What's good for the GDP here is awful for
the economy at large! This is bad news, not good news.
As a result of this economic squeeze, investors see that the economy is not growing. So
they're bailing out. They're taking their money and running.
If you're taking your money out of bonds and out of the stock market because you worry about
shrinking markets, lower profits and defaults, where are you going to put it? There's only one
safe place to put your money: short-term treasuries. You don't want to buy a long-term Treasury
bond, because if the interest rates go up then the bond price falls. So you want buy short-term
Treasury bonds. The demand for this is so great that Bogle's Vanguard fund management company
will only let small investors buy ten thousand dollars worth at a time for their 401K
funds.
The reason small to large investors are buying short term treasuries is to park their money
safely. There's nowhere else to put it in the real economy, because the real economy isn't
growing.
What has grown is debt. It's grown larger and larger. Investors are taking their
money out of state and local bonds because state and local budgets are broke as a result of
pension commitments. Politicians have cut taxes in order to get elected, so they don't have
enough money to keep up with the pension fund contributions that they're supposed to make.
This means that the likelihood of a break in the chain of payments is rising. In the United
States, commercial property rents are in trouble. We've discussed that before on this show. As
the economy shrinks, stores are closing down. That means that the owners who own commercial
mortgages are falling behind, and arrears are rising.
Also threatening is what Trump is doing. If his protectionist policies interrupt trade,
you're going to see companies being squeezed. They're not going to make the export sales they
expected, and will pay more for imports.
Finally, banks are having problems of they hold Italian government bonds. Germany is
unwilling to use European funds to bail them out. Most investors expect Italy to do exit the
euro in the next three years or so. It looks like we're entering a period of anarchy, so of
course people are parking their money in the short term. That means that they're not putting it
into the economy. No wonder the economy isn't growing.
California – $2.751 trillion
Texas – $1.707 trillion
Russia – $1.578 trillion
Likbez:
@Winston July 28, 2018 at 10:00 am
Cult of GDP is a damaging mental disease. With the size of the USA financial sector it is grossly distorted.
The inflated costs of pharmaceutical and medical-industrial complex add another large portion of air into the US GDP.
Surveillance Valley (Amazon, Apple, Facebook, Google, Microsoft, etc ) firms valuations are also inflated and their
contribution to the USA economics is overestimated in GDP.
There is also such thing as purchase parity. To compare GDP between countries, you must use purchasing power parity. To
compare GDP without calculating in purchasing parity is just naïve.
I suspect that in real purchasing power Russia is close to Germany (which means it it is the fifth largest economy)
The USA still has dominance is key technologies and cultural influence.
Example with GDP growth after natural disaster is pretty illuminating...
Notable quotes:
"... GDP = Consumption + Investment + Government Spending + Net Exports ..."
"... or more succinctly ..."
"... GDP = C + I + G + NX ..."
"... where consumption (C) represents private-consumption expenditures by households and nonprofit organizations, investment (I) refers to business expenditures by businesses and home purchases by households, government spending (G) denotes expenditures on goods and services by the government, and net exports (NX) represents a nation's exports minus its imports. ..."
"... Here's Dave's explanation: ..."
"... Once I learned about accounting, I figured out why the GDP metric wasn't sufficient. What is missing? ..."
"... The balance sheet. ..."
"... Hurricanes are a direct hit to your nation's balance sheet. The national income statement goes up because of increased spending to replace lost assets, but the "equity" part of the national balance sheet ends up taking a hit in direct proportion to the damage that occurred. Even if you rebuild everything just the way it was, your assets remain the same, while your liabilities have increased. ..."
"... We know this because we use the balance sheet equation: equity = assets – liabilities. Equity is another word for wealth. ..."
"... After hurricane, you rebuild your house, and buy a new car, using borrowed money: ..."
"... wealth = (house + car) – (2 x home debt + 2 x car debt) ..."
"... Wealth (equity) has declined by the sum (home debt + car debt) ..."
"... So when you see pictures of a hurricane strike, you can now look through all that devastation and see the impact on the balance sheet. National equity (wealth) just dropped by the amount of damage inflicted by the hurricane. Whether it is ever rebuilt doesn't actually matter; that equity is just gone. Destruction is always a downside for equity – even if there is a temporary positive impact on the income statement. ..."
"... Isn't it interesting that the mainstream economists, who don't use banks, debt, or money in their models, largely ignore balance sheets and instead just looks at the income statement alone? Its almost as if the entire education system was organized so that people paid no attention to banks, debt, and money. Who do you think might benefit from our flock of PhD economists ignoring the extremely profitable debt-elephant in the room, and its purveyors, the banks? ..."
"... without resistance from academics whom those aristocrats likewise finance ..."
Gross Domestic Product, or GDP, is the most commonly used measure and ranking of a nation's
economy. According to the OECD and Wikipedia, its definition is: "an aggregate measure of
production equal to the sum of the gross values added of all resident and institutional units
engaged in production (plus any taxes, and minus any subsidies, on products not included in the
value of their outputs) " No subtractions are included in it for debts that were undertaken in
order to generate the given "gross values added." A trillion dollars of increased assets
(additional "gross values" of "production") adds a trillion dollars to GDP, even if all of it
was produced by increasing the debts by a trillion dollars: only the assets-side of the
balance-sheet is relevant to GDP.
However, wealth is assets minus liabilities; it is assets minus debts; it is not
assets alone. Therefore, a nation's wealth has no necessary relationship at all to a nation's
GDP, because the nation's wealth is its assets minus its liabilities, not its assets
regardless of its liabilities (such as GDP is).
Britannica
provides this definition of "GDP" : "Gross domestic product (GDP), total market value of
the goods and services produced by a country's economy during a specified period of time. It
includes all final goods and services -- that is, those that are produced by the economic
agents located in that country regardless of their ownership and that are not resold in any
form. It is used throughout the world as the main measure of output and economic activity." In
this definition, too, no subtractions are included in it for the debts. Britannica then goes on
to state:
GDP = Consumption + Investment + Government Spending + Net Exports
or more succinctly
GDP = C + I + G + NX
where consumption (C) represents private-consumption expenditures by households and
nonprofit organizations, investment (I) refers to business expenditures by businesses and home
purchases by households, government spending (G) denotes expenditures on goods and services by
the government, and net exports (NX) represents a nation's exports minus its imports.
Kimberly
Amadeo at "The Balance" uses that definition , and opens her article about GDP by saying:
"Gross domestic product is the best way to measure a country's economy. GDP is the total value
of everything produced by all the people and companies in the country. It doesn't matter if
they are citizens or foreign-owned companies. If they are located within the country's
boundaries, the government counts their production as GDP."
However: is GDP, in fact , "the best way to measure a country's economy"? If you're
a banker whose income is derived from having a lot of money owed to you, then, of course, you
will want to fool the public into believing that ignoring debts that were incurred in producing
a given GDP is "the best way to measure a country's economy," because the more fools that
believe it, the more income you will make, because people won't be measuring their
economic welfare by deducting from it the debts they owe. They will be deceived to
think their country to be in better economic and financial position than it is, if the debts
that it incurs are being ignored; this ignoring of debt in the ranking of nations' economies
will make easier a government's taking on more debt than it should.
Roy H. Webb, of the Richmond Fed, headlined in 1994,
"The National Income and Product Accounts" and he presented there a lengthy breakdown of
how GDP is calculated, but, yet again, nowhere in that article did any form of the terms "debt"
or "liability" appear.
Isn't it obvious, that GDP is a fraud -- and a very influential one?
MBA-Tutorials has an article "Shortcomings of GDP"
, but it, too, doesn't mention, in any form, "debts" or "liabilities"; and, so, it, too, is
fake.
Bob McTeer, former President of the Dallas Fed, headlined in Forbes on 31 October 2012,
"Hurricane Sandy And The
Shortcomings Of GDP" , and he opened: "Natural disasters, like Hurricane Sandy, provide
periodic reminders, not of the shortcomings of GDP necessarily, but what GDP is designed to
measure and what it is not designed to measure." In other words: the bankers excuse GDP because
"it is not designed to measure" what it is being routinely used to measure. If the
ordinary-language meaning of "GDP" is devoid of the liabilities-side of the balance-sheet, and
ranks nations' economic performance in that way -- by ignoring any additional indebtedness that
went into generating that additional "production" -- then what language was Dr. McTeer even
writing in, there (since it wasn't ordinary language -- language as it's commonly understood)?
That statement by McTeer, too, therefore, is deceit. In the rest of his article, he blathers
on. And, nowhere in that article, either, are the words "debts" or "liabilities" used, in any
form.
Deceit regarding GDP is routine, just as such a fake 'misuse' of "GDP" is routine. (It's
really no "misuse" of the term, at all.) GDP is designed to be a misleading basis for ranking
the economic performance of countries; it's used for the purpose it's intended for, because the
purpose it's intended for is to deceive the public in this very way -- to ignore debt -- and,
so, that's the way it's used.
However, Charles Hugh Smith, at several blogs, explained the matter honestly, instead of (as
is normally done) as a representative of the debt-industries, when he headlined on 19 October
2017, "GDP Is Bogus: Here's Why" ,
and he presented there a superbly clear example, which applies not only to Hurricane Sandy, but
to any natural disaster or war, and thus (by implication) constitutes a threat to not only the
debt-industries (the financial firms), but also the man-made-disaster industries (the
war-firms), such as Dwight Eisenhower famously (but only vaguely) referred to in his final
words parting from the White House and handing it over to JFK in 1961, as "the
military-industrial complex," against which Eisenhower vaguely was warning there.
Charles Hugh Smith's example, much clearer than McTeer's blather, had allegedly come from
some accountant, "Dave," and presented (without linking to) the following:
Here's Dave's explanation:
Once I learned about accounting, I figured out why the GDP metric wasn't sufficient.
What is missing?
The balance sheet.
Hurricanes are a direct hit to your nation's balance sheet. The national income
statement goes up because of increased spending to replace lost assets, but the "equity" part
of the national balance sheet ends up taking a hit in direct proportion to the damage that
occurred. Even if you rebuild everything just the way it was, your assets remain the same,
while your liabilities have increased.
We know this because we use the balance sheet equation: equity = assets –
liabilities. Equity is another word for wealth.
Before hurricane:
wealth = (house + car) – (home debt + car debt)
After hurricane, you rebuild your house, and buy a new car, using borrowed
money:
wealth = (house + car) – (2 x home debt + 2 x car debt)
Wealth (equity) has declined by the sum (home debt + car debt)
So when you see pictures of a hurricane strike, you can now look through all that
devastation and see the impact on the balance sheet. National equity (wealth) just dropped by
the amount of damage inflicted by the hurricane. Whether it is ever rebuilt doesn't actually
matter; that equity is just gone. Destruction is always a downside for equity – even if
there is a temporary positive impact on the income statement.
Isn't it interesting that the mainstream economists, who don't use banks, debt, or money
in their models, largely ignore balance sheets and instead just looks at the income statement
alone? Its almost as if the entire education system was organized so that people paid no
attention to banks, debt, and money. Who do you think might benefit from our flock of PhD
economists ignoring the extremely profitable debt-elephant in the room, and its purveyors, the
banks?
By means of deceits such as using false measures of nations' economic performance, like
that, the aristocracy and its agents, in all countries -- the owners of banks like HSBC, and of
'defense' contractors like Lockheed Martin, etc. -- can, and do, without resistance from
academics whom those aristocrats likewise finance , use fake 'measures' of nations'
economic performance, so as to advance their own private economic performances, by fooling
their narcoticized public into accepting these economic and financial bloodsuckers, accepting
them by ignoring whatever blood might be lost in the process. Or: are they, too, merely fools?
They function more like vampires, than like fools. But, apparently, the victims -- here, the
public -- just don't awake from this bite, and, so, it will probably continue until the next
great economic crash, after which, yet again, the government will go into still more debt, in
order to 'recover' from these 'mistakes'. That sounds like a good business to be in -- a stable
business, of the "heads I win, tales you lose" type. It might not be irresistible, but no one
is resisting it. Now, why would that be?
"... "Here is my two cents: these three researchers may have just put the nail in the coffin of using production-side measures of the free economy-and that is not really all that bad. GDP is a measure of total production. It was ever meant to be a measure of how well-off society has become. ..."
"... While introduction of the concept of GDP and systematic its measurement (with all its warts, especially in calculation of "real GDP") was a great achievement, absolutization of GDP under neoliberalism and, especially, false equivalence between GDP growth and growth of the standard of living of population are dangerous neoliberal myths. ..."
"... We should fight neoliberal cult of GDP. ..."
"... Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what. ..."
Interesting post at Digitopoly by Shane Greenstein
"Here is my two cents: these three researchers may have just put the nail in the coffin
of using production-side measures of the free economy-and that is not really all that bad. GDP
is a measure of total production. It was ever meant to be a measure of how well-off society has
become.
More to the point, maybe it is time to focus on the demand-side measures of free goods. In
other words, you get a lot more for your Internet subscription, but nothing in GDP reflects that.
For example, the price index for Internet services should reflect qualitative improvement in user
experiences, and needs to improve."
While introduction of the concept of GDP and systematic its measurement (with all its warts,
especially in calculation of "real GDP") was a great achievement, absolutization of GDP under
neoliberalism and, especially, false equivalence between GDP growth and growth of the standard
of living of population are dangerous neoliberal myths.
We should fight neoliberal cult of GDP.
Simon Kuznets, the economist who developed the first comprehensive set of measures of national
income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses
of National Income Measurements":
The valuable capacity of the human mind to simplify a complex situation in a compact characterization
becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative
measurements especially, the definiteness of the result suggests, often misleadingly, a precision
and simplicity in the outlines of the object measured. Measurements of national income are subject
to this type of illusion and resulting abuse, especially since they deal with matters that are
the center of conflict of opposing social groups where the effectiveness of an argument is often
contingent upon oversimplification. [...]
All these qualifications upon estimates of national income as an index of productivity are
just as important when income measurements are interpreted from the point of view of economic
welfare. But in the latter case additional difficulties will be suggested to anyone who wants
to penetrate below the surface of total figures and market values. Economic welfare cannot be
adequately measured unless the personal distribution of income is known. And no income measurement
undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of
effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred
from a measurement of national income as defined above.
In 1962, Kuznets stated:
Distinctions must be kept in mind between quantity and quality of growth, between costs
and returns, and between the short and long run. Goals for more growth should specify more growth
of what and for what.
"... NAIRU is a specific claim and estimate about the way the economy works. As you discovered yourself, the Fed literally produces a NAIRU estimate and uses that estimate to determine policy. NAIRU cannot be estimated accurately, and furthermore there is zero evidence of accelerating inflation. So there is literally nothing redeeming about the theory except to say that there is some relationship between supply labor, and inflation. Which is to say, that your support of the thing is wrong, and all of our criticisms that NAIRU is trash are correct. ..."
"... The answer is that there is no unemployment rate that generates accelerating inflation. As inflation is not simply a relationship between unemployment and prices. Inflation is a result of many different types of inputs. ..."
"... There are literally zero examples of low unemployment rates, even below 1% during WWII, that have resulted in accelerating inflation. You and the NAIRU crowd have no legs to stand on. ..."
"... You make the same mistake as all illiterate persons, that is, you cannot read. What I have clearly stated is: "NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false."* The measurement problem is a side issue.** ..."
"... "better to say that there is no necessary or constant relationship between employment and inflation that can be expressed either as a function or a rule," ..."
"... Good line here Tom... they don't have a function... ..."
"... I've closely followed this NAIRU argument here and on other threads. I don't have a dog in this fight, but it seems perfectly obvious from all this that Auburn and Brian have this exactly right. And for the life of me I cannot fathom how anyone can misunderstand their argument: there may be a link between employment and inflation, but the NAIRU doesn't capture it. There may be a link between dogs barking at a full moon, but my theory of a moon made out of green cheese doesn't capture it. ..."
"... Standard labor market theory as it is incorporated in the NAIRU-Phillips curve is not vaguely true, or evolutionary true as David Glasner maintains, but provable false. ..."
For the second time, you claimed "Nobody says there is no relationship between supply,
employment, and inflation." My answer is the same as before: what does Brian Romanchuk mean by
saying NAIRU should be "bashed, smashed and trashed". Seems a pretty outright condemnation of
the whole idea to me.
Tom,
You say "Probably better to say that there is no necessary or constant
relationship…". Quite agree. But whoever said there WAS a constant relationship?
Certainly not the Fed. Anyone with a bit brain ought to realise that NAIRU will vary with a
whole host of variables: standards of education, recent unemployment levels (hystersis) and so
on.
EK-H,
You make the naïve mistake many people make of thinking the because something cannot be
measured accurately that therefor it does not have a precise value. The amount of iron in the
Moon has a very very precise value indeed. Ask God how much iron there is on and in the Moon
and he'd tell you the figure to the nearest 0.00000001%. In contrast, astronomers might not
know the quantity to better than plus or minus 10% for all I know. It is therefor perfectly
permissible to write equations or get involved in discussions which assume a very very precise
value for the amount of iron in the Moon. Same goes for NAIRU.
Much of the stuff I've written makes the latter assumption: it is helpful to make that
assumption sometimes.
No Egmont, its not about scientific idiocy. Its about the nature of the subject. Economics
is not different than social psychology in this regard.
Ralph-
NAIRU is a specific claim and estimate about the way the economy works. As you discovered
yourself, the Fed literally produces a NAIRU estimate and uses that estimate to determine
policy. NAIRU cannot be estimated accurately, and furthermore there is zero evidence of
accelerating inflation. So there is literally nothing redeeming about the theory except to
say that there is some relationship between supply labor, and inflation. Which is to say,
that your support of the thing is wrong, and all of our criticisms that NAIRU is trash are
correct.
What is the unemployment rate that would correspond to accelearating inflation right now
Ralph?
The answer is that there is no unemployment rate that generates accelerating inflation. As
inflation is not simply a relationship between unemployment and prices. Inflation is a result
of many different types of inputs.
There are literally zero examples of low unemployment rates, even below 1% during WWII,
that have resulted in accelerating inflation. You and the NAIRU crowd have no legs to stand
on.
You say: "You make the naïve mistake many people make of thinking the because
something cannot be measured accurately that therefore it does not have a precise value."
You make the same mistake as all illiterate persons, that is, you cannot read. What I have
clearly stated is: "NAIRU is dead, not because of measurement problems, but because the
underlying employment theory is false."* The measurement problem is a side issue.**
Egmont Kakarot-Handtke
* See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
** See 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html
The moronic part of economists, i.e. the vast majority, maintains that economics is a
social science. Time to wake up to the fact that economics is a system science.#1
Economics is NOT a science of individual/social/political behavior - this is the social
science delusion - but of the behavior of the monetary economy . All Human-Nature issues are
the subject matter of other disciplines (psychology, sociology, anthropology, biology/
Darwinism, political science, social philosophy, history, etcetera) and are taken in from
these by way of multi-disciplinary cooperation.#2
The economic system is subject to precise and measurable systemic laws.#3
Egmont Kakarot-Handtke
#1 See 'Lawson's fundamental methodological error and the failure of Heterodoxy'
http://axecorg.blogspot.de/2016/03/lawsons-fundamental-methodological.html
#2 See 'Economics and the social science delusion'
http://axecorg.blogspot.de/2016/03/economics-and-social-science-delusion.html
#3 See 'The three fundamental economic laws'
http://axecorg.blogspot.de/2016/03/the-three-fundamental-economic-laws.html
But whoever said there WAS a constant relationship? Certainly not the Fed.
Not now. They had to learn this by first the NAIRU model that assumed a natural rate and
cet. par., and then the difficulty of writing a rule that could be applied across time.
Too many confounding factors involved that are not directly related to employment or the
interest rate.
It is, first of all, of utmost importance to distinguish between political and theoretical
economics. The main differences are: (i) The goal of political economics is to successfully
push an agenda, the goal of theoretical economics is to successfully explain how the actual
economy works. (ii) In political economics anything goes; in theoretical economics the
scientific standards of material and formal consistency are observed.
Political economics has produced NOTHING of scientific value in the last 200+ years. The
four majors approaches - Walrasianism, Keynesianism, Marxianism, Austrianism - are mutually
contradictory, axiomatically false, and materially/formally inconsistent.
A closer look at the history of economic thought shows that theoretical economics (=
science) had been hijacked from the very beginning by the agenda pushers of political
economics. These folks never rose above the level of vacuous econ-waffle. The whole
discussion from Samuelson/Solow's unemployment-inflation trade-off to Friedman/Phelps's
natural rate to the rational expectation NAIRU is a case in point.
The NAIRU-Phillips curve has zero scientific content. It is a plaything of retarded
political economists. Samuelson, Solow, Friedman, Phelps, and the rest of participants in the
NAIRU discussion up to Wren-Lewis are fake scientists.*
Egmont Kakarot-Handtke
* See also 'Modern macro moronism'
http://axecorg.blogspot.de/2017/02/modern-macro-moronism.html
"better to say that there is no necessary or constant relationship between employment and
inflation that can be expressed either as a function or a rule,"
Good line here Tom... they don't have a function...
But I would point out that with the employment issue, we have had an unregulated system
interface (open borders) for decades which is ofc going to result in chaos..
I see: so you're saying the "underlying employment theory" of NAIRU "is false": i.e.
you're saying there is no relationship between inflation and unemployment.
Why then don't you advocate a massive increase in demand. Think of the economic benefits
and social problems solved.!!
Reason you don't advocate that is that, like all the other NAIRU deniers, you know
perfectly well that THERE IS a relationship between inflation and unemployment.!!
It would be fine if you could first learn to read and to think and to do your economics
homework.
The point at issue is the labor market theory and the remarkable fact of the matter is
that economists have after 200+ years NO valid labor market theory. The proof is in the
NAIRU-Phillips curve. So what these failures are in effect doing is giving policy advice
without sound theoretical foundation. Scientists don't do this.
What is known since the founding fathers about the separation of politics and science is
this: "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." (J. S. Mill)
The first point is that economists violate the separation of politics and science on a
daily basis.#1 The second point is that their unwarranted advice is utter rubbish because
they have NO idea how the economy works. The problem society has with economists is that it
would be much better off without these clowns.
You ask me: "Why then don't you advocate a massive increase in demand. Think of the
economic benefits and social problems solved.!!"
Answer: The business of the economist is the true theory about how the economic system
works and NOT the solution of social problems. This is the proper business of politicians. In
addition, an economist who understands how the price and profit mechanism works does not make
such a silly proposal, only brain-dead political agenda pushers do.#2
What I am indeed advocating is that retarded econ-wafflers are thrown out of economics and
that economics gets finally out of what Feynman aptly called cargo cult science.#3
Economists claim since more that 200 years that they are doing science and this is
celebrated each year with the 'Bank of Sweden Prize in Economic Sciences in Memory of Alfred
Nobel'. Time to make this claim come true.
The only thing economist like you can actively do to contribute to the progress of
economics is switching on TV and watching 24/365.
Egmont Kakarot-Handtke
#1 See 'Scientific suicide in the revolving door'
http://axecorg.blogspot.de/2016/11/scientific-suicide-in-revolving-door.html
#2 See 'Rethinking deficit spending'
http://axecorg.blogspot.de/2016/12/rethinking-deficit-spending.html
#3 See 'Economists and the destructive power of stupidity'
http://axecorg.blogspot.de/2017/02/economists-and-destructive-power-of.html
"The business of the economist is the true theory about how the economic system works and
NOT the solution of social problems. This is the proper business of politicians."
"The business of the economist" is not just "true theory": it is also to give the best
economic advice they can even where the theory is clearly defective. In the case of the
relationship between inflation and unemployment, the EXACT nature of that relationship is not
known with much accuracy, but governments just have to take a judgement on what level of
unemployment results in too much inflation. Ergo economics have a duty to give the best
advice they can in the circumstances.
Re social problems, your above quote also doesn't alter the fact that economists are in a
position to solve HUGE social problems if they promote an increase in demand where that is
possible. So why are you so reluctant to solve those social problems by advocating a huge
increase in demand. It's blindingly obvious.
Like all the other NAIRU deniers, you know perfectly well there is a relationship between
inflation and unemployment!!
To say that there is "a" relationship between inflation and unemployment does not even
remotely support the claims inherent in the NAIRU, nor does it justify its use to guide the
macroeconomic framework. NAIRU does not claim that there is "a" relationship between
inflation and unemployment (that lesser claim is covered adequately by the Phillips Curve).
NAIRU claims that low levels of unemployment generate ACCELERATING inflation (i.e.
"hyperinflation"), a claim based on pure sophistry and nothing else. If you would like to
support the NAIRU's utterly fallacious claim that low unemployment generates ACCELERATING
inflation, then please provide data to support that claim.
Furthermore, "a" relationship between unemployment and inflation in no way justifies the
central bank intervention of choking off economic growth to prevent "too many jobs". Is the
inflation harmful or benign? With the historical perspective available to us from nearly 5
decades of NAIRU, all that is required is to look at the chart of hourly wage growth vs
productivity and observe that real wages growth took a sharp right turn at the very time
NAIRU was implemented worldwide. There has not been one iota of real wage growth since the
70's (despite low inflation), whereas the real wage grew steadily prior to that (despite
moderate inflation). If that is the price of "protecting" us from inflation, then in what way
is it beneficial to do so?
I see Ralph Musgrave referred to my article again.
Good Lord, how can I make what I wrote simpler to understand?
The DEFINITION of NAIRU is the level of the unemployment rate at which the price level
starts to accelerate. Sure, there's usually another variable in there mucking up the works,
but it's going to be a second order effect in the current environment.
- If you hand me a time series of the NAIRU, I could demonstrate how the predicted
acceleration does not match observed data.
- If you cannot hand me such a time series, that is a strong indication that no such
series exists. In which case, you're wrong, and I'm right.
You say: "Ergo economics have a duty to give the best advice they can in the
circumstances."
The only duty of scientifically incompetent economists is to throw themselves under the
bus. Economists are a menace to their fellow citizens as Napoleon already knew: "Late in
life, moreover, he claimed that he had always believed that if an empire were made of granite
the ideas of economists, if listened to, would suffice to reduce it to dust." (Viner)
Economists do NOT solve social problems they ARE a social problem.
You repeat your silly question: "So why are you so reluctant to solve those social
problems by advocating a huge increase in demand. It's blindingly obvious."
Yes it is blindingly obvious that deficit spending does NOT solve social problems but
CREATES the social problem of an insanely unequal distribution (see the references
above).
This follows from the true labor market theory which is given with the systemic employment
equation.#1 "The correct theory of the macroeconomic price mechanism tells us that ―
for purely SYSTEMIC reasons ― the average wage rate has in the current situation to
rise faster than the average price. THIS opens the way out of mass unemployment, deflation,
and stagnation and NOT the blather of scientifically incompetent orthodox and heterodox
agenda pushers."#2
Right policy depends on true theory: "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)
Economists do not have the true theory. They have NOTHING to offer. The NAIRU-Phillips
curve is provable false. Because of this ALL economic policy conclusions drawn from it are
counterproductive, that is, they WORSEN the situation. So, Samuelson, Solow, Friedman, Phelps
and the other NAIRU-Phillips curve proponents bear the responsibility for mass unemployment
and the social devastation that comes with it.
From the fact that the NAIRU labor market theory is false follows that economists are
incompetent scientists and that ALL their economic policy proposals are scientifically
worthless.
Egmont Kakarot-Handtke
#1 See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
#2 See 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html
I've closely followed this NAIRU argument here and on other threads. I don't have a dog in
this fight, but it seems perfectly obvious from all this that Auburn and Brian have this
exactly right. And for the life of me I cannot fathom how anyone can misunderstand their
argument: there may be a link between employment and inflation, but the NAIRU doesn't capture
it. There may be a link between dogs barking at a full moon, but my theory of a moon made out
of green cheese doesn't capture it.
Comment on David Glasner on 'Richard Lipsey and the Phillips Curve Redux'
David Glasner contributes to the NAIRU discussion#1 by reproducing essential content of
his 2013 paper. Back then he propagated Lipsey's concept of multiple equilibria or band of
unemployment (NAIBU) which is consistent with a stable rate of inflation. The NAIBU concept
is a fine example of the tendency of economists to soften, relativize, qualify, and
semantically dilute every concept until it is senseless and useless.
It is the very characteristic of economics that there are no well-defined concepts and
this begins with the pivotal economic concepts profit and income. The habit of swampification
keeps the discourse safely in the no man's land where "nothing is clear and everything is
possible" (Keynes) and where anything goes.
Swampification is what Popper called an immunizing strategy. The beauty of vagueness and
ambiguity is that it cannot be falsified: "Another thing I must point out is that you cannot
prove a vague theory wrong." (Feynman)#2
David Glasner applies the concept of evolution in order to swampify the NAIRU: "The
current behavior of economies … is consistent with evolutionary theory in which the
economy is constantly evolving in the face of path-dependent, endogenously generated,
technological change, and has a wide range of unemployment and GDP over which the inflation
rate is stable."
In other words, presumably there is a relationship between unemployment and inflation but
nobody knows what it is. While science is known to strive for uniqueness, economics is known
to strive for ambiguity and obfuscation. This swampiness is rationalized as realism. After
all, reality is messy, isn't it?
To recall, the Phillips curve started as a simple and remarkably stable EMPIRICAL
relationship between wage rate changes and the rate of unemployment. The original Phillips
curve was reinterpreted and thereby messed up by Samuelson and Solow who introduced the
economic policy trade-off between inflation and unemployment which was finally thrown out
again with the NAIRU.
A conceptional error/mistake/blunder slipped in with the bastardization of the original
Phillips curve that was never rectified but in effect buried under a huge heap of
inconclusive economic shop talk. This means that until this very day economics has no valid
theory of the labor market.
So, the microfounded NAIRU-Phillips curve has first of all to be rectified.#3 The
macrofounded SYSTEM-Phillips curve is shown on Wikimedia
https://commons.wikimedia.org/wiki/File:AXEC62.png
From this correct employment equation follows in the MOST ELEMENTARY case that an increase
of the macro-ratio rhoF=W/PR leads to higher total employment L. The ratio rhoF embodies the
price mechanism. Let the rate of change of productivity R for simplicity be zero, i.e. r=0,
then there are three logical cases, that is, THREE types of inflation.
(i) If the rate of change of the wage rate W is equal to the rate of change of the price P,
i.e. w=p, then employment does NOT change NO MATTER how big or small the rates of change are.
That is, NO amount of inflation or deflation has any effect on employment. Inflation is
neutral, there is no trade-off between unemployment and inflation.
(ii) If the rate of change of the wage rate is greater than the rate of change of the price
then employment INCREASES. There is a POSITIVE effect of inflation on employment.
(iii) If the rate of change of the wage rate is smaller than the rate of change of the price
then employment DECREASES. There is a NEGATIVE effect of inflation on employment.
So, it is the DIFFERENCE in the rates of change of wage rate and price and not the
absolute magnitude of change that is decisive. Every PERFECTLY SYNCHRONOUS
inflation/deflation is employment-neutral, that is, employment remains indefinitely where it
actually is. The neutral inflation can start at ANY point between full and zero employment.
The crucial fact to notice is that there is no such thing as "inflation", there are THREE
types of inflation.
The systemic employment equation defines the causal relationship of "inflation" on
employment. However, there is the inverse causality of employment on "inflation".
Common sense suggests that positive inflation (ii) is more probable the closer actual
employment is at full employment and negative inflation (iii) is more probable the farther
away actual employment is from full employment. In other words: the market economy is
inherently unstable. The feed-back loop between employment and "inflation" is the very
antithesis to the idea of equilibrium. To recall, the NAIRU is DEFINED as an equilibrium.
Standard economics has built equilibrium right into the premises, i.e. into the axiomatic
foundations. All of economics starts with the idea that the market economy is an equilibrium
system. It turns out that this premise is false, just the opposite is the case.
Standard labor market theory as it is incorporated in the NAIRU-Phillips curve is not
vaguely true, or evolutionary true as David Glasner maintains, but provable false.
Egmont Kakarot-Handtke
#1 See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
and 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html
#2 "By having a vague theory it is possible to get either result. ... It is usually said when
this is pointed out, 'When you are dealing with psychological matters things can't be defined
so precisely'. Yes, but then you cannot claim to know anything about it."
#3 See 'Keynes' Employment Function and the Gratuitous Phillips Curve Disaster'
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421
Fed Needs a Better Inflation Target - Narayana Kocherlakota
yes for a given amount of monopoly power, which the fed does
not really control,
the most the fed can do is work on the real interest rates
but if we have less monopoly power that would reduce the
part of nairu that is also known as involuntary unemployment,
and help real wages, without having so much inflation
in other words closer we get to full a perfectly
componetitive market, the less change of accelerating
inflation because in a perfectly competitive market , firms
are price takers not price makers
in a perfectly competitive market, the unions couldn't
drive inflation, without monopoly power there is no
accelerating inflation period
the fed cant control that only the legislature and
judiciary can control the ext of monopoly power
the point is the can only target inflation and real
interest rates
but there are other factors that can get us to full
employment, ie eliminate involuntary employment, that affect
inflation wages and employment in different ways and
different directions
and those factors other than inflation and interest rates
that affect involuntary unemployment seem to be ignored when
we are having these discussion
Did the rise of free information technology improve GDP? It is commonly assumed that it did.
After all, the Internet has changed the way we work, play, and shop. Smartphones and free apps
are ubiquitous. Many forms of advertising moved online quite a while ago and support gazillions of
"free" services. Free apps changed leisure long ago-just ask any teenager or any parent of a teenager.
Shouldn't that add up to a lot?
Think again. The creation of the modern system of GDP economic accounting was among the greatest
economic inventions of the 20th century. Initially created in the US and Britain, this system has
been improved for decades, and, for all intents and purposes, it is the system in every modern government
around the world today.
Although this system contains some flexibility, it also has its rigidities, especially when it
comes to free services. I expect the answer to sit awkwardly with most readers. Nonetheless, a little
disciplined thinking yields a few insights about the modern experience, and that is worth the effort.
... ... ...
This was an obvious problem when commercial television first spread using advertising as its primary
revenue source. The consumption is free, and the only revenue comes from advertising. When the TV
experience improved- say, as it moved from black and white to color - GDP recorded only the revenue
for television sets and advertising, not the user experience.
There was hope that industry specialists would find some underlying proportional relationship
between consumption of services and advertising revenue-for example, between the time watching TV
and the value of watching commercials. Such proportionality would have been very handy for economic
accounting, because it would yield an easy proxy for improvement in the quality of services. Accountants
would merely have to examine improvement in advertising revenue.
Alas, no such relationship could be found. Just look at the history of television to understand
why. Television has gotten much better over the last few decades, but-for many reasons-total advertising
has not grown. The economics is just not that simple.
A similar problem has arisen today. Search engines attract users, and that generates tens of billions
of dollars of revenue from advertisers, and that revenue contributes to GDP. However, the services
delivered by search contribute no revenue and, by definition, contribute nothing to GDP. With so
many free services today, this weakness in GDP accounting seems awkward. It does not matter how amazing
the services are, nor how much they have improved over time. Any improvement in the quality of search
services is not a contribution in GDP except insofar as it generates more advertising dollars.
Recently, three professional economists- Leonard Nakamura, Jon Samuels, and Rachel Soloveichik-tried
to wade into this topic again, and tried something experimental and novel. They wondered how GDP
would change if these free services were reconceived as a barter.
A good way to try and quantify the value of free goods/services is to estimate (as best as
one can) how those goods/services make us healthier and/or live longer active lives. A solution
free environment and public parks are good examples of free services that make us healthier. In
principle, the social media (e.g., Facebook) and voluntary work could reduce social alienation,
and make people healthier.
On the other hand, some goods/services that contribute to the GDP can have negative effects
on health & wellbeing – e.g., gambling.
"... Of course part of the point of 401(k) and similar plans is to "align" workers with the company and companies in general, aside from paying them in stock rather than cash. I suspect it works more so than it doesn't, overall. ..."
"... Sarcasm or satire, yes. I'm not claiming that the narrative is "correct", but that it exists. Surely you must have heard of "alignment" between shareholders and employees. Usually used to justify large stock grants to executives, but also applicable more broadly. ..."
"... And in the case of vesting, (3) employees are supposedly reluctant to "leave money on the table" by quitting before the stock is vested. This must work in aggregate or companies wouldn't do this. ..."
"... Honestly cm, I have not heard about the alignment between shareholders and employees. That doesn't mean it doesn't exist, I realize that. ..."
"... I don't have any stats to cite but I would say that is ridiculous. I would say that almost all people who are characterized as working class make their income through their labor. Not from some stock ownership. ..."
"... It is supposedly common for startups to pay below-market (compared to established companies) to their employees, with the promise of appreciation of stock grants after an IPO/acquisition. Usually that's a bad deal for most employees, as the IPO may not happen, or when it happens, their stock has been heavily diluted. ..."
"... In established companies, stock-based compensation can be more substantial for managerial or professional staff, but not life-changing - e.g. you may get a 5-20% upgrade on your salary depending on how important you are considered, which is nice, but it will not change the fact that you still have to show up for work every day. ..."
It is a commentary on a narrative. Of course part of the point of 401(k) and similar plans
is to "align" workers with the company and companies in general, aside from paying them in stock
rather than cash. I suspect it works more so than it doesn't, overall.
Sarcasm or satire, yes. I'm not claiming that the narrative is "correct", but that it exists.
Surely you must have heard of "alignment" between shareholders and employees. Usually used to
justify large stock grants to executives, but also applicable more broadly.
Companies have several programs: ESPP (employees can buy a limited amount of company stock
at a 15% discount), 401(k) retirement accounts that may contain company stock or other investment
funds, stock and stock option grants (employees are not buying the stock but get it as part of
a regular or retention bonus program, usually with vesting - commonly your grant will vest over
4 years).
The idea behind all programs involving company stock is (1) disbursing stock is usually cheaper
to the company than cash, for the same nominal amount - for large programs where administration
overhead is amortized, (2) employees are supposedly "incentivized" to act to increase the stock
price.
The latter is believable at higher management levels, for lower level employees it is supposed
to increase their motivation to put business priorities before their own, how much it works is
anybody's guess.
And in the case of vesting, (3) employees are supposedly reluctant to "leave money on the
table" by quitting before the stock is vested. This must work in aggregate or companies wouldn't
do this.
If somebody absolutely wants to quit because of a bad situation or a sufficiently compelling
offer, they will. But it raises the bar. Also I have heard about companies sufficiently interested
in hiring somebody with "handcuffs" offering compensation, i.e. effectively buying out your unvested
stock (or replacing it with their own extra grant).
Honestly cm, I have not heard about the alignment between shareholders and employees. That
doesn't mean it doesn't exist, I realize that.
Regardless, I would want to see a bunch of stats that showed that workers were primarily (or
"predominately" was the actual word used) stock holders and that they derive a meaningful part
of their yearly income through that ownership while they are working.
I don't have any stats to cite but I would say that is ridiculous. I would say that almost
all people who are characterized as working class make their income through their labor. Not from
some stock ownership.
I am not claiming that workers are primarily stockholders. I am claiming that companies have
programs to issue, or sell stock at a discount, or match 401(k) contributions up to a limit (in
all applicable cases with our without vesting) to their employees. 401(k) and ESPP probably have
to be offered to everybody, stock grants are usually selective. (Probably restricted by grade
level and job function.)
The primary motivations for companies are that stock is usually cheaper for them than cash,
and the retention effect of vesting. Employee alignment with the stock price is also a narrative,
but it is not clear to me who believes it.
Are you disputing that companies are interested in pushing narratives of their labor relations
that are beyond just "you work here and we pay you", and are in fact doing this?
It is supposedly common for startups to pay below-market (compared to established companies)
to their employees, with the promise of appreciation of stock grants after an IPO/acquisition.
Usually that's a bad deal for most employees, as the IPO may not happen, or when it happens, their
stock has been heavily diluted.
In established companies, stock-based compensation can be more substantial for managerial
or professional staff, but not life-changing - e.g. you may get a 5-20% upgrade on your salary
depending on how important you are considered, which is nice, but it will not change the fact
that you still have to show up for work every day.
"... Almost three and a half years ago, I published a post about Richard Lipsey's paper "The Phillips Curve and the Tyranny of an Assumed Unique Macro Equilibrium. ..."
"... One important early post-WWII debate, which took place particularly in the UK, concerned the demand and inflationary pressures at which it was best to run the economy. The context for this debate was provided by early Keynesian theory with its absence of a unique full-employment equilibrium and its mainly forgotten, but still relevant, microeconomic underpinnings. The original Phillips Curve was highly relevant to this debate. ..."
Almost three and a half years ago, I published a
post about Richard Lipsey's paper "The Phillips Curve and the Tyranny of an Assumed Unique Macro
Equilibrium." The paper originally presented at the 2013 meeting of the History of Econmics
Society has just been published in the Journal of the History of Economic Thought , with a
slightly revised title "
The Phillips Curve and an Assumed Unique Macroeconomic Equilibrium in Historical Context ." The
abstract of the revised published version of the paper is different from the earlier abstract included
in my 2013 post. Here is the new abstract.
An early post-WWII debate concerned the most desirable demand and inflationary pressures at
which to run the economy. Context was provided by Keynesian theory devoid of a full employment
equilibrium and containing its mainly forgotten, but still relevant, microeconomic underpinnings.
A major input came with the estimates provided by the original Phillips curve. The debate seemed
to be rendered obsolete by the curve's expectations-augmented version with its natural rate of
unemployment, and associated unique equilibrium GDP, as the only values consistent with stable
inflation. The current behavior of economies with the successful inflation targeting is inconsistent
with this natural-rate view, but is consistent with evolutionary theory in which economies have
a wide range of GDP-compatible stable inflation. Now the early post-WWII debates are seen not
to be as misguided as they appeared to be when economists came to accept the assumptions implicit
in the expectations-augmented Phillips curve.
Publication of Lipsey's article nicely coincides with Roger Farmer's new book
Prosperity for All which I discussed in my
previous
post . A key point that Roger makes is that the assumption of a unique equilibrium which underlies
modern macroeconomics and the vertical long-run Phillips Curve is neither theoretically compelling
nor consistent with the empirical evidence. Lipsey's article powerfully reinforces those arguments.
Access to Lipsey's article is gated on the JHET website, so in addition to the abstract, I will quote
the introduction and a couple of paragraphs from the conclusion.
One important early post-WWII debate, which took place particularly in the UK, concerned
the demand and inflationary pressures at which it was best to run the economy. The context for
this debate was provided by early Keynesian theory with its absence of a unique full-employment
equilibrium and its mainly forgotten, but still relevant, microeconomic underpinnings. The original
Phillips Curve was highly relevant to this debate.
All this changed, however, with the introduction of the expectations-augmented version
of the curve with its natural rate of unemployment, and associated unique equilibrium GDP, as
the only values consistent with a stable inflation rate. This new view of the economy found easy
acceptance partly because most economists seem to feel deeply in their guts - and their training
predisposes them to do so - that the economy must have a unique equilibrium to which market forces
inevitably propel it, even if the approach is sometimes, as some believe, painfully slow.
The current behavior of economies with successful inflation targeting is inconsistent with
the existence of a unique non-accelerating-inflation rate of unemployment (NAIRU) but is consistent
with evolutionary theory in which the economy is constantly evolving in the face of path-dependent,
endogenously generated, technological change, and has a wide range of unemployment and GDP over
which the inflation rate is stable. This view explains what otherwise seems mysterious in the
recent experience of many economies and makes the early post-WWII debates not seem as silly as
they appeared to be when economists came to accept the assumption of a perfectly inelastic, long-run
Phillips curve located at the unique equilibrium level of unemployment. One thing that stands
in the way of accepting this view, however, the tyranny of the generally accepted assumption of
a unique, self-sustaining macroeconomic equilibrium.
This paper covers some of the key events in the theory concerning, and the experience of, the
economy's behavior with respect to inflation and unemployment over the post-WWII period. The stage
is set by the pressure-of-demand debate in the 1950s and the place that the simple Phillips curve
came to play in it. The action begins with the introduction of the expectations-augmented Phillips
curve and the acceptance by most Keynesians of its implication of a unique, self-sustaining macro
equilibrium. This view seemed not inconsistent with the facts of inflation and unemployment until
the mid-1990s, when the successful adoption of inflation targeting made it inconsistent with the
facts. An alternative view is proposed, on that is capable of explaining current macro behavior
and reinstates the relevance of the early pressure-of-demand debate. (pp. 415-16).
In reviewing the evidence that stable inflation is consistent with a range of unemployment rates,
Lipsey generalizes the concept of a unique NAIRU to a non-accelerating-inflation band of unemployment
(NAIBU) within which multiple rates of unemployment are consistent with a basically stable expected
rate of inflation. In an interesting footnote, Lipsey addresses a possible argument against the relevance
of the empirical evidence for policy makers based on the Lucas critique.
Some might raise the Lucas critique here, arguing that one finds the NAIBU in the data because
policymakers are credibly concerned only with inflation. As soon as policymakers made use of the
NAIBU, the whole unemployment-inflation relation that has been seen since the mid-1990s might
change or break. For example, unions, particularly in the European Union, where they are typically
more powerful than in North America, might alter their behavior once they became aware that the
central bank was actually targeting employment levels directly and appeared to have the power
to do so. If so, the Bank would have to establish that its priorities were lexicographically ordered
with control of inflation paramount so that any level-of-activity target would be quickly dropped
whenever inflation threatened to go outside of the target bands. (pp. 426-27)
I would just mention in this context that in
this 2013
post about the Lucas critique, I pointed out that in the paper in which Lucas articulated his
critique, he assumed that the only possible source of disequilibrium was a mistake in expected inflation.
If everything else is working well, causing inflation expectations to be incorrect will make things
worse. But if there are other sources of disequilibrium, it is not clear that incorrect inflation
expectations will make things worse; they could make things better. That is a point that Lipsey and
Kelvin Lancaster taught the profession in a
classic
article "The General Theory of Second Best," 20 years before Lucas published his
critique
of econometric policy evaluation.
I conclude by quoting Lipsey's penultimate paragraph (the final paragraph being a quote from Lipsey's
paper on the Phillips Curve from the Blaug and Lloyd volume Famous Figures and Diagrams in Economics
which I quoted in full in my 2013 post.
So we seem to have gone full circle from the early Keynesian view in which there was no unique
level of GDP to which the economy was inevitably drawn, through a simple Phillips curve with its
implied trade-off, to an expectations-augmented Phillips curve (or any of its more modern equivalents)
with its associated unique level of GDP, and finally back to the early Keynesian view in which
policymakers had an option as to the average pressure of aggregate demand at which economic activity
could be sustained.
However, the modern debated about whether to aim for [the high or low range of stable unemployment
rates] is not a debate about inflation versus growth, as it was in the 1950s, but between those
who would risk an occasional rise of inflation above the target band as the price of getting unemployment
as low as possible and those who would risk letting unemployment fall below that indicated by
the lower boundary of the NAIBU as the price of never risking an acceleration of inflation above
the target rate. (p. 427)
"... Never underestimate an [neoliberal] economist's ability to ignore reality. ..."
"... In a kleptocracy, looters are not called looters. That might cause the serfs to rebel. So they are called "creators" instead, and their stolen loot becomes the just and righteous reward for their work. Indeed it is the manifestation of natural law without which society and the economy would fall into darkness, etc., etc. ..."
"... NAIRU is not to blame but the looters who espoused it. They are afterall the crafters of the conventional wisdom. There were no mistakes. As looting-enabling propaganda, NAIRU functioned exactly as it was supposed to. ..."
"... NAIRU is the perfect example of purpose-driven science, and Milton Friedman et al and NAIRU rank right up there with the German racial scientists and eugenics and social Darwinism when it comes to justifying pure evil. ..."
"... The idea that there really is no "Gault" in a modern economy is not new. J.K. Galbraith described the inherent interdependence between management and workers in his book The New Industrial State in which he coined the term "technostructure" to describe how modern industry no longer could realistically claim to run by a single person. Instead, the rise of scientific and business specialties made nearly all employees of a business vital. No one, especially the CEO, could really claim to all the profits. ..."
"... Relative wealth is the key to power and concentrated wealth to absolute power, the holy grail. Thus inequality is not an unintended consequence at all; it's the neolibs' actual goal, a feature not a bug. Power is their ultimate narcotic. And their pursuit of it is relentless and violent. ..."
"... I believe this is the elemental nature of our criminal elite that people must understand, first and foremost, before change is remotely possible. Unfortunately it's difficult for sane people to comprehend such madness, and they continue to believe people like Obama have a conscience, that Congress really seeks the greater good, that our warriors really want to avoid war. They can no more relate to people like Jamie Dimon, Lloyd Blankfien, or Benjamin Shalom than they can to a pedophile or a rapist. They have no common reference with the enemies of humanity. ..."
"... Feudalism wasn't concerned with economic growth and performance. Those ideas came with the Enlightenment and the Modern eras, and the end of monarchy. My point was to use "vassal" in the sense of someone who owe allegiance to a master but is not a slave. ..."
"... Mexico, you made the claim that NAIRU was "purpose-driven science". I countered with the point that NAIRU was pseudo-science and that economics is not a science. Neither statement has anything to do with indicting science. ..."
Great article!!! The drum beat continues Productivity is definitely constrained by tight consumer
liquidity from weak labor compensation.
Economists are going to learn a big lesson, when they see unemployment get stuck above 6.7%. They
will try to explain it by pointing to problems in the economy or government. But the dynamic to
limit employment is already established and it is due to low labor share. My calculations say
the limit is 7.0% but I am allowing some margin of error.
The next two years should certainly be enlightening for many economists, including Krugman,
Delong and Thoma. They do not see the effective demand limit coming.
Hello? All talk of policy and regulations have left-out the workers. They make shit and they
buy shit. Without them, how would multi-national corporations be able to afford the lawyers, lobbyists,
members of Congress – both House and Senate, and it would now appear, members of the US Supreme
Court.
"Higher real wage claims necessarily reduce firms' profitability and hence, if firms want to
protect profits (needed for investment and growth), higher wages must lead to higher prices and
ultimately run-away inflation. The only way to stop this process is to have an increase in "natural
unemployment", which curbs workers' wage claims.
"What is missing from this NAIRU thinking is that wages provide macroeconomic benefits in terms
of higher labour productivity growth and more rapid technological progress."
True. But that aside, the original argument is a non-sequitur. Certainly, a fight between labor
and capital over how to share the economic pie can lead to inflation, but it does not follow that
full employment leads to accelerating inflation instead of converging inflation or fairly constant
inflation. The NAIRU argument takes the behavior of capital as given and puts the onus of responsibility
on labor. It amounts to special pleading.
BTW, it is not unusual in human systems to have conflicts that threaten to become a runaway
feedback cycle. But somehow that rarely happens, for reasons that are not always clear. We still
do not understand human systems all that well.
..Greenspan's (therefore Rand "goddess") ideological position is based upon equal access and
most especially information to markets this "equality" is undone by secrecy, insider trading,
HFT, etc, etc.
In other words, it's all ideological-never existed, anywhere, any time, in reality..
In a kleptocracy, looters are not called looters. That might cause the serfs to rebel.
So they are called "creators" instead, and their stolen loot becomes the just and righteous reward
for their work. Indeed it is the manifestation of natural law without which society and the economy
would fall into darkness, etc., etc.
"Greenspan's stance reflected the conventional wisdom , codified in the theory of
the non-accelerating-inflation rate of unemployment (NAIRU). It must take the blame for unleashing
and at the same time legitimizing a vastly unequal and ultimately unsustainable growth process."
NAIRU is not to blame but the looters who espoused it. They are afterall the crafters of
the conventional wisdom. There were no mistakes. As looting-enabling propaganda, NAIRU functioned
exactly as it was supposed to.
"firms want to protect profits (needed for investment and growth)"
No. Firms are inanimate. They do not want anything. Nor is it the case that their managements
want to protect their profits for the purpose of investment and growth. In a kleptocracy, management
wishes not just to keep but increase profits in order to loot them.
The authors of this article, like those they criticize, leave out the social purposes for why
we have an economy and why we allow corporations to exist. Both look on the economy as a natural
process governed by natural laws (that is what this article is about: which laws best describe
the economy), and not the human enterprise it is. The real measure of the economy is whether it
is producing the society we want to live in. Classical measures, such as growth and productivity,
may be irrelevant or even at odds with this construction.
NAIRU is not to blame but the looters who espoused it. They are afterall the crafters of
the conventional wisdom. There were no mistakes. As looting-enabling propaganda, NAIRU functioned
exactly as it was supposed to.
Exactly!
NAIRU is the perfect example of purpose-driven science, and Milton Friedman et al and NAIRU
rank right up there with the German racial scientists and eugenics and social Darwinism when it
comes to justifying pure evil.
I isn't fair to call NAIRU "science", since it, like economics, isn't scientific in any way.
Science has enough problems without having to take on charlatans like Friedman.
Friedman's work, as exemplified by NAIRU, is pseudo-science used to justify the demands of
the industrtialists and financiers to remove governmental economic regulation. It's an example
of what I like to call "Laissez-Faire
Lysenkoism ", after the
infamous Soviet agronomist who rigged his experiments and data to demonstrate that communism had
a biological basis.
I agree very much with the article's analysis and conclusions. But I want to add two things:
1. The idea that there really is no "Gault" in a modern economy is not new. J.K. Galbraith
described the inherent interdependence between management and workers in his book The New Industrial
State in which he coined the term "technostructure" to describe how modern industry no longer
could realistically claim to run by a single person. Instead, the rise of scientific and business
specialties made nearly all employees of a business vital. No one, especially the CEO, could really
claim to all the profits.
2. I think the question of economic performance is too narrow. The real issue ultimately is
power. At some point, wealth will become so concentrated that the rich won't care about economic
performance; they'll just make vassals and slaves of the rest of us. At some point money per se
will become obsolete, since everything will be owned by a few anyway.
On number 2, I don't remember Feudalists ever worrying about economic growth, except when it
came to how much grain they could extract from their serfs.
It doesn't matter all that much to the ruling classes how much growth there is or not as long
as they control all that there is.
If low growth means easier control, then they will prefer that. Though I must say im not sure
that low growth does mean easier control.
Dave's close, but you got it! Neoliberal economics is not interested in a dynamic economy,
in optimum output, or in aggregate wealth-creation, and most certainly not in shared prosperity
(egad!). It is only relative wealth that concerns our neoliberal elite.
Relative wealth is the key to power and concentrated wealth to absolute power, the holy
grail. Thus inequality is not an unintended consequence at all; it's the neolibs' actual goal,
a feature not a bug. Power is their ultimate narcotic. And their pursuit of it is relentless and
violent.
I believe this is the elemental nature of our criminal elite that people must understand,
first and foremost, before change is remotely possible. Unfortunately it's difficult for sane
people to comprehend such madness, and they continue to believe people like Obama have a conscience,
that Congress really seeks the greater good, that our warriors really want to avoid war. They
can no more relate to people like Jamie Dimon, Lloyd Blankfien, or Benjamin Shalom than they can
to a pedophile or a rapist. They have no common reference with the enemies of humanity.
Feudalism wasn't concerned with economic growth and performance. Those ideas came with
the Enlightenment and the Modern eras, and the end of monarchy. My point was to use "vassal" in
the sense of someone who owe allegiance to a master but is not a slave.
As for the other points you made, I was trying make those too: At some point the inequality
makes modern economics irrelevant.
You can also take the time to read the classics of Bacon, Descartes, Newton, et al.
A succinct definition of "science" is not that easy. But I argue that scientific statements
at the least have to be robust-they have to be capable of reliable confirmation i.e., identical
conditions should lead to the same observations, in other words "predictability" (Popper's "falsification"
is a useful rule of thumb); a new theory should be able to explain or describe all relevant phenomena
described by older theories as well as new phenomena to maintain unified explanation.
As I've argued many times on this 'blog, economics fails both tests. Instead economists offer
statements that ape scientific forms, what I call "pseudo-science". They do this out of ignorance
and a desire to cow the public (including scientists).
And we're all entitled to review the facts and make our judgment in light of the definitions
and uses of the term "science".
I don't see your point in attacking science, which you of course never define. I believe that
humanity needs a view of life that is far broader than provided by science alone. But the scientific
view is still vital to our lives. The problem is that far too many have become mesmerized by the
usefulness of science in addressing certain types of questions, and have been trying to force
their own investigations into a scientific mold rather than admitting that the scientific method
cannot address all questions equally well.
Well for me, the question is still who gets to decide what is science and what is pseudo-science?
Is it the guy with the most money?
The guy with the biggest printing press or soap box?
The guy with the most political power?
The Nobel Prize committee?
University professors?
The person with the most publications?
The most prestigious and renowned scientist?
The school of hard knocks has taught us that none of the above are trustworthy or reliable.
The historian of science Naomi Oreskes gives a great talk about this phenomenon here:
This means that one is therefore forced back onto their own lights.
Which brings us back to the question: How does the layperson tell the difference between science
and pseudoscience? I don't know many laypersons who have read Bacon, Newton or Descartes.
And what if they've read Hume, Kant or Nietzsche? Then they come away with a very different
idea of what science is. For example:
Thus, though metaphysics is an illusion from the point of view of science, science in turn
becomes but another state of illusion as far as absolute truth is concerned. In The Birth
of Tragedy Nietzche already attacks the scientific optimism of his time under the guise
of "Socratism." The "theoretic man" pursues truth in the delusion that reality can be fathomed,
and even purged of evil, by rational thought and its applications. But faith in the omnipotence
of reason shatters, for the courageously persistent thinker, not only on the fact that science
can never complete its work but chiefly on the positive apprehension that reality is irrational.
As Nietzsche writes later, "We are illogical and therefore unjust beings from the first,
and can know this : that is one of the greatest and most insoluble disharmonies of existence."
Mexico, I already answered that question. I really don't care what Naiomi Oreskes thinks; I
think for myself. And I don't have much patience for people who won't make the effort to learn
enough about science to answer the question for themselves.
There's a world of difference between Oreskes's writings about the abuse of science to further
partisan political positions, and the meaning of science itself and deciding what qualifies as
science. Just make the effort to learn and stop quoting everyone else.
As for your quote about Nietzsche, all this argument leaves is the usual relativistic confusion.
And that just invites abuse. Science and the scientific method can be defined well enough to distinguish
reliable claims from charaltanism. If you want absolutes, you might just as well accept what the
most powerful tell you to accept.
Yes, someone does get to decide. Because there ARE universal truths, like it or not.
For example, the world is not flat. Period. All the relativism in the world won't change the
fact that the world is NOT flat.
Arguing against fact doesn't make one some sort of relativist intellectual (is that a term??)
it makes one WRONG. And the only way humanity can ever transcend chaos is to acknowledge those
truths that are universal. We, as a species, are still nowhere near there, and it's like trying
to play a baseball game with no foul lines, basees, umpires, or even a ball. Yes, if life were
like a baseball game there are entire groups of people today that argue it can be played without
a ball. We'll never get beyond this chaos and into a peaceful order until we all get on more or
less the same playing field, and the only way to do that is to acknowledge truths (or rules, like
foul lines, in baseball).
Science is but one avenue to identify those truths. There are others.
Mexico, you made the claim that NAIRU was "purpose-driven science". I countered with the
point that NAIRU was pseudo-science and that economics is not a science. Neither statement has
anything to do with indicting science.
If you argue about flaws in science, whatever that means,n then start a new thread.
Science is a method, but what that method is applied to and how its results are interpreted
are not. Science is also a human activity and so must be viewed through the lens of our humanity,
not as objective truth external to us.
Lord save us! Humans are biological systems and such systems have all kinds of modularity to
protect various sub-systems and the overall system from collapse.
So where is a modular economics?
Growth? What's that? A sensible, scientific notion of it would be a system that raises everyone
a lot, curtails rich by-products that capture politics and load the many with economic rents,
educates to planet level responsibility, reduces work and squalid energy burning and related wars
We should be seeking stability and incorporating real well-being and a new understanding of
growth. Growth as we have it is a Gucci handbag while others live on a squalid jack tuna boat
earning almost nothing for your fish, eaten with a fancy T-shirt on proclaiming 'save the dolphins',
served with salad picked by migrant workers to keep your figure trim along with the coke you snort.
What growth should be one of the first questions of economics, followed by how we might create
a modular financing of what we should be doing. Without such, no subject.
In reality all the dynamism is in the state sector – from the internet, to superconductors,
pharmaceuticals, biotechnology, containerisation. 'The market' just deals with copyright and marketing.
This is all about mathiness and corruption of neoliberal economist, which is a real Fifth Column
of financial oligarchy no question about it. With unemployment measures irrevocably corrupted
by political pressures, how one can be talk about validity of derivatives based on them, unless
he/she is drunk ?
In this sense NAIRU is yet another sophisticated neoliberal fake that help to drive the public
policy in the interests of financial oligarchy under mathiness smoke screen and a bunch of corrupt
neoliberal economics serving as a propagandist army of financial oligarchy.
It's time to revamp the old quote changing it to " When I hear the term NAURU...I reach for
my gun!."
If course it would be too cruel to shoot all neoliberal economists, so reeducation camps should
probably be considered.
I think only U6 has some connections to reality. And the discrepancy between official and Gallup
value of U6 is 4%
In other words only the first digit is probably valid and the range is 10 to 20%.
== quote ==
For January 2016 the official Current U-6 unemployment rate was 10.1% up from last month's 9.1%.
On the other hand the independently produced Gallup equivalent called the "Underemployment Rate"
was 14.1% up from 13.7 in December and 13.0% in November. The current differential between Gallup
and BLS on supposedly the same data is 4.0%!
The NAIRU essentially presupposes the existence of the wage-price spiral. Which can happen
only if wages are either indexed to inflation by law, or there are strong trade unions to defend
workers rights. Under neoliberalism both are those factors are suppressed and can be viewed as
non-existent.
And the statement that the NAIRU myth belongs to the vocabulary of charlatans does not deviate
from the serious character of the discussion. This is just a historical truth.
Hot of the presses: "Debunking the NAIRU myth" January 19, 2017 By Matthew C Klein
First, some history. In 1926, Irving Fisher found a relationship between the level of unemployment
and the rate of consumer price inflation in the US. In 1958, AW Phillips studied UK data from
1861-1957 and found a relationship between the jobless rate and the growth of nominal wages, although
the relationship seems to have been an artifact of the gold standard given the vertical line he
found in the postwar period:
Some people (wrongly) interpreted Phillips's data to mean that there was a straightforward
trade-off between the inflation rate and the unemployment rate. Policymakers could just pick any
spot on "the Phillips Curve" they want. Among a certain set, the big debates in the 1960s were
about whether the government should target an unemployment rate of 3 per cent or 5 per cent.
This worked out poorly, but the reaction took the form of an equally dubious idea: the Non-Accelerating
Inflation Rate of Unemployment, or NAIRU. In this view, the change in the inflation rate should
be related to the distance between the actual jobless rate and some theoretical level. If the
unemployment rate were above this "neutral" level the inflation rate would slow down and potentially
turn into outright deflation. If the jobless rate were "too low", however, consumer prices would
rise at an accelerating rate.
Suppose you believe NAIRU is a real thing. What would be the argument against pushing the unemployment
rate as close to zero as possible? In theory, the cost of the policy would be ever-accelerating
inflation, eventually perhaps leading to hyperinflation. But the reason to dislike excessive inflation
is that it ultimately makes everyone poorer, which should, among other things, increase unemployment.
(Just look at Venezuela, for a recent example.)
According to the wacky world of NAIRU, however, hyperinflation can coexist just fine with hyper-employment.
Clearly there must be other mechanisms at work, or else we are leaving money on the table by allowing
the jobless rate to ever rise above zero.
== end of quote ==
Some comments are interesting too:
grputland, Jan 22, 2017
To test the NAIRU hypothesis against historical data, shouldn't we plot unemployment vs. change
in inflation? -- instead of CHANGE in unemployment vs. change in inflation?
Be that as it may:
If there is such a thing as a NAIRU, it is still a mistake to treat the NAIRU as a "given"
rather than a function of policy.
If a certain tax feeds into prices, it leaves less room for wages to feed into prices before
(according to NAIRU logic) inflation accelerates. So any tax that feeds into prices will tend
to raise the NAIRU. This is especially the case if the tax causes the cost of labor for employers
to be higher than workers' take-home pay.
Thus the NAIRU, if it exists, is not a counsel of despair, but rather a counsel to get rid
of taxes that feed into prices (especially taxes on labor) and replace them, as far as necessary,
with taxes that DON'T feed into prices -- that is, taxes on economic rents.
Many variables contribute to the inflation rate, certainly more than just domestic employment
(and how it is calculated). The Fed's dual mandate is inflation and employment, so it makes sense
that these are a focus of the Fed's communication. But the Fed tends to focus on the result rather
than the cause. It is troubling that there is little discussion from most of the FOMC on inflation
factors which are now more important than unemployment (currency values, foreign labor, technology,
commodity demand and speculation, labor monopsony, underemployment, labor skill demand mismatch,
etc).
Producer and consumer prices are increasing, largely due to China driven commodity prices.
Managerial compensation and production hourly wages are increasing. But weekly wages are stagnant
due to fewer hours. The Fed is ignoring the latter, even though it is what is more important to
sustained core inflation.
Observer, Jan 19, 2017
Looking just at the U3 unemployment rate for the NAIRU without considering the still high U6
rate and lower labour participation rate in the US may be the issue. There's still labour market
slack even though U3 is at its "full" employment level.
grumpy, Jan 19, 2017
Models have to be used with caution (they are only tools) and interpreted with awareness of
the real world - including for example, the varying wage bargaining power of labour, which is
different, post globalisation, to what it was in the '70s.
Who do you think wanted globalisation and liberalisation of trade, and why?
"... In the 90s, Democrats like Yellen and Blinder were pushing Greenspan to raise rates when he located the trap line at a different location than they did and held off. ..."
"... A story that fits the actions. But I suspect misses the motive. Perhaps Green stain far from wanting to improve job markets i.e. defy the false wage repressing NAIRU taboo zone. He simply wanted the crazy stock bubble to continue to inflate... ..."
"... I assume Greenspan never really bought the NAIRU fairy tale. Anymore then I do. Otherwise he could never have so skillfully repressed bottom half wage rates for more then fifteen years. ..."
"... Kocker buys the general story as much as say larry sommers buys it. They simply, like Greenspan, move the mythic NAIRU up or down to support other motivations ..."
"... To simply deny the NAIRU ppens the pearly gates to a job class FED. Heaven forbid -- ..."
The models are just rationalizations of a deeply embedded
policy paradigm In place since Greenspan
The motivation: Wage rate regulation
Inflation of product prices by other means then wage costs
is ignored. The relation between job market conditions and
wage rate change
Is the core focus
If UE can go lower without wage rates accelerating. There
is no urgency Ie There is no need to accelerate the present
pace of normalizing the policy rate
Hence the informed expert opinion now calling for the FED
to play it kool
However the wall street silk hat set takes a more cynical
view
Yes Sanjait and PGL are (willfully?) naive in their pleas for
Obama's Fed to behave better.
It's not the models. It's not a bug it's a feature. The
Fed has to be pushed by a popular movement which would also
enact significant reforms on the fiscal side.
"This may seem like a strange objective, given that
Congress has charged the Fed with promoting "maximum
employment," which sounds like "try to make employment as
high as you can." But the Fed knows that if it pushes
economic activity above its long-run level in pursuing that
goal, it will eventually have to hit the brakes and bring
growth below normal to cool the economy and keep inflation
under control. The Fed doesn't want to be in that position,
so it gets just as worried when unemployment falls below its
target as it does when unemployment is too high. 1 As a
result, when the economy is close to what the Fed sees as
full employment, the central bank takes a decidedly
anti-growth policy stance to keep employment in check."
This is NAIRU worship. NK fails to bash this up. For example: How can we glibly conclude
that over shoots must be over corrected. Seems on the face of it
a convenient asymmetry: The system can run control ably Up. But not Down
The fed can lower UE step by step without some inevitable
over shoot. But not back up. The reverse gear causes a destructive excessive jolt. Well maybe so
But we ought to really look this fearsome dynamic
assymetric right in the eyes.
For a long time. Not just assume its credible because it fits some morality
play plot
written to please wall street
Depends where you locate the "basic wage trap line."
In the 90s, Democrats like Yellen and Blinder were pushing
Greenspan to raise rates when he located the trap line at a
different location than they did and held off.
A story that fits the actions.
But I suspect misses the motive.
Perhaps
Green stain far from wanting to improve job markets
i.e. defy the false wage repressing NAIRU taboo zone.
He
simply wanted the crazy stock bubble to continue to inflate...
I assume
Greenspan never really bought the NAIRU fairy tale. Anymore then I do. Otherwise he could never have so skillfully repressed
bottom half wage rates
for more then fifteen years.
Kocker buys the general story as much as say Larry
Summers
buys it. They simply, like Greenspan,
move the mythic NAIRU up or down to support other motivations
To simply deny the NAIRU
ppens the pearly gates to a job class FED. Heaven forbid --
New Deal, I thought the hyper inflation of the 70s came about because pricing determinations all
aligned in a ratcheting, a sign of a complete breakdown in market-based economics, inviting govt
intervention to halt it.
Where was it proven that wages caused these results then?
The notion of wages being related to general pricing trends is clear during deflationary trends.
Common sense, hurting and wages follow the downward spiral. If I asked a question about wages I
might agree that the downward trend is being caused by the downward trend in general pricing and
demand.
But it needs to be proven that there us a correlation and then a cause and effect reality when
general prices are rising rapidly, if you are asking if wages are a cause if this rapid rise.
The data do not now support this as you know.
The Fed needs to figure out what it can do when general prices begin to ratchet. I wish they
would look at wages last, look at other factors and other 'tools' to influence pricing determinations,
again, long before they use these false notions to justify attacking employment.
I want better economics and better logic, a different actions. For instance, can the Fed order
the credit channels not to ratchet their pricings rapidly, this would have a direct influence
on pricing. Can the Fed stop rolling over their book of assets with new purchasing subsidies to
the financial asset marketplaces and instead lower the amount of buying and selling so that the
markets see that low rates still exist (and so premia built into pricing need not use this as
a reason to ratchet). Do something differently than slamming hard on the Volker rate-peddle and
tell everyone to take it out on employment.
Productivity is typically defined as GDP divided by the total number of hours worked by population.
As GDP includes such things a military production and consumption as well as gambling profits
(Wall Street firms profits, stock market gains) how realistic is productivity as a metric?
I do not think it is realistic. Like many other neoliberal metrics (and first of all GDP),
I think it is a fake -- a pseudoscience, if you wish.
Productivity is only a realistic concept when dealing with stable units. Dividing GDP by labor
hours (or private sector labor hours) is not realistic because the monetary units are not actual
stable units because the composition of goods and services measured by GDP changes over time.
In other words, even if GDP may be useful for comparing aggregate monetary value of goods and
services from period to period. It tells us nothing about physical output and THAT, not monetary
value is what the concept of productivity implies.
If the proportions of various goods and services remained constant from quarter to quarter,
then GDP/hours would tell us something about productivity. But they don't, so it doesn't.
See "Productivity as a Social Problem: The Uses and Misuses of Social Indicators," Fred Block
and Gene A. Burns
Productivity as a Social Problem: The Uses and Misuses of Social Indicators
By Fred Block and Gene A. Burns
The study of social indicators is valuable for understanding the role that the social sciences
play in the political arena. One common pattern is for a particular social indicator to become
frozen in place once it takes on political significance, and this can result in ironic consequences.
This study traces out the case of indicators of aggregate productivity trends in the United States.
These measures were initially developed as part of an underconsumptionist argument that was linked
to the political left, but there was considerable debate over different measurement schemes. Over
time, one particular measure of trends in aggregate productivity became central for wage negotiations
and for government policy. This created a context in which the slower rates of growth of this
measure of productivity in the 1970s helped to validate the views of those on the political right
who saw the need for greater restrictions on wage gains and government civilian spending. The
paper raises questions about the value of this particular measure and ends by emphasizing the
problems of locking in place an "objective" social indicator when the reality being measured is
in continual flux.
We marxians so reverence the notion We dare not spell it out in full LTV -- Labor theory of
value
Once. The bourgeois theory of value until ricardoput too sharp a point on it
And it became the intellectual sword of the exploited toilers
All lasting exchange value is created by social labor
The part of the value of social product exchange thru markets
Not reflected in labors compensation is a product of one or other form of class exploitation
Complication
This includes rewards to innovation
Real cost reduction
And improvements of all sorts
as well as arbitrage wind fall and mere rent
It's too easy and too useless to simply condemn the whole procedure of indexation. Despite
its inevitable contradictions
[ Really important criticism, which is why I am far more interested in accumulating data for
current comparative productivity measures. I find current comparative productivity measures revealing
and important, and readily available. ]
Criticizing measures of productivity is reasonable, but where are the alternate measures and
the data to be used in recording these alternates? Current measures are backed by extensive data
and used comparatively the measures so far strike me as meaningful and important.
"It tells us nothing about physical output and THAT, not monetary value is what the concept
of productivity implies."
Yes, GDP presentations should also report the data removing the Finance and insurance segments
from the statistical program and calculations.
Considering that with the age of the computer and advanced telco capabilities it is silly to
include these segments in productivity duscussions, so we need a GDP view that matches.
And as we know these segments grew in terms of top line revenue flows remarkably in a very
short time, and this should raise questions about its role in the economic system and whether
the views of even the 1980s make sense.
You could use crude oil or electricity or debt or any numbered entity as the denominator. Thy
are all formally similar
Why labor hours ?
This is the labor theory of exchange value in modern bourgeois scientific framing
If we posit a simple historical mission for capitalism it might be the minimizing of the social
necessary labor time to produce the material requisites of society itself
Liberating humans from the burden of necessary labor
The same list tells me that Saudi Arabia had a greater GDP than Sweden, Belgium,
Norway and Denmark did in 2015. But does this information tell us anything about the
health or long-term prospects for the Saudi economy compared to the economies of the
other countries I just mentioned? Does the information tell us how well average Saudi
citizens live compared to how well the average citizen lives in Sweden? Does the
information say anything about what Saudi Arabia produces and/or exports, and about the
range of products the KSA makes, compared to what Sweden does?
I'm sure you can do better than come up with a stack of numbers and nothing else that
explains or qualifies them.
Oh and BTW, most labour migration between Russia and other countries is made up of
Central Asian migrants travelling to Russia to work in construction and other jobs
requiring little or no technical skills, or to study in the country's universities, and
going back home to visit family on special occasions (like Persian New Year) or help
gather in local harvests. Money flows in the form of remittances between Russia and
Central Asian countries like Uzbekistan and Tajikistan tend to be out of Russia and into
those other countries.
@61. So GDP is a measure of what is produced in the country. GNP adds or subtracts from
it money that is sent from elsewhere. Russia with a significantly larger GNP compared to
GDP is a net recipient of income inflow, the Central Asian migrants not withstanding.
There are two potential problems with higher GNP. Firstly, Taxes on the income being
sent have been paid in a different country. So for example the millions of Mexicans who
send money from US to Mexico pay their taxes in US. The Mexican government does not see
any of that revenue. Secondly the money coming is primarily spent via consumption. While
this may help the local economy a little bit there is also demand for more
infrastructure to support this added consumption but the government is not getting
revenue to address this need for greater infrastructure and is always trying to play
catch up.
Most countries with higher GNP (compared to GDP) continue to have weak economies
susceptible to the ravages of the World economy. Russia is no exception. A weak economy
cannot support a strong military without significantly sacrificing spending for
improving it citizens well being. There are a number of countries maintaining large
armies (for various reasons) that are disproportionate compared to their economic power.
Russia is an extreme case of this. And the Russian citizens suffer because of this.
Russia has an economy that is smaller than that of South Korea, smaller than
Canada, smaller than Italy.
On the basis of
purchasing power parity (PPP)
, Russia has an economy that is more than TWICE that of
South Korea or Canada and 61% greater than Italy's.
The Russian economy is about 20%
that of USA but the Russian per capita GDP economy grew faster than USA, Canada, or
Italy from 1990-2015.
<> <> <> <> <> <> <> <> <> <>
2015 per capita, adjusted for PPP multipled by current population (from Wikipedia):
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.
"... Sure, and that is why a company which produces nothing of value "commands" the so called "investments" which are several times larger than those of Boeing who is de facto US national treasure and who, as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely the point–structure of GDP. ..."
"... In general, we speak here different languages and I may only refer you back to Michael Lind's quote in my text. Judged in a larger, geopolitical framework, one can observe very clearly the process of US literally running out of resources and no amount of "raised capital" can change it. This is not to speak about the whole house of cards of Pax Americana which rested on US military imperial mythology. Once this mythology is debunked (the process which is ongoing as I type it) the house of cards folds. ..."
"... Sure, and that is why a company which produces nothing of value "commands" the so called "investments" which are several times larger than those of Boeing who is de facto US national treasure and who, as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely the point--structure of GDP. ..."
"... You may go here and see for yourself how FIRE overtook manufacturing in US in output. What is "output", of course, remains a complete mystery, same as many other services, once one considers the "quality" of education in US public schools which reflects in the most profound way on US labor force which increasingly begins to look like a third world one. ..."
@inertial
You just illustrated my point. Facebook vs. Gazprom market caps - all that shows is that Facebook
has access to vastly larger amounts of capital than Gazprom. Well, duh.
Market capitalization is determined mostly by institutional investors - mutual funds, pension
funds, insurance companies, etc. - who pool private savings and channel them into various investments.
There are massive amounts of such savings available in USA; in Russia, not so much.
In Russia, the government is just about the only major saver and investor. This works fine
in areas where the government must play a role, such as weapons manufacture. In other areas,
enterprises that need capital to develop must either accumulate it themselves over the years
(which puts limit on growth,) or get the government to help them out, or borrow abroad at usurious
rates. That's not good. Ideally, Russian enterprises should enter Russian stock or fixed income
market and raise as much capital as they need.
As for Boeing, yes it's a gem. But it does have some difficulties in raising capital. It's
been balancing on the edge of bankruptcy for years and, unlike Facebook, it has huge liabilities.
Incidentally, Boeing very much engages in all that "useless" high finance stuff. The buy and
sell and issue bonds and short term paper; I don't know if they issue options but they certainly
trade them. They don't believe that they are performing "virtual transactions with virtual
money;" on the contrary, they consider this and essential part of the business, as important
as building engines or whatever. Perhaps they know something you don't?
Finally, a tip. Any "expert" who doesn't treat US (or other) economic data seriously is an
idiot.
Market capitalization is determined mostly by institutional investors – mutual funds, pension
funds, insurance companies, etc. – who pool private savings and channel them into various investments.
There are massive amounts of such savings available in USA; in Russia, not so much.
Sure, and that is why a company which produces nothing of value "commands" the so called
"investments" which are several times larger than those of Boeing who is de facto US national
treasure and who, as you stated, has problems with raising "capital". That pretty much says it
all. Again, I omit here the trick with stock buybacks. But in the end, you seem to miss completely
the point–structure of GDP.
You may go here and see for yourself how FIRE overtook manufacturing in US in output.
What is "output", of course, remains a complete mystery, same as many other services, once one
considers the "quality" of education in US public schools which reflects in the most profound
way on US labor force which increasingly begins to look like a third world one.
In general, we speak here different languages and I may only refer you back to Michael
Lind's quote in my text. Judged in a larger, geopolitical framework, one can observe very clearly
the process of US literally running out of resources and no amount of "raised capital" can change
it. This is not to speak about the whole house of cards of Pax Americana which rested on US military
imperial mythology. Once this mythology is debunked (the process which is ongoing as I type it)
the house of cards folds.
Ondrej , April 18, 2017 at 3:20 pm GMT
@Andrei Martyanov
Market capitalization is determined mostly by institutional investors – mutual funds, pension
funds, insurance companies, etc. – who pool private savings and channel them into various investments.
There are massive amounts of such savings available in USA; in Russia, not so much.
Sure, and that is why a company which produces nothing of value "commands" the so called "investments"
which are several times larger than those of Boeing who is de facto US national treasure and who,
as you stated, has problems with raising "capital". That pretty much says it all. Again, I omit
here the trick with stock buybacks. But in the end, you seem to miss completely the point--structure
of GDP.
You may go here and see for yourself how FIRE overtook manufacturing in US in output. What
is "output", of course, remains a complete mystery, same as many other services, once one considers
the "quality" of education in US public schools which reflects in the most profound way on US
labor force which increasingly begins to look like a third world one.
In general, we speak here different languages and I may only refer you back to Michael Lind's
quote in my text. Judged in a larger, geopolitical framework, one can observe very clearly the
process of US literally running out of resources and no amount of "raised capital" can change
it. This is not to speak about the whole house of cards of Pax Americana which rested on US military
imperial mythology. Once this mythology is debunked (the process which is ongoing as I type it)
the house of cards folds. Maybe this would help to someone:-)
„Excluding as we do noncapitalist change, we have to define that word which good economists
always try to avoid : capitalism is that form of private property economy in which innovations
are carried out by means of borrowed money, which in general, though not by logical necessity,
implies credit creation. A society, the economic life of which is characterized by private property
and controlled by private initiative, is according to this definition not necessarily capitalist,
even if there are, for instance, privately owned factories, salaried workers, and free exchange
of goods and services, either kind or through the medium of money. The entrepreneurial function
itself is not confined to capitalist society, since such economic leadership as it implies would
be present, though in other forms, even in a primitive tribe or in a socialist community." (Schumpeter
1939, 216)
This means that in perfect equilibrium interest would be zero in the sense that it would not
be a necessary element of the process of production and distribution, or that pure interest tends
to vanish as the system approaches perfect equilibrium. Proof of this proposition is very laborious,
because it involves showing why all the theories which lead to a different result are logically
unsatisfactory.
Hence, the money market with all that happens in it acquires for us a much deeper significance
than can be attributed to it from the standpoint just glanced at. It becomes the heart, although
it never becomes the brain, of the capitalist organism (Schumpeter 1939)
== quote == In much of the world, of course, electricity demand is still growing. In China, per-capita electricity
use has more than quadrupled since 1999. Still, most other developed countries have experienced
a plateauing or decline in electricity use similar to that in the U.S. over the past decade. And
while the phenomenon has been most pronounced in countries such as the U.K. where the economy
has been especially weak, it's also apparent in Australia, which hasn't experienced a recession
since 1991. == end of quote ==
From comments:
One interesting data point that should be within that "industrial" number: "U.S. aluminum production
has gone from 2.5 million tons in 2005 to 1.6 million in 2015."
http://www.seattletimes.com...
Aluminum smelting uses a lot of electricity, and that's a 36% decline. I'm not sure of the
total electricity use of the aluminum industry in the U.S. but it's conceivably big enough to
make a difference in that last graph.
(Bloomberg)
... In an article published in the Electricity Journal in 2015, former Lawrence Berkeley energy
researcher Jonathan G. Koomey, now a consultant and a lecturer at Stanford, and Virginia Tech
historian of science Richard F. Hirsch offered five hypotheses for why electricity demand had
decoupled from economic growth (which I've paraphrased here):
In an article published in the Electricity Journal in 2015, former Lawrence Berkeley energy
researcher Jonathan G. Koomey, now a consultant and a lecturer at Stanford, and Virginia Tech
historian of science Richard F. Hirsch offered five hypotheses for why electricity demand had
decoupled from economic growth (which I've paraphrased here):
1.State and federal efficiency standards for buildings and appliances have enabled us to get by
with less electricity.
2.Increased use of information and communications technologies have also allowed people to conduct
business and communicate more efficiently.
3.Higher prices for electricity in some areas have depressed its use.
4.Structural changes in the economy have reduced demand.
5.Electricity use is being underestimated because of the lack of reliable data on how much energy
is being produced by rooftop solar panels. ...
I appreciate these conjectures or hypotheses, which I had read initially and should have set down
as well. The problem is there is no clear defining of the hypotheses, or provision for coming
to a tentative conclusion as to the effect of any hypothesis.
The matter is of course important, and I will welcome further consideration.
'By shifting
profits overseas, economic output that should be counted in
the United States ends up being registered in other
countries.
This shifting appears to have happened in part due to the
rise in "intangible assets." To borrow an example from the
four economists, think of a simplified version of the profits
from an iPhone. Employees at Apple Inc. design the phone,
which is then produced abroad at a cost of $250 and sold to a
customer in the United States for $750. If we assume the
reason people buy iPhones is the branding and design created
by Apple, then a good portion of the $500 net profit is a
return on "intangible assets" produced in the United States.
But if a company sells the rights to these intangible assets
to a subsidiary in a low-tax country, then the profits will
end up there.
The result? An increase in the Gross Domestic Product of
the low-tax country and a decline in the GDP of the United
States without any real change in economic activity.'
Transfer pricing abuse! Of course that Ryan DBCFT tax
deform would allow this tax avoidance on a permanent basis in
a way that is all perfectly legal.
Reply
Tuesday,
pgl said in reply to Peter K....
"hey would still be taxed on their sales."
Seriously? Most
of Apple's sales are abroad. Same for Coca Cola, Boeing,
Caterpillar, the list goes on.
transfer pricing
manipulates the situation to show most of the profits as
being earned in the low tax country. So that lets say the
true cost of the manufacture of the iphone is 250 dollars,
they might say that the American subsidiary of the same
company went to the low tax country and paid 700 dollars for
the iphone
at least say that on paper
then they import it and sell it for 750 dollars here
so 450 dollars of the profit is taxed in the low tax
country
and 50 dollars of the profit is taxed in the US
that's what he is talking about
sales tax doesn't affect the tax on profit
besides, sales tax is paid over and above the 750 dollars
Reply
Tuesday, April 11, 2017 at 11:00 AM
pgl said in reply to djb...
"pgl is talking about corporate tax on profit". Yep - you get
it.
By inducing Keynesian Stimulation from Keynesian
Expectations. Here is how works :
A car dealer has contract to buy from auto factory set
amount of cars each month. Contract allows factory to churn
out Tesla-s at steady rate thus efficient clip.
Unlike his customers, savvy dealer watches deflation rate
carefully. He holds onto inventory when he expects less or no
future deflation, but when he expects greater deflation, he
deftly dumps inventory before price drops, accelerates M2V.
Deflation causes dealers of each product and service to
stimulate economic expansion. Here is my impression of Tyler
Cohen :
When a government hardens its currency most of that
currency is held by the citizens serving that government.
Each citizen then has more buying power, more wealth because
of her/his shrewd rulers.
As deflation allows full reserve, full reserve makes the
predictions of Nouriel Roubini irrelevant. Full reserve
eliminates uncertainty that nauseates business ventures that
hire folks.
Awareness!
By
spending less, but taxing more, taxing foreigners by way of
import duties. Is that what communist rulers of China are now
doing? Import tariff? To harden currency thus enrage 45th
President?
Don't worry nothing!
Don't worry!
Be happy!
45th will soon become aware. First aware; then, "company,
attenzione!
forward march
!!
"
Reply
Tuesday, April 11, 2017 at 11:38 AM
point said in reply to pgl...
It's a terrific article, especially showing aggregate debt
exceeds aggregate assets through use of tax havens.
On calculating GDP, it sure seems the standard labor
arbitrage maneuver of transferring the production of
intermediate goods to a favorable labor rate jurisdiction for
importation should have implications beyond transfer pricing
abuse.
If I, a US citizen, own a US located factory producing
product with entirely US located inputs, then transfer an
intermediate production stage to a low wage rate
jurisdiction, where I still own the entire chain, this seems
insufficiently foreign to account as exporting and importing.
People sometimes create "look through" earnings to
consolidate unconsolidated results of minority subsidiaries
to get a better look at a parent's full results. Something
similar could be worthwhile here where a company's
"insufficiently foreign" production would be consolidated
into a look-through US production number.
Reply
Tuesday, April 11, 2017 at 06:20 AM
pgl said in reply to point...
It is an interesting paper. Glad you read it. I see that
PeterK did not.
Reply
Tuesday, April 11, 2017 at 07:48 AM
GDP is a classic junk science, some sort of 'economic Lysenkoism" and "cult of GDP is an immanent
feature of neoliberal propaganda designed to substitute arbitrary metric for more scientific measurements
of the wellbeing of people. That's a neoliberal lie: "That's why per capita GDP is one of the
strongest predictors
of happiness measured through people's subjective perceptions of their well-being. "
And it is generally connected strongly only with well being of financial oligarchy, which in the
USA is at all time high. Preetty much disconned with well being of ordinary people as declining
wages signify in the USA>
Economists have long argued that the gross domestic product has many flaws as a measure of well-being
and policy success. Yet there's a good reason it's still being used: There's a certain magic to it,
despite its science being somewhat iffy.
On Monday, the National Bureau of Economic Research published a
paper by Harvard economist Martin Feldstein
detailing an argument he has been making for years -- that GDP calculations underestimate actual
growth and productivity. This optimistic argument is based on the difficulty of measuring changes
in the quality of products and services, and therefore of life. Feldstein points out, for example,
that official measurements, for the most part, only catch quality improvements if a product or service
requires more expensive inputs: "If it doesn't cost more to produce a product or service this year
than it did last year, there has been no improvement." That way, for example, leaps in the quality
of health care -- when a patient who used to need a week in hospital to recover from a cataract operation
is now discharged on the day of the procedure -- are not measured. The way official statistics measure
the introduction of new products, too, doesn't account for their actual contribution to consumers'
well-being or to the economy as a whole.
According to Feldstein, government messaging should be more optimistic to make sure people understand
that their savings will buy more in the future. Goods and services are improving lives more than
price increases would indicate.
Nobel laureate Joseph Stiglitz has long held the
opposite view -- that the GDP as measured today may overestimate well-being. For example, it
counts any increase in government spending as positive, even though these increases may be inefficient
or even counterproductive. And as for those improvements in health care quality that form the basis
of Feldstein's argument, they, too, can be overestimated in the U.S. because health care spending
there is higher than other countries while the outcomes are the same or worse.
Some recent work also argues against the theory, supported by Feldstein, that the recent productivity
slowdown is due to a failure of measurement. Last year, Chad Syverson of the University of Chicago
pointed out that even the most generous estimates of the value added by the growth in digital
technology aren't big enough to bring productivity growth to its pre-2004 trajectory. Another
analysis by International Monetary Fund economist Marshall Reinsdorf found that their unmeasured
effect on productivity could only be small. Statistics fail to record some of the added value because
of the tech sector's use of tax havens, he wrote. But even the "free" internet services provided
now are counted through the advertising they attract. And some of the improvements that tech created
for consumers don't belong in the GDP calculation in the first place: If they save a user some personal
time, that stays in the home and doesn't affect economic activity. (Even if it did, it might be canceled
out by the time our digital addictions take out of our productive workday.)
All the back and forth about how GDP is calculated is only possible because, despite all the flaws,
the measure somehow ends up feeling right. The distortions often end up canceling themselves out.
In 2013, Nicholas Oulton of the London School of Economics' Center for Economic Performance wrote
a paper to disprove the notion that U.K. economic growth had been overestimated because official
calculations overstated the contribution of banking to GDP. He showed that "if banking output has
been overstated, then the output of some other industry or industries must have been understated."
Earlier this year, a team of IMF economists
attempted to figure out how GDP numbers would have changed for a number of developed countries
had they used an outdated deflation method, still used by China and India. It turned out that the
effects wouldn't have been consistently negative or positive for most countries; for Western European
countries, on aggregate, the effects would have been small. The team's recommendation was that more
countries adopt the more progressive deflation methods now used by most of the G20 -- but their research
made it clear that in some cases the difference in the results would be tiny.
As much as GDP calculation isn't an exact science , the results usually make sense. That's
why per capita GDP is one of the
strongest predictors
of happiness measured through people's subjective perceptions of their well-being.
It's fine to argue for better measures of well-being. These measures, however, add even harder-to-measure
indicators, such as levels of social support, freedom and generosity. For many countries, these data
are either unavailable or subjectively colored. The choice is between engineering and science: The
former will accept an imperfect approximation, while the latter will always strive for perfection.
As Federal Reserve Chair Janet Yellen recently pointed out, GDP is "a pretty noisy indicator"
at best. Yet it remains extremely useful as a reference.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and
its owners.
"... he never lost his aversion for the 'economism' that presumes that matters of public policy, employment, ecology and culture can be interpreted mainly in terms of mathematical abstractions. ..."
"... Lean Logic: A Dictionary for the Future and How to Survive It ..."
"... Tomorrow's World ..."
"... So in an economy like ours, a technological advance that doubles the amount of useful work a person can do in a day becomes a problem rather than a benefit. It tends to put half the workers out of work, turning them into a potential drain on the state. ..."
"... Tomorrow's World ..."
"... Lean Logic ..."
"... Surviving the Future: Culture, Carnival and Capital in the Aftermath of the Market Economy ..."
"... Didn't residents keep on doing whatever they were doing when the Vesuvius erupted ..."
"... As a dispirited milennial myself, it seems that the best option for me is to cut loose, live somewhere cheap and warm, enjoy nature and some friendly neighbors and watch this apocalypse unfold. ..."
"... News from Nowhere ..."
"... Illegitimi non carborundum ..."
"... During my time as a retail worker it struck me how much of effective customer service was really an unpaid use of our spontaneous urge to give aid to other people, to respond to their needs as human beings. ..."
"... We were often in the position of spiking the SOP of the business to get them what they wanted. It hit me then how much the ostensible money economy is a free rider on the world of our human non-economic lives, or is like free clean water used in an industrial process. ..."
As my friend David
Fleming once wrote, conventional economics 'puts the grim into reality.'
Something of a radical, back in the 1970s Fleming was involved in the early days of what is now
the Green Party of England and Wales. Frustrated by the mainstream's limited engagement with ecological
thinking, he urged his peers to learn the language and concepts of economics in order to confound
the arguments of their opponents.
By the time I met Fleming in 2006, he had practised what he preached and earned himself a PhD
in Economics. But he never lost his aversion for the 'economism' that presumes that matters of
public policy, employment, ecology and culture can be interpreted mainly in terms of mathematical
abstractions.
Worse, he noted that even the word ' economics' has the power to make these life-defining
topics seem impenetrable, none-of-our-business and, of all things, boring . Fleming's work
was all about returning them to their rightful owners-those whose lives are shaped by them, meaning
all of us.
Fleming was a key influence on the birth of the
New Economics Foundation and
Transition
Towns movement , but it was only in the aftermath of his sudden death in 2010 that I discovered
the breadth of the powerfully-different vision of economics that underpinned his life. On his home
computer I discovered a manuscript for the book he had been preparing to publish after thirty years'
work entitled
Lean Logic: A Dictionary for the Future and How to Survive It .
Reminding us that our present growth-based market economy has only been around for a couple of
hundred years (and is already hitting the buffers), Fleming's lifework looks to the great majority
of human history for insight: "We know what we need to do,"
he writes , "We need to build the sequel, to draw on inspiration which has lain dormant, like
the seed beneath the snow."
What he found was that-in the absence of a perpetually-growing economy- community and culture are key. He quotes, for example,
the historian Juliet Schor's view of working life in the Middle Ages:
"The medieval calendar was filled with holidays These were spent both in sober churchgoing
and in feasting, drinking and merrymaking All told, holiday leisure time in medieval England
took up probably about one third of the year. And the English were apparently working harder than
their neighbors. The a ncien régime in France is reported to have guaranteed fifty-two
Sundays, ninety rest days, and thirty-eight holidays. In Spain, travelers noted that holidays
totaled five months per year."
Reading this took me back to a childhood fed by TV programmes like the BBC's Tomorrow's World
, which had informed me that by now robots would be doing all the menial work, leaving humans
free to relax and enjoy an abundance of leisure time. So it came as a shock to realise that the good
folk of the Middle Ages were enjoying far more of it than we are in our technologically-advanced
society. What gives?
Fleming explains
,
"In a competitive market economy a large amount of roughly-equally-shared leisure time – say,
a three-day working week, or less – is hard to sustain, because any individuals who decide to
instead work a full week can produce for a lower price (by working longer hours than the competition
they can produce a greater quantity of goods and services, and thus earn the same wage by selling
each one more cheaply). These more competitive people would then be fully employed, and would
put the more leisurely out of business completely. This is what puts the grim into reality."
So in an economy like ours, a technological advance that doubles the amount of useful work
a person can do in a day becomes a problem rather than a benefit. It tends to put half the workers
out of work, turning them into a potential drain on the state.
Of course, in theory all the workers could just work half-time and still produce all that is needed,
much as Tomorrow's World predicted. But in practice they are often afraid of having their
pay cut, or losing their jobs to a stranger who is willing to work longer hours, so they can't take
the steps needed to solve their collective economic problems and enjoy more leisurely lives. Instead,
people are kept busy partly through what anthropologist David Graeber memorably characterised as
" bullshit jobs ."
How, then, can we feed, house and support ourselves without working as relentlessly as we do today?
Fleming's work explores the answer, making a rigorous case that we need to get beyond mainstream
economists' ideas of minimising 'spare labour' if we are to sustain a post-growth economy. This 'spare
labour' is what most of us would call spare time-a welcome part of a life well lived rather than
a 'problem of unemployment.'
He highlights that the holidays of former times were far from a product of laziness. Rather
they were, in an important sense, what men and women lived for . 'Spare time' spent in feasting,
performing, collaborating and merrymaking together formed the basis of community bonding and membership.
Those shared cultural ties hold people together, even in the absence of economic growth and full-time
employment. When productivity improves,
as one of
his readers put it , "in our system you have a problem, in Fleming's system you have a party."
Under the current economic paradigm, the only way to keep unemployment from rising to the point
where the population can't be supported is through endless economic growth, which thus becomes an
obligation. So we are damned if we grow and damned if we don't, since endless growth will eventually
cross every conceivable biophysical boundary and destroy the planet's ability to support us. That's
why, in practice, we just keep growing and cross our fingers that somehow it will all work out.
As Fleming writes :
"The reduction of a society and culture to dependence on mathematical abstraction has infantilised
a grown-up civilisation and is well on the way to destroying it. Civilisations self-destruct anyway,
but it is reasonable to ask whether they have done so before with such enthusiasm, in obedience
to such an acutely absurd superstition, while claiming with such insistence that they were beyond
being seduced by the irrational promises of religion."
Technological fixes do not help, as we are all discovering to our cost. We are already working
ever harder, and with ever more advanced technologies, yet the hope of a better future dwindles day-by-day.
Take heart though, for when the current paradigm transparently provides nothing but a dead end, we
can be sure that we are on the cusp of a fundamental shift.
Fleming provides a radical but historically-proven alternative: focusing neither on the growth
or de-growth of the market economy, but the huge expansion of the 'informal' or non-monetary economy-the
'core economy' that allows our society to exist, even today. This is the economy of what we love:
of the things we naturally do when not otherwise compelled, of music, play, family, volunteering,
activism, friendship and home.
At present, this core non-monetary economy is much weakened, pushed out and wounded by the invasion
of the market. Fleming's work demonstrates that nurturing it back to health is not just some quaint
and obsolete sharing longing but an absolute practical priority.
The key challenge of today, for Fleming, is to repair the atrophied social structures on which
most human cultures have been built; to rediscover how to rely on each other rather than on money
alone. Then life after the painful yet inevitable end to the growth of the monetary economy will
start to seem feasible again, and our technological progress can bring us the fruits it always promised.
It's increasingly clear that this is the conversation we all need to have, and Fleming's compelling,
grounded vision of a post-growth world is rare in its ability to inspire optimism in the creativity
and intelligence of human beings to nurse our economy, ecology and culture back to health. I am proud
to have played a part in bringing it to the world; in fact, it might just be the best thing I have
done.
The thing of it is, we have had growth except for recessions every 10 years or so. But somewhere
along the line, due to the fact that we can never speak of "DISTRIBUTION" of this growth, we get
the completely artificial idea that the lower income can ONLY be helped by higher growth. Economics
has a nice scam going – only if the rich get much richer can anything be done for the 90%.
And we're told (by the rich) that this is just "natural" – a law of nature .Yeah, back when
the church owned everything the priests told us it was God who wanted it that way. Now the economic
priests tell us its nature that wants it this way
I am increasingly of the view that we conflate two entirely different ideas, or that we don't
emphasize enough that there are two fundamentally different critiques, when we challenge economists'
reliance on "growth." I'm not opposed to the notion of 'steady-state' economics. But it seems
presumptuous TSTL for Americans (famously 5% of the world's population using 25% of the world's
resources), really 'first-world'ers in general, to say, "OK, no more growth and time to stay within
in our limits, and by the way I'm good with what I've got." So I think there is a lot more work
that has to be done to make that concept appropriate in a reality-based sense.
Whereas, even though Marxists have often tended toward productivist notions of economic growth
that share many problematic features of capitalist growth, there is a deconstruction of capitalist,
and neoclassical depictions of, economic growth that is not by definition anti-community or anti-planet.
While the fundamental issues are power and control, they are perhaps most easily understood through
measurement – specifically what capitalists and their economists choose to measure as growth and
what they choose to ignore or take for granted. Why is paying someone else to take care of your
kid considered 'economic activity,' a provider of 'jobs,' a contributor to economic growth, but
raising your own kid is not? Actually, working at McDonald's while you pay someone to raise your
kid counts as two jobs, while raising your own kid counts as no jobs, even though the second is
in virtually all cases a socially superior outcome. (True, someone else might take that job at
McD's, so the net might only be one job. But with less demand for that job, perhaps it would have
to pay more and be a better job.) If you extend this line of thinking through elder care, and
then family- and community-based health care ('health care' in the widest, not specifically industrial
sense of the word), one could imagine substantially more healthy (in the widest sense) families,
communities, and societies with substantially lower carbon footprints than our current predicament.
One question is, if one took current measures of paid 'care work' as a baseline for what counts
as 'work,' and then provided similar levels of compensation to those currently performing similar
unpaid work (and I would advocate for higher pay for carers with a closer social bond to those
they care for, because in knowing the 'patient' better they are more 'skilled'), what implications
would that have for 'the economy' and the society in general?
(Similarly, as many others have noted, we need new economic categories that allow us to identify
negative economic activity (much finance, deforestation, pollution, waste, de-humanization, etc.)
that subtracts from standard measures of well-being rather than being included in them.)
There are many different ways to think about this, not all positive. Commodification vs. de-commodification
is a long-running discussion in Marxist circles, and one could imagine arguments in favor of extending
the latter to many more spheres of society. I think many supporters of BIG are de-commifiers at
heart. Even in our current context, massively improving and extending paid leave is a nod in this
direction. OTOH, one could also easily imagine to make kids the one paying their parents to raise
them, and going even deeper into debt, on the same logic of paying for college – your parents
are working to improve your social capital and earning potential and so you should pay them out
of your future earnings.
Relatedly, I am not opposed to alternative measures of social well-being, such as 'happiness
indexes.' But until we are able to directly challenge capitalist and neoclassical hegemony over
what counts as paid work (i.e. 'useful economic activity') and directly address the economic cost
of social 'bads,' there will be no taking the foot off the accelerator of economic growth, even
as we plunge Thelma-and-Louise-style over the cliff.
And I believe that at least several, if not all, of the "notable signers" listed in my comment
above have actually done some of that challenging of capitalist and neoclassical hegemony for
which you are calling.
I absolutely agree that "there is a lot more work that has to be done to make that [steady
state economy] concept appropriate in a reality-based sense."
I think we can continue with "growth" maybe not indefinitely but certainly for a very long
time to come. Just remove the giant parasitic vampire squid that drains away all of the blood,
8 guys holding 50% of the world's wealth, I mean gimme a break you don't have to be a dreaded
pinko Commie to think that is just hideously wrong. The more we talk about that and the less we
talk about how great it is for us all to cut back and move into Mom's basement the better. It's
US versus THEM and there are very very few of THEM.
Piling on:
All of the artists that I personally know, and I know many, make their living doing something
other than their art. Even the professional musicians get paid playing someone else's music so
they can make their own.
So the thing that gives an artist's life meaning- creating art- and contributes to or even defines
a local or regional culture doesn't count as work, but the day job does. The cost of making the
art not only doesn't count as a job, it counts as a drain of resources in terms of both time and
treasure.
I had never heard of the author or the book, I will definitely be ordering it. It's helpful
to have a reminder now and again, that our society, and whole way of living and being is a historical
aberration and there are many better options.
It also made me smile while reading to think about someone like Krugman reading this book and
twisting themselves into pretzels to dispute it (reality).
I imagine it would be one very complex pretzel but if anything could manage it, it would be
a serious of krugfacts.
: What he found was that-in the absence of a perpetually-growing economy-community and culture
are key.
There is a distinct difference from an ordinary pastoral in 'As You Like It' – the shepherds
do not own their sheep, and specific reference is made to the rural displaced, set to walk and
die on the roads. The policy was simply industrialized post-WWII, with tracts of suburbs in company
towns, separated from the competing allegiances of extended family and culture.
The problem is an old one. The successful solutions are not well publicized. The equivocations
of economicysts are now being revealed, and needs be drawn and quartered for the metastases they
encourage.
Soo.. we're working more now than the middle ages. Great! Good job america!
As a dispirited milennial myself, it seems that the best option for me is to cut loose, live
somewhere cheap and warm, enjoy nature and some friendly neighbors and watch this apocalypse unfold.
I sure as hell am not grinding my life away in the corporate trenches for ever-diminishing purchasing
power, give me a job at the grocer! What's that they've all been automated? Oh, damnit.
As a dispirited milennial myself, it seems that the best option for me is to cut loose,
live somewhere cheap and warm, enjoy nature and some friendly neighbors and watch this apocalypse
unfold.
Also the case for a reasonably affluent babyboomer
I actually did that. At 55, seven years ago now, I got disgusted and bailed out. I closed my
business (I actually gave it to my last two employees who wanted to keep going), sold my couple
of real estate holding in the city (my house and my business property) and moved out to the sticks
to brood and live cheaply. Turns out the living is cheap but there's been no brooding. Although
I had a ball in business, until the last two years, I've never had this much fun and contentment
with life. I'm a two bit hobby farmer or homesteader, if you will. You say that flippantly, as
I did, but bailing out and disconnecting from a Madison Ave determined lifestyle can actually
be quite rewarding. It's not for everyone but it's been a very fulfilling experience for me. Good
luck.
I had a weird dream about capitalism in reverse. Where we came to understand money as just
another form of energy and distributed it to people regularly so nobody needed to sell their labor
and the economy didn't need to grow to make profits. Instead of selling products/labor, everyone
used their money to make things we need and then paid again to give their product to someone:
"I'll give you the cost of making this naturally cured ham if you will please take it and enjoy
it." And we gave our money back to the environment the same way: here, please take all of our
energy and help to repair yourself. Or, we've spent our energy making these sustainable homes,
and we can offer your family $20K to take one and live in it. Sounds so nutty. I guess it would
still work to form a partnership, pool our money, and build a state of the art drug research lab.
And pay people to use these excellent drugs. Never mind.
William Morris, News from
Nowhere . Pleasant overview, not big on infrastructure, well-handled dream sequence.
To clarify: I approve, but don't expect this book to give assembly instructions.
Thanks for this great post, more like it please! It's no good endlessly criticising the status
quo we all need to spend more time discussing the alternatives and moving ourselves forward.
During my time as a retail worker it struck me how much of effective customer service was
really an unpaid use of our spontaneous urge to give aid to other people, to respond to their
needs as human beings.
We were often in the position of spiking the SOP of the business to get them what they
wanted. It hit me then how much the ostensible money economy is a free rider on the world of our
human non-economic lives, or is like free clean water used in an industrial process.
My co-workers and I sometimes became bitter about the low wages, and stopped paying attention
to people, but we couldn't keep it up for long, because you couldn't feel good for long about
taking it out on innocent people, and eventually even the bitterest co-workers would encounter
someone they just had to respond to as another person. We all figured out, sooner or later, that
the connection was the enduring value in the job.
This book, Lean Logic has twigged to this reality underlying the economy.
Hmmm. Resonates strongly with the bricklaying scene in Solzhenitsyn's One Day in the Life
of Ivan Denisovitch (about working in a prison camp.) I've got to see tomorrow if the bookstore
can get Lean Logic .
In an Utopian world the hardest least desirable jobs pay the most. CEOs make minimum wage while
the burger flippers being whipped by managers to hurry up are raking it in but do we have enough
unambitious intelligent people to keep the world turning
Socialism will always have to be balanced by the carrot and stick to minimize the mis-allocation
of resources.
Thus we can see reasons behind the high priority capitalistic societies put on individualism,
privatization, the self, the breaking down of "the commons," and fearing other groups, such as
Hispanics, Jews, or Muslims, at one time Catholics too as in the US. The whole mode of social
"we're all in this together" thinking is antithetical to it's reason for being. We need to think
"bigly" with a whole new paradigm (or is it an ancient paradigm) on how we view the world, and
we better do so quickly.
In short, there is no such thing as a "natural rate of interest".
........................
What then? It is difficult to say, exactly, whether the prevalent confusions are the result
of sloppy thinking, an incoherent textbook pedagogy, or a deliberate desire to cover for the Federal
Reserve and to obstruct potential criticism of the independent central bank. As a next step, let
us ask: is there a better theory of interest rates out there, somewhere in the great work of the
economists?
In the CEA paper, as in most of this so-called literature, the 20th century British economist
John Maynard Keynes is not cited. Yet it is a fact that Keynes did write an influential book with
the word "Interest" in the title. It was called The General Theory of Employment Interest and
Money, published in 1936. In which Keynes states, of the classical theory of interest – that theory
of loanable funds overlying a natural rate – that his own analysis "will have made it plain that
this account of the matter must be erroneous" (p. 177). Perhaps it is worthwhile to seek Keynes's
counsel at this point?
Keynes's theory of interest does not rest on the capital stock. And in Keynes as in the real
world, there is no "capital market" that equates household saving with business investment.
Instead, Keynes's theory of interest is about the market for money – a market that definitely
does exist in the real world. He wrote: "The rate of interest is not the 'price' which brings
into equilibrium the demand for resources to invest with the readiness to abstain from consumption.
It is the 'price' which equilibrates the desire to hold wealth in the form of cash with the available
quantity of cash" (p. 167). In other words, interest rates are a portfolio issue. They are determined
in the money markets, by how – in what form – people with wealth choose, at any given time, to
hold that wealth. You pay interest, in order to get people to hold their wealth in less-liquid
forms, such as bonds – and this is what provides firms with a secure source of financing, which
then permits them to invest.
Keynes's theory of interest is the pure common sense of how financial markets work. So why
is it treated, by our leading liberal economists, as though it didn't exist? Why all this confusing
folderol about natural and neutral rates? The apparent answer is damning. In the theories our
economists like, a technical theory of interest creates a technical theory of income distribution,
since interest rates govern the incomes of creditors against debtors, of the rich against the
poor, of profits against wages. Thomas Piketty's recent book is a nice instance of this point,
with its argument that the great inequalities of capitalism are due to interest rates higher than
the rate of economic growth. If interest somehow reflects the physical productivity of the capital
stock, then the consequences may be unfortunate – but they are inevitable and not something of
which it is proper to complain.
"Why all this confusing folderol about natural and neutral rates? The apparent answer is damning.
In the theories our economists like, a technical theory of interest creates a technical theory
of income distribution, since interest rates govern the incomes of creditors against debtors,
of the rich against the poor, of profits against wages..........If interest somehow reflects the
physical productivity of the capital stock, then the consequences may be unfortunate – but they
are inevitable and not something of which it is proper to complain."
[Is that clear enough?......Galbraith is accusing mainstream economists of acting as apologists
for rentiers.]
Marketplace Radio Has Not Heard About the Productivity
Slowdown
Marketplace radio had a peculiar piece * asking what the
world would have looked like if the North American Free Trade
Agreement never had been signed. The piece is odd because it
dismisses job concerns associated with NAFTA by telling
readers that automation (i.e. productivity growth) has been
far more important in costing jobs.
"As in, ATMs replacing bankers, robots displacing welders.
Automation is a very old story that goes back 250 years, but
it has really picked up in the last couple decades.
"'We economic developers have an old joke,' said Charles
Hayes of the Research Triangle Regional Partnership in an
interview with Marketplace in 2010. 'The manufacturing
facility of the future will employ two people: one will be a
man, and one will be a dog. And the man will be there to feed
the dog. And the dog will be there to make sure the man
doesn't touch the equipment.'
"Ouch. But it turns out technology replaced workers in the
course of reporting this very story."
Actually, the Bureau of Labor Statistics tells us the
opposite. Productivity growth did pick up from 1995 to 2005,
rising back to its 1947 to 1973 Golden Age pace (a period of
low unemployment and rapidly rising wages), but has slowed
sharply in the last dozen years.
[Graph]
While more rapid productivity growth would allow for
faster wage and overall economic growth, no one has a very
clear path for raising the rate of productivity growth. It is
strange that Marketplace thinks our problem is a too rapid
pace of productivity growth.
The piece is right in saying that the jobs impact of NAFTA
was relatively limited. Certainly trade with China displaced
many more workers. NAFTA may nonetheless have had a negative
impact on the wages of many manufacturing workers. It made
the threat to move operations to Mexico far more credible and
many employers took advantage of this opportunity ** to
discourage workers from joining unions and to make wage
concessions. It's surprising that the piece did not discuss
this effect of NAFTA.
Thanks for the data. It confirms what Dean wrote here:
"the
Bureau of Labor Statistics tells us the opposite.
Productivity growth did pick up from 1995 to 2005, rising
back to its 1947 to 1973 Golden Age pace (a period of low
unemployment and rapidly rising wages), but has slowed
sharply in the last dozen years.
Looking internationally, I consider the evidence conclusive
that productivity growth has slowed significantly since 2005
in countries that have had limited infrastructure
development, regardless of the emphasis in those countries on
information technology advance and application.
The OECD defines it as "the ratio of a volume measure of
output to a volume measure of input".] Volume measures of
output are normally gross domestic product (GDP) or gross
value added (GVA), expressed at constant prices i.e. adjusted
for inflation.
== end of quote ==
If you use GDP the result is suspect for the reasons GDP
is suspect. If not, then it is sector/industry based metric.
In this sense growth of GDP in 1990th is not only the
result of technological changes (Internet, PCs, cell phones)
but also looting of the xUSSR economies
And as looting slowed down after 2000 growth of
productivity also allowed down.
Steve Keen pointed out that all production is driven by
energy (mostly oil and electricity). And the energy comes
ultimately from the sun.
Either it is turned into production via feeding workers,
or by fueling machinery (by burning hydrocarbons or
indirectly via electricity supply).
That means that growth of productivity is inversely
correlated with the price of oil. As the period of cheap
hydrocarbons ended (remember $.99 per gallon of gas in 90th)
the period of rapid productivity growth ended as well.
One of the aspects od the idea of "secular stagnation" is
that high oil prices hit neoliberal economies like a hammer
and the period of high oil prices started to undermine
neoliberal globalization by making shipping more expensive.
That also means that without continuation of low oil
prices the next debt crisis (aka Minsky moment) is eminent
for the USA economy.
BTW none of US shale companies is profitable. They are all
up to the neck in debt, and their method of extracting oil
includes generating a flow of junk bonds. If financing stops
most of them will be bankrupt in one year period.
Obama clever game with Iran helped to produce "Obama
recovery" due to the period of "normal" oil prices which
started in mid 2015.
It probably can be extended for another year or two. What
happens next is completely unknown territory. It is clear
that the US shale is a card that was already played. It can't
be played again as output probably can be substantially
raised (say 2 Mbd/day) only with high or very high oil prices
(as in above $70 or higher).
After "Obama recovery" (which depends on continuing low
oil prices created by clever political maneuvering in Arab
world -- Hail Mary pass that worked) we might well face the
period of "elevated oil prices" and increased stagnation of
the US economy with noticeably higher level of unemployment.
Much depends on Trump playing his trump card of "détente"
with Russia which theoretically could extend this period
(Russia has the same level of oil production as Saudis and
more reserves), but there were to much sand thrown by neocons
and DemoRats for this scenario to work. I thing Russia now is
no longer interested in partnership with the USA on the basis
of maintaining low oil prices -- like KSA today, and might
cut output further to get higher oil prices which are vital
for their economy. Of course Russia has strong neoliberal
fifth column (including pro-western directors of oil
companies and oligarchs who have their wealth transferred to
Western banks) but even they are pissed off by the USA now.
DemoRats wiped up Anti-Russian hysteria to the level when
even contact with Russian official can be a "career limiting
move" in the USA.
This hysteria now has its own self-propagating dynamics
and is difficult to stop. It might last for the same period
of time as McCarthyism hysteria (roughly from 1947 to 1956).
"... "The principal problem for Democrats is that so many
media figures and online charlatans are personally benefiting
from feeding the base increasingly unhinged, fact-free
conspiracies - just as right-wing media polemicists did after
both Bill Clinton and Obama were elected - that there are now
millions of partisan soldiers absolutely convinced of a
Trump/Russia conspiracy for which, at least as of now, there
is no evidence. ..."
It put the Democrats and Republicans in sync as two
equally warmongering parties, but what good that would bring
for the American people and the world is hard to fathom.
The USA lost the possibility of switching personal car
fleet to more economical hybrid models by adopting some
drastic measures and now is less prepared for a new period of
high oil prices. People are still buying SUV which became the
most popular type of personal transportation in the USA, and
small tracks.
On the electricity front there are some problems too. The
looting of Russia and the flow of cheap uranium stopped.
Building of high voltage East -West line necessary for
substantial wind and solar production is still on the drawing
board.
"... The long term absence of convergence in productivity growth between developed and developing countries should be of considerable concern, but seems overlooked even in settings such as trade negotiations in which such concerns especially need to be addressed. ..."
"... You need to understand that like most "integral" metrics (and, especially, like GDP) productivity growth is very suspect. Its importance was artificially amplified under neoliberalism to the "sacred cow" status. ..."
"... While the strong earnings growth of US-based corporations might, at least partially, be real and not all accounting tricks, the question arise what part of those gains are coming from improvements in domestic productivity and what part from offshoring. ..."
"... Productivity growth is an important part of the system of neoliberal myths (along with "cult of GDP" ) and this mythology is directed at deceiving the public that it is indirectly benefitting from the neoliberal transformation of the society, while in reality we observe impoverishment of the majority of population. As in " The USA is the country with fastest productivity grown." Rejoice. ..."
The long term absence of convergence in productivity growth between developed and developing countries
should be of considerable concern, but seems overlooked even in settings such as trade negotiations
in which such concerns especially need to be addressed.
You need to understand that like most "integral" metrics (and, especially, like GDP) productivity
growth is very suspect. Its importance was artificially amplified under neoliberalism to the "sacred
cow" status.
Government bureaucrats also are afraid to tell the truth. Richard Benson , a well-known critic
of government labor statistics, who wrote several insightful papers on the subject, noted "The
BLS is mindful of how politically sensitive any reported job data is to the White House, so there
is a strong bias for the government bureaucrats to publish a favorable jobs report."
One hidden fact is that it is offshoring that is the driver of corporate profits and it distorts
"productivity" statistics.
While the strong earnings growth of US-based corporations might, at least partially, be real
and not all accounting tricks, the question arise what part of those gains are coming from improvements
in domestic productivity and what part from offshoring.
Rising stratification of the society also affects this metric (via the ratio of "have more"
vs "have not")
Productivity growth is an important part of the system of neoliberal myths (along with "cult
of GDP" ) and this mythology is directed at deceiving the public that it is indirectly benefitting
from the neoliberal transformation of the society, while in reality we observe impoverishment
of the majority of population. As in " The USA is the country with fastest productivity grown."
Rejoice.
It is also simplifies the adoption of pro financial oligarchy policies masked with technocratic
jargon -- policies that destroyed New Deal and hurt the majority of the population ("rising labor
costs" is one such usage).
Adopting technocratic posture (economics like Boeing there by using certain controls you can
change flight course) serves like anesthetic. Rephrasing Marx we can say "neoliberal economics
is the opium for the people". And it is by design. which confirms the iron law of oligarchy in
a very interesting, unexpected way.
That's why jargon use by priests of neo-classical economics is almost in-penetrable for an
ordinary person. The well known neoliberal stooge Greenspan was a real master of it.
So the importance assigned to such measures as GDP and productivity is, to a certain extent,
politically motivated.
For example, in the denominator we have all those hedge funds managers and other members of
financial oligarchy bonuses, and top managers exorbitant remuneration within all kinds of firms
(which definitely drives productivity growth down ;-)
In the numerator are military expenses and income of financial sector (and now another somewhat
parasitic sector close to banking -- medical insurance industry).
Both are essentially money stolen from people and, to a certain extent, from "real" economy.
Of cause, not all money are wasted as military spending in addition to war for neoliberal empire
expansion (and related loot) also employs a lot of people and fund fundamental research; the myth
about innovation of Silicon Valley is partially a myth; in reality in many cases this is a direct
transfer of technology from the military sector.
Among the examples are integrated circuits, laser, wireless, Internet, multiprocessing, etc;
even some algorithmic languages :-).
So when you have such fuzzy numerator and denominator, the result is also fuzzy and all conclusions
based on them might be not worth electrons with which they are depicted on our screens.
As I mentioned before, productivity should be somewhat inversely correlated with the oil price,
as "amount of energy per worker" is what defines at the end worker's productivity (via the level
of automation, mechanization of his work). That's were the USA strong (or week, if you wish) point
is -- it has the largest consumption of energy per capita in the world. If we normalize productivity
via per capita energy consumption we will get a more interesting picture.
"... The OECD defines it as "the ratio of a volume measure of output to a volume measure of input".] Volume measures of output are normally gross domestic product (GDP) or gross value added (GVA), expressed at constant prices i.e. adjusted for inflation. ..."
"... If you use GDP the result is suspect for the reasons GDP is suspect. If not, then it is sector/industry based metric. ..."
"... In this sense growth of GDP in 1990th is not only the result of technological changes (Internet, PCs, cell phones) but also looting of the xUSSR economies ..."
"... And as looting slowed down after 2000 growth of productivity also allowed down. ..."
"... One of the aspects of the idea of "secular stagnation" is that high oil prices hit neoliberal economies like a hammer and the period of high oil prices started to undermine neoliberal globalization by making shipping more expensive. ..."
"... BTW none of US shale companies is profitable. They are all up to the neck in debt, and their method of extracting oil includes generating a flow of junk bonds. If financing stops most of them will be bankrupt in one year period. ..."
Marketplace Radio Has Not Heard About the Productivity Slowdown
Marketplace radio had a peculiar piece * asking what the world would have looked like if the
North American Free Trade Agreement never had been signed. The piece is odd because it dismisses
job concerns associated with NAFTA by telling readers that automation (i.e. productivity growth)
has been far more important in costing jobs.
"As in, ATMs replacing bankers, robots displacing welders. Automation is a very old story that
goes back 250 years, but it has really picked up in the last couple decades.
"'We economic developers have an old joke,' said Charles Hayes of the Research Triangle Regional
Partnership in an interview with Marketplace in 2010. 'The manufacturing facility of the future
will employ two people: one will be a man, and one will be a dog. And the man will be there to
feed the dog. And the dog will be there to make sure the man doesn't touch the equipment.'
"Ouch. But it turns out technology replaced workers in the course of reporting this very story."
Actually, the Bureau of Labor Statistics tells us the opposite. Productivity growth did pick
up from 1995 to 2005, rising back to its 1947 to 1973 Golden Age pace (a period of low unemployment
and rapidly rising wages), but has slowed sharply in the last dozen years.
[Graph]
While more rapid productivity growth would allow for faster wage and overall economic growth,
no one has a very clear path for raising the rate of productivity growth. It is strange that Marketplace
thinks our problem is a too rapid pace of productivity growth.
The piece is right in saying that the jobs impact of NAFTA was relatively limited. Certainly
trade with China displaced many more workers. NAFTA may nonetheless have had a negative impact
on the wages of many manufacturing workers. It made the threat to move operations to Mexico far
more credible and many employers took advantage of this opportunity ** to discourage workers from
joining unions and to make wage concessions. It's surprising that the piece did not discuss this
effect of NAFTA.
Thanks for the data. It confirms what Dean wrote here:
"the Bureau of Labor Statistics tells us the opposite. Productivity growth did pick up from
1995 to 2005, rising back to its 1947 to 1973 Golden Age pace (a period of low unemployment and
rapidly rising wages), but has slowed sharply in the last dozen years.
Looking internationally, I consider the evidence conclusive that productivity growth has slowed
significantly since 2005 in countries that have had limited infrastructure development, regardless
of the emphasis in those countries on information technology advance and application.
The OECD defines it as "the ratio of a volume measure of output to a volume measure of
input".] Volume measures of output are normally gross domestic product (GDP) or gross value added
(GVA), expressed at constant prices i.e. adjusted for inflation.
== end of quote ==
If you use GDP the result is suspect for the reasons GDP is suspect. If not, then it is
sector/industry based metric.
In this sense growth of GDP in 1990th is not only the result of technological changes (Internet,
PCs, cell phones) but also looting of the xUSSR economies
And as looting slowed down after 2000 growth of productivity also allowed down.
Steve Keen pointed out that all production is driven by energy (mostly oil and electricity).
And the energy comes ultimately from the sun.
Either it is turned into production via feeding workers, or by fueling machinery (by burning
hydrocarbons or indirectly via electricity supply).
That means that growth of productivity is inversely correlated with the price of oil. As the
period of cheap hydrocarbons ended (remember $.99 per gallon of gas in 90th) the period of rapid
productivity growth ended as well.
One of the aspects of the idea of "secular stagnation" is that high oil prices hit neoliberal
economies like a hammer and the period of high oil prices started to undermine neoliberal globalization
by making shipping more expensive.
That also means that without continuation of low oil prices the next debt crisis (aka Minsky
moment) is eminent for the USA economy.
BTW none of US shale companies is profitable. They are all up to the neck in debt, and
their method of extracting oil includes generating a flow of junk bonds. If financing stops most
of them will be bankrupt in one year period.
Obama clever game with Iran helped to produce "Obama recovery" due to the period of "normal"
oil prices which started in mid 2015.
It probably can be extended for another year or two. What happens next is completely unknown
territory. It is clear that the US shale is a card that was already played. It can't be played
again as output probably can be substantially raised (say 2 Mbd/day) only with high or very high
oil prices (as in above $70 or higher).
After "Obama recovery" (which depends on continuing low oil prices created by clever political
maneuvering in Arab world -- Hail Mary pass that worked) we might well face the period of "elevated
oil prices" and increased stagnation of the US economy with noticeably higher level of unemployment.
Much depends on Trump playing his trump card of "détente" with Russia which theoretically could
extend this period (Russia has the same level of oil production as Saudis and more reserves),
but there were to much sand thrown by neocons and DemoRats for this scenario to work. I thing
Russia now is no longer interested in partnership with the USA on the basis of maintaining low
oil prices -- like KSA today, and might cut output further to get higher oil prices which are
vital for their economy. Of course Russia has strong neoliberal fifth column (including pro-western
directors of oil companies and oligarchs who have their wealth transferred to Western banks) but
even they are pissed off by the USA now.
DemoRats wiped up Anti-Russian hysteria to the level when even contact with Russian official
can be a "career limiting move" in the USA.
This hysteria now has its own self-propagating dynamics and is difficult to stop. It might
last for the same period of time as McCarthyism hysteria (roughly from 1947 to 1956).
"... "The principal problem for Democrats is that so many media figures and online charlatans
are personally benefiting from feeding the base increasingly unhinged, fact-free conspiracies
- just as right-wing media polemicists did after both Bill Clinton and Obama were elected - that
there are now millions of partisan soldiers absolutely convinced of a Trump/Russia conspiracy
for which, at least as of now, there is no evidence. ..."
It put the Democrats and Republicans in sync as two equally warmongering parties, but what
good that would bring for the American people and the world is hard to fathom.
The USA lost the possibility of switching personal car fleet to more economical hybrid models
by adopting some drastic measures and now is less prepared for a new period of high oil prices.
People are still buying SUV which became the most popular type of personal transportation in the
USA, and small tracks.
On the electricity front there are some problems too. The looting of Russia and the flow of
cheap uranium stopped. Building of high voltage East -West line necessary for substantial wind
and solar production is still on the drawing board.
"... Ugh what an awful display of pop economism. Globalization and technology are "impersonal forces." No mention of the rise of inequality or the SecStags. No mention of monetary policy fail in Europe. The biggest lies of economism are the lies of omission. ..."
"... Looks like this concept of "Economism" introduced by James Kwak in his book Economism is very important conceptual tool for understanding the tremendous effectiveness of neoliberal propaganda. ..."
"... When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy. ..."
"... For example, the basic Econ 101 theory of supply and demand is fine for some products, but it doesn't work very well for labor markets. It is incapable of simultaneously explaining both the small effect of minimum wage increases and the small impact of low-skilled immigration. Some more complicated, advanced theory is called for. ..."
"... But no matter how much evidence piles up, people keep talking about "the labor supply curve" and "the labor demand curve" as if these are real objects, and to analyze policies -- for example, overtime rules -- using the same old framework. ..."
"... An idea that we believe in despite all evidence to the contrary isn't a scientific theory -- it's an infectious meme. ..."
"... Academic economists are unsure about how to respond to the abuse of simplistic econ theories for political ends. On one hand, it gives them enormous prestige. The popularity of simplistic econ ideas has made economists the toast of America's intellectual classes. ..."
"... It has sustained enormous demand for the undergraduate econ major, which serves, in the words of writer Michael Lewis, as a "standardized test of general intelligence" for future businesspeople. But as Kwak points out, the simple theories promulgated by politicians and on the Wall Street Journal editorial page often bear little resemblance to the sophisticated theories used by real economists. ..."
"... And when things go wrong -- when the financial system crashes, or millions of workers displaced by Chinese imports fail to find new careers -- it's academic economists who often get blamed, not the blasé and misleading popularizers. ..."
"So I wonder if economism was really as unrealistic and useless as Kwak seems to imply.
Did countries that resisted economism -- Japan, for example, or France [Germany?] -- do better
for their poor and middle classes than the U.S.? Wages have stagnated in those countries, and
inequality has increased, even as those countries remain poorer than the U.S. Did the U.S.'s
problems really all come from economism, or did forces such as globalization and technological
change play a part? Cross-country comparisons suggest that the deregulation and tax cuts of
the 1980s and 1990s, although ultimately excessive, probably increased economic output somewhat."
Ugh what an awful display of pop economism. Globalization and technology are "impersonal forces."
No mention of the rise of inequality or the SecStags. No mention of monetary policy fail in Europe.
The biggest lies of economism are the lies of omission.
libezkova -> Peter K.... , -1
Thank you --
Looks like this concept of "Economism" introduced by James Kwak in his book Economism is
very important conceptual tool for understanding the tremendous effectiveness of neoliberal propaganda.
I think it is proper to view Economism as a flavor of Lysenkoism. As such it is not very effective
in acquiring the dominant position and suppressing of dissent, but it also can be very damaging.
...When competitive free markets and rational well-informed actors are the baseline assumption,
the burden of proof shifts unfairly onto anyone proposing a government policy. For far too
many years, free-marketers have gotten away with winning debates by just sitting back and saying
"Oh yeah? Show me the market failure!" That deck-stacking has long forced public intellectuals
on the left have to work twice as hard as those safely ensconced in think tanks on the free-market
right, and given the latter a louder voice in public life than their ideas warrant.
It's also true that simple theories, especially those we learn in our formative years, can
maintain an almost unshakeable grip on our thinking.
For example, the basic Econ 101 theory of supply and demand is fine for some products,
but it doesn't work very well for labor markets. It is incapable of simultaneously explaining
both the small effect of minimum wage increases and the small impact of low-skilled immigration.
Some more complicated, advanced theory is called for.
But no matter how much evidence piles up, people keep talking about "the labor supply curve"
and "the labor demand curve" as if these are real objects, and to analyze policies -- for example,
overtime rules -- using the same old framework.
An idea that we believe in despite all evidence to the contrary isn't a scientific theory
-- it's an infectious meme.
Academic economists are unsure about how to respond to the abuse of simplistic econ theories
for political ends. On one hand, it gives them enormous prestige. The popularity of simplistic
econ ideas has made economists the toast of America's intellectual classes.
It has sustained enormous demand for the undergraduate econ major, which serves, in the
words of writer Michael Lewis, as a "standardized test of general intelligence" for future businesspeople.
But as Kwak points out, the simple theories promulgated by politicians and on the Wall Street
Journal editorial page often bear little resemblance to the sophisticated theories used by real
economists.
And when things go wrong -- when the financial system crashes, or millions of workers displaced
by Chinese imports fail to find new careers -- it's academic economists who often get blamed,
not the blasé and misleading popularizers.
... ... ...
Russia and China have given up communism not because they stopped having working classes, but
because it became obvious that their communist systems were keeping them in poverty. And Americans
are now starting to question economism because of declining median income, spiraling inequality
and a huge financial and economic crisis.
"... Neoliberalism, which is essentially simplified pseudo-economics in action, is finally beginning to break down, but rather than yielding to a more rational politics it is giving us Brexit, Trump and similar delusionary movements. Required to choose between the stale cant of economism and authoritarian fairytales of denial, the public is opting for the second door. Unless economism is disposed of quickly, there won't be an opening for a more enlightened third option. ..."
"... The critical deconstructive move follows, in which Kwak surveys the empirical literature, showing that, in real economics, the conventional assumptions are either flat out wrong or at least seriously qualified. He then concludes by explaining the policy implications of a more informed approach. It gets to be a bit formulaic, but it is effective and easy to follow. ..."
"... I can imagine using a book like this in an introductory microeconomics class. (Except for a bit of macro here and there, the book's focus is micro.) It's exactly the right antidote for the tendency of introductory textbooks to oversell markets and undersupply critical thinking. I hope lots of faculty teaching Econ 101 adopt it. ..."
"... He would do well to distinguish between the normative and positive aspects of economism. In a policy context, both are usually entailed: the positive view that this is how the world works is given political salience by the normative view that demand curves represent "benefits" to society and the supply curve "costs". It's important to recognize that economism can fail on either account: either empirical work can show that this is not how the world works, or the assumptions about how markets represent social interests can be challenged, or both. ..."
"... the full-dress neoclassical trade model (Heckscher-Ohlin-Samuelson, although he doesn't identify it as such) recognizes losers as well as winners from trade liberalization and makes this the conceptual linchpin of his critique of economism in this area. ..."
"... the impacts of trade liberalization on employment may be worse than this, since the proposition that the trade balance is unaffected by changes in the degree of openness requires adjustments in exchange rates that, at the very least, are empirically unreliable. ..."
"... In practice it's entirely possible, likely even, that a major liberalization event like the US opening to trade with China at the time of its WTO accession has an effect on the aggregate trade balance and not just the composition of industries on each side of the ledger. I shouldn't make a big deal of this, because Kwak is no doubt eager to avoid criticism that he is unknowledgeable about economics, and most economists would regard my criticism as falling under that shadow-but I don't think I'm wrong about this. ..."
"... Economism is wrong about how labor markets work, how health care works, how international trade works and so on, not because money doesn't buy you love, but because its analysis is wrong . If we're looking for a common message that applies to all these topics and pokes a hole in the economistic world view, wouldn't we look for common elements in the arguments we've already made? ..."
"... At its best, Economism is feisty. It challenges sloppy thinking about how the economic system works and makes the case for progressive policies that would result in greater income equality and access to economic goods. Excellent! ..."
"... The unifying progressive message is not that economics doesn't matter so much; it's that the economics of knee-jerk libertarianism is doctrinaire, false and self-serving. Our message is that we reject the ideology of universal unlimited acquisitiveness as a reasonable way of organizing human affairs, and that the evidence is on our side. I'd love to see a hard-hitting conclusion replace the flabby one that's currently there. ..."
There's economics, a field that has been renewing itself, shaking off theoretical rigidities through
more attention to behavior and institutions and shifting its center of gravity toward empirical observation
and testing. And then there's economics as it exists in standard political discourse, seeing
the whole world as refracted through supply and demand diagrams where markets are always efficient
and outcomes always socially optimal. This second, dumbed down, knee-jerk libertarian creed
is the object of James Kwak's new book,
Economism
.
If ever a book arrived to fill a need, this one has. Neoliberalism, which
is essentially simplified pseudo-economics in action, is finally beginning to break down, but rather
than yielding to a more rational politics it is giving us Brexit, Trump and similar delusionary
movements. Required to choose between the stale cant of economism and authoritarian fairytales
of denial, the public is opting for the second door. Unless economism is disposed of quickly,
there won't be an opening for a more enlightened third option.
In many ways, Kwak is an ideal person to take on the job. He's very, very smart. He
generally knows his economics, but he's not in thrall to the profession. (He's actually a law
professor.) He writes clearly and explains economic concepts with a minimum of lecture-itis.
His book is short and to the point.
Most chapters follow the same general template. Kwak begins by laying out an area of policy
and briefly explaining why it's important; topics include income distribution, taxes, health care,
finance and trade. He then goes into a thorough exposition of the standard economistic analysis,
usually based on casual assumptions concerning rational choice, competition, and the market as a
cost-benefit device. His next step is to show this conceptual framework in action, as mouthed
by politicians and journalists. The critical deconstructive move follows, in which Kwak surveys
the empirical literature, showing that, in real economics, the conventional assumptions are either
flat out wrong or at least seriously qualified. He then concludes by explaining the policy
implications of a more informed approach. It gets to be a bit formulaic, but it is effective
and easy to follow.
I can imagine using a book like this in an introductory microeconomics class. (Except for
a bit of macro here and there, the book's focus is micro.) It's exactly the right antidote
for the tendency of introductory textbooks to oversell markets and undersupply critical thinking.
I hope lots of faculty teaching Econ 101 adopt it.
That said, I think it could have been even better than it is. In a future second edition-and
I expect there will be one-Kwak should consider these improvements:
1. His adoption of the voice of economism is
very
extended. He will go on for several
pages presenting the economistic worldview as if it were his. Yes, I know, academics like Kwak,
myself and perhaps you are trained to cope with this. It's nothing for us to read a book in
which the author takes on the personna of someone with a differnt point of view for many pages at
a time. Most general readers are not familiar with this, however. I can say from personal
experience that something like half my students would come away thinking that Kwak himself espouses
economism and is contradicting himself when he criticizes it. What to do about this?
Of course, it's important for Kwak to present economism in a neutral, even sympathetic voice, and
to do so at the length it requires. Perhaps he considered adding, every paragraph or so, a
qualifier like "from this point of view", but decided it was too clunky. In that case, an altered
typeface, like italics, could have been used to set off his temporarily assumed voice as expositor
of economism. One way or the other, markers are needed for readers unused to academic protocols.
2. He would do well to distinguish between the normative and positive aspects of economism.
In a policy context, both are usually entailed: the positive view that
this is how the world works
is given political salience by the normative view that demand curves represent "benefits" to society
and the supply curve "costs". It's important to recognize that economism can fail on either
account: either empirical work can show that this is
not
how the world works, or the assumptions
about how markets represent social interests can be challenged, or both. In practice, Kwak
relies more on the first critique, and the book usefully draws together key empirical findings on
topics like minimum wages, health costs, etc. But the market failure framework could have been
given more of a workout than it received; in practice these arguments are effective.
3. The chapter on international trade is timid. Kwak points out that the full-dress neoclassical
trade model (Heckscher-Ohlin-Samuelson, although he doesn't identify it as such) recognizes losers
as well as winners from trade liberalization and makes this the conceptual linchpin of his critique
of economism in this area. In this he has a lot of company; H-O-S with lots of friction has
become the standard progressive position. However, the impacts of trade liberalization on employment
may be worse than this, since the proposition that the trade balance is unaffected by changes in
the degree of openness requires adjustments in exchange rates that, at the very least, are empirically
unreliable. (
All
exchange rate adjustments in response to anything are empirically unreliable.)
In practice it's entirely possible, likely even, that a major liberalization event like the US opening
to trade with China at the time of its WTO accession has an effect on the aggregate trade balance
and not just the composition of industries on each side of the ledger. I shouldn't make a big
deal of this, because Kwak is no doubt eager to avoid criticism that he is unknowledgeable about
economics, and most economists would regard my criticism as falling under that shadow-but I don't
think I'm wrong about this.
4. The very end of the book-the final four pages-are simply weak. To wrap up, Kwak points
out that, whatever its faults, economism delivers by having a simple, all-purpose, easy-to-grasp
message and then asks, "What's our message?" His answer is that wealthy economies don't need
economic growth or even economic efficiency as they used to, and we should all turn away from economic
concerns and embrace happiness instead. Huh? Now, before I launch into a critique of
this view, I should make it clear that I agree with a lot of it on matters of substance: economic
values, like income, are not the same as human values. One can live well on less money, and
the pursuit of wealth should not be the primary goal either for individuals or societies. Yes,
of course. But that doesn't mean that "downplay money" is the logical message to set against
economism.
One obvious reason is that the difference between wealth and happiness played no role whatsoever
in the chapters that led up to his conclusion. Economism is wrong about how labor markets work,
how health care works, how international trade works and so on, not because money doesn't buy you
love, but because its analysis is
wrong
. If we're looking for a common message that
applies to all these topics and pokes a hole in the economistic world view, wouldn't we look for
common elements in the arguments we've already made? It's always a mistake in a piece of
writing to go off in a new direction at the point where we should be summing up; this should have
occurred to Kwak or been pointed out to him by his reviewers.
The other reason is that downplaying economics-saying that income and other economic measures
don't mean so much-violates the spirit of the book. At its best,
Economism
is feisty.
It challenges sloppy thinking about how the economic system works and makes the case for progressive
policies that would result in greater income equality and access to economic goods. Excellent!
Why at the end turn around and say, in effect, OK, we'll give the conservatives economics, and we'll
take happiness instead? No! Don't give them that! They don't deserve it!
The unifying progressive message is
not
that economics doesn't matter so much; it's that the
economics of knee-jerk libertarianism is doctrinaire, false and self-serving. Our message is
that we reject the ideology of universal unlimited acquisitiveness as a reasonable way of organizing
human affairs, and that the evidence is on our side. I'd love to see a hard-hitting conclusion
replace the flabby one that's currently there.
It's in the nature of a review like this to dwell on the negative, but I don't want you to be
dissuaded from buying and reading this book.
Economism
is an important work of popular
education that needed to be written. Kwak has the skills to do it well-even better than he
has this time out.
I have not read Kwak's book, though
I have read the chapter on minimum
wage policy republished in the
Atlantic in January. My comment
reflects on your review and that
Atlantic article.
Kwak is trying
to do a very difficult thing in
attacking "economism", the glib
libertarian ideology derived from
neoclassical economics, and he
does not seem to grasp just how
difficult or why it is so difficult.
The Amazon page explains, "
Economism:
an ideology that distorts the valid
principles and tools of introductory
college economics, propagated by
self-styled experts, zealous lobbyists,
clueless politicians, and ignorant
pundits." This is the basic rhetorical
stance of the book: that the economics
of Econ 101 has validity and economism
is some distorted, illegitimate
simplification. This rhetorical
template will get reiterated as
the notion that the actual economy
is messy and complicated and economism
is wrong because it is oversimplified
(to serve interests).
On the minimum wage, Kwak concedes
"The supply-and-demand diagram
is a good conceptual starting point
for thinking about the minimum
wage. But on its own, it has limited
predictive value in the much more
complex real world."
and then
presents sophisticated economics
as "it's complicated".
"In short,
whether the minimum wage should
be increased (or eliminated) is
a complicated question. The economic
research is difficult to parse,
and arguments often turn on sophisticated
econometric details. Any change
in the minimum wage would have
different effects on different
groups of people, and should also
be compared with other policies
. . . "
This is a hopelessly weak rhetorical
position, because it depends on
conceding -- indeed, confirming
-- the validity of neoclassical
economics, which still outlines
introductory college economics
textbooks. Economism is a fair
distillation of neoclassical economics
and, like it or not, mainstream
economics nurtures neoclassical
economics and demands commitment
to the neoclassical framework.
Even if the mainstream permits
many other ideas to float around
academia, neoclassical economics
is the framework of indoctrination.
I do not think it is possible
to win the argument against economism,
if you are not willing to reject
neoclassical economics wholesale.
Neoclassical economics is the father
and mother of economism, and neoclassical
economics is wrong, fundamentally
wrong, in a scientific (aka epistemological)
sense. The world is not essentially
or fundamentally as neoclassical
economics says, which is provable
logically and empirically; you
can only sustain neoclassical economics
as an academic doctrine by suppressing
critical thinking (which economics
pedagogy insists upon). We do not
live in an economic system organized
primarily by markets tending toward
general equilibrium; the actual
economy is organized primarily
by bureaucracy and driven by disequilibrium
dynamics. Most prices are not formed
by competitive bidding; prices
are administratively determined
and managed. And so on.
The supply-and-demand diagram is
NOT
a good conceptual starting
point for thinking about the minimum
wage, and Kwak should never have
conceded as much. There's no labor
market. Most employers offer low-wage
workers take-it-leave-it terms,
constrained only by the rules and
bureaucracy of state and Federal
labor regulations, one of which,
of course, is the statutory minimum
wage. (Millions work for less than
the minimum wage by the way --
as the Bureau of Labor Statistics
regularly attests.) And, when people
go to work, they are managed and
supervised in systems that determine
how productive they are; if they
are paid their "marginal product"
in some abstract sense, it is because
their managers make it so. They
work in bureaucracies controlling
production and distribution processes
by administrative and technological
means, and the terms of their employment
reflects this role as controller
and controlled: they are paid a
more or less fixed wage, subject
to being fired. The threat of being
fired is key to the willingness
of employees to follow managerial
direction.
Neoclassical economics does
not admit economic hierarchy as
central to the organization of
the economy. But, when you reject
neoclassical economics, you do
not exclude all that might be relevant
from mainstream economics. Indeed,
economists have had many useful
insights into "efficiency wages"
and the relation of principals
to their agents.
Useful and sophisticated ideas
are still available after rejecting
neoclassical economics, but I am
not sure reputable economists are.
I do not think Kwak would find
his book jacket blurbed by quite
such luminary figures, if he had
rejected neoclassical economics
as one big lie (which it is). He
would have been in a stronger logical
and rhetorical position to reject
economism, but he might have lacked
reputable allies. That's what makes
the rejection of economism so difficult.
Economism is the ideology of
right neoliberalism, but the neoliberal
right is locked into a symbiotic
relationship with left neoliberalism.
Paul Krugman, Brad DeLong, John
Quiggin, Noah Smith, Jared Bernstein
-- these people seem to be opposed
to economism, but they depend upon
the legitimacy of neoclassical
economics and the mainstream economics
establishment too much to allow
a winning argument premised on
a rejection of the mother lode
of economism, neoclassical economics.
It is an old story of "with
friends like these who needs enemies".
Economics is a thoroughly corrupt
profession and all neoclassical
economists are some mix of fraud
and fool. We might like the fools
better, but they are not that much
help against the frauds. As Peter
Dorman says, "Kwak is no doubt
eager to avoid criticism that he
is unknowledgeable about economics",
but I suspect his eagerness to
avoid such criticism is focused
more on the sociological factor
that mainstream economics nurtures
neoclassical economics than on
actual knowledge of economics qua
knowledge of the economy. And,
that's the core problem.
"the neoliberal right is locked
into a symbiotic relationship with
left neoliberalism"
I would have
phrased it the other way round.
It seems to me the neoliberal right
would be content without the left
but the neoliberal left desperately
needs
the neoliberal right
for legitimization in its relentless
crusade against the heterodox infidels
-- the right is what makes Krugman,
DeLong et al. "the lefter of two
neoliberalisms."
"In practice it's entirely possible,
likely even, that a major liberalization
event like the US opening to trade
with China at the time of its WTO
accession has an effect on the
aggregate trade balance and not
just the composition of industries
on each side of the ledger. I shouldn't
make a big deal of this, because
Kwak is no doubt eager to avoid
criticism that he is unknowledgeable
about economics, and most economists
would regard my criticism as falling
under that shadow-but I don't think
I'm wrong about this."
Hobson made a very big deal
about this when it comes to China
more than 100 years ago:
"It is here enough to repeat
that Free Trade can nowise guarantee
the maintenance of industry, or
of an industrial population upon
any particular country, and there
is no consideration, theoretic
or practical, to prevent British
capital from transferring itself
to China, provided it can find
there a cheaper or more efficient
supply of labour, or even to prevent
Chinese capital with Chinese labour
from ousting British produce in
neutral markets of the world. What
applies to Great Britain applies
equally to the other industrial
nations which have driven their
economic suckers into China. It
is at least conceivable that China
might so turn the tables upon the
Western industrial nations, and,
either by adopting their capital
and organisers or, as is more probable,
by substituting her own, might
flood their markets with her cheaper
manufactures, and refusing their
imports in exchange might TAKE
HER PAYMENTS IN LIENS UPON THEIR
CAPITAL, REVERSING THE EARLIER
PROCESS OF INVESTMENT UNTIL SHE
GRADUALLY OBTAINED FINANCIAL CONTROL
OVER HER QUONDAM PATRONS AND CIVILISERS.
This is no idle speculation. If
China in very truth possesses those
industrial and business capacities
with which she is commonly accredited,
and the Western Powers are able
to have their will in developing
her upon Western lines, it seems
extremely likely that this reaction
will result." John Atkinson Hobson,
Imperialism, A Study, 1902."
Bad economics, futile critique,
and illusive new thinking
Comment on Peter Dorman on 'Review
of Economism: Bad Economics and
the Rise of Inequality by James
Kwak'
Economics claims since
Adam Smith/Karl Marx to be a science.
Yet, everybody who looks closer
into the matter comes to the conclusion
that economics is a failed science.
The four main approaches ― Walrasianism,
Keynesianism, Marxianism, Austrianism
― are mutually contradictory, axiomatically
false, materially/formally inconsistent,
and all got the pivotal concept
of the subject matter, i.e. profit,
wrong.
In this hopeless situation,
critique is futile: "There is another
alternative: to formulate a completely
new research program and conceptual
approach. As we have seen, this
is often spoken of, but there is
still no indication of what it
might mean." (Ingrao et al., 1990)
James Kwak, too, has not the
slightest idea what a paradigm
shift means: "To wrap up, Kwak
points out that, whatever its faults,
economism delivers by having a
simple, all-purpose, easy-to-grasp
message and then asks, 'What's
our message?' His answer is that
wealthy economies don't need economic
growth or even economic efficiency
as they used to, and we should
all turn away from economic concerns
and embrace happiness instead."*
Instead of coming up with a
'completely new research program
and conceptual approach' as replacement
for the standard approach, which
is known to be false on all methodological
counts, Kwak dishes out cheap advice
from the self-help workshop: don't
worry, be happy. To top it all,
this abortive pseudo-critical exercise
is advertised as new economic thinking.
Egmont Kakarot-Handtke
* See also 'The economist's
pick: liar, moron or what?'
http://axecorg.blogspot.de/2016/12/the-economists-pick-liar-moron-or-what.html
"... Facts are always presented via lens of some underling theory and if the theory is wrong, facts can lie, even when the figures are more or less correct, or within the margin of error. ..."
"... Technocratic neoliberal economists well represented here actually serve as a fifth column of financial oligarchy, and always were. ..."
"... Simplistic and wrong supply-and-demand theory fed a market fundamentalism ideology. As a result we have a financial crash, a dysfunctional health-care system, spiraling inequality and a deficient, inadequate for a modern society social-safety net. ..."
"... When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy. Government programs and regulations start to seem dangerous and inefficient, while inequality begins to feel like the natural and just order of things. ..."
"... The Amazon page to Kwak book explains, "Economism: an ideology that distorts the valid principles and tools of introductory college economics, propagated by self-styled experts, zealous lobbyists, clueless politicians, and ignorant pundits." ..."
"... Economism is reduction of all social facts to economic dimensions. The term is often used to criticize economics as an ideology, in which supply and demand are the only important factors in decisions, and outstrip or permit ignoring all other factors. ..."
"... It is believed to be a side effect of neoclassical economics and blind faith in an "invisible hand" or "laissez-faire" means of making decisions, extended far beyond controlled and regulated markets, and used to make political and military decisions. ..."
"... Conventional ethics would play no role in decisions under pure economism, except insofar as supply would be withheld, demand curtailed, by moral choices of individuals. Thus, critics of economism insist on political and other cultural dimensions in society. ..."
Facts are always presented via lens of some underling theory and if the theory is wrong,
facts can lie, even when the figures are more or less correct, or within the margin of error.
Technocratic neoliberal economists well represented here actually serve as a fifth column
of financial oligarchy, and always were.
Rehashing Noah Smith thoughts we can say:
Simplistic and wrong supply-and-demand theory fed a market fundamentalism ideology. As
a result we have a financial crash, a dysfunctional health-care system, spiraling inequality
and a deficient, inadequate for a modern society social-safety net.
So when people like Krugman are now expressing their rage about Trump social policies they
should understand that they created Trump.
When competitive free markets and rational well-informed actors are the baseline assumption,
the burden of proof shifts unfairly onto anyone proposing a government policy. Government programs
and regulations start to seem dangerous and inefficient, while inequality begins to feel like
the natural and just order of things.
Neoliberalism with its set of myth, sold as economic theory maintains an almost unshakeable
grip on thinking of most people in the USA. It is the USA civil religion, national ideology
that displaced Christianity. So they now somebody claims the this is one nation under God,
they factually incorrect if we mean Jesus ;-) It is a newly-born nation which rejected Christianity,
adopted neoliberalism instead and now prays to the altar of "free market".
Because those myths when shared by most people, they obtained its own dynamics. In this
sense too we can say that most people in the USA are totally and possibly irrevocably "neoliberally-brainwashed".
That means that neoliberalism has huge staying power and it is unclear when and how and into
what it collapses.
That might well mean that like Bolsheviks who used to hold the same ideological grip on
the people of the USSR people of the USA will march toward the cliff without much thinking.
The abuse of simplistic econ theories for political ends gives neoliberal economists enormous
prestige. It also sustains the enormous demand for the undergraduate econ major and corresponding
courses and textbooks (look at Mankiw ;-). Passing economic courses with high grade now serves
like SAT for those who want to go into business or management. The mark of indoctrination.
Look at disdain with which "economists" here treat the people who does not know or does not
want to know all this neoclassic nonsense.
The worldview neoliberalism promulgates is too simplistic, and inevitably ends up hurting
the many to benefit the few.
There one additional notion that is more general then neoliberalism and that is applicable
here. It is called "economism" (please read Kwak book, it is really worth reading).
This is the reduction of all social facts to economic dimensions which is at the core of mental
model that most "economists" here use. Unlike mathiness, it is a very old term which was use since
late 19th century.
The Amazon page to Kwak book explains, "Economism: an ideology that distorts the valid principles
and tools of introductory college economics, propagated by self-styled experts, zealous lobbyists,
clueless politicians, and ignorant pundits."
Here is a relevant quote from Wikipedia
== quote ==
Economism is reduction of all social facts to economic dimensions. The term is often
used to criticize economics as an ideology, in which supply and demand are the only important
factors in decisions, and outstrip or permit ignoring all other factors.
It is believed to be a side effect of neoclassical economics and blind faith in an "invisible
hand" or "laissez-faire" means of making decisions, extended far beyond controlled and regulated
markets, and used to make political and military decisions.
Conventional ethics would play no role in decisions under pure economism, except insofar
as supply would be withheld, demand curtailed, by moral choices of individuals. Thus, critics
of economism insist on political and other cultural dimensions in society.
Old Right social critic Albert Jay Nock used the term more broadly, denoting a moral and
social philosophy "which interprets the whole sum of human life in terms of the production,
acquisition, and distribution of wealth". He went on to say "I have sometimes thought that
here may be the rock on which Western civilization will finally shatter itself. Economism can
build a society which is rich, prosperous, powerful, even one which has a reasonably wide diffusion
of material well-being.
It can not build one which is lovely, one which has savor and depth, and which exercises
the irresistible power of attraction that loveliness wields.
Perhaps by the time economism has run its course the society it has built may be tired of
itself, bored of its own hideousness, and may despairingly consent to annihilation, aware that
it is too ugly to be let live any longer."[1]
libezkova -> libezkova... , -1
"It is a newly-born nation which rejected Christianity, adopted neoliberalism instead and now
prays to the altar of "free market"."
Neoliberalism explicitly rejects the key ideas of Christianity -- the idea of ultimate justice
for all sinners. Like Marxism this is an atheistic philosophy which asserts that "each individual
is his or her own god and there is no room for any other God. "
Here is Pope Francis thought of the subject (Evangelii Gaudium, Apostolic Exhortation of Pope
Francis, 2013):
... Such an [neoliberal] economy kills. How can it be that it is not a news item when an elderly
homeless person dies of exposure, but it is news when the stock market loses two points? This
is a case of exclusion. Can we continue to stand by when food is thrown away while people are
starving? This is a case of inequality. Today everything comes under the laws of competition and
the survival of the fittest, where the powerful feed upon the powerless. As a consequence, masses
of people find themselves excluded and marginalized: without work, without possibilities, without
any means of escape.
Human beings are themselves considered consumer goods to be used and then discarded. We have
created a "disposable" culture which is now spreading. It is no longer simply about exploitation
and oppression, but something new. Exclusion ultimately has to do with what it means to be a part
of the society in which we live; those excluded are no longer society's underside or its fringes
or its disenfranchised – they are no longer even a part of it. The excluded are not the "exploited"
but the outcast, the "leftovers".
54. In this context, some people continue to defend trickle-down theories which assume that
economic growth, encouraged by a free market, will inevitably succeed in bringing about greater
justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts,
expresses a crude and naïve trust in the goodness of those wielding economic power and in the
sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting.
To sustain a lifestyle which excludes others, or to sustain enthusiasm for that selfish ideal,
a globalization of indifference has developed.
Almost without being aware of it, we end up being incapable of feeling compassion at the outcry
of the poor, weeping for other people's pain, and feeling a need to help them, as though all this
were someone else's responsibility and not our own. The culture of prosperity deadens us; we are
thrilled if the market offers us something new to purchase; and in the meantime all those lives
stunted for lack of opportunity seem a mere spectacle; they fail to move us.
No to the new idolatry of money
55. One cause of this situation is found in our relationship with money, since we calmly accept
its dominion over ourselves and our societies. The current financial crisis can make us overlook
the fact that it originated in a profound human crisis: the denial of the primacy of the human
person! We have created new idols. The worship of the ancient golden calf (cf. Ex 32:1-35) has
returned in a new and ruthless guise in the idolatry of money and the dictatorship of an impersonal
economy lacking a truly human purpose. The worldwide crisis affecting finance and the economy
lays bare their imbalances and, above all, their lack of real concern for human beings; man is
reduced to one of his needs alone: consumption.
56. While the earnings of a minority are growing exponentially, so too is the gap separating
the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies
which defend the absolute autonomy of the marketplace and financial speculation. Consequently,
they reject the right of states, charged with vigilance for the common good, to exercise any form
of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly
imposes its own laws and rules. Debt and the accumulation of interest also make it difficult for
countries to realize the potential of their own economies and keep citizens from enjoying their
real purchasing power. To all this we can add widespread corruption and self-serving tax evasion,
which have taken on worldwide dimensions. The thirst for power and possessions knows no limits.
In this system, which tends to devour everything which stands in the way of increased profits,
whatever is fragile, like the environment, is defenseless before the interests of a deified market,
which become the only rule.
No to a financial system which rules rather than serves
57. Behind this attitude lurks a rejection of ethics and a rejection of God. Ethics has come
to be viewed with a certain scornful derision. It is seen as counterproductive, too human, because
it makes money and power relative. It is felt to be a threat, since it condemns the manipulation
and debasement of the person. In effect, ethics leads to a God who calls for a committed response
which is outside of the categories of the marketplace. When these latter are absolutized, God
can only be seen as uncontrollable, unmanageable, even dangerous, since he calls human beings
to their full realization and to freedom from all forms of enslavement. Ethics – a non-ideological
ethics – would make it possible to bring about balance and a more humane social order. With this
in mind, I encourage financial experts and political leaders to ponder the words of one of the
sages of antiquity: "Not to share one's wealth with the poor is to steal from them and to take
away their livelihood. It is not our own goods which we hold, but theirs".[55]
58. A financial reform open to such ethical considerations would require a vigorous change
of approach on the part of political leaders. I urge them to face this challenge with determination
and an eye to the future, while not ignoring, of course, the specifics of each case. Money must
serve, not rule! The Pope loves everyone, rich and poor alike, but he is obliged in the name of
Christ to remind all that the rich must help, respect and promote the poor. I exhort you to generous
solidarity and a return of economics and finance to an ethical approach which favours human beings.
No to the inequality which spawns violence
59. Today in many places we hear a call for greater security. But until exclusion and inequality
in society and between peoples is reversed, it will be impossible to eliminate violence. The poor
and the poorer peoples are accused of violence, yet without equal opportunities the different
forms of aggression and conflict will find a fertile terrain for growth and eventually explode.
When a society – whether local, national or global – is willing to leave a part of itself on the
fringes, no political programmes or resources spent on law enforcement or surveillance systems
can indefinitely guarantee tranquility. This is not the case simply because inequality provokes
a violent reaction from those excluded from the system, but because the socioeconomic system is
unjust at its root. Just as goodness tends to spread, the toleration of evil, which is injustice,
tends to expand its baneful influence and quietly to undermine any political and social system,
no matter how solid it may appear. If every action has its consequences, an evil embedded in the
structures of a society has a constant potential for disintegration and death.
It is evil crystallized in unjust social structures, which cannot be the basis of hope for
a better future. We are far from the so-called "end of history", since the conditions for a sustainable
and peaceful development have not yet been adequately articulated and realized.
60. Today's economic mechanisms promote inordinate consumption, yet it is evident that unbridled
consumerism combined with inequality proves doubly damaging to the social fabric. Inequality eventually
engenders a violence which recourse to arms cannot and never will be able to resolve. This serves
only to offer false hopes to those clamouring for heightened security, even though nowadays we
know that weapons and violence, rather than providing solutions, create new and more serious conflicts.
Some simply content themselves with blaming the poor and the poorer countries themselves for their
troubles; indulging in unwarranted generalizations, they claim that the solution is an "education"
that would tranquilize them, making them tame and harmless.
All this becomes even more exasperating for the marginalized in the light of the widespread
and deeply rooted corruption found in many countries – in their governments, businesses and institutions
– whatever the political ideology of their leaders.
"It is a newly-born nation which rejected Christianity, adopted neoliberalism instead and now
prays to the altar of "free market"."
How about "Mammon"
Mammon /ˈmæmən/ in the New Testament of the Bible is commonly thought to mean money, material
wealth, or any entity that promises wealth, and is associated with the greedy pursuit of gain.
"You cannot serve both God and mammon."
"... In the same way, neoliberals are no different. They aren't bad people – they just see their policies as right and just because those policies are working well for them and the people in their class, and I don't think they really understand why it doesn't work for others – maybe, like Adam Smith, they think that is the "natural state" .. ..."
"... Read the first sentence of the Theory of Moral Sentiments – it makes an assumption which is the foundation of all of Adam Smith. He asserted that all men are moral. Morality in economics is the invisible hand creating order like gravity in astronomy. Unfortunately, Adam Smith's assumption is false or at least not true enough to form a sound foundation for useful economic theory. ..."
"... But "morality" means different things to different people. Smith only saw the morality of his own class. For example, I am sure a wealthy man would consider it very moral to accumulate as much money as he could so that he would be seen by his peers as a good and worthy man who cares for his future generations and the well being of his class – he doesn't see this accumulation as amoral – whilst a poor man may think that kind of accumulation is amoral because he thinks that money could be better used provide for those without the basic needs to survive ..."
"... "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." ..."
"... Another I remember from Smith was something like, "The law exists to protect those who have much from those who have little." Sounds about right. ..."
"... One of Steve Keen's favourite analogies is astronomy. Neoclassical economics is like Ptolemy's epicycles; assume the Earth is at the centre, and that the planets orbit in circles and simply by adding little circles-epicycles-you can accurately describe the observed motion of the planets. The right epicycles in the right places can describe any motion. But they can't explain anything, they add nothing to understanding, they subtract from it, because they are false but give the illusion of knowledge. Drop the assumptions and you can begin to get somewhere. ..."
"... Steve Keen seems to have latched onto this in the last year or so, pointing out that all production is driven by energy. And the energy comes ultimately from the sun. Either it is turned into production via feeding workers, or by fueling machinery (by burning hydrocarbons extracted from plant and animal remains). ..."
"... I have a question about a similar thing. Simon Kuznetz is credited as someone who has invented modern concept of GDP and he revolutionized the field of economics with statistical method (econometrics). However, Kuznets , in the same report in which he presented modern concept of GDP to US congress, wrote following(from wikipedia): ..."
"... "The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. ..."
"... All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above. Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what." ..."
"... "So , my question is why economists keep treating GDP as some scared metric when its creator himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most of the economists nowadays?"@Vedant ..."
"... That is your explanation right there. Large abstract numbers such as GDP obscure social issues such as "the personal distribution of income." and the effort that goes into creating that income. Large abstract numbers obscure the moral dimension that must be a part of all economic discussion and are obscured by statistics and sciencism. As the genius of Mark Twain put it, "There are lies, damned lies and statistics." Beware the credentialed classes! ..."
"... Interesting. There is a great book by John Dupré called 'Human Nature and the Limits of Science (2001)", which tackles this subject in a general way: the facts that taking a mechanistic model as a paradigm for diverse areas of science is problematic and leads to myopia. ..."
"... He describes it as a form of 'scientific imperialism', stretching the use of concepts from one area of science to other areas and leading to bad results (because there are, you know, relevant differences). As a prime example, he mentions economics. (When reading EConned;s chapter of the science ( 'science') of economics, I was struck by the similar argument.) ..."
"... Soddy was a scientist. He should have written as a scientist with definitions, logic and rigour, but he wrote like a philosopher, full of waffle and unsubstantiated assertions like other economists. It is unscientific to apply universal laws discovered in physics and chemistry to economics without proving by observations that those laws also apply to economics. ..."
"... I get irritated by radical free-marketeers who when presented with a social problem tend to dogmatically assert that "The free market wills it," as if that ended all discussion. It is as if the free market was their God who must always be obeyed. Unlike Abraham, we do not need to obey if we feel that the answer is unjust. ..."
"... Gibbon's Decline and Fall of the Roman Empire ..."
"... The moralistic explanations for the disintegration of the (Western) Roman Empire were long ago discarded by all serious analysis of late antiquity. More practical explanations, especially the loss of the North African bread basket to the Vandals, are presented in the scholarly work these days. ..."
"... That book of Gibbon's is an incredible achievement. If it is not read by historians today, it is their loss. Its moral explanations, out of fashion today, are actually quite compelling. They become more so when read with de Tocqueville's views of the moral foundations of American township democracy and their transmission into the behavior, and assumptions, of New Englanders, whose views formed the basis of the federal republican constitution. ..."
"... The loss of the breadbasket was problematical, too. And it may be that no civilization, however young and virile, could withstand the migrations forever, as they withstood or absorbed them, with a few exceptions, for eight hundred years. But the progressive losses to the migratory tribes may have been a symptom of the real, "moral," cause of the decline. ..."
"... From 536-539AD the entire planet suffered a staggering holocaust. Krakatoa blew up - ejecting so much dust that it triggered a 'nuclear winter' that lasted through those years. ..."
"... It was this period that ended agriculture in North Africa. ( Algeria-Tunisia ) The drought blew all of the top soil into the Med. It was an irreversible tragedy. ..."
"... Economics is not science, simply because economics does not take facts seriously enough to modify flawed theories. ..."
"... In college I couldn't help but notice the similarities between modern economic theory and the control theory taught in engineering. Not such a great fit though, society is not a mechanical governor. ..."
Yves here. This post takes what I see as an inconsistent, indeed, inaccurate stance
on Adam Smith, since it depicts him as advocating laissez faire and also not being concerned about
"emotions, sentiment, human relations and community." Smith was fiercely opposed to monopolies as
well as businessmen colluding to lower the wages paid to workers. He also saw The Theory of Moral
Sentiments as his most important work and wanted it inscribed on his gravestone.
Jacob Viner addressed the laissez-faire attribution to Adam Smith in 1928 ..Here is a list
extracted from Wealth Of Nations:
the Navigation Acts, blessed by Smith under the assertion that 'defence, however, is of much
more importance than opulence' (WN464); Sterling marks on plate and stamps on linen and woollen
cloth (WN138–9); enforcement of contracts by a system of justice (WN720); wages to be paid
in money, not goods; regulations of paper money in banking (WN437); obligations to build party
walls to prevent the spread of fire (WN324); rights of farmers to send farm produce to the
best market (except 'only in the most urgent necessity') (WN539); 'Premiums and other encouragements
to advance the linen and woollen industries' (TMS185); 'Police', or preservation of the 'cleanliness
of roads, streets, and to prevent the bad effects of corruption and putrifying substances';
ensuring the 'cheapness or plenty [of provisions]' (LJ6; 331); patrols by town guards and fire
fighters to watch for hazardous accidents (LJ331–2); erecting and maintaining certain public
works and public institutions intended to facilitate commerce (roads, bridges, canals and harbours)
(WN723); coinage and the mint (WN478; 1724); post office (WN724); regulation of institutions,
such as company structures (joint- stock companies, co-partneries, regulated companies and
so on) (WN731–58); temporary monopolies, including copyright and patents, of fixed duration
(WN754); education of youth ('village schools', curriculum design and so on) (WN758–89); education
of people of all ages (tythes or land tax) (WN788); encouragement of 'the frequency and gaiety
of publick diversions'(WN796); the prevention of 'leprosy or any other loathsome and offensive
disease' from spreading among the population (WN787–88); encouragement of martial exercises
(WN786); registration of mortgages for land, houses and boats over two tons (WN861, 863); government
restrictions on interest for borrowing (usury laws) to overcome investor 'stupidity' (WN356–7);
laws against banks issuing low-denomination promissory notes (WN324); natural liberty may be
breached if individuals 'endanger the security of the whole society' (WN324); limiting 'free
exportation of corn' only 'in cases of the most urgent necessity' ('dearth' turning into 'famine')
(WN539); and moderate export taxes on wool exports for government revenue (WN879).
"Viner concluded, unsurprisingly, that 'Adam Smith was not a doctrinaire advocate of laissez-faire'.
By Douglass Carmichael, perviously a Professor at University of California at Santa Cruz and
a Washington DC based consultant, which clients including Hewlett-Packard, World Bank, Bell laboratories,
The White House and the State Department. For the last ten years he has focused on the broad social
science issues relevant to rethinking humanity's relationship to nature. Cross posted from
the Institute for New Economic Thinking website
With Adam Smith, and hints before in Ricardo and others, economics took the path of treating the
economy as a natural object that should not be interfered with by the state. This fit the Newtonian
ethos of the age: science was great, science was mathematics; science was true, right and good.
But along the way the discussion in, for example, Montaigne and Machiavelli - about the powers
of imagination, myth, emotions, sentiment, human relations and community - was abandoned by the economists.
(Adam Smith had written his Theory of Moral Sentiments 20 years earlier and sort of left
it behind, though the Wealth of Nations is still concerned with human well-being.) Gibbon's
Decline and Fall of the Roman Empire was published in 1776, the same year as Smith's
Wealth , but hardly read today by most economists.
In philosophy and the arts (romanticism among others) there was great engagement in these issues
economics was trying to avoid. But that philosophy and art criticism have not been widely read for
many years.
The effect of ignoring the human side of lives was to undermine the social perspective of the
"political," by merging it with the individually focused "interest." So, instead of exploring the
inner structure of interest (or later utility or preference), or community feeling and the impact
of culture, these were assumed to be irrelevant to the mechanics of the market. Politics, having
to do with interest groups and power arrangements, is more vague and harder to model than economic
activity.
Those who wanted economics to be a science were motivated by the perception that "being scientific"
was appreciated by the society of the time, and was the path to rock-solid truth. But the move towards
economics as a science also happened to align with a view of the landed and the wealthy that the
economy was working for them, so don't touch it. We get the equation, embracing science = conservative.
This is still with us because of the implication that the market is made by god or nature rather
than being socially constructed. Since economics is the attempt at a description of the economy,
it was more or less locked in to the naturalist approach, which ignores things like class and ownership
and treated capital as part of economic flow rather than as a possession that was useable for social
and political power.
Even now, economics still continues as if it were part of the age of Descartes and avoids most
social, historical and philosophical thought about the nature of man and society. Names like Shaftesbury
and Puffendorf, very much read in their time, are far less known now than Hobbes, Descartes, Ricardo,
Mill and Keynes. Karl Polanyi is much less well known than Hayek. We do not learn of the social history
such as the complex interplay in Viennese society among those who were classmates and colleagues
such as Hayek, Gombrich, Popper and Drucker. The impact of Viennese culture is not known to many
economists.
The result is an economics that supports an economy that is out of control because the feedback
loops through society and its impact of the quality of life - and resentment - are not recognized
in a dehumanized economics, and so can't have a feedback correcting effect.
The solution, however, is not to look for simplicity, but to embrace a kind of complexity that
honors nature, humans, politics, and the way they are dealt with in philosophy, arts, investigative
reporting, anthropology and history. Because the way forward cannot be a simple projection of the
past. We are in more danger than that.
Anthony Pagden, in Why the Enlightenment is Still Important , writes that before the
enlightenment, late feudalism and the Renaissance, "The scholastics had made their version of the
natural law the basis for a universal moral and political code that demanded that all human beings
be regarded in the same way, no matter what their culture or their beliefs. It also demanded that
human beings respect each other because they share a common urge to 'come together,' and it required
them to offer to each other, even to total strangers, help in times of need, to recognize 'that amity
among men is part of the natural law.' Finally, while Hobbes and Grotius had accepted the existence
of only one natural right - the right to self-preservation - the scholastics had allowed for a wide
range of them." -
Pagen also writes, "The Enlightenment, and in particular that portion with which I am concerned,
was in part, as we shall now see, an attempt to recover something of this vision of a unified and
essentially benign humanity, of a potentially cosmopolitan world, without also being obliged to accept
the theologians' claim that this could only make sense as part of the larger plan of a well-meaning,
if deeply inscrutable, deity."
But as Pagen shows, that effort was overcome by market, technical and financial interests.
The reason this is so important is that the simple and ethical view in Smith (and many other classical
economists if we were to read them) that it was wrong to let the poor starve because of manipulated
grain prices, was replaced by a more mechanical view of society that denied human intelligence except
as calculators of self interest. This is a return to the Hobbesian world leading to a destructive
society: climate, inequality, corruption. Today, the poor are hemmed in by so many regulations and
procedures (real estate, education, police) that people are now starved. Not having no food, but
having bad food, which along with all the new forms of privation add up to a seriously starved life,
is not perceived by a blinded society to be suffering. Economics in its current form - most economics
papers and college courses - do not touch the third rail of class, or such pain.
Interesting. I've been reading (thanks to an intro from NC) Mark Blyth's "Austerity" and, thus
far, seems to imply, if not outright state, that Adam Smith was quite suspicious of government
intervention in the economy. The "can't live with it, can't live without it, don't want to pay
for it" perspective. The bullet points you've listed above seem to refute that notion.
Adam Smith tried to make a moral science out of what his class wanted to hear. If he had actually
gone into those factories of his time, he might have had a different opinion of what labour was
and how there was no "natural state" for wages, but only what was imposed on people who couldn't
fight back. If he had gotten out of his ivory tower for a while, he might have had a different
opinion of what those owners of stock were doing. He also might have had different views on trade
if he could have seen what was happening to the labourers in the textile industries in France.
And I could go on. But instead he created a fantasy that has been the basis for all economic thinking
since.
In the same way, neoliberals are no different. They aren't bad people – they just see their
policies as right and just because those policies are working well for them and the people in
their class, and I don't think they really understand why it doesn't work for others – maybe,
like Adam Smith, they think that is the "natural state" ..
Sorry, but there needs to be a Copernican Revolution in Economics just as there was in science.
We have to realize that maybe Adam Smith was wrong – and I know that will be hard – just as it
was hard for people to realize that the Earth wasn't the center of the universe.
Since I am retired, maybe I will go back to school, hold my nose and cover my lying eyes long
enough to finish that Economics degree, so that I can get good access to all the other windows
in Economics. I can't really believe I am the only person thinking this way – there must be some
bright people out there who have come to similar conclusions and I would dearly love to know who
they are.
Read the first sentence of the Theory of Moral Sentiments – it makes an assumption which
is the foundation of all of Adam Smith. He asserted that all men are moral. Morality in economics
is the invisible hand creating order like gravity in astronomy. Unfortunately, Adam Smith's assumption
is false or at least not true enough to form a sound foundation for useful economic theory.
But "morality" means different things to different people. Smith only saw the morality
of his own class. For example, I am sure a wealthy man would consider it very moral to accumulate
as much money as he could so that he would be seen by his peers as a good and worthy man who cares
for his future generations and the well being of his class – he doesn't see this accumulation
as amoral – whilst a poor man may think that kind of accumulation is amoral because he thinks
that money could be better used provide for those without the basic needs to survive
I've read a fair amount of Wealth of Nations although far from all of it and my take was that
Smith was describing the economic system of his time as it was , not necessarily as it
should or must be. Smith gets a bad rap from the left due to many people over the last 200+ years
hearing what they wanted to hear from him to justify their own actions rather than what he actually
said.
I'm cherry picking a bit here since I don't have the time to go through several hundred pages,
but I think Smith might actually agree with you about the plight of labor and he was well aware
of what the ownership class was up to –
"People of the same trade seldom meet together, even for merriment and diversion, but
the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."
there needs to be a Copernican Revolution in Economics
One of Steve Keen's favourite analogies is astronomy. Neoclassical economics is like Ptolemy's
epicycles; assume the Earth is at the centre, and that the planets orbit in circles and
simply by adding little circles-epicycles-you can accurately describe the observed motion of the
planets. The right epicycles in the right places can describe any motion. But they can't
explain anything, they add nothing to understanding, they subtract from it, because they
are false but give the illusion of knowledge. Drop the assumptions and you can begin to get somewhere.
And that is exactly what Marx did, but then got himself sidetracked by trying to find (or create)
support for his labor theory of value.
Actually most of what he writes in Capital basically refutes said theory, instead hinting at
energy being the core source of value (how much food/fuel is needed to produce one unit, basically).
Steve Keen seems to have latched onto this in the last year or so, pointing out that all
production is driven by energy. And the energy comes ultimately from the sun. Either it is turned
into production via feeding workers, or by fueling machinery (by burning hydrocarbons extracted
from plant and animal remains).
Since words have somewhat flexible boundaries, it's hard to tell from what perspective this
response is looking at the history of science. Characterizing cybernetics as mechanistic would
require an unusually broad definition of "mechanistic". Even a superficial reading of Norbert
Wiener, Warren McCulloch, W. Ross Ashby, or any of the other early contributors to the discipline
will make one aware that they were explicitly trying to address the limitations of simplistic
mechanistic thinking.
In the related discipline, General Systems Theory, von Bertalanffy expressly argued that we
should take our cues from the organic living world to understand complex systems. With the introduction
of Second Order Cybernetics by Heinz von Foerster, Margaret Mead, Gregory Bateson and others,
the role of a sentient observer in describing the system in which he/she is embedded becomes the
focus of attention. Bateson was an original participant with many of the people mentioned above
in the Macy conferences where cybernetics was first introduced. The bulk of his work was a direct
attack on the mechanistic view of the natural world.
Of course, many writers treat cybernetics, General Systems Theory, and their related disciplines
as pseudoscientific. But those are typically people who are firmly committed to mechanistic explanations.
I have a question about a similar thing. Simon Kuznetz is credited as someone who has invented
modern concept of GDP and he revolutionized the field of economics with statistical method (econometrics).
However, Kuznets , in the same report in which he presented modern concept of GDP to US congress,
wrote following(from wikipedia):-
"The valuable capacity of the human mind to simplify a complex situation in a compact characterization
becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative
measurements especially, the definiteness of the result suggests, often misleadingly, a precision
and simplicity in the outlines of the object measured. Measurements of national income are subject
to this type of illusion and resulting abuse, especially since they deal with matters that are
the center of conflict of opposing social groups where the effectiveness of an argument is often
contingent upon oversimplification.
All these qualifications upon estimates of national income as an index of productivity are just
as important when income measurements are interpreted from the point of view of economic welfare.
But in the latter case additional difficulties will be suggested to anyone who wants to penetrate
below the surface of total figures and market values. Economic welfare cannot be adequately measured
unless the personal distribution of income is known. And no income measurement undertakes to estimate
the reverse side of income, that is, the intensity and unpleasantness of effort going into the
earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement
of national income as defined above.
Distinctions must be kept in mind between quantity and quality of growth, between costs and returns,
and between the short and long run. Goals for more growth should specify more growth of what and
for what."
So , my question is why economists keep treating GDP as some scared metric when its creator
himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most
of the economists nowadays?
"So , my question is why economists keep treating GDP as some scared metric when its creator
himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most
of the economists nowadays?"@Vedant
" Economic welfare cannot be adequately measured unless the personal distribution of income
is known. And no income measurement undertakes to estimate the reverse side of income, that is,
the intensity and unpleasantness of effort going into the earning of income."
That is your explanation right there. Large abstract numbers such as GDP obscure social
issues such as "the personal distribution of income." and the effort that goes into creating that
income. Large abstract numbers obscure the moral dimension that must be a part of all economic
discussion and are obscured by statistics and sciencism. As the genius of Mark Twain put it, "There
are lies, damned lies and statistics." Beware the credentialed classes!
Interesting. There is a great book by John Dupré called 'Human Nature and the Limits of Science
(2001)", which tackles this subject in a general way: the facts that taking a mechanistic model
as a paradigm for diverse areas of science is problematic and leads to myopia.
He describes it
as a form of 'scientific imperialism', stretching the use of concepts from one area of science
to other areas and leading to bad results (because there are, you know, relevant differences).
As a prime example, he mentions economics. (When reading EConned;s chapter of the science ( 'science')
of economics, I was struck by the similar argument.)
Science does not imply only mechanistic models, which may be appropriate for physics, but not
economics. Science is a method of obtaining sound knowledge by iterative interaction between facts
and theory.
Just because equilibrium is shitty mechanistic model to try and stamp onto economics doesn't
mean that all scientific modeling of economics futile. Soddy just about derived MMT from the conservation
of energy in 1921.
Soddy was a scientist. He should have written as a scientist with definitions, logic and rigour,
but he wrote like a philosopher, full of waffle and unsubstantiated assertions like other economists.
It is unscientific to apply universal laws discovered in physics and chemistry to economics without
proving by observations that those laws also apply to economics.
Soddy needed to have developed a scientific methodology for economics first, before stating
his opinions which are scientifically unproven like most economic propositions.
I get irritated by radical free-marketeers who when presented with a social problem tend to
dogmatically assert that "The free market wills it," as if that ended all discussion. It is as
if the free market was their God who must always be obeyed. Unlike Abraham, we do not need to
obey if we feel that the answer is unjust.
Gibbon's Decline and Fall of the Roman Empire was published in 1776, the same year
as Smith's Wealth, but hardly read today by most economists.
Other than as a reflection of the sentiments of the time Gibbon was writing in, historians
don't spend much time reading it either. The moralistic explanations for the disintegration of
the (Western) Roman Empire were long ago discarded by all serious analysis of late antiquity.
More practical explanations, especially the loss of the North African bread basket to the Vandals,
are presented in the scholarly work these days.
That book of Gibbon's is an incredible achievement. If it is not read by historians today,
it is their loss. Its moral explanations, out of fashion today, are actually quite compelling.
They become more so when read with de Tocqueville's views of the moral foundations of American
township democracy and their transmission into the behavior, and assumptions, of New Englanders,
whose views formed the basis of the federal republican constitution.
The loss of the breadbasket was problematical, too. And it may be that no civilization, however
young and virile, could withstand the migrations forever, as they withstood or absorbed them,
with a few exceptions, for eight hundred years. But the progressive losses to the migratory tribes
may have been a symptom of the real, "moral," cause of the decline.
After all, the Romans did not always have that breadbasket; indeed, they had to conquer it
to get it, along with the rest of the mighty and ancient civilizations of the Mediterranean and
beyond, using the strengths derived from the mores of their martial republic. The story of the
Punic Wars is a morality play in history, as much as anything else. But the main problem was the
dilution of the Roman republican mores into a provincial stew.
And after that nice detached remark, about which historians can surely natter on in the abstract,
I'll toss in this completely anti-historicist piece of nonsense: I think it's actually much the
same problem the Americans are having today, as the mores of the founders have dissolved into
the idea that the nation is about national government, centralized administration, world leadership,
global domination through military might, and imperialist capitalism. That is not a national ethic
that leads to lasting nobility of purpose and moral strength-as George Washington and Ike Eisenhower
both pointed out.
Dendrochronology ( tree ring dating & organic history ) has established a wholly new rationale
for the termination of the Roman Empire the re-boot of the Chinese and Japanese cultures and
the death of a slew of Meso-American cultures.
From 536-539AD the entire planet suffered a staggering holocaust. Krakatoa blew up - ejecting so much dust that it triggered a 'nuclear winter' that lasted through
those years.
The Orientals actually heard the blasts recognized that they emminated from the Indonesian
islands. ( Well, at least to the south. ) The erruption and the weather was duly recorded by Court
scribes.
Roman accounts assert that 90% of the population of Constantinople died or fled. ( mostly died
) The Emperor and his wife were at the dockside ready to flee - when she talked him back off the
boat. Her reasoning was sound: it's Hell everywhere. He won't have any authority once he leaves
his imperial guard.
It was this period that ended agriculture in North Africa. ( Algeria-Tunisia ) The drought
blew all of the top soil into the Med. It was an irreversible tragedy.
This super drought triggered the events in Beowulf - and the exodus of the Petrans from Petra.
They marched off to Mecca and Medina both locations long known to have mountain springs with
deep water. The entire Arabian population congregated there.
This was the founding population amongst which Mohammed was raised many years later.
The true reason that Islam swept through Araby and North Africa was that both lands were still
largely de-populated. The die-off was so staggering that one can't wrap ones mind around it.
Period art is so bleak that modern historians discounted it until the tree ring record established
that this trauma happened on a global scale.
Or throw them out! I remember the very first thing I was taught in Economics 101 about supply
and demand and how they would balance at an equilibrium price. It didn't take much thinking to
realize that there is no equilibrium price and that an equilibrium price was exactly the last
thing suppliers or demanders wanted, and that the price of a good depended on who had the most
power to set the price. Yet, we had to accept the "supply and demand theory" as coming directly
from God. It's as if we were taught in Chemistry that the only acceptable theory of bonding possible
was the hydrogen-oxygen bond and even though we could see with our own eyes that hydrogen also
bonds to carbon, we should throw that out because it is an aberration from "acceptable theory" ..
Yes, coming from God; Platonic, like a Form. Economics is written in Forms, like "homo economicus"
and "the efficient market." But we live in the Cave, where the markets that humans actually make
are sad imitations of the Forms in the textbooks.
There's a lot good in the post, I think; noting the important philosophical underpinnings and
challenges to Economics, and particularly in making it a moral, and therefore political and "social"
science. But it's great to see where people's use of "incantatory names from the past" is called
out by the curator. It's a pet peeve.
Economics is the last "science" to hold onto the notion of equilibrium. The rest has moved on to complex systems/chaos theory, first demonstrated in meteorology.
Trying to apply complex systems to economics have been the goal of Steve Keen's work for several
decades now.
In college I couldn't help but notice the similarities between modern economic theory and the
control theory taught in engineering. Not such a great fit though, society is not a mechanical
governor.
Ha. That's the same thing that got economists so excited. Things is, an engineering student
attempting to model a simple system with two moving parts cares a great deal about whether the
moving parts are connected by a spring, or ball screw, or shock absorber, or lever, or even invisible
stuff like a temperature gradient when coming up with the system math model. Economists seem to
think wtf is the difference?
Next, if the math gets a bit unwieldy as the number of moving parts increase, which it does
in a hurry, they decide to simplify the math. Next, assume they have perfect sensors for everything and system lag can assumed to be zero
for talking purposes, and in research papers too. Next, hysteresis effects due to bent parts, leaky valves and stretched springs are assumed
not to exist. Congress has the "Highway Bill" thingy to address that.
Next, the guy with the control knob will do the "right thing". Or better yet, a "market" is
doing the control knob. There could be "intermediaries", but these are modeled as zero loss pieces
of golden wire and gold plated connectors.
Finally, money comes from batteries and there is no such thing in the real world like "shorts",
"open circuits", or "semiconductors" with their quantum tunneling properties.
Thanks for this, and especially the heads up about the author's take on Smith. This is exactly
what I'm on about. Not only are there more ways of knowing than the infamous mechanical, it itself
should've died long ago.
The author stresses economics is stuck in the age of Descartes. The history of Newton's refutation
of Descartes's mechanical philosophy is very interesting. Yes, refutation. Descartes's mechanical
philosophy is as dead as a dodo. So why does it still plague us? Obviously, because thinking of
and acting on nature as if it were all just one great big machine works at getting you paid, much
better than that wishy-washy humanism crap. /f (facetious).
I used to go on and on against reducing everything to mechanisms, and I largely blamed Newton.
I was wrong.
I've spent an hour trying to boil this down. Ain't happenin. Apologies for the length.
The background is the so-called "mechanical philosophy" – mechanical science in modern terminology.
This doctrine, originating with Galileo and his contemporaries, held that the world is a machine,
operating by mechanical principles, much like the remarkable devices that were being constructed
by skilled artisans of the day and that stimulated the scientific imagination much as computers
do today; devices with gears, levers, and other mechanical components, interacting through
direct contact with no mysterious forces relating them. The doctrine held that the entire world
is similar: it could in principle be constructed by a skilled artisan, and was in fact created
by a super-skilled artisan. The doctrine was intended to replace the resort to "occult properties"
on the part of the neoscholastics: their appeal to mysterious sympathies and antipathies, to
forms flitting through the air as the means of perception, the idea that rocks fall and steam
rises because they are moving to their natural place, and similar notions that were mocked
by the new science.
The mechanical philosophy provided the very criterion for intelligibility in the sciences.
Galileo insisted that theories are intelligible, in his words, only if we can "duplicate [their
posits] by means of appropriate artificial devices." The same conception, which became the
reigning orthodoxy, was maintained and developed by the other leading figures of the scientific
revolution: Descartes, Leibniz, Huygens, Newton, and others.
Today Descartes is remembered mainly for his philosophical reflections, but he was primarily
a working scientist and presumably thought of himself that way, as his contemporaries did.
His great achievement, he believed, was to have firmly established the mechanical philosophy,
to have shown that the world is indeed a machine, that the phenomena of nature could be accounted
for in mechanical terms in the sense of the science of the day. But he discovered phenomena
that appeared to escape the reach of mechanical science. Primary among them, for Descartes,
was the creative aspect of language use, a capacity unique to humans that cannot be duplicated
by machines and does not exist among animals, which in fact were a variety of machines, in
his conception.
As a serious and honest scientist, Descartes therefore invoked a new principle to accommodate
these non-mechanical phenomena, a kind of creative principle. In the substance philosophy of
the day, this was a new substance, res cogitans, which stood alongside of res extensa. This
dichotomy constitutes the mind-body theory in its scientific version. Then followed further
tasks: to explain how the two substances interact and to devise experimental tests to determine
whether some other creature has a mind like ours. These tasks were undertaken by Descartes
and his followers, notably Géraud de Cordemoy; and in the domain of language, by the logician-grammarians
of Port Royal and the tradition of rational and philosophical grammar that succeeded them,
not strictly Cartesian but influenced by Cartesian ideas.
All of this is normal science, and like much normal science, it was soon shown to be incorrect.
Newton demonstrated that one of the two substances does not exist: res extensa. The properties
of matter, Newton showed, escape the bounds of the mechanical philosophy. To account for them
it is necessary to resort to interaction without contact. Not surprisingly, Newton was condemned
by the great physicists of the day for invoking the despised occult properties of the neo-scholastics.
Newton largely agreed. He regarded action at a distance, in his words, as "so great an Absurdity,
that I believe no Man who has in philosophical matters a competent Faculty of thinking, can
ever fall into it." Newton however argued that these ideas, though absurd, were not "occult"
in the traditional despised sense. Nevertheless, by invoking this absurdity, we concede that
we do not understand the phenomena of the material world. To quote one standard scholarly source,
"By `understand' Newton still meant what his critics meant: `understand in mechanical terms
of contact action'."
It is commonly believed that Newton showed that the world is a machine, following mechanical
principles, and that we can therefore dismiss "the ghost in the machine," the mind, with appropriate
ridicule. The facts are the opposite: Newton exorcised the machine, leaving the ghost intact.
The mind-body problem in its scientific form did indeed vanish as unformulable, because one
of its terms, body, does not exist in any intelligible form. Newton knew this very well, and
so did his great contemporaries.
And later:
Similar conclusions are commonplace in the history of science. In the mid-twentieth century,
Alexander Koyré observed that Newton demonstrated that "a purely materialistic pattern of nature
is utterly impossible (and a purely materialistic or mechanistic physics, such as that of Lucretius
or of Descartes, is utterly impossible, too)"; his mathematical physics required the "admission
into the body of science of incomprehensible and inexplicable `facts' imposed up on us by empiricism,"
by what is observed and our conclusions from these observations.
So the wrong guy was declared the winner of Descartes vs. Newton, and we've been living with
the resultant Frankenstein's monster of an economy running rampant all this time. And the mad
"scientists" who keep it alive, who think themselves so "realistic" and "pragmatic" in fact are
atavists ignorant of the last few centuries of science. But they do get paid, whereas I (relatively)
don't.
Alexander Koyré observed that Newton demonstrated that "a purely materialistic pattern
of nature is utterly impossible (and a purely materialistic or mechanistic physics, such as
that of Lucretius or of Descartes, is utterly impossible, too)"
I think that Newton considered phenomena like gravity, magnetism, and optics to be non-material,
perhaps even spiritual, and separate from matter. Modern physicists would disagree, and would
consider gravity and electro-magnetism to be purely material phenomena. Newton didn't prove that
the world is non-mechanical; he showed that objects do not need to touch for them to have influence
on each other.
It is still quite possible that there are non-material phenomena, but those would be separate
from gravity and electro-magnetism, which Newton considered non-material.
Are all products of the brain. I don't see how the results of the interaction of electrical
impulses and chemicals are non-material. Magic is not an explanation for anything.
So Newton formulated his theories because of his belief in Alchemy and not, as I had thought,
despite it.
Discussions like this are what make this site so great.
All modern economic thought ( 1900+ ) has been corrupted by the arrogance of Taylor's Time
& Motion Studies. The essence of which is that bean counters can revolutionize economic output by statistics
and basic accounting.
AKA Taylorism.
Big Government is Taylorism as practiced.
At bottom, it arrogantly assumes that if you can count it, you can optimise it.
The fact is that 'things' are too complicated.
Taylor's principles only work in a micro environment. His work started in machine shops, and
at that level of simplicity, still applies.
Its abstractions and assumptions break down elsewhere.
MOST economic models in use today are the grandsons of Taylorism.
They are also the analytic engines that have driven the global economy to the edge of the cliff.
For my penny's worth the sentence "Today, the poor are hemmed in by so many regulations and
procedures (real estate, education, police) that people are now starved" reveals the main problem.
Too many of the most lucrative parts of every national economy have been closed off by politicians
and reserved for their friends.
DAVID BARSAMIAN: One of the heroes of the current right-wing revival is Adam Smith. You've
done some pretty impressive research on Smith that has excavated a lot of information that's
not coming out. You've often quoted him describing the "vile maxim of the masters of mankind:
all for ourselves and nothing for other people."
NOAM CHOMSKY: I didn't do any research at all on Smith. I just read him. There's no research.
Just read it. He's pre-capitalist, a figure of the Enlightenment. What we would call capitalism
he despised.
People read snippets of Adam Smith, the few phrases they teach in school. Everybody
reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division
of labor is. But not many people get to the point hundreds of pages later, where he says that
division of labor will destroy human beings and turn people into creatures as stupid and ignorant
as it is possible for a human being to be.
And therefore in any civilized society the government
is going to have to take some measures to prevent division of labor from proceeding to its
limits.
And here is a link to Adam Smith's poignant denunciation of division of labour:
This mention of division of labor is, as Chomsky points out, left out of the index of the University
of Chicago scholarly edition! Of George Stigler's introduction Chomsky claims, "It's likely he
never opened The Wealth of Nations. Just about everything he said about the book was completely
false."
I recommend reading the entire paragraph at the link above. Smith writes:
"The man whose whole life is spent in performing a few simple operations, of which the effects
are perhaps always the same, or very nearly the same, has no occasion to exert his understanding
or to exercise his invention in finding out expedients for removing difficulties which never
occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as
stupid and ignorant as it is possible for a human creature to become. But in every improved
and civilized society this is the state into which the labouring poor, that is, the great body
of the people, must necessarily fall, unless government takes some pains to prevent it.
"
The beauty and underappreciated (by non-economists) strength of economics
is that we appreciate, understand, and can offer technocratic solutions
to problems that have moral dimensions. Our weakness is that we don't always
appreciate that economics is, in fact, a
morality play whether we like it or not.
Steve Randy Waldman at
Interfluidity
has taken to batting at what I regard as the hornet's nest that is the boundary
between positive and normative economics. I guess I'll take a few swings,
too. Let me start with something that was said a few weeks ago in a gathering
of economists:
"Well, if you make a normative judgement then you
are not a real economist."
I know what you're thinking (if you're not an economist). You're thinking
this is just some outlier economist taking an extreme stance. Or you're
thinking, "Gosh darn, when I read Wealth of Nations, it seemed like Adam
Smith made the occasional normative judgment. In fact, doesn't the very
concept of national wealth seem to embody a normative judgement that it
is a Good Thing, else why waste time inquiring into its nature and causes?"
Or you're thinking, "Didn't Maynard Keynes occasionally opine normatively
on certain aspects of what we now call macroeconomics?" I could go on and
on, but you get the idea.
No. Not an outlier, I fear. It was said with conviction by someone whose
work I greatly admire and who has a national reputation in his particular
corner of economics. It reflects the mainstream of economics as we know
it today.
It caused me to reflect.
There is a real beauty in math and the hard science that we have tried
to make economics. It stirs me in much the same way that poetry stirs me.
At the same time, it satisfies some part of me that really doesn't like
to haggle much over solutions to technical problems. The part of me that
prefers hard technical problems to soft, squishy human problems. Math has
the added advantage that you can often say in 5 equations or a graph or
two what would otherwise take you 5 pages to say in words.
I remember the first time I contemplated an
Edgeworth
box. I took such comfort from it. Me, a child of the merchant class.
There it was, this beautiful system where everyone traded to the point where
no one could be made better off without making someone worse off, resources
were used in the right relative (efficient) proportions to produce the right
(efficient) mix and amount of output. It made me happy that I had grown
up in the core of this marvelous, poetic construct, scion of the class that
reduces friction and makes it work. It seemed to solve all the economic
problems that could trouble a generous and benevolent soul.
Or so I thought, young innocent that I was.
After I had lived in the world a bit, questions began to occur to me.
What if one person has waaaayyyyy more than the other in our two person,
two good, two input world? Under what circumstances might that be fair (or
unfair)? What if the person with more of the resources produces children
and grandchildren who are, say, lazy, yet over time they retain the resources
that could, in the hands of the other person, produce more output? What
if the budget constraint that the less advantaged person faces is wholly
exogenous in the sense that no amount of industry, frugality, or investment
in human capital will yield an outward or upward shift in it because of
discrimination by the other person in this little economy? What if the person
with more resources is able to control and set prices, thereby relegating
the other to permanent resource deprivation? What if the advantaged person
obtained his advantage by enslaving or killing the ancestors of the disadvantaged
person?
You begin to see why there might be strong preferences to avoid normative
questions and their answers, yes?
Fortunately, in grad school I discovered Francis Bator's
The Simple Analytics of Welfare Maximization. It helped me to see that
that I was not alone in recognizing the beauty of the technical aspects
of the problem, nor was I alone in recognizing the ethical limitations of
the framework. A few years later, I discovered
Amartya Sen,
who had this sensible, normative thing to say about Pareto efficiency:
"Being in the core [of the economy],
however, is not as such a momentous achievement from the point of view of
social welfare. A person who starts off ill-endowed may stay poor and deprived
even after the [market] transactions, and if being in the core is all that
competition offers, the propertyless person may be forgiven for not regarding
this achievement as a 'big deal.'"
The beauty and underappreciated (by non-economists) strength of economics
is that we appreciate, understand, and can offer technocratic solutions
to problems that have moral dimensions. Our weakness is that we don't always
appreciate that economics is, in fact, a
morality play whether we like it or not. My take on Waldman's critique
of technocrats was not that he was faulting
technocrats for being technocrats or for the technical solutions they
were offering. He was making the point that a technically sound solution,
no matter how brilliant, is doomed if it doesn't engage voters, taxpayers,
lawmakers on moral grounds. (He has posted an follow up
here,
that I think is consisent with this. If I'm wrong and misrepresenting him,
I apologize in advance).
Whether we like it or not, our technical solutions are competing in a
morality play scripted by interest groups and mama grizzlies who in 25 words
or less conflate small government and something they imagine to be "free
markets" with individual liberty, a key justice principle. Most sound techocratic
solutions are difficult to convey, must less motivate, in 25 words or less
(and the motivation is often moral as well as technical: more for most,
more for less, prices as reliable signals of marginal social cost, reducing
unemployment, increasing inflation to discourage saving and stimulate spending
... you get the idea). But the larger problem, I think, is that allegedly
"amoral" economists view the moral sequelae of sound economic policy, such
as banksters' gains (at taxpayer expense), as "side issues" that are irrelevant
to restoring the economy, while some of "we the people" view it as one of
the most important issues. We end up with....the Tea Party (or, at least,
with a large portion of the population who are extremely resentful and angry
at being unemployed and underwater while the economy romps upward at least
for those whom we bailed out).
Robert Frost once wrote that "something
there is that does not love a wall." I think it is also true that
something there is that does not love injustice or unfairness. That same
"something" is why economics is very much a morality play. We ignore this
at our peril. Like Frost's neighbor who could not see the circumstances
that rendered a fence unnecessary, I wonder if we in economics aren't sometimes
deaf and blind to the changing cirumstances that necessitate recognition
that the "fence" we like to imagine between our "amoral" technical solutions
and their moral context and sequelae is not only no longer needed, it is
harmful in formulating sound policy.
He moves in darkness as it seems to me~
Not of woods only and the shade of trees. He will not go behind his father's saying,
And he likes having thought of it so well He says again, "Good fences make good neighbors."
It has been drilled into us from the first day that we set our feet on
the path to "economist" that "real economists" do not make normative judgments.
The greats who went before us (at least some of them) did not and, so, nor
should we. Yet who would be better than we with our technical knowledge
to understand and communicate the normative ramifications of it?
This "fence" is not making us good neighbors. Maybe it's time to let
the wall between technocratic economics and moral discourse crumble. It
seems already to be weakening. I think we would become a better science
if we acknowledged at least some of the moral aspects of our technocratic
solutions with the same scholarly attention we devote to the technical aspects.
An additional unintended benefit of such a change might be that undergrads
and non-economists would become more
interested in the causes of economic downturns and in reading the Financial
Times because we will have helped them to see that both have moral,
as well as economic, significance.
Thx, I was hoping you would pick up on Wladman's work. It still
amazes me how many bright people, educated at the same institutions,
can look at the same data and reach totally different conclusions.
Is there any other realistic way to explain this other than
people making normative judgments?
Some ramblings triggered by your essay, which I enjoyed immensely.
Regarding the Science of Economics - I would suggest
that Econ lies at the intersection of Anthropology and Psychology
and is "scientific" only in the sense that Descriptive Biology
is scientific – i.e. it benefits from careful observation.
You may recall in The Ugly American how Eugene Burdick
describes giving advice to a developing country.
"Raise the price of rice and
the production of rice will go up." They raised the price
of rice and production went down. When interviewed
farmers explained "I used to need to raise more rice to
support my family. Now that it sells for more, I can raise
less."
Thus Economics is a way of describing the functioning
of a set of institutions and cultural values. Institutions
and cultural values change from time to time and differ
from location to location. In Finance – somewhat related
to Econ - you can calculate the probability that a stock
will change in value by 10%, but you must first assume that
the mind set of today's investing public is the same as
the mind set from which your data sample set is drawn. And
guess what – mind sets change. Same deal with macro economic
models.
While one can assume that people act to maximize their
interest, in my experience people act out of emotion without
too much real focus on their interest cf. "What's the matter
with Kansas?"
While the trajectory from Earth to Moon is knowable and
can be calculated, the trajectory from depression to good
times is not. If you tried to promote a computer program
that would tell you the outcome of an election you would
be seen as a knave. Elections and economics are not computable.
Oh those pesky Animal Spirits – you just can't compute when
a baby deer will spook and run away.
Of course, equations that restate the idea that the whole
is equal to the sum of the parts are valid, but they are
not predictive. If we have a surplus here it must be that
we have a deficit there. Ho hum.
And I am not trying to be a fatalist – good judgment
is still good judgment, but there are no guarantees and
no mathematical solutions.
Disclaimer – my education is in one of the "physical
sciences"., but I am reasonably fluent in the math used
in Finance and Economics.
For an extended time I had a computer programming company.
I have done my share of economics calculations. Salesmen
take the results of computer calculations and use them to
create an aura of authenticity to the things they want to
promote – and unsophisticated people apparently think that
if you take an idea and wrap it in mystery, somehow the
idea becomes valid.
Regarding normative – my mother (b 1899) used to complain
that economics had gotten off track. According to her, when
she studied econ (she had an MS from Smith) it was taught
as having 2 components – (1) how to maximize production;
and (2) how to determine the fair and proper way to divide
the results. She complained that part 2 had been lost somewhere.
She may have been biased being the daughter of a clergyman.
She and many others have trouble seeing Pareto optimality
as being the answer to question 2, for the reasons advance
by Amartya Sen and also for reasons advanced by religious
figures who would like to believe that we have some interest
in helping one another.
As an aside – I just saw "My name is Khan" - it should
be required viewing for all US citizens curious to see how
a part of the world sees the white population of the US.
And yes, there is a sub-field for non-normative. Just
as doctors know what constitutes poison, and leave it to
judges to decide where it should be used, it is ok to have
some specialized sub-field of economic study that ignores
values, and attempts to understand how changing x modifies
y given our current set of values and institutions.
As regards "Well, if you make a normative judgment then
you are not a real economist." - apparently he identifies
the whole field with what I consider to be a sub-field.
It's important to try to estimate the unemployment rate that is equivalent to maximum employment
because persistently operating below it pushes inflation higher, which brings me to our price
stability mandate. –Janet Yellen,
January 18, 2017
A little more than half the income generated in America is paid to workers and most of the money
spent in America goes to personal consumption. So it's reasonable to think there is some relationship
between the health of the job market and other important macro variables.
And, in fact, there is a robust connection between the change in the unemployment rate
and the change in the real value of money spent on employee compensation per working-age American
since the mid-1980s:
That chart shows the link between two real variables that have a logical connection to each other.
The question for NAIRU believers is: why should a purely real variable (unemployment) have any bearing
on a purely nominal one (inflation)?
In particular, is it reasonable to think there is an unemployment rate below which inflation necessarily
gets faster and above which the pace of consumer price increases slows down? And even if there were
such an unemployment rate at any point in time, would it be stable enough to be useful for policymakers
concerned with smoothing the business cycle?
Many, including Federal Reserve boss Janet Yellen, seem to think the answer is "yes", but the
evidence points the other way, particularly since the mid-1980s.
First, some history. In 1926, Irving Fisher
found
a relationship between the level of unemployment and the rate of consumer price inflation in
the US. In 1958, AW Phillips studied UK data from 1861-1957 and
found a relationship
between the jobless rate and the growth of nominal wages, although the relationship seems to
have been an artifact of the gold standard given the vertical line he found in the postwar period:
Some people (wrongly) interpreted Phillips's data to mean that there was a straightforward trade-off
between the inflation rate and the unemployment rate. Policymakers could just pick any spot on "the
Phillips Curve" they want. Among a certain set, the big debates in the 1960s were about whether the
government should target an unemployment rate of 3 per cent or 5 per cent.
This worked out poorly, but the reaction took the form of an equally dubious idea: the Non-Accelerating
Inflation Rate of Unemployment, or NAIRU. In this view, the change in the inflation rate
should be related to the distance between the actual jobless rate and some theoretical level. If
the unemployment rate were above this "neutral" level the inflation rate would slow down and potentially
turn into outright
deflation . If the jobless rate were "too low", however, consumer prices would rise at an accelerating
rate.
Suppose you believe NAIRU is a real thing. What would be the argument against pushing the unemployment
rate as close to zero as possible? In theory, the cost of the policy would be ever-accelerating inflation,
eventually perhaps leading to hyperinflation. But the reason to dislike excessive inflation is that
it ultimately makes everyone poorer, which should, among other things, increase unemployment. (Just
look at Venezuela, for a recent example.)
According to the wacky world of NAIRU, however, hyperinflation can coexist just fine with hyper-employment.
Clearly there must be other mechanisms at work, or else we are leaving money on the table by allowing
the jobless rate to ever rise above zero.
In case this argument seems strange, consider the following exchange the Fed had on this very
topic back in
July 1994 (emphasis added):
MR. LINDSEY. If we ran the model out, do we believe that if we applied some social rate of
discount, the losses in output later on would be more than, less than, or equal to the gains in
output in the short run [from letting inflation accelerate]?
MR. KOHN. The model itself doesn't have, I don't believe, losses in output from higher inflation
rates.
MR. LINDSEY. Ever? We never have a net loss in output resulting from a choice to go for inflation?
MR. PRELL. It does not take, in terms of a normal simple cost of capital calculation, a very
big inflation differential to get you a net loss in the present value in the long run.
CHAIRMAN GREENSPAN. The argument as to why we get a net loss is "the Federal Reserve will react–do
something." But the question is, we are the Federal Reserve and why should we react if that's
true?
MR. LINDSEY. If we don't believe that the present value of output in this economy will be lower
by letting inflation alone, then we should let inflation go up. It's as simple as that Do we believe
that printing money will increase the present value of output?
MR. BLINDER. Yes, I think we would. I believe that printing money will give the economy a temporary
high that will not last and therefore in the integral sense that you said, yes, you get a larger
integral of output over an historical period, if you never decided to end it–if you never said,
when you got to 10 percent inflation, whoops, that wasn't very good, and you went back to lower
inflation.
CHAIRMAN GREENSPAN. Yes, but why would you conclude that at that point when, because as Ed
Boehne says, 11 percent is still better?
MR. BLINDER. If 11 percent is better than 10 percent, if there's no cost to inflation–I am
a little bit surprised at the tenor of this conversation around here! [Laughter] There is some
academic content that is–
CHAIRMAN GREENSPAN. In all seriousness, the question really gets to the models. Why would you
believe that there is a cost of increased inflation from the models?
Greenspan never got a straight answer to his question but the consensus was that models based
on NAIRU are basically wrong. Tellingly, it was
none other than Janet Yellen who wrongly worried the unemployment rate was "too low" in the mid-to-late
1990s and would cause inflation to accelerate.
As it happens, the data don't support the idea of NAIRU either, at least not since the mid-1980s.
The test would be to compare changes in the unemployment rate against changes in the inflation rate.
If NAIRU made sense, there should be a strong inverse relationship between the changes in the two
series. And yet:
Regressing changes in core inflation against changes in the jobless rate gets you an r-squared
of 0.11, which is basically meaningless. Moreover, that result is purely a product of the data points
in the blue circle, which all occurred during the teeth of the financial crisis and could be blamed
on the co-movement of employment and commodity prices. Take those out, and you end up with two perfectly
unrelated series:
You get similar results if you use headline inflation rather than core inflation.
The intellectual confusion over the relationship between unemployment and inflation was especially
salient during the Fed's own policy debates in the aftermath of the crisis. The unemployment rate
rose by 5 percentage points between mid-1979 and late 1982. It also rose by 5 percentage points between
early 2008 and late 2009. Moreover, the jobless rate stayed above 9 per cent through first nine months
of 2011.
The Fed staff expected this would produce massive disinflation, or even deflation, yet it never
happened.
By the
January 2011 FOMC meeting , it should have been clear the old models weren't sufficient. Instead
of ditching the NAIRU concept, however, the Fed's staff and many of the regional presidents tried
to rehabilitate it by arguing the NAIRU had changed. (There were lots of reasons provided, including
the extension of unemployment insurance benefits and skill mismatches.)
With the admirable exception of Richard Fisher at the Federal Reserve Bank of Dallas, the overwhelming
consensus was that the crisis had raised the "non-accelerating inflation rate of unemployment" by
about
1.5 percentage points :
Moreover, everyone except Fisher and the New York Fed's Bill Dudley thought the crisis produced
such long-lasting damage that the NAIRU would still be higher by 2015 (!) than it was before 2007.
In reality, of course, the Fed has been forced to steadily revise its NAIRU estimates lower as the
unemployment rate gradually normalises and inflation remains quiescent. The net effect was this rather
ridiculous chart:
NAIRU isn't just a useless concept, it's a counterproductive one that encourages policymakers
to focus on the jobless rate as a means to an end (price stability) even though there is zero connection
between the two variables. The sooner NAIRU is buried and forgotten, the better.
To test the NAIRU hypothesis against historical data, shouldn't we plot unemployment vs. change
in inflation? -- instead of CHANGE in unemployment vs. change in inflation?
Be that as it may:
If there is such a thing as a NAIRU, it is still a mistake to treat the NAIRU as a "given"
rather than a function of policy. If a certain tax feeds into prices, it leaves less room
for wages to feed into prices before (according to NAIRU logic) inflation accelerates. So any
tax that feeds into prices will tend to raise the NAIRU. This is especially the case if the tax
causes the cost of labor for employers to be higher than workers' take-home pay.
Thus the NAIRU, if it exists, is not a counsel of despair, but rather a counsel to get rid
of taxes that feed into prices (especially taxes on labor) and replace them, as far as necessary,
with taxes that DON'T feed into prices -- that is, taxes on economic rents.
Drago Jan 21, 2017
@ Ralph Musgrave So according to Galileo Galilei the earth is a perfect sphere. Great news.
So presumably he believes there's some magical force of nature that keeps us all from falling
into space, and apparently one can travel in a straight line and end up exactly where he departed.
Never read such twaddle.
Ralph Musgrave, Jan 21, 2017
@ Drago
@ Ralph Musgrave Totally daft response to my points - but what I'd expect from the anti-NAIRU
brigade. But for the benefit of the latter cerebrally challenged brigade, I'll spell out what
I mean in more detail. I'd honestly appreciate a detailed and intelligent answer.
NAIRU is the idea that there is a relationship between inflation and unemployment: specifically,
when demand rises and unemployment falls, inflation will at some point also rise (assuming the
rise in demand continues).
Klein & Co claim that NAIRU relationship does not exist. That means, unless I've missed something,
that if unemployment falls and continues to fall, inflation WILL NOT RISE, (because, to repeat,
according to Klein & Co there is no relationship between inflation and unemployment).
Ergo it should be possible to implement a very large rise in demand plus a very large fall
in unemployment, and according to Klein & Co there will be no automatic rise in inflation. Now
what have I missed?
@ Ralph Musgrave
@ Drago MCK perhaps went too far in saying that there is zero connection between inflation
and unemployment, but the rest of his points stand.
And regarding my previous reply, I was merely alluding to the fact that what is intuitive is
not always what is true.
@ Ralph Musgrave "So presumably he favors bumping up demand to the point where unemployment
almost vanishes"
There won't if you hold the level of competition high and using buying power to stop price
rises taking hold. The key is for a significant purchaser to refuse to trade at any suggested
higher prices which then starves the system of aggregate demand forcing either innovation or failure.
And you do that directly rather than trying to do it indirectly by trying, and failing, to price
loans higher.
In a tight labour market the capital/labour ratio gets better which forces replacement of jobs
with machinery and improved methods. If you can't get the staff you have to get cleverer with
the ones you have.
Inflation is people trying higher prices and having them confirmed by market purchases. So
you set up the system so it refuses to confirm them which forces time serialisation on the market
at a lower price.
Everybody knows that the labour market pricing is controlled by trying to keep a pool of people
out of work and not producing. It is a very sick design that impoverishes many, many people. And
the policy concept on which it is based is a belief system, not even science. You can't see them.
You can't measure them. You just have a bunch of 'Very Clever People' who make them up based upon
what they feel and what they believe.
Far better to have a pool of people employed outside the private sector at a fixed living wage
which the private sector has to bid against to get any labour. Then the labour market is always
'tight' against the living wage and excess bids of labour wages fall back to the living wage when
the businesses fail. Both of which allow you to keep business competition white hot intense -
which is what controls prices and drives productivity.
Many variables contribute to the inflation rate, certainly more than just domestic employment
(and how it is calculated). The Fed's dual mandate is inflation and employment, so it makes sense
that these are a focus of the Fed's communication. But the Fed tends to focus on the result rather
than the cause. It is troubling that there is little discussion from most of the FOMC on inflation
factors which are now more important than unemployment (currency values, foreign labor, technology,
commodity demand and speculation, labor monopsony, underemployment, labor skill demand mismatch,
etc).
Producer and consumer prices are increasing, largely due to China driven commodity prices.
Managerial compensation and production hourly wages are increasing. But weekly wages are stagnant
due to fewer hours. The Fed is ignoring the latter, even though it is what is more important to
sustained core inflation.
Mr Klein, your work is usually excellent, but this, I am afraid, is very poor. Your regression
analysis does not test for labour market slack (unemployment minus NAIRU); you do not discuss
how the unemployment rate can be an imperfect measure of labour market slack if the structure
of the labour market changes; no one has ever assumed the NAIRU is constant and policymakers are
well aware of the pitfalls of using an unobservable quality; the Philips curve can shift and indeed
monetary policy making is in no small part about trying to judge under what conditions it may
shift.
Looking just at the U3 unemployment rate for the NAIRU without considering the still high U6 rate
and lower labour participation rate in the US may be the issue. There's still labour market slack
even though U3 is at its "full" employment level.
Brito , Jan 19, 2017
" The test would be to compare changes in the unemployment rate against changes in the inflation
rate."
Wait what? That doesn't test for NAIRU, that simply tests the Philips Curve, but the NAIRU
and the Philips Curve is not the same concept.
"zero connection between the two variables."
What? How can there be zero connection? If the labour market becomes very tight, firms have
to raise wages to attract workers. Are you saying wages cannot impact prices? That would be a
bizarre claim. Wage price spirals are an observable phenomena. And what about simple supply &
demand? At some point you're not going to be able to employ enough additional people to supply
the rising demand for your product, this increased scarcity is likely to result in higher prices.
@ Brito "If the labour market becomes very tight, firms have to raise wages to attract workers.
Are you saying wages cannot impact prices?"
Or do without the person, or invest in capital to replace the labour - because the capital/labour
ratio just changed. Both of which drive productivity. Which is what we want.
Tight labour markets drive innovation, and if you keep the level of competition active at the
front end then prices remain stable.
Models have to be used with caution (they are only tools) and interpreted with awareness of
the real world - including for example, the varying wage bargaining power of labour, which is
different, post globalisation, to what it was in the '70s.
Who do you think wanted globalisation and liberalisation of trade, and why?
What a silly piece. NAIRU, like many economic concepts, requires a ceteris paribus clause. Your
unconditional evaluation of hypothesis is naive at best. If you're having a surge in productivity
due to, say, tech, or globalization, all else is not equal.
Drago Jan 19, 2017
@ user8347 Regardless, even if such a thing as NAIRU exists, its value can only be estimated post
factum, which makes it completely useless for policy purposes.
There's a whole string of other relationships in economics which cannot be estimated with any
sort of accuracy. For example it is widely accepted that devaluation will sooner or later improve
a country's balance of payments, but no one really claims to know by how much and by when. So
what do we do: abandon currency re-alignments as a method of rectifying external surpluses or
deficits?
And again, it is widely accepted that interest rate hikes curb demand, but no knows with any
great accuracy exactly by how much. What do you suggest: abandon interest rate adjustments?
"What do you suggest: abandon interest rate adjustments?"
Maybe?
"The funny thing is: they haven't. In fact, among the more than 10,000 research articles produced
by the major central banks in the two decades prior to the 2008 crisis, none explored the correlation
or causation between nominal interest rates and nominal GDP growth. Fortunately, this task is
not very demanding, and once we conduct such an examination, we conclude that, in actual fact,
there is no evidence to back these assertions whatsoever. To the contrary, empirical evidence
shows that the central banking narrative on interest rates is diametrically opposed to the observable
facts in two dimensions: instead of the proclaimed negative correlation, interest rates and economic
growth are positively correlated. Secondly, the timing shows that interest rates do not move ahead
of growth, but instead are either coincidental or even follow it."
@ Ralph Musgrave This is gold standard thinking Ralph. There is no balancing payment of gold
to send to China any more.
Instead China's pounds are sitting in an account in London, right alongside yours and mine.
What difference does it make to anything if for instance China were to buy something for you and
now those Pounds sit in your account rather than China's??
What do you think that changes..?
Your neighbours bought Chinese TV's and now China is sitting on a bunch of Pounds it can't
easily spend - except on property, and educating the children of the wealthy. The incorrect thinking
that 'we need to get those Pounds back' just means that we're more likely to sell vital infrastructure
to China.
How is that a good response? We're NEVER going to export as much to China as China exports
to us, and selling them our vital infrastructure is the result the flawed logic of thinking that
moving numbers from one account to another account in London is something we 'need' to do in order
to balance things up.
What if you could erase your old misassumptions Ralph? Rather than falling back on automatic
mistakes.
Viewed correctly, the Pound IS the export, and the trade already balances. It's just that we
don't happen to measure it this way.. yet..
Ralph Musgrave Jan 26, 2017
@ yellowbrickroad
@ Ralph Musgrave Your comment is totally an completely unrelated to the above article and
to my comments. Never mind being right or wrong: you haven't the faintest idea what this debate
is about.
Isn't the point that the NAIRU theory is based on the concept of a wage-price spiral which is
only sustainable in a situation where wages are either indexed or there are strong trade unions?
With the rise of the precariously employed, in the services sector, even if there are many other
minimum wage jobs in town, the threat to leave is not going to result in meaningful pay increases.
This is not a dogma. This is a convenient pretext for suppressing wages, which is part of FED agenda
Notable quotes:
"... When I wrote my piece on NAIRU bashing, I mainly had in mind a few newspaper articles I had read which said we cannot reliably estimate it so why not junk the concept. ..."
"... It conjures up lots of bad associations. ..."
"... Last month, Matthew C Klein wrote an article for Financial Times' blog Alphaville arguing against the concept of NAIRU. ..."
"... Instead of their statutory mandate, these central bankers sought guidance from the so-called non-accelerating inflation rate of unemployment, or NAIRU. Proponents of the NAIRU doctrine claim that some fixed level of unemployment exists that will yield a stable rate of inflation. If the actual unemployment rate surpasses this level, they say, the inflation rate will decline. If unemployment drops below this level, inflation will increase. Most economic research over the last two decades placed the NAIRU between 5.8 and 6.6 percent. ..."
Re: The NAIRU: a response to critics - mainly macro
[Simon is catching a lot of heat and is getting a little irritated.]
....................
The NAIRU: a response to critics
When I wrote my piece on NAIRU bashing, I mainly had in mind a few newspaper articles I had
read which said we cannot reliably estimate it so why not junk the concept. What I had forgotten,
however, is that for heterodox economists of a certain hue, the NAIRU is a trigger word, a bit
like methodology is for mainstream economists. It conjures up lots of bad associations.
As a result, I got comments on my blog that were almost unbelievable. The most colourful was
"NAIRU is the economic equivalent of "Muslim ban"". At least two wanted to hold me directly responsible
for any unemployment at the NAIRU. For example: "So according to you a fraction of the workforce
needs to be kept unemployed." Which is a bit like saying to doctors: "So according to you some
people have to be allowed to die as a result of cancer."
...........
[PostKeynesians fire back]:
........
Simon Wren-Lewis, NAIRU And TINA
Last month, Matthew C Klein wrote an article for Financial Times' blog Alphaville arguing against
the concept of NAIRU. Today, Simon Wren-Lewis published a reply to Klein on his blog defending
NAIRU. SWL's argument is essentially that there is no alternative (TINA):
[By coincidence I posted this comment by Dean Baker yesterday]:
NAIRU: Dangerous Dogma at the Fed
BY DEAN BAKER
The Full Employment and Balanced Growth Act of 1978 established two goals to guide the
Federal Reserve's conduct of monetary policy: price stability and full employment, defined by
the Act as four percent unemployment. While the central bank has diligently pursued the first
goal, it has often given the second part of its mission short shrift. Indeed, past Fed policy
makers have publicly labeled four percent unemployment unobtainable for practical purposes.
..............
The experience of the last six years has unambiguously repudiated the NAIRU - at least insofar
as an economic theory may ever be disproved with evidence.
Die-hard adherents simply proclaim the NAIRU a moving target that has shifted. But none of
these advocates has explained convincingly why previous consensus estimates of the NAIRU went
so far awry.
The Full Employment and Balanced Growth Act of 1978 established two goals to guide the Federal
Reserve's conduct of monetary policy: price stability and full employment, defined by the Act
as four percent unemployment. While the central bank has diligently pursued the first goal, it
has often given the second part of its mission short shrift. Indeed, past Fed policymakers have
publicly labeled four percent unemployment unobtainable for practical purposes.
Instead of their statutory mandate, these central bankers sought guidance from the so-called
non-accelerating inflation rate of unemployment, or NAIRU. Proponents of the NAIRU doctrine claim
that some fixed level of unemployment exists that will yield a stable rate of inflation. If the
actual unemployment rate surpasses this level, they say, the inflation rate will decline. If unemployment
drops below this level, inflation will increase. Most economic research over the last two decades
placed the NAIRU between 5.8 and 6.6 percent.
The operating differences between a legal target of four percent unemployment and a NAIRU target
matter tremendously for the economy and the public....
"... Second, the empirical evidence for a vertical Phillips curve and the associated hypothesis that lowering unemployment past the NAIRU leads to unacceptable acceleration of inflation is weak, and has become much weaker in the past decade. Third, viewed collectively, attempts to estimate the location of the NAIRU have become a professional embarrassment; disagreements remain on too many basic issues. Fourth, adherence to the concept as a guide to policy has major costs and negligible benefits. Conversely, the risks of dropping the natural rate hypothesis are minor, while the benefits from a sustained pursuit of full employment could be substantial. ..."
First is
Dean Baker's post about the latest Economic Report of the President's "insight into the question
of how fast the economy can grow, and more importantly how low the unemployment rate can go."
Economists have long held the view that lower rates of unemployment would be associated with rising
rates of inflation and vice versa. When the Federal Reserve Board decides to raise interest rates
to slow the economy it is based on the belief that unemployment is falling to a level that would
be associated with a rising rate of inflation.
Most economists now put the unemployment rate at which inflation starts to rise somewhere near
the current 4.9 percent rate. (This is called the non-accelerating inflation rate of unemployment
or NAIRU.) So does the ERP. But its analysis suggests a somewhat different story.
Second is Jamie Galbraith's 1997 -- that's almost 20 years ago -- Journal of Economic Perspectives
article, "
Time to
ditch the NAIRU "
First, the theoretical case for the natural rate is not compelling. Second, the empirical evidence
for a vertical Phillips curve and the associated hypothesis that lowering unemployment past the
NAIRU leads to unacceptable acceleration of inflation is weak, and has become much weaker in the
past decade. Third, viewed collectively, attempts to estimate the location of the NAIRU have become
a professional embarrassment; disagreements remain on too many basic issues. Fourth, adherence
to the concept as a guide to policy has major costs and negligible benefits. Conversely, the risks
of dropping the natural rate hypothesis are minor, while the benefits from a sustained pursuit
of full employment could be substantial.
G. Friedman's projections may well be wrong. But the argument that they are "implausible" is based
on uncompelling theory, weak empirical evidence, embarrassing estimates and "a guide to policy [that]
has major costs and negligible benefits."
But, hey, you can't criticize the top wonks if the they don't come right out and say it.
UPDATE:
John T. Harvey writes, at Forbes:
In the words of Christina Romer, former chair of the Council of Economic Advisors under Barack
Obama:
"Just as there is no regularity in the timing of business cycles, there is no reason why cycles
have to occur at all. The prevailing view among economists is that there is a level of economic
activity, often referred to as full employment*, at which the economy could stay forever."
*Often referred to as full employment? War is Peace. Freedom is Slavery. Ignorance is Strength. NAIRU
is full employment.
The Last but not LeastTechnology is dominated by
two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt.
Ph.D
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